Mark W. Hendrickson
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.
"Only Government Can . . ."? -- Parsing Obama's Speech on the Economy
[On January 8th] President-elect Barack Obama delivered a major speech on the economy. I didn't know if it had that legendary tingling effect on its listeners but reading the text in black and white, it reads like a manifesto on central planning. Obama's faith in Big Government is unmistakable:
Only government can provide the short-term boost necessary to lift us from a recession this deep and severe. Only government can break the vicious cycles that are crippling our economy.
Obama largely ignored government's central role in causing the current crisis -- totally ignoring the rampant government meddling via Fannie Mae, Freddie Mac, inflationary policies by Uncle Sam's monetary meddlers at the Federal Reserve, Community Investment Act regulators, and other interventionists. He did concede that, "Politicians spent taxpayer money without wisdom or discipline." He went on to declare:
Our government has already spent a good deal of money, but we haven't yet seen that translate into more jobs or higher incomes or renewed confidence in our economy. That's why the American Recovery and Reinvestment Plan won't just throw money at our problems -- we'll invest in what works.
He went on to underscore the need to make "smart investments" and to avoid spending money on "pet projects."
May I ask: Why are other politicians' programs "pet projects," but President-elect Obama's preferred programs are not? How can the incoming President know if his projects will be "smart investments," since they will take place outside of the profit-and-loss test of the marketplace? How can you know the future and tell us "what works"? How can Obama believe that he knows what is best for society, when no other central planner has ever been able to solve that riddle?
The contradictions in Obama's address were breathtaking.
"Government at every level will have to tighten its belt," he solemnly intoned, while requesting massive increases in federal spending. Obama acknowledged that taxpayer dollars have been spent "without discipline," but what is disciplined about trillion-dollar deficits? How can we get "our fiscal house in order" through floods of red ink?
Some may think that massive deficits might be a worthwhile tradeoff -- placing a heavier financial burden on the future in exchange for Obama's programs that "immediately jumpstart job creation and long-term growth." History, however, shows Obama's promise to be, well, unpromising. Sure, the President-elect's plan will create jobs for many Americans. Put a trillion dollars in my hands, and I could employ a lot of people too. But overall employment would stagnate. Roosevelt's New Deal created many jobs, yet the unemployment rate never fell below 14 percent during his first eight years as president. This is because government jobs are what economists call "acatallactic" -- that is, they are outside the economic marketplace. That's the place where workers have to produce what people in society most urgently want in order for the people's wealth to increase. Although government jobs may meet the objectives of central planners, they cripple overall employment. The larger the government programs, the more scarce resources (most importantly, capital) are diverted from the private sector into the public sector, which is inherently uneconomic and inefficient.
Rather than repeating the colossal mistakes of the New Deal, Obama should consider policies that have been shown to work. The recession of 1920-21 was the most severe deflationary episode of the last century, yet it was followed by an early and strong recovery. The difference between this relatively brief downturn and the Great Depression, which lasted from 1929 to 194l, was that government intervention was minimal and markets were allowed to adjust.
Employment is first and foremost a cost phenomenon -- that is, there will be a demand for labor at the right price. When consumer prices fell in 1920, wages quickly adjusted downward, too, which resulted in a rapid recovery of output and employment, with industrial production increasing a whopping 63 percent in only 22 months. During the early 1920s, under the leadership of Treasury Secretary Andrew Mellon, federal spending was cut almost in half. During the New Deal, federal spending and government deficits soared. It is clear which course of action produced better results.
President-elect Obama appealed to us to abandon "the worn-out dogmas of the past." There is no position more dogmatic than clinging to the unjustified belief that "only government" can restore prosperity to America. He said, "We can restore opportunity and prosperity." By this I wish he meant that he would give the private sector the opportunity to create the high levels of prosperity that only free markets can produce.
The President-elect is right: "It is time to finally change the ways of Washington so that we can set a new and better course for America." Yes, let's change from the broken paradigm of heavy government intervention and embark on the time-tested and better course of freedom and free enterprise.
Love the Economic Pain!
What would you think if you heard a prominent physician being interviewed and the topic of discussion was the breakout of a serious epidemic, and then the physician started enthusing about how great this plague would be for his business? At the very least, you would regard such remarks as tactless and inappropriate. More likely, you would be repulsed by the lack of compassion, the gross selfishness, the ruthlessness of such an attitude.
What if you then discovered that the physician was part of a medical cabal that had unleashed the plague on the public? Would you not want, at the very least, to see them banned from the practice of medicine, and perhaps punished for having inflicted such cruel and unnecessary suffering upon so many innocent victims?
This ugly scenario is analogous to our political situation today. Leading Democrat politicians openly gush about how the current economic pain has opened the door of opportunity for them to expand the powers of the federal government. They openly celebrate what they perceive as a once-in-a-lifetime opportunity to enact sweeping new legislation, create new government programs, and assert ever-greater economic control over the American people.
Shortly after being appointed chief of staff to President-elect Obama, Rahm Emanuel told a conference of corporate CEOs how the new administration views today's wrenching economic crisis: "This crisis provides the opportunity for us to do things that you could not do before."
"You never want a serious crisis to go to waste," Mr. Emanuel declared with amazing candor.
This likewise reflects the view of Emanuel's boss. Obama himself recently stated, "This painful crisis also provides us with an opportunity to transform our economy."
The Democratic majority in Congress apparently shares the administration's view of the crisis. On Dec. 4, House Financial Services Chairman and a principal Democratic spokesman, Rep. Barney Frank (D-MA), enthusiastically predicted that 2009 would be the "best year" for new public policies since Franklin Roosevelt's New Deal.
Mr. Frank's statement is rich with irony. One irony is that he is one of the main culprits in having blocked Republican attempts to reform Fannie Mae and Freddie Mac several years ago. The result was this year's catastrophic bankruptcy of the two mortgage-lending giants, which was one of the key events that helped to plunge the country into its current economic woes. Barack Obama said in October that there would be time after the election to identify and punish those responsible for contributing to the country's financial woes, but instead of being punished for his malfeasance, Barney Frank is being rewarded with a lead role in reshaping economic policy.
There is a second irony in Mr. Frank's gushing adoration of the New Deal. If 2009 is to be the "best year" for public policy since the New Deal, it suggests that Mr. Frank celebrates both the current economic pain and the economic devastation of the Great Depression as being exactly what "the doctor" (i.e., Mr. Frank and his ideological soul mates on Capitol Hill) ordered -- lots of pain for lots of Americans, so that Frank and Company can initiate some radical public-policy surgery.
A further inference to be drawn from Frank's statement is that he views the New Deal as the high-water mark for good legislation in our country. Apparently, Frank does not regard the growth-stimulating tax cuts under Presidents Kennedy, Reagan, and George W. Bush as being as helpful to the American people as the New Deal. The tax cuts unleashed and led to vibrant growth in the private sector; the New Deal, by continually siphoning materials, labor, and capital from the private sector to the public sector, crippled economic activity and consequently imposed great economic hardship on Americans. Clearly, Frank favors legislation that enlarges the public sector over legislation that helps the private sector to thrive.
One of the many striking similarities between today's crisis and the Great Depression is that Democratic spin-masters are engaged in an all-out propaganda campaign to blame the 2008 financial panic on market behavior rather than on the government intervention that actually caused it. They are borrowing a page from the long-time strategy of New Deal apologists, who fallaciously attribute the Great Depression to "market failure," rather than on the radical government intervention that disrupted and suppressed.
What needs to be widely understood by Americans is this: If those in power have the same dislike for markets and the same exaggerated faith in government that FDR had, and if the New Deal is to be the model for legislation in 2009, then we shouldn't be surprised if we end up with similarly painful economic conditions.
"We the people" are seeking cures from economic doctors with a well-known history of malpractice. Heaven help us survive whatever remedies they may concoct.
Team Obama: Ready to Rock 'n' Roll
Ready for some political and economic rock and roll? It's happening. In 2008, Americans were rocked by the beginnings of a deflationary credit collapse and Uncle Sam's extraordinary bailout/nationalization agenda. In 2009, Americans will be rolled. If you think 2008 was expensive, wait until you see what President Obama's band has in store for us.
In politics, people are policy. The band of policy players that President Obama has assembled gives some hints as to the chart-topping tunes we can expect to be hearing -- bigger, even more costly government, and a beleaguered private sector that will be hard-pressed to create new jobs.
Secretary of State Hillary Clinton's testimony during her confirmation hearings epitomizes Obama's priorities. Despite multiple risks to American interests around the globe, Clinton declared that her top priority was to place Americans under the control of multilateral global-warming agreements. Do Secretary Clinton and President Obama really believe that American interests will be advanced by curtailing our consumption of energy, thereby further slowing economic growth in the midst of a severe recession?
Joining Mrs. Clinton in putting growth-killing measures like carbon taxes at the top of this year's policy agenda are Secretary of Energy Steven Chu and environmental/climate "czarina" Carole Browner. Chu is a global-warming alarmist who has echoed Obama's rhetoric about reducing our consumption of coal (which generates half our country's electricity) by making it prohibitively expensive to burn. Browner, since serving as the heavy-handed administrator of the Environmental Protection Agency under Clinton-Gore, has more recently held a leadership position on a Socialist International committee dedicated to transferring wealth from the United States to much of the rest of the world.
Obama's Secretary of the Treasury (which includes the IRS) Tim Geithner, "forgot" to pay tens of thousands of dollars in taxes to Uncle Sam. It would seem inappropriate to most Americans to place such a person in charge of federal tax collections, but behold the zeal of partisans, who regularly rant about "the rich" and businesses not paying enough taxes, to make excuses for Geithner. Such an attitude is elitist and antidemocratic, a repudiation of the rule of law, but the partisans are willing to give this high-income American a free pass as long as he supports their plans to increase government control over Americans' wealth.
Geithner wasn't the only tax hypocrite tapped by Obama to serve in his cabinet. Another, of course, was former Senate Minority Leader Tom Daschle, who had been tapped by Obama as Secretary of Health and Human Services, until his tax "problems" became too much even for liberals to swallow. (Daschle has long favored socialized medicine. He was making $83,000 per month as a consultant in addition to his lavish Senate pension and his wife's lucrative income as a lobbyist. He believes in government transfers of wealth from rich to poor, as long as it isn't his wealth.)
Secretary of Labor Hilda Solis is solidly pro-union. She has sponsored legislation to deprive workers of secret ballots when voting on union representation. Her appointment underscores Obama's commitment to unions. The last time the rules of the game were tilted in labor's favor was during the Great Depression. Then, newly empowered unions crippled business activity and profitability, which consequently stifled job growth and increased unemployment.
Perhaps most disturbing of all is the appointment of Eric Holder as attorney general. As deputy attorney general in the 1990s, Holder worked on Bill Clinton's pardon of fugitive financier Marc Rich, whose debt to justice was apparently paid via generous contributions to the Clinton library. But the primary problem with Holder is his apparent view that American businessmen are more dangerous than Al Qaeda fighters. Consider: The "Holder Memorandum" of 1999 was designed to coerce businesses into forgoing rights to legal counsel, infringing their Fifth and Sixth Amendment rights. In contrast to his desire for American businesses to have fewer legal protections, Holder favors greater legal protections for captive Islamic combatants who seek to kill Americans.
President Obama has assembled a cabinet that shares his love of Big Government and concomitant antipathy for free markets. That same philosophy is embodied in Obama's stimulus plan, which has nothing to do with economics and everything to do with politics. Like FDR's New Deal, increasing government control of the economy will not stimulate economic growth. It will, however, stimulate and strengthen the Democrats' hold on power by channeling vast sums of money to Democratic special interests.
The Obama band is ready to roll, and we in the private sector are the ones who will get rolled. Brace yourself for the reverb.
Tough Times for Wise Virgins
The biblical parable of the 10 virgins (Matthew 25:1-12) is particularly relevant today. As you may recall, the five wise virgins behaved responsibly and prudently, making sure they had enough lamp oil for the midnight arrival of the bridegroom. The five foolish virgins, by contrast, diddled around, and didn't get oil. At the last minute, they asked their wiser sisters for some of their oil, whereupon the wise virgins, not wanting their own lamps to run out of fuel, told the foolish girls to go buy their own oil. When they did, they missed the celebration.
The parable illustrates that we reap the consequences of our choices, for good or ill, and we are responsible for our own success or failure. (Let me hasten to add that the parable's primary significance is theological; however, Jesus often couched his spiritual lessons in everyday terms that were easily understandable to his listeners.) In this parable, there was no socialistic redistribution of property from the prudent to the imprudent. The foolish virgins weren't charity cases, unable to fend for themselves. They simply didn't make the necessary effort to succeed. Each virgin got what she deserved.
Today, the "wise virgins" are those millions of Americans who are diligent, responsible, law-abiding, and financially prudent. They pull their own weight and don't impose a burden on others. They are the bedrock of society. Today, though, they are under siege.
Consider the deflating housing bubble. Think of how many times politicians of both parties have proposed federal assistance to bail out mortgage-holders. Many Americans who put little or no money down now owe more than the current market value of their house. While we surely sympathize with their unhappy predicament, why should they receive government assistance? Did Uncle Sam give special subsidies to those who were more financially conservative and deferred home ownership -- often deferring Hawaiian vacations or new cars -- until they could make a sizable down payment? Why should the tax dollars of wise homeowners bail out homeowners who took on more debt?
What about proposals to bail out borrowers with adjustable-rate mortgages for which the interest rate has reset higher? How is that fair to all the Americans who didn't bite on low teaser rates, but deliberately took on higher monthly payments at the outset so as to avoid the risk of rising interest rates?
The same unfair dynamic -- the prudent being forced to pay for the mistakes of the imprudent -- characterizes corporate bailouts. Those "wise virgins" who haven't bankrupted themselves (and whose pay incidentally, is generally lower) are expected to shoulder rescue packages for the economic elite -- for Wall Street firms, whose executives are at the pinnacle of the white-collar pay scale, and for the Big Three auto companies, whose UAW workers are near the top of the blue-collar pay scale.
Besides being financially prudent, today's "wise virgins" share other virtues. They are loyal patriots who cherish their citizenship, uphold our democratic principles, and obey the laws of the land. For this, they deserve respect and honor; instead they see widespread contempt for those values, as politicians and political activists cater to those who defy our laws and principles.
Patriotic Americans feel betrayed when politicians cheapen citizenship by fast-tracking the naturalization of recent immigrants before an election, and when activists register illegal immigrants to vote.
Americans who play by the rules believe in the principle of one person, one vote; so when ACORN and others mock that principle by engaging in large-scale voter registration fraud, and neither the Justice Department nor the nightly news condemns such actions, what are they to think? What are they to think of President Obama's attempt to include several billion dollars for ACORN in his so-called "stimulus" package? What are they to think of Obama's astounding decision to transfer control of the next national census from the Commerce Department to his White House Chief of Staff Rahm Emmanuel? Is the "fix" on for 2012?
The ultimate insult to law-abiding Americans is the vigorous effort by some partisans to give felons the vote. Is there really a political upside to being "the party of felons" and granting lawbreakers the same political prerogatives as those who obey our laws?
2008 was a tough year for those who play by the rules, and 2009 may be even tougher. Congressional liberals have held hearings about nationalizing the private retirement accounts of today's "wise virgins" to help guarantee retirement income for their unwise counterparts, who, for whatever reason, have not saved enough. The president-elect wants to give tax credits (i.e., free money) to low-income workers. He overlooks the fact that their incomes are lower either because they aren't working as many hours as higher-income Americans or their labor produces less value. Obama wants more productive workers -- mainly, those who made good use of 13 years of free education and continued to acquire skills, either through higher education or on the job, that create more value for their fellow citizens -- to subsidize unproductive workers who didn't expend a comparable effort. (Does anyone in Washington realize that such policies precipitated the Fall of Rome?) If this is social justice, then our ethical compass is broken.
How long can our society endure if Washington continues to abuse "wise virgins" and make the prudent pay for the mistakes of the imprudent?
Assessing the Presidency of George W. Bush
George W. Bush had the misfortune to become president when two long-term trends that predated his presidency reached historical tipping points, First, decades of militant Islamic ferment culminated in 9/11. Second, a combination of a decades-long buildup of debt, reckless financial practices (abetted by government policies) established in the1990s, and habitual inflationary policies by the Federal Reserve System, finally culminated in the great financial panic of 2008. Twice Bush reaped what he had not sown and, fairly or not, those historical events are what he will be remembered for. Of course, this is not to say he hasn't made mistakes.
We are all armchair quarterbacks when it comes to the war in Iraq. I didn't see how any president in a post-9/11 world could adopt a passive response to that attack. Whether toppling Saddam was the best possible alternative is something we can never know. What we do know is that Bush merely carried out the official U.S. policy, adopted under his Democratic predecessor, of removing Saddam Hussein because of his potential for providing weapons of mass destruction to terrorists. (In response, the not-so-loyal opposition twisted the CIA's incompetent intelligence-gathering into vicious charges of "Bush lied," rather than stimulating bipartisan efforts to shore up our intelligence capacities; like the far left's pro-Viet Cong cheerleaders in the 1960s, they embrace Saddam as more trustworthy than Bush; cynically, they repaid our troops' sacrifices by prematurely declaring the war lost.) What we also know is that there have been no terrorist strikes on American soil since 9/11. Yes, it looks like we will have to play whack-a-mole with terrorists for a long time, but does anyone seriously believe that this wouldn't be the case if we had allowed Saddam to continue his sadistic, terrorist-financing rule?
If Bush were a lesser man, he could have declared victory in Iraq once Saddam was captured and brought the troops home. Many politicians would have done so. Bush did not. He refused to break faith with two groups of people -- the Iraqi population, who would have suffered massive bloodshed, and the American military, whose great sacrifices would have been for naught. Bush's willingness to accept vilification rather than break faith with those most directly affected by the war showed great character.
In the economic realm, Bush has been a major disappointment. When government expenditures soared to finance the war, he never once proposed that Uncle Sam reduce other spending by even a token amount to help pay for it. His "compassionate conservatism" has helped bankrupt the country. He was the first president to preside over a $2-trillion budget and also the first to preside over a $3-trillion budget. A 50 percent increase in federal spending and a near-doubling of the national debt in only eight years is neither conservative nor compassionate.
On the positive side, Bush's strategic tax cuts during his first term were his greatest economic achievement. They strengthened the economy. However, he allowed federal spending and deficits to soar out of control due to his own spending initiatives and his refusal to veto any of the pork-laden bills passed by the Republican-controlled Congress during his first six years in office. Thus, Bush must share the blame, both for his own party's self-destruction and for the flood of red ink that he leaves behind.
To his credit, Bush tried unsuccessfully to rescue Social Security as well as Fannie Mae and Freddie Mac from their collision courses (one still pending, the others already past) with bankruptcy, but Congress foiled him. By 2008 he was the lamest of lame-duck presidents, resigned to being unable to stop the political tide, and so he meekly went with the flow and signed on to the massive bailout scheme favored by Democrats and Wall Street insiders.
Bush has been likened to Truman (unpopular war) and Hoover (gigantic financial panic), but I think the most striking parallels are with the other president from Texas, Lyndon Johnson. Bush is the first president since LBJ to have created a new federal entitlement (the Medicare prescription drug benefit). Like LBJ, Bush conducted a "guns and butter" policy -- waging an expensive, unpopular military war while massively increasing domestic spending. Like LBJ, Bush's runaway spending has sown the seeds of stagnation and inflation. Future stagnation, the "War on Terror," and the financial collapse of 2008 will comprise the legacy of our 43rd president.
Right now, it seems unlikely that anyone will ever long for "the good old days" when Bush II was president, although what happens in the future may alter our perceptions. If Barack Obama tries to conciliate Islamic militants and they, in turn, inflict a devastating strike on an American city, or if, in his zeal to be the second coming of FDR, Obama drives the economy into a second Great Depression, then the American people might gain a new-found appreciation for the presidency of George W. Bush. *
"Why has government been instituted at all? Because the passions of men will not conform to the dictates of reason and justice without constraint." --Alexander Hamilton