Wednesday, 16 December 2015 12:01

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 & Value, and

The FCC Versus Internet Freedom

Earlier this month, Federal Communications Commission Chairman Tom Wheeler announced that its five commissioners will conduct a vote on February 26 to decide whether to grant itself the authority to regulate the Internet under Title II of the Communications Act of 1934. It's highly likely the FCC will give itself this new power. Lawsuits are certain to follow. The Wall Street Journal's L. Gordon Crovitz denounced FCC Chairman Wheeler's decision to apply outdated regulations designed to manage the erstwhile Ma Bell telephone monopoly to today's rapidly evolving Internet. He warned that these "reactionary regulations" will mark "the end of the permission-less innovation that built today's Internet."

Mr. Crovitz is correct. Here are some of the far-reaching implications and negative consequences of the FCC's new policy:

Innovation will be squelched. Crovitz' phrase, "permission-less innovation" gets right to the heart of the problem. He notes:

In 2005, the U.S. Supreme Court warned that if the FCC treated the Internet as a telecommunications service, it "would subject to mandatory common carrier regulation all information service providers that use telecommunications as an input to provide information service to the public" - in other words, almost all websites and apps would be subject to regulation.

Chilling. If this were to happen, and it's not unreasonable to suspect that it could if not challenged, the FCC would have a chokehold on entrepreneurial innovation and technical creativity. Even if the FCC consisted of nonpartisan experts (which it doesn't and probably never will) the entrepreneurial process of creative destruction would be diminished. The problem with experts sitting in judgment and deciding which breakthroughs and entrepreneurial visions will be given the green light is that experts are only experts about the past, while entrepreneurs are the ones who invent the future. Today's "experts" are spectacularly unqualified to sit in judgment about how the future should evolve. To believe otherwise is to fall for the oft-discredited myth of government economic planning.

2) Cronyism and special interest politics will be strengthened. By adopting the highly subjective language banning "practices" that the FCC decides are "unjust or unreasonable," the FCC is inviting lawsuits from large corporations with deep pockets designed to cripple less-well-capitalized newcomers. Thus, the FCC continues the current president's pattern of favoring large entrenched corporations (e.g., the ACA and Dodd-Frank Act - see Timothy Carney's 2009 book, Obamanomics). In addition to favoring established big businesses, the new regulations create yet another government make-work program for lawyers.

3) Consumers will pay more. Government regulatory control almost invariably makes things more expensive by raising prices higher than free-market prices. This happened with trucking under the Interstate Commerce Commission, airlines under the Civil Aeronautics Board, and long distance telephony under this very same FCC. In fact, this new FCC rule will encourage and empower existing businesses that are falling behind to petition the FCC to hamstring and even shut down emerging competitors that are outperforming them. This is exactly how antitrust law has been abused throughout our history - penalizing efficient competitors to protect inefficient competitors at considerable cost to the American consumer.

4) The constitution will be weakened. The FCC's action is another step away from the hallowed principle of representative government and toward bureaucratic tyranny. It is simply the latest in a long series of executive branch usurpations of Congress' constitutionally mandated legislative prerogative. For a few unelected political appointees to break decades of precedent and unilaterally decide to regulate the Internet is abhorrent - especially since, once the process gets underway, these same unelected officials will act as judge, jury and executioner in the cases that come before them. Chairman Wheeler is trying to reassure us by promising to "forbear" from actually exercising full regulatory power, but of course, he is vague about what powers he and his colleagues wouldn't exercise. Once the sought-after powers have been conceded to the FCC, they will have vast discretionary and arbitrary powers.

5) Free speech will be compromised. The First Amendment itself would be at risk under this new FCC regime. If you think that the IRS discrimination against conservative tax-exempt organizations was offensive, imagine what the FCC could do to stifle communication by not approving select websites. If you need government permission to disseminate ideas, speech can hardly be said to be free.

Congress needs to wake up and decisively halt this unwarranted expansion of executive branch power. In previous cases of bureaucratic overreach (IRS, NLRB, NSA, etc.) some members of Congress have made lots of noise, but the consequences to the perpetrators have been pathetically weak. It's time to move beyond giving indignant speeches and an occasional slap on the wrist. Why not abolish the FCC, update federal communication law, and then let individual cases be litigated in common law courts?

Elizabeth Warren Is Right (Sort Of)

The junior senator from Massachusetts, Elizabeth Warren, gets a lot of mileage from proclaiming that "the system" is rigged against the middle class. While not completely accurate - upward mobility is still attainable, as millions of Americans have proved and are proving - it is true that other millions of Americans are encountering more obstacles and headwinds on the path to increased prosperity than ever before.

Here is a far-from-complete list of those obstacles:

1) According to Edward P. Lazear in The Wall Street Journal, the Affordable Care Act has lowered incomes in at least two significant ways: first, the individuals whose hours have been cut by employers to avoid incurring ACA-related costs; second, by reducing employment in the health care industry itself.

2) Like the ACA, the Dodd-Frank Act (which happens to have been Sen. Warren's brainchild) has reduced employment in its target industry, finance. Many smaller financial institutions have folded while multibillion-dollar Wall Street firms have received bailout guarantees (talk about rigging the system - shame on you, Ms. Warren!).

3) The pace of new regulations promulgated by Team Obama has reached all-time highs - 468,500 total new pages in the Federal Register so far during this presidency with an annual cost nearing $2 trillion. The costs of complying with Dodd-Frank alone could eventually add over $1,000 to the cost of living of the typical American worker, according to Robert Genetski, writing in Investor's Business Daily, Dec. 12, 2014. Due to the costs imposed by Dodd-Frank along with other taxes and regulations, more businesses are closing than opening, resulting in fewer employment opportunities.

4) The Obama Administration, egged on by the green lobby, has blocked approval for such privately funded projects as the Keystone XL and a dozen other pipeline projects (even though pipelines are more environmentally friendly than transporting oil by railroad or trucks).

5) Government spending has remained at elevated levels even though the crisis cited as justification for increased spending subsided long ago. One of the clearest macroeconomic relationships is the inverse correlation between government spending as a percentage of GDP and the rate of economic growth. Much of this elevated spending under Obama is for corporate welfare and cronyism, whether guaranteeing bailouts to big banks under Dodd-Frank and to health insurance companies under ACA, channeling subsidies to Boeing, GE, and Caterpillar via the Export-Import Bank, or bestowing taxpayer-funded largess upon green boondoggles.

6) Another economically crucial relationship is the positive correlation between economic freedom and economic growth. According to the annual Index of Economic Freedom co-published by The Wall Street Journal and The Heritage Foundation, 2014 was the first time in eight years that economic freedom did not decrease in the United States.

7) Another key factor that contributes to robust economic activity and job growth is private investment. Economist Stephen Moore and former Senator John Kyl reported (WSJ, Oct. 29, 2014, p. A17) that Team Obama has raised taxes on capital gains and dividends while private investment is a lower percentage of GDP compared to the 1980s (9 percent vs. 12 percent) when taxes on investment were cut.

8) Various government efforts to "help" workers - from increases in the minimum wage law to government "stimulus" and jobs programs - have contributed to the dramatically falling labor participation rate in recent years.

9) The Federal Reserve's bizarre policies of penalizing savers through its six-year-old zero interest rate policy while working to decrease the purchasing power of the dollar (for which the recent dollar rally is providing temporary relief) have been insidiously undermining middle class Americans' standard of living.

So, what is the common thread running through all these impediments to economic advancement? They all have been foisted on the backs of the American middle class by government and its partner in mischief, the Federal Reserve. This is where Senator Warren has it all wrong. Government is the problem, yet Warren argues that more government power is the solution to the middle class's economic woes. This is sheer quackery - a classic case of wanting to put the foxes in charge of the henhouse.

President Obama has an ideological antipathy for the middle class. Whether Sen. Warren shares that antipathy or is simply economically ignorant, I can't say, but clearly she hasn't come to the understanding that only a system in which the government doesn't have the power to rig economic outcomes - in other words, free-market capitalism - has the vitality and flexibility to generate the rapid economic growth that produces widespread prosperity. Perhaps she should read the book Problems with Piketty in which the author (yours truly) differentiates between systems like feudalism, mercantilism, and socialism - systems in which political elites rig the rules to enrich themselves at the expense of everyone else - with capitalism, in which the system is "rigged" so that the way to get rich is by creating wealth for others instead of draining wealth from them.

I share Elizabeth Warren's (professed) concern for the middle class, but the kinds of progressive government intervention she favors are poison, not medicine, for the economic prospects of the middle class.

The EU's Nightmare in the "Hotel California"

When the Eagles came out with their mega-hit "Hotel California" almost 40 years ago, I'm sure they never dreamt that their words would capture the essence of the economic and political nightmare that the nations of the European Union (EU) would be suffering through in 2015. For decades, Eagles fans have debated what those haunting lyrics really meant. What follows is one interpretation:

"This could be heaven and this could be hell." (Eagles, "Hotel California")

In agreeing to join the EU, the political majorities in various European nation-states entertained optimistic visions of economic gain - not actually "heaven," but definitely a significant improvement. They viewed greater economic integration as a means to increased prosperity through free trade, free migration, and perhaps even some transfer of wealth to help a country out during a time of need.

Alas, human nature being what it is, people proved far more interested in the benefits they could reap from membership in the EU than in doing the hard work of discharging their own treaty-defined responsibilities, such as balancing their budgets, so that the union would work like its architects had intended. Heavenly hopes have turned out to be hellish realities. Instead of flourishing via positive-sum, mutually beneficial cooperation, the EU has degenerated into a negative-sum squabble in which irresponsible governments have egregiously failed to honor their promises of fiscal discipline, thereby jeopardizing the financial stability throughout the EU. Far from keeping government budget deficits within specified limits (as they had promised) spendthrift governments have generated massive debts that have necessitated bailouts to avert defaults that would devastate the entire Union.

"We are all just prisoners here of our own device." ("Hotel California")

Greece and the other EU countries have been learning the hard way that democracy is like a Venus flytrap. Its allurements draw you in, then the trap door slams shut and it devours you. In the case of the EU democracies, though, the damage is self-inflicted. The Europeans themselves devised the very political systems that are now doing them in.

Our Founding Fathers clearly understood the self-destructive dynamics of democracy: Citizens, seduced by the attraction of getting the proverbial free lunch, vote for politicians promising to confer financial favors upon them; politicians, in turn, quickly learn that the way to electoral success is to feed the appetite of voters for increased government benefits. The problem is that this appetite is insatiable, and so, in the symbiotic relationship that exists between voters and elected officials in a democracy, government spending inexorably increases. The expedient of deficit financing inevitably is resorted to and debt accumulates. Eventually, the ability to make good on all the promises hits the inevitable wall of economic reality in which the government lacks access to sufficient funds to pay for all its programs and debt service expenses. Creditors worry that the government will default on its debt and start dumping bonds. Then arises the grim prospect of a catastrophic chain reaction of debt defaults and bankruptcies.

What options does a democratic government have for raising sufficient revenues to honor its financial obligations? The democratic system that seemed so attractive when it was set up has morphed into a prison that has trapped citizens and politicians in an unsolvable dilemma. On the one hand, there is a limit to how much it can cut spending before angry, frightened citizens vote incumbents out of office. In other words, politicians who dare to do what is economically necessary find that it is politically suicidal, and so they balk. On the other hand, there is a limit to how much the government can raise tax rates before so many businesses and individuals are crushed, ruined, or go underground, thereby shrinking rather than boosting tax revenues. Yet interest on the debt must be paid somehow. Where are the needed funds to come from when fiscal policy has become useless due to the democratic fiscal stalemate?

It turns out that the powers that be have an ace up their sleeve - a fairy godmother who can magically postpone disaster. This, of course, is the international and supranational monetary and political establishment - additional creatures of democracies' own device. In the case of the EU's current crisis, we are talking about the so-called "troika" - the European Central Bank, the EU, and the International Monetary Fund. These multilateral institutions are not subject to the normal strictures of democracy; they aren't accountable at the ballot box to the people whose lives they affect. They were conceived and brought into existence by national governments that gave them immense power to make momentous unilateral, autocratic decisions. ECB chief Mario Draghi's recently announced trillion-euro "quantitative easing" program (hardly a surprise, given the ECB's other trillion-euro bailouts over the last five years) is designed to stave off default and prop up Europe's moribund financial system despite Greece's essential bankruptcy and lack of economic viability. In the short run, it may appear that the troika has saved the day, but in the long run, when additional trillion-euro bailouts are launched to try to paper over the fiscal crackup of other European democracies, and the euro currency becomes a cruel joke, Europeans will rue the day that government officials created such powerful, unaccountable entities.

"They stab it with their steely knives, but they just can't kill the beast." ("Hotel California")

In the current Greece/EU drama, there are two beasts that cannot be slain despite impassioned mental knife thrusts. One is, from the perspective of non-Greeks, the apparent unwillingness of the Greeks to mend their ways and get their financial and fiscal affairs in order. The other, from the Greek perspective, is the gang of foreigners who are seen as oppressing the Greek people and attempt to undermine Greek sovereignty - the troika and some of the other European governments, most prominently Germany.

Greece's foreign creditors understandably want to be repaid. They view the Greeks as recalcitrant, irresponsible, and dishonorable. "This crisis would dissipate if the Greeks would just pay their bills." The problem here is expressed in that old clich about not being able to squeeze blood from a turnip. At this point, with the electoral victory of the Syriza coalition under new Prime Minister Alexis Tsipras, Greece's voters have shown that they aren't going to tolerate any more of the austerity that foreign creditors have demanded and that the outgoing government imposed.

Undoubtedly and undeniably, the Greeks are going to have to learn how to live within their means and figure out how to keep government from squashing the private sector. However, one should be able to understand the Greeks' current desperation, if not have a smidgen of compassion for them. The outgoing government did cut spending significantly (although it failed to accomplish a much-needed significant downsizing of the bloated and expensive government bureaucracies). Government spending in Greece fell from about 124 billion euros in 2009 to approximately 90 billion in 2014.

Despite this notable decrease, government spending as a share of Greece's GDP actually increased over the same time period from 46.8 percent in 2007 to 59 percent by 2013. This horrific statistic means that the private sector is contracting at an even faster rate than the public sector. Indeed, household income in Greece has fallen an estimated 40 percent since the crisis began, unemployment among young Greeks has soared to 64 percent, and the health care system is near collapse (with relatives often having to take care of hospital patients due to the shortage of nurses). The Greeks will find some way to survive. They aren't going to kill themselves no matter how hard and insistently their creditors pressure them.

Just as foreign creditors can't "kill" the problem of the Greeks' present inability to pay what they owe, neither are the Greeks going to kill off the ECB, the EU, or the ever-troublesome (whether to Greece or the U.S.) IMF. Still, given the magnitude of the economic catastrophe that the Greeks are suffering, the Greeks' anger with the troika, Germany, et al., is understandable. No wonder they made a statement at the polls: "Enough! It's time for a change. Go to hell, you foreign bullies!"

Whatever changes the Greeks eventually make (and they certainly need to be major fundamental changes) it is unrealistic and inhuman for non-Greek creditors to insist that the Greeks take larger doses of their current misery. The IMF's demand that the Greek government raise taxes on an impoverished prostrate populace is unconscionable. Indeed, while the Greeks themselves must bear responsibility for the myriad policy errors that have prevented its private sector from experiencing healthy growth, the IMF's "jack up the tax rate" policy is the most counterproductive, destructive policy of all.

"You can check out any time you like, but you can never leave." ("Hotel California")

Greece may in fact check out or get kicked out of the EU at any time, but it can never leave Europe nor escape its economic problems by exiting the EU. The Greeks will still need to make profound, far-reaching, fundamental changes to correct their multiple economic dysfunctions. They still need to figure out how to enable a productive private economy to emerge. They will still have to learn how to live within their means and to rid themselves of the government disease that has consumed their economic substance. They will still have to learn how to depend on free markets instead of Big Government to supply their needs. They will still need to learn to respect each other's property rights and refrain from using government to redistribute wealth. They will still have to kick their addiction to debt and learn to live within their means. They will still have to figure out what goods and services to produce and provide for commerce with their fellow Europeans and other non-Greeks. They will still have to learn how to manage their fiscal affairs sufficiently well to earn the trust of lenders if they are to have access to credit markets going forward.

Even if Greece leaves the EU, the remaining EU countries will still be stuck in the same EU version of Hotel California. Many other EU countries have the same problems that have bankrupted Greece, though not to such an advanced degree - yet. Several of them are in danger of replicating the Greek democracy's slide into bankruptcy and insolvency. Not one of the countries whose government debt problems were considered worrisome five years ago (specifically, the PIIGS - Portugal, Ireland, Italy, Greece, and Spain) has managed to reduce its debt-to-GDP ratio since then. While Greece's debt-to-GDP ratio rose from 129.7 percent in 2010 to 174.9 percent in 2014, over the same time frame, Portugal's rose from 83.7 to 129, Ireland's from 64.4 to 123.3, Italy's from 116.4 to 132.6, and Spain's from 54 to 92.1.

In fact, despite French President Hollande's plaintive cry, "Europe cannot continue to be identified by austerity," the reality is that cannibalistic democratic governments throughout Europe have continued to grow at the expense of the private sector. For the EU as a whole, government spending hit 49 percent of GDP in 2013, up from 45.5 percent in 2007. Only four of the 28 countries in the EU saw government spending as a percentage of GDP fall from pre-crisis levels through 2013 - Bulgaria, Romania, Lithuania, and Poland (countries that nobody ever suggests pose a threat to the viability to the EU) - while the other 24 countries have seen government grow faster than the private sector.

In addition to the official debt of the non-Greek PIIGS having risen over the past five years, so have their unfunded future liabilities. Those liabilities range in size from two-and-a-half to five times the amount of their explicit debt in those countries. (The same predicament exists in Germany, France, the U.K., and, yes, the U.S. None of these democracies will ever be able to honor all these obligations. Some of these liabilities, this negative wealth, will have to be vaporized, either by explicit defaults or through the maneuver of currency depreciation. There are going to be a lot of unhappy residents when they find that they can't leave the nightmare of their countries' political Hotel California.

The fact is that even if Greece leaves the EU, most Europeans will still be stuck with a Frankenstein currency; they will still be subject to the monetary quackery of the ECB as it mirrors the Federal Reserve's bizarro world; they will still have the machinations of EU bureaucrats pulling whatever levers they can to strengthen the EU and protect their generously compensated jobs; they will still have to contend with pests that have a more global reach, like the IMF. The people of Europe and their sovereign governments won't be able to leave the EU's dream-turned-nightmare Hotel California until they wake up from the spell that they are under. They will need to repent of, repudiate, and reject Big Government, democratic welfare states, debt addiction, a currency based on nothing, and a host of other economic errors. I doubt that this awakening will come before the ECB creates trillions more euros, destroying it in the vain attempt to avert an eventual catastrophic implosion of the European sovereign debt bubble, crackup of the EU, and tragic economic pain shared by millions of Europeans.

Kim Kardashian, Ronny Porta, and Other Beautiful People

Last weekend, I had a real treat. My first college roommate visited us. We hadn't seen each other in three years.

While sitting in the gazebo on a perfect spring morning, we did what old friends do: We engaged in relaxed, desultory conversation punctuated with blissful intervals in which nothing needed to be said, and we simply enjoyed each other's presence. The conversation ranged from the past to the present, from the profound to the trivial, and from the personal to the universal.

At one point, out of the blue, I asked Steve, "Do you know who Kim Kardashian is?" I asked because I don't know. I mean, I've seen dozens of headlines about her online - Kim gets married, Kim gets unmarried, Kim dates so-and-so, Kim gets pregnant, etc., but what does she do, other than be famous? I haven't cared enough to Google her and find out. Steve didn't know who she is either.

Actually, I was one step ahead of Steve. I've seen her photo enough to know what she looks like. She is young, curvaceous, and has some nice features, so I conclude that she is known for her physical beauty. The phenomenon still puzzles me, though. There are many, many physically beautiful young people in America. Ms. Kardashian must have the country's best publicity agent to have created such visible celebrity out of so little substance. "The Marketing of Kim Kardashian" should make a classic business school case study.

Within minutes of our passing mention of Ms. K, Steve checked his iPhone messages while I read the previous day's USA Today. On page one, I read the story of Ronny "Tony" Porta, an ex-Marine who lost his arm and whose face had been badly burned by an IED explosion in Iraq. Immature kids mock and taunt Tony for his disfigurement.

What a heart-rending story. Here's a man who suffered greatly for his service to his country, and instead of compassion, gratitude, and appreciation, he is the object of scorn and derision. And yet, in reading the story, I see an inner beauty in Tony - an honesty, a sensitivity, a strong and gentle man.

Speaking to the reporter who interviewed him, Tony asked, "Who will love me now?" That gets right to the nub of his great longing. I immediately thought, "I do, Tony, and so does my wife, my friend Steve, and a ton of other Americans you don't know." Of course, that's not Tony's primary need. Like any other young man, Tony desires acceptance, and hopes to receive the love of a partner.

Does Tony have any chance of finding the happiness of that one special companion? Indeed, the odds are long. I know from my own development over the decades and what I have observed from others that one's desire for physical beauty generally exceeds one's appreciation for inner beauty at least during the first four or five decades of life (permanently, in some cases). But it surely isn't impossible.

Tony can take heart from another story I encountered over the weekend. A friend had sent me the viral email with 22 photos depicting the love story of Taylor Morris, the young man who lost all four limbs from a bomb blast in Afghanistan, and his girlfriend, Danielle Kelly. Danielle has continued to love Taylor in spite of the radical change in his physical appearance. She has that admirable ability to look beyond the surface appearance and see the same wonderful man she had known since her junior high school days. Only 24 years old, Danielle is wise beyond her years. She sees not just with her eyes, but also with her heart. She sees beyond the transient physical beauty that lasts but a few years or decades to the abiding beauty of character and qualities that transcend and outlast mere physicality. Isn't it great to know that there are people like that out there?

And while we are talking about beauty, let me salute another beautiful person about whom I learned in the same section of the newspaper in which I learned about Tony Porta: Heather Abbott. Heather's foot was severely injured by the second bomb at the Boston Marathon. She explained to the reporter that she decided to have her leg amputated below her knee so that she could get a prosthetic device and resume normal activities rather than endure years of disability with a mangled foot. What really impressed me was her buoyancy and constructive attitude. She said she isn't thinking about the bomber, but focusing all her attention on making the best of her own life. What a gem! If I were the dad of this positive, wise, and sunny young woman, I'd be bursting with joy. Even with her being a total stranger to me, I can't help but think, "Oh, yeah, this wonderful person gets it, and what a blessing she will be to those who are close to her."

Writing about economics and politics isn't always a happy task. It was a real treat to take this detour to appreciate the inner beauty of young Americans like Tony Porta, Taylor Morris, Danielle Kelly, and Heather Abbott. These beautiful people help to make the United States the amazing country that it is. *

Read 4362 times Last modified on Wednesday, 16 December 2015 18:01
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

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