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.
President Obama recently referred to free-market economics as "you're-on-your-own economics." It's a catchy phrase - rhythmic, alliterative, clever. Too bad it's bunk.
The only genuine "you're on your own economics" - let's call it "yo-yo economics," for short - is known as "Robinson Crusoe economics." It applies only to those who really are on their own, like sole inhabitants of islands or hermits. Apart from those oddities, human beings don't live in solitude, but are interdependently connected in a social division of labor.
In a free-market economy, individuals typically prosper to the extent that they contribute economic value to others. Those who earn high incomes are generally producing more of what people value than those earning lower incomes. To President Obama and his ideological kindred, social justice consists of government overseeing a compulsory redistribution of property from the productive to the less productive. Disdaining free markets as "yo-yo economics," Obama advocates a radically different agenda - what we might call "we'll always take care of you" economics, or, to use another child's toy as an acronym, "BB economics" (as in "Big Brother economics").
We may concede to the president that, in a free market, some people will be in need. These include children, the sick and disabled, and even some healthy, involuntarily unemployed adults. It is a non sequitur, though, to conclude that the federal government must provide economic support to those people. Relatives, friends, neighbors, churches, voluntary community organizations, etc., can address those needs at far less cost and with a much more personal touch than can federal bureaucracies. Even if one believes that government must be involved, local, county, and state governments are closer to the situation than Uncle Sam.
The declaration that federal programs are not essential is anathema to the president's belief in BB economics. According to him, yo-yo economics
. . . has been tried in history and it hasn't worked. It didn't work when we tried it in the decade before the Great Depression. It didn't work when we tried it in the last decade.
Wrong, wrong, and wrong. Let's correct those errors with facts.
1) What the president belittles as "yo-yo economics" - that is, a system characterized by voluntary economic transactions - predominated for the first 125 years of our history. The glaring and regrettable exception, of course, was slavery. The salient historical fact here is that during the period of yo-yo economics, the United States developed into the richest country in the world. Contrary to the president's counterfactual statement, "yo-yo economics" did work.
2) Later in our history, in the 1920s and 1930s, the superiority of the free-market/yo-yo over the government-intervention/BB model was clearly demonstrated. The depression of 1920-21 was as severe and rapid an economic contraction as any in U.S. history. Unlike the contraction in 1929-30 that eventually persisted for 12 years, the severe depression in the early 1920s ended in 1922. By 1923, the economy was firing on all cylinders. Why?
The policy response of the Harding-Coolidge administration was to cut tax rates and slash government spending - basically to get government out of the way to let free markets make the necessary price adjustments. In the 1920s, yo-yo economics was an indisputable success. Obama's insistence that "it didn't work when we tried it in the decade before the Great Depression" is patently untrue.
In stark contrast to the successful policy response in the early 1920s, Presidents Hoover and Roosevelt opted for BB economics: massive tax increases, government spending, new regulations. The result was the 12 years of made-in-Washington misery that became known as the Great Depression. Ignoring that grim historical lesson, Obama has persisted in pushing 1930s-style, debt-financed, "stimulus" spending, and a huge expansion of government power over economic activity.
3) President Obama's third historical inaccuracy was that "we tried [yo-yo economics] in the last decade" under George W. Bush and "it didn't work." Here, the president is half-right. It's true that the last decade's overall economic performance was inferior. The problem with the president's statement is that George W. Bush's policies were the antithesis of yo-yo economics-everything from the addition of a new federal entitlement (Medicare Part D), to Wall Street bailouts, to expanding the annual federal budget from $2 to $3 trillion per year in only eight years.
The president's aggressive historical revisionism is no mere academic debate. We're not dealing here with inconsequential trivia like his 2008 gaffe about having visited 57 states. The stakes are much greater. Obama has contrived a historical narrative that justifies the kinds of economic policies that retard rather than promote prosperity.
The truth will make us free - and falsehood will make us less free.
The GOP: A Party in Flux
With Rick Santorum having dropped out of the race, Mitt Romney is apparently the Republican nominee for POTUS, barring a "black swan" event swooping down out of nowhere.
Why has the Republican Party taken so long to decide upon its presidential nominee? The two most common explanations given have been the structure of the primaries and the absence of an "ideal" candidate. Those are valid reasons, but there is one more that generally has been overlooked: The Republican Party itself is in a state of flux, and its new identity has not yet gelled.
The Tea Party message of smaller government has been dominant in the GOP primaries. However, even though the old guard, moderate, country club, establishment -choose whichever clich you prefer - wing of the party was eclipsed in the nominating process, it remains a formidable force in Washington. This was evident in the recent Senate vote on repealing all subsidies to all private energy companies (conventional and renewable): 19 Republicans voted with every single Democrat against abolishing the subsidies. Also, the very fact that the most conservative budget proposal put forth in Congress by Paul Ryan (R-Wis.) - a plan that, while obviously superior to the Obama alternative, will increase federal spending and debt - shows the present limits of the Tea Party's influence.
The Republican Party may indeed be evolving into a truly conservative party, but the transformation is far from complete. Many rank-and-file Republicans have been becoming more conservative at different rates, so it is not surprising that the candidates struggled to find the "sweet spot" where one could establish himself as the ideal 2012 Republican.
Although many Republicans were dismayed and disheartened as the primary race dragged on, there is an excellent chance that this sense of malaise will quickly dissipate now that the race is essentially over.
The bickering between the candidates was unpleasant and cast a pall over the nominating process, but that was a passing phenomenon that will soon be forgotten. Mitt Romney, Rick Santorum, and Newt Gingrich took turns pointing out each other's past flirtations with interventionist government, while trying to outdo each other in professing to repent of those earlier missteps, and emerging as the one genuine, born-again, true-blue conservative.
Ron Paul, meanwhile, who remained unnominateable due to his noninterventionist foreign policy (and perhaps even his uncompromising free-market principles), must feel vindicated that his three opponents (in some cases) staked out positions much closer to his consistent, constitutionalist, limited-government philosophy than would have been conceivable four years ago.
The Republican program in 2012 became clear even before Romney emerged as the standard-bearer. The last four men in the primary race - Romney, Paul, Gingrich, and Santorum - all agreed: The federal government is too big, the country is in deep trouble, and the presidency of Barack Obama has been disastrous. All four advocated less federal involvement in education, effective control of national borders, lower taxes, fewer bureaucracies, repealing Obamacare, greater freedom to develop domestic energy resources, less social engineering by Washington, etc.
Choosing between Romney, Gingrich, and Santorum was, for many, like choosing between vanilla, chocolate, and strawberry ice cream. Their personalities, pasts, and priorities had different flavors, but their philosophies were of the same general type. The presidential election campaign will generate far more enthusiasm among Republicans than the primary race did, because voters will now have a clear-cut choice between Republican ice cream or another helping of Barack Obama's spinach.
Barack Obama has already laid the groundwork for a very challenging economic environment in 2013. Whoever is president will have to cope with a bruising debt-ceiling battle, the scheduled expiration of the Bush tax cuts, a weak job market, unresolved systemic problems with Social Security and Medicare, a badly deteriorated power grid, and degraded military capabilities - not to mention possible complications resulting from Obama's feckless foreign policy.
Frankly, I don't think there is a person on earth who is completely prepared for all the challenges that will confront us during the next four years. I am convinced, though, that if Romney is elected, he will devote himself unreservedly to trying to solve those problems, while Obama would just make them worse. Tea Partiers, moderate Republicans, independents, and anyone else hoping for a change of direction in our country, can either unite behind Mitt Romney or concede defeat to Barack Obama. That is the choice before us.
Reflections on the French Election
The election of Socialist Party candidate Francois Hollande to the presidency of France epitomizes the sorry state of contemporary democracy. By that, I don't mean to imply that the French people should have voted for the incumbent, Nicolas Sarkozy. Neither would be capable of solving France's intractable problems in a way acceptable to French voters, nor are the problems with democracy unique to France. To varying degrees they exist throughout Europe as well as here in the United States.
The first problem is: widespread economic illiteracy. Hollande campaigned on a platform of economic growth and expanded job creation, to be accomplished by raising taxes on the rich and increasing government spending. Well, good luck with that one. Even Lord Keynes himself advocated lowering taxes rather than raising them to stimulate economic activity. And the record of net job creation via government stimulus is one of dismal failure. Hollande's program can't work, and yet a majority of the French electorate voted for it. How sad.
The second problem is the utter cynicism of today's politics. One wonders whether Hollande himself truly believes his own campaign rhetoric. One senses that he knows that his socialistic policies would drive France's struggling economy into the ditch: According to the World Socialist Web Site (www.wsw.org) - who were cheerleaders for Hollande's campaign promises of more tax and spending - Hollande's team has told Reuters that he is going to change course and "carry out reactionary policies . . . and intensify social cuts."
The third problem is that people sometimes believe in fairy tales. Who knows what Hollande believes or understands about economics, but let's give him credit for being politically astute. He understood that the key to electoral success is to tell voters what they want to hear. In France's case (as in the recent elections in Greece and northern Germany) most people are opposed to "austerity." Hollande sized up the public mood and won the presidency on the theme of, "You don't want austerity, and under me, you won't have it." That's bunk. There is going to be "austerity" (in France and elsewhere) whether the people want it or not.
The fourth problem is that the public is in denial about reality. What is commonly called "austerity" is more accurately termed "sobriety." For years, people in the democracies have been voting themselves economic freebies and subsidies - getting high on the drug of government wealth transfers. They became addicted to politicians who promised and voted more and more monetary fixes for their present and future desires. That means that politicians who indulge voters' fantasies and play along with the delusion that the government is a bottomless cornucopia of goodies will have the electoral advantage over those who are courageous enough to tell people the truth about the hard choices that must be made.
What the voters didn't reckon on - and what they are still in denial about - is that just as a feel-good drug addiction eventually brings one to the point where additional fixes could prove fatal, so the democratic Santa Claus state has neared the breaking point. Either the binge stops - that is, government spending and promises of future benefits are trimmed back - or the system breaks down. The ineluctable fact is that there simply isn't enough real wealth in existence to make good on all these government promises. The penalty for not facing up to this painful economic truth will be either a market rejection of sovereign debt or a central bank "quantitative easing to infinity" that debases the currency, either of which will convulse markets horribly.
The biggest problem underscored by the French election is the degenerate state of modern democracy (with apologies to Aristotle and our Founding Fathers, who would consider "degenerate democracy" a redundancy). Democracy today is both childish and cannibalistic. It is childish in the sense that masses of people believe that if they want something, all they need to do is vote for it and they will get it - as if economic reality can be transformed by a mere act of will, and government can conjure desired benefits out of thin air. It is cannibalistic in that so many have fallen into a state of moral depravity and pathetic impotence in which they believe that the only way they can have the comfortable life is for government to take other people's wealth and give it to them.
Many people believe that government is the answer to their problems. They are about to learn the painful lesson that government isn't the answer. I doubt many of them will recognize that their pain will be self-inflicted. As H. L. Mencken once put it, "Democracy is the theory that the common people know what they want and deserve to get it good and hard." The French, the Greeks, and a lot of other people living in democracies are about to get a jolt of economic reality and sobriety "good and hard."
The Tax Rate Scandal
When Republican presidential candidate Mitt Romney casually estimated that his effective tax rate is around 15 percent, progressives immediately pounced on the issue. To this ideological minority with its Ahab-like obsession on class warfare, a rich American paying an effective tax rate of "only" 15 percent is, a priori, a scandal of the first order.
Yes, this story is a scandal (actually, a series of scandals) but not the one that progressives think it is.
It is scandalous that so many journalists and commentators have gotten their basic facts wrong. They have conflated average "effective" tax rates with statutory rates. Under our complex and convoluted tax code, no American pays an effective rate that is as high as his top marginal rate (the statutory rate on the last dollar of income). As it turns out, Romney's effective tax rate of 15 percent is higher than the effective tax rate of approximately 97 percent of taxpayers.
An even greater scandal is that Romney's tax rate is as high as it is. Most of Romney's income comes from his investments, i.e., from capital. Of course, those still influenced by the defunct labor theory of value and Marxian class envy think that taxing capital makes sense. They deride investment income as "unearned" income, as if capital doesn't contribute anything of value to economic production, when, in fact, we owe our wealth almost entirely to capital.
Capital, far from being the cruel exploiter of labor, is labor's major benefactor. Human labor and natural resources are found around the world, but the rich countries are the ones in which the productivity of human labor (and therefore wages and standards of living) have been multiplied by capital.
Americans' relatively high standard of living exists because, according to the opponents of capitalism, greedy capitalists have "exploited" us more than people in poor countries. Well, we should be thankful for this type of so-called "exploitation." Taxing capital diminishes its supply, thereby crimping labor's productivity and lowering workers' standards of living. Any tax on capital above zero percent is scandalously stupid and perversely anti-labor.
A third scandalous aspect of the Romney tax-rate story is that the very people making the tired, tedious complaints that America's income tax code is "unfair" are those who are primarily responsible for the unfairness. Fairness, or justice, means equal treatment before the law. In taxation, that presents two options: Either tax everyone the same amount or tax everyone at the same percentage rate. There is no principle that defines the "right" degree of progressivity in tax rates; such rates are essentially arbitrary, determined by who holds political power - a "might makes right" calculus devoid of ethical content.
Finally, the most egregious scandal in the story about Mitt Romney's tax rate is that the discussion about taxation is distracting us from what is, by far, the major problem our elected officials in Washington need to address: out-of-control federal spending. Granted, a flat tax, if not a consumption tax, would be a huge improvement over the current monstrosity that is our 72,000-plus-page tax code. However, we can survive our flawed tax code for decades, whereas runaway federal spending threatens our country's financial viability in the short run.
Uncle Sam is racing toward a fiscal train wreck that requires a massive cutback of the 75 percent increase in federal spending that has been added over the past dozen years, but neither party is talking along those lines. The Republicans are willing to trim around the edges, whereas the Democrats are digging in their heels against even those token cuts.
Here's an experiment you can try: Ask any candidate running for federal office this year how he or she would cut $1 trillion in spending. They won't have a clue. That's the real scandal of Election Year 2012.
Economics: The Cheerful Science
Chances are, you've heard economics referred to as "the dismal science." That unflattering description is glib and catchy; it is also 100 percent wrong. Let me set the record straight and explain why economics - far from being dismal - is cause for hope, joy, cheer, and optimism.
Thomas Carlyle, a 19th-century Scottish essayist, coined the phrase "the dismal science." Carlyle was reacting to grim predictions made by the classical economists David Ricardo (1772-1823) and Thomas Malthus (1766-1834). Ricardo posited an "iron law of wages" that sentenced laborers to a life of poverty at the margin of survival. Malthus became the intellectual forebear of today's gloomy environmentalists by asserting that the human population tended to increase geometrically while the means of sustenance would grow only arithmetically, thereby, like Ricardo, condemning humankind to a poor, tenuous life.
Yes, those theories were dismal. Thankfully, though, they were utterly demolished by subsequent events. In country after country, populations and standards of living have multiplied since the days of Ricardo and Malthus. The classical economists failed to foresee such future phenomena as widespread middle-class affluence and people being defined as "poor" despite having cars, air conditioners, and cell phones (not to mention indoor plumbing, a reliable supply of clean water, and other conveniences that most people lacked in 1800).
Let's not be too harsh in judging Ricardo and Malthus for their lack of foresight. Who, in 1800, could have foreseen the marvelous growth of productivity and wealth that would transform the world over the next two centuries? To do so would have been to envision a state of affairs without precedent, entirely outside their scope of experience.
What was "dismal" to Carlyle was not economic science, but economic error. Would it be fair to dub aeronautics a "dismal science" on the basis of the many failed attempts at manned flight in the pre-Wright brothers era?
The fact is that "economics," as a distinct science, was still in its embryonic stage when Carlyle wrote. Economics had not emerged as a distinct field of study, and there were no "economists." Adam Smith was a professor of moral philosophy. Ricardo was a businessman, investor, and politician. Malthus was a preacher. The first chair in "political economy" (notice: NOT even "economics" yet) wasn't established until 1825 at Oxford University.
The classical economists contributed greatly to our understanding of markets, the coordinating function of prices (the "invisible hand"), the division of labor, the need for freedom, and a very light hand for government - but they still hadn't discovered the foundational principles of economics. They were still in the thrall of such persistent errors as "the labor theory of value."
"Economics" as a modern science wasn't "born" until the 1870s, when the neoclassical school emerged as a result of finally figuring out what "value" was. There is no "economic science" without understanding value any more than you can have chemical science without understanding valences, or valid arithmetic without zero.
Since Carl Menger's brilliant discovery and articulation of the "subjective theory of value" in 1871, economic science has flourished, culminating logically in Ludwig von Mises' general theory of human action, called praxeology. Mises used the science of economics/praxeology to prove a priori that socialism literally could not be viable, and that if the goal of a wealthy society is one's goal, then private property, limited government, and free markets are the means to achieve that goal. In the decades since Mises explained how the world works, history has confirmed the validity of his theories.
Mises' economic science has unlocked the secrets of wealth creation. We know which policies work and which are counterproductive. We now have the economic knowledge to unlock humankind's potential for eliminating chronic poverty and coexisting and collaborating in a world characterized by peace and abundance.
Why, then, is there so much "dismal" news on the economic front today? Because political agendas and powerful special interests trample economic principles for their own selfish purposes, thereby thwarting the amazing economic potential that economic science makes available to us.
Since 1995, the Heritage Foundation and Wall Street Journal have published an Index of Economic Freedom, an examination of 10 political conditions that affect wealth creation. More freedom, as measured by this index, correlates significantly with economic growth. The recently released 2012 edition shows that the United States has fallen to the 10th-freest economy in the world. It is no coincidence that our economic growth has stagnated as economic activity has become less free.
This bad news has a silver lining: We know what we need to do to return to prosperity. Economic science will work in our favor-if only we adhere to its inexorable principles and get the oppressive burden of Big Government and failed political ideologies off our backs.
The dismal clouds on today's horizon are a toxic mixture of moral corruption, political power-grabbing, and economic error. Economic truth is the sunlight that illuminates the way to a bright and glorious future. Thank God for this cheerful science. *