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.
New Year's Resolution: Stop the Fiscal Insanity
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.
On Reading Aloud in Congress
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's Uphill Challenge
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.
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.
Fed Up with the Fed
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.
Dead Man Walking: Dealing with Deflation
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.
Honoring Bill of Rights Day -- and Responsibility
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