Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are from V & V, a web site of the Center for Vision & Value, and Forbes.com.
Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are from V & V, a web site of the Center for Vision & Values.
As we enter the new year, the financial landscape is littered with essentially bankrupt governments. Governments at every level are in dire financial straits. During the last decade's governmental spending binge, total state and municipal bond debt has nearly doubled to almost $3 trillion, while federal debt rose over 150 percent from under $6 trillion to almost $14 trillion.
Several dozen cities, including Harrisburg, Los Angeles, and Detroit, teeter on the brink of insolvency. Municipal bonds, once considered ultra-safe, are approaching junk status.
State governments from coast to coast are broke. From Republican Governor Chris Christie's New Jersey on the east coast to incoming Democratic Governor Jerry Brown's California on the west coast, the piper wants to be paid for years of fiscal profligacy. Illinois is six months behind in paying its bills. Cash-strapped Arizona sold the state capitol, supreme court, and legislators' office buildings to private investors. According to "60 Minutes," since the Great Recession started in 2008, state governments have spent a half-trillion dollars more than their revenues (despite constitutional prohibitions of deficit spending).
The federal government, of course, is the most indebted of all. In addition to the explicit debt of nearly $14 trillion (current figure available at www.usdebtclock.org), Uncle Sam has tens of trillions of dollars in unfunded liabilities. Interest rates on Treasury bonds have risen sharply recently, as investors (most notably the Chinese) have started to dump them.
Given this grim state of affairs, states and cities are looking for ways to tighten their belts. Not Washington, though. Consider the December deal between President Obama and congressional Republicans to prevent tax rates from rising: This bipartisan deal blew a three-quarter-of-a-trillion-dollar hole in the federal budget.
In exchange for keeping personal income-tax rates unchanged for only two years, Republicans assented to an unaffordable spending splurge. Among other concessions, the GOP agreed to over $50 billion for extended unemployment benefits. The deal doles out billions in subsidies to the economically uncompetitive and environmentally harmful ethanol industry at a time when even Al Gore admits that ethanol subsidies are indefensible. (The Obama-GOP coalition also propped up the wind-energy boondoggle.)
Even more shocking, Republicans acquiesced to Obama's reckless plan to reduce FICA withholding from workers' paychecks from 6.2 percent to 4.2 percent. Social Security payouts will soon exceed revenues within the next few years; yet, instead of measures to shore up cash flow, we get an agreement that weakens the system. I agree with Representative Earl Pomeroy (D-ND), who warned:
When you start to signal that the [Social Security] tax levels are negotiable, you end up in long-term trouble . . . in terms of making absolutely certain that the entitlement funding streams are secure.
It's easy to understand why progressives (President Obama, ex-Speaker Pelosi, the labor unions, et al.) support reducing workers' Social Security contributions. Favoring a major redistribution of wealth, they intend to solve Social Security's inevitable cash crunch by grabbing money from other sectors of society, perhaps even by nationalizing private retirement accounts, as some progressives already have advocated.
Why, though, did Republicans concede to Obama's unaffordable budget-busting spending wish list? It is because they are mired in the same political mindset that got us into our current bankrupt condition. The Republicans wanted to show that they are willing to give a little to get a little, to prove to critics that they aren't intransigent or obstructionist. This is a mistake.
With governments going broke, we literally cannot afford politics as usual. We face financial ruin accompanied by some catastrophic mix of monetary breakdown, economic collapse, and social unrest. When a maniac is about to drive the car you are in over a cliff, you don't make a deal to reduce your speed from 60 mph to 30 mph; you either stop or proceed onward to your doom.
Nobody knows where the point of no return is, or which spending straw will break government's fiscal back. The only way to find out is by hitting that point and plunging into the resulting vortex. I suspect that most Americans would rather not find out where that breaking point is.
It's time for a paradigm shift -- no more Mr. Nice Guy, no more compromises with bankrupt and bankrupting policies. Reducing government spending before it is too late isn't a matter of political preference, but of economic imperative.
For decades, the political debate has been between those who want to expand government enormously versus those who wish to increase government moderately. That bankrupt political paradigm has produced bankrupt governments. A new paradigm for fiscal sanity would be a political contest between those who favor cutting government spending a little or a lot. The Tea Party movement notwithstanding, nothing fundamental has changed in Washington. We and our bankrupt governments are due for a day of Reckoning.
Opening the 112th Congress by having a succession of representatives read the Constitution aloud on the floor of the House was a worthwhile exercise, despite heated criticism to the contrary.
If nothing else, it showed how little respect many members of Congress have for the supreme law of our republic. Fewer than half the members even bothered to be present during the reading.
Some members groused about what a waste of time it was, sniffing that it was cheap grandstanding. Perhaps it was. We won't know until we've had time to see whether Republicans actually uphold the Constitution with their votes.
Nonetheless, the most bizarre criticism was that of Rep. Jerrold Nadler (D-NY) who denounced the reading of the Constitution as "propaganda."
The most comical (tragi-comical?) protest came from Rep. Jay Inslee (D-WA), who tried to delay the reading on the grounds that Congress hadn't had 72 hours to review the document in question. Seriously. This was hypocritical, since Democrats routinely ignored the 72-hour provision during the last two years (e.g., the non-stimulus and Obamacare). It was also ludicrous, since one would have assumed that all members of Congress are familiar with the Constitution, since they have solemnly sworn to uphold it.
The resistance by Nadler and Inslee to reading the Constitution was not an aberration, but indicative of the deeply entrenched disdain that many progressives have for it, even as they publicly proclaim their admiration.
Consider: President Obama has long lamented that the Supreme Court "didn't break free from the essential constraints that were placed by the Founding Fathers in the Constitution," thereby making the redistribution of wealth more difficult than Obama would like it to be.
Erstwhile Speaker of the House Nancy Pelosi, when asked whether her proposed healthcare reform bill was constitutional, reacted with shocked incredulity that anything she wanted could be unconstitutional, expostulating, "Are you serious? Are you serious?" (Notably, now that U.S. District Court Judge Henry Hudson struck down the individual mandate component of Obamacare as unconstitutional, one sees that the constitutionality of a bill is indeed a serious matter worthy of Pelosi's consideration.)
Last year, Senate Majority Leader Harry Reid inserted this language into the pending healthcare bill:
It shall not be in order in the Senate or the House of Representatives to consider any bill, resolution, amendment, or conference report that would repeal or otherwise change this subsection.
It appears that Sen. Reid is one of those who most needs to listen to the Constitution, because if he read it, he would see that it is unconstitutional to ban changes in our laws, and that the Founders had no desire to tell us how we should govern ourselves today. In fact, Reid would know that if he paid any attention to the annual reading in Congress of George Washington's Farewell Address. Here is what the father of our country, that wise and virtuous patriot, said:
The basis of our political systems is the right of the people to make and to alter their Constitutions of government. But the Constitution that at any time exists, 'till changed by an explicit and authentic act of the whole people, is sacredly obligatory upon all. . . . If in the opinion of the people, the distribution or modification of the Constitutional powers be in any particular wrong, let it be corrected by an amendment in the way which the Constitution designates. But let there be no change by usurpation; for though this, in one instance, may be the instrument of good, it is the customary weapon by which free governments are destroyed.
It's time to quit ignoring our Constitution as the three branches of government so frequently do. Let's get back to basics in government. Last week was believed to be the first time that the complete Constitution had ever been read in Congress. Let's make reading the Constitution in Congress an annual event, as it is for Washington's Farewell Address.
In fact, let's make reading bills aloud in their entirety in both legislative chambers mandatory and require members to be in attendance before they can vote on them.
"But wait!" you protest, "there aren't enough minutes in a year to read all that verbiage." Right you are. That would be one way to try to shrink our leviathan government back to a manageable size and constitutional scope.
Perhaps we should consider making it standard operating procedure for all important documents to be read aloud in Congress.
The Tea Party movement and its millions of supporters have high hopes that the recent elections will rein in runaway government. While I endorse this objective, accomplishing it will be far more difficult than most people realize.
The Tea Partiers will have to contend with more than just a Big-Government president and Senate. They also face well-funded, well-connected, and well-entrenched special interests, plus a public that expects the officials they elect to shrink government and balance the federal budget only if it's the other guy's programs that get cut. Would-be reformers will also have to deal with the larger, permanent, unelected powers that aren't accountable to the people.
The fact is that the United States isn't as democratic as we'd like to think it is. We cherish the idea that the vox populi (the voice of the people) predominates over the will of privileged elites; that government is subordinate to the people (that it serves the people, rather than ruling them); that those in positions of governmental power should be accountable to the people from whom they derive their authority; that government is, essentially, "of the people, by the people, and for the people."
Is that the kind of system we have today? Let's see:
Congress delegated its constitutional prerogative to be the guardians of our money to the Federal Reserve System. Fed Chairman Ben Bernanke & Co. exercise extraordinary discretionary powers that affect us all, yet Bernanke -- arguably the second most powerful person in America -- is unelected and unaccountable to the people.
Key rules by which we live -- most notably, the right to legal abortion -- were created by the Supreme Court, instead of by Congress. Regardless of your opinion about the Roe v. Wade decision, it doesn't seem very democratic that five unelected, unaccountable justices should have the power to establish the rules by which we live.
Perhaps the greatest damage to democracy has been the tremendous amount of power amassed by "the permanent government," the unelected federal bureaucrats.
Consider:
Although the Constitution confers the legislative prerogative on Congress, in a typical year federal agencies will adopt more than 10 times as many legally binding rules as Congress passes laws (3,830 final rules compared to 285 laws in 2008, for example).
The Obamacare bill grants the Secretary of Health and Human Services the authority to determine or define what the legislation means no fewer than 1,697 times, according to a tabulation by Devon Herrick of the National Center for Policy Analysis.
This year's Dodd-Frank financial reform bill gives power to unelected officials to decide which financial institutions live and die. It also adds power to the 115 federal agencies that already shared regulatory supervision over the financial system, and guarantees high-paying federal jobs to all employees of those agencies, despite their failure to protect us from the financial meltdown of recent years.
The EPA has a long tradition of exceeding its statutory authority and seems determined to further cripple the generation of electricity by imposing heavy penalties for carbon dioxide emissions, despite the crack-up of the global-warming myth and the refusal of Congress to restrict CO2 emissions.
Nobody seems to be able to stop the National Labor Relations Board from helping unions to avoid conducting business in a way that is transparent to rank-and-file workers.
These are just a few examples of the power wielded by unelected officials. They are part of what the late economist Milton Friedman termed an "iron triangle": Congress appropriates funds for federal agencies, who, in turn, give grants to citizen-activist groups that then actively lobby Congress for expansions of those programs. Thus is maintained what Friedman and his wife, Rose, labeled "the tyranny of the status quo."
The influx of some new, Tea Party-supported legislators in Congress should make government marginally more democratic. At least we can count on an end to the imperial speakership of Nancy Pelosi, which was characterized by major legislation written behind closed doors (in the middle of the night), ram-rodding bills along partisan lines (before even Pelosi's allies could read them), and refusing to heed the concerns of millions of Americans (by excluding their elected representatives from even having a perfunctory say in Congress' proceedings). That is significant, though incremental, progress.
Will the Tea Party movement be able to tame Big Government in all its undemocratic manifestations? That isn't likely on the strength of just one strong mid-term election. The task ahead is daunting.
What happens to a car company that makes crummy cars, a restaurant that serves lousy food, or an insurance company that poorly serves its policyholders? Unless they mend their ways, they lose customers and eventually go out of business. That's how a free market works.
The notable exceptions are entities that enjoy special protection from government. Thus, Uncle Sam bails out select private businesses (e.g., GM, AIG, Fannie Mae); enlarges inefficient government bureaucracies (e.g., FEMA, EPA); and preserves monopolies for poorly performing government-created institutions (e.g., the postal service and the Federal Reserve System).
Let's take a closer look at the Fed. A thorough rethinking of Uncle Sam's central bank is long overdue.
Congress created the Federal Reserve System in 1913 to promote stable money and banking, and to lessen the disruptive ups and downs of the business cycle. The Fed has failed dismally.
Under the Fed's supervision, boom-bust cycles have continued. Three of them -- the Great Depression, the stagflationary period from 1974-82, and the current "Great Recession" -- have been devastating. Bank failures have occurred in alarmingly high numbers. The dollar has lost 95-98 percent of its purchasing power.
Tragically, the Fed appears to have learned little from its mistakes. Its current policy of "quantitative easing" continues its long tradition of creating bubbles by deliberately implementing inflationary policies. Citing the official Consumer Price Index, the Fed justifies its aggressive inflationary QE2 policy by asserting that price inflation is too low.
People living in the real world may disagree. In the last year, the Commodity Research Bureau's food index has risen 27 percent; cotton's price has more than doubled to an all-time high; and oil and gasoline prices have posted double-digit gains. The costs of eating, driving, and wearing clothes are trending higher at the very time the Fed plans to inject hundreds of billions of dollars (trillions, if needed) to prop up Washington and Wall Street.
What concerns me about the Fed's current course (apart from the danger it poses to the purchasing power of our income and savings) is the totally arbitrary way in which it is proceeding. The Fed has arrogated unprecedented discretionary powers to itself.
Indeed, the Fed now has a free hand to create however much money it wants and buy whatever financial assets it chooses, whether government or private or even foreign. There is no oversight or accountability. Even the Inspector General for the Federal Reserve, the Fed's official watchdog, has been left in the dark.
It is anomalous that there should be such a powerful, unrestrained institution as the Fed in our body politic. Its awesome, arbitrary powers make a mockery of constitutional checks and balances; it threatens not only our money, but liberty itself.
The chairman of the Fed is commonly referred to as the second most powerful person in the country. In a democratic republic, should the second most powerful policymaker be unelected?
Why won't Congress at least audit the Fed? Rep. Ron Paul has proposed this for years, but a majority of his colleagues seem afraid to take this simple, prudent step. This is the same Congress that routinely demands microscopically detailed access to the financial records of private-sector corporations. Why the double standard?
If there is going to be a central bank (and that is a big "if"), it needs to have a simpler focus than the Fed's current mission statement. The 1970 amendments to the Federal Reserve Act state that the Fed should "promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." These goals are misguided and unattainable.
First, the premise that the central bank can promote employment is erroneous. It is based on a spurious academic theory called the Phillips curve that posits a supposed tradeoff between inflation and employment. Unemployment is fundamentally a price problem, not a monetary problem; therefore, unemployment can only be cured by the presence of a free market in wages. Employment is not the responsibility of a central bank.
Second, central bank tampering with interest rates is the fundamental cause of the artificial boom-bust cycle; thus, the Fed or any successor institution should forever cease from tampering with interest rates.
Finally, focusing on "stable prices" is looking at the problem backwards. The Fed shouldn't try to influence prices any more than a nurse should influence the readings on a thermometer. The "fever" that causes prices to rise and purchasing power to fall is unstable, unreliable money. "Heal" the money, and prices will take care of themselves.
The sole mission of the Fed or any alternative guardian of our country's money should be to preserve the integrity of the monetary unit. That means an end to fiat money and a return to constitutional, honest money. The Fed, as currently constituted, must go.
To Federal Reserve Chairman Ben Bernanke, deflation is regarded as Public Enemy Number One.
In the words of New York Times columnist and Nobel Prize-winning economist Paul Krugman, the "real [economic] threat is deflation." Krugman advocates additional and even more aggressive government deficit spending.
The normally on-target Ambrose Evans-Pritchard, international business editor of The London Telegraph, favors more "Quantitative Easing" (i.e., a policy whereby the Fed would create trillions of new dollars with which to buy government bonds and other financial junk) to prevent deflation.
Why is deflation -- by which Bernanke et al. mean "widespread declining prices" -- so feared?
First, we must distinguish between benign deflation and traumatic deflation.
In a truly free market with a monetary gold standard, benign deflation would be the norm. Human productivity, unfettered by government intervention, typically increases total wealth several percent per year, whereas it is geologically impossible for the supply of gold (money) to increase at that fast a rate, and so prices tend to trend gradually downward.
The deflation that is possible today is traumatic. It is what economists describe as a "variety-rapid decline" in prices and spending. That kind of inflation triggers an accelerating, self-reinforcing cycle of widespread bankruptcies (both personal and business) and soaring unemployment. Mountains of debt would be vaporized by a chain-reaction of defaults.
Make no mistake about it: We are talking about very hard times here. You can see why policymakers in Washington are scared to death of this kind of deflation. No politician wants to face the wrath of the electorate by having such a wrenching deflationary cycle happen on his or her watch, so they will encourage Bernanke and the Fed to pull out all the inflationary stops to try to avert it.
Before you throw your support behind inflationary policies and hail the Fed and Uncle Sam as our economic saviors, there are two things you should understand: 1) The conditions that make us ripe for a traumatic deflation were caused by the very institutions that now propose to save us from it; and 2) deflation would be the lesser of two evils.
Traumatic deflations are the inevitable aftermath of prior massive inflationary bubbles. A bubble can't burst if a bubble doesn't exist. The sole cause of economic bubbles is government. The Fed's inflationary monetary policies -- holding interest rates artificially low, thereby over-stimulating fundamentally uneconomic investments -- caused the still-deflating housing and mortgage-backed security bubbles. Now, they are currently inflating bubbles in commodities, government bonds, and surely in other markets.
Government's fiscal policies of tax and spend are the other culprits that warp production into unnatural, uneconomic patterns. Fiscal policies in a democratic system suffer from the same inescapable problem that plagues socialist economies: The government cannot know what the people want nearly as well as the people themselves know, and so government inevitably over-stimulates production of things that people wouldn't freely choose while depressing production of what the people do want. Hence, government "experts" make society poorer than it otherwise would be.
Today, due to decades of massive government distortions of economic activity, market forces are impelling us toward deflation. The official policy is that the Fed will try to thwart these market forces by issuing floods of new dollars (i.e., inflation).
Economically speaking, inflation is like heroin addiction. The "highs" are enjoyable, even exhilarating, when bubbles inflate and the good times roll -- but underneath the surface, the health of the system is wasting away. Just as the addict has to suffer the wrenching pains of withdrawal in order to recover his physical health, so our economy needs to endure the short-term pain of a deflation in order to purge decades' worth of malinvestments, uneconomic patterns of production, and unfathomably massive amounts of unpayable debts.
The U.S. economy is a dead man walking -- a zombie on life support. If we don't bite the proverbial bullet and go through a painful cleansing, a healing period of deflation, the ultimate price we pay will be even worse. Like the heroin addict who can't kick his habit and eventually overdoses, someday the Fed will go too far in its inflationary policies. It will ignite a hyperinflation, thereby annihilating the dollar, wiping out the country's capital -- not to mention, the savings of the middle class -- and totally collapsing the economy.
We can pay a painfully high price for past government follies sooner, or an even more horrendous price later. Incidentally, a deflationary cleansing need not last a long time (e.g., Depression of 1920-21, when President Harding opted for market forces over government intervention). However, a quick deflation isn't possible today, because of our policymakers' mindsets. Congress, the president, and Bernanke & Co. believe blindly in government interventions to try to "help" us. They don't understand that such quackery leads to economic ruin.
December 15 is Bill of Rights Day. [Last] year was the 219th anniversary of the adoption of the first 10 amendments to the United States Constitution -- the Bill of Rights.
Few Americans notice Bill of Rights Day. That isn't surprising, since we have done such a poor job of upholding and abiding by its provisions. (From my perspective, only the Third Amendment is completely intact, while the Seventh, Ninth, and Tenth have been most completely ignored. Check them out for yourself.)
Rather than debate individual amendments, let's consider a more fundamental problem: We poorly understand the elementary concept of rights. Many Americans, both conservative and liberal, further cloud the issue by asserting that responsibilities frequently eclipse rights. We need a correct understanding of both rights and responsibilities.
To the Founders, government's sole legitimate purpose is to protect our rights. The Declaration of Independence specifies two essential points we need to understand about our rights: 1) They are God-given; 2) they are inalienable.
Divine authority is a stumbling block for some Americans, but it is the second point that is the immediate issue. That our basic rights are inalienable means, simply and unequivocally: No person or group of persons, including government, is justified (or authorized: see the Fifth Amendment) in trespassing upon anyone's rights -- that is, in taking life, liberty or property from another -- except via due process of law as a penalty for having harmed or violated someone else's life, liberty, or property. One person's rights end where another person's rights begin. Nobody's rights trump anyone else's.
The clear understanding of our fundamental rights has eroded over the decades. The property right has suffered the greatest damage. Under the influence of progressive/socialist ideas, the traditional American negative right to NOT have somebody take one's property has been corrupted and inverted into a positive premise. Now, people often claim a "right" to have certain things.
One of the most famous examples of this inverted concept of rights was President Franklin Roosevelt's so-called "Economic Bill of Rights." In 1944, FDR asserted that Americans had a "right to a useful and remunerative job," "a decent home," "adequate medical care," "a good education," etc.
Nobody objects to decent jobs, homes, health care, and education, but these good things can't be "rights." If one person has a legal right to have a home, then other people must be compelled to provide that home. That would violate those citizens' rights to their own liberty and property. In other words, "rights" in FDR's sense negates "rights" in the Founders' sense. (This is ironic, since it was FDR who instituted Bill of Rights Day in 1941.) Rights = no rights, a self-evident absurdity.
Critics assert that we have become too "rights-centered" and that we need to strike a balance between rights and responsibilities. This argument is inaccurate and misleading. First, our Republic has always been rights-centered -- after all, we have a Bill of Rights, not a Bill of Responsibilities. Second, no mature adult denies that we have responsibilities. In fact, responsibilities are implicitly inherent in the rights-based vision of our Founders.
Citizens have at least three primary responsibilities in our constitutional, rights-based order: First, to respect the rights of others (first, do no harm); second, to provide for self and dependents (since nobody has a right to anyone else's property); third, to find a way to render something of economic value to others in the social division of labor as the means to be self-supporting.
But don't we have a responsibility to help those who are in need? Yes, we who are in the Judeo-Christian tradition have a responsibility to extend charity to those who are incapable of helping themselves. This, however, is a moral responsibility, not a legal one. We are accountable to God, not to government, for our good works.
It makes no sense to say that those who work hard, are productive, and have savings, have a responsibility to provide for those who shirked that very same responsibility to provide for themselves. That position denies the premise that we all share the same responsibilities. It is to maintain that some competent adults have responsibilities and others don't -- analogous to the earlier point that spurious "rights" override the true rights of others.
The traditional American credo is that we all have equal rights and responsibilities. Progressives and other social engineers, by contrast, believe that government should decide whose "rights" and "responsibilities" receive privileged treatment. Which side of the fence are you on?
Hail to the Bill of Rights! May we always honor and uphold it. *
"The spirit of encroachment tends to consolidate the powers of all the departments in one, and thus to create whatever the form of government, a real despotism. A just estimate of that love of power, and proneness to abuse it, which predominates in the human heart is sufficient to satisfy us of the truth of this position." --George Washington
Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are from V & V, a web site of the Center for Vision & Values.
Now that the elections are over, attention is turning to the economy.
The stock market rose steadily from the end of August up to the elections. Since the stock market tends to be forward-looking, its recent strong and steady rise suggests that investors have been optimistic. In my opinion, two factors have generated that optimism:
1) The expectation that significant Republican gains in Congress would produce political gridlock, thereby putting the brakes on the Obama/Pelosi/Reid/progressive spending binge.
2) The Federal Reserve's promise of "QE2," a second round of "quantitative easing," the currently fashionable euphemism for creating mind-boggling sums of new money out of thin air.
Sorry to rain on anyone's parade, but I don't believe that gridlock (assuming it happens) and QE2 will be sufficient to turn the economy around. There are several reasons for my tepid outlook.
Surely, gridlock -- a political stalemate between the Democratic president and congressional Republicans -- will change the game. There will be no more enormously expensive and economically crippling legislation, like the mega-non-stimulus and healthcare/insurance reforms that were passed, or the cap-and-trade monstrosity that was barely averted.
To use a medical metaphor, compare the economy to a human body that has been bludgeoned. Obviously, it helps when the bludgeoning stops. But just because additional blows aren't being struck, it doesn't mean the patient is healthy; the patient is still at risk from internal injuries. Our economy urgently needs a trip to the emergency room for radical surgery and intensive care. The government needs to undo the massive damage it has inflicted on the economy over the last several years. It needs to reverse, not merely halt, runaway spending, and to shrink, not just slow, the growth of the federal bureaucracy.
Recently, the Congressional Budget Office released a study projecting total federal spending of $44.5 trillion during this decade. Since we are already choking on $3.7 trillion of spending this year, the implication is that Uncle Sam is on track to spend over $5 trillion in other years later this decade. Will the new Congress, even with the addition of several dozen fiscal conservatives, be able to overcome Obama's resistance to canceling trillions of dollars of planned spending? I doubt it.
Those longing for a return to the economic good times of the 1990s by replicating the gridlock that existed between the Clinton White House and Gingrich Congress need to realize that circumstances are significantly different today. Gridlock tends to preserve the status quo. That was desirable in the mid-1990s, when the economy was healthy and growing; preserving today's economic stagnation, by contrast, is not desirable; it is unacceptable.
Even if Obama and the new Congress surprise us by reducing the annual rate of growth of federal spending to the modest 2.9 percent level that Clinton and Gingrich achieved (highly unlikely, given Obama's ideology), the ticking time bomb of Social Security, Medicare, and Medicaid's unfunded liabilities will continue to push us inexorably onward toward ruin.
At any time, the world's bond investors may demand a higher interest rate to compensate for the risk of insolvency. That would cause the cost of financing our trillions of dollars of debt to soar, consuming hundreds of billions of dollars of tax revenues.
The see-no-evil optimists would say, "Hey, why worry? The Fed will buy all those bonds." That's the purpose of QE2.
The problem here is that bond investors will still demand a higher interest rate to compensate them for the cheapening of the dollar (what we call an "inflation premium") that will inevitably result from the Fed creating so many new dollars to buy the Treasury's debt. In anticipation of QE2, major bond-buyers -- notably the Chinese and PIMCO, the largest American bond fund -- have already started to sell Uncle Sam's bonds. I wouldn't want to bet against PIMCO chief Bill Gross, who is to bonds what Warren Buffett is to stocks. If the exit from bonds becomes a stampede, Katy, bar the door, because QE2 may then go to infinity, as in "hyperinflation." Adios, greenback!
Ben Bernanke has to know that QE2 cannot possibly produce prosperity. QE2 is another instance of "the money illusion" that all Econ 101 students (at Grove City College, at least) learn: Money isn't wealth, and even if the central bank created a million dollars for every single American, we wouldn't be any richer in real terms.
Yes, it's possible that a flood of new dollars may buoy stock prices, but in terms of real wealth and real jobs for Americans in general, lots of luck. Those pinning their hopes for a vigorous economic turnaround on political gridlock and QE2 are likely to be sorely disappointed.
You've probably seen the headlines about major banks suspending foreclosure proceedings to reclaim houses from borrowers who have defaulted on their mortgages. This has the potential to be hugely disruptive -- a milestone development comparable to the failure of Lehman Brothers in 2008, after which all hell broke loose.
Let me emphasize the word "potential." The core of the problem is that there are serious problems in proving who actually has clear, lawful title to specific houses.
This situation arose because of the last two decades' common practice of "securitization" -- the bundling of large numbers of mortgages into a new interest-paying, tradable security. These securities are then sold and resold, often several times. This has lead to widespread confusion. I read of one case in which no fewer than four different firms claimed to own a particular title, and thus the right to foreclose, on the same property.
Because many judges have blocked foreclosure proceedings on the grounds of unclear title, Bank of America, GMAC, and other financial giants have declared a moratorium on foreclosures until the legal picture becomes less muddied.
Some commentators insist that the problem is nothing more than a few technical glitches that can be easily corrected. Others assert that there has been massive fraud, false attestation (attesting to facts without having ascertained those alleged facts), and forgery (creating documents after the fact to produce a fictitious paper trail). Apparently, the states' Attorneys General feel there might be fire among all the smoke, because all 50 of them have initiated investigations, and many of them appear as though they are about to go on the prosecutorial warpath.
If, in fact, the problem is not easily rectified and the various allegations of malfeasance are sustained, here is what is at stake:
We are looking at a breakdown of the housing market. Would-be buyers can't obtain title insurance or loans to buy property without clear title. The country's entire real-estate market could freeze up, further torpedoing home prices and throwing a monkey wrench into the plans of millions of people who want or need to relocate.
The financial industry could break down. Currently, 4.5 percent of existing mortgages are in some stage of foreclosure. If banks can neither collect mortgage payments nor replace that lost income by selling the related properties, losses could be massive, perhaps catastrophic. Then the bailout issue would be back on the front burner.
If courts rule that "robo-signing" -- lenders mechanically signing off on thousands of foreclosures without taking the time to review the facts of each individual case as required by law -- constitutes fraud, then the resulting tsunami of fines and lawsuits could cripple or wipe out many lenders. Here again, would be a breakdown of the financial sector.
If either the housing market freezes up and/or the financial industry cracks up, then the process of economic recovery itself will break down.
If lenders can no longer foreclose on properties, how many millions of other mortgage-holders will decide to stop making their monthly payments? Anecdotal evidence indicates that there are already hundreds of thousands of "strategic defaulters." These are people who can afford their monthly payments, but have chosen to stop making payments, figuring that, at the very least, they can get away with living rent-free for a year or two before getting evicted. These numbers are bound to soar. The whole "strategic default" epidemic represents a breakdown of respect for law and also for the moral code (of honoring contracts) that constitutes the very heart of a viable economy.
The issue of clear legal titles to property is indispensable to a thriving capitalist economy, as the Peruvian economist Hernando de Soto explained in his bestseller The Mystery of Capital. We either restore the clarity and inviolability of titles to property, or our capitalist system breaks down.
At the center of the foreclosure controversy is an entity named Mortgage Electronic Registration Systems. MERS was hatched by Fannie Mae, Freddie Mac, and other giant players in the mortgage business to speed up the mortgage-backed securitization process and bypass various local property laws. If, in fact, MERS trampled on state and local laws, this represents a breakdown of constitutional federalism and a direct assault on the rule of law.
If all of the breakdowns listed above continue unabated, then we are peering over the precipice at a potential breakdown of social, civil, and political order, too. That's the nightmare scenario. Let's get back on track before it's too late.
Last week, thirteen Republicans released a "Pledge to America." What is most surprising to me is its length. At twenty-one pages, it was many times the length of the GOP's hugely successful 1994 "Contract with America." Why ditch a winning formula?
Furthermore, our increasingly unpopular president is known for being long-winded, and his progressive allies in Congress are infamous for concocting ridiculously long bills. Wouldn't a simple, concise list of objectives accentuate the contrast between the two parties?
Instead of sticking to the main theme of reining in an insanely expensive and increasingly intrusive government, the pledge was padded with statements designed to rally the traditionally Republican pro-life, pro-military, and small business constituencies. Yes, those areas are important, but the single issue that unites the largest number of Americans today is the concern that if we don't check runaway government soon, we never will. The too-broad pledge ends up being a hodgepodge of cliched sloganeering. It offers superficially bold but often frustratingly vague proposals, occasionally dubious math, and at least one glaring omission.
Here are some examples of the pledge's faults:
It expresses an intent to "make government more transparent . . . careful in its stewardship and honest in its dealings." But doesn't every party claim this? Why not pledge to drastically shrink government instead?
It also promises "a better America." Who would promise a "worse" America?
It offers "[a plan whereby] the best ideas trump the most entrenched interests." Sure. Then why not put entrenched interests on notice by forswearing earmarks? (This is the glaring omission I spotted.)
It aims to "eliminate wasteful and duplicative programs . . . while still fulfilling all necessary obligations." Everyone promises to trim waste, but it never happens; instead, too-big bureaucracies proliferate and expand. More fundamentally, where do Republicans differ from Democrats on the "necessary obligations" of government?
It seeks to "require congressional approval of any new federal regulation that may add to our deficit and make it harder to create jobs." Why not insert a period after "regulation" and leave out the qualifiers that follow? Currently, rules proposed by federal bureaucracies take effect automatically unless Congress -- which is too busy to even read its own bills, much less reams of bureaucratic regulations -- explicitly rejects them, and so they are almost never challenged. Change it so that no rule proposed by unelected bureaucrats takes effect unless Congress explicitly votes to adopt it.
The pledge suffers from occasional ambiguity. Its proposal to replace Obamacare with reforms like liability reform and permitting interstate sales of health insurance makes sense. But then the Republicans sound just like Democrats when they promise to "ensure [do they mean "mandate?"] that those with pre-existing conditions gain access to the coverage they need."
Remember the promise to eliminate "duplicative" programs? Then why promise "a net hiring freeze" for federal employees instead of reducing the federal payroll after Obama's rapid expansion of it?
The pledge calls for "preventing the expansion of unfunded liabilities." Fine, but simply freezing the amount of those unpayable promises isn't enough. If we don't eliminate many trillions of those liabilities, our financial doom is sealed.
Another intriguing proposal is to require every bill to include a citation of constitutional authority. Do Republicans regard such authority as the letter of the Constitution itself or merely judicial opinions written about the Constitution?
Overall, the pledge is not very bold. The authors' numbers suggest very modest plans for downsizing Uncle Sam. At one point, they write about rolling spending back to "pre-stimulus, pre-bailout levels." That sounds like at least a trillion-dollar cut to me, but then they say that such a step would save $100 billion. Huh?
The pledge has its redeeming features. Invoking the Declaration of Independence at the outset is inspiring. Some of the facts cited hit home -- e.g., how much higher taxes will be next year for middle class families and single moms if the Bush tax cuts expire; the existence of 2,050 federal programs providing economic assistance to Americans.
At best, though, the "Pledge to America" is a mixed bag. Clearly, its Republican authors sought to chart a middle path between Democrats and the Tea Party movement. In that, they succeeded.
This is probably a sound political strategy for the GOP. With voters weary of heavy-handed, hatch-it-behind-closed-doors-in-the-middle-of-the-night-then-ram-it-into-law-before-anyone-reads-it legislation (not to mention counterproductive "stimulus" plans, in-your-face cronyism, and soaring national debt), 2010 is the Republicans' election to lose. All they have to do is run to the right of Obama and they will make large gains in Congress.
Would the "Pledge to America," even if adopted in its entirety, be enough to turn us off our current road to national bankruptcy? No. But perhaps it will prove to be the first of many steps needed to restore economically sound governance to our country.
A couple of years ago, the terms "too big to fail" and "bailout" were the trendy buzzwords. Currently, the "in" word seems to be "austerity." On both sides of the Atlantic, public officials and media pundits are debating the need for "fiscal austerity programs," i.e., shrinking government deficits by increasing tax revenues and/or reducing expenditures.
The term "austerity" is problematic. It connotes sacrifice and deprivation. While "austerity" programs include cutbacks in some persons' lifestyles, it seems odd to say that learning to live within one's means is a sacrifice. What some call "austerity" is simply the recognition of reality: A society cannot chronically consume more than it produces.
Favoring "austerity" are those worried that today's swollen budget deficits and national debts, if not corrected, will trigger an economic catastrophe through a sovereign debt crisis (i.e., the inability of governments to find buyers for their bonds). Opposing it are those who profess concern about the economic hardship that would be endured by innocent victims, and/or those who believe that the right economic policy is for governments to increase spending and budget deficits even more than they already have.
Traditionally, "austerity programs" have been International Monetary Fund (IMF) bailouts of heavily indebted, virtually bankrupt Third World governments. For governments to obtain a loan, the IMF has required them to get their fiscal affairs in order by reducing their budget deficits.
Today, by contrast, we find that some of the wealthiest countries in the world require "austerity programs." The dangerous indebtedness of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) is well known. This has deflected our attention from the salient reality that the United States has comparable degrees of debt and deficits to those European countries. We, too, are in danger of either a sovereign-debt and currency crisis.
We should be ashamed and alarmed that we are even talking about "austerity programs" for the United States of America. The very fact that we are doing so means that we have lapsed into a Third-World-style quagmire of fiscal incompetence and over-indebtedness. Like a banana republic, we have allowed a self-serving political class to spend tax dollars and borrowed funds to "buy" popularity and take us to the brink of national bankruptcy.
Uncle Sam has behaved like a guy earning $40,000 per year who -- with the help of borrowing -- has been spending $60,000 per year. Obviously, that can't continue indefinitely. In fact, such a person can't repair his balance sheet even if he reduces his annual consumption to $40,000; he has to consume less than $40,000 to be able to serve his debt obligations. So it is with Uncle Sam.
In recent years, our government has gone on a spending binge. As a result, today's economy is sluggish and severely hung over. Yet Keynesian economists like Paul Krugman tell us that we haven't binged enough. We've been belting down doubles, but Krugman says that the cure for our fiscal hangover is to go back to the bar and start chugging triples. No thank you.
Other pundits on the left are calling for tax increases instead of spending cuts. Their primary goal is the redistribution of wealth, and so they object to the alleged unfairness of spending cuts. This raises the issue of whether existing government payments to individuals ever were fair. There isn't space to debate this now, but the overriding problem is this: If federal spending isn't cut significantly, we will end up with a financial crisis and economic crack-up that will cause more economic pain for more people, including those that the redistributionists claim to want to help. What could possibly be fair about that?
It is clear what we must do: slash government spending. Tax rates should not be raised while we are in this weakened economic condition.
What some call "austerity" is simply a return to fiscal sanity and economic reality. We cannot continue to spend more than we produce. The adjustments will be painful, but the longer we wait to bite the bullet, the more painful those necessary adjustments will be.
One more point: The blame for the pain caused by "austerity" belongs, not to those who make the politically difficult decisions to cut spending, but, to those in the past who made politically facile decisions to spend beyond our means. They are the ones who got us into this mess.
If you read the financial press or listen to what politicians say, you have probably heard many times how important it is for the Chinese renminbi (yuan) to strengthen against the dollar. Indeed, it sometimes sounds as though a weaker dollar is the key to a prosperous economic future for Americans. Nonsense!
Let's look at this issue from an individual standpoint. Are you better off with a stronger or weaker dollar? In other words, do you hope to be able to buy a lot or a little with a dollar? Silly question, isn't it?
I first learned the advantage of a strong dollar when I lived in Colombia, South America, as a 19-year-old. When I first got there, I could exchange one U.S. dollar for 16 Colombian pesos. Several months later, I could get close to 20 pesos per dollar. At that exchange rate, I could buy a steak dinner and a beer in a nice restaurant on Carrera Septima, the main street of the capital city, Bogota, for the equivalent of one dollar. For an impecunious college kid, that was a real treat!
A strong currency is a consumer's best friend. Why, then, do politicians fixate on exchange rates and lobby for a weaker dollar?
There are two reasons for this anti-consumer attitude: an obsession with balance of trade data and the problem of debt. Let's examine the trade question first.
We hear the constant refrain that we have such a large trade deficit with China because China manipulates the dollar-yuan exchange rate, keeping the yuan artificially cheap. True, the Chinese do manipulate the exchange rate. But if the yuan were to strengthen significantly over the next several years -- say, even if it doubled vis-a-vis the dollar (although there is no guarantee that it would in a free, unmanipulated exchange-rate market) -- would China's trade surplus with the United States shrink? Probably not.
Nearly 40 years ago, the exchange rate for the Japanese yen was over 300 to a single dollar. Japan was running a large trade surplus with the United States. Some experts believed that the way to shrink the Japanese surplus (i.e., the U.S. trade deficit) was for the yen to appreciate.
Fast forward to the 1990s. The exchange rate was about 90 yen to the dollar. In other words, the yen bought more than three times as many dollars as before. And guess what? The U.S. trade deficit with Japan hardly budged.
In fact, Japan derived some considerable benefits from the stronger yen. For example, since the global market for oil is priced in dollars, the real cost of higher oil prices to the Japanese has been only about 1/3 of ours. Advantage, Japan.
Just as other factors outweighed the impact of the currency exchange rate in the trade balance between Japan and the United States, this has also been the case in recent years with China. Between July 2005 and July 2008, the yuan strengthened 21 percent against the dollar, and yet the annual trade deficit rose from $202 billion to $268 billion.
American imports from China increased by 39 percent during that period in spite of the stronger yuan. In theory, a stronger yuan is supposed to reduce American demand for Chinese goods by pushing their prices higher. In practice, though, most Chinese goods are labor-intensive, meaning that labor is the major component in their price -- yet even if Chinese wage rates rose by several multiples, the goods they produce would still be competitively priced here.
This isn't to say that no Americans benefit from a weaker dollar. The weak buck increases the sales of some exporters. I'm sure they are delighted to contribute to the reelection campaigns of politicians who are weak-dollar proponents, even though most Americans are net losers due to reduced purchasing power.
Besides exporters, the other special interest group that benefits from a weaker dollar is official Washington itself. Throughout history, debtors have favored monetary debasement and depreciation. It is easier to repay debts that way. Since Uncle Sam is the largest debtor in the history of the world, Washington insiders have the strongest incentive to weaken the dollar.
Even though a weaker dollar defrauds our creditors, foreign creditors prefer getting repaid in cheaper dollars to an outright default and suspension of payments, so they will hold their noses and settle for what they get. Through this ethically dubious device, our profligate, dissolute, bankrupt government bleeds the wealth of productive citizens and manages to prolong its misrule for a while longer. We the people are left to hold our noses -- just like the Chinese and our other creditors. *
"Liberty must at all hazards be supported. We have a right to it, derived from our Maker." --John Adams
Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are from V & V, a web site of the Center for Vision & Values.
In most, if not all, states, pupils must pass a course in American history to receive a high-school diploma. Unfortunately, when it comes to our country's economic history, most students are poorly taught, perhaps wrongly taught. Mythology and error prevail where facts and truth should reign.
Some economists and historians have made excellent contributions to correcting the historical record. Dominick Armentano's Antitrust and Monopoly sets the record straight on the "monopoly" bogeyman. Burt Folsom's The Myth of the Robber Barons and New Deal or Raw Deal? demolish numerous fairy tales. Much work, though, remains to be done.
Here are three of the most vitally important lessons from American economic history that are widely neglected today: 1) the history of our money, 2) the Constitution's built-in bulwark against runaway government spending, and 3) government's counterproductive responses to economic recessions.
Few contemporary students are familiar with the phrase "Not worth a continental." The continental dollar was the paper currency issued by the Continental Congress from 1776 to 1780 to finance the War of Independence.
The continental currency met the fate of all paper currencies not backed by gold or silver. The Congress, desperate for more purchasing power, printed vast sums of continentals. The resulting hyperinflation rendered the bills nearly worthless; hence "not worth a continental."
This fiasco wrought devastation. Soldiers, farmers, merchants, and even financiers, were wiped out, impoverished. Because of this ruinous experience, the Founders drafted a Constitution designed to avoid the pitfalls of paper money. One of Congress' enumerated responsibilities is to "coin money" (in contrast to "print currency"). The Constitution also stipulates that states settle all their financial obligations in gold or silver.
Having suffered the ravages of paper money, the Founders sought to spare us from similar grief, but alas, subsequent generations of leaders have steered us away from constitutional money. Instead, we use unbacked Federal Reserve Notes, which are destined to suffer the same dismal fate as the continental currency and all fiat money.
There is an instructive incident recorded about the life of the famous frontiersman, Davy Crockett. When running for re-election to Congress from his district in Tennessee, Crockett encountered one Horatio Bunce, a farmer who informed Crockett that he would not vote for him because he disregarded the Constitution. This led to a fruitful dialogue during which Bunce tutored Crockett on the Constitution, explaining that Congress had no authority to give economic charity, especially with other people's money. Crockett henceforth was a born-again constitutionalist. (This account is available at www.fee.org. Search: "Not Yours to Give.")
Another historical vignette of similar import was President Grover Cleveland's frequent use of the presidential veto. Cleveland might have been the last true constitutionalist in the White House, repeatedly refusing to approve of congressional attempts to expand government spending beyond its constitutional limits.
"Big Government" cheerleaders today dismissively tell us that 18th and 19th century practices are passe and that the role of government must change. Yes, of course. George Washington and the other Founders understood that change was inevitable, and they provided for change.
In his Farewell Address, Washington advised us to alter the Constitution "by an amendment in the way which the Constitution designates," and later added, "But let there be no change by usurpation" (either by tortured constitutional reinterpretations or by simply ignoring the Constitution when it became inconvenient). The Founders knew that a government that would slip the chains of the Constitution would begin to redistribute wealth and ultimately bankrupt the country. Now, having ignored Washington's wise counsel, we face the prospect of bankruptcy that he and the other Founders sought to spare us.
Americans deserve a historically accurate account of the ineffectiveness of government intervention during economic downturns. The current teaching about recessions, and particularly the Great Depression, is riddled with errors.
For example, Herbert Hoover was not a laissez-faire president; government "stimulus" spending does not cure recessions; the Federal Reserve can not restore prosperity by lowering interest rates and/or inflating the money supply.
In fact, Hoover scorned free markets. He engaged in so much government intervention that Roosevelt accused him of reckless over-spending and socialistic tendencies.
The most effective anti-recession policy of the 20th century was President Warren Harding's anti-stimulus policy of slashing federal spending nearly in half.
More money is not the cure for depressions, as can be seen by contrasting the depression of 1920-21 with the early 1930s. The money supply contracted to a comparable degree both times, but in the 1920s prices and wages were more flexible (that is, free of government intervention), so that they could adjust and bring supply and demand into balance. In short, markets work if government stays out of the way.
On economic issues, the Founders had it right. We can spare ourselves a lot of pain if we heed the lessons of our own national history.
The grand lesson of the 20th century is that Big Government retards economic progress.
The evidence of this lesson goes beyond the socialist countries and their dramatic economic failures. Several decades ago, as a young economist, I encountered repeated studies that showed a high correlation between two macroeconomic phenomena: The larger the government's share of a country's GDP, the slower the rate of economic growth tended to be. Conversely, economic growth flourished where government was relatively small.
Many Americans seemed, and still seem, impervious to this lesson despite our own history. The same correlation was evident in the 1920s, when President Harding cut the size of federal spending in half, leading to a decade of prosperity, and in the 1930s, when the economy tanked under Presidents Hoover and Roosevelt and their huge expansions of government.
Despite this clear historical evidence, President Obama is committed to growing government. He has increased federal spending to over 27 percent of GDP, up from 20.5 percent when George W. Bush left office.
Obama indisputably favors the public sector over the private. When Michelle Obama gave her famous speech a couple of years ago, urging young people to avoid working for profit-seeking (i.e., private) companies, she was doing more than simply expressing an opinion: She articulated her husband's agenda.
It started on day one, when Obama staffed his cabinet and other top positions in his administration with a record-low percentage of people with private-sector experience -- fewer than 10 percent (the historical average is near 40 percent).
Since then, he has consistently worked to bring more and more people onto the government payroll. He increased the number of paid positions in Americorps by 224 percent; Teach for America by 94 percent; Peace Corps, 24 percent. The health-insurance bill created dozens of new agencies. The just-passed financial reform bill creates a new bureaucracy with an initial budget of nearly a billion dollars per year.
One source recently reported that Team Obama is revoking contracts with private firms and transferring the work to government employees. The government even hires former employees of the private contractors, giving them significant pay-and-benefit hikes. That may be good for them, but at a time of record budget deficits, finding ways to increase the costs of government doesn't make economic sense.
In his compact 1944 classic, Bureaucracy, economist Ludwig von Mises explained why bureaucracies are inherently uneconomical. Whether under socialist or democratic governments, bureaucracies are not disciplined by the profit-loss calculus. Insulated from the competitive marketplace, they become bloated and inefficient.
When private businesses serve customers poorly, their revenues decline. If their losses are severe enough, they fold. Exactly the opposite happens with bureaucracies. If they fail to get the job done, Congress typically appropriates more funds for them. We saw this with FEMA after Hurricane Katrina, and the same dynamic will play out with Obamacare, too, unless it is repealed. It's the nature of the beast.
No society can afford to bear the costs of many bureaucracies. As much as Obama prefers government workers, most people need to be in the private sector generating the wealth that government appropriates for bureaucratic functions.
This implies that Obama has veered down a dead-end detour. He wants government agencies to be in charge of this, that, and the other thing, but how can we pay for it all? A bureau-centric policy agenda inevitably impedes economic growth.
Obamanomics, in short, ignores two economic truths: Expanding government's share of GDP cripples economic growth. So does a proliferation of new government bureaucracies. From this we may predict that Obama's policies will saddle us with continuing economic sluggishness.
Given that Americans tend to replace presidents when the economy is struggling, can we predict that Obama will be a one-term president? I don't think so. The presidential campaign of 2012 could be a repeat of 1936 (FDR's first run for re-election). The historical record shows that many voters in 1936 were disappointed about the terrible shape of the overall economy after four years of New Deal programs. Many who were unhappy about the economy voted for Roosevelt anyhow. Why? Because they were benefiting personally from his massive spending programs.
Obama's stimulus plan has been and will continue to be spent in ways that benefit targeted groups. His recent request for another $50 billion to give to teachers, firefighters, and police (traditionally, these have been locally funded public employees, and therefore independent of Washington) is just one example of Obama's politically strategic spending.
Obama has ignored the economic lessons of history, but he has taken to heart the political lesson of FDR's formula for electoral success. It would be prudent and timely for us citizens to grasp both the economic and political lessons of our history.
I'm now convinced that the Obama administration is placing its political agenda above policies that would contribute to the economic recovery that millions of Americans so desperately need. That agenda includes bringing more economic activity under government control, making more people dependent on government, and, generally, redistributing wealth.
I have come to this conclusion after listening to Team Obama's spokesman, Treasury Secretary Tim Geithner, assert that allowing the Bush tax cuts to expire on December 31, as currently scheduled, is good policy. In truth, raising tax rates when the economy is faltering is counterproductive. It will weaken the economy further. Given the sorry state of the economy -- with the jobs markets, credit markets, construction industry, and small-business climate all in states of decline or stagnation -- adopting a policy that will exacerbate economic stagnation and increase hardship for Americans is worse than ill-advised.
George W. Bush persuaded Congress to lower taxes on income, inheritance, capital gains, and dividends to resuscitate the moribund post-9/11 economy. Those tax cuts helped foster a pickup in economic activity. Today's economy is moribund again, yet Geithner wants all those taxes to go up at year-end.
There is no justification -- theoretical or historical -- for such a policy. And it isn't just free-market economists who believe that raising taxes during a time of economic weakness is counterproductive. Lord Keynes -- the famous economist whose 1930s-era theories were exhumed by Team Obama in support of "stimulus" spending programs -- maintained that economic sluggishness calls for tax cuts, not tax hikes. (Have you noticed how Keynes is invoked when his theories support what Team Obama wants to do, but they leave him in the closet when his theories conflict with their objectives?)
The historical evidence is also weighted against Geithner. As I have written before, the depression of 1920-21 was followed by cuts in both tax rates and government spending, and the economy recovered; by contrast, in the 1930s, both Hoover (Republican) and Roosevelt (Democrat) raised taxes and spending -- Team Obama's identical policy today -- and the economic misery was prolonged.
Geithner's arguments for letting the Bush tax cuts expire were, frankly, devious. He asserted that this step was needed to convince bondholders around the world that the United States is serious about reducing deficits. Apart from the inconvenient fact that raising tax rates often lowers tax revenues (e.g., the 1930s under Hoover and Roosevelt), Team Obama has engaged in a classic bait-and-switch maneuver.
It wasn't that many months ago when the Obama administration, having jacked up federal spending by almost a trillion dollars in emergency stimulus spending, was talking about scaling back about half of that spending. That was a clever way for Team Obama to convince the gullible that the president and his administration are fiscally responsible, when their actual goal was to lock in a permanent 12-figure increase in federal spending.
Are you hearing any noise from Geithner about reducing Uncle Sam's out-of-control spending as a means of persuading bond investors that our government is beginning to return to fiscal sobriety? Nope. All of the focus is now on high spending and high taxing -- i.e., depression-inducing economic policy in its purest form.
Geithner played the class-warfare card by asserting that the tax cuts would only hurt the top two or three percent of taxpayers. That may be technically true (though even that is in doubt until we see if the other 97 percent of Americans are indeed protected by extending the Bush tax cuts for them), but it is economically untrue. You can explicitly and directly increase tax rates only on the top earners, but the indirect effects of such tax hikes will be profound. The reduction in production and investment caused by tax increases will end up harming many Americans in lower income brackets.
Perversely, the tax hike that Obama and Geithner want would hurt Americans of modest or low incomes more than the rich. In the name of "social justice" and making the rich pay "their fair share," pro-tax-hike zealots are willing to sacrifice the economic well-being of Joe Lunchbucket. That raises interesting questions: Are the "soak the rich" clique economically blind and ignorant, not knowing what they are doing? Or do they know that their Big Government agenda will cause unnecessary economic pain, yet they are willing to pursue it anyway? Either way, these are some very troubling questions.
It is hard to find anything positive to say about the corporate income (i.e., profits) tax. Economists across the ideological spectrum agree that the corporate profits tax is woefully inefficient:
1) It warps corporate decision-making, inducing expenditures made only to reduce a company's tax liability.
2) The compliance costs are astronomical, often exceeding 60 cents for every dollar of revenue that the government raises from taxing corporate profits. How would you like to spend $6,000 per year calculating that you owe Uncle Sam $10,000?
3) It fosters over-reliance on debt. Corporations often need to borrow money to replace funds that government taxed. In fact, the tax code encourages debt, making corporate debt tax deductible.
The corporate profits tax is also ethically problematical.
Every year we read about some corporations that earned profits paying zero taxes, while other firms are ensnared in the tax net. This is patently unfair.
The unfairness is compounded by the periodic tax breaks that Congress writes. The timing of such tax breaks is arbitrary. Why should some firms receive an accelerated depreciation allowance for helpful upgrades paid for this year when their competitors upgraded last year and received no comparable break?
Another thorny ethical problem involves the tax-free status of non-profit organizations. Some of them engage in political lobbying where they enjoy a cost advantage vis-a-vis for-profit organizations that lobby on the same issue (though perhaps on the other side). Other non-profits compete directly with for-profits for personnel, supplies, etc. The newest ethical abuse is that formerly for-profit companies can convert to non-profit status as a loophole to make themselves eligible for additional federal earmarks.
Despite the glaring economic and ethical shortcomings of the corporate profits tax, such taxation enjoys widespread popular support. A large percentage of citizens like the idea of taxing "rich" corporations. However, the economic reality is different from the common perception.
It's a cliche, but true: corporations don't pay taxes, people do. Corporations are simply fictitious legal persons serving as unpaid tax collectors for governments. The actual economic burden of taxation is borne by real people, i.e., consumers, who pay higher prices; workers, who are left with lower compensation packages and diminished employment opportunities; and investors, particularly the millions of middle-class Americans who own stocks in their retirement and investment accounts, because the corporate income tax makes their investments worth less.
In addition to being economically irrational, ethically dubious, and a cynical disguise for taxing real people, most of whom are not rich, the corporate profits tax stunts economic growth. In a recent study, the Organization for Economic Cooperation and Development affirmed, "Corporate taxes are found to be most harmful for growth, followed by personal income taxes and then consumption taxes."
Currently, the United States has the second-highest corporate income tax rate in the developed world, 35 percent. Should we trim this rate? No. We should scrap the tax entirely.
The biggest problem with eliminating the corporate profits tax, which raised $138.2 billion in fiscal year 2009, is that it would aggravate our budget deficit. To offset this sudden loss of revenue, Congress should terminate all federal subsidies to businesses. Although precise definitions of corporate welfare and exact dollar figures for such government favors are hard to tabulate, they surely exceed $138 billion per year. Let's do away with the myriad privileges for special business interests and make them earn their income by serving consumers instead of milking the taxpayers.
American workers would benefit greatly from ditching the corporate profits tax. Business flooded into Ireland when it undercut the other EU countries by lowering its corporate income tax rate to 12.5 percent. A zero percent rate on corporate income here would be even more enticing, making the United States the favored destination of multinational corporations. Job opportunities would mushroom, and the resulting expansion of the tax base would lower the federal deficit.
The benefits of jettisoning the whole corporate income tax/corporate welfare mess would be many: More jobs, more production, more wealth, more fairness, and lower government deficits. Who could object?
Unfortunately, many people. Start with the strange bedfellows of corporate lobbyists and anti-capitalist ideologues. Then add the politicians who traffic in political favors and moral posturing. Finally, add the millions of American citizens who fail to perceive that, instead of soaking the rich, the corporate profits tax is a scorched-earth policy inflicting widespread economic damage on middle America.
Abolishing the corporate profits tax isn't politically feasible today, but we can hope for a day when economic reason prevails and we get this albatross off our backs.
"Climategate: A Veteran Meteorologist Exposes the Global Warming Scam" by Brian Sussman, WND Books (April 22, 2010), 240 pp., List Price: $25.95 B.
Climategate is thorough, knowledgeable, timely, and very well written. I have been reading about global warming for 20 years, yet this book included important information and details that were new to me.
The title of the book requires clarification. Climategate is not a book-length dissection of the "climategate" scandal that erupted last November when a huge bunch of incriminating e-mails between key global warming advocates came to light. Instead, it gives a big-picture treatment of the science, politics, economics, ideological underpinnings, and personal agendas behind the global warming issue.
The author of Climategate, Brian Sussman, is a trained meteorologist who was a TV weatherman in California for many years. He currently hosts radio station KFSO's top-rated morning talk show in the San Francisco Bay area.
For most of his book, Sussman writes in a breezy, folksy, upbeat style that makes learning important information enjoyable. The tone shifts to earnest eloquence toward the end, when he warns us about the great dangers to liberty and prosperity posed by the ruthlessly ambitious elitists behind the global warming scam.
The most prominent of these elitists is, of course, Al Gore, who -- according to Sussman -- is well on his way to becoming the world's first anti-carbon billionaire. Gore's elitism is encapsulated in his statement, "There are times when a small group has to make difficult decisions that will affect the future of everybody." Gore is all too happy to accept his self-appointed responsibility to restructure our lives.
Sussman provides plenty of evidence that Gore and other global warming activists bend, if not mutilate, truth and science in pursuit of money, power, and prestige. For example, in Gore's Oscar-winning horror film, An Inconvenient Truth, the graph showing an apparent correlation between global temperature and CO2 in the atmosphere is shown briefly, so that viewers won't have time to notice that increases in CO2 occurred after increases in temperature, thereby demolishing the assertion that CO2 causes global warming.
Sussman also recounts how an English court found that Gore's "film contains nine scientific errors" in the context of "alarmist" and "exaggerated" content. That court ruled that An Inconvenient Truth amounted to "political brainwashing" for partisan, nonscientific objectives, and further ordered that the movie could not be shown to British schoolchildren without being accompanied by a 56-page instruction guide which points out where Gore's claims "do not accord with mainstream scientific opinion."
Climategate is a wide-ranging expose of characters and special-interest groups that have exploited the global warming scare for self-serving purposes. For example, Sussman reports that the grandstanding dictator of the Maldives has demanded billions of dollars from the developed world on the grounds that human-caused global warming threatens to cause his low-lying chain of islands to disappear. In fact, the sea level there is falling.
One group exposed by Sussman is the Society of Environmental Journalists. SEJ provides lists for journalists preparing stories on global warming. One list recommends trusted advocates of global warming; the other blackballs scientists who are global warming skeptics.
Sussman also explains some of the measuring errors that have clouded the global warming issue. For example, adding new weather stations near urban heat islands, and arbitrarily "expanding" the Arctic to include an additional four million square miles of territory farther south from the North Pole, both produce an illusory increase in average temperatures.
Climategate includes the most detailed explanation I have yet seen of how untenable the anthropogenic CO2-as-culprit theory is. Sussman gathers the scientific information about the relative heat-trapping capacity of different atmospheric gasses, shows CO2's percentage of the whole (both with and without the major greenhouse gas, water vapor) then factors in mankind's share of total global CO2 emissions. Bottom line? Humans are responsible for about one-ninth of one percent of the greenhouse effect (and, as Sussman briefly explains, the greenhouse effect is only one of several factors that influence earth's temperature).
Sussman's chapter summarizing the pros and cons of the various sources of energy provides an excellent primer on the subject. His information about how corporate and political insiders stand to make billions in controlling the government-rigged energy market under a cap-and-trade scheme while regimenting Americans under a yoke of Big Brother-like, high-tech monitoring devices is chilling.
It is difficult to overstate the importance of this book. Climategate provides a comprehensive debunking of global warming mythology. It sounds a timely warning about how grim our future will be if powerful elitists and special-interest groups succeed in imposing their agenda on us. If you only understand global warming in bits and pieces, this is the book that puts it all together for you in the proper perspective and context. *
"Man, once surrendering his reason, has no remaining guard against absurdities the most monstrous, and like a ship without rudder, is the sport of every wind. With such persons, gullibility, which they call faith, takes the helm from the hand of reason and the mind becomes a wreck." --Thomas Jefferson
Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are from V & V, a web site of the Center for Vision & Values.
The explosion that sank British Petroleum's Deepwater Horizon oil-drilling vessel/platform in the Gulf of Mexico in April was an unmitigated disaster. The accident killed 11 workers and has caused massive environmental damage, the full extent of which may not become known for months or years.
Here are some thoughts on this horrible event:
1) The deaths of 11 workers drilling for oil -- less than three weeks after the deaths of 29 West Virginia coal miners -- serve as a vivid reminder of the dangers faced by those who toil to supply the raw energy upon which our society depends. Most of us take for granted these vital contributors to our economic life. As one who never knew his father due to an oil-field accident long ago, I tend to view these folks as unrecognized heroes. Thank you to all who are doing this essential, dangerous work; may God comfort all who have lost loved ones in this endeavor.
2) The technologies that have been developed to extract fossil fuels from the earth are engineering marvels. Some drilling vessels in the Gulf are nearly the size of World War II-era aircraft carriers. There have been over 14,000 wells drilled in at least 700 feet of water with a superb overall safety record, including no oil spills in the Gulf despite the merciless battering inflicted by Hurricane Katrina. (Whether drilling these wells is safe enough to be permitted is a separate question that will be revisited below.) Drilling for oil in oceans five miles deep, into deposits where the temperature can reach 900 degrees and the pressure 20,000 pounds per square inch, is a colossal engineering achievement.
3) We must never forget the power of nature. Humans have devised myriad ways of fending off nature's destructive power, but there will always be times when nature will simply overpower and overwhelm our best efforts. The explosive force that erupted through the ocean floor and destroyed Deepwater Horizon is one emphatic reminder of that awesome might.
4) Was the disaster avoidable? This is the key question. It is very tempting to jump to conclusions, but first we need more fact-finding.
There have been reports that workers saw considerable physical evidence that key parts of the built-in safety mechanisms on Deepwater Horizon had disintegrated. A preliminary congressional memo containing admissions of "mistakes" by BP reinforces the impression that the disaster might have resulted from a faulty decision-making process. If so, then this horrible tragedy will enter business-school literature as perhaps the definitive case of a dysfunctional managerial chain-of-command.
One of the oldest lessons in the book is to avoid being penny-wise and pound-foolish. How tragic and foolish it would be if it turns out that a decision was made to ignore a safety shutdown that would have cost millions, thereby resulting in an accident that surely will cost BP and related corporations billions.
There has been an unconfirmed report that government regulators gave Deepwater Horizon a pass. If so, why?
5) Finally, should we stop drilling for hydrocarbons in such deep waters? The central problem we deal with in environmental economics is whether the costs of an activity outweigh the benefits or vice versa. It isn't always possible to accurately tabulate costs and benefits, but without a doubt, the environmental and human costs of the Deepwater Horizon disaster are gargantuan.
I certainly can't say whether deep-sea oil development should continue. With 20 percent of the oil consumed in the United States coming from the Gulf of Mexico, a complete cessation of drilling there appears to be out of the question. Certainly, though, there will be a re-examination of where drilling will be allowed.
Many people are asking why there is drilling in such deep waters. This is a complex issue with multiple factors to consider, but ironically, environmentalists may be partly responsible.
For decades, environmentalists have striven to thwart the development of domestic supplies of energy. They have blocked oil exploration and development in vast tracts of Alaska, the Rocky Mountain states, and the outer continental shelf under relatively shallow waters along our coasts. Furthermore, environmentalists succeeded in preventing increased usage of another energy source that is economically competitive and ecologically and operationally the safest energy source readily and abundantly available to us -- namely, nuclear energy.
If these sources of energy had not been choked off in the name of environmental protection, would energy companies be currently drilling as many higher-cost wells in deep water? Is it not possible that zealous environmentalists have unwittingly driven energy companies to drill for oil in places where perhaps they have no business drilling? Should environmentalists rethink their positions and make their peace with sources of energy that pose less of a threat to the environment than deep-water drilling?
These are important questions for environmentalists, policymakers, and indeed, all of us, to consider.
Charity -- a loving spirit concretely expressed in unselfish good deeds to one's fellow man -- is a primary Christian duty. Nobody who has read the New Testament can come to any other conclusion.
In his parable of the Good Samaritan (Luke 10:30-37), Jesus explains what it means to love one's neighbor as oneself. When the Samaritan happened to encounter a man who had been badly hurt by robbers, he compassionately ministered to the man's needs. This was in stark contrast to two other men who already had seen the wounded man and left without helping him. The vivid contrast was made even more stark by the fact that the merciful man was a Samaritan, whom Jesus' own people, the Jews, despised as religious inferiors, while the heartless men who ignored the victim's plight -- a priest and a Levite -- came from the ranks of the religious elite.
The Good Samaritan gave what he could to help the wounded man. He first took care of him himself, and then, when his own pre-existing commitments necessitated his departure, he paid an innkeeper to nurse the man back to health.
In this famous parable, Jesus illustrated, with exquisite (and typical) brevity and simplicity, the two forms of Christian charity: first, assistance provided personally and directly to another; second, rendering assistance indirectly by donating one's own property to those who have the time and skills to tend to those in need, in lieu of our own hands-on assistance.
As a thought experiment, let's imagine the story of the Good Samaritan taking a different twist. Let's suppose that the Samaritan, upon spotting the badly wounded man, also sees a rich man walking by. Let us then suppose that the Samaritan is a big, powerful man who intimidates the rich man into handing over enough money to pay for the wounded man's care. The man in need would still receive the help that he so desperately needs, but would the Samaritan still touch our heart, and would he have acted selflessly? Would we remember him as a paragon of Christian virtue and charity?
Jesus had not demanded that the Samaritan take money from strangers on the street by threat of force. That wouldn't feel right, would it?
The obvious difference, of course, is that in Jesus' parable, the Samaritan acts voluntarily -- out of the goodness of his own heart -- whereas in my hypothetical, counterfeit version, the Samaritan engages in an ersatz pseudo-charity by forcing someone else to pay for the good deed that the Samaritan wants to be performed. Is it true charity to be generous with other people's money?
This is the murky moral territory onto which many Christians stray in the name of "social justice" or the social gospel. The desire to help those in need is laudable, but the means often employed by advocates of "social justice" are not.
Many Christians commit a fundamental error when they call for government to redistribute wealth to the poor, the sick, the needy. Government necessarily introduces the additional factor of compulsion into the equation, as government employs organized force.
If we wouldn't justify an individual collecting funds for the poor by threatening passersby, then how do we justify government using the threat of fines or imprisonment to extract property from some to give it to others? In the words of Thomas Jefferson:
It is strangely absurd [to suppose] that a million human beings, collected together, are not under the same moral laws that bind (or liberate) each of them separately.
This isn't to say that no collective action should be taken to minister to the poor. Indeed, many churches and various private-sector charities are doing praiseworthy work for those in need, and they merit our financial support. The common factor, though, in these nongovernmental organizations is that participation is voluntary. Nobody compels you to belong to a certain church or contribute to a specific charitable organization. It is your prerogative and choice.
By all means, be charitable. But don't mix charity with compulsion. Jesus never did.
I first met Levi almost 20 years ago. He was about 12. We had just purchased our land from his parents, Jake and Nancy. Being old-order Amish, Jake and Nancy needed a ride to the attorney's office, so we drove them and new-born Chris, their youngest, to finalize the transaction. Thus began a very special friendship between two families.
Every Christmas Eve, our little family of three and Jake and Nancy's larger family (five children at the beginning, but more recently including four daughters-in-law, one son-in-law, and 13 grandchildren) gather for Christmas fellowship.
Levi is the second of Jake and Nancy's five children. Friendly, kind, very bright, soft-spoken, strong and gentle, he has always been a gem. I can still picture, during that first year of friendship, Levi sitting next to my daughter on a couch in Jake and Nancy's house. Karin, who was about 15, was holding a book or magazine. Levi leaned over to get a better look, resting his head on Karin's shoulder. It was a completely unselfconscious moment for both of them, just two pure and innocent youngsters sharing the joy of a story. Nancy remarked, "I know we don't have photographs, but I'd love to have a photo of that."
Levi was an avid reader. I shared dozens of the books that I had read as a young teenager with him and his siblings.
About ten years ago, we attended the wedding dinner celebrating Levi's marriage to Katie. We were two of five "English" (that's the word the Amish use for all of us who aren't Amish) packed in among 200 or 300 Amish.
Katie was a perfect match for Levi, a veritable angel of sweetness and quiet steadiness. A couple of years later, they welcomed Sally into the world. Of all of Jake and Nancy's 13 grandchildren, it was Sally who bonded most closely with our family. The highlight of her year was to draw pictures to give us at our Christmas Eve gathering and to help my Eileen in the kitchen. Like her Aunt Lizzie before her, she was enthralled by the "miracle" of the "baked Alaska" going into the hot oven and the ice cream not melting.
Five years later (about three years ago) little Anna joined the family. The four of them lived their version of the American dream, keeping to the simple Amish life, placing worship of God and love of their families above all else. It was idyllic.
Two weeks ago, Jake and Nancy were over for dessert. Eileen told Nancy that she would be going over to visit her buddy, Sally, on the following Monday. It wasn't to be.
On that Saturday, May 8, the unthinkable happened. Levi went fishing with his brother Gideon, one of those simple enjoyments that always remain special to these unspoiled people. It was a miserable day, cold, windy, and rainy. At home, Katie went to light a fire. Somehow the can of kerosene ignited. Katie, Sally, and Anna all quickly succumbed.
The next day was visitation. It was at Levi's next-door neighbor's house. I have never seen such gloom and grief in my life. Dozens of Amish were quietly and tearfully sitting on rows of benches -- men in one group, women in the other, as is their custom.
I could barely recognize Levi, so transfigured were his features by sorrow. We shared a quiet, private word. Jake, his father, was sitting next to him. He couldn't speak. I just stayed by his side for a few minutes, hand gently touching him in wordless sympathy. Later a tearful Nancy softly voiced her deep faith to Eileen and me, bravely affirming, "God is in control."
I went to visit Jake and Nancy two days after the funeral. They reported that Levi was trying to buoy up everyone's spirits. The next day, I spent a half-hour with Levi, and found that to be the case. Though still trying to come to grips with this inexplicable calamity, he continues to be a loving soul, caring deeply for those around him. He has already learned the secret discovered by Job in the Bible, that the key to recovery and renewal from grievous affliction is to pray for one's friends.
A tragedy of this magnitude puts things in perspective. Why do we waste our scarce and precious time on earth with trivial concerns and petty quarrels?
One of my college classmates told me that her dad's advice on her wedding day was, "Don't sweat the small stuff." Amen. Let us all honor the gift of life by forgiving and forgetting our misunderstandings, small and great, and use our brief time on earth to do a better job of loving each other. Let us follow Levi's example.
Calling for a balanced budget amendment has been a staple campaign issue for conservative Republicans for years. Undeniably, our nation is beset by fearful fiscal woes. However, a balanced budget amendment isn't the answer.
Let me emphasize that I endorse a balanced budget in principle. Indeed, in my recent article, "Good Cop, Bad Cop," I wrote, "The greatest threat to our country's future is chronic overspending by the federal government." Government, like individuals, should live within its means, and because it isn't, we are bankrupting ourselves and perpetrating a great evil on our children by saddling them with a national debt that now exceeds $13 trillion.
Further, I reject the economic orthodoxy that claims that government has mystical power to spend us into prosperity by running deficits. All deficit spending can do is what an inflationary monetary policy does, namely, distort production, not produce a net increase in sustainable production.
In short, then, I believe that balancing government budgets is a virtue and that government fiscal deficits are a vice. So what objections could I possibly have to a balanced budget amendment? I have two . . . well, make that two-and-a-half.
The "half" is my skepticism about the facile notion -- so common among both conservatives and liberals -- that laws and amendments solve every problem. Not so. In practice, no law can work unless there is the will to enforce it and abide by it. Remember Public Law #95-435? Of course not. Adopted by Congress in October 1978, it was one of several laws solemnly binding Congress to a balanced budget (in that case, by 1982). Needless to say, Congress has perennially proven incapable of abiding by such laws.
Ah, but wouldn't enshrining a balanced budget in the Constitution itself accomplish the goal? I doubt it. I've already written about the way the Constitution is selectively observed. An additional reason for skepticism is that many state governments are running large deficits despite state constitutions that expressly ban deficit spending.
Let's assume, though, that human nature is transformed so that Congress would actually balance the budget if the Constitution said it must. There reside the two major problems with passing a constitutional amendment to balance the budget:
The first problem is a practical consideration. How would Congress close a deficit of $1.5 trillion? While free-market economists like yours truly would love to see federal spending cut by $1.5 trillion (actually, by more!), can you imagine the political donnybrook in Washington this would precipitate? The only way the Big Government majority in Washington would agree to a balanced budget would be to raise taxes one dollar for every dollar of spending cuts. In other words, the best we could hope for would be spending cuts of three-quarters of a trillion dollars combined with increasing tax revenues by three-quarters of a trillion dollars. Ouch! In the economy's current weak condition, increasing the tax burden by $750 billion would absolutely crush us. This "cure" would kill the patient.
The other problem with a balanced budget amendment is that it would legitimize current constitutional abuses. As it currently stands, the Constitution does not authorize most of what the federal government spends.
The Founders crafted a Constitution of limited enumerated powers of government. They clearly were of the "strict construction" school, believing that the federal government should do only what the Constitution explicitly stipulates and nothing else.
In the decades since, the "loose construction" philosophy has mangled that original intent by adopting the opposite view that the federal government can do anything that the Constitution doesn't explicitly state that it can't do -- a formula for virtually unlimited, infinitely elastic expansion of government.
If we, as a country, would strictly abide by the letter of the Constitution, federal spending would be a mere fraction of what it currently is. We wouldn't have trillion-dollar deficits and nobody would be talking about a balanced budget amendment.
Amending the Constitution requires prodigious effort. That is why it has been done fewer than 20 times since the Bill of Rights was ratified in 1791. Rather than knock ourselves out trying to amend the Constitution, let's strive to restore a correct understanding of the Constitution. We don't need to amend the Constitution as much as we need to read it, understand it, and abide by it.
The Founders have given us the only tool we need to put an end to deficit spending. Let's begin using it.
I agree with President Obama that we need more labor unions. However, I disagree with his approach.
Full disclosure: I have been a dues-payer to both the United Auto Workers and the National Education Association unions. My sympathies are heavily tilted toward the interests of the men and women who do the work that makes America go.
For that reason, I strongly oppose the dishonestly named "Employee Free Choice Act," which aims to deprive workers of secret ballots when voting for or against union representation. You don't benefit workers by stripping them of basic democratic protections.
Team Obama made another anti-democratic, anti-worker, pro-union move on May 10. The National Mediation Board (with an Obama appointee providing the tie-breaking vote in a 2-1 decision) overturned 75 years of established policy by ruling that aviation and railway workers can unionize without the approval of a majority of members. Now, union organizers only need to obtain a majority of votes actually cast. By manipulating who votes, as well as when, where, and how, union organizers will be able to thwart genuinely democratic decisions.
There are better ways to increase the number of labor unions. Let us revise existing labor laws to make it easier for unions to form in ways that increase the number of unions from which American workers could choose.
First, let's amend the Clayton Antitrust Act of 1914. That law was designed to prevent monopolies, but it explicitly exempted labor unions. Let's repeal that exception.
We generally agree that monopolies are bad and that competition is good. Why do we end up with the best cars, the best cell phones, the best personal computers, etc.? Simple: The relentless pressures of competition drive companies to provide more value for fewer consumer dollars. And what explains the abominable performance of many public schools, the higher death rates in the United Kingdom's nationalized healthcare system, and the lousy quality of American currency (Federal Reserve Notes having lost approximately 98 percent of their purchasing power in less than a century)? Equally simple: The lack of competition to which these government-mandated monopolies or near-monopolies are exposed. Introduce competition into these markets, and quality would improve markedly.
The same principle holds true for labor unions. If unions had to compete to represent workers' best interests, they would be more accountable and responsive to the workers whose dues they take.
For example, think of Republican teachers who may feel that the benefits they receive from their mandatory NEA dues are outweighed by the NEA's practice of spending those dues overwhelmingly in support of liberal Democratic causes. These teachers would be free to join a competing union that supports GOP initiatives, or, alternatively, a completely apolitical union.
Think of the job-security issue: Given the abject failure of the UAW and other monopolistic unions at preserving the jobs of their members, wouldn't it be fairer if workers had the option to join unions that emphasize long-term job security over higher compensation packages in the short run? Under the current system, union bosses have every incentive to pay themselves lavish compensation, even as they cannibalize the jobs of their rank and file.
If unions had to compete for members, surely there would be fewer scandals of union brass using union treasuries as personal piggy banks.
Another needed reform is to end the "union shop" principle. Americans need to be free to join or not join whatever organizations they choose. How can a person be considered free when he or she is either prohibited from joining or contributing to an organization that he admires or, conversely, compelled to join or contribute to an organization that he loathes? The right to join was protected when the Norris-LaGuardia Act of 1932 outlawed "yellow dog" contracts under which employers denied workers the right to join a union. The right not to join is violated by the Wagner Act of 1935 and Taft-Hartley Act of 1947, under which workers may be compelled to pay dues to a monopolistic union as a condition for having their job. Those acts should be amended.
In short, let's end union monopoly and forced-dues privileges, and let new unions emerge and compete to best serve their members' interests. If there had been open competition between unions over the past century, who knows what creative and effective nongovernmental solutions would have been found to address workers' concerns about pensions, healthcare, unemployment insurance, etc.?
Too many American workers have been denied the benefits of competition for far too long. Enough is enough. Let competition between labor unions begin today. Let the number of unions proliferate and let workers choose to ally themselves with whatever unions best serve their needs. *
"With respect to future debt; would it not be wise and just for that nation to declare in the constitution they are forming that neither the legislature, nor the nation itself can validly contract more debt, than they may pay within their own age . . ." --Thomas Jefferson
Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are from V & V, a web site of the Center for Vision & Values.
The truly revolutionary American idea of government as the servant of the people may be fading away. Many of today's so-called "civil servants" are a protected, privileged class. While Middle America struggles through a difficult recession, a lot of government employees have lived on the gravy train.
Here are some facts to buttress that assertion:
Since the recession began in 2008, a period during which approximately eight million private-sector workers lost their jobs and millions more saw their income decline, the number of federal employees is increasing at a 7 percent per-year rate and their income is holding up quite nicely. According to the Cato Institute, the average federal worker's pay and benefits now approximates $120,000 per year, or roughly double the compensation of the average private-sector employee. Factor out the lavish government fringe benefits and look at salary only, and the civil servant is still far ahead: $71,197 vs. $49,935.
During this recession, the percentage of federal employees earning annual base salaries above $100,000 increased from 14 to 19 percent. The number of Defense Department employees being paid more than $150,000 per year increased from 1,868 to 10,100. Before, the Department of Transportation had one employee with a salary above $170,000, but now has 1,690.
As a gesture toward fiscal responsibility, President Obama reduced what was supposed to be a 2.4 percent raise in federal salaries this year to 2.0 percent. That still compares quite favorably to the zero-percent cost-of-living increase that Social Security recipients have received.
Also on tap are handsome pay raises for the employees of the Federal Housing Administration. The FHA has distinguished itself recently by incurring a loss of $54 billion in a mismanaged home-loan business. And of course we can't neglect to mention the CEOs of Freddie Mac and Fannie Mae, who have been cleared to receive as much as $6 million in salary this year while being subsidized to the tune of over $100 billion in monetary transfusions from the Treasury and the Fed.
Other federal agencies may not be losing money by the tens and hundreds of billions of dollars in such an obvious way, but money appropriated for them by Congress still seems to vanish into a black hole. For example, statistics from 2006 showed that if all the federal dollars spent by antipoverty programs had been given directly to Americans below the poverty line, a poor family of four would have received $67,000. The actual aid received by poor Americans is less than half that amount. What explains such glaring inefficiency? Most of those funds are consumed by the cushy pay packages of the army of bureaucrats who administer those programs. And let's not even get into the Department of Agriculture, which has one bureaucrat for every nine or ten full-time farmers.
The preferential treatment received by government employees was also reflected in how last year's stimulus money has been spent. According to ProPublica, the District of Columbia received more than four times as much money per capita as the average of the 15 states that received the most money. (Oh, did I mention that members of the Pelosi/Reid Congress voted themselves a 6 percent increase in funds for their staffs and other support?)
It isn't just the federal government workers who have an unusually lucrative setup. Governor Christie of New Jersey recently announced his intention to reform the pension plan for the Garden State's public employees. Consider an incredible fact: According to Christie, a 49-year-old state employee who had contributed $124,000 toward his retirement is eligible to receive $3.3 million in pension payments and another half million dollars in heath care benefits over the rest of his life; and a retired teacher who had put $62,000 toward her pension and not a penny for health care is scheduled to receive $1.4 million in pensions and $215,000 in health care benefits. Taxpayers pay for this.
This story is repeated over and over in a number of states that now teeter on the brink of bankruptcy due to billions of dollars of obligations to state employees. It's hard to refer to these people -- many of whom, of course, are wonderful, decent human beings -- as civil "servants" when their salaries and/or benefits are so much higher than those of the taxpayers who pay for the generous compensation packages of their government "servants."
Abraham Lincoln's ideal of government "of the people, by the people, for the people" seems to have become government of the governing elite, by the governing elite, and for the governing elite. The current imbalance can't continue. Something's got to give.
Recently, progressives have made noise about introducing a value-added tax (VAT) in the United States. The VAT is an indirect tax -- that is, Americans wouldn't pay the tax directly to government, but would pay it to businesses as part of the retail price of things we buy, and businesses would then remit the tax to Uncle Sam.
A VAT is set at a fixed rate -- say, 10 or 15 percent -- added to the price of a good at every step of production, with a deduction allowed for the amount of VAT paid during earlier stages of production. The more steps there are in transforming raw materials into complex consumer goods, the higher the resulting consumer price as a result of those multiple layers of taxation.
Many countries have VATs, including Canada, Mexico, and the European Union. One might say that a VAT is an emblem signifying that a country's government consumes a large percentage of its GDP, for VATs seem to go hand-in-hand with big-budget nanny states.
The reason for this phenomenon is simple: Any government that seeks to be all things to all people, and therefore seeks to spend ubiquitously, must inevitably seek to tax ubiquitously. Such governments have insatiable appetites for revenue. Because VATs are cash cows, diverting huge sums of money from consumers to government, they are favorites of big-spending governments.
Unfortunately, though, VATs have significant negative economic consequences. Because they inflate consumer prices, quantities demanded fall. Most often, the marginal buyers who can no longer afford to pay the higher price are poorer citizens. When government policy raises prices, the first victims are poor people.
The second victims of a VAT are the workers who will lose their jobs as a result of falling demand for the newly higher-priced goods.
Many affluent Americans may not curtail their consumption, but because more of their money is diverted to the government treasury, their savings must correspondingly decline. This results in decreased capital accumulation, which, in turn, slows business expansion, development, and formation. It also slows the growth rate of labor productivity, hence retarding economic progress for workers.
The desire of today's big spenders in Washington to greatly increase their revenues is reminiscent of how FDR financed his spending binge during the Great Depression. During the 1930s, federal revenues from the income tax fell the more tax rates were raised. (Congress, take note.) To raise more revenue, FDR and Congress increased excise taxes -- taxes embedded in the price of common consumer goods like gasoline, milk, and cigarettes. The effectiveness of those taxes as generators of government income derived from the fact that those taxes are difficult to avoid, unless you can live without milk, gasoline, etc.
VATs are essentially excise taxes. They are economically destructive and hit society's most vulnerable members the hardest. Here let me offer both a political strategy to resist the imposition of a VAT and an alternative proposal for opponents of a VAT to rally around:
The strategy is a recommendation to Republicans to not obsess about or campaign for balanced budgets. This is not to say that deficits don't matter. They do, and they've got to go.
The problem with focusing on a balanced budget is that it sets up a dynamic of balancing spending cuts and tax increases. Tax increases, as we have already seen, depress economic conditions. Who can get excited about that kind of economic plan? Deficits need to be eliminated by cutting spending, however unpopular that may be in certain quarters.
As economists for the past two centuries have made plain, the real burden of government is not what it taxes but what it spends, because whatever it spends comes at the expense of citizens, whether via taxes, borrowing, or creating additional Federal Reserve Notes. Reducing the burden of government means slashing government spending, not raising taxes.
Here is a counterproposal: Instead of adding yet another "stealth" tax -- the VAT -- to the many excise taxes already in place, let's have Congress pass a truth-in-labeling law.
Let's require all excise taxes and all other hidden taxes (e.g., payroll, real estate, franchise, excise) that are embedded in the price of consumer goods to be listed in plain sight. Put the dollar amount of those taxes on price signs, price tags, and at the point of sale. Then, Americans will be able to clearly see how much they are paying in indirect taxes to government.
What's holding you back, Congress? You aren't afraid of the truth, are you?
Trying to keep up with all the changes in U.S. Sen. Chris Dodd's (D-Conn.) financial reform bill has been a daunting task. Two weeks ago, it was described in the press as "the 1100-page bill." Last week, it became "the 1400-page bill." And within a day or two -- voila! -- we were reading about "the 1600-page bill." The Dodd bill has been morphing at a rapid rate. Shades of health-insurance reform!
Most Americans support a government attempt to regulate exotic, esoteric, unregulated, and nontransparent financial derivatives. Warren Buffett calls such exotica "financial weapons of mass destruction."
Derivatives shook the country's financial system to its foundations in 1998, when Long-Term Capital Management's derivatives pyramid imploded, and then again in 2008-9 with AIG's portfolio. Despite these near-death experiences, published guestimates of the total notional value of derivatives held by U.S. banks remain in the $200-billion range. (Total U.S. GDP is only about $14 trillion.)
The Dodd bill aims to reduce risk by placing stricter limits on financial leverage. The irony -- and, I believe, the danger -- of the bill is that, while seeking to reduce financial leverage, it seems designed to increase political leverage; that is, the government's power and control over financial firms.
President Obama, Sen. Dodd, and other supporters of the bill say that the bill will protect Americans from the financial fallout of major bankruptcies by authorizing federal regulations to shut down financial institutions in an orderly fashion when they start to fail. In theory, that sounds commonsensical and innocuous. In practice, it could be problematical.
Who decides when a firm is starting to fail? Like the heavenly emissary in the movie "Heaven Can Wait," who took a man's soul prematurely, only to later discover that the man would have survived and shouldn't have died, financial regulators may pull the plug on institutions that could find ways to come back from the precipice of failure.
Worse, think of the leverage that regulators could wield over private companies if they held life-and-death power over them: "Listen, Ms. CEO, the guys at Treasury think you should do A, B, and C. Do what you want, but if you don't do them, they may pull the plug on you." The Dodd bill could make vassals and serfs out of all financial institutions. A president could effectively cartelize the industry.
Another provision of the bill desired by President Obama and Sen. Dodd is for the SEC to be given increased influence in elections for corporate boards of directors. The SEC already is a politicized agency. Many of us suspect that the SEC's recent charges against Goldman Sachs were not based on solid legal grounds, but were announced when they were to drum up support for the Dodd bill. I'm no fan of Goldman Sachs, but neither do I believe that a politicized attack dog like the SEC should gain more leverage over private companies.
Lastly, there is the question as to whether this alleged financial reform halts or codifies taxpayer-funded bailouts of financial institutions.
President Obama flatly denies that the Dodd bill includes bailout provisions. Speaking in New York on April 22, he said, "a vote for reform is a vote to put a stop to taxpayer-funded bailouts. That is the truth."
Contradicting the president are two members of Congress from the president's own party. Sen. Ted Kaufman (D-Del.) worries that the bill expands "the safety net . . . to cover ever-larger and more complex institutions heavily engaged in speculative activities," thereby "sowing the seeds for an even bigger crisis." Rep. Brad Sherman (D-Calif.) categorically states, "The bill contains permanent bailout authority."
You decide for yourself who is telling the truth. The Congressional Budget Office seems to side with Kaufman and Sherman. CBO examined the budgetary impact of the bill's $50-billion resolution fund for large insurance and securities companies, hedge funds, and other non-bank firms deemed "systemically important."
This language raises serious questions: Which firms, exactly, will be deemed "systemically important?" Will they be told ahead of time, thereby increasing moral hazard? Are there specific guidelines that will be transparent and available to all so that they know where they stand, or will the requirements for "systemically important" status be kept secret? Would regulators be constrained by fixed rules, or would they be free to arbitrarily decide which firms are the ones anointed for rescue?
Judging by his track record so far, President Obama likes to play Big Brother to private businesses, rewarding his friends while stiffing others. The Dodd financial reform could bring us more of the same.
Many Christians over many years have been beguiled by the Religious Left's use of the term "social justice." This is because Christians rightly love justice and hate injustice. But "social justice" -- or, at least, how it's often used by liberal Christians -- isn't necessarily biblical justice.
The standard of biblical justice is equal treatment by law: "Thou shalt not respect the person of the poor, nor honour the person of the mighty." (Leviticus 19:15) Justice not only means that nobody is to be picked on because he is poor or favored because he is rich, but that (contrary to the doctrine of "social justice") nobody is to be picked on because he is rich or favored because he is poor. Everyone's rights deserve the same protection. Thus, nobody should be taxed at a higher rate than his neighbors, nor should anyone receive special government handouts.
The modern left's "social justice" strives for economic equality. It endeavors to reduce, if not erase, the gap between rich and poor by redistributing wealth. This is "justice" more akin to Marx and Lenin, not according to Moses and Jesus. It is a counterfeit of real justice, biblical justice. Modern notions of "social justice" are often wolves in sheep's clothing.
The fundamental error of today's "social justice" practitioners is their hostility to economic inequality, per se. "Social justice" theory fails to distinguish between economic disparities that result from unjust deeds and those that are part of the natural order of things. All Christians oppose unjust deeds, and I'll list some economic injustices momentarily. First, though, let us understand why it isn't necessarily unjust for some people to be richer than others:
God made us different from each other. We are unequal in aptitude, talent, skill, work ethic, priorities, etc. Inevitably, these differences result in some individuals producing and earning far more wealth than others. To the extent that those in the "social justice" crowd obsess about eliminating economic inequality, they are at war with the nature of the Creator's creation.
The Bible doesn't condemn economic inequality. You can't read Proverbs without seeing that some people are poor due to their own vices. There is nothing unjust about people reaping what they sow, whether wealth or poverty.
Jesus himself didn't condemn economic inequality. Yes, he repeatedly warned about the snares of material wealth; he exploded the comfortable conventionality of the Pharisaical tendency to regard prosperity as a badge of honor and superiority; he commanded compassion toward the poor and suffering. But he also told his disciples, "ye have the poor always with you" (Matthew 26:11), and in the parable of the talents (Matthew 25:24-30) he condemned the failure to productively use one's God-given talents -- whether many or few, exceptional or ordinary -- by having a lord take money from the one who had the least and give it to him who had the most, thereby increasing economic inequality.
The Lord's mission was to redeem us from sin, not to redistribute our property or impose an economic equality on us. In fact, the Almighty explicitly declined to undermine property rights or preach economic equality when he told the man who wanted Jesus to tell his brother to share an inheritance with him, "Man, who made me a judge or divider over you?" (Luke 12:14).
All that having been said, there is much injustice in our world, much needed reform that all Christians can unite in accomplishing. Around the world, many people are poor and will never realize their God-given potential due to lack of freedom and opportunity. Let us never be on the side of those who reject man's God-given rights and biblical justice, and who oppress and impoverish in the name of a spurious economic equality.
In relatively free societies such as our own, we must continue to combat the economic injustices of theft, fraud, deceit, trickery, etc. We should strive to undo the injustices perpetrated by unethical public policies, such as the subtle theft of citizens' purchasing power via central bank inflation; the corrupt government practice of doling out earmarks, subsidies, and myriad special favors, often to big businesses and wealthy individuals; destructive tax policies that decapitalize society, thereby retarding growth in labor productivity, wage increases, and higher standards of living; runaway government spending that imposes an incalculable and unconscionable debt burden on the next generations, etc. We should be charitable.
By all means, let us tackle these persistent injustices. But let us be careful to abide by the biblical standard of impartiality and equal treatment by law, lest we create additional injustices.
The intertwined worlds of government and finance are swirling with drama not seen since the fall of Lehman Brothers in 2008. The epicenter of the current crisis is Greece. The Aegean nation's sovereign debt has been downgraded to "junk" status while talk of outright default by the Greek government has arisen. The very survival of the euro -- the 11-year-old currency used by Greeks and over 300 million other Europeans -- has been brought into question.
Yields on the Greek government's two-year notes have soared from 2.1 percent to 18.9 percent in the last few months, producing what one analyst termed "bond market Armageddon." The Secretary General of the Organization for Economic Co-operation and Development (OECD) has likened the bond market panic to the Ebola virus; the head of the International Monetary Fund (IMF) has warned of "contagion"-- the potential for Greece's sovereign debt crisis to spread to other heavily indebted European states.
How did Greece get into this mess? The primary cause has been fiscal irresponsibility. Sovereign governments that join the European Union pledge to keep their budget deficits below 3 percent of GDP. Greece's most recent deficit is estimated to be almost 14 percent. It didn't get there in one year. It turns out they have been lying about their deficits for years, employing those financial bad boys at Goldman Sachs to devise devious schemes for disguising the extent of their deficits.
Greece's total indebtedness approximates 120 percent of GDP. Combined with this year's 14 percent deficit, such massive quantities of red ink suggest that Greece is essentially broke and its currency is due to take a tumble.
Here is where it gets complicated: Greece shares the euro with 15 (officially) or 20 (unofficially) other European countries. A devaluation of the euro makes no sense for European Union members with sounder fiscal policies. The inherent, perhaps fatal, flaw of the euro currency is that each member country pursues its own fiscal policies, some of which inevitably must be incompatible with the European Central Bank's monetary policies.
Greece clearly needs to get its fiscal house in order if it is to regain financial credibility and stability. It lacks the political will to do so. Proposals to reduce government spending have caused Greek Air Force pilots to go on strike, anarchists and students to throw Molotov cocktails, and unions to call for a nationwide strike beginning May 5.
One raging debate has been whether Germany, the economically dominant European state, would bail out Greece. On the one hand, many Germans still resent the immense costs of re-integrating East Germans into the German economy after the dissolution of the Soviet bloc. If hard-working, industrious, fiscally disciplined Germans are fuming about helping their fellow Germans, who developed an entitlement mentality during their decades under socialism, they surely won't want to bail out profligate Greeks.
Ah, but again there is a complicating factor: German banks, it turns out, own nearly half of Greece's debts. Thus, German politicians are wrestling with the vexing question of whether they will incur greater voter wrath by bailing out undeserving Greek deadbeats or by doing nothing and possibly precipitating a major crisis in the German financial system.
Should Americans care about all this? Not long ago the euro was being touted as a possible competitor with the dollar for global foreign currency reserves. Not today. But if you are tempted to gloat, here are two reasons why you shouldn't:
1) We Americans have become a significant player in the stopgap Greek bailout. That is because the IMF has been like the cavalry riding to the rescue, promising big bucks to the Greek government. Since the largest contributions to the IMF come from the American taxpayer, we find ourselves once again picking up the tab for a bailout -- this time, not for rich American financiers, but for corrupt and profligate foreign governments and special interest groups.
2) Our own debt and deficit figures are not too far from being as parlous as Greece's. At $1.6 trillion, this year's federal debt is over 11 percent of our GDP, while our total (explicitly acknowledged) national debt is pushing the 90 percent-of-GDP threshold. Greece may be giving us a sneak peak at our own sovereign debt crisis in the not-so-distant future.
These are historic times. We may be at the beginning stages of a great unraveling of several widely believed political myths -- that democratic governments can exercise sufficient fiscal restraint to preserve their ongoing financial viability; that unbacked paper currencies imposed by governments and central banks can provide a long-lasting, sound medium of exchange; that countries can't go broke; and that government debt is a relatively safe investment.
The current Greek tragedy shows us that democratic welfare states, predicated on the belief that citizens have the right to live at the expense of fellow citizens, are economically untenable and inherently suicidal. *
"Where is the security for property, for reputation, for life, if the sense of religious obligation deserts the oaths . . .?" --George Washington
Some of the quotes following each article have been gathered by The Federalist Patriot at: http://FederalistPatriot.US/services.asp.
Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are from V & V, a web site of the Center for Vision & Values.
Last year, 2009, marks the 250th anniversary of the publication of Adam Smith's masterful treatise on ethics, The Theory of Moral Sentiments. Smith, primarily known today for his hugely influential 1776 work on political economy, The Wealth of Nations, was a professor of moral philosophy. The Theory of Moral Sentiments is stunningly relevant today.
Whereas The Wealth of Nations featured the "invisible hand," the metaphor that dominates Moral Sentiments is "the impartial spectator." The "spectator" represents one's conscience -- one's ability to perceive the divinely ordained objective standard of right and wrong.
In Smith's view, conscience is both a divine spark in mankind and also the product of reason. Indeed, Moral Sentiments (like Western civilization itself) is a synthesis of Greek Stoic philosophy and Christian thought.
The genius of Moral Sentiments lies in its clear, thorough explanation of the necessary preconditions for social harmony. Smith cites three cardinal social virtues: prudence, justice, and beneficence. Indeed, as we survey our discordant, divided society today, we can see that many of our problems stem from confusion about these three virtues. Smith, in spite of writing his book so long ago, provides the solutions to today's most vexing social problems.
By "prudence," Smith means the practical steps that a person takes to provide for his own needs and wants. For able-bodied adults to shun this basic responsibility is self-destructive and antisocial.
Smith's second social virtue, justice, is "the main pillar that upholds the whole edifice" of society. As essential as it is, though, justice "is entitled to very little gratitude" because "it does no real positive good" and "is . . . but a negative virtue" that "only hinders us from hurting our neighbour."
Smith is right. We don't feel gratitude to others for not killing or robbing us, because they are simply refraining from what they ought never to do. Yet when people do not refrain from infringing our basic rights, society disintegrates. Thus, the irony that just behavior is at once the virtue that is least deserving of praise, but most indispensable for society's wealth.
Smith's third social virtue, beneficence, deserves the highest approbation, for it represents the greatest good that one can do beyond the call of duty. Beneficence, though, is never a duty. More specifically, it may be one's duty to God as a practicing Christian, but it can never be made a legally compulsory duty to one's fellow man. Here Smith illuminates the essential difference between law and gospel that still confuses and divides Christians today.
In Smith's words:
Beneficence is always free, it cannot be extorted by force, the mere want of it exposes to no punishment; because the mere want of beneficence tends to do no real positive evil.
Beneficence . . . is less essential to the existence of society than justice. Society may subsist, though not in the most comfortable state, without beneficence; but the prevalence of injustice must utterly destroy it.
Beneficence "is the ornament which embellishes, not the foundation which supports [society]."
Government force may only be used to enforce justice (i.e., to restrain or punish those who would infringe the rights of others) but not to enforce prudence or beneficence. A government that would presume to compel citizens to work (or threatens to lock up citizens who prefer not to purchase health insurance) violates the very rights it is supposed to protect. So does a government that compels the redistribution of property from some citizens to others, because such deeds would violate the necessary and fundamental principle of justice.
Meddlesome do-gooding -- the pseudo-charity whereby A and B use governmental force to bestow unearned benefits upon C that are paid for by D -- is unraveling the fabric of society today. When one looks to Washington, one sees that Smith has captured with uncanny accuracy the mentality and spirit of present-day social engineers, central planners, and redistributors of property:
The man of system . . . is apt to be very wise in his own conceit, and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it . . . he seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board.
The political reformer manifests "the highest degree of arrogance." He seeks "to erect his own judgment into the supreme standard of right and wrong." He:
. . . fanc[ies] himself the only wise and worthy man in the commonwealth, and [believes] that his fellow-citizens should accommodate themselves to him.
This attitude leads to "the madness of fanaticism" among the political leaders of radical reform, while the mass of followers are:
. . . intoxicated with the imaginary beauty of the ideal system, of which they have no experience, but which has been represented to them in all the most dazzling colours in which the eloquence of their leaders could paint it. Those leaders themselves, though they originally may have meant nothing but their own aggrandizement, become, many of them, in time the dupes of their own sophistry.
Indeed, I don't believe it is possible for any current book analyzing contemporary America to surpass Adam Smith's classic Theory of Moral Sentiments in terms of lucid insight and timely (and timeless) wisdom.
High and/or rising unemployment is always a political liability for a president, and so Barack Obama has taken the offensive in trying to persuade the American people that his team can get Americans back to work.
In November, Obama took credit for having created 640,000 jobs. That audacious assertion was less than persuasive, coming as it did near the end of a year during which the number of employed Americans declined by over four million while the unemployment rate rose from 8 percent to 10 percent.
Team Obama's credibility came into question again when alert reporters pointed out an embarrassingly large number of "inaccuracies" in the Obama administration's claims of jobs "saved" and "created" by the stimulus plan he pushed through Congress last winter. This included isolated stories about things like more than 900 jobs being saved in a Georgia business with only 500 employees. Then it quickly snowballed when researchers examined Obama's recovery.gov website and tabulated official claims of tens of thousands of phantom jobs in nonexistent congressional districts.
This unseemly episode raised issues of competence and trust in terms of whether Team Obama had what it took to help the unemployment situation (and never mind whether these are the people you want redesigning the country's healthcare and energy industries). In fact, it proved to be an advantageous diversion for Team Obama, because it deflected attention away from the administration's actual record of adopting policies that have increased the number of unemployed Americans.
In June, the minimum wage rate increased 75 cents. This government intervention priced many young Americans out of jobs, with the unemployment rate for black teens rising from an already-too-high 39 percent to an abominable 50 percent.
Team Obama's aggressive attempts to raise taxes on businesses and employees to pay for his healthcare plan would significantly increase the costs of employing people, making businesses afraid to hire. And the cap-and-trade scheme would increase energy costs dramatically, further adding to business worries. (Incidentally, economic studies have shown that Obama's cap-and-trade program would reduce American employment by between one to two million jobs per year.)
Another factor that has aggravated unemployment this year is that Uncle Sam's enormous budget deficit has consumed virtually all the available credit, crippling the ability of private businesses to hire new workers.
Obama's fundamental problem regarding jobs is that he believes all that baloney about government having quasi-deific powers as an alleged "creator" and "savior" of jobs. Yes, government can put people on its payroll or prop up certain jobs, but only by redirecting scarce capital and resources from elsewhere in the economy, thereby reducing employment in the private sector.
Examples abound:
What about the Obama hype about creating new "green" jobs? Lots of luck! Germany's government tried this, and every "green" job cost $240,000 and raised the overall unemployment rate. Each solar energy job in sunny Spain resulted in the loss of 2.2 other jobs.
Even in our own nation's history, it is no coincidence that unemployment stubbornly remained at atrocious levels for all the years that FDR's jobs programs were in place.
As history shows, governments are not creators and saviors of jobs on a net basis, but effective destroyers of jobs.
A little economic knowledge explains why this happens.
When a job exists only because of a government subsidy (whether in the form of a grant, a tax credit, or any other policy device), then what the job produces is worth less than the worker is being paid. Society as a whole is made poorer by the difference between the value of what the worker produces and what the government pays him, and that wealth is withdrawn from the private sector. Even if government could miraculously hire workers to do exactly the work that citizens want most and pay them true market wages (and no government planners ever have sufficient specific knowledge to make these decisions, which is why centrally planned economies always stagnate), such a program would make society poorer and therefore reduce overall employment. Why? Because of the overhead costs of administering the program: the armies of bureaucrats (with their cars and offices) needed to study, administer, and keep records on the government-employed "non-governmental" workers.
The Obama/Pelosi/Reid axis rushed to defuse the fake jobs scandal of November by holding a "jobs summit" in December. The outcome of that summit was more of the same failed policies of government spending and government subsidies that will finance uneconomical jobs at the expense of economically rational jobs in the private sector. As a result, high unemployment will persist throughout 2010.
One of the tragedies of Barack Obama's presidency is that the more he tries to use government to improve the job market, the more he throttles that market. Let go, Mr. President. You're making things worse.
You may have seen the recent story about the 41-year-old doctor who graduated from medical school in 2003 with student-loan indebtedness of $250,000 that has since swelled to more than $555,000. She is now scheduled to pay $990 per month until she is 70 years old. Ouch!
This is an extreme example of a widespread problem. Only 40 percent of the $730 billion of outstanding student loans are actively being repaid. This isn't healthy for financial institutions and it isn't healthy for many young Americans. Just as was the case with the ongoing mortgage fiasco, there is plenty of blame to go around for this sorry state of affairs.
It's easy to say that those who borrow to pursue their post-secondary education bear the primary responsibility. The first rule of survival in a market economy is caveat emptor ("let the buyer beware"). Nobody forced anyone to go into debt.
Still, it is significant that almost all student loans are taken out by Americans too young to know what it takes to pay their bills and make a living on their own. Undoubtedly, some unscrupulous students will borrow money with every intention of avoiding repayment; however, I believe that most borrowers sincerely intend to fully repay their debt. The problem is -- due to their lack of maturity and, yes, intellectual development -- they literally have no idea how hard it can be to repay $50,000 or $100,000 of debt.
My wife and I recently entertained two of her former college students -- intelligent, talented young ladies laden with considerable debt. The one owes over $100,000 and has a bachelor's degree in theater. She has an entry-level position with a business, and no realistic prospect of repaying her debt before she turns 40. Much wiser now at age 23, she realizes the gravity of her predicament. She most emphatically wouldn't have sustained such debt if she had known then what she knows now, but now she's stuck.
Like many young adults in her position, the price for her indebtedness is more than monetary. There are very few young men out there who are willing to marry somebody with a six-figure debt chained to her ankle. (Apologies to all the romantics out there, but that's the way it is.) Here you have someone whose strongest desire is to be a wife and a mother, but her student-loan debt makes her a leper to most men in the marriage market. Sad.
I have heard people suggest that colleges and universities provide debt counseling to students so they don't get in too deep. My employer, Grove City College, requires students to attend debt management seminars as a requirement for participating in its privately funded loan program. That is a wonderful program, but the reality is that colleges are businesses and, like all businesses, are hungry for revenue. Expecting them to counsel students to drop out or transfer to an inexpensive junior college is like expecting a fox to warn chickens not to go into foxholes because they might be eaten. It just isn't the nature of the beast.
That leaves the lenders. As was the case with defaulted mortgages, lenders protest that they explained the dollars and cents of the student loans thoroughly. And again, it is safe to assume that some of them really did, just as some of them really did not alert starry-eyed, naive youngsters to the pitfalls inherent in taking on large debts. Let's face it, if loan officers profit from issuing loans, they have every incentive to write as many as they can.
Normally, I would say there is nothing objectionable about that, but in this case, I believe that public policy once again is guilty of having altered normal market incentives. I refer to laws that make it almost impossible for student loans to be erased through bankruptcy.
Now don't get me wrong -- I believe strongly that debts should be repaid. A society that makes it too easy for individuals to walk away from their financial obligations does not sufficiently uphold the foundation of economic progress -- property rights -- and consequently jeopardizes economic progress. But in the student-loan market, government has created moral hazard: Knowing that government will take extraordinary measures (even garnishing unemployment checks) to see that student loans are repaid, issuers of student loans feel bulletproof, and proceed to crank out as many loans as they can. If they knew that they might lose their loans through normal bankruptcy proceedings, they would do what prudent lenders always should do: Assess risk very carefully and issue fewer loans to starry-eyed kids who want to pay $30,000 per year for a degree with minimal market value.
I don't pretend to know how to get out of the current mess. It would have been much preferable had we never gotten into it. I do believe, though, that it isn't right for financially incompetent young Americans to be penalized for decades because no adult who knew better stopped them from making a foolish financial mistake. Let's have some mercy here.
We've all had those sudden epiphanies where the proverbial light bulb clicks on and understanding comes into clear focus. I had one of those moments over the Christmas holiday season. In this case, the light bulb experience was literal as well as figurative.
Here is what happened: My wife came home all excited because she had found strands of battery-powered Christmas lights to add some pizzazz to a couple of wreathes in our living room. The excitement gave way to glumness as soon as the "on" switch was turned. Instead of bright, cheery, Christmassy points of light, the LED bulbs emitted a pale, weird, sickly light of indeterminate bluish hue. Yuck!
Welcome to the dreary world of politically correct Christmas lights. Such wan, ghastly Christmas lights may bring joy to the hearts of worshipers of Gaia and those who put up "unity trees" instead of Christmas trees, but for those of us who are still quaint and old-fashioned enough to want a festive and joyous atmosphere in which to celebrate the birth of our Savior, those ugly-though-energy-efficient LEDs were a big humbug.
The austerity of a green future was apparent again when I turned on our new energy-efficient outdoor light on the back porch. I thought the new bulb must have already broken, because the twilight seemed as dark as it had before I flipped the switch. When I went outside to check, I saw that the light "worked." The bulb was emitting about half the light that a match would provide. As most of you readers probably know already, these "modern" energy-efficient bulbs take time to warm up. Do environmentalists really believe that using bulbs that no longer give us instant illumination is progress?
Some of these wretched new bulbs also represent a retrograde step in terms of human safety. They contain mercury. For decades, we have searched for ways to lessen human exposure to this highly toxic element. Now our environmentally enlightened leaders have legislated a phase-out of tried-and-true incandescent bulbs in favor of bulbs that give inferior performance while posing a greater health hazard.
For those naive enough to believe that environmentalism is about making the world more livable for humans, these new-fangled, pathetic excuses for light bulbs should suffice to correct that misapprehension. The greens want to punish us for having dared to convert Mother Earth's raw materials into products that improve our quality of life so magnificently.
President Obama is a believer in this grim green Puritanism. During his presidential campaign he chastised the American people for our affluence, asserting moralistically:
We can't drive our SUVs and, you know, eat as much as we want and keep our homes on, you know, 72 degrees at all times . . . and then just expect that every other country is going to say OK. You guys go ahead and keep on using 25 percent of the world's energy, even though you only account for 3 percent of the population.
The implication is that Americans have been piggish, hogging an unfair percentage of the world's depleted resources. This view is flawed.
In the first place, we have consumed so much energy simply because we have been free to do so. Whenever countries adopt market economies -- that is, when they protect property rights and protect legitimate (i.e., non-coercive, non-fraudulent) profit-seeking behavior -- human productivity, energy consumption, and prosperity all rise in lockstep. It is NOT the United States' fault that foreign governments so long impeded the economic freedom and concomitant energy consumption of their citizens.
Secondly, it is fallacious to view energy supplies as nearing exhaustion. In their book, The Bottomless Well, Peter W. Huber and Mark P. Mills tell us that human beings consume approximately 350 Quads (a quadrillion BTUs) of energy per year. KNOWN (I'm emphasizing "known," because more will surely be found) global coal deposits contain some 200,000 Quads of energy; oil shale deposits, 10 million Quads; uranium and its cousin elements contain even more; and the deuterium in the world's oceans contains at least 10 trillion Quads of energy that will be unlocked when nuclear fusion technology is developed.
Since the Huber and Mills book was written, Brazil has found billions of additional barrels of recoverable oil off its shores. BP has found billions more in the Gulf of Mexico. Humans will never use all the energy that our energy-rich world contains.
Someday, our descendants will look back at the vigorous efforts of greens and liberals to keep us from developing the most economical forms of energy with bemusement and bewilderment. The energy is there. What would you rather do -- tap in to nature's bountiful supplies, or put up with light bulbs that don't give instant light and the eerie, gloomy beams of politically correct light bulbs at Christmastime? *
"The hardest arithmetic to master is that which enables us to count our blessings." --Anonymous
Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are republished from V & V, a website of the Center for Vision & Values.
2009 ended with a flurry of important events on the climate-change front.
In November, the Climategate scandal broke. An anonymous whistle-blower released over 1,000 e-mails from key scientists (both British and American) in the alarmist climate-change camp. The e-mails revealed a shocking pattern of the abuse of science by both American and British scientists collaborating at the Climate Research Unit of East Anglia University -- the source of various global-warming "studies" that have formed the alleged scientific justification for capping human CO2 emissions.
E. Calvin Beisner wrote that the e-mails showed: "serious scientific malfeasance -- the fabrication, corruption, destruction, hiding, and cherry-picking of data" as well as "intimidation of dissenting scientists and journal editors -- and efforts to evade disclosure under Freedom of Information Laws in the United Kingdom and the United States." James Delingpole's blog found "Conspiracy, collusion . . . manipulation of data, private admissions of flaws in their public claims and much more."
The incriminating e-mails were followed in December by charges from Russia's Institute of Economic Analysis that Britain's Meteorological Office deliberately skewed Russia's temperature data.
With the underlying climate-change "science" so thoroughly compromised, did policymakers pause to reconsider the need for colossally expensive CO2-curbing policies? No. Instead they are locked into automatic-pilot mode.
In the United States, Sen. Barbara Boxer (D-CA) dismissed Climategate's revelations as irrelevant and continued to push her expensive cap-and-trade proposal (potential cost: trillions of dollars; potential climate impact according to its own proponents: a few hundredths of a degree). Internationally, last month's UN climate conference in Copenhagen ignored it. The delegates didn't skip a beat in pursuing a multi-trillion dollar transfer of wealth from developed to undeveloped countries.
Could it be that climate-change politics is more about wealth and power than science? That would explain why those paragons of environmental stewardship -- Hugo Chavez and Robert Mugabe -- received standing ovations in Copenhagen when they denounced capitalism and called for a massive global redistribution of wealth.
Actually, the green movement has been anti-capitalist and pro-socialist for many years. Over 15 years ago, for example, environmentalist activist Dr. Helen Caldicott declared at a gathering of fellow greens that "capitalism is destroying the earth," whereas "what Castro's done is superb." The green group Ecotage fumed, "We must make this [earth] an insecure and uninhabitable place for capitalists and their projects." The Northwest Coalition for Alternatives to Pesticides proposed "eradicating capitalism from the face of the earth."
Such sentiments explain why environmentalists are known as "watermelons" -- green on the outside, but bright pink (socialistic) underneath. Thus, long-time environmentalist guru Lester Brown has called for "restructuring the global economy, major shifts in human reproductive behavior, and dramatic changes in values and lifestyles." Alarmist superstar Paul Ehrlich has asserted, "Economic growth in rich countries like ours is the disease, not the cure," which explains why he also has called for a central plan to "de-develop the United States." And two years ago, a Friends of the Earth spokesperson announced, "A climate-change response must have at its heart a redistribution of wealth and resources."
What agency can accomplish such radical changes except a global political body? Former French president Jacques Chirac stated in a November 2000 speech that an international CO2 emissions control agreement "represents the first component of an authentic global governance."
Notice the absence of any reference to science in environmentalists' unambiguous pronouncements. In fact, many of those leading the push for CO2 emissions controls disdain science. Examples:
1) Former U.S. Senator and Under-Secretary of State for Global Affairs in the Clinton-Gore administration, Timothy Wirth, stated in 1990, "We've got to ride the global-warming issue. Even if the theory is wrong, we will be doing the right thing."
2) In the mid-1990s, a State Department official wrote a letter that included the statement, "A global climate treaty must be implemented even if there is no evidence to back the greenhouse effect."
3) Stephen Schneider, a scientist and activist who has advocated greater concentrations of government power since the 1970s (back then, because of the purported threat of global cooling, more recently because of alleged global warming), has admitted, "I don't set very much store by looking at the direct evidence."
Clearly, climate-change science is a pretext for a political agenda. Al Gore, writing in Earth in the Balance nearly two decades ago, candidly wrote, "We must dramatically change our civilization," and explicitly appealed for "a wrenching transformation of society."
Okay, that was then; what about now? In 2008, President Obama promised during his presidential campaign "nothing less than the complete transformation of our economy."
Herein you have the green agenda expressed in its own words. How will that agenda fare in 2010?
Perhaps Climategate will awaken more people to the fraudulence of climate-change alarmism and begin to explode the myth that humans can regulate earth's temperature.
Maybe the antics in Copenhagen will convince people that these characters have no respect for scientific integrity, but would exploit science in the pursuit of power and money.
At the very least, let us hope that a majority of voters clearly understand that there is no reason to bludgeon our economy with pointless cap-and-trade schemes.
We have a problem. This could be "the big one" -- bigger than coping with the Ahmadinejads, Kims, and Chavezes of the world and bigger than our current economic woes. Our republic, our society, may be heading for a crackup. We are bankrupt, both financially and politically.
The source of the problem is democracy. Decades of so-called "progressive" thought have led us to abandon the limited-government, constitutional republic established by our Founding Fathers. In the name of putting more power into the hands of "the people," the government has arrogated sweeping powers.
There is a famous passage (possibly cobbled together from several separate statements and authors) that explains democracy's fatal flaw, the inherently self-destructive element that caused our Founding Fathers to distrust democracy (google "James Madison on democracy" for more):
A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.
Crude, majoritarian democracy (as in, "there are more of us than there are of you, so we're going to redistribute your wealth") inevitably undermines the harmony of society. A free market, as competitive as it is, is based on peaceful, voluntary cooperation. When commerce is free and unfettered by government interference, both sides to a transaction normally gain, thereby promoting social harmony.
Democracy, by contrast, engenders social conflict. Money changes hands by force of the taxman and the threat of imprisonment, not voluntarily. Democracy pits citizens against each other in a sordid squabble whereby many strive to have the state confer benefits seized from their fellow citizens.
Today, Washington redistributes trillions of dollars annually, so the capital is swarmed by battalions of lobbyists, representing myriad special interests, each trying to secure more political rent from government than what government takes from them. As the late, great economist Hans Sennholz described it, the democratic "transfer society" resembles the absurd spectacle of a circle of people, each trying to pick his neighbor's pocket. How can there be social harmony when everyone is trying to rip off someone else?
This process of using government to extract wealth from other citizens (dubbed "legal plunder" by the 19th-century French economist Frederic Bastiat in his brilliant essay, "The Law") has reached the point where Uncle Sam is essentially bankrupt. With government spending and deficits soaring under the present administration, the day of reckoning approaches. If foreigners should decide to cut their losses and balk at financing any more of our debt, either interest rates will soar, collapsing the economy, or the Fed will monetize all the debt, collapsing the dollar and the economy.
Can that day of cataclysm be postponed? Perhaps the wealth-redistribution system can be kept on life support a while longer, if government can confiscate a much larger share of the middle class' wealth (yes, the middle class, because there aren't enough rich people to finance all of Uncle Sam's promises) or by dramatically slashing benefits.
When that momentous day arrives, there will be a lot of angry Americans. One might say that the so-called "social contract" will be broken, but the problem is, there isn't just one such "contract." There are two, and they are fundamentally and irreconcilably opposed to each other.
One "contract" is the government's long-standing promise to support those in need. Many Americans have been taught to believe that they are entitled to a share of other people's property, even if they have contributed nothing of value to society themselves and have made poor choices. The other social "contract" is the traditional implicit promise of America: namely, that if you work hard, you are entitled to the fruits of your labor.
When a financial crackup occurs, those who have been taught to depend on government will demand continued government benefits. If government fails to provide them, those demands could turn violent. On the other hand, if government moves to confiscate a significant chunk of whatever wealth remains in the hands of an already-hurting middle class, then millions of peaceful, law-abiding, hardworking Americans may finally reach the breaking point and rebel, as our forebears did in the 1770s, against a government viewed as abusive and oppressive.
How bad could it get? If the social order breaks down, civil unrest could disrupt markets, and shortages of essential goods could occur. The resulting chaos could trigger martial law. A strong leader -- a Caesar -- could institute some sort of command order. Millions would resent it, but it would be accepted, because the alternative -- civil conflict, chronic disorder, and impending starvation -- would be intolerable. In such a calamity, Caesar would be the lesser of two evils. The American Republic and Constitution would join earlier democracies in the ashbin of history.
God help us.
What should governments do to combat recessions? In the United States, before the Great Depression of the 1930s, the answer was "very little." Of course, the federal government was much smaller then compared to the size of the private sector, so its options were limited.
The Depression changed all of that. In the mid-1930s, the British economist John Maynard Keynes developed a new paradigm: "The economy" was reified; that is, it was regarded as an entity in itself, sort of like a mechanism that could be repaired and fine-tuned, thereby "smoothing out" the booms and busts of the business cycle. Keynes shifted the focus of attention from individual economic behavior ("microeconomics") to collective statistics such as "aggregate demand," "price levels," "unemployment rates," etc. "Macroeconomics" was born.
The two primary "tools" of macroeconomic mechanics are fiscal and monetary policy. In the decades immediately after the Keynesian revolution, governments embraced "contra-cyclical" fiscal policy -- responding to recessions by increasing deficit spending.
After the horrible stagflation (simultaneous economic sluggishness, high unemployment, and high inflation) of the 1970s, monetarism -- Milton Friedman's theory that monetary policy was of primary importance in keeping "the economy" on a steady growth path -- gained popularity.
Fast forward to today, and we find our economy mired in its worst downturn since the Great Depression. Fiscal and monetary policies have not prevented the current mess, and in fact have produced it (detailing how would require a book). What macroeconomic policy is government employing?
Chairman Ben Bernanke's Federal Reserve has decided on an easy-money policy, holding short-term interest rates near zero percent, doubling the monetary base, and continually purchasing all sorts of dubious financial assets from banks and government agencies.
Presidents Bush and Obama both pushed "stimulus" spending bills through Congress. Keynesian deficit-spending is still being used as a macroeconomic tool against recession (as usual, without notable success). Where do we go from here?
One macroeconomic viewpoint currently gaining traction is Richard Koo's "balance sheet recession" theory. Dr. Koo, chief economist of Nomura Research Institute in Japan, sees today's post-bubble U.S. economic predicament as being similar to Japan's post-bubble situation in the early 1990s: Because banks' balance sheets are so weak, bank lending is declining, despite the Fed supplying massive amounts of reserves. The Fed is "pushing on a string" -- i.e., powerless to compel banks to issue loans or customers from borrowing funds.
American banks are emulating the Japanese strategy: borrow from the central bank at miniscule interest rates and purchase safe, higher-yielding longer-term government bonds, slowly repairing their balance sheets with this risk-free interest-rate spread. Because this mending process takes many years, Koo asserts that Uncle Sam should continue running large deficits -- in other words, use fiscal policy to compensate for the lack of lending, thereby preventing a deflationary collapse featuring a chain reaction of bank failures and debt liquidation. It worked in Japan and can work here, too, he maintains.
Prominent economic commentators like Martin Wolf and Paul Krugman have jumped on this bandwagon. They agree that the United States should not reduce fiscal deficits until a recovery is firmly established. Unfortunately, nobody is asking the crucial question: Are the costs of such a policy worth it?
True, Japan has avoided a financial wipeout and the sweeping economic adjustments and restructuring that would have followed. The price has been nearly two decades of economic stagnation. The Japanese economy remains subdued, and is now saddled with an accumulated debt of 200 percent of GDP, a burden that will retard economic activity for additional decades unless an economic cataclysm forces the needed restructuring. Also, because Japanese banks have financed governments instead of private firms, Japan's public sector has grown at the expense of its private sector, another formula for economic stagnation.
In short, Japan has won the battle against a deflationary collapse, but lost the war for economic prosperity. Do we want to follow Japan down the dreary road of decades-long stagnation?
Unfortunately, there is no pain-free alternative. Decades of government intervention have prevented needed adjustments, resulting in a gargantuan, rotten financial house of cards looming over us. Whenever the inevitable collapse happens, GDP will plunge. It will be like the economy has been hit by a financial neutron bomb. The problem is, the longer we wait for this to happen, the larger and more painful the collapse.
What is the "right" macroeconomic policy? I reject the macroeconomic premise that the economy is a mechanism that can be mastered by government. Macroeconomics is an epistemological absurdity undergirding economic fallacies used to justify political frauds.
The right public policy is summarized in one word: Freedom. Abolish the central bank, scrap legal tender laws, and limit government to its original constitutional function of protecting individual rights.
If, by some miracle, free markets were allowed to function, we would pass through a couple of years of wrenching adjustments and economic hell that would produce a solid, economically rational foundation leading to a prolonged period of strong, sustainable economic growth. But then our children would inherit a much more economically healthy future.
There is no economic pain-free utopia, but free markets will optimize wealth creation and minimize the jarring disruptions of inflation, deflation, recession, booms and busts that government intervention invariably produces.
What kind of prices do you prefer to pay when you go shopping -- high or low? Unless you're trying to show off for someone by spending a bundle, I'd bet that you prefer low prices. I've never met anybody who decided not to buy something because he wished the price were higher. Indeed, common sense leads to the inescapable conclusion that economic standards of living are higher when people can afford to buy more things than when they can afford to buy fewer.
Why am I stating such an obvious truism? Because, strange as it seems, our friendly federal government has a bad habit of adopting policies that raise prices. We have heard for decades, ad nauseam, that politicians compassionately care about the poor and want to help "the people" prosper. Their deeds, however, do not match their rhetoric. Repeatedly, American politicians have subverted the healthy functioning of free markets, whose competitive pressures and ever-improving productivity exert downward pressure on prices.
This tendency has a lengthy history. When the first federal regulatory agency, the Interstate Commerce Commission, was created in the 1880s, it regulated prices. That meant it blocked railroad companies from lowering fees to customers, resulting in higher transportation costs and higher retail prices for consumer products.
My Econ-101 students are amazed when they read about government-mandated price floors, subsidies, guaranteed purchases, etc., that raise the price of foods. They shake their heads in disbelief when they learn about government's myriad tariffs and quotas that abrogate Americans' right to buy needed goods from the lowest-cost providers, and force them to pay higher prices, resulting in them being able to afford fewer things. They are amazed to discover that the actual history of early antitrust cases (as detailed in Dominick Armentano's Antitrust and Monopoly) shows that Standard Oil and other large corporations prosecuted under antitrust laws were neither monopolies nor guilty of the monopolistic abuse of gouging consumers with high prices, but, in fact, were the very companies that were charging consumers the lowest prices. In effect, then, antitrust laws punished the companies that were most beneficial for American consumers. They are frustrated that as oil prices soar, government imposes greater restrictions on the development of domestic petroleum resources.
At the same time that President Franklin Roosevelt had the Justice Department target private firms for alleged anticompetitive practices during the Great Depression, his own economic strategy was to organize businesses into government-managed cartels, which plotted to raise prices. FDR's bizarre and ugly practice of ordering farmers to plow under thousands of acres of cotton, kill millions of piglets, and pour out massive quantities of milk made food more expensive at a time of severe poverty and hunger in America.
This is all very relevant today, because Barack Obama is using FDR as his role model. What is Obama's attempted solution for the housing crisis? It is to do whatever he can to stop prices from falling -- as if higher prices for the expensive consumer goods in America is vital to prosperity. Yes, those of us in my generation who mistakenly viewed our house as a savings account may reap the capital gain we had anticipated, but if we would let the market settle at lower prices for houses, that would be one of the rare times that we would be doing something economically beneficial for today's younger Americans.
The perverse political preference for high prices is also manifested in Obama's major legislative initiatives, healthcare insurance reform, and energy policy. The healthcare proposals are full of taxes, fines, and talk of higher premiums for many. Meanwhile, the Obama administration's stated goal for energy is to tax fossil fuels through a cap-and-trade scheme -- a policy that surely would jack up the price of energy.
Making energy more expensive for Americans in the depths of a severe economic contraction may suit radical environmentalists such as Paul Ehrlich, who once opined that "Giving society cheap . . . energy . . . would be the equivalent of giving an idiot child a machine gun." However, for the average American, rising energy costs will translate into higher prices for running one's car and heating one's home, and powering one's factory, and that will make most of us (especially the Americans with the lowest incomes and those who lose their jobs to countries with lower energy costs) feel poorer.
I know that President Obama believes that people like me are out of step with the times. Maybe wanting low prices for Americans is quaint and old-fashioned, but I still think low prices are better for Americans than high prices. What do you think?
In 1962, President John F. Kennedy hosted a dinner for 49 Nobel laureates. The occasion provided the opportunity for JFK to display his keen wit in the memorable quote:
I think this is the most extraordinary collection of talent, of human knowledge, that has ever been gathered at the White House -- with the possible exception of when Thomas Jefferson dined alone.
I wonder how many of today's high school and college students appreciate Jefferson's genius. Our third president, author of the Declaration of Independence and founder of the University of Virginia, was a masterful scholar of history, a political philosopher for the ages, a noted horticulturist, an archaeologist, architect, and inventor. He also knew a thing or two about money and banking. Let's take a moment here to review the wise insights on money and banking left to us by this consummate Renaissance man.
Regarding money, Jefferson commented, "Paper is poverty . . . it is only the ghost of money, and not money itself." We should remember this when we contemplate the loss of 95 percent of the purchasing power of the paper currency called "Federal Reserve notes" in less than a century. As Ben Bernanke and the Fed create trillions of new paper "dollars," we, the richest country in history, face the possibility of a hyperinflationary collapse and accompanying impoverishment.
Jefferson, like other Founding Fathers, understood vividly the vulnerability of paper currencies, because of the devastating hyperinflation of the paper Continental dollar during the War for Independence. That is why the Coinage Act of 1792 stipulates gold and silver, NOT paper, as money. Jefferson and the Founders knew that for money to be sound, it needed to be something objective, tangible, unvarying, as well as something that people valued independent of its use as money -- something like a fixed weight of gold or silver -- rather than something as transitory and insubstantial as "the full faith and credit" of a government of unreliable human beings.
Jefferson intuitively grasped one of the basic principles of free-market economics: In a free, open competitive market, people choose good stuff (food, machines, tools, etc.) over bad stuff, and so goods of superior quality and value push inferior products into oblivion. The only reason Americans today have such an inferior currency is political. Government legislation denies us the freedom to choose what to accept as money. Jefferson wrote, "I now deny [the federal government's] power of making paper money or anything else a legal tender." What a terrible price we have paid and will pay for legal-tender laws forcing us to accept mere paper as money.
Anticipating the Federal Reserve System, Jefferson believed that:
The incorporation of a bank and the powers assumed [by legislation doing so] have not, in my opinion, been delegated to the United States by the Constitution. They are not among the powers specially enumerated.
In Jefferson's eyes, a central bank is unconstitutional.
Jefferson warned:
If the American people ever allow the banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers occupied. . . . I sincerely believe the banking institutions having the issuing power of money are more dangerous to liberty than standing armies.
Today, Uncle Sam is woefully dependent on the Fed and a few "too-big-to-fail" banks. That is because Uncle Sam is the world's largest debtor, and without these giant banks to maintain a market for its oceans of debt, the federal government would have to shut down.
I once spoke with a congressman after hearing him complain about Federal Reserve policy. When I reminded him that the Fed had been created by an act of Congress, and that the creator controls the creation, he turned ashen, speechless. Is Congress a bunch of cowards or do the banks have a chokehold on our government?
Are the Fed and the giant money-center banks as "dangerous" as Jefferson believed? Certainly, their power is undeniable.
The wealth of the American people is jeopardized by paper money and big banks. We should have heeded Jefferson's warnings. *
"With respect to the two words 'general welfare,' I have always regarded them as qualified by the detail of powers connected with them. To take them in a literal and unlimited sense would be a metamorphosis of the Constitution into a character which there is a host of proofs was not contemplated by its creators." --James Madison
Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are republished from V & V, a website of the Center for Vision & Values.
On Sept. 30, Senators Barbara Boxer (D-CA) and John Kerry (D-MA) unveiled their proposal for cap-and-trade (C&T) legislation. The Senate bill calls for a 20 percent reduction of U.S. carbon dioxide (CO2) emissions by 2020, and an 80 percent reduction by 2050 -- targets similar to those in the C&T bill passed by the House of Representatives in June.
The timing of this proposal is ironic. Scientists in the global warming alarmist camp have begun to change their tune. They are now telling us that the earth is likely to cool for a few decades before entering a prolonged period of rapid warming. This is an astounding admission; they have essentially demolished the man-made global warming theory.
Here is why: For years alarmists have insisted that CO2 warms the planet. Now they assert that rising levels of CO2 won't warm the earth for 30 or 40 years, but then will do so later on. Come again? Does CO2 warm the earth or doesn't it? Alarmists are finally conceding the main argument of global warming skeptics: Other forces -- particularly solar variations -- overwhelm the greenhouse effect. It's time to focus on those other factors instead of obsessing over CO2.
It is also ironic that the Senate bill was unveiled just one week after the G-20 declined to prioritize an international climate agreement at the upcoming Copenhagen meeting. The foreign heads of state who visited Pittsburgh are unwilling to cripple their economies by limiting CO2 emissions, although they surely won't object if President Obama and his congressional allies torpedo the American economy with C&T. (C&T would slam the American economy to the tune of $1,700 annually per family, according to a study performed by the Environmental Protection Agency -- a study that Team Obama squashed, until its release was obtained via the Freedom of Information Act.)
The bad news is that, in spite of the strategic retreat of scientists unable to deny earth's present cooling trend and the dim prospects for a strong international agreement in December, Congress may still pass C&T legislation. The progressive/environmentalist power base of the Democratic Party will rally behind such a bill. It will be joined by some odd bedfellows, e.g., powerful corporations like Goldman Sachs eager to make fortunes by establishing a market for buying and selling CO2 permits (a role for which Enron had the inside track when this scheme first surfaced in the 1990s). Also, nuclear-power companies and other utilities with no or low CO2 emissions would reap immense windfall profits from a C&T scheme. To the chagrin of anti-capitalist greens on the left and free-market economists on the right, C&T could end up being the most expensive corporate welfare bill in history.
On Oct. 2, The Wall Street Journal's Kimberly Strassel reported that three CEOs of giant utilities expecting to profit from C&T legislation have withdrawn from the U.S. Chamber of Commerce in protest of the Chamber's reasonable position that the government be transparent about the "science" used to justify C&T. While it's no surprise that many CEOs have no compunctions about ambushing their competition, it is reprehensible that they are willing to sell out the freedom and prosperity of the American people.
As reported by the Financial Times on Sept. 14, some Britons are already being fined for having traveled "too far," thereby exceeding government-mandated personal CO2 emission limits. That's what Americans will eventually face if Uncle Sam gets the proverbial camel's nose under the tent by passing legislation -- however minimal at the outset -- that incorporates the principle that the government may regulate our energy consumption and thereby regiment our lives.
The really bad news for the American people is that, even if we rise up in sufficient numbers to block draconian C&T legislation from being enacted, we will STILL be saddled with costly caps on CO2 emissions. That's because the EPA is now required to regulate them, because CO2 was officially designated as a pollutant earlier this year.
The EPA recently announced that it intends to start by regulating only the 10,000 or so industrial companies (such as utilities and refineries) that emit over 25,000 tons of CO2. This would cost jobs and drive up the price of electricity and gasoline for the rest of us. The EPA's target is arbitrary and illegal at the moment, since existing legislation mandates a threshold of 250 tons of emissions (a discrepancy that the Senate bill would eliminate by stipulating the higher figure).
There is a simple way out of this nightmarish mess. Instead of the Senate's bloated 821-page proposal, Congress should enact a one-sentence bill: "For legal purposes in the United States, carbon dioxide shall not be regarded as a pollutant." Sadly, with this Congress, we're a million miles away from such enlightened policymaking.
The price of gold has recently spurted to a new all-time high in terms of U.S. dollars. I'm neither an expert nor a market timer, but let me offer a few perspectives on this event.
To most people, including gold bugs, gold is an inflation hedge, preserving purchasing power at a time of currency depreciation. Today, unlike the gold bull market in the 1970s, gold is rising while consumer and producer prices are falling. Nevertheless, many economically knowledgeable market participants are getting out of Dodge -- that is, they are reducing their holdings of dollars now -- some to avoid potential losses from future dollar depreciation and some for other reasons.
The market price of things reflects how much people value them. For people to value a currency highly, they must have confidence both in the integrity of the currency and, in the case of a fiat currency, the political and financial viability of the government issuing the currency. Confidence in the buck is currently low because Washington's fiscal policy is profligate and out of control, and because Federal Reserve Chairman Ben Bernanke has stated that the Fed will create as many dollars as deemed necessary to prevent a depression. (For the record, there is no guarantee that monetary policy, inflationary or otherwise, can prevent a depression. It is possible to have a hyperinflationary depression.)
Market prices decline when sellers outweigh buyers. The dollar currently has lots of sellers. China, for example, is hedging its exposure to dollars by exchanging paper assets for hard assets, buying massive quantities of raw materials around the globe, while also encouraging its own citizens to diversify into gold and silver. There are recurring rumors that some Arab Gulf states, China, Russia, France, and maybe even Japan would like to replace the buck with a basket of currencies and gold for oil transactions. The Federal Reserve Note may become "the old maid" of the global currency markets.
Another important, but generally under-appreciated, factor affecting the price of gold is geopolitics. Eight-hundred dollars an ounce gold in January 1980 was, among other things, an emphatic no-confidence vote for the United States as a world power. Under Jimmy Carter, the United States appeared impotent and incompetent on the world stage. Soviet tanks rolled into Afghanistan, Iran held over 50 Americans hostage for 444 days, and everyone remembered how Carter had kissed Leonid Brezhnev. The dollar tanked and gold soared. When Ronald Reagan reasserted America's resolve and effectively stood up to Soviet expansionism, the dollar entered a prolonged bull market and gold a prolonged bear market.
Today, President Obama seems paralyzed in Afghanistan, clueless about Iran, makes unilateral concessions to the likes of Vladimir Putin and Hugo Chavez, and gold is at record highs despite overall price deflation. Nobody wants to hold the currency of a declining power; hence, until our president starts projecting strength, the dollar is likely to remain under pressure. Many foreigners love to gripe about American power, but when push comes to shove, they generally prefer the relative stability provided by a strong United States and a strong dollar.
Another major factor affecting the gold-dollar exchange market today is "the carry trade." This is a currency-trading technique whereby speculators (everyone from financial institutions to hedge funds to individual investors) borrow money at low interest rates in one currency, then sell that currency to buy another currency where they can earn higher interest rates, thereby profiting from interest rate spreads.
In recent years, the Japanese yen had the lowest interest rates, and therefore was sold to finance the carry trade. Incidentally, this policy was designed to prop up politically connected too-big-to-fail bankrupt banks, resulting in years of economic stagnation in Japan.
Uncle Sam and the Fed have adopted a similar program today. The Federal Reserve is keeping interest rates near zero, so currency traders are selling dollars (accentuating the already bearish trend in the buck) to buy other currencies in the search for yield. Since the Fed has insisted that it will hold interest rates at these amazingly low levels at least through 2011, many currency traders are selling dollars to buy euros, yuan, the Brazilian real, Canadian, Australian and New Zealand dollars, etc. (Note to amateur speculators: The carry trade isn't as risk-free as it seems. If there is a financial panic similar to last fall's, panic buying of the dollar might crush those who are "short" the buck.)
Incidentally, since one of the traditional arguments against buying gold is the fact that it pays no interest, today's super-low interest rates on dollar-denominated savings practically eliminate the opportunity costs of converting dollars to gold, further incentivizing a shift from dollars to gold.
This economist doesn't know the future, and this article isn't giving investment advice. Gold prices may continue to soar or they may get caught in a deflationary downdraft. I will, however, make one categorical assertion: Gold is warning us that our country is on the wrong track.
China, Russia, et al. are talking about shifting their monetary reserves out of U.S. dollars. Gold has hit $1000 per ounce, even though wholesale and retail prices exhibit a deflationary bias. The United Nations has called for a new world currency to replace the dollar. What's going on?
All of these phenomena are early death throes of Federal Reserve Notes. I balk at saying "the U.S. dollar," because a "dollar" is still defined in law as a certain quantity of silver or gold, whereas the U.S. currency that now circulates here and around the globe consists of nothing more than scraps of paper (actually, a linen-cotton compound) -- a "fiat currency." (Technically, Federal Reserve Notes aren't even money. Historically, "money" denoted coinage of metals prized in the commercial marketplace; therefore, only a currency redeemable in those metals is a genuine money substitute. Federal Reserve Notes s are fakes, nothing more than legalized counterfeits of true money substitutes.)
Whether Federal Reserve Notes survive -- that is, whether they continue to retain purchasing power and function as money -- for a few more years or a few more decades is unknowable. In fact, the Federal Reserve Note could strengthen against other currencies if the powers-that-be would trigger another financial crisis like last year's. (Isn't that a wretched option?) Inevitably, though, Federal Reserve Notes will become worthless, just as every other fiat currency in world history eventually ends up worth nothing more than what they are -- little scraps of material.
You may hear some politicians and commentators complain about the Chinese and others as they rebel against the dollar's status as the world reserve currency. You may say that the Chinese have no business stating that our government needs to stop its spendthrift, debt-bingeing ways. The fact of the matter, though, is that the Chinese have a right to speak out on these issues. After all, the Chinese are joined to us at the financial hip. They hold reserves of over two trillion Federal Reserve Notes, and close to one trillion of Treasury debt.
Put yourself in their shoes: If we held that much of a foreign currency, and we could see that the government of that country was in the process of debauching that currency by having its central bank flood the financial system with newly created reserves while the government's debt was exploding as a result of reckless, runaway spending, wouldn't you worry? Wouldn't you be tempted to feel resentful and indignant?
It is vital to realize that neither the Chinese nor the Russians nor any other foreign nation has put us in this predicament.
Who won the Cold War? That's a no-brainer. The United States prevailed while the Soviet Union collapsed, and the People's Republic of China dumped Marxism; capitalism (free markets and private property) triumphed over socialism (centrally planned markets and state-owned property); an ethos of individual rights proved to be more resilient and healthy than collectivist ideology; relatively small, democratic government clearly was demonstrated to help a society prosper far more effectively than elitist Big Government.
How ironic, then, that voices in Russia and China are mocking our current Big Government policies. Those whose countries took the tragic, impoverishing detour through Big Government hell, now react with scorn and derision as we Americans charge headlong down that same path. What an amazing spectacle it must be for them to see the victor of the Cold War borrow many pages from the losers' playbook.
To read a startling indictment of the American predicament, Google the words "American Capitalism Gone with a Whimper," the title of an article by Stanislav Mishin. The author writes, "the American descent into Marxism is happening with breath-taking speed."
This decline has happened because, according to Mishin, "the population was dumbed down through a politicized and substandard education" that produced millions of Americans who "know more about their favorite TV dramas than the drama in D.C. that directly affects their lives." Mishin also faults the widespread abandonment of Christ's religion in America, our loss of faith. This is the cultural backdrop for a political system that has culminated in Barack Obama's unprecedented "spending and money printing." Mishin believes that, under Obamanomics, "America at best will resemble the Weimar Republic and at worst Zimbabwe."
Earlier this year, reports Mishin, "Prime Minister Putin . . . warned Obama and UK's Blair, not to follow the path to Marxism, it only leads to disaster." Mishin has concluded that we are ignoring Putin's warning -- based on 70 years of suffering during the nightmarish Soviet experiment in central planning -- and he concludes:
The proud American will go down into his slavery without a fight, beating his chest and proclaiming to the world how free he really is. The world will only snicker.
When I first read this astounding diatribe, I thought perhaps it had been written as a satire, almost as a spoof of what some libertarian writers in the United States have written. After consulting with a Russian friend, I have concluded that Mishin wrote in complete earnestness. Either way -- satire or grim analysis -- what Mishin wrote is no laughing matter. Mishin's is one of many voices, foreign and domestic, warning us of the dangers of the faith that government can be omnicompetent and can meet all our economic needs.
Adding to the irony of a Russian warning the United States about the dangers of Marxism is the fact that this article appeared in the online publication Pravda.ru -- the contemporary version of the Soviet-era newspaper Pravda that served as the official Communist Party channel for pro-Communist, anti-American propaganda.
Another harsh indictment of our ill-advised embrace of Big Government occurred on June 1, during Treasury Secretary Tim Geithner's official visit to China. Speaking at the University of Beijing, Geithner assured a large audience of students that China's large holdings of U.S. Treasury securities were "very safe." The students laughed out loud. This reaction might have been unusually rude, but it was brutally honest. They didn't believe Geithner for one second.
When the ability of the United States government to repay its debts (or at least, without doing so in significantly depreciated dollars) is perceived as a joke, it is anything but a laughing matter for our country. The Chinese gave us a wakeup call, although we appear not to have heeded it.
The Chinese students see what is plain for anyone with eyes to see. For years, fiscal discipline has been eroding in Washington, but President Obama has increased government spending with reckless abandon as the leviathan government absorbs more and more of the private sector. With Uncle Sam's total financial obligations totaling approximately five times our GDP, there is no way those debts and promises can be honored. The most likely outcome will be Uncle Sam -- the largest debtor in human history -- paying off those debts in greatly depreciated dollars. Indeed, our one-trick Federal Reserve (Motto: When there's a bump in the economic road, inflate) already has begun to create vast sums of new dollars through the mechanism of "quantitative easing" -- the direct purchase of the bonds that the government issues to finance its massive spending agenda.
The Chinese students laughing at Geithner told us implicitly what Stanislav Mishin told us explicitly: It is runaway government spending, stemming from the socialistic error that the government can be all things to all people, which threatens us all with financial cataclysm, national bankruptcy, and the loss of our prosperity and our freedoms. From the perspective of the Russians and the Chinese, the joke is on us. But for all of us, America's plunge into the Big Government trap is no laughing matter. *
"[G]overnment, even in its best state, is but a necessary evil; in its worst state an intolerable one." --Thomas Paine
Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are republished from V & V, a website of the Center for Vision & Values.
Barack Obama ran a brilliant campaign for president. Unfortunately for him, that strategic brilliance did not carry over to his campaign for healthcare reform. His push for greater government control of healthcare has struck a majority of Americans as radical, arrogant, and not so subtly lethal.
Obama is backtracking, trying to salvage some increase in government control. He dropped the proposal for government end-of-life counseling.
Hello, Mr. Smith ? I'm your government counselor. Tell me about yourself. How badly do you want to live? I'm sorry I can't come over and meet you in person, but I have thousands of clients. Can you help me out and tell me why you should have priority in receiving life-prolonging treatment?
Obama now claims to have dropped the "public option." He is playing word games here. His explicitly stated ultimate goal (shared with virtually all liberal Democrats in Congress) is to nationalize healthcare, and he is still working to increase government control of healthcare as much as is politically possible.
Obamacare is not "socialized medicine," as some critics claim, but this is a semantic technicality. My late economics mentor, Dr. Hans Sennholz, grew up in Nazi (national-socialist) Germany. He explained that the difference between socialism and fascism was that socialists seize ownership of businesses, whereas fascists let owners retain title to businesses, but wield dictatorial control over them. When it comes to healthcare, we see echoes of this in Obama's August 16 New York Times op-ed, in which he proposed that Uncle Sam regulate which people health-insurance companies insure, the generosity of those benefits, and the prices those companies charge.
The fundamental flaw in the proposed healthcare reform is encapsulated in Nancy Pelosi's assertion that the reform would mean "a cap on your costs, but no cap on your benefits."
Well, that would be grand. But that's not how the world works.
It is an elementary economic truth that price ceilings produce an excess of demand over supply -- i.e., a shortage. Shortages breed political rationing, as happens regularly in Canada, Britain, and other countries with government-provided healthcare.
The prospect of being at the mercy of government bureaucrats for access to healthcare can make one feel as queasy as looking into the barrel of Dirty Harry's .44 Magnum and hearing him taunt "Are you feeling lucky, punk?"
The purpose of cap and trade (C&T) legislation is to reduce Americans' consumption of fossil fuels -- coal, oil, and natural gas -- and to speed up the transition to alternate forms of energy, such as wind and solar power. The "cap" part would be a legislated limit to the quantity of carbon dioxide that Americans would be permitted to put into the atmosphere from the burning of fossil fuels. The government would then issue permits that it would sell or give (details are being worked out) to businesses who could then either emit CO2 up to the amount stipulated in their permit, or, if they can curb CO2 emissions below that amount, could sell or "trade" the permit to the highest bidder in the after-market.
The stated overarching goal of proposed C&T is to save the planet from human-caused climate change, which C&T proponents attribute to human emissions of greenhouse gases, primarily CO2 from fossil fuels. These proponents truly believe (despite considerable scientific disagreement) that such measures are necessary to save the earth. Others have a political agenda: If government can regulate energy consumption, then government has great control over economic activity and people's lives -- an irresistible lure to central planners, social engineers, utopian visionaries, and megalomaniacs.
Still others have economic incentives: companies that generate electricity from non-CO2 sources, such as nuclear and hydropower, would gain a windfall cost advantage against their competition; alternative energy businesses would stand to receive billions of dollars in additional subsidies; and Al Gore, who met behind closed doors with congressional leaders to plan the C&T strategy earlier this year, has reportedly invested millions of dollars in alternate energy companies and stands to profit enormously from C&T-generated government subsidies.
Opponents of C&T are more concerned about its massive costs -- both economic and political. In January 2008, candidate Barack Obama stated plainly that under his C&T plan, electricity prices would "necessarily skyrocket" as utilities using fossil fuels would pass along the costs of CO2 permits to consumers. Significantly raising the cost of power would not only hammer Americans' utility bills, but would make it more expensive for businesses to power their operations. This would shut down marginal businesses and leave the survivors less competitive against foreign businesses -- especially since China and India, for example, have announced they won't curtail CO2 emissions at all.
Indeed, from an economic standpoint, the C&T bill should be titled the "Raise the Cost of Living and Ship Jobs Overseas Act of 2009."
Even though studies cited by advocates of C&T show that American CO2 reductions would shave only a few hundredths of a degree off future temperatures, they still believe that this is worth the considerable costs. Thus, when the House of Representatives approved cap and trade legislation at the end of June, a majority rejected proposed amendments that would have limited the program's economic damage by suspending C&T if gasoline rose to $5.00 per gallon or unemployment reached 15 percent.
Most Americans aren't concerned about global warming and certainly don't want to get poorer (especially now, at a time of acute economic distress), so one might think that C&T legislation would be doomed. But this is where things get really interesting.
Originally, government was going to sell the CO2 permits, raising hundreds of billions in revenue. Now, though, congressional leaders are reshaping the program to give permits to various utility companies in exchange for their endorsement of the plan (and perhaps their lobbying dollars). So much C&T money is now slated to be given to Big Business that members of Team Obama admit that this program could become the largest corporate-welfare program ever.
So, will C&T pass in the Senate so that an eager President Obama can sign it into law? Probably not, if the bill is openly and deliberately debated. However, Senate Majority Leader Harry Reid may duplicate what House Speaker Nancy Pelosi did to get a C&T bill through the House -- rush it through before members could read it, and bestow billions in favors to "persuade" undecided members to support it. Despite the overall negative impact of such a bill, the special interests -- both environmentalists and corporations -- may still prevail.
The Obama/Pelosi/Reid axis will not initially get as much revenue or as deep cuts in fossil-fuel consumption as they would like, but if they can establish the principle that the government should decide how much energy Americans can consume, they will celebrate.
We the people, though, should reckon the cost to our liberty.
If this principle becomes law, we may face a day when a federal bureaucrat will grant permission to Al Gore to jet around to preach the evils of CO2 emissions while denying Joe Sixpack the right to fly cross-country to see his girlfriend once a month. Might we emulate the Brits, who currently are devising a "para-police" force to monitor energy consumption?
There is much at stake in the C&T debate. This is one of the major issues of our time. Become informed.
For those of you above a certain age, do you remember where you were on July 20, 1969? I certainly do. Just as many of us will never forget where we were when we learned about 9/11 or heard President Kennedy had been shot, many of us will always remember where we were on July 20, 1969, when Neil Armstrong and Buzz Aldrin became the first humans to walk on the moon.
Reminiscing about the first moon landing has triggered in me a flood of vivid memories about various milestones in "the space race" against the Soviets -- a race in which they took the early lead, but the United States caught up and surpassed them.
1957, the beginning: Standing in our driveway and watching Sputnik twinkle in the sky as it passed overhead.
May 5, 1961: Sitting on the gym floor with all my classmates and Mr. Grant in Longfellow Elementary School. We set aside all thought of running and playing as we listened on radio to history being made as Alan Shepard became the first American to journey into space.
January 27, 1967: Stepping through the front door into our living room and hearing the television blare the stunning report of the launch-pad fire that took the lives of astronauts Gus Grissom, Roger Chaffee, and Ed White.
Christmas Eve, 1968: In the same living room and on the same television set, I recall the profound feeling of eeriness, wonder, and mystery when Apollo 8 first passed behind the moon, completely removed from all contact with planet earth.
July 20, 1969: The crowning achievement -- Apollo 11's successful moon landing. I was in Mexico. In hushed anticipation, a group of us -- Mexicans and gringos alike -- gathered around a black and white television in the lobby of the Hotel Acueducto in Morelia to watch Neil Armstrong climb down the ladder of the lunar landing module and safely step onto the moon's surface. Awestruck, we applauded the surreal image on the television screen.
The next day, we took a bus trip. The driver stopped for a quick break in the center of a poor village. I was overwhelmed by the incongruity of two concurrent realities -- the shoeless, dirty vendors rushing out of their crude, primitive stalls to hawk their mysterious, unidentifiable, supposedly edible merchandise to us through the windows of the bus, while two men were walking on the moon a quarter of a million miles above us. It was disorientating. How could there be such poverty and primitiveness in one corner of planet Earth while another human society had achieved such wealth and technological advancement as to put people on the moon?
This was a defining moment in my life. My heart yearned to bridge the gap between the haves and have-nots. That desire impelled my youthful foray into socialism. Later, having learned socialism's shortcomings and fallacies, the quest that Apollo 11 had kindled in my heart in July 1969 culminated in my embrace of free markets as the best, though imperfect, way to uplift mankind from poverty.
The space program has provided other indelible memories. Nothing ever surpassed the intense, protracted drama of bringing the Apollo 13 crew home after nearly losing them in space. I doubt that the world has ever been more united in prayer than it was during those several days in April 1970.
In more recent years, the wonder of the space program seems to have diminished. Our strongest memories are of the Challenger and Columbia disasters. However, I think we are weighed down by something more somber and depressing than those two horrible, but isolated, tragedies.
When the dream of landing a man on the moon was fulfilled 40 years ago, there was a prevailing sense of hope and optimism. If we could achieve this, what couldn't we achieve?
Alas, like those who built the tower of Babel in Genesis, perhaps we made the mistake of thinking we could build a better world without God's guidance. Instead of reaffirming our country's Judeo-Christian roots and principles, we opted for a secular salvation. We placed our faith in Big Government, thinking that democratic politics could eradicate poverty, end injustice, and usher in a new age of Aquarius, or Peace and Prosperity, or Heaven on Earth, or whatever you wish to call it.
We erred. We were wrong. Forty years ago, we put men on the moon. Today, our streets, bridges, and electricity infrastructure are decrepit and decaying; our body politic is riven by distrust and hostility; we teeter on the edge of national bankruptcy and economic abyss.
Are we doomed? Never! The same spirit that overcame multiple "can't-be-done" obstacles can attain a better and brighter future for mankind. But only with the help of a merciful God. If we reconsecrate our lives to Him, just think what glorious heights we will be able to celebrate 40 years from today.
Wouldn't it be wonderful if, like Ebenezer Scrooge, we could have a preview of the future so that we could change our course if necessary? This can happen in real life. Such a dispensation was granted to me 35 years ago. It happened while I was studying literature at Oxford University in England.
At the time, I hadn't yet outgrown my youthful flirtation with socialism. The United Kingdom appeared to me to be about 30 years ahead of the United States on the path toward socialism.
Living for a while with a teacher and his young family, I saw up close and personal how bleak life under socialism would be. The government owned most of the primary industries. The economy was stagnant. The homeowners' monthly mortgage payments were adjusted upward to keep pace with inflation -- that insidious, impoverishing monetary cancer that crops up wherever government grows too large. The outlook for a middle-class family was hopeless. The overall atmosphere was suffocating.
This experience opened my eyes. More government control was not a desirable future for the United States, and I've been in the free-market camp ever since. And fortunately for the United Kingdom, in 1979 Margaret Thatcher became prime minister. She privatized many of the nationalized industries, reinvigorated the market economy, dispelled the economic gloom and stagnation, and revitalized a great country.
Today, a similar preview of the damage of an overbearing government can be gained by spending some time in Detroit, my hometown. Detroit was arguably the most prosperous city in the world in the 1920s. Today, however, whole neighborhoods are abandoned; still-occupied neighborhoods are in a frightful state of decay; some of the streets are so rough you would think that the military used them for target practice. Most startling is that the median sale price for a house in the once-thriving city of Detroit this January was $7,500. Yes, 75 hundred, not "thousand." You can buy two or three houses in Detroit today for the price of one new car.
What happened? What explains this sad decline? In the simplest economic terms, the ultra-low prices of houses in Detroit are explained in terms of supply and demand. Specifically, there is little demand. Few people want to live in this former boomtown. Why?
Here is what friends and neighbors told me over the years: Starting in the 1960s, governance in Detroit started to deteriorate. The mayor and the city council began to view government as a mechanism for redistributing wealth, primarily to one's friends and political constituencies. Detroit became known for abnormally corrupt politics, rife with nepotism and favoritism. Leaders appeared to care more about their own self-enrichment than about implementing constructive policies. (Let me say that Detroit's current mayor -- successful businessman and erstwhile Detroit Pistons star Dave Bing -- is highly respected for his integrity, and I wish him every success in improving conditions in Motown.)
Taxes were raised. Productive tax-paying citizens moved out of the city, commuting into the city to work. In an attempt to recapture lost revenues, the city imposed a tax on income commuters earned in the city limits. Consequently, many businesses uprooted and relocated, reducing tax revenues further.
Members of public employee unions -- close allies of city hall -- profited handsomely, even while the quality of municipal services declined. Detroit's once-respected public schools went into a tailspin -- a trend exacerbated by Uncle Sam's welfare policies which perversely promoted single-parent households, resulting in restless and undisciplined children.
Crime soared. The city of Detroit failed to discharge the primary function of government -- protecting the life and property of citizens. As a result of the lawlessness, more and more businesses fled, and the downward spiral accelerated.
The failures of Detroit's city government were compounded by misguided policies imposed by the federal government. Decades of Uncle Sam's costly meddling with the Big Three -- forcing these corporations to become healthcare agencies and retirement planners, in addition to the already formidable economic challenge of trying to survive in a highly competitive industry -- has brought down GM and Chrysler, two pillars of Detroit's economy. Now the devastation has rippled out to the surrounding counties, where many fine homes have plunged into negative equity and foreclosure in recent months.
Detroit's decline was not caused by natural disaster. There was nothing mysterious about it. Detroit is a casualty of the "government disease." Instead of bigger, more activist government solving problems, as its advocates had hoped, the foreseeable result was a government that has done what it should not do (e.g., redistribute wealth to political allies) and hasn't done what it should (i.e., defend life and property).
Detroit may be the most advanced case of "government disease" in the United States today, but signs of suffering are widespread. Compared to glistening, modern airports in cities like Shanghai and Bangkok, Los Angeles International seems like a Third World airport. The whole state of California is suffering from a Detroit-like exodus of thousands fleeing the economic devastation wrought by Big Government.
We should keep these self-inflicted tragedies in mind in considering whether to assent to the massive expansion of government that President Obama and his congressional allies are seeking. We don't want the whole country to share the fate of Detroit.
In the concluding paragraph of my article about President-elect Obama's constitutional philosophy, I opined: "Our Constitution has been terminal for a long time." President Obama's nomination of Sonia Sotomayor to the Supreme Court provides a timely opportunity for me to explain what I meant.
Liberals and progressives believe that the Constitution is a living, breathing document that should evolve with the times. They want Supreme Court justices to be flexible in interpreting the Constitution and adapting 18th-century language to 21st-century applications. Conservatives, on the other hand, are said to believe in "the original intent" of the Constitution. They oppose Supreme Court justices' creative interpretations of the Constitution.
It is unfortunate that the fundamental difference in constitutional philosophy -- what used to be called "loose construction," (favoring expanded government powers) vs. "strict construction" (favoring limited government powers) -- has been cast in these terms. The left cleverly has employed a winning straw-man argument -- a truism -- in asserting that America should not be trapped by the past. Of course we shouldn't. By contrast, paying homage to the Founding Fathers, and invoking their "original intent" of the Constitution, makes the right seem backward-looking.
If today's Americans knew their history better, they would realize how wise the Founding Fathers were, and that we depart from their principles of governance at our peril. Nevertheless, the Founders themselves would heartily agree with the left that times change, and so do constitutions. That is why they included a provision in the Constitution for amending it.
Constitutional mischief occurs when ambitious, impatient politicians appoint activist justices who willfully defy, disregard, and reinterpret the Constitution, rather than insist that it be changed lawfully, i.e., through the amendment process.
Conservatives rightly oppose such judicial activism. But the right's focus shouldn't be so much on trying to preserve an 18th-century worldview that -- for all its wisdom -- included treating women and racial minorities as less-than-full citizens. Instead, conservatives' main argument should be to insist that Supreme Court justices uphold the principle that all laws and policies conform to the letter of the Constitution. If 1780s vintage phraseology is ambiguous or opaque to modern usage, then amend the wording to make explicit its objective meaning; don't let nine people (actually, five) divine implicit, subjective meanings as if the Constitution were so many tea leaves. Such judicial malfeasance over many decades has led to laws, policies, and government programs that clearly contradict the plain language of the Constitution.
Here are some examples:
1) Article I, Section 8, Paragraph 5 of the Constitution grants Congress the exclusive authority "to coin Money [and] regulate the Value thereof." Article I, Section 10, Paragraph 1 stipulates, "No State shall coin Money; . . . make any Thing but gold and silver Coin a Tender in Payment of Debts." When is the last time your state income tax refund was payable in gold or silver coin? We all use unconstitutional money. (Eventually, we will suffer the pain of hyperinflation, just as the Founders did during the Revolutionary War due to the continental dollar debacle, despite our Founders' best effort to spare us that hell.)
2) The Tenth Amendment plainly states, "The powers not delegated to the United States [i.e., the federal government] by the Constitution . . . are reserved to the States respectively, or to the people." Article I, Section 8 enumerates the several powers of the United States government. No authority is given there for government programs in agriculture, education, energy, health, housing, etc. The Constitution was never amended to authorize these unconstitutional federal activities.
3) Both the preamble and Article 1, Section 8, stipulate that Uncle Sam is to perform only those few functions that provide for the "general welfare." There is no constitutional authority for "special interest" legislation, yet the latter comprises most federal action today.
Clearly, the plain language of the Constitution has not kept ambitious officeholders from expanding their powers. Those who have regarded the constraints of the Constitution as inexpedient have simply ignored them. This should alarm any Democrat or Republican who values liberty. If the Tenth Amendment can be bypassed today, who is to say the First Amendment (free speech, religious freedom, etc.) won't be trampled underfoot tomorrow?
The egregious examples of constitutional mutilation cited above are the fruit of the left's doctrine that the Constitution is a living, breathing document. There is grim irony in this. Treating the Constitution like a living, breathing document has rendered it a dead letter. A Constitution whose provisions can be selectively ignored is a weak guarantor of anyone's rights. We are no longer governed by the impartial, objective rule of law, but by partial, subjective and capricious men and women. Justice has given way to privilege; our constitutional republic has decayed into a dangerous democracy; the primacy of individual God-given rights has been supplanted by the primacy of government power.
Going forward, we may wonder which of the three branches of government is most likely to slow the expansion of government power by honoring the letter of the United States Constitution. President Obama and the executive branch? The Pelosi/Reid Congress? Hardly. And with one more Obama appointment, neither will the Supreme Court. Sad to say, there will be no brakes left to prevent a constitutional train wreck. *
"Too bad the only people who know how to run the country are busy driving cabs and cutting hair. --George Burns
Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are republished from V & V, a website of the Center for Vision & Values.
In my recent article "Checkmate" I made the case that President Obama's grand strategy has outfoxed the opposition, dooming us all to a massive increase in the scope and power of Uncle Sam. Is the situation hopeless? Never! If Americans who believe in individual liberty and free markets rally to the cause, then we may some day look back on the current gloomy period as the Valley Forge winter of a new American revolution.
The Achillies' heel of Obama is most likely the hubris that is common to those who seek "nothing less than the total transformation" of a society ("of our economy," were Obama's exact words). In their consuming desire to be the Great Leader, such individuals shed restraint and grab impatiently for more power. In a society where people prize their individual rights and retain a residual distrust of Big Government, overreaching may prove to be Obama's fatal strategic miscalculation.
In recent decades, Americans have been like frogs in the chef's pot. Just as frogs don't realize they are being boiled alive when the heat is turned up gradually, we Americans have been lulled into passivity by the gradual, decades-long expansion of government power. If we don't wake up and jump out of the cauldron, we, like the frogs, will be doomed -- in our case, by losing our freedom and prosperity to socialistic Big Brother. Obama's bold power grabs are startling us, waking us out of our torpor, giving rise to tea parties, righteous indignation, and a renewed will to resist the encroachments of tyranny.
Let's get the "S" word out of the closet and into the open. I abhor name-calling, and have never labeled President Obama a socialist -- even after I heard through the grapevine that some Democrats were describing him as such at Washington cocktail parties. But since socialism is the specific term for government ownership of various commercial enterprises, it is impossible to not view Obama's agenda as overtly socialistic in tendency.
Consider: He clearly wants and is working for a government-run health-care system.
He has proposed guaranteed universal college educations for every young American.
He wants to create new "volunteer" service programs that sound suspiciously like a draft to compel young adults to work for government.
He has asserted greater government control over the auto industry by demanding (and securing) the ouster of General Motors CEO Rick Waggoner.
His Treasury Secretary is proposing new powers that would enable the government to nationalize banks, insurance companies, and other financial entities.
And now his Interior Secretary seeks increased taxation of American oil companies -- even though Big Oil has paid more in taxes to government in recent decades than they have retained in profits -- on the grounds that Uncle Sam receives a lower share of oil and gas revenue compared to governments in other countries. Well, of course other countries' governments derive a higher percentage of revenue from oil and gas production -- after all, the 15 or so oil companies that are larger than our largest, ExxonMobil, are all state-owned oil companies. The only possible way Uncle Sam could equal the share taken by those foreign governments would be to nationalize American oil companies. Obama won't go that far (yet), but he clearly intends to play central planner and radically restructure the domestic energy complex.
If Obama doesn't scale back his audacious power grab, the American people may turn on him. Where might such a tipping point be? I'll place my bet on cap-and-trade. Cap-and-trade is Obama's scheme to charge big bucks to companies for permission to use carbon dioxide-emitting coal, oil, and natural gas -- that will be passed on to the American consumer. If cap-and-trade becomes law, vast numbers of Americans of modest means will be angry if the costs of driving their cars, heating their homes, and paying their electric bills soar. They will feel conned when they realize that Obama's promise not to raise taxes on them referred only to direct, explicit taxes, and not to indirect taxes that raise their cost of living. Cap-and-trade is Obama's make-or-break issue. If he restrains himself from ramming a cap-and-trade program through Congress, then he may get most of the power he seeks; if not, he will be vulnerable.
Obama's other Achilles' heel will be his conduct of foreign affairs. He seems to believe that his personal charm is so forceful that he can talk enemies into beating their swords into plowshares. In doing so, he risks repeating the tragedy of Jimmy Carter whose Lennonist philosophy (that is, "Lennonist" -- not Leninist -- as in Beatle John Lennon's motto, "All you need is love") was rewarded with contemptuous aggression by the Soviets, the ayatollahs, and that ilk. If the response to Obama's apologetic America-debasing groveling is a lethal attack on American interests, especially a domestic incident, then the spell of the Obama personality cult will be broken, and support for his socialistic agenda will shrink drastically.
Either of Obama's Achillies' heels will hand the Republican Party a magnificent opportunity to present an alternative agenda that resonates with the American people. In my opinion, Republicans will win more support if they stop playing the party of Big Government to the Democrats' party of Bigger Government, and offer a clear contrast by making themselves the party of Smaller Government. We have to hope that they aspire to something more than simply being at the helm when the ship of state cracks up on the rocks of national bankruptcy.
In assessing Team Obama's semi-nationalization of the auto industry, a slight alteration of the famous verse by Elizabeth Barrett Browning encapsulates my reaction: "How do I (not) love thee? Let me count the ways."
1) The government takeover is unconstitutional.
The Constitution authorizes Uncle Sam to "regulate commerce," not to own and manage it. Even before the formal coup, Obama had already fired GM's former CEO. Now Team Obama intends to dictate to GM what kinds of cars it must build. Of course, the federal government is already well on its way to nationalizing the financial industry, the home mortgage market, health care, education, retirement, etc., so -- ho-hum -- why not the car industry, too?
2) Parts of the government takeover are illegal.
Contract law was trampled underfoot when the government placed unsecured creditors (read: the United Auto Workers) ahead of secured creditors (bondholders) in the pecking order of who gets first dibs on the remnants of the old bankrupt GM and Chrysler.
That the president bestowed largesse on Big Labor was no surprise. What was jarring was the blatantly, literally Marxist-Leninist flavor of Obama's denunciation of the ripped-off bondholders as "speculators." These "speculators" range from retired blue-collar workers to investment firms managing the retirement accounts of state and municipal employees, school endowments, and other such suspicious characters. Yet Obama views and portrays them in class-warfare terms-as greedy capitalists whose property should be expropriated and redistributed to labor. This is textbook Marxism.
3) The takeover unwisely and unjustly keeps UAW intact.
UAW has been a disaster for the people of southeastern Michigan. For decades it has been strangling the Big Three. Its "triumphs" have been Pyrrhic victories. Yes, UAW members received fantastic compensation, if they have managed to keep their jobs. Unfortunately, UAW, more than any other organization, has been responsible for hundreds of thousands of union jobs being vaporized by pricing them out of the market. Now this parasitic outfit has killed the goose that laid their golden egg. If the bankruptcy had gone through the usual legal channels, UAW could have been buried alongside the companies that it killed. Instead, Obama made UAW its partner in these two companies by sharing ownership with them.
4) It leaves Corporate Average Fuel Economy (CAFE) standards intact, too.
Second to UAW, what most crippled the Big Three was Washington's mandate requiring the automakers to manufacture cheap, fuel-efficient cars domestically, using high-priced UAW labor, in order to meet CAFE standards. This move made these politically correct cars automatic money-losers and, hence, company killers. Yet, already this year, the Obama/Pelosi/Reid axis perpetuated this error by mandating even higher gas-mileage standards for domestically, produced autos.
5) It has been and will continue to be costly for taxpayers.
Not only did Uncle Sam sink far more billions into GM and Chrysler than the companies' market value, but now Washington expects the "new GM" to build many electric cars. These vehicles will not be cost-competitive on their own merits. Team Obama's solution? $7000 tax credits for those who buy the product of Washington's central planning. And where will all that money come from? From us taxpayers, of course. Clearly, Obama wasn't kidding when he told Joe the Plumber that he wanted to "spread the wealth" around more evenly.
Another potential cost of more fuel-efficient cars is that, to the extent that they reduce fuel consumption, government revenues from the excise tax that we pay at the gas pump will fall. Already in 2009, the decline in this source of revenue has meant that Uncle Sam has insufficient funds for road maintenance. Additional government revenues are now required, which implied a tax increase.
6) It turns economic decisions into political ones.
For example, will Uncle Sam protect the taxpayers' investment in GM by buying GM vehicles, even if Ford and other domestically made cars are cheaper and better? That presents a major conflict of interest.
Will political clout rather than economic rationality determine which automobile factories remain open? Already, the blogosphere is filled with charges that Team Obama closed a disproportionately high percentage of car dealerships with Republican Party ties. Does anyone really doubt that this most partisan of presidents and congresses will play politics with the businesses that it controls?
7) Uncle Sam as hero?
As Team Obama rides to the rescue of GM and Chrysler, we should realize that earlier government interventions doomed those companies. Labor laws and fuel-economy mandates weakened them for years. The current deep recession that polished them off was due to the boom/bust cycle generated by the central bank and exacerbated by government meddling in the housing market, incompetent regulation, and Uncle Sam's too-close relationship with Big Finance. Sadly, most Americans don't understand government's culpability in precipitating the demise of these two corporate icons; on the contrary, many entertain the dangerous fallacy that our economic well-being depends on government.
Until we understand the counter-productiveness of government intervention, our country will continue to suffer unnecessary economic pain.
A few days before "Earth Day" (which happens to be the same day as Lenin's Birthday), Americans ideological greens and reds received a present they have been desiring for many moons: The Environmental Protection Agency -- egged on by the U.S. Supreme Court -- officially designated carbon dioxide (CO2) as a pollutant. That means that either Congress or the EPA is expected to produce a plan for regulating this common gas.
So opens a new chapter in regulatory absurdity, a veritable Pandora's Box of complications.
A generation ago, it was considered great progress against pollution when catalytic converters were added to automobile engines to change poisonous carbon monoxide to benign carbon dioxide. Now CO2 has been demonized.
The EPA's characterization of CO2 as a pollutant brings into question the natural order of things. By the EPA's logic, either God or Mother Nature (whichever creator you believe in) seriously goofed. After all CO2 is the base of our food chain. CO2 nourishes plants, plants nourish animals and humans, and plants and animals serve a variety of human needs. "Pollutants" are supposed to be harmful to life, not helpful to it, aren't they?
Of course, it is true (although greens often ignore it when trying to ban such useful chemicals as pesticides, insecticides, Alar, PCBs, etc.) that "the dose makes the poison." Too much oxygen, for example, poses danger to human life. So, what is the "right," concentration of CO2 in our atmosphere? There is no right answer to this question. The concentration of CO2 in earth's atmosphere fluctuated greatly long before humans appeared on earth, and that concentration has fluctuated since then, too.
The current concentration is approximately 385 parts per million. Some scientists maintain that 1,000 parts per million would provide an ideal atmosphere for plant life, accelerating plant growth and multiplying yields, thereby sustaining far more animal and human life than is currently possible. Whatever standard the EPA selects will be purely arbitrary.
"Forget about the plants, Hendrickson," say the greens. "What we're trying to control is how warm the earth's atmosphere gets." To which I reply, "With all due respect, are you kidding me?"
As with a "right" concentration of CO2, what is the "right" average global temperature? For 7,000 of the last 10,000 years, the earth was cooler than it is now; mankind prospers more in warm climates than cold climates; and the Antarctic icecap was significantly larger during the warmer mid-Holocene period than it is today. Are you sure warmer is bad or wrong?
And how do you propose to regulate the earth's temperature when as much as 3/4 of the variability is due to variations in solar activity, with the remaining 1/4 due to changes in the earth's orbit, axis, and albedo (reflectivity)? This truly is "mission impossible." Mankind can no more regulate earth's temperature than the tides.
Even if the "greenhouse effect'' were greater than it actually is, the EPA and Congress would be powerless to alter it for several reasons:
1. Human activity (according to NASA data) accounts for less than 4 percent of global CO2 emissions.
2. CO2 itself accounts for only 10 or 20 percent of the greenhouse effect. (This discloses the capricious nature of EPA's decision to classify CO2 as a pollutant, for if CO2 is a pollutant because it is a greenhouse gas, then the most common greenhouse gas of all -- water vapor, which accounts for almost 3/4 of the atmosphere's greenhouse effect -- should be regulated, too. The EPA isn't going after water vapor, of course, because then everyone would realize how absurd climate-control regulation really is.)
Even if Americans were to eliminate their CO2 emissions completely, total human emissions of CO2 would still increase as billions of people around the world continue to develop economically.
Clearly, it is beyond the ken of mortals to answer the meta-questions about the right concentration of CO2 or the optimal global average temperature, or to control CO2 levels in the atmosphere. I feel sorry for the professionals at EPA who are now expected to come up with answers for these unanswerable questions.
However, I do not feel sorry for the political appointees, like climate czar Carol Browner, and the whole Al Gore, left-wing political fraternity, because it looks like they are about to get what they want -- the power to increase their power over Americans' lives and pocketbooks via CO2 emission regulations.
The big questions facing us regular citizens is whether Congress or the unelected folks at EPA will decide questions like:
Who will be forced to drive and fly less often? (If we quit using every gasoline-powered vehicle in the country, we still wouldn't reduce CO2 emissions as much as Al Gore wants.)
How much economic pain should be imposed on Americans for heating and cooling their homes? (Your 75 percent higher electric bill will fund President Obama's "green jobs" machine.)
Which businesses will need to move offshore to power their operations at a competitive cost? (This is nothing new. EPA regulations started to off-shore oil-refinery jobs decades ago.)
The impact of CO2 regulations will hurt us far more than CO2 itself ever could. We need a miracle, folks. Let's hope that someone nails shut the lid on this Pandora's Box before it swings wide open and infests us with a multitude of plagues.
The Intergovernmental Panel on Climate Change (IPCC) is widely regarded in the media as the ultimate authority on climate change. Created by two divisions of the United Nations, and recipient of the 2007 Nobel Peace Prize, its pronouncements are received as if they come down from Mount Olympus or Mount Sinai. The common presumption is that the IPCC has assembled the best scientific knowledge. Let's take a closer look at this organization to see whether it merits such uncritical deference.
The IPCC's February 2007 report stated: It is "very likely" that human activity is causing global warming. Why then, just two months later, did the Vice Chair of the IPCC, Yuri Izrael, write, "the panic over global warming is totally unjustified"; "there is no serious threat to the climate"; and humanity is "hypothetically . . . more threatened by cold than by global warming"?
IPCC press releases have warned about increased concentrations of greenhouse gases in Earth's atmosphere, yet Dr. Vincent Gray, a member of the IPCC's expert reviewers' panel, asserts, "There is no relationship between warming and [the] level of gases in the atmosphere."
A 2001 IPCC report presented 245 potential scenarios. The media publicity that followed focused on the most extreme scenario, prompting the report's lead author, atmospheric scientist Dr. John Christy, to rebuke media sensationalism and affirm:
The world is in much better shape than this doomsday scenario paints . . . the worst-case scenario [is] not going to happen.
Clearly, the IPCC does not speak as one voice when leading scientists on its panel contradict its official position. The solution to this apparent riddle lies in the structure of the IPCC itself. What the media report are the policymakers' summaries, not the far lengthier reports prepared by scientists. The policymakers' summaries are produced by a committee of 51 government appointees, many of whom are not scientists.
The policymakers' summaries are presented as the "consensus" of 2,500 scientists who have contributed input to the IPCC's scientific reports. "Consensus" does NOT mean that all of the scientists endorse the policymakers' summaries. In fact, some of the 2,500 scientists have resigned in protest against those summaries. Other contributing scientists, such as the individuals quoted above, publicly contradict the assertions of the policymakers' summaries.
To better understand the "consensus" presented in the policymakers' summaries, it is helpful to be aware of the structure of the IPCC. Those who compose the summaries are given considerable latitude to modify the scientific reports. Page four of Appendix A to the Principles Governing IPCC Work states:
Changes (other than grammatical or minor editorial changes) made after acceptance by the Working Group of the Panel shall be those necessary to ensure consistency with the Summary for Policymakers or the Overview Chapter.
In other words, when there is a discrepancy between what the scientists say and what the authors of the policymakers' summaries want to say, the latter prevails.
Here is a specific example. One policymakers' summary omitted several important unequivocal conclusions contained in the scientists' report, including, "No study to date has positively attributed all or part [of observed climate change] to anthropogenic [i.e., man-made] causes," and:
None of the studies cited above has shown clear evidence that we can attribute the observed changes to the specific cause of increases in greenhouse gases.
These significant revisions were made, according to IPCC officials quoted in Nature magazine, "to ensure that it [the report] conformed to a policymakers' summary."
Elsewhere, Rule 3 of IPCC procedures states: "Documents should involve both peer review by experts and review by governments." In practice IPCC sometimes bypasses scientific peer review, and the policymakers' summaries reflect only governmental (political) review. This shouldn't be surprising. After all, the IPCC is a political, not a scientific, entity. It is the "Inter-GOVERNMENTAL Panel on Climate Change," not a "global SCIENTISTS' panel."
Also, "consensus" is a political phenomenon, a compromise, whereas scientific truth is not subject to obtaining a political majority. (Actually, 31,000 scientists have signed a petition protesting the "consensus" that human activity is dangerously altering the Earth's climate. Consider that against the 2,500 scientists cited by IPCC -- many of whom publicly refute IPCC's press releases.)
To its credit, the IPCC debunks many of the alarmist exaggerations of radical greens. However, its scientific authority remains irreparably compromised by political tampering. When a U.S. State Department official writes to the co-chair of the IPCC that "it is essential that . . . chapter authors be prevailed upon to modify their text in an appropriate manner," the political character of IPCC is plain.
The sponsors of the IPCC, the United Nations, and liberal American politicians all share the goal of reducing Americans' wealth by capping our consumption of energy with a binding international climate change treaty. They are willing to resort to scientific fraud to further their goal. In the words of Al Gore's ally, former Under-Secretary of State Tim Wirth, "Even if the theory of global warming is wrong, we will be doing the right thing" by reducing Americans' consumption of fossil fuels. Keep that in mind whenever the IPCC is cited in support of a climate treaty.
The "greens" must be thrilled with the new Obama/Pelosi/Reid (OPR) troika in charge of the federal government. Three times already, the troika has blocked the development of domestic oil resources.
During his first week in office, President Obama rescinded his predecessor's executive order permitting drilling on the continental shelf and in the Green River Formation. Both areas contain abundant oil -- especially Green River (under Wyoming, Colorado, and Utah), which has recoverable shale-oil reserves three times the oil reserves of Saudi Arabia.
Several weeks later, Secretary of the Interior Ken Salazar unilaterally canceled 77 oil and gas leases in Utah, on the grounds that (I kid you not) someone might catch a glimpse of temporary drilling equipment from the national park that sits more than a mile away.
Next, on March 25, the House of Representatives passed the Omnibus Public Land Management Act of 2004 (S. 22) which, among many other things, adds two million more acres to the 107 million acres of protected wilderness already owned by the federal government. (In all, Uncle Sam owns 607 million acres of land.) The main purpose of this law is to prevent the exploration and extraction of oil and gas from these lands, which are estimated to have 300 million barrels of oil and 8.8 trillion cubic feet of natural gas under them.
In addition to increasing American dependence on foreign oil by thwarting such domestic development, the OPR/green alliance desires the imposition of expensive cap-and-trade rules to discourage utilities from using coal, which currently provides nearly half of America's electricity. As Obama candidly explained to the San Francisco Chronicle during his presidential campaign:
If somebody wants to build a coal-powered plant, they can [but cap-and-trade] will bankrupt them because they're going to be charged a huge sum for all that greenhouse gas that's being emitted.
Of course, this anti-fossil fuel agenda is nothing new for green Democrats. This group has long resisted drilling in a tiny sliver of the remote, desolate Arctic National Wildlife Refuge. And even the relatively moderate Clinton administration, after designating natural gas as its environmentally responsible fossil fuel of choice, conferred wilderness designation on the western lands that contained some of the richest targets for natural-gas exploration.
The super-green Obama administration plans to replace fossil fuels with alternative fuels. The last time we went down this road, President Carter managed to blow several billion dollars on failed attempts to produce economically viable synthetic fuels (remember "Synfuels?") and foisted the ongoing ethanol boondoggle on us. Corn-based ethanol, even 30 years later, still requires massive government subsidies, and is useless for achieving energy independence. It consumes nearly as much, and perhaps more, energy to produce it than it yields in our fuel tanks. It is also the least environmentally friendly fuel we use, increasing emissions of volatile organic compounds (VOCs) that cause smog, using up precious water supplies, and requiring the tilling of millions of acres of wildlife habitat.
Ah, but the good news is that the current generation of green leaders will take us to the fabled land of wind and solar energy. Apart from the daunting economics, it is likely that these energy sources will still require government subsidies several decades hence, as ethanol does today. Think of the environmental impact of these allegedly superior energy sources:
Solar energy requires vast territories for solar cells -- as many as 46,000 square miles would have to be covered by solar panels. One logical place for a "solar energy farm" would be the wide-open, sunshine-rich, sparsely populated Mojave Desert. However, Senator Dianne Feinstein (D-CA) already has nixed that possibility in the name of wilderness protection. As a frustrated Gov. Schwarzenegger lamented, if you can't put solar panels in the Mojave Desert, then where can you put them?
Wind energy also runs into the NIMBY (Not In My Back Yard) syndrome. Besides the legitimate environmental concern about the way windmills slice up birds and create low-pressure zones that explode the lungs of bats, environmentalists have started to block transmission networks that would tie the energy generated by windmills to the power grid. This reminds me of the congressman who voted for funding of a ship-borne weapon because the weapon is manufactured in his district, but then voted against funding the construction of the only ships that use that particular weapon in order to appeal to antiwar voters.
This green agenda is more than absurd, it is sinister. The real goal of greens is not "clean energy" but less energy. Energy is essential to economic progress, and many greens want to halt and reverse economic progress. Some radical greens have praised Fidel Castro for de-developing Cuba. Al Gore wrote in his book, Earth in the Balance, that U.S. policy should aim for slower economic growth. President Obama's chief science advisor John Holdren's top two environmental goals are to shrink the human population and to slow economic growth.
So here we are, in the midst of a severe economic crisis, and the ruling party is pursuing an anti-energy agenda that would further cripple economic activity. They seem oblivious to the fact that poverty is the most lethal environment for human beings. (Life expectancy in the United States declined during the Great Depression.) What a grim price we will pay for the green agenda. *
"He had delusions of adequacy." --Walter Kerr
Some of the quotes following each article have been gathered by The Federalist Patriot at: http://FederalistPatriot.US/services.asp.