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Hendrickson's View

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Hendrickson's View

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 from V & V, a web site of the Center for Vision & Values.

Three Neglected Economic Lessons from American History

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.

1) Sound Money.

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.

2) Spending Restraint.

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.

3) Government's Ineffectual Response to Recessions.

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.

More Lessons from History: How Obamanomics May Play Out

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.

Geithner Versus the Bush Tax Cuts

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.

Rethinking the Corporate Income Tax

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.

Global Warming -- The Big Picture: A Review of Brian Sussman's Climategate

"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

Read 2073 times Last modified on Sunday, 29 November 2015 09:47
Mark 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 from V & V, a web site of the Center for Vision & Value, and Forbes.com.

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