Our Hazlitt Memorial Lecturer this afternoon is Martin Fridson. Martin is perhaps the most well-known figure in the high-yield world, according to Investment Dealers Digest.
Over 25 years' span with brokerage firms including Salomon Brothers, Morgan Stanley, and Merrill Lynch, he became known for his innovative work in credit analysis and investment strategy.
Fridson received his BA cum laude in history from Harvard College and his MBA from Harvard Business School.
He has served as president of the Fixed Income Analysis Society, governor of the Association for Investment Management and Research, now the CFA Institute,
and director of the New York Society of Security Analysis.
In 2000, the Green Magazine called Fridson's financial statement analysis, quote,
One of the most useful investment books ever.
The Financial Management Association International named Fridson the Financial Executive of the Year in 2002.
In 2000, he became the youngest person ever inducted into the Fixed Income and Analyst Society Hall of Fame.
The Boston Globe said his 2006 book, Unwarranted Intrusions, the Case Against Government Intervention in the Marketplace,
and there are many copies all over the Institute here, should be listed for best business book of the decade.
Now, I read this book, and it was what stimulated me to invite Martin here, and I tell you as a professional economist, it really has more economic insight and sense than all the articles that were published in 2006 in the American Economic Review.
So I am very pleased to have just met and now to present to you Morton Fridson.
Thank you for very, very kind comments and I wanted to say, first of all, that it is really a pleasure to be here
in the Loveliest Village on the Plains
and it's truly an honor to be speaking at the Mises Institute.
I had another honor this week
in the form of making page one of the New York Times.
Unfortunately, the edge was taken off that one a little bit
because Governor Eliot Spitzer made page one the same day.
His article, by the way, had nothing to do with the state of the leveraged buyout industry.
But unlike mine, his article is above the fold, so all in all, speaking to this gathering is definitely the biggest honor of the week and, in fact, of the year for me.
Now, in addition to expressing my thanks for this invitation, I also want to acknowledge a debt to the Mises Institute.
The debt is that my book on unwarranted intrusions has a chapter on America's misguided policy of criminalizing Paola.
And the basic idea of that is that if you go into a supermarket, every inch of the shelf space has been paid for by a food manufacturer or some other consumer goods company.
Now the only way you can possibly get people to buy recorded music is for them to hear it.
That has been proven over many, many decades, and yet if you pay to enable them to hear your music, you'll get prosecuted.
Posted by Eliot Spitzer
The problem of Paola in 1956 actually had been going on for many decades before that, even before the era of recording, there was Paola because that's how they sold sheet music as well, by getting famous artists to perform the music.
Murray Rothbard, you see here, and I know his books are well represented out here in the hallway, and was vice president of the Institute.
But this article that he wrote about Paola in 1956 was not published until 2001 when it appeared in the Institute's publication, Free Market.
And it was extremely helpful in putting together that chapter, so I'm very grateful.
By the way, Rothbard in this article indirectly anticipated the introduction of satellite-based subscription radio several decades later.
And if you'll indulge me a small digression, I have to mention a wonderful story about Murray Rothbard and a circle of his anarchist-minded friends who enjoyed composing songs, playing board games and going to movies together.
One movie they went to was a horror picture about a man-eating tree. Rothbard cheered for the tree the entire time.
The people he ate were aggressors. They kept trying to set the tree on fire or chop it down, when the tree hadn't done a damn thing to them.
Three key themes run through unwarranted intrusions.
Theme 1 is the stark contrast between bedrock economic principles which were accepted by economists clear across the ideological spectrum on the one hand and political rhetoric on the other hand.
An example is a survey of the early 1990s found that 93% of economists agreed with the statement that the usual effect of import tariffs and quotas is to reduce economic welfare.
Yet, Congress engages in idiocies such as overriding the Linnaean system to declare that catfish native to Vietnam are not really catfish.
And they cannot be marketed in the United States as such.
This is a purely protectionist piece of legislation and just one of many ludicrous examples.
I live in New York City and another of the findings of that survey was that a similar proportion of economists agreed that
Rent Control Reduces the Stock and Quality of Housing
I was reluctant to include it in the book because it's such a standard example given in elementary economics textbooks
And yet I was fascinated by the fact that we had a mayoral election right around the time the book was coming out
And there were five major candidates on the Democratic side, one representing the party of free enterprise, the Republicans
None of them suggested that there was anything wrong with rent control
The only discussion was whether they should shift the administration of the rent control law from the state capitol in Albany back to the local jurisdiction in New York.
That was the sum of the debate about rent control after decades of horrendous results and well-documented inferiority of the housing stock in New York of a similar age in Chicago where they don't have rent control, of course.
That was theme one of the book, just a remarkable disconnect between the political debate and issues.
They're just not controversy at all among economists.
Theme two is that economists and politicians agree in principle that we should leave matters of commerce to the marketplace
unless someone can demonstrate a market failure.
Now in practice, politicians devise a subsidy for some special interest group they're beholden to.
at various times, the egregious ethanol program has been promoted as the solution to the energy shortage, the solution to the air pollution problem, and even as a way of supporting our troops in Iraq.
This story has only gotten worse since the book came out, with the government pushing ethanol harder and harder in the face of rising oil prices,
This story has only gotten worse since the book came out.
With the government pushing ethanol harder and harder in the face of rising oil prices,
corn has become more costly for the traditional use of feeding livestock and humans.
So we're treated to the spectacle of interventionist congressmen who represent cattle farmers
battling interventionist congressmen who represent corn growers.
And the rise in food prices produced by artificially induced demand
The rise in food prices produced by artificially induced demand for corn has led to food riots
in some countries. On top of that, recent economic research adds to the evidence reported
in my book that the ethanol program is actually bad for the environment, not good. Shifting
agricultural land to ethanol production from other uses increases the production of greenhouse
gases. And that's true not only for corn-based ethanol, but also for ethanol produced from
and the switchgrass, which is supposed to be the responsible form of an ethanol.
On top of that, the increase in agriculture activity required for ethanol production diverts scarce water resources
and it deposits detrimental fertilizer products that are threatening the ecology of the Mississippi River and the Gulf of Mexico.
Theme three is, I really believe strongly that in a democracy, people have the right to enact a bad law.
I also truly believe that if the proposals are presented to the voters honestly, they'll reject the ones that are economically damaging to everyone except a vested interest seeking an unfair advantage.
Therefore, politicians go to great lengths to make sure the voters never get a straight story.
And in Unwarned Intrusions, I detail numerous examples of our public servants telling it like it isn't.
Perhaps the most outrageous was an attempt by the media mogul Rupert Murdoch in collusion with Hillary Clinton, among others, to tighten federal control over television audience ratings.
The real reason for this unwarranted intrusion was that new and improved technology was beginning to show that the Murdoch station's audience share had been overstated under the previous methods of measuring audiences.
But the politician's official story, believe it or not, was that audience measurement was a civil rights issue.
And you can read all about it.
I sent a copy of the book to the Nielsen Service, which was, of course, right in the crosshairs of this alleged reform.
And they concur that the story was pretty much as outlandish and preposterous as it seemed.
It was actually an accurate account of what happened.
Now, I wish I could say that the publication of unwarranted intrusions ignited a prairie fire of honesty and economic rationality on the political landscape.
Well, the book has won some hearts and minds, but I'm afraid there's still a long way to go in rooting out the corruption of buying votes with the voter's own money.
A much worse scam than ordinary corruption, which I would far prefer.
Now, if they use their own money, that would be much better, but this is really rubbing salt in the wounds.
Now, in fact, the headlines tell us that our politicians are digging into a deeper hole every day.
In unwarranted intrusions, I reported on research showing that home ownership subsidies have produced massive over-investment in housing in the United States.
The result is a substantial penalty in national income far greater than can possibly be justified by the acknowledged community and social benefits of ownership versus rental.
That has been documented, but the cost of the subsidies and spillover effects far, far exceeds that by any reasonable standard.
And the benefits of pushing homeownership rates to new highs looks more and more dubious.
Recent research by Carolina Katz-Reed finds that for low-income households,
owning a home means less mobility to pursue improved employment prospects,
less money to devote to children's education,
and a return on investment lower than holding Treasury bills.
And yet, politicians persist.
They're currently proposing a variety of harebrained schemes
to head off foreclosures and prop up housing prices.
That is, they want to A, reward individuals who obtain free options on houses through no-money-down mortgages
and now are very rationally walking away because they're out of the money on their option.
And B, they want to prevent home prices from reaching a level at which they would once again represent attractive investments.
The biggest outrage of all involves the GSEs, or government-sponsored enterprises, Fannie Mae and Freddie Mac.
A few years ago, Fannie and Freddie were finally getting their wings clipped.
Now, this was not happening for the right reason, namely that their entire mission is dubious,
but because they were mired in accounting scandals, so that gave the politicians some scandal to try to rein them in.
But once the housing crisis hit, all was forgiven, and Fannie and Freddie loomed as the saviors of the U.S. economy.
Now, Fannie Mae has now been authorized to deal in mortgages of as much as $700,000, up from $420,000 previously.
Now, people step back for a minute. The median home price in the United States is $200,000.
Why do we have gigantic taxpayer-subsidized companies facilitating purchases of homes with mortgages three times as large as that?
Don't we presume that the buyers of those homes are not low-income families who are trying to get onto the bottom rung as the Fannie Mae propaganda that is advertising?
The question is, why does Fannie Mae advertise during the Super Bowl?
They do not deal with consumers. If you're running a business, why would you advertise to consumers if that's not even your customer base?
Clearly to generate political sympathy and always representing, well, this is what we're doing. We're helping those people get their start.
But surely the people buying those $700,000 mortgage homes, even if they have no money down, are above average income families.
So why do we have this huge middleman in there taking our own tax dollars to subsidize above average income home buyers?
It doesn't really make sense.
And to add insult to injury, the cover of this week's barons suggests that despite all the interest rate subsidies lavished on Fannie Mae over the decades,
the company has mismanaged its affairs so atrociously that it may soon require a taxpayer-financed bailout.
So we see the dangers of the government interfering in a basic economic activity such as providing shelter.
Now let me address another sacred cow, the myth that America's savings rate is too low and something needs to be done about it.
Well, the title of this section is a French phrase, sauve qui peut, which is usually rendered something like every man for himself.
himself, but a loose literal translation would be let those who can save, and that would
be a good policy for the government to follow in the absence of any solid evidence that
all of our tax-based savings programs combined have generated one dollar of incremental savings.
So we should let those who can or are willing to save because none of our expensive programs
have any effect on those who can't or won't save.
As I detailed in Unwarranted Intrusions, former Federal Reserve Chairman Paul Volcker's overall
assessment of the research is that if you create a tax-protected savings vehicle, people
will transfer savings from a taxable to a non-taxable account, but they won't save
any more than before.
They may even save less, because the tax preference means that they don't have to put as much
away as now to reach their total retirement fund objective.
And, you know, the evidence is somewhat mixed on that, but you would think, before launching
into the huge programs we have, we'd kind of get a pretty clear cut that the evidence
is sort of strong on one side or the other, but that's simply not the case.
Now, as for the notion that the nation's savings rate is too low, the idea behind this, you
know, the reason that we have a crisis, allegedly, that has to be addressed, is that people aren't
and saving enough and therefore there won't be enough business investment in new technologies
and productivity will decline and the United States will become less competitive as a result.
Now ever since the lobbyists for financial services firms issued the earliest of these
warnings that I was able to document, US productivity gains have reached a new and higher level.
So this is just purely a scam perpetrated by the marketers of savings products because
It's clearly easier for them to get their hands on our money if we have specifically designated programs with all sorts of acronyms associated with them.
It's very effective for the marketing. But in terms of doing anything useful for the economy, nothing really to support this.
Now, you might ask, has this evidence caused our politicians to see the light?
The answer is of course not. They persist in proposing new tax incentives for savings that are likely to be every bit as ineffective as those of the past.
And you can just look at the presidential candidates' websites to see what they propose to do about the mythical savings crisis.
Barack Obama, and I quote, create a generous savings match for low and middle income Americans,
Americans, match 50% of the first $1,000 of savings for families that earn less than $75,000.
The Clinton campaign, quote, Hillary's American retirement accounts.
I mean, I'm not sure, what other kind would she be proposing than American?
I have to, you know, is she running for presidency of Mexico or something?
I don't know.
But she goes on to say, offer matching tax cuts of up to $500 and $1,000 to help middle
Social Class and Working Families Save.
So in short, instead of letting people allocate resources most efficiently, without being
pushed toward either saving or toward consumption by the tax policy, our elected officials insist
on turning savings into a political football.
Which brings me to my next topic.
Here is the man who has set out to save the sport of football.
Arlen Spector, the ranking Republican member of the Senate Judiciary Committee.
Yes, Spector belongs to the party that purports to be the defender of free enterprise and
small government.
That tells you right there that our truth in advertising laws are misdirected.
Now however misguided the government's intervention in the housing market is, one can at least
understand why politicians think it's something they ought to stick their noses into.
One needs housing of some kind, and for most home-owning families, their house represents
their biggest financial asset.
So to a politician, it sounds like there are legitimate interests to protect.
But who is the victim of the New England Patriots spying on their opponents' signals with videotape
cameras?
Well I suppose that the other teams are hurt, but after all, that's why professional sports
leagues have rules committees and disciplinary procedures.
Now the fans of the Patriots' opponents are unhappy too.
But is that a harm that the United States Senate should be trying to repair?
People, this is entertainment.
Wasn't it sufficient for the government to make a jackass out of itself 50 odd years
ago by cleaning up television quiz shows for no apparent purpose?
As far as I can tell, the folks who have a beef about spying on football teams are gamblers
who, to some small extent, got unfair odds as a result of these spy cameras.
Well, why is Arlen Spector wasting our tax dollars on behalf of gamblers?
The National Football League certainly has a stake in keeping gamblers interested in their sport,
even though these hypocrites would never admit it.
So I say let the league clean up the game and keep the odds honest.
The prime beneficiary of this Senate inquiry is Arlen Spector,
who evidently likes to see his picture in the newspaper.
Now, Spygate erupted after unwarranted intrusions was published,
but a sports topic that I did discuss in the book is taxpayer-financed stadiums.
Now, in a nutshell, no study that was financed by anyone other than a team owner,
and there have been many of those,
has ever shown an economic benefit to the municipality that subsidizes the construction of a stadium.
All it does is shift consumer spending from other forms of entertainment.
And for the first 90 years of professional sports, teams got along just fine in non-tax payer supported stadiums and arenas.
You know, one really great little vignette that I came across in the course of doing the research on this,
research on this. It turns out that the sports owners have made Walt Disney their hero.
And I said, well, why is that? Because there was a wonderful scene where Disney was looking
out at the area in Anaheim, surrounding Disneyland, and he was furious. He said, here are all
these little businesses that have gotten rich off me. I made all this money by building
Disneyland here and they're getting rich. That's never going to happen again. So when
When he went out and constructed Disney World in Orlando, he made sure that he bought up
every piece of land, miles and miles surrounding that, and no one would get any benefit other
than the Disney Corporation.
And, you know, this is a smart business strategy, but the team owners have emulated this.
You'll notice if you go to stadiums and they're, you know, a stadium that's 10, 15 years old,
out of date, got to be replaced.
What do they mean?
It's got to be replaced because they need more skyboxes and they need more room inside
the stadium for restaurants and entertainment, all sorts of other things, to make absolutely
sure that the little bar on the corner down the road from the stadium doesn't get any
revenue from this. So whatever argument that there ever was that there was a spillover
effect from building a taxpayer-finance stadium, they've made sure to demolish. They're going
to get all the revenues inside. And the reason for this is that they have to split the ticket
revenues with the visiting team. So the more other types of activities that they can get
into the stadium, they can keep all of that for themselves, the more profitable it comes,
and of course the more they need the subsidy to build this thing in the first place.
In the case of the infamous stadium in Arlington, Texas, to have the first condemnation of public
property in the state of Texas ever for private use to build that stadium, which was a very
successful venture for the more or less the frontman for that operation, George W. Bush,
The latest bizarre turn in the story of taxpayer-finance stadiums involves Clayton Bennett, who is the owner of the Seattle Supersonics basketball team.
Bennett is currently trying to break his lease on the city's basketball arena, and the reason is he and his partners failed to get Seattle or any neighboring city to provide a new taxpayer-subsidized arena.
So they want to move the team to Oklahoma City.
Now, having failed to obtain a new subsidy in Seattle, Benefit has adopted the impartial economist's consistent view that the team provides no economic value to the city.
And that's his rationale for saying that Seattle should not mind if he walks away from the lease, because they're not doing any good for the city by being there.
Now of course, in Oklahoma City, Bennett is arguing exactly the opposite, namely that having a pro basketball team will bring an economic benefit that justifies building a taxpayer-subsidized arena.
Now this issue has always been about lining team owners' pockets rather than economic reality, but it is now devolving into a theater of the absurd.
Now, of course, that phrase, theater of the absurd, conjures up images other than basketball in Oklahoma City.
For instance, high fashion in New York City, where I am proud to live and work.
This is a catwalk photo featuring a collection by Marc Jacobs.
Jacobs was one of the designers whose show at the Fashion Week in New York in February
was produced by a company that allegedly was solicited for $40,000 in bribes and the alleged
seeker of graft was a state government employee who controlled access to the building where
the fashion shows were being held.
Now according to the charges, the superintendent of the 26th Street Armory demanded money under
the table for reserving space in this highly desirable facility and for making sure in
and in particular that the National Guard's needs did not interfere with the designer's activities.
Now, the government official allegedly asked for $1,500 to allow a designer to begin setting up one day early
without paying the daily rental fee.
Now, the accused is going to get his day in court,
but nowhere in the reporting of this case have I seen anyone raise the question that an economist would naturally ask,
Which is, why was the assignment of valuable space and setup time left at the discretion of a government employee?
Here is another case, like radio airtime in Paola, where a market is bound to arise for a valuable asset, whether it's officially sanctioned or not.
The rather obvious solution is to publicize the existence of these benefits and auction them off to the highest bidder.
The value of the display space and the setup time would then accrue to the taxpayers and not to an enterprising state employee.
So what have I learned from publishing the case against government intervention in the marketplace?
Well, I've learned something that may surprise you.
And by way of background, I not only live in New York, but I live on the Upper West Side of Manhattan,
which is surely one of the most liberal congressional districts in the entire United States.
So, you might not expect my neighbors to embrace the ideas of a book that espouses libertarian principles.
But I've actually found people are quite receptive to many of the book's arguments.
And why shouldn't they be?
I point out in the book that calcium is the nutrient in which children and the elderly in the United States are most deficient,
and this is a direct result of milk price supports, which simply make dairy products too expensive.
I cite the World Bank estimate that on a global basis, ending agricultural trade restrictions would lift 150 million people out of poverty.
And I mention that in the United States, tariffs, believe it or not, are higher on low-price clothing and shoes bought by low-income people
than on expensive watches and liquor bought by the wealthy.
So how could any self-respecting liberal support these kinds of economic inequities?
Now, I have to admit that there's some strategy involved here.
I present these ideas in terms of economic efficiency, not in terms of ideology.
And it turns out that there are many issues on which agreement is achievable across a surprisingly broad political spectrum.
The late Milton Friedman excelled at putting such proposals forth, including the negative income tax,
tax, which inspired the earned income credit, and also the abolition of the peacetime draft.
Even if the United States has not reached a state of ideological perfection in the minds
of most libertarians, I believe we're better off as a nation as a result of the free market
ideas that have been put into action.
And this has been accomplished by pragmatists who wanted to make the world better instead
of waiting for it to become perfect.
Now, I understand that libertarians take doctrine very seriously.
They say that if two libertarians ever find themselves agreeing on something, you know that one of them has sold out.
But I'm not embarrassed to be no more of a purist than Milton Friedman.
And I know that the libertarian movement has many sincere individuals who argue that the issue is not economic efficiency at all, but freedom.
I sometimes think that maybe this movement, if it's possible to describe such a group as a movement,
maybe it's really two completely separate strains.
I think there are people who are very interested in economic efficiency,
and it turns out that freedom is very consistent.
You wind up with the same results when you proceed from these two different directions,
and one could imagine a universe where it wouldn't be the case,
where you'd wind up with inefficiency as a result of freedom or lack of freedom as a result of economic efficiency, but I know that for many people that really is the issue more so than the types of questions I've been talking about, the economic fallacies that arise from interfering in people's ability to enter freely into transactions with other consulting adults, but the problem
The problem is that while there's a reasonably objective consensus on what constitutes economic efficiency,
the same cannot be said for economic freedom.
This word, freedom, has a different meaning for the gun-owning, cigarette-smoking,
and helmetless motorcycle-riding members of this audience
than it does for many of my friends on the Upper West Side of Manhattan.
And this difference in understanding has been a fact of life for centuries.
At the time of the American Revolution, the British writer Samuel Johnson observed that the loudest yelps about liberty came from the drivers of slaves.
This is material for a wonderful and necessary philosophical debate.
But my experience has been that a great deal can be accomplished to improve the lot of mankind
before these debates get resolved many eons from now.
Now I mentioned at the beginning of my talk one debt of gratitude to the Mises Institute
and let me conclude my formal remarks by mentioning a second.
I am very grateful for the opportunity to share ideas with such a distinguished audience
and I look forward to hearing the views of those of you who have been so kind to listen.