Who Is On What Side About ANWR?

Jonathan Waterman wrote an article special to the Washington Post, which appeared on June 5, 2005, in which he contends that all oil drilling should be prohibited in the Artic National Wildlife Refuge. This comment will not address the merits of that issue directly, but will be confined to the more narrow consideration of who it is that is making that contention.

Waterman describes himself as someone who has been going to ANWR for 20 years, as having kayaked 1700 miles across the Canadian Artic, and having hiked and climbed and ridden the wild rivers in the parks in the lower 48 states - not your average, everyday, get-up-and-go-to-work citizen. He states that he has looked at ANWR, and thinks we shouldn't drill for oil there, because he has never seen anything like it. Neither have I. Neither have you. Neither, in fact, have almost all of the people who so vociferously argue against drilling there.

The plain unembelished truth is that essentially no one ever has, or will, see ANWR, drilled or pristine. So what happens there is not going to change the lives of pretty much everyone except Jonathan Waterman.

But how about the caribou? First of all, if the caribou could vote, they wouldn't, because caribou don't vote, just like they don't dread extinction, worry about the future, or mourn the loss of calving grounds. They do enjoy having the paved roads in the adjoining Prudhoe Bay area to walk on to get away from the swarms of mosquitos.

How about the fragile tundra? It doesn't care either. Tundra does even less worrying than do the caribou. So the caribou and the tundra are not the ones on the anti-drilling side of this issue.

How about "Posterity"? Well, Posterity doesn't exist. Only individual people exist. Then how about those generations yet unborn, who will never get to see this wilderness in its unspoiled state? Those generations will send no more individuals to that incredibly isolated, forbidding region than does the present generation - essentially, none.

The point is, that this ANWR dispute, like all environmental disputes, does not pit Man against Nature, it pits the interests of individuals, such as Jonathan Waterman, against the interests of all of the other individuals in the world. Jonathan Waterman's interest is in looking upon a scene that no one else will ever see.

Thus, the real trade off here is warmth, transportation, and useful products for every man, woman, and child in America, on the one hand, versus an enjoyable annual vacation for Jonathan Waterman on the other.

Why Do Housing Bubbles Occur?

Paul Krugman, in an article headlined "Only housing bubble appears to stand in way of recession", which appeared in the May 31 edition of the Alaska Daily News, gets a great deal of the concept of "Bubbles" right.
The significant thing in his analysis is that he grasps the fact that housing bubbles and stock market bubbles are counter-cyclical. This distinguishes him from the many analysts who in times past, marveled at the fact that even though the stock market market was in the tank, housing prices were rising.

Points that he goes awry on, though, include the following

1. "the Federal Reserve would simply replace one bubble with another."
2. "interest rate cuts led to soaring home prices"
3. "the Fed's ability to manage the economy mainly comes from its ability to create booms and busts in the housing market."

This third point is significant in that always before analysts had assumed that "the Fed" created booms and busts only in the stock market. Now, "the Fed" has been ascribed even greater powers, and is arrogated responsibility for both arms of the speculation phenomenon.

The fact is, that the Fed is just as much a helpless bystander in the creation and demise of economic speculation bubbles as is the corner grocer.

Interest rate cuts didn't lead to soaring home prices, and increases in both mortgage rates and Fed funds rates have not affected the upward march of housing prices one whit.

The points that Krugman comments on, but ignores in his analysis, include:

1. "Now the question is what can replace the housing bubble."
2. "Many home purchases are speculative; the National Association of Realtors estimates that 23 percent of the homes sold last year were bought for investment, not to live in."
3. "if the stock market bubble hadn't quickly been replaced with a housing bubble."

Point number 2, above, in reality should be expanded to include, not only those who bought houses purely as markers in the giant Ponzi Scheme, but also those who bought a house that they intended to live in, but bought it, in large measure, because they believed that it would rapidly increase in price.

[This effect is exacerbated by the change in the income tax law, which makes all profits from residential real estate, lived in for at least two years, tax free. As a result of this change in the law, a home owner can buy a house for 10% down, live in it for two years, while the price goes up by 20 to 30%, sell it and pocket a 100 to 150% profit on their down payment tax free! Anyone who doesn't do that every two years either has a bad tax advisor, or has fatally fallen in love with their investment.]

The bottom line is that house prices don't go up because of Fed control, low interest rates, housing shortages, a good economy, or any of the other shibboleths used to explaining the phenomenon. House prices go up because house prices go up. Stock prices don't go up because the underlying value of the individual stocks increases, or because the Fed changed the interest rate, or because of wars, Tsunamis, or election results, or any of the other reasons routinely given on the business pages of newspapers or by business talk show hosts. Stocks go up because stocks go up.

In today's stock market, who is going to buy a stock because it has good fundamentals in preference to one which has been soaring in price? What, are people crazy? The object is to make money, not to exhibit loyalty to merit.

In today's housing market what would be the reason for not buying a house at any price, since the price next year is going to be ten to twenty percent higher. What difference does it make that you can't afford to make the payments out of your salary? You just borrow what you need to stay in it for two years, and repay the loan out of your tax free profit on the sale.

The truth of the matter is that, at least since the late 1970's, there is a vast pool of artificial wealth, created when house prices suddenly bolted from and annual increase of between 5% and 8% to an annual increase of 20%. It was as though some insane legislature had passed a law giving everybody $100,000.

When mortgage interest rates reached 20%, people began to look for other places to invest this heretofore nonexistent wealth in excess of that needed to live on. They bought fine art at absurd prices, and paid more for FM radio stations than those stations would generate in revenue in fifty years, just to have some place to put the money.

But, in fact, there are only two places big enough to put that kind of money - the housing market, and the stock market. So people went back to the moribund stock market, which made stocks go up, which made people buy stocks, and there you go!

When price to earnings ratios went completely insane, people looked again at the housing market, which had bumbled along on a straight line during the mid 1980's, pumped enough money in it to start the speculation anew, and there you go!

So the problem is not something that Alan Greenspan is doing. The problem is that most money is not earned by laboring, or by being clever, or by being inventive, or by risking money on new enterprises, but by investing in Ponzi Schemes, where the payoff is determined by getting in and out at the right time.

Thus, the answer to Krugman's question "What can replace the housing bubble", is, a stock bubble. He is right to be concerned that these cycles are increasing in both amplitude and frequency, with an outlook that is not promising.

It is difficult to predict what the interim effect of resolving the problem will be, and who it will affect, but it is clear what needs to be done to put an end to the boom and bust economy.

One need only look to the early days of the current President's first term, when he had two proposals to cut the investment income tax on the table. One was to cut the tax on dividends, the other to cut the capital gains tax. The people that make money without earning it wanted to cut the capital gains tax, and the old fogies that lived on dividends didn't make much fuss, so they compromised on a little of each. Big mistake!

What would be the effect of eliminating the tax on dividends, and placing a 100% tax on all of the amount by which the proceeds of a sale of stock exceeded the value of a combination of assets, profits, inventory, or other meaningful measures of the actual value of the stock?

The effect would be that the only way to make money by investing in a stock would be for the company underlying the stock to make money. The stock would be unaffected by the value or price of other stocks in its "sector", or by an analysis by a professional analyst of the stock's prospects for appreciation , or by schemes for pumping money into the stock for reasons other than that it was increasing in value not price.

This would protect the concept of capitalism, by which one can invest one's money in another's enterprise, but would eliminate the non value producing speculation that contributes nothing to the economy.

The same principle applies to real estate. There is no reason that anyone should profit from the fact that real estate prices went up independently of the owner's improvement of the property. That income is not earned, and any part of the proceeds of the sale of a house over and above an amount determined by rental value on an open market, improvements made by the seller, and similar measures of real value should be taxed at 100%.