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.
Climategate, Copenhagen, and Cap and Trade
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.
The Coming of Caesar
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.
Combating Recessions: The Search for the Right Macroeconomic Policy
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.
Government Intervention and High Prices
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?
Jefferson's Warnings about Money and Banks
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.
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