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 & Value, and Forbes.com.
Economic Outlook for 2013: ZIRP, Zombies, and the Japanization of the American Economy
Forecasts for sluggish economic growth are common. Investment superstars and gurus such as Bill Gross of PIMCO and Jeremy Grantham of GMO, and researchers such as Dr. Robert Gordon of the National Bureau of Economic Research, all have predicted anemic growth for the next several years. With the caveat that when too many "expert" opinions agree, the resulting consensus can be spectacularly wrong, I agree with the pessimists.
The American economy is stuck in the molasses of unfathomably colossal debt. Team Obama will block any attempt to curtail the federal government's chronic overspending or to reform its unsustainable growth in entitlements. President Obama's regulators are ramping up costly, suffocating rules on massive scale. A compliant Federal Reserve continues to enable the destructive over-spending by further debasing the currency by aggressively increasing its supply. And don't be fooled by modest rises in the Consumer Price Index; the Federal Reserve Note's purchasing power is shrinking.
Looking ahead, I see no end to ZIRP - the Fed's zero interest rate policy. Besides depriving savers of an opportunity to earn a measurable return on their savings, I suspect that the Fed will do everything in its power to keep interest rates artificially low, whether that power has been explicitly authorized by enabling legislation or not. The Fed simply cannot permit interest rates to rise several percentage points above current rates, because the ensuing cost of servicing the federal debt would consume so much of Uncle Sam's tax revenue that the Fed would have to undertake a quantum increase in quantitative easing (raising it from a river to a flood of new monetary units) to provide enough liquidity to fund the government.
The continuation of ZIRP serves to keep large economic zombies - inefficient, dead-on-their-feet banks, corporations, and, of course, the grand-daddy of them all, Big Government - on life support. For healthy economic growth rates to return, these zombies need to be allowed to expire - that means bankruptcy for the private-sector zombies, and a massive down-sizing, if not the outright dissolution, of the federal leviathan - so that valuable economic resources can be reallocated to more rational, wealth-producing ventures.
If market forces were allowed to follow their natural course, the moribund, rickety structure of mistakes, mal-investments, and misguided government planning would be euthanized, clearing the way for renewed vigorous and sustainable economic progress. Both for ideological reasons (i.e., the progressives' preference for government planning over free markets) and pragmatic reasons (i.e., no politician, Democrat or Republican, wants to be blamed for a wrenching-but-healing reallocation of resources to their most valued economic uses) the powers-that-be will do everything possible to thwart market forces and preserve the sluggish status quo.
My suspicion is that we will take the route that Japan has been following since 1990. The Japanese political class has averted a full-fledged deflationary cleansing of their economy by engaging in endless rounds of Keynesian fiscal stimulus and loose monetary policy. One might expect near-zero interest rates to lead to an economic boom (i.e., bubble). Indeed, that is possible, but don't discount the possibility that Team Obama and Federal Reserve Chairman Ben Bernanke will, like their Japanese counterparts, manage to keep a lid on economic activity as they strive to prevent a surge in economic activity that would cause interest rates to rise significantly and unleash a government-insolvency-followed-by-central-bank-hyperinflation sequence.
Team Obama's army of regulators is prepared to restrict and subdue vigorous private-sector growth so that it won't compete with public-sector spending and push up interest rates. The financial regulators in particular, now that Dodd-Frank has given them great power to ration credit and direct it toward the public sector, will be able to deprive the private sector of the fuel it needs to pick up speed and push up interest rates. Indeed, Dodd-Frank, which does so much to centralize control of credit in the state, may well be Team Obama's greatest success in implementing Marx's 10-point platform.
I sure hope I'm wrong, folks, but it looks to me like 2013 will see a progressive Japanization of the American economy. Bernanke will persist in his ZIRP policy to prop up politically connected economic zombies, and official Washington will do everything possible to prevent a needed economic restructuring from taking place. The good news is that, against this unpromising backdrop, American ingenuity and creativity will find ways to prosper-but it won't be easy. Good luck.
Romney and Ryan Didn't Cut It in a Time for Radicalism
We live in radical times. How radical? Over $16 trillion of officially acknowledged debt - multiples of that if you count unfunded federal liabilities; a president with a Marxist-Leninist economic agenda; a Senate majority leader who refuses to pass a budget and will do his best to sabotage any meaningful restructuring of fiscally unsound federal entitlements, etc.
The Republicans don't know how to respond. Mitt Romney is a good man who probably would have made a great president in the 1950s, competently managing the executive branch at a time of balanced budgets. By temperament and philosophy, though, he was too moderate for the radical challenges facing us today. He had no radical plan to break our addiction to the deficit spending and entitlements that are bankrupting us.
Some thought Romney's selection of Paul Ryan hinted at radicalism, but the much-ballyhooed "Ryan Plan" wasn't radical. On the contrary, it was designed to shore up the entitlement state and still would add trillions more to the national debt. Ryan's plan to gradually reduce deficits over the course of a decade might have sounded reasonable on paper, but does anybody think that the American public has the self-discipline to adhere faithfully to a fiscal diet for 10 straight years? Dream on!
For decades, the Republicans have let the Democrats set the agenda, expanding the power and scope of the federal government and spending far beyond federal revenues. The Republicans have been reactive, agreeing to the basic premises of the transfer society while generally trying to slow the rate of growth in spending (although Nixon and Bush II took the line of least political resistance and spent as merrily as any Democrat not named Obama). The result is that Republicans are too stingy for liberals and too profligate for true conservatives and libertarians.
A truly radical alternative to Obama's Big Government radicalism might involve slashing over a trillion dollars of federal spending per year. Too radical? Then try these on for size:
Zero out of the advertising and grant-giving lines in the budget of every federal department and agency. Currently, they use our tax dollars to promote themselves and to give grants to special interest groups who then sue the government in the attempt to increase the regulatory chains they put on us.
Reduce federal employees' compensation packages to the same levels as their private-sector counterparts receive.
Liquidate one of the cabinet-level departments. Put it all on the auction block in a Thatcher-style privatization, and whatever useless bureaucratic pieces don't receive a bid from the private sector would simply be shut down. Taxpayers would quickly learn that the sun would still rise in the morning and the world could get along fine with less government.
Abolish OSHA - the Occupational Safety and Health Administration. Considering the epidemic explosion of Americans going onto permanent disability in the last few years, OSHA should be disbanded on the grounds of rank incompetence. Either that, or somebody needs to put the kibosh on the disability scam, because the American taxpayer shouldn't have to pay for both a safety bureaucracy and record numbers of workers on disability.
Here's a big one: Privatize Social Security. Not in the timid way clumsily proposed by George W. Bush, but if the government is going to remain in the pension business at all (a dubious proposition), set up a private account for each worker with his or her own name on it. Don't ever let contributions to workers enter the U.S. Treasury. Pay off accrued benefits with a combination of cash and tradable shares in U.S. government assets (e.g., land, oil, and gas leasing properties).
If Speaker of the House Boehner had a single radical bone in his body, he would at least argue that any tax increase should only be passed with an expiration date. Why should only tax cuts be scheduled ahead of time to expire, but not tax hikes? Why can't Boehner hold his ground against raising the tax rate on millionaires? Why can't he just say, A) I don't believe in discrimination, and B) They are Americans, too, and their property rights are just as important as any other American's - and just as entitled to the equal protection of the law under the 5th and 14th Amendments.
These are radical times, but there is only one party in Washington playing a radical game with radical rules, and that's why they are prevailing.
Don't Be Fooled, No Union Rights Were Lost in Right-to-Work Michigan
The passing of a right-to-work law in Michigan is a hugely significant development. In my mind, Michigan would have been the last state to pass legislation removing the requirement for workers to join a union as a condition of employment in unionized businesses.
As welcome as this new law is for those of us who recognize how economically pernicious and ethically debased compulsory union membership is, the reporting of the story has been marred by sloppy, inaccurate usage of a key word: "rights." Here's a typical example from Reuters: "Michigan weakens union rights in home of auto industry."
Americans greatly value rights. It's in our DNA. However, no rights - neither unions' nor anyone else's - have been lost by passage of this right-to-work law. What has changed is that unions can no longer compel a worker to pay dues to them as a condition of employment. That was never a "right," but a power - a power that had been bestowed on unions by prior legislation conferring upon them a privilege. Unions in Michigan have lost a privilege, not a right.
In fact, rather than infringing on anyone's rights, Michigan's right-to-work law restores a lost right to workers - the right of voluntary association. Our Declaration of Independence and the Constitution's 5th Amendment name liberty as an unalienable right; now workers in Michigan have the liberty to choose whether to join or not join a group as each one's conscience dictates.
American labor law has been out of whack for the last century. Unions have been given special powers and privileges that have trampled on the rights of their fellow citizens. Consider:
Do businesses have a right to block you from purchasing from their competitors? Do Kellogg employees have a right to stand in the cereal aisle of a grocery store and interfere with your right to buy a General Mills cereal? Of course not. Then what gives unions the "right" to prevent an employer from choosing to hire someone who doesn't happen to be a union member?
Unions behave monopolistically, suppressing competition. It's time to amend the Clayton Antitrust Act of 1914 by removing its explicit exemption for unions. What's sauce for the goose is sauce for the gander. Unions, like businesses, should not enjoy the privilege of being insulated from competition. Workers should be free either to refrain from joining a union or to join a competing union that they believe will better serve their interests.
Should anyone have the power to tell an American that he can't move to a particular state? That would violate the citizen's rights. Then what right does the National Labor Relations Board have to tell a private corporation that they can't move to a different state? Why does the NLRB have the power to infringe on the First Amendment right of free speech by forbidding employers from communicating key financial information to workers as an "unfair labor practice"? Why does the NLRB operate a separate, special judicial process outside of the laws and courts that govern non-union Americans and hold union members to a lower standard of accountability for extortion, racketeering, and acts of vandalism and violence? For all Americans to have equal rights, we must abolish the NLRB by repealing the 1935 Wagner Act that created it.
What American has a "right" to violate the life, liberty, or property of other Americans? Courtesy of the 5-4 Enmons Supreme Court decision in 1973, unions have enjoyed special privileges allowing them to inflict bodily harm, to prevent people from entering workplaces, and to destroy private property if it is "in the pursuit of legitimate union goals." Such violations of the rights of others can never be a "right" of unions or anyone else. To restore justice ("justice" means "equal protection of everyone's rights," not "we get what we want," as the unions seem to think) Congress should pass the Freedom from Union Violence Act.
Michigan's right-to-work law is an important step in restoring the unalienable rights of every American. We still have a long way to go, but If Big Labor's unjust power to infringe individual rights can be rolled back in Michigan, then there is hope that individual rights will be restored across the country.
Compromise or Gridlock in Washington: Unpalatable Alternatives
As soon as the elections were over, a wave of commentaries extolling the virtues of compromise appeared in the press. The common theme is that it is time for Democrats and Republicans alike to end partisan gridlock - to make compromises that will shrink federal deficits without driving us off "the fiscal cliff."
That said, gridlock has its defenders. They fondly remember "the good old days" in the 1990s when divided government (Democratic White House, GOP Congress) produced a gridlock that kept spending increases relatively modest and eliminated budget deficits.
Gridlock today, however, is not as benign as it was then. Also, the 1990s constituted a very special case that cannot be replicated today.
In the 1990s, gridlock kept the spigot of federal spending stuck at a relatively slow growth rate. Today's gridlock between the Boehner-led House and Team Obama has stuck the federal spigot in the wide-open position of perennial trillion-dollar deficits.
The 1990s are an inapt comparison for another reason: That decade featured a fiscal "perfect storm" to wash away red ink: The end of the Cold War led to defense spending cuts; the welfare reform of 1996 slashed welfare expenditures and increased the number of taxpaying workers; the Roth IRA legislation of 1997 induced millions of Americans to pay taxes on their private retirement funds up front; the "Greenspan put"-fueled stock-market bubble gave Uncle Sam a windfall of capital-gains revenue. In short, the propitious confluence of events that stanched the flow of red ink in the late 1990s was a one-off phenomenon.
So, we need compromise rather than gridlock, right? But what if compromise is not a viable option either? Compromise may be what fair, reasonable, mature, and enlightened people do; it may be the democratic way, but the problem is that there are limits to compromise, dictated by the immovable truths of economic realities.
We see this at the local level in school district contract negotiations with teachers' unions. The union asks for 10 percent annual pay increases; the school board offers 2 percent; they compromise at 6 percent. That may work for decades, but what happens when the local taxpayers go through a prolonged economic slowdown and the tax base in the district stagnates? There comes a breaking point where teacher compensation can't rise as much as it used to, if at all, and maybe even retirement benefits have to be cut back because taxpayers simply can't afford additional tax increases.
A similar dynamic plays out with the federal budget. The big spenders propose a large increase in spending (an increase above an assumed projected increase, i.e., the infamous "base line"); the opposition proposes a smaller increase; they compromise and spending continues on a relentless upward trajectory. There is a ratchet effect whereby total spending can only move in one direction: higher. But "trees don't grow to the sky," and eventually government spending produces so much accumulated debt that there isn't enough wealth to tax or borrow to finance spending, so the central bank steps in with "quantitative easing" and financial manipulations. Eventually, the debt burden and the inflation of the monetary unit proceed to the point where they threaten the financial viability of not only the government but the entire economy - the net result of a succession of well-meaning, "fair"-minded compromises.
The pickle we are in today is excruciating. In the first place, the big spenders clearly won't make any more than token compromises. President Obama came out of the election suddenly asking for tax hikes twice as large as he had requested earlier. Senate Majority Leader Harry Reid declared that Social Security was off the table. Since Reid has blown up Congress' constitutional budget-making process for several years already, we know he isn't bluffing. They are willing to drive off the fiscal cliff if necessary, because chaos and crisis provide them with the pretext for more government intervention and control, which is their ultimate goal.
If there is to be any meaningful compromise, the Republicans will be the ones who make it. Yet, if the GOP compromises by agreeing to raise taxes while not curbing runaway spending, the result will be slower economic growth and probably lower federal revenues. Nothing positive will have been accomplished and the government will continue careening toward an eventual financial crackup. We are told that reasonable people compromise, but if compromise leads to disaster, can it be a virtue?
Gridlock or compromise: Heads, Big Government wins; tails, "we, the people," lose. *