Mark Hendrickson

Mark Hendrickson

Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are from V & V, a web site of the Center for Vision & Value, and Forbes.com.

Saturday, 05 December 2015 05:08

Hendrickson's View

Hendrickson's View

Mark W. Hendrickson

Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are from V & V, a web site of the Center for Vision & Values.

Yo-Yo Economics?

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. *

Saturday, 05 December 2015 05:04

Hendrickson's View

Hendrickson's View

Mark W. Hendrickson

Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are from V & V, a web site of the Center for Vision & Values.

China's "Superior" Economic Model?

In a recent piece for the Wall Street Journal, Andy Stern, an Obama insider and one of organized labor's more aggressive personalities, praised what he called "China's superior economic model."

Does China have a superior economic model? That depends: Superior to what?

Mr. Stern, who headed the Service Employees International Union, cited Andy Grove, founder and chairman of Intel, who concedes the 20th century's "decisive victory of free-market principles over planned economies." That is true. However, both Stern and Grove proceed to assert that some unspecified degree of government economic planning will generate more prosperity than free markets. Stern writes that the "free-market fundamentalist" model that made America prosperous "is being thrown onto the trash heap of history in the 21st century." He argues that we should jettison our "empirically failing free-market extremism."

Really? Pardon my candor, but what planet does Mr. Stern inhabit? For something to be "empirically failing," it must first exist. Where in America is this supposed extreme "free market" system that Stern disdains?

In the United States today, government has largely nationalized the home mortgage market; cartelized the financial system; partially commandeered the auto industry; begun to take over the energy industry; plays the dominant role in the retirement, education, and health care of most Americans; has a leviathan bureaucracy that does everything from shutting down the development of domestic energy, to telling corporations which states they can operate in, to blowing taxpayers' money on boondoggles. As for the boondoggles, they are both great (ethanol and solar energy) and small ($2.6 million to study whether alcohol increases a Chinese prostitute's chances of contracting AIDS).

That said, I share Mr. Stern's dissatisfaction with our sluggish economic growth, and agree that we should not be too proud to observe and learn from competitors like China. In fact, there are two important lessons we can learn from China right now:

First, China's impressive economic growth rates prove rather than disprove the need for free markets. While China's leaders dictate certain economic priorities and parameters, and insist upon loyalty to the Communist Party's political monopoly, they often practice a policy of benign neglect toward provincial and regional entrepreneurs, giving them considerable latitude in a free-wheeling, wild west scramble to find ways to create as much wealth as they can.

A second important lesson from the Chinese, and one that helps to explain why their growth rate is higher than ours, is that we are drowning in debt while they are awash in savings.

Before we jump to the conclusion that China's economic model is the way of the future, we should remember that we have heard similar projections before. In the late 1980s, commentators raved about the Japanese economic model. Predictions abounded that the Japanese economy was so powerful and unstoppable that it would soon surpass our own and be the wealthiest in the world. Like the Chinese state today, the Japanese government worked closely with businesses to forge an industrial policy that (allegedly) would prove far superior to a free-market model. Then the wheels fell off and the bubble burst. Since then, Japan has struggled with economic stagnation and malaise.

China, of course, has a much larger population than Japan, and it certainly is possible that it eventually will have the largest GDP in the world, but to the extent that the Chinese government calls the economic shots and tries to pick winners and losers, China runs the risk of ending up like every other country (including our own) that has squelched free markets - broke and stagnant.

It is ironic that the former head of a major American labor union is enamored with a political system and economic model in which workers earn low wages and are not represented by independent labor unions. The precarious state of individual rights and liberty in China doesn't seem a great concern to Andy Stern. Instead, he is eager to sign on to a system that (according to Professor Ralph Reiland in an Investor's Business Daily commentary) enables the sons of China's top Communist Party leaders to buy $400,000 Ferraris and $32-million mansions.

China's hard-working people and high savings rate are impelling China's rapid economic development, and for that China deserves our respect. But the political system of crony capitalism run by the Chinese politburo is antidemocratic and elitist to the core. For Andy Stern to claim that such a model is superior to freedom and free enterprise . . . well, you can draw your own conclusions.

When Clarence Thomas Came for a Visit

On Tuesday, November 15, Supreme Court Justice Clarence Thomas visited Grove City College. I had a choice to make - whether to meet him or attend to the tons of work I had to finish before several looming deadlines.

I don't share our society's fascination with famous people. I never go out of my way to meet them, and when I do meet them, I don't ask them for their autographs like some starry-eyed teenager. The father of a close friend once told me that every man, regardless of how important a position he may hold, puts his pants on one leg at a time. A person and the position that he or she holds are two different things, and the office does not automatically confer greatness.

I decided to set aside everything to meet Justice Thomas. This man has bravely and heroically defended the U.S. Constitution for the last two decades, and for this alone, he has earned my gratitude. It would have been selfish of me not to have taken a couple of hours out of my schedule to express my appreciation to him for his valiant efforts - especially since I would probably never have another opportunity to do so.

I arrived early at a private luncheon for the Grove City faculty and Justice Thomas. He arrived early, too, and since I was the only one there at the moment, he came up to me and we introduced ourselves. That was the beginning of an uplifting, inspiring day for me.

I can attest that Clarence Thomas is a warm, down-to-earth, personable man. The first question he asked me, when I told him that I taught economics, was whether I was familiar with the work of Ludwig von Mises. When I replied that I had earned my doctorate under Hans Sennholz, who had earned his under Mises, we were off to the races.

Besides economics, we compared notes about our upbringing. I had read part of Justice Thomas' autobiography and was amazed at some of the uncanny parallels in our lives. Both of us were raised not by our fathers but by older, stern male relatives who practiced "tough love" and even kicked us out of the house during our rebellious, angry, cheap-wine-drinking, socialist-leaning college years. As young men, we both had our Christian reawakenings. I should mention that my youth was not nearly as challenging as his, because he had to deal with the cruel racism that permeated the Deep South when he was a boy - an awful burden that he has transcended, largely through the Christian grace of forgiving those who had done wrong.

Justice Thomas is one of the most amazing people I have ever met. Indeed, I am groping for words that do full justice to the impact that Justice Thomas had on those of us who listened to him in the intimate setting of small classrooms and other occasions. I wish you could have seen the way our students' faces lit up while listening to him. We have very mature, attentive students at Grove City College, but I have never seen them as rapt as when Justice Thomas was speaking with them. He shared wisdom, personal vignettes, historical perspective, and helpful insights, but there was another level of communication going on that transcended his words:

It may sound corny to say this in this cynical day and age, but we were blown away by the sheer goodness and virtue of this man. I truly found Clarence Thomas to be the epitome of humility, integrity, public service, and faithfulness - both to God and to the solemn responsibilities of his important office. In regard to the latter, Justice Thomas was always discreet, carefully withholding his personal opinions whenever a question was asked about an issue that the Supreme Court would be adjudicating. He reiterated that his job was not to make rules for the rest of us - to presume to judge whether a law or application of a law was good or bad, wise or imprudent - but simply to determine whether it was constitutional.

Before meeting Justice Thomas, I respected him immensely. After meeting him, my admiration grew exponentially. Again, call me corny, but I was affected in a spiritual way - like I was a better person for having been in the presence of this good man. I don't feel that way often.

Godspeed, Justice Thomas. And thank you not only for what you are doing but also for who you are.

Barry and the Babe

Barry Bonds' Dec. 16 sentencing for obstruction of justice is an anticlimactic addendum to a sterling, though marred, baseball career.

Without a doubt, Bonds was a great hitter who didn't need performance-enhancing drugs to put up Hall of Fame numbers. Bonds had dedication and self-discipline. He worked hard for many years to stay in shape, prolong his career, and be the best he could be. Unfortunately for his reputation, the consensus is that he went too far.

It's interesting to reflect on how far people will go to gain an edge. Movie and TV stars "cheat" on what nature gives them - some with plastic surgery, others with breast augmentations, perhaps some even with steroids. Like them, Bonds tried to give the public what they were looking for - in his case, the ability to hit a baseball an awe-inspiring distance. In sports, though, cheating to gain an unfair advantage offends most Americans' sense of fair play.

At this unhappy time for baseball, let's look back at a player to whom Bonds was frequently compared - the game's greatest icon: Babe Ruth. When Bonds surpassed Ruth's career homerun total, he remarked that we shouldn't have to hear about the Babe any more. It's sad that he resented being spoken of in the same breath as the Babe. He should have felt honored.

Babe Ruth was sui generis - one of a kind. He occupies an irreplaceable and unmatchable spot in American sports history. In fact, you can make the case that he single-handedly elevated professional sports to national prominence.

Ruth became a legend by virtue of his prodigious athletic feats and his larger-than-life character. Where Bonds was sometimes reserved and cool toward reporters and the public, the Babe was gregarious and sunny. The fun-loving Babe led a colorful life, and he gladly made numerous visits to children in hospitals. He loved people, and people in turn loved him.

As a slugger, Ruth has no equal. Only 35 times in major league history has a player achieved a season slugging percentage of at least .700. Ruth did it nine times. Bonds did it four times, all after bulking up late in his career. Ruth hit at that level much longer, compiling an incredible cumulative slugging percentage of .711 for his 15-year career with the Yankees.

Bonds' highest slugging percentage, in 2001, was an astounding 127 points above the runner-up, Sammy Sosa (another slugger who tested positive for steroids). That is dominance! But Ruth's highest slugging percentage, in 1920, was even more impressive. The runner-up, Hall of Famer George Sisler, batted an eye-popping .420, was second in the league in doubles, triples, and homers-yet had a slugging percentage 215 points lower than the Babe. The next year, Ruth's slugging percentage was 240 points higher than the runner-up, Hall of Fame outfielder Harry Heilmann, who batted .394.

The bulked-up Barry Bonds smashed some long home runs, but never did he hit a 500-foot homer. Ruth hit dozens of homers over 500 feet, set the distance mark in every American League park, and hit the longest verifiable home run in major league history in Detroit in 1921 - at least 570 feet on the fly. Bonds' power was concentrated in four seasons. Babe hit his last 500-foot home run 18 years after his first. It's scary to think what Babe would have accomplished if he had half of Barry Bonds' commitment to training.

Babe's preternatural power was such that he occasionally reached second base before an infielder would catch one of his pop-ups. (Showing his fun-loving personality, he hit one pop-up so high that the infielder lost sight of it, so Babe caught it himself in his bare hands.) Another news account tells of Babe hitting a screaming line drive that nearly hit the pitcher's head before sailing over the centerfielder and hitting the centerfield wall 500 feet away (yes, some of those early ballparks were that deep in center field) on one bounce.

The greatness of Ruth would not be complete if we did not acknowledge several other dimensions of his baseball skills. Tris Speaker, Hall of Fame outfielder, testified that Ruth was one of the five or six greatest outfielders he ever saw. The Babe stole home 10 times in his career. As a pitcher, Ruth won over 100 games; still has the 17th-lowest career ERA and the fourth-lowest World Series ERA; had a winning record in head-to-head match-ups with the great Walter Johnson; and pitched complete game victories in 1930, after not pitching for a decade, and again in 1933 after an additional three-year hiatus. He also played on seven World Series winners (three in Boston, four in New York).

I wish Barry Bonds peace. Meanwhile, baseball fans, let us rejoice in the baseball miracle that was Babe Ruth. *

Saturday, 05 December 2015 04:55

Hendrickson's View

Hendrickson's View

Mark W. Hendrickson

Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are from V & V, a web site of the Center for Vision & Values.

The Election-Year Politics of Energy

Realizing that his popularity may decline as the price of gasoline rises, President Obama is barnstorming the country, emphatically insisting that drilling for more oil isn't the cure for high gas prices and that wind and solar energy represent our energy future.

Republican presidential candidate Newt Gingrich recently challenged Obama, claiming that gas prices would fall to $2.50 per gallon or lower if he were president. Many Americans believe Gingrich when he says that repealing Obama's anti-drilling policies would increase the supply of oil and push gas prices lower. In his weekly address on March 10, Obama disputed Gingrich's assertion, arguing, "With only 2 percent of the world's oil reserves, we can't just drill our way to lower gas prices."

One wonders how the president can make such a claim, given that natural gas companies are currently hurting because, in fact, they have drilled their way to lower natural gas prices. Surely this president does not believe that the law of supply and demand doesn't apply to oil, too.

To the contrary, Obama concedes just that when he considers dipping into the Strategic Petroleum Reserve for no other reason than to lower gas prices in an election year.

When you think about President Obama's antipathy for oil companies' profits, you would think that he would be one of the most vocal supporters of more drilling. After all, increased production of oil would drive down prices and shrink profits. How deliciously ironic that Obama's own anti-drilling policies are handing windfall profits to the very oil companies he rails against.

The president's statement about America having only 2 percent of oil reserves is misleading. The size of our reserve is actually quite vast, but the percent of the world's oil we have is far less important than the amount we produce. The United States accounts for at least 6 percent of global production of petroleum - a figure that would be significantly higher had President Obama's party not been impeding and restricting domestic petroleum production for years.

On March 14, the president ramped up his anti-drilling argument. He employed hyperbole, asserting, "If we drilled every square inch of this country . . . we would still have only two percent of the world's known oil reserves." To assert that a massive increase in drilling would result in no increase of oil defies logic and experience. The reality is that reserves have grown year after year, decade after decade, precisely because the more we drill, the more oil we find.

The president resorted to a "straw man" subterfuge to disparage Republicans who aren't on the "green" energy bandwagon, snidely proclaiming that they "probably would have agreed with one of the pioneers of the radio who said, 'Television won't last,' or the Henry Ford associate who argued that 'the automobile is only a fad.'" First, the comparison is inapt. Neither radio nor the Ford automobile needed government subsidies, whereas "renewable energies" have received them for years, even decades, and they still aren't cost-effective. Second, I don't know anyone - Republican, Democrat, or Martian - who would oppose clean, renewable, cost-effective energy. Nobody is against "green" energy per se. The objection is to costly, taxpayer-financed government subsidies to the politically connected, and to mandates that compel Americans to purchase uneconomical forms of energy.

The Wall Street Journal recently reported that the Democrat-controlled Senate defeated Sen. Jim DeMint's (R-SC) budget amendment to eliminate every federal subsidy and tax credit to all energy companies, whether they produce fossil fuels, renewables, batteries, or nuclear power. By voting with all Democrat senators (yes, every single one) to defeat DeMint's amendment, 19 Republicans showed that the GOP is not yet a free-market party. What chutzpah Vice President Biden showed by denouncing Republicans as the party of privilege during the very week when his own party voted unanimously to retain expensive taxpayer-subsidized privileges to corporate America.

The Obama/Biden tandem's overstated rhetoric may backfire on them. When people don't have the facts on their side, their attempts to ridicule others can end up making themselves look ridiculous. Apparently, the president and vice-president are betting that enough voters believe so fervently in hope, change, and other good things that facts, basic economic knowledge, and common sense won't burst their bubble.

Upheavals in American Education: The Start of Something Big?

Reform in America's public schools occurs with seemingly glacial slowness. In the private sector, businesses (including schools) that provide a lousy product quickly lose customers. They either correct their deficiencies or they eventually close. Similarly, if the problem is poor performance by a private enterprise's workers, then either the employees start doing a better job or management replaces them to save the company.

These market-based, pro-consumer forces are largely absent from taxpayer-supported schools, because public schools have captive "customers." Young residents of a public-school district are legally required to attend school, and in areas where those schools lack meaningful, affordable competitors, the youngsters are trapped by a virtual monopoly. The school can do a poor job year after year, and teaching jobs can become sinecures for the mediocre, the burned out, and the indifferent, protected by powerful unions that exist to serve teachers and not the pupils with whose education they have been entrusted.

It is in that context that I was glad to hear the news out of Chicago that Democratic Mayor Rahm Emanuel has announced plans to close 17 of the city's worst-performing schools. This seems like one of those Nixon-in-China moments when only a politician from the party normally allied with unions would dare to implement a policy that is so hated by the teachers' union. Indeed, the mayor's courageous decision brought upon him the ire of Jesse Jackson and the Chicago Teachers Union, but I salute Mayor Emanuel for challenging a status quo that protects failed, dysfunctional schools.

I can attest from first-hand experience that some schools are so dysfunctional that they simply cannot be reformed. Early in my career, I did some substitute teaching in innercity Phoenix. While there were several schools that were pathetic, one particular middle school sticks in my memory.

The windows in the classrooms had been smashed so often that the decision was made to brick them up, depriving the rooms of any natural light. A favorite pastime was to turn off the light switch when the teacher wasn't looking. That was a signal for books to be thrown through the air. Everyone, including the teacher, would take cover, because in the total darkness, everyone was at risk of injury, while it was nearly impossible to know who had thrown the particular book that hit somebody.

At that same school, kids would tear pages out of books to get out of doing assignments. At least a dozen seventh-grade girls were pregnant at any given time. A fulltime teacher there (a former college linebacker) told me that a good day was when nobody got hurt. The priority at that school was safety, not education. That school should have been euthanized and something else done in an attempt to salvage a decent education for those children.

Similar to Mayor Emanuel's decision to pull the plug on a few failed schools in Chicago, there are similar moves afoot in California, where a majority of parents could sign a petition that triggers a major reform of an unsatisfactory public school, up to and including shutting it down if it can't be reformed or restructured satisfactorily.

That is the good news. The bad news is that union operatives and allies, some from outside the area, used a combination of intimidation and lies against parents who had signed petitions to trigger reforms, causing the petition to be rescinded. It remains for the courts to determine whether the original petition is valid or not, but in the interim, reform is being blocked. This may be a short-term victory for the teachers' union, but in the long run, they may find (as in Wisconsin) that their aggressiveness may turn people against them.

In New York City, teacher evaluations were made public at the instigation of The Wall Street Journal and other media organizations. This is problematical, and I'm not sure I agree with it. Yes, without a doubt, teachers should be held accountable for their performance and irremediably ineffective teachers should be canned. But can't this be done without making public spectacles of inferior teachers? Perhaps a small committee of parents could be allowed to see the evaluations on the condition of confidentiality being maintained as long as the school district acts to replace bad teachers. In short, remove them, but don't make them wear a scarlet letter.

There are signs that significant upheavals are beginning to occur in public education. Let's hope they gain traction and momentum. We owe it to our young people. A decent education is an integral part of the American Dream.

People Say the Darnedest Things

Those of you past a certain age may remember the old Art Linkletter show "Kids Say the Darndest [sic] Things." The one I still remember was when Linkletter asked a little boy if he looked like his daddy. "No," replied the boy innocently, "I look like the mailman."

Well, adults say the darnedest things, too. Sometimes they give us a window into their egos or their ignorance. Sometimes their comments contain important truths. Other times, they don't even make sense. Let me give you an example of each kind of statement, starting with an example of the latter.

Many journalists have dutifully reported that the latest Greek bailout will reduce Greece's national debt to a "sustainable" level of 120 percent of GDP (from over 164 percent today) by the year 2020. The problem is, they never explain how Greece will be sustained through the next eight years of "unsustainable" debt levels until the level supposedly becomes sustainable. Sustaining the unsustainable for eight years is quite a trick!

At the opposite pole from such unthinking fatuity is a statement of blazing clarity made by Rick Santorum during a recent GOP debate. With refreshing candor, Santorum stated to a nationwide audience:

I voted for that [No Child Left Behind Act]; it was against the principles I believe in . . . and I made a mistake.

Politics is known as a business where principles routinely fall by the wayside, but rare indeed is the politician who admits to compromising principles.

As an example of a statement that displays a disturbing ignorance of elementary economic rationality, President Obama's friend and adviser, Valerie Jarrett, recently asserted that unemployment payments are economically beneficial, because

. . . people who receive that unemployment check go out and spend it and help stimulate the economy.

Those who advance this theory never explain how prosperity can improve from putting more money into circulation without any additional goods or services being produced. If the key to economic progress is more money in circulation, then let Federal Reserve Board Chairman Ben Bernanke rain money down on us from the figurative helicopter to which he once alluded. In real life, boosting prosperity is not that simple.

It's scary when one realizes how many members of Team Obama, including the leader himself, share Jarrett's faith in tossing money at a problem. Apparently, they really believe in the mysticism that economist John Maynard Keynes preached when he wrote in 1943 that increasing credit (or money) performed the "miracle . . . of turning a stone into bread."

Finally, if you want a supreme example of how a statement can provide a revealing glimpse of a person's ego, consider the president's speech at the National Prayer Breakfast last month. In it, he attempted to justify tax increases and government redistribution of wealth by citing Jesus' statement, "unto whom much is given, much shall be required."

I agree 100 percent with what the Lord said, but President Obama tore it out of context and twisted its meaning. The statement, which is the punch line in Jesus' parable of the talents, reminds us that it is God (not government) Who has blessed humans with the gifts of life and talent, and that we owe it to God (not government) to use those gifts productively for His (God's, not government's nor Obama's) glory and purposes. For a human being, even one as powerful as the president of the United States, to seek to usurp the place and prerogatives of the Creator takes hubris to the highest degree.

Yep, people do say the darnedest things. And those things can be quite illuminating when we pay attention.

Sports, Concussions, and Contemporary American Culture

If you follow professional sports, and especially if you are a football or hockey fan, you undoubtedly are aware of the rash of concussions that have rendered players unfit to play. Now there's a rash of lawsuits being filed against the National Football League, the latest of which includes a group of 106 retired football players, all alleging that the NFL should have done more to protect them from known risks.

We here in western Pennsylvania are acutely aware of this phenomenon. The Pittsburgh Steelers' linebacker, James Harrison, was suspended for a game after concussing Colt McCoy with a helmet-to-helmet hit on the defenseless Cleveland quarterback. On December 13, I attended my first hockey game in years, watching the Detroit Red Wings beat the Pittsburgh Penguins, 4-1. It was an exciting, well-played hockey game that I enjoyed, but would have enjoyed more if two Penguins' stars, Sidney Crosby and Kris Letang, had not been sidelined by concussions.

The question has arisen: Should the NFL and National Hockey League tighten the rules to protect players from concussions? Opponents argue that these sports are inherently risky and violent, and that to curtail the action in any way would diminish, if not ruin, the game. I respectfully disagree.

It's time for the owners and commissioners to exercise leadership and take decisive action to reduce the incidence of concussions.

Let me offer the Detroit-Pittsburgh hockey game as Exhibit A in support of my case. I wish you could have been there. The game was a magnificent display of athletic skill and intense competition. The players' wizardry on skates was accompanied by hard checks, collisions, and knockdowns on open ice, against the boards, and in the goalmouth. In other words, it was a clean game - tough, physical, without a whiff of wimpiness, but also without a single cheap shot.

This game was hockey as it was meant to be - artistic, fast-paced, and rugged. The play-making skill of Henrik Zetterberg, the power and precision of Evgeni Malkin's booming shot, the magician-like stick of Pavel Datsyuk, the acrobatics of goalie Marc-Andre Fleury, were a wonder to behold.

Such displays of skill make hockey a great spectator sport - not goon-like thuggery where a player takes a shot at an opponent's head. The hockey game I saw was physical enough to satisfy anyone other than a macho sadist. It had "manliness" without crossing a line where players' lives were at risk from gratuitous and dangerous head hunting.

I'm sure the commissioners and team owners are currently calculating whether the potential premature end of the careers of a sport's marquee superstars (and the tens of millions of dollars that owners have invested in them) are worth risking to appease an appetite for mayhem. Even fans must think it would be a shame if the best players' careers were abbreviated by brain damage. But the discussion needs to go beyond the welfare of star players. Every professional athlete, even a rookie just called up from the minors to make his major league debut, is a precious human being. None of these athletes should have to go through life brain-damaged because the leagues are unwilling to police headshots.

A sickness has crept into our culture. Some sports fanatics think that cheap shots that can result in brain injuries are a legitimate part of sports. This warped mentality brings to mind James Caan's 1975 movie, "Rollerball." In that futuristic world, the powers-that-be kept loosening the rules of the fictitious sport rollerball until players eventually were allowed to kill their opponents, so that victory would go to the team that survived - literally.

We seem ominously close to starting down the same senseless slippery slope as dramatized in "Rollerball." In pagan societies, life is cheap and individuals are expendable. Think of the blood-thirsty Roman crowds in the Coliseum who derived perverse pleasure from seeing gladiators not just defeated, but destroyed.

Call me a wimp, if you wish, but it's time for the owners, players, commissioners, etc., to rein in the headshots. It's one thing in sports to want to physically dominate an opponent and "whup 'em." It's something totally different to inflict brain damage on another human being for life.

A Whiff of Privatization

Three decades ago, Prime Minister Margaret Thatcher implemented a policy called "privatization" to rejuvenate the moribund economy of the United Kingdom.

Like the United States today, the cost of a too-large government was sapping the vitality of the U.K.'s economy. The private sector was staggering under the heavy tax burden needed to fund the public sector. In fact, despite very high tax rates, taxation could not keep up with government spending, so the Bank of England (the U.K.'s central bank) created more money (what we euphemistically call "quantitative easing" today) to make up the difference.

Prime Minister Thatcher's solution to this untenable situation was brilliant and elegantly simple: She decided to divest the government of its nationalized businesses by selling them to private investors - i.e., privatization. This shrank the budget deficit dramatically, first, by shrinking expenditures, since the government would no longer have to fund those businesses, and second, by increasing revenue. Revenue was increased both immediately, via the price paid by private investors for government assets, and on an ongoing basis, as private firms and their employees became net taxpayers.

A whiff of privatization is in the air here in the United States, and at the federal level. (Privatization has been widely practiced by American states and local governments during the past two decades.) A bill called the Civilian Property Realignment Act (H.R. 1734) is "in play" in the House of Representatives. Its objective, according to Congressman Mike Kelly's press release, is to

. . . save billions of taxpayer dollars by selling or redeveloping high value federal properties, consolidating federal space, maximizing the utilization rates of space, and streamlining the disposal of unneeded assets. . . . If passed into law, the Office of Management and Budget (OMB) estimates that H.R. 1734 could generate $15 billion in revenue from property sales, in addition to the billions more generated from future cost avoidance from simply owning less property.

Given the federal government's gargantuan debt and deficits, H.R. 1734 should be a no-brainer, a slam-dunk. One would expect any member of Congress who professes any concern for fiscal responsibility to vote for this bill. Nevertheless, the bill is flawed.

Selling properties outright is a great idea, but is "redeveloping . . . properties and consolidating . . . space" a great idea? Sorry, but I have no confidence in Washington's ability to manage resources efficiently. Just sell the stuff and let private-sector experts in property management figure out how to make economic use of those properties.

Hopefully, H.R. 1734 would be a first step in a much larger privatization process. While the United States doesn't have a large inventory of nationalized industries to privatize like the U.K. did in the 1980s, there are many assets that Uncle Sam could sell to the private sector to start reducing the national debt.

First, Uncle Sam could divest itself of vast swaths of federally owned land. Surely, the government needs nowhere near the 30 percent of our national territory that it owns.

Second, privatize AmTrak; privatize the Post Office and rescind its monopoly privilege; and completely privatize government-sponsored enterprises, so the taxpayer doesn't get stuck with any more Fannies and Freddies.

Third, privatize the Government Printing Office and any other federal agency or office that unfairly competes with unsubsidized private companies.

Fourth, privatize any government activity that profits private businesses: energy research, the Export-Import Bank, the advertising programs in the Department of Commerce, etc. At a time when many large American corporations are sitting on record amounts of cash, we don't need to increase the national debt to subsidize them.

Fifth, whether you can find a bidder or not, quit funding the PR and grant-bestowing desks in federal agencies. Their main function often is to use our tax dollars to promote their own expansion. If federal employees want to toot their own horn or give money to non-profits who will do their lobbying for them, let them do it on their dollar, not ours.

Finally, don't waste time trying to reform bureaucracies or make them more efficient. Only the profit-and-loss calculus in competitive markets can do that. Put any federal agency on the block if it is performing a function that conceivably could earn a profit, and sell it to the highest bidder. (If there are no bidders, you're looking at an economically unviable operation, so axe it - unless our lives depend on it.) If an agency isn't fulfilling its purpose, and its primary function seems to be to provide well-paying jobs to otherwise unemployable holders of undergraduate and law degrees, then just pull the plug and abolish it.

Let's hope that the whiff of privatization leads to far more than selling a few unused properties, and that there's real movement toward shrinking the federal government by privatizing many of its properties and activities.

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. *

Saturday, 05 December 2015 04:47

Hendrickson's View

Hendrickson's View

Mark W. Hendrickson

Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are from V & V, a web site of the Center for Vision & Values.

Green Fiascoes and Boondoggles

A barrage of news headlines on the Solyndra scandal continue to remind us that President Obama made green jobs one of his administration's priorities. Those headlines also reveal this initiative to have been a costly mistake.

The bankruptcy of Solyndra, the solar-panel manufacturer that has collapsed despite receiving half a billion dollars from the federal government, is only the tip of the iceberg. The Wall Street Journal recently reported that several other green companies that received generous federal aid are teetering on the brink.

Ener1, whose subsidiary EnerDel received a $118 million federal grant, lost $165 million in fiscal 2010 and has dim prospects. According to the Journal, Ener1 had "lost its bid to supply batteries to Fisker Automotive, a battery-powered car maker which received a $529 million U.S. taxpayer-backed federal loan guarantee in 2010," when "Fisker chose to buy its batteries from a company called A123 Systems, itself the recipient of a $249 million U.S. Department of Energy grant."

Great! First Team Obama extends taxpayer dollars to green companies, then it torpedoes them by giving larger grants to their competitors. Meanwhile, Fisker, itself a recipient of over a half-billion dollar handout from Uncle Sam, is making its cars in Finland.

Team Obama's record on creating green jobs is no more confidence inspiring than its record in mid-wifing a viable electric car industry.

A recent study by the Labor Department's Inspector General examined what became of $162.8 million of Obama stimulus money funneled to the Employment and Training Administration. Set up to "train and prepare individuals for careers in 'green jobs,'" the score is this: 53,000 individuals were trained, 8,035 got jobs, and only 1,033 trainees still held those jobs after six months.

There are at least four important reasons why we should stop funding "green" government programs:

First lesson: government-appointed experts are incompetent economic planners - a fact of life that any intelligent adult should know after the spectacular failure of central economic planning in the socialist experiments of the 20th century. No matter how brilliant and how well-intentioned government planners may be, they do not and cannot know what consumers want and how much they are willing to pay for it. Only free markets can solve this challenge. If electric cars are to be a viable industry, private companies will make them so.

Second lesson: The government's involvement in Solyndra raises troubling questions about possible corruption. While I think the Solyndra deal stinks to high heaven, I wonder whether any laws have been broken. Where is the dividing line between influence peddling, legitimate lobbying, political deal-making, and actual crime? Many farm-state Republicans have supported the uneconomical ethanol boondoggle for decades in exchange for generous support of their electoral campaigns, so the practice is bipartisan.

Third lesson: Government job programs are a blatant failure. They have never been economically beneficial. In the 1930s, Franklin Delano Roosevelt had the department of agriculture hire 100,000 Americans to monitor how much acreage American farmers were cultivating. These federal jobs produced no wealth. Their jobs made no more economic sense than paying people to dig holes and then fill them up.

Today's green workers are economically nonsensical, too. True, they sometimes produce something, but the economic value is invariably less than the amount of tax dollars needed to subsidize their job. In other words, federal jobs make us poorer.

Fourth lesson: Finally, we simply can't afford these green boondoggles. Uncle Sam's official debt is now $15 trillion, and when you include off-budget items and unfunded liabilities, the situation is far worse. Given this fiscal reality, it is the height of irresponsibility to throw taxpayer dollars at any special interest, and it is particularly egregious to subsidize enterprises that are plainly uneconomical.

I am not opposed to green industries. What we need is for the government to get out of the way and let green technologies prove themselves in the competitive marketplace. It's time for change and an end to economic foolishness. Let's get the burden of green boondoggles off the taxpayers' back.

Veterans: What Is Seen and What Is Not Seen

In economics, the first lesson I teach my pupils is the lesson of things that are seen and things that are not seen. Actions have some effects that are readily apparent and others are overlooked or not perceived.

It's the same with our military veterans. We see the obvious price they've paid - the time they spent far away from home and some of the physical injuries, such as lost limbs. What we don't see are their psychological wounds. Sadly, these are more numerous than physical injuries, and they often cause greater suffering.

It took me many years to understand this. The uncle who raised me was as tough and fearless as any man I've ever known, yet even he struggled with deeply disturbing memories from World War II more than half a century later.

He tried to keep those memories bottled up deep inside, but after a few stiff drinks at night, those memories would issue forth in long soliloquies. Many times the uncle I called "Pop" recounted an incident that happened on the aircraft carrier Essex. He was in charge of making the planes flightworthy. One day, a fighter plane returned from its mission intact, except that when Pop checked the belly gunner's turret, he encountered a gory sight: the belly gunner's head had been blown off and the turret was a bloody mess.

As soon as he learned of the situation, the captain of the Essex wanted to know if the aircraft could fly again. Pop sent a message back via the ship's chaplain: Yes, the plane could fly, but all that blood would smell horribly in the tropical heat. Pop recommended confirming the identity of the dead man, administering last rites, then burying the man at sea in the plane in which he had given his life for his country. The captain signaled "thumbs-up" from the bridge, and so the plane became a coffin that was pushed off the flight deck into the Pacific.

Pop had seen much death and destruction in the war, but he couldn't shake the memory of this particularly vivid incident. Many times I had sat silently while Pop retold the story, doing my best to be a supportive listener. One night, while listening to this story for the umpteenth time, it dawned on me that Pop was haunted by that horrific image, and it seemed right to try to ease his torment. I decided to reason with him the way he had reasoned with me when I was growing up. "Pop," I said, " that belly gunner was no more dead than all the other soldiers and sailors killed in the war, and his death may have been more merciful than most, because it happened before he knew what hit him."

My statements hit home. Pop snapped out of his dreamy, far off, reverie. His eyes took on a clear, focused look. "I suppose that's so," he acknowledged, and he then turned the conversation to less intense subjects. I sat with Pop during many more nights when he drank and reminisced before his passing a year later. Never again did he tell that story. That nightmarish memory had ceased to haunt him. He had finally processed it and moved on.

Every veteran close to me has wrestled with disturbing memories to varying degrees. In some cases, it took years, even decades, before they were ready or able to talk about the traumatic events that have haunted them.

Our veterans have far more scars than meet the eye. For most of them, thank God, the love of their families, their many happy memories, and their personal courage to push ahead with satisfying and productive lives enable them to cope with the ugly memories of war.

How can we help them? That isn't an easy question, but as we pause to recognize and honor their service to our country on Veterans Day, let us resolve to do what we can. Let us be steadfastly supportive friends and family members.

If our veterans need to talk, let us be patient and compassionate listeners.

If they prefer not to talk about their military service and are getting on with their lives, then let us respect their wishes and let sleeping dogs lie.

If their military memories continue to hurt them today, perhaps we need to help them find professional help.

If nothing else, let us look for opportunities to express our gratitude for their sacrifices and pray that each precious one of them may find peace from haunting memories.

Looking Ahead to 2012, 2013, and 2014

Whoever takes the oath of office as President of the United States in January of 2013 will inherit an economy facing multiple challenges:

Undoubtedly, still-escalating federal spending will have the government bumping up against the debt ceiling again. By then, total federal debt will be larger than our GDP.

Unemployment is likely to remain high.

The supply and reliability of our power-generating infrastructure will be stressed and at risk due to President Obama's anti-energy policies.

Social Security and Medicare will still need to be reformed significantly to address long-term fiscal imbalances.

And the economy will encounter new headwinds as the landmines of tax increases with which Obama has salted the economic landscape are detonated. These include new taxes for Obamacare, the scheduled expiration of the Bush tax cuts, and the end of Obama's temporary reduction in Social Security withholding.

Obama has shown no indication of modifying his policies or agenda. Presumably, any of the Republican candidates would favor change on these issues (although perhaps not on Social Security and Medicare), but would he or she actually be able to solve these problems, even if there were a veto-proof Republican Congress?

The big political question for election year 2012 is: How much change would Republicans want? Would they downsize government as much as Obama upsized it? Will Republicans nominate a safe, moderate candidate (think: Ford, Bush, and Dole) - a technocratic tinkerer who accepts the entrenched paradigm of Big Government, and seeks to manage Leviathan better than Democrats would? Or will they opt for an unabashed conservative, a major reformer with a radical vision for smaller government?

That question wasn't even conceivable a year ago, but the tectonic plates in the American political landscape may be starting to shift. Whiffs of radical reform are in the air.

Herman Cain, who favors a three-step plan to replace the income tax with a national sales tax and the privatization of Social Security, has risen in the polls since his impressive victory in the Sept. 24 Florida straw poll.

On Sept. 27, Newt Gingrich unveiled his "21st Century Contract With America," proposing to replace such venerable bureaucracies as the National Labor Relations Board and the Environmental Protection Agency. In doing so, Gingrich dared to challenge two of the most powerful Democratic special interest groups in America, environmentalists and labor unions (the strangest political bedfellows in our country, since hardcore greens would eliminate jobs in industry if they could).

It is possible that the bold proposals of Cain and Gingrich are just so much noise - red meat offered by dark horse candidates designed to excite passionate conservatives, but that are anathema to Republicans who believe that a more centrist nominee would be more electable?

Another possibility is that a majority of Republicans will regard the 2012 election as an existential crossroad for our country, a last chance to change direction before we end up like Greece - financially bankrupt, economically moribund, and politically convulsed. In this scenario, just as the Democrats in 2008 nominated a man of the left, Obama, rather than a more centrist candidate, so the GOP will nominate an anti-Obama, a true-blue conservative as committed to a radical swing to the right, just as Obama pushed a radical swing to the left.

If the political pendulum swings far enough to the right to produce a 2012 conservative electoral landslide, and then Republicans follow through with bold cuts in federal spending and power, the years 2013 and 2014 will be crucial. If conservative policies revive the economy quickly, then Republicans could hold on to their 2012 gains in the 2014 mid-term elections. If not, or if they step on too many toes, then there could be an anti-Republican backlash for moving too far to the right, just as voters punished Democrats in the 2010 elections for moving too far to the left.

If a sizable Republican majority were elected in 2012, would they "roll the dice" and risk political suicide by instituting major reforms? I imagine there is some serious soul-searching going on now. I wonder how many of them are grappling with the dilemma that must confront every office-seeker in a democratic electoral system: Should I do what will get me elected or re-elected, even if I know that the policies I support will weaken our country, or should I vote for what I know will help the country, even if it costs me my political career?

These next few years will be fascinating.

Short-Lived Euphoria in Europe

Thursday, Oct. 27, 2011, was a giddy day for European politicians and global investors. European Union officials announced a plan for addressing the EU's worst financial problems. There would be a partial write-down of Greek sovereign debt - a 50 percent haircut for private bondholders, but no haircut for governmental creditors (the political class looks after its own). In addition, EU officials unveiled a one-trillion euro (approximately $1.4 trillion) bailout fund purportedly to recapitalize European banks and insure against sovereign defaults.

Stock markets on both sides of the Atlantic soared on this news. Euphoria reigned - for a few days, that is. Just three trading days later, markets gave up all of the previous Thursday's gains and pessimism returned.

Two events in particular have precipitated this manic mood shift: Prime Minister George Papandreou announced that he will submit the EU bailout plan to a national referendum, and the financial firm MF Global Holdings, which had placed a heavy bet on European government bonds, has declared bankruptcy.

Even if these two Halloween surprises hadn't spooked the markets, the viability of the EU bailout plan was in doubt anyhow.

Europe's financial problems are immense and intractable. Greece is the focus of attention, but when you realize that Greece's national debt is around 350 billion euros - its entire GDP is only about 225 billion euros, which shows how hopelessly broke the Greek government is - and the announced bailout fund was for one trillion euros, you can see that most of the bailout fund isn't for Greece.

Spain and Italy combined are almost three trillion euros in debt and run chronic budget deficits. Significantly, since the bailout plan was announced, interest rates on sovereign Spanish and Italian debt have risen, indicating widespread skepticism that the bailout fund (if it materializes) would buy sufficient time for those governments to get their financial houses in order.

While detailed specifics about the bailout plan are vague, cautious skepticism is prudent - for two major reasons:

First, where will the vast sum of one trillion euros of bailout money come from? Certainly, no European government has that kind of money set aside for the proverbial rainy day. Even Germany, the undisputed economic leader of Europe, has a national debt of 70 percent of its GDP and is limping along with a one percent growth rate.

Bailout funds would have to come from a combination of creative forms of monetary inflation and clever financial and accounting engineering, much of it using more of the leveraged gimmicks that already have made both Europe's and the United States' financial systems so stressed and vulnerable.

Second, how realistic is it to expect all EU member states to finally start to abide by the terms of the Maastricht Treaty that they signed - the one in which they solemnly promised to keep sovereign debt and deficits far below current levels? How many of the electorates in these democracies will support government "austerity plans" - a significant reduction in the government handouts to which they have grown so addicted?

The modern welfare state is broke. As Herman Van Rompuy, the president of the European Council, has stated, "We can't finance our social model anymore." Government spending will have to be trimmed whether Europeans want it or not, but don't expect European voters to admit the inescapable economic facts and vote for belt-tightening.

It is because voters don't want to surrender government benefits that Papandreou's announcement of a referendum in Greece caused consternation and displeasure among the EU's political elite. The irony here is rich: How dare the leader of a democracy leave such an important decision to the people!

Personally, I think Papandreou did what he had to do. If he were to try to cram austerity down the throat of his compatriots, he would appear to be siding with foreign elites against his own people. The present simmering rebellion in Greece would increase, giving way to social chaos and the fall of Papandreou's government, thereby triggering the sovereign default that Europe's leaders understandably want to avoid.

If Greeks vote against the terms of the bailout, Greece will default. If they approve the plan, then a Greek sovereign default may be delayed (not eliminated - Greece is too far gone to rescue). Even if we remove Greece from the equation entirely, events in Spain, Italy, Portugal or Belgium might trigger the dreaded chain reaction of bank and sovereign bankruptcies.

Decades of government intervention into economic activity have produced economic distortions, sluggish growth, an unsupportable debt burden, and a rotten financial structure ready to collapse of its own dead weight. In spite of that record, most Europeans want more government. That's their choice. Like it or not, sooner or later, we reap what we sow.

We've Been ZIRPed

It isn't easy to earn interest income these days. Interest rates on government T-bills, banks' savings accounts, and certificates of deposit are microscopic. You can blame our government and central bank. They have "ZIRPed" millions of American savers. Here are the details:

According to the U.S. Treasury Department, the average interest rate paid on federal debt, as of July, was just under 2.4 percent, implying an annual interest expense on $14.5 trillion of debt of nearly $350 billion. (Net debt, subtracting intra-governmental debt is lower; actual debt, including off-budget items, is higher.) If the average interest rate rose to 5 percent, the annual debt burden would rise correspondingly to well over $700 billion and consume approximately one-third of total federal revenues.

At some point, higher interest rates would consume such a large portion of federal revenues that only massive dollar creation by the Federal Reserve could provide funding for government's myriad programs. Washington simply cannot afford interest rates to rise, and therefore, the Fed will keep them abnormally low for as long as possible. In essence, the Fed has declared an end to a free market in interest rates.

The market price of interest rises when demand increases relative to supply and falls when supply increases relative to demand. Today's record-low interest rates imply that the supply of money saved, i.e., capital, is abundant relative to the demand for capital. It isn't.

Today's low interest rates are not the result of superabundant capital, but are the result of massive intervention by the Federal Reserve System. In response to the financial panic in 2008, the Fed adopted what is known as ZIRP - a "zero interest rate policy." This August, Fed Chairman Ben Bernanke announced his intention to maintain this policy for two more years. Doubling down on this engineered low-interest-rate policy, on September 21 the Fed announced "Operation Twist" - its plan to force down long-term interest rates even more.

Without Fed intervention, the supply of savings - genuine capital - would not be sufficient to finance and refinance all of the world's debt. Interest rates are this low only because the Fed has been using its extraordinary powers to boost the supply of capital with "fiat capital" - money that nobody has earned and saved, but that the Fed conjures up ex nihilo.

As with the supply of capital, Federal Reserve interventions, along with various government interventions, have manipulated the demand for capital. If the U.S. Treasury had to compete with vigorous private demand for capital, interest rates would rise, so it has been necessary to squelch private demand.

Government and its central bank have suppressed demand for capital in several ways:

First, the torrent of anti-wealth policies unleashed by the Obama administration have produced the "turtle phenomenon" - many businesses have gone into shells, postponing plans to open or expand until the cloud of uncertainty and fear of arbitrary wealth-destroying policies blow over.

Second, the Fed has been paying interest (albeit a modest .25 percent) on banks' excess reserves, and that has reduced the incentive for banks to lend those funds.

Third, there is abundant anecdotal evidence that banks have been rationing credit so severely that even low-risk customers often are denied loans.

American savers are taking it on the chin. With interest rates on Treasury debt being ultra-low, when you factor in inflation and taxes, savers are paying the Treasury to hold their money instead of earning a positive and market rate of interest. By creating artificially low interest rates, the federal government benefits by making artificially low interest payments on its massive amount of debt. In effect, ZIRP is bailing out our bankrupt government at savers' expense. This is one way that wealth is being "spread around" in the age of Obama.

By ZIRPing us unrelentingly, the Fed is proving that it is no friend of the people. To paraphrase the Gettysburg Address, the Fed is a tool "of the [government], by the [government], for the [government]." One is tempted to add: [May it soon] "perish from the earth." *

Saturday, 05 December 2015 04:43

Hendrickson's View

Hendrickson's View

Mark W. Hendrickson

Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are from V & V, a web site of the Center for Vision & Values.

Gold's Meteoric Rise

The price of gold has gone on a tear this summer, from slightly under $1500 per ounce to well over $1800 per ounce, and it looks like it wants to go higher. What gives?

Well, if you bought gold last spring, you're looking pretty smart. And if you bought gold a decade ago at $300 per ounce, you're looking like a whiz. Imagine buying a stock 10 years ago, having it appreciate fairly steadily over the decade, and then watching its price increase in less than two months by more than your original purchase price. For a commodity to increase at such a rate is truly extraordinary, even portentous.

For an investor, gold is an insurance policy, a way to preserve some purchasing power regardless of what happens to the official currency or a country's banking system.

For a society, the rising price of gold is not a good thing. When investors flock to gold, it means they are not investing in wealth-creating enterprises. Money (which is what gold is once again becoming) is the oil that enables a country's economic engine to run smoothly. Gold can't make our country wealthier any more than engine oil by itself will get you from point A to point B, so while owning some gold may be individually prudent, it won't make our country more prosperous.

Gold is a barometer that warns of financial and political storms. When its price goes up as much as it has this summer, it is telling us that our country is in deep, deep trouble. "Gold's meteoric rise" is just another way of saying "the dollar's sickening plunge." Because the dollar is our normal frame of reference, we think more in terms of the price of gold rising than the value of our currency falling. Gold provides a mirror image to the dollar, and the golden mirror is telling us that the Federal Reserve Note is critically ill.

Actually, the dollar has been sick for a long time. Forty years ago this month, President Richard Nixon "closed the gold window" - that is, the United States defaulted - yes, "defaulted." Nixon broke our country's solemn promise to redeem our foreign trading partners' paper dollars for gold. There had been another default in 1933 when President Roosevelt "closed the gold window" domestically by refusing to let Americans exchange paper dollars for gold (Americans were free to own gold again without restrictions in 1975). Indeed, FDR even made it illegal for Americans to own gold, just as the Soviet Communists forbad Russians to have dollars. But August 15, 1971 was the day that the dollar's last link to gold was severed.

Nixon's decision to default began the slow death process that is the inevitable fate of fiat currencies. It also means that we have been engaged in a partial default on our debts for the last 40 years, for we have been repaying our debts with Federal Reserve Notes that have less purchasing power than what we borrowed.

The dollar has now begun its death throes. (Don't panic, the process could take years.) The perception of increased likelihood of U.S. default by monetary debasement, triggered by the pathetically ineffectual debt-ceiling agreement earlier this month, has shaken the confidence of millions, if not billions, of people in Federal Reserve Notes. People just don't believe that our government will get spending under control. They have doubts about the paper Federal Reserve Note and, by extension, the "faith and credit" of the government whose creditworthiness undergirds the Federal Reserve Note for better or for worse.

Some may argue that gold is irrelevant and that the dollar really hasn't taken a hit because its exchange value against a basket of foreign currencies has remained fairly steady this summer. This is hardly reassuring.

The currencies from smaller-GDP countries don't compete with the dollar. What is your average American or European going to do with South Korean won or Mexican pesos? The only two currencies that compete with U.S. dollars are the euro and the Japanese yen.

Europe is a mess, suffering multiple sovereign-debt crises. The E.U. is on life-support and the euro could implode, yet the dollar can't rise against it. This is a sign of incredible dollar weakness, not strength. The yen has been the strongest of the three, which is astounding, since Japan has a debt-to-GDP ratio more than twice as high as ours and has been devastated by March's massive natural/nuclear disaster. If Japan, with its massive economic problems, is deemed the strongest major currency in the world, then the world's fiat currencies are a joke, and it is no wonder that the price of gold is setting new record highs.

Buckle up, folks. Things are getting very interesting, and it isn't going to be fun.

The Limits to Bernanke's Power

As chairman of our country's central bank, the Federal Reserve Board, Ben Bernanke is expected to put the economy on a sound footing and foster strong economic growth. Unfortunately, Bernanke faces "mission impossible" - partly because the policies implemented by Congress, the president, and bureaucrats account for much of what happens to the economy, and partly because the Fed has already done most of what it can do.

The Fed's favorite policy for stimulating economic activity is to lower interest rates to encourage individuals and businesses to buy more things and hire more workers. The problem today is that the Fed has already lowered interest rates about as much as it can. Currently, interest rates for U.S. Treasury debt obligations of one-year and shorter durations are at zero percent, and 10-year debt instruments yield only 3.125 percent. Despite these historically low rates, economic activity remains sluggish.

At his June 22 press conference, Bernanke said: "We don't have a precise read on why this slower pace of growth is continuing." His critics have been merciless and vicious in heaping scorn and derision upon him. Some have labeled him an "idiot" or "evil."

While I am no fan of Ben Bernanke or the Federal Reserve System, the name-calling is revolting. Intellectuals can be blinded by their theories, and one of the blind spots that Keynesians like Bernanke have (one shared by many members of the Chicago monetarist school) is that rapid expansion of monetary reserves is crucial to counteracting a recession. As the quick recovery from the severe economic and monetary contraction of 1920 demonstrates, a falling money supply need not lead to prolonged economic stagnation if there is flexibility in prices and wages so that supply and demand can quickly rebalance.

Even if Bernanke doesn't personally grasp why his monetary stimulus hasn't revived the economy, the Fed has plenty of researchers who could supply him with truthful talking points, such as, "there is still a housing glut," "spending is muted because the economy is saturated with debt," and "the uncertainty caused by Obama's anti-business policies has discouraged entrepreneurial risk-taking."

The problem is: Bernanke can't say those things. Unelected central bankers aren't supposed to meddle in the legislative process. (To his credit, Bernanke did warn Congress last year that it needed to get its fiscal house in order before there is a calamity.)

A more charitable interpretation of Bernanke's statement is that it was "Fedspeak" for the honest admission that, "The Fed can't do anything more to stimulate economic growth."

Here is Bernanke's problem: As of June 30, the Fed's "Quantitative Easing Two" program ended. Under it, the Fed had purchased approximately $80 billion of federal government debt every month since last fall. If nothing else changes, the removal of $80 billion of demand for government debt means lower prices for bonds and consequently higher interest rates.

Higher interest rates could abort a sustainable economic recovery. According to former director of the National Economic Council Lawrence Lindsey, if interest rates were to rise merely to normal levels (heaven forbid they should go higher!) the federal government's interest expenses would increase $4.9 trillion over the next decade. Thus, interest payments alone would consume over a third of Uncle Sam's revenue from income taxes. Spending on everything else, from entitlements to national defense, would be squeezed. Austerity, anyone? In short, higher interest rates must be avoided at all costs.

There are only two ways to avert a painful rise in interest rates in the post-QE2 environment. One would be for the supply of treasuries to fall. In other words, Congress and the president would have to agree on spending $80 billion less per month. Think: "snowball in hell." The other option would be if other buyers lined up to replace the Fed. But who could take up so much slack? The Chinese, Russians, and others are already reducing their purchases of U.S. debt, and the Europeans are engulfed in their own sovereign debt crises.

I wonder if Bernanke and Elizabeth Warren's new super-regulatory creature, the Consumer Financial Protection Bureau, will use their political leverage over financial institutions to compel them to borrow short-term treasuries to buy long-term treasuries on the grounds that not to do so would create systemic risk. Could Bernanke make a deal with European banks and governments, with whom the Fed has already been cooperating: You buy our debt, we'll buy yours, and we'll figure out how to stick the taxpayers with the cost later on? These are speculative musings, not assertions. Bottom line: either massive new buying of federal debt appears or interest rates rise, plunging a dagger into the heart of economic recovery.

Bernanke and the other powers that be in Washington are almost out of tricks to paper over our government's bankruptcy. Whatever you think of Bernanke personally, be grateful that you aren't in his shoes. He is fated to be a very unpopular individual.

Big Deal or No Big Deal?

As the August 2 deadline for a debt-ceiling deal drew near, many expected a big deal that would significantly change the direction of federal fiscal policy. After weeks of tumultuous negotiations, partisan bickering, and impassioned histrionics, the agreement that finally emerged was, to put it bluntly, no big deal. Ironically, the most accurate assessment I read about it was Russian Prime Minister Vladimir Putin's comment that it "was not that great overall because it simply delayed the adoption of a more systemic solution."

In exchange for raising the debt ceiling by another $2.4 trillion, federal spending will be cut next year by all of $21 billion (that's from projected increases, not an actual cut) and $42 billion (ditto) in 2013. It will be business as usual in Washington. Political gridlock has preserved the status quo of rapidly escalating federal spending and debt. After an unprecedentedly emotional rendition of what I term "the debt-ceiling dance," the big spenders prevailed yet again.

Washington's failure to forge a big deal over the debt-ceiling issue is turning out to be a very big deal for the rest of us. In a year when we are on target to pay more than $500 billion (close to 40 percent of personal income-tax revenues) in interest on the existing federal debt, our elected leaders have authorized $2.4 trillion in additional debt over the next year-and-a-half.

Anyone who thought that a debt-ceiling deal would reassure markets was sorely mistaken. Stocks cratered. Gold, which has been warning of serious political / economic / monetary malfunctions since its price was much lower, has exploded to over $1800 per ounce, signifying a grave deterioration of conditions.

One outcome of the debt-ceiling agreement has been Standard & Poor's downgrade of federal debt from the highest rating, AAA, to the still very high rating of AA+. Standard & Poor's announcement has turned out to be a really big deal, triggering panics in financial markets around the globe and eliciting indignant denunciations from Democrats and Republicans alike.

Team Obama adopted a "kill the messenger" tactic. Treasury Secretary Geithner cited a hastily produced CBO (Congressional Budget Office) statement asserting that S&P had made a $2-trillion miscalculation. Defenders of S&P claim that CBO manufactured the discrepancy by using a different time frame. Regardless, in today's fantasy world, when Uncle Sam is on the hook for a total financial shortfall of $75, $150, or $200 trillion - depending on one's time frame and other assumptions - $2 trillion, though a colossal number, really doesn't alter the picture.

The Senate Banking Committee appears to be trying to intimidate S&P by raising the prospect of a senatorial investigation.

Even conservative Republican Steve Forbes has blasted S&P. While Forbes is technically correct that the United States can't default, because the Federal Reserve can always create more dollars, cheapening the dollar amounts to a stealth default. Furthermore, a downgrade to AA+ in no way suggests that there is an imminent danger of default, but for S&P not to look down the road and report the possibility that all federal debts may not be repaid in full would be a dereliction of duty.

What has happened since the debt-ceiling agreement is that people around the world have voted "thumbs down" on the current government policy of racing further into debt. The agreement, as per President Obama's insistence, was designed to schedule the next debt-ceiling debate for after the 2012 election so that it wouldn't be a big deal in next year's political campaign. That is astounding. There could hardly be a bigger deal for Americans than making the choice between spending ourselves into the poorhouse and shrinking the federal leviathan to forestall such an outcome.

I anticipate that the debate over federal spending will be the principal election issue regardless of when the next debt-ceiling dance begins. If a majority of Americans want to be the Western hemisphere's Greece, a banana republic suffering from the mass delusion that government can economically support everyone indefinitely, then the Democrats will prevail. On the other hand, if a majority of Americans truly want less government, they will vote Republican (assuming the GOP can convince enough voters that they really would slash spending).

I wonder whether the GOP really would significantly cut federal spending. Ultimately, it is the voters, not the political parties, who decide how much government we'll have. Polls may show that a majority of Americans favor less spending, but the real test will be whether a majority of Americans will support reforms that include cuts to programs that personally benefit them. I hope I'm wrong, but I don't think a majority of Americans want that kind of change.

Solutions for the "Tax Gap"

In 2010, there was a "tax gap" - i.e., the difference between federal taxes owed and those actually paid - of $410-$500 billion.

Some of the gap stems from the complexity of the tax code. Much of it, though, is deliberate: self-employed individuals working for cash, table-servers under-reporting tips, taxpayers claiming unauthorized credits and deductions. And don't forget the highly paid White House, congressional, and federal agency staff (including some at the Internal Revenue Service) who, according to reports last year, collectively underpaid their taxes by tens of millions of dollars.

Unpaid taxes are unfair to the millions of taxpayers who pay their full tax obligation. What can be done?

Some suggest beefing up the IRS's budget and manpower. Many oppose this out of concern that an enlarged IRS would be like the Transportation Security Administration, making life miserable for millions of law-abiding citizens.

President Obama estimates that increased enforcement would capture 10 percent of the tax gap. That sounds accurate. Completely eliminating the tax gap is no more possible than completely eliminating waste and fraud from Medicare. When systems become as gigantic and convoluted as our tax code and the Medicare system, all the king's horses and all the king's men can't extirpate fraud, waste, and loss.

Since the tax gap is so intractable, we should investigate alternatives to the reflex political "solution" of hiring more government workers. I do not condone breaking the law, but if millions of otherwise law-abiding Americans are defying a law, then maybe something is wrong with the law itself.

Millions of Americans despise our tax laws. They believe that taxes are excessive and that the tax regime is arbitrary, discriminatory, and oppressive. One potential reform is to adopt a low, flat tax rate, such as those that Russia and other erstwhile Communist countries now have. Low, flat taxes reduce the incentive to cheat. Fewer people risk criminal prosecution for 12 or 15 percent of their income than when 28 percent or more is at stake. In addition to greatly simplifying the tax code (which would also reduce the portion of the tax gap resulting from miscalculations), a flat tax lessens the rebellion fueled by discriminatory progressive taxes.

An even more effective way to eliminate the tax gap would be the appropriately labeled "fair tax," which would replace all federal taxes on income with a national tax on consumption. The fair tax would restore taxpayer privacy, save the colossal amount of time spent calculating (or miscalculating) one's tax liability, and would bring the vast underground economy above ground into the taxpaying realm.

Either a flat tax or a fair tax would be better than the existing tax code, but the problem underlying the tax gap goes beyond our crazy, convoluted tax code. The fundamental problem is the widespread perception that our political system itself is immoral, dishonest, and corrupt.

Is it any wonder that taxpayers are cynical and demoralized when politicians routinely break promises; the government's own accounting watchdogs refuse to vouch for the accuracy of government's official budget figures; rich people and businesses with expensive tax attorneys and accountants can legally avoid taxes; and well-funded, politically-connected special interests get billions in handouts and bailouts from government?

Citizens perceive that our democratic process has degenerated into what H. L. Mencken dubbed an "advance auction of stolen goods." Trillions of dollars per year are redistributed according to who has power, connections, and lobbyists. American politics has become a never-ending donnybrook in which nearly everyone wants the government to make somebody else pay for the benefits they receive.

In the moral lawlessness that characterizes a redistributionist state, respect for property rights atrophies. When politicians, intellectuals, clergymen, the media, etc. demagogically denounce "the rich" and have the effrontery to call income that they grudgingly let a taxpayer keep "a tax expenditure," it is not a good situation for property rights. In this "every man for himself," "grab what you can get" culture, many individuals will defy the law.

The root cause of our elaborate, confusing, costly, maddening, and unfair tax system - and of the tax gap - is our delusional belief that we are entitled to a free lunch and our morally bankrupt insistence that government subsidize our lifestyles with wealth from others. Until we correct those errors and quit worshiping at the altar of Big Government, the tax gap will not go away.

Bernanke and the Potemkin Economy

On July 11, The Center for Vision & Values posted my article decrying the insulting name-calling directed toward Federal Reserve Board Chairman Ben Bernanke. The very next day, Bernanke made me question my forbearance by telling Congress that a third round of "quantitative easing" or "QE3" could be a near-term option.

Now it's my turn to call Bernanke a name, but I'll use a clinical label, not a crude one. He is an inflationist, although he may prefer the label "anti-deflationist." He so fears a deflationary spiral that he will create however many dollars he believes necessary to avert deflation.

Bernanke's repeated attempts to patch over the nation's economic weakness, rottenness, and dead wood with newly created dollars remind me of the "Potemkin village" ruse. The Soviet Communists duped foreign visitors into thinking that Communism was a viable and prosperous system by steering them to sham factories, stores, villages, etc. that appeared productive, bustling, and attractive. In reality, Potemkin villages were like movie sets, built to disguise the widespread poverty and backwardness that characterized life in the "workers' paradise."

Official statistics insist that the Great Recession ended two years ago. Yet unemployment is creeping up, record numbers of workers are remaining unemployed for record lengths of time, income is down for small proprietors, and millions of people feel as though the recession never ended.

It is a maxim that statistics lie. One such statistic is the gross domestic product. GDP has risen modestly the last two years, supposedly indicating growth rather than recession. Here is the flaw in GDP: By definition, GDP=C+I+G. In other words, GDP equals the sum of consumer spending, private investment, and government spending. (There is also a problematical addendum of net exports, reflecting the mystical mercantilist notion that a country is richer if foreigners obtain more goods and services than domestic residents do, but let's omit that here.)

In the last few years, GDP has increased by approximately one-third of a trillion dollars, while the government component has risen by closer to a full trillion dollars. That means that the private sector (consumption and investment) has shrunk. Government has cannibalized private sector spending and jobs. GDP creates a Potemkin-like superficial appearance of economic growth, but the private sector, the heart of the economy, is suffocating. The private sector share of GDP has contracted to its 1998 level.

Another Potemkin-like aspect of our economy involves the chasm between the economic fortunes of Wall Street and Washington on the one side, and Main Street on the other. Chairman Bernanke's QE1 and QE2 policies helped to propel a huge advance in the stock market over the last two years. The political and financial elite has been prospering, but, relatively speaking, aside from potentially unrealized gains in his 401K, that Fed-generated glitter may not have helped Joe Six-pack.

Here is what we need to understand: Bernanke and Co. have immense powers, but they don't have the right power. They can control short-term interest rates; virtually dictate the policies and practices of American financial institutions; artificially boost asset prices by purchasing whatever quantity of them they choose; bail out politically connected enterprises; and do many other things by virtue of their power to create dollars without limit. Yet, the one thing that Bernanke and the Fed cannot do is generate prosperity and thereby raise standards of living. They can benefit some at the expense of others by deciding which assets to purchase and where to deploy new dollars - that is, they can redistribute wealth, but they can't create it.

Question: Are there any grownups who really believe that our country can get richer by printing more money? If so, why not just mail everybody a check for $20 million? Even better, why not give every household its own little printing press so that whenever someone gets laid off or isn't generating enough income, he can create the wealth he needs by printing it?

There is really only one way out of Ben Bernanke's Potemkin-like economy. It isn't to replace Bernanke with a supposedly "better" central banker. Rather, we need to abolish the central bank and foreswear the fiat money that enables the Fed to create the cruel faade of Potemkin-like illusions on the rest of us. *

Saturday, 05 December 2015 04:39

Hendrickson's View

Hendrickson's View

Mark W. Hendrickson

Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are from V & V, a web site of the Center for Vision & Values.

Jefferson Versus Hamilton: The Continuing Contest

This Fourth of July marks 235 years since the Declaration of Independence was published. In this immortal document, the Spirit of 1776 was given its fullest, most eloquent expression. The Declaration is a timeless document, espousing eternal principles that, while forever historically identified with America, are universal in their application.

The Fourth of July provides an occasion to reflect on what it means to be an American. Since day one, there have been widely divergent views on those questions.

During the Revolutionary War, the colonists fell into three groups: those who desired independence from Britain, Tories who did not, and many who didn't care or couldn't decide.

The Second Continental Congress was so divided over the issue of slavery that the Declaration was almost stillborn. (The perfect Fourth of July movie is the musical "1776" - an excellent dramatization of that profound disagreement.) Many of the Founding Fathers abhorred slavery with every bone in their body. Those Founders are sometimes condemned today for having compromised with southern slaveholders, a retroactive judgment of 18th-century men by 21st-century values. Granted, the Founders didn't create the ideal society. They knew that. They expected subsequent generations to make improvements. But they did, mercifully, lay the foundation for a republic that would go on to bring more freedom to more people than any other political entity in history.

From the start, Americans have been divided between the visions and values of Founding Fathers Alexander Hamilton and Thomas Jefferson. That intellectual and political debate continues undiminished today. In fact, during a recent radio interview, the host asked me out of the blue, "Whose side are you on, Hamilton's or Jefferson's?"

The question is difficult to answer for two primary reasons: First, these two giants of America's Founding addressed a wide range of issues, so one may partially agree and partially disagree. Second, as Stephen F. Knott's 2002 book Alexander Hamilton & the Persistence of Myth demonstrates so ably, subsequent American thought leaders have invented their own versions of Jefferson and Hamilton. These versions have been based on their own political convictions and biases, including which books they themselves happened to read (each of those containing its author's own slanted view) and the tenor of the era in which they lived.

There is no definitive, indisputable interpretation of Hamilton and Jefferson, but I'll attempt a few generalities.

Foremost among these generalities, at the most elementary level, those who favor a stronger government in Washington are more likely to be Hamiltonians and those who favor a weaker government, Jeffersonians.

In reply to that radio host's question, I said that I leaned toward Jefferson. In this era of Big Government that is suffocating liberty, devouring our economic substance, and is joined at the hip with big banks, Jefferson's inspiring defenses of liberty and impassioned warnings about government are timely. Nevertheless, I have my differences with Jefferson, such as his endorsement of the French Revolution. My sense is that Jefferson's strong suit was his idealism, whereas in practice he was, at times, inapt or inept.

While I have serious misgivings about Hamilton's vision for government, I think he gets a bum rap when some accuse him of having been an antidemocratic monarchist. Yes, he distrusted certain elements of democracy, but so did most of the Founding Fathers, including James Madison. Hamilton believed in some degree of a government partnership with business, but, like other Founders, he supported a Constitution that, unlike old world governments, did not erect barriers designed to keep poor Americans poor. Hamilton was an elitist, but he was an elitist by accomplishment, and not (at all) by birth.

One of the ironies of the Jeffersonian/Hamiltonian divide today is that the two major political parties have flip-flopped on their historical positions. Up until the 1950s, Democrats tended to be Jeffersonian. They opposed tariffs and other government favors for moneyed interests. Republicans, who tended to be Hamiltonian in their use of government to shape economic development from the party's Founding through Herbert Hoover's presidency, now have many leading figures with strong Jeffersonian sympathies. Today's Republicans generally share to some degree Jefferson's aversion to Big Government, the great threat to liberty and prosperity.

Finally, in the Hamilton/Jefferson debate, one of the few points that enjoys nearly universal acceptance is that both men were geniuses. They both played defining roles in the Founding and formation of the United States of America. However much we may disagree with one or the other, they were great Americans and we are blessed to have had them both as Founding Fathers.

Happy birthday, America!

Thanks, Pop

Father's Day is a poignant occasion for me, as for many. I never knew my biological father, who died in an accident. Mom and I lived near Detroit with her oldest sister and her husband, who were childless. That's how I got a Pop.

Pop was larger-than-life. Born in Nebraska in 1904, he epitomized the strong, silent prototype of the era. As a father-figure, he was stern and strict - no touchy-feely stuff. Pop believed that the school of hard knocks was the best educator. Disdaining cautionary warnings, he stood aside while I took my knocks.

Pops lived for duty. There was right and wrong, and it was his duty - and mine - to do right.

He didn't get along with my mother, but we were in need, and he fulfilled what he perceived as his familial duty by sharing his home.

He whole-heartedly embraced his patriotic duty to country:

He defied his German immigrant father, who, like many, opposed President Wilson's declaration of war against Germany in World War I.

He served three years in the Pacific on the antique submarine U-39 in the mid-1920s.

He remained active in the naval reserves for 15 years.

He returned to active duty for five years in World War II, shunning the desk job he could have had due to being older and having a wife, and volunteering instead to be on the aircraft carrier Essex, which took more enemy fire than any American vessel.

In the mid-1950s, to provide Distant Early Warning of Soviet missile attacks, he volunteered to work in the Arctic on the DEW Line, overseeing construction of radar installations every 50 miles for 4,000 miles at the "top" of North America. This job entailed two 10-hour shifts some days, living in spartan Quonset huts during months of prolonged darkness, taking bucket baths in tents when temperatures were 40-60 degrees below, and repeatedly being on airplanes that cracked up landing on the ice.

Pop's philosophy was that we all have to die someday, and what could be more worthwhile than dying to defend what is right? That attitude carried over to civilian life.

Once Pop had a run-in with the notorious Detroit-area mobster Santo "Sam" Perrone. Pop owned a quarter-section of land up north that was his deer-hunting retreat. He built the cabin, with the primary wall decoration being a twisted piece of metal from a kamikaze plane that had crashed onto the Essex. Perrone happened to be his neighbor. When Pop learned that Perrone's men were poaching deer on Pop's land during the off-season, Pop drove over to Perrone's place. Sam came outside pointing a handgun. Pop was prepared. He lifted his hand into the window opening of his car with his own gun cocked. "Are you willing to trade, Sam?" There was no more poaching.

Pop did things his way. One year, the guest speaker at the annual father-son dinner at my boarding school was Terry McDermott, the only American gold medalist at the 1964 winter Olympics. Everyone gave him a standing ovation, except Pop. I guess Pop figured he had risked his life multiple times in service to his country while all that McDermott had done was skate fast. I still think Pop's act lacked grace, but the lesson he imparted was never be afraid to be different.

At the next year's dinner, a senior in my dormitory and his dad sat across from us. It was Mitt Romney and his father, George, then Michigan's governor. Pop's philosophy was that the purpose of sitting at the dinner table was to "put on the feedbag," not to make small talk, and so he never said a word to the governor, even though I'm almost certain he voted for him. Pop felt a duty to attend such functions, not to enjoy them.

Pop went above and beyond the call in caring for his two wives, both of whom he dearly loved. He had 38 years with my beloved aunt, and as the cancer of the spine ate away at her, he contorted himself in bed to provide her maximum warmth.

Years later, when he and his second wife, Katie, were both 90, Katie became incapacitated. Pop was a one-man 24/7 nursing squad. He lost 25 pounds, needed a walker, and finally did the unthinkable: He called me for help. He promised Katie he would outlive her so he could care for her.

After Katie's passing, Pop resumed his deer-hunting outing. The "man who never missed" shot his last deer at age 92. He quit because his joints were deteriorating. He felt that if he couldn't haul the carcass unassisted, he had no business shooting an animal.

With Katie gone, Pop's life lacked purpose and duty. We urged him to live with us, but he would never surrender independence. At 94, we had to take away his car keys when he began suffering fainting spells because of mini-strokes.

That was it for Pop. He lived a strict creed: NEVER be a burden on others. In the presence of two neighbors as witnesses, he asked me to shoot him. I told him I couldn't do it, and so Pop stopped eating and left this world a month later.

Happy Father's Day, Pop. And thanks.

The High-Stakes Showdown Over Medicare Reform

The trustees of the Medicare system recently reported that the program will go broke in the year 2024 - five years sooner than was projected just last year.

The millions of Americans who have been counting on Medicare to be a reliable, stable guarantor of affordable healthcare in their senior years should be asking themselves, "Who is responsible for this predicament?" The short answer is "lots of people," but let's start by looking in the mirror.

The shameful status of Medicare brings to mind a sequence in the movie "Animal House." A freshman pledge, Flounder, let some upperclassmen in the fraternity use his brother's brand-new Lincoln for a road trip. Naturally, the brothers trashed the car. As Flounder wept in regret, the suave, smooth-talking senior, Otter, put his arm around Flounder's shoulder and explained the facts of life to him: "You [goof]ed up; you trusted us." ("Goof" replaces the original R-rated verb.)

"We the people" have goofed up big time, trusting a government bureaucracy to oversee our healthcare.

When will we learn that gigantic bureaucracies - undisciplined by the profit-motive and insulated from the normal competitive pressures of the marketplace - are inherently inefficient?

And when will a majority of Americans take a sober look at Uncle Sam's track record and recognize his chronic incompetence? Consider:

Government meddling, abetted by misregulation and a compliant Federal Reserve, generated the housing bubble/bust that has caused the market value of most Americans' most valuable asset - their home - to decline, plunging millions into negative equity.

Chronic federal overspending has impelled a weaker currency and higher prices of daily necessities.

The quackery of government stimulus spending has produced anemic economic growth; the usual result when the government share of a country's GDP dramatically expands.

The government-run Social Security Administration will henceforth operate in permanent deficit - a grotesque malfeasance that would have resulted in the imprisonment of private executives who perpetrated such a swindle.

With a record like this, how could anyone trust government to get it right on healthcare? The big question now is: Why are so many Americans opposed to Congressman Paul Ryan's attempt to put Medicare on sounder financial footing?

Part of the resistance to fixing Medicare may be simple partisan loyalty - i.e., Republicans are the enemy; oppose everything they propose.

Part of it may be fear of change.

Part of it may be the seductive belief of "the free lunch" and a corresponding belief that Congress simply has to raise taxes on somebody else to obtain necessary funds.

Part of it may be that Americans believe, "We paid for it, so it's ours." Well, yes, we've been paying for Medicare via payroll deductions for decades, but no, our promised benefits remain unfunded due to government mismanagement. (We [goof]ed up; we trusted them.)

Part of it may be what economists call "short time horizons" - that is, focusing on the short run instead of the long run. Many seniors tend to do this. So do many politicians with their fixation on the next election. In economics, short-time horizons are highly correlated with poverty; in other words, ignoring the long term is why many people are poor.

Many of those on the extreme left oppose reforming Medicare for another reason entirely: they desire a state-run monopoly of healthcare. They prefer a socialized healthcare model. To attain that goal, the left needs to merely block reforms to Medicare. Gridlock and stalemate will assure Medicare's eventual bankruptcy and therefore its subsequent nationalization (a la Fannie Mae and Freddie Mac).

Early polls show stiff resistance to Congressman Paul Ryan's proposed Medicare reforms. If the Republicans can sell the public on the need for reform, then Medicare's solvency may be prolonged. If the public repudiates Ryan's plan by returning a Democratic majority to the House while re-electing Barack Obama to the White House, then a government takeover of the healthcare industry is all but assured.

The stakes in the next election are enormous. The Medicare reform contest could be the one for all the marbles.

My Congressman's Tough Job

Being a congressman can be a great job. It can be attractive for someone who relishes the ersatz virtue of playing Santa Claus with other people's money, who finds a year-round routine of fund-raising social events enjoyable, and who covets receiving one of the most generous pensions on the planet. It can also be a great challenge for someone who didn't pursue the job for those purposes.

Consider my congressman, first-term Representative Mike Kelly (R-PA). (Full disclosure: I voted for him and contributed to his campaign.)

Kelly is an interesting case. He didn't need Washington. Already set financially from his successful automobile dealerships, satisfied with the joys of living close to his family, Mike Kelly didn't need the money, fame, prestige, or power of a congressman. He would have been happy to enjoy the good life he already had, watching his grandchildren grow up. He gave a lot in order to go to Washington belatedly, at age 62, but he did it in the hope of stopping a runaway federal government before its insane policies produce a calamity.

Having recently attended one of Kelly's town-hall meetings, it is clear that he has been dealt a herculean task. First, he has the extremely difficult task of convincing many of his constituents that the federal government has to spend less, not more, in order to avert economic ruin. Based on what I saw and heard at the meeting, the odds are against him.

A conservative gentleman craved a government policy - certain to cost tens of billions of dollars - to convert our national automobile fleet to run on natural gas. A liberal lady wanted new federal spending on educational training. They meant well, I know, but I felt like asking, "What part of 'we're broke' do you not understand?"

Kelly related a phone conversation that he had with a couple in their 80s: They begged him not to support Paul Ryan's plan to reform Medicare, even though the plan doesn't touch benefits for anyone over 55. They were opposed to any plan that would increase consumer choice; they just wanted the government to tell them what to do.

More resistance to downsizing Big Government was typified by a lady who felt we could afford the ongoing federal spending binge if only we would raise taxes on "the rich" and on oil companies allegedly making profits of "38 percent."

Alas, this anti-capitalist religion is founded on myths. Big Oil generally makes 7-8 percent profits, and earned 6.1 percent in the most recent quarter - enough to place their industry 112th after publishing, software, telecom, biotech, steel, restaurants, beverages, and other capitalist demons. Exxon, the biggest of Big Oil, has paid more in taxes on U.S. operations during the last five years ($59 billion) than government has allowed them to keep as profits ($41 billion).

As for "the rich," whose percentage of total income taxes paid actually rose after the Bush tax cuts, you could take 100 percent of their income and still not eliminate the deficit. Rep. Kelly is going to have a difficult time curbing federal spending when many voters believe that they are morally justified in operating on the "principle" of "He has it, we want it, and we have more votes."

Also standing in the way of Kelly's goal of shrinking government deficits are many, perhaps most, of his congressional colleagues, who take the line of least resistance and vote for government largesse for so many who simply appeal and lobby for it.

Another formidable obstacle to the general goal of curbing Big Government before it ruins us is a president who has the opposite goal. President Obama is so committed to expanding government that he continues to call for new programs and has proposed no serious reforms of Medicare - a program whose costs are likely to increase exponentially in the future.

As if government-addicted constituents, a divided congress, and an obstinate president don't make shrinking government seem like "mission impossible," Mike Kelly and his colleagues have to contend with the entrenched power structure of Washington's leviathan bureaucratic state. Trying to curtail bureaucracies' expensive excesses is like the game Whack-a-Mole. For every abusive regulation that Congress is able to rescind - such as the EPA's recently annulled rule that dairy farmers take costly oil-spill prevention measures (on the astounding ground that milk contains a type of oil!) - the bureaucracies promulgate dozens of new regulations.

I admire Rep. Kelly's courage in waging this uphill battle. He's trying to save his constituents from a runaway government, but many would rather run away with the largesse that government gives them.

Swindling America's Youth

We older Americans have saddled our youth with a mind-boggling public debt - over $20 trillion already spent ($14.3 trillion of "official" national debt plus various off-budget expenditures, according to the U.S. Treasury); trillions more of projected deficit-spending over the coming decade; and tens of trillions of dollars of unfunded liabilities.

By the time today's toddlers can vote, it is likely that both the Medicare and Social Security funds will be exhausted. Many of today's older Americans vehemently oppose any and all attempts to restructure those entitlement programs to extend their viability. Instead, the graybeard generation expects younger Americans to endure the oppressive tax burden that will be needed to keep the entitlement promises fully funded.

My generation should be ashamed of what we have done to younger Americans. No, we haven't sold them into child prostitution, but we have placed them in bondage to the most massive debts in world history. We have led these innocent lambs to a financial slaughterhouse.

To add insult to injury, we show our lack of regard for the young by regarding them as second-class citizens in bankruptcy law. A middle-aged businessman with decades of experience can make mistakes and be relieved of his debt burden by a bankruptcy judge. By contrast, a nave, inexperienced teenager, who borrows money for college, then can't earn enough to pay back all the loans, is stuck for life, because college loans, unlike business loans, are not eligible for forgiveness via bankruptcy. The overall, unspoken message is clear: The youth are our society's indentured servants, in permanent debt servitude to their elders.

The young will never make good on all of the federal government's mountains of debt and unfunded promises. These debts won't be paid because they can't be paid; there simply isn't enough wealth in the country for this to be possible.

If the debt burden continues to mount, eventually the young will perceive the enormity of the burden that older generations have imposed on them, and there will be a backlash. They might rebel against the crushing debt burden by repudiating it - an outright default. However, I doubt it will come to that. Uncle Sam has already started to default on those debts - not explicitly, but stealthily, by having the Federal Reserve inflate our debts away. It is likely that there will be a hyperinflationary blow off or a deflationary implosion, either of which will extinguish trillions of dollars of debt before many of today's children are grown.

Few things could tear a society apart more than having the economic interests of young and old arrayed against each other. Yet this is the inevitable bitter fruit of chronic deficit spending and unending accumulation of debt.

Our Founding Fathers warned of this danger. In his Farewell Address, George Washington urged Congress to strive to quickly retire debts resulting from occasional and hopefully infrequent wars instead of "throwing upon posterity the burthen [sic] which we ourselves ought to bear." Thomas Jefferson could think of few things more unjust than loading the living generation with the debt of those who have already died. Writing to John Taylor in 1816, Jefferson wrote that "the principle of spending money to be paid by posterity ... is but swindling futurity on a large scale."

Rather than sentencing today's younger Americans to a lifetime of bondage to debts that we have incurred, justice and mercy suggest that we need to retire the federal debt burden. We must begin shrinking federal spending this year. If we don't slay the debt monster, our children may someday - and justifiably - curse us.

The Global Energy Superpower

Saudi Arabia has long been the dominant producer of petroleum on the planet. Nature endowed the Arabian Peninsula with gigantic deposits of this vital source of energy. Many of us have lamented the quirk of nature that placed much-needed oil in the most geopolitically unstable region in the world.

Although Saudi Arabia is the king of oil producers at present, there is another country that has far more extensive deposits of fossil fuels. Because fossil fuels are the most economical and reliable energy sources known to man, the country that has the largest share of them is fortunate indeed. What is this richly endowed country? It is none other than the United States of America.

Perhaps you have heard the United States described as "the Saudi Arabia of coal." Actually, that may be an understatement, for while the U.S. Department of Energy estimates that the Saudis have 20 percent of the world's known petroleum reserves, the United States has an even larger share - 27 percent - of the world's known deposits of coal. As engineers continue to develop more and more "clean coal" technologies, this abundant resource will continue to serve our energy needs for as long as we need it.

In addition to our immense coal deposits, the United States contains gigantic natural gas deposits. Currently, the United States ranks fourth in natural gas production, but domestic reserves are soaring as horizontal drilling and "fracking" tap the mind-boggling dimensions of the natural gas fields located here in Pennsylvania (the Marcellus formation), Louisiana (the Haynesville formations), and elsewhere across the lower 48. If fracking can be done without contaminating precious water supplies, it is possible that the United States may also become "the Saudi Arabia of natural gas."

There is even more good news: Besides being the Saudi Arabia of coal and potentially natural gas, we may become the next "Saudi Arabia" of oil. This won't be the light, sweet crude that the Saudis pump at little cost and with relative ease, but it's oil nonetheless. The Green River shale rock formation under just three of our states - Colorado, Wyoming, and Utah - is estimated to hold 1.8 trillion barrels of oil, about seven times as large as the Saudis' crude oil reserves.

Beyond the vast petroleum deposits in the Green River formation, we have the Bakken field in North Dakota and Montana, where ever-more reserves are being found, the untapped deposits in Alaska, the continental shelf, and other existing fields in the lower 48 states. Add to those immense reserves yet-to-be-discovered petroleum deposits and technological improvements, such as those that improved recovery rates from 20 percent to 35 percent of oil deposits in recent years (yes, that means that most of the oil is still there), and you can see that the prospects for domestic oil production are mind-boggling.

Ours is a case of geological good news and political bad news. We have under our feet the world's greatest treasure trove of energy supplies. The bad news is, we have a president and a party that have made it their full-time policy to obstruct, thwart, and forbid extraction of those immense resources, while encouraging other countries to drill, drill, drill.

We have all that we need, friends. We just need the freedom to go get it.

Millionaires in America

Recently, CNN's Money.com posted an article bearing the title, "U.S. Millionaires Population Expanded by 8 Percent in 2010." According to the article, there are now approximately 8.4 million millionaires in the United States, and last year's increase was due primarily to rising stock prices, following a 27 percent decline in the number of millionaires in 2008 due to the stock market's plunge that year.

What is one to make of this information?

There were only a few thousand millionaires in the United States in 1900. One would expect there to be many more today with the enormous economic growth of the last 110 years. On the one hand, there would be even more millionaires today had progressive taxation not prevented millions of Americans from accumulating more wealth. On the other hand, there would be considerably fewer millionaires were it not for the effects of inflation.

Adjusting for the increase in the Consumer Price Index, it would take a net worth of about $25 million today to be the economic equivalent of a millionaire in 1900. Clearly, being a millionaire today does not support the lifestyle that it did a century ago.

Leaving out the market value of one's primary residence, the number of American millionaires today would fall by more than half. Many millionaires are land-rich or house-rich, but middle class in terms of liquid assets.

As the article reported, many Americans rise into and fall out of millionaire status as the stock market fluctuates. Their millionaire status is rather tenuous - "here today, gone tomorrow"-subject to the capricious gyrations of financial markets. Easy come, easy go, that paper wealth.

The fact, though, that last year's increase of millionaires is attributable to stock-market gains is troublesome. Federal Reserve Chairman Ben Bernanke stated that today's higher stock prices show that his QE2 policy of inflating the monetary base has been successful. This raises questions of legitimacy, for it was never the Fed's legislative mandate to pump up stock prices, as well as questions of fairness - if Bernanke is using his power to enrich stock-market investors. I am concerned that these facts will stir up resentment at millionaires in general. There are already too many Americans who have a negative, even hostile, attitude toward the rich.

As a free-market economist who believes in America as the Land of Opportunity, I hope our country continues to prosper and produce even more millionaires. Indeed, these two phenomena go hand in hand, rising together interdependently. However, an absolutely crucial distinction must be drawn here.

From a true free-market, capitalist perspective, there is a legitimate way to become a millionaire (the economic) and an illegitimate way (the political). The economic way is the old-fashioned way: One earns his or her fortune as a reward for sharing one's talents and products with others, by excelling in service to one's fellow man in an open, free, competitive marketplace. The "soak-the-rich" ideologues think these achievers deserve to be subjected to punitive taxation for having dared to earn so much. Is it really a valid theory of justice to punish success in benefiting others? Is rendering service to one's fellow man somehow objectionable or morally suspect? I think not.

The political approach is an entirely different matter. This is the far-too-common practice that economists call "rent-seeking" behavior: individuals and corporations using their political connections to rig the market to enrich themselves - things like bailouts for Wall Street firms, giant subsidies, federal regulations that require use of a particular product that a politically-connected firm just happens to make, etc.

Rent-seekers don't profit by serving their fellow man through voluntary exchange, but by milking the taxpayer through manipulating the political process. Rent-seekers prosper from political connections and privileges that the rest of us don't have. This is patently unfair, and most definitely is not free-market capitalism, contrary to the false assertions of the anti-capitalist left. Indeed, free-market economists going back to Adam Smith have warned us about businessmen exploiting the political system to enrich themselves at everyman's expense.

Let us respect those who earn their millions in free, honest commerce; let us end the socialistic practice of government determining economic winners by channeling favors and funds to favored clients. The former is the fulfillment of the American Dream; the latter is its repudiation.

Who Objects to Free Speech?

Free speech has always been one of our most cherished rights. It has come under attack repeatedly by those who find it to be an inconvenient and unwanted obstacle to the attainment of their political goals. Sometimes, those in positions of power ignore the First Amendment and issue laws and regulations to silence their opponents. Other times, politicians or citizens work on an unofficial level, resorting to influence or intimidation to achieve censorship.

President John Adams signed the Sedition Act to criminalize "false, scandalous, and malicious writing" against the government or its officials. Americans didn't like the federal government censoring expression or presuming to determine truth, so they canned Adams in the next election.

Abraham Lincoln jailed newspapermen whose comments on the Civil War were not to his liking.

In 1935, Franklin Roosevelt signed the National Labor Relations Act, effectively curtailing employers' freedom to talk with their own employees about their company's financial condition and the affordability of wages and benefits.

Both Roosevelt and Richard Nixon imposed various wage and price controls. Since prices are the language through which present value is communicated between potential buyers and sellers, they essentially banned a form of free economic speech.

The assault on free speech seems to have accelerated in recent years. Freelance censors on the left have prevented dozens of conservatives from giving scheduled speeches on college campuses by shouts, chants, and even physical aggression.

A favorite tactic of global-warming propagandists has been to try to suppress dissenting views by urging reporters to ignore opposing viewpoints. Stephen Schneider, from his well-funded government perch at the National Center for Atmospheric Research, called it "journalistically irresponsible to present both sides" of the story. Al Gore used to tell journalists not to waste time interviewing global-warming skeptics.

Under the Patriot Act, the FBI is empowered to issue gag orders against those whom they investigate - even harmless little old ladies. (See Judge Andrew Napolitano's YouTube clip.)

The Obama administration seems particularly unfriendly toward free speech. Consider just a few examples:

* The president's FCC diversity officer, Mark Lloyd, has lamented that private media companies almost thwarted Hugo Chavez's "incredible" revolution in Venezuela, and wants to impose punitive fees on radio stations that broadcast conservative talk shows, lest they interfere with the accomplishment of the Obama revolution.
* The president's Secretary of Health and Human Services, Kathleen Sebelius, publicly warned health-insurance companies that there would be "zero tolerance" for statements that contradicted the official party line on Obamacare.
* In December, the Federal Communications Committee (on a party-line 3-2 vote) imposed "net neutrality" - an innocuous-sounding phrase that disguises the elementary fact that the government wants some control over the Internet, the kind of power that the Chinese government has. (Incidentally, Verizon has filed suit against this unconstitutional power grab.)
* In his book, Democracy and the Problem of Free Speech, President Obama's head of the Office of Information and Regulatory Affairs, Cass Sunstein, asserted, "the First Amendment . . . is not so much a matter of protecting rights as ensuring sound public judgment through the process of public deliberation." Sunstein believes that "people should be exposed to materials that they would not have chosen" and favors policies like federal guidelines for coverage of public issues and taxpayer-funded panels of "experts" to insure "diversity of views." So much for the principle of letting Americans listen to what they want.

In November, Sen. Jay Rockefeller (D-WV) mused publicly about the FCC shutting down Fox News and MSNBC (not exactly an equal trade, since relatively conservative Fox has multiples of the viewers of relatively liberal MSNBC) so that Americans could "have some faith in their government." Yep, don't let the people hear about what our great leaders are doing in Washington!

More recently, some voices on the left have exploited the tragedy in Tucson to rail against free political speech. (Personal disclaimer: I can't stand strident rhetoric and am on record in advocating self-restraint from hateful rhetoric.) The left shows a remarkable lack of confidence in the attractiveness of its agenda by resorting to attempts to suppress opposing points of view. Thomas Jefferson wrote, "It is error alone which needs the support of government. Truth can stand by itself."

Rather than attempt to censor those with whom we disagree, let us welcome a vigorous debate. If you don't like what you hear, turn it off, but don't deny others the freedom to speak or hear various viewpoints. Jefferson again: If an opinion or argument "be false in its facts, disprove them; if false in its reasoning, refute it. But for God's sake, let us freely hear both sides if we choose." Amen. *

Saturday, 05 December 2015 04:37

Hendrickson's View

Hendrickson's View

Mark W. Hendrickson

Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are from V & V, a web site of the Center for Vision & Values.

Inflation: Food, Fuel, and the Fed

As Americans increasingly feel the pinch of higher prices for food and fuel, the Federal Reserve's QE2 policy of creating more money has been called into question. Asked if the Fed bore some responsibility for these vexing price increases, Fed Chairman Ben Bernanke essentially replied, "It's not our fault." Instead, Bernanke blamed the price increases on "global supply and demand conditions."

Is Chairman Bernanke correct? To use a well-known phrase: "Not exactly."

Far be it from me, as an economist, to downplay the importance of supply and demand in determining prices. Certainly supply and demand have been pushing food and fuel prices higher. But those factors don't account for all of the increases. For Bernanke to claim that the Fed's inflationary monetary policies have not put upward pressure on prices is preposterous.

Let's examine some of the causes of higher food and fuel prices more closely.

First, fuel: For decades, it has been federal policy to declare huge tracts of domestic territory off-limits to petroleum production. Team Obama - whose secretary of energy, Steven Chu, publicly declared in 2008, "Somehow we have to figure out how to boost the price of gasoline to the levels in Europe" (i.e., $8 per gallon) - has been the most radical anti-drilling administration ever. With government having succeeded in artificially suppressing supply to such a great degree, prices for oil and gasoline can't help but be higher than they should be.

Second, food: For decades, federal policies have been designed to boost food prices above their free-market level in order to benefit well-organized, well-funded, and politically influential agricultural interests. In recent years, federal policy has given a turbo-boost to prices of agricultural commodities by mandating increased usage of ethanol in our gas tanks. We are literally burning up millions of acres of corn, a basic food staple. Inevitably, less corn available for food means a higher price for corn. The higher price for corn ripples through the economy, resulting in higher prices for competing grains and livestock that feed on grain - voila, it gets more expensive to eat.

The ripple effects of government-induced higher corn prices are international. Since food, like oil, has a global market, higher agricultural commodity prices are necessarily global. As food prices have risen, life has become increasingly precarious for the masses of poor people, such as those in the Middle East who have risen in protest and toppled governments. In turn, the rising political instability of the world's key oil-producing region has imposed an uncertainty premium on the price of crude oil, further driving up gasoline prices here in the United States.

Clearly, Ben Bernanke was right to cite supply and demand factors as contributing to higher food and energy costs. He was too delicate, too politic, to point out the culpability of government policy in perpetrating this mischief. Without a doubt, federal policies have made food and fuel more expensive for Americans, with an additional international feedback loop whereby higher food prices trigger political instability in the Middle East, driving up oil prices even further.

However, Bernanke and the Fed are not blameless here. If the prices of a small number of commodities rise while most prices do not, we would reasonably conclude that those price movements are dictated by supply-and-demand factors. But when prices in general rise, that is the smoking gun that points to an inflationary monetary policy.

Since the Fed's QE2 program was launched last September, the Commodities Research Bureau index of 19 basic, widely-used commodities has risen by almost 40 percent. Has demand risen and supplies fallen significantly for all commodities since September? The odds against such an improbable coincidence are astronomical.

Instead, the answer is obvious: The Fed has flooded the financial system with newly created money, and the inevitable result of a lot more money bidding for approximately the same supply of goods is markedly higher prices. Indeed, for Bernanke to deny partial responsibility for higher prices is more than disingenuous, since the Fed's stated goal last September was for prices to rise more rapidly. Does the Fed now regret getting what it wished and aimed for?

The solution to the problem of soaring prices of food and fuel lies in Washington. If Congress, the president, and the bureaucracies would restore free markets in food and fuel markets, prices would come down. If Bernanke and the Fed would quit expanding the supply of Federal Reserve Notes, upward pressure on prices would be diminished. It's that simple, economically. Whether Washington's frequent perverse, wealth-destroying policies can be reversed politically is another matter.

How "Radical" Is the Ryan Plan?

Question for those of you concerned about the size of federal debts and deficits: Would you endorse a plan which would add another five or six trillion dollars to the federal debt over the next decade while increasing Uncle Sam's annual expenditures by $1.1 trillion? If so, you're in luck. House Budget Committee Chairman Paul Ryan (R-WI) recently unveiled just such a plan.

Naturally, Democrats immediately denounced Ryan's plan as "radical." They think the increases in spending and debt should be much larger. It shows how far the goalposts have been moved in American politics that adding multi-trillion-dollars of debt is the most conservative proposal anyone in government has made. How would you like your government debt, Mr. or Ms. Citizen - gargantuan or astronomical?

The Ryan Plan, if implemented (more on that in a moment), would cut $179 billion from President Obama's planned spending in 2012 and another $241 billion in 2013. Why is it not "radical" to raise spending by $787 billion in one year, like Obama did in 2009, but "radical" to propose a decrease of $179 billion?

Ryan proposes to reform Medicare and Medicaid so that they don't bankrupt the country. Why is that demonized as "war on the elderly and poor" (the phraseology of Illinois Democrat Jan Schakovsky), but nobody talks about waging "war on the young" by saddling the rising generation with trillions of dollars of debt?

Ryan's plan is bold in comparison to the status quo in Washington, but it isn't radical. You want "radical"? How about getting government out of the medical field entirely? Since the creation of Medicare and Medicaid in the 1960s, medical costs have soared far beyond the rate of inflation. More than that, market competition has been diminished and fraud and inefficiency have ballooned apace with the growth of these two medical bureaucracies. (Why do liberals rant and rave about the Pentagon's inefficiencies, but remain silent about the similar inefficiencies of Medicare and Medicaid?) Ryan's plan is statist to the core, promising seniors large government subsidies with which to choose from a slate of government-regulated health care plans.

At this stage, Ryan's plan is academic. Its combination of spending cuts, tax cuts, and devolution of administration of government programs from the federal to the state level - while a significant improvement over the fiscal insanity of recent years - is dead in the water until at least 2013.

If you doubt that, look at the recently concluded "government shutdown" soap opera. The government is going broke, the Republicans were asking for a giveback of less than 10 percent of the Obama/Pelosi/Reid spending increases, but the Democrats - famous for extolling bipartisanship - threatened to shut down the government rather than make such a modest compromise.

It will be interesting to see how long Ryan's fellow Republicans in the House stand by his proposals. The coming vote is largely symbolic. The real test will be when Republicans have to face the voters in close re-election races next year. A majority of Americans may say that they favor reduced federal spending and smaller deficits, but when push comes to shove, how many will vote for a legislator who actually shrinks programs from which voters benefit?

Even if Ryan's plan, by some miracle, were to be enacted, nothing would change. Uncle Sam will remain a gigantic, meddling nanny, interfering with our lives and progressively eroding our liberty, entangling us in a corrupt network of special privileges that murder justice and bury the rule of law.

Ryan's plan is a futile attempt to square the circle. He is trying to find a way to preserve an inherently flawed system - a democratic transfer society - whereby government somehow takes care of all of us without eventually spending itself into bankruptcy.

The Ryan Plan is not radical; that is, it doesn't get to the root of the problem. It never questions the legitimacy of government redistribution of wealth. The mechanisms, rationale, and justification for Big Government remain unchallenged. Although a significant step in the right direction (i.e., less federal spending), Paul Ryan's plan ultimately is not a cure for what ails us.

Christian Conservatives and Randians

According to a 1991 Book of the Month Club / Library of Congress survey that asked what book had most influenced their lives, the two top picks by respondents were the Bible and Ayn Rand's Atlas Shrugged. Coincidentally, this is a big week for both Christians and Randians. The former are celebrating the resurrection of Jesus Christ; the latter, the long-awaited release of the film version of Atlas Shrugged (part one of three).

On the eve of the film's April 15 release, I was half of a panel discussion on Atlas Shrugged at a gathering of young professionals in Pittsburgh. I focused on economic and political themes in Rand's writings. As a former socialist who now espouses genuine free-market capitalism (not today's counterfeit version), I esteem Atlas Shrugged as a brilliantly insightful work of politico-economic fiction. Rand's grim depiction of self-serving political opportunists progressively destroying the economic motor that sustains human life is uncannily accurate, astute, and timely, despite having been written over 50 years ago.

The other speaker at the Pittsburgh event was a very kind, gracious, and bright professor - a philosopher who is an adherent of Rand's comprehensive philosophy, called "Objectivism." For those of you not familiar with it, one of the fundamental tenets of Objectivism is atheism. Consequently, dialogs between Christians and Objectivists are relatively rare, so I am glad to report that the Pittsburgh panel shared by a Christian economist and Objectivist philosopher was friendly and respectful.

We were able to pull it off because we largely stayed away from areas of irreconcilable differences - specifically, beliefs about ultimate causes. Instead, we made common cause in addressing the huge threat to all of us of an aggressive political class bent on demolishing property rights, redistributing wealth, and absorbing the private sector into a centrally planned people's republic.

This gives me hope that a tactical alliance between Christian conservatives and Objectivists can be forged, since we both seek to reverse the progressive loss of liberty in the United States. We Christians shouldn't expect Objectivists to accept the reality of the God that we know as an immanent spirit, but Who does not appear on earth as an objective reality. Nor should Objectivists expect Christians to accept some materialistic hypothesis about the origin of the visible universe, such as the fantastical "Big Bang" theory - a belief that requires one willfully to overlook the reasonable but problematical question, "Where did the primordial ball of gas come from?"

We Americans have a long and proud history of overlooking religious differences while collaborating to produce a more prosperous society. What one believes about God or how one conceives of ultimate causation cannot be enforced by government. It is a matter of what the Puritans called "liberty of conscience." How Americans treat each other, by contrast, is inevitably a public matter. A society must hammer out rules for what is and is not permissible in how we interact with each other.

Commonly shared ethical principles form the basis for our Constitution and laws. Christians who correctly understand the Bible's teachings about private property unite with Randians in believing that every individual's property rights should be inviolable. Rand's statements in Atlas Shrugged about the legitimate sphere of government power are virtually indistinguishable from certain principles expressed in the Declaration of Independence.

For the time being, let's set aside our differences. The problematical relationship of Christians and Objectivists reminds me of the friction that so often divides economic conservatives and libertarians, limited-government classical liberals and anarcho-capitalists. All of these believe that government is far too big today. Yet they waste far too much energy quarreling with each other when they could expend that energy far more productively in working to roll back Big Government. Their mutual priority should be to get rid of 75 percent of the federal leviathan. Then, after having achieved that much freer and more prosperous state of affairs, have a royal donnybrook to decide what to do about the remaining 25 percent of Uncle Sam.

Similarly, I see conservative Christians and Objectivists as potential allies in the "good fight" for smaller government and a restoration of individual rights, united by a commonality of ethics. In the short run, there is an immediate, desperate need to pry government's grip off of our country's economic windpipe before it chokes us into serfdom; in the long run, metaphysical questions about ultimate reality, the creative force, and accountability may be the most important. But, let's first make common cause to thwart those whom Rand dubs "looters" and "cannibals" - those who are bleeding our wealth and devouring our rights. Later, in a United States liberated from suffocating government, there will be a more advantageous time for interested parties to have a knockdown, drag-out debate about God and creation.

America's Christian Founding Fathers and the 20th-century immigrant Ayn Rand both deeply loved the United States of America. May those who walk in their respective footsteps today also love the United States enough to forge an alliance, not of convenience but of necessity, to rescue our country from her destroyers and to resurrect liberty and restore our fundamental rights.

Budget Tightening in Pennsylvania - and Around the Nation

Pennsylvania's new governor, Tom Corbett, has submitted his first annual budget to the state legislature. It includes proposals for spending cuts and no new taxes. In some ways, the budget is a model of what must be done nationwide.

Governor Corbett also claims that it cuts spending, but that depends on how the numbers are crunched. During the current 2010-2011 fiscal year, $28 billion is being disbursed from the general fund. That's less than half of total Pennsylvania government spending - the balance consisting of special funds and federal funds. Next year, approximately $3 billion of one-time federal stimulus funds will be gone; thus, the 2011-2012 general fund would decrease to $25 billion without any spending cuts or increases. Since Corbett has proposed to spend $27.3 billion in fiscal year 2011-2012, then the alleged 3.1 percent cut from $28 to $27.3 billion, while technically true, appears to be an actual 9.5 percent, $2 billion hike in Pennsylvania-funded spending ($25 to $27.3 billion).

Nevertheless, Corbett has proposed specific spending cuts, eliciting criticism from those who have grown accustomed to receiving erstwhile Governor Ed Rendell's perennial largess. Indeed, the contrast between the Democrat, Rendell, and his Republican successor is unmistakable. It brings to mind the late Austrian scholar Erik R. von Kuehnelt-Leddihn's description of the competing parties in modern democracies: The liberal party is the Santa Claus party; the conservative party is the "tighten the belt" party.

In Pennsylvania, ex-Governor Rendell was Santa Claus on steroids. He increased subsidies to his favorite constituencies, such as school districts and state colleges, all eight years he was in office, even while the private sector was shrinking from the recession. Under Rendell, Pennsylvania's general obligation debt rose 39 percent. Wait, it gets worse. Most of the commonwealth's debt is in off-budget agencies. That indebtedness soared 93 percent under Rendell. In total, Pennsylvania's state debt swelled 82 percent in eight years to $43 billion. (By way of comparison, local debt in Pennsylvania increased 35 percent during the same time period.) So profligate was Rendell's spending that he borrowed more than $3 billion of federal monies to fund unemployment checks, and he left Corbett without sufficient funds to pay all current bills; consequently, Pennsylvanians are paying interest on emergency loans to cover current expenditures. Want more? The teachers' retirement fund is $31 billion underfunded and the state employees' pension $11 billion underfunded. Thank you, Ed Rendell.

In ancient Athens, there was a time when citizens voted on an office-holder's performance at the end of his term. If he had governed poorly, the citizens voted to exile him. We don't have such a safeguard today. Instead, Rendell goes on his way while Corbett inherits a mess and takes all the heat for trying to make ends meet.

Governor Corbett has one option if he is not to allow the state's finances to continue deteriorating to the point of bankruptcy: To play the role of belt-tightener-in-chief. Thus, he has begun to do what fiscally responsible governors across the union are doing and must continue to do to help salvage states' financial viability. He is asking long-time beneficiaries of state spending, like the education sector, to accept some cuts. Also, citing figures that the median state government salary in Pennsylvania increased from $39,000 in 2004 to $45,000 today (in comparison to today's private sector median income of $32,000), Corbett proposed freezes and cutbacks for state employees.

Corbett is to be commended for defying the know-nothing leftists who complain, "The big winners [in Corbett's budget] are corporations with out-of-state addresses," particularly oil and gas companies. This is economically illiterate. One of the best hopes for increasing state tax receipts is for those out-of-state companies to continue to create good jobs by developing the state's rich natural-gas deposits. As for them being domiciled out of state, blame our anti-business (and therefore anti-job) tax laws. You don't attract businesses to your state by taxing the heck out of them.

It remains to be seen which of Corbett's proposals will be enacted by the GOP-controlled legislature. However, since the total indebtedness (including unfunded obligations) of all units of government in Pennsylvania now exceeds $194 billion, it would be fiscally insane for Corbett and the legislature not to trim spending. Actually, a three-percent trim is not enough. The debt figures are plain: It's time for some major belt-tightening, in Pennsylvania and around the nation.

A Tale of Two Union Disputes: the NFL vs. Wisconsin Teachers

There are two high-profile labor disputes in the news these days. One involves Wisconsin's public-school teachers; the other, the National Football League's players. I mentioned this to a friend, who responded that the NFL dispute was more troublesome. The very idea of people making such high salaries possibly striking for more irked her. While I understand that sentiment, I believe that the dispute in Wisconsin is far more problematical. Here's why:

I freely concede that teachers are far more valuable to society than pro-football players. Education is necessary; major league sports teams are not. Why, then, do jocks get paid so much more than teachers?

This question is a latter-day version of what was known a couple of centuries ago as "the paradox of value" - a paradox that economists didn't resolve until the 1870s. The paradox was that an ounce of gold sold for a much higher price than a loaf of bread, even though the former was an optional ornamentation and the latter sustained life itself. Clearly, bread is more valuable. It is also, however, far more common than gold. The relative scarcity of gold accounts for its higher price. Today, the relative scarcity of men able to compete at the NFL level is why they get paid so much more than teachers, the latter of whom are far more abundant.

Many say that pro athletes don't deserve to make so much money. I disagree. That is not to say that I regard athletes as more important than teachers. I don't. Nor is it to say that we shouldn't be concerned about the athlete-as-idol phenomenon in our culture. (The decline and fall of Rome was accompanied by a pagan obsession with musculature and physical contests.) It's not that I don't think tickets to NFL games are already too high. For my taste, they are, but that is irrelevant, because enough of my fellow citizens freely choose to pay those stiff prices and pay for those gaudy NFL salaries. Since nobody forces anybody to pay those ticket prices, who can object?

Here are the main reasons why I have more sympathy for the NFL Players' Association (NFLPA) than the Wisconsin teachers union (WEAC) in their respective labor disputes:

The NFL is highly competitive. Those who don't perform at a very high level are quickly replaced. Superior performance is rewarded and underachievers are pink-slipped. The NFL is a meritocracy, and that commands respect. The teachers union, by contrast, is anticompetitive. The NEA and its affiliates have squandered much public goodwill by routinely protecting inferior teachers and resisting all efforts to reward exceptional performance.

The NFLPA is negotiating directly with those who pay their salaries - the team owners. The WEAC, by contrast, uses every political tactic it can think of to induce the Wisconsin governor and legislature to transfer money that isn't even their own (it's citizens' money) into their bank accounts. NFL owners are wealthier than the players they pay. By contrast, many of the citizens who are taxed year after year to pay teachers' salaries and benefits have lower salaries and fewer benefits than those to whom their taxes go.

I should interject here that there is an unresolvable dilemma inherent in the taxpayer-financed public school model. Either governments enable public school teachers to hold taxpayers over a barrel and essentially extort money from them by work stoppages, or teachers surrender their right to withhold their labor if the terms of employment aren't satisfactory to them. Neither option seems just. The only way out of that dilemma is to privatize education, but that idea is currently regarded as too radical.

Finally, the NFL negotiations have not become a divisive partisan phenomenon in an age when too many issues have. We won't have to worry about the NFL labor dispute inducing President Obama to abuse our constitutional federal order or try to subvert a state's duly elected government.

Indeed, don't expect to see any of your favorite pro football players carrying posters of Hitler or trying to shut down lawful government. Even if you don't like what the NFL players are asking for, compared to the teachers in Wisconsin, they are pursuing their goals in a dignified, respectful way. Thanks, guys, for upholding a higher standard in collective bargaining. And thank you to all you Wisconsin teachers who are dedicated to your students and don't support your union's mandatory shakedowns.

Imperfect Justice in Snyder v. Phelps

On March 2, the Supreme Court issued a decision in the case Snyder v. Phelps that illustrates the difficulty of balancing competing claims to rights and justice in our judicial system.

The court overturned a lower court's $5 million tort judgment against Pastor Fred Phelps of the Westboro Baptist Church of Topeka, Kansas, for invasion of privacy and inflicting emotional distress on the Albert Snyder family.

In case you haven't heard, Phelps and his little band of coreligionists had chosen the funeral of Mr. Snyder's son, Matthew, a Marine who perished in Iraq, to hold up signs containing such niceties as "God hates you," "You're going to hell," and "Thank God for dead soldiers." Phelps opposes and condemns various public policies (e.g., gays in the military) and private matters of conscience (e.g., religious affiliation, in this case, the Phelps family's Catholicism). In Snyder v. Phelps, the Supreme Court ruled 8-1 that the First Amendment right to free speech trumped the relevant tort doctrines under which Phelps had been found at fault.

I rarely play Monday morning quarterback after a Supreme Court decision. I am not a lawyer, nor do I know all the facts and pertinent legal precedents of this case. There were multiple legal issues, each with its own complexities, raised in this case (e.g., infliction of emotional distress, invasion of privacy, civil conspiracy, states' rights, etc.). I acknowledge the immense difficulty of coming to a single "right" ruling. I believe that all nine justices acted in good faith. It seems to this observer, though, that the opinion of the dissenting justice, Samuel Alito, was superior to the majority's position.

All nine justices emphasized our right to free speech - a right that some powerful Americans have sought to curtail. If we are to remain a free people, we cannot censor words or ideas just because they are ugly, unpopular, revolting, venomous, or abhorrent.

However, that does not mean that offensive language can be used anywhere or anytime. For example, we rightly bar people from walking into kindergarten classes and dropping a string of f-bombs. Such restrictions don't endanger our precious liberty.

Similarly, I concur with Associate Justice Alito's opinion in Snyder v. Phelps that:

Allowing family members to have a few hours of peace [at a funeral] without harassment does not undermine public debate.

Alito really nailed the issue with this statement:

In order to have a society in which public issues can be openly and vigorously debated, it is not necessary to allow the brutalization of innocent victims.

Perhaps I am guilty of wanting to have my cake and eat it too, but can we not have both a right to express our beliefs and also have government fulfill its primary purpose of protecting individuals from acts of aggression? Make no mistake about it: The Snyder family was the target of a deliberate, pre-meditated, unprovoked assault.

The Snyders had done nothing to Phelps. The Snyders weren't responsible for any of the national policies to which Phelps objects. Matthew Snyder's funeral was a private family matter, not a public event. Don't the Snyders - indeed, all Americans - have a right to be protected from hurtful, unprovoked, sadistic assault? Does our Supreme Court want to turn the First Amendment into a license for anyone to intentionally inflict emotional anguish on a grieving family at a moment of maximum vulnerability?

Yes, Phelps has rights, but so do the Snyders. And yet, in Snyder v. Phelps, the Snyders' rights were abrogated for the sake of Phelps' rights. Surely American jurisprudence is broad enough to protect both Phelps' right of free speech and the Snyders' right to protection. As Justice Alito wrote in his dissent, there are thousands of places at which Phelps and Co. could have had their say without inflicting emotional duress on the innocent Snyder family.

There is a story (whether true or apocryphal, I know not) about a first-year law student who strongly objected in class to a judicial decision that was being discussed. "This is NOT justice!" he exclaimed to his professor. The experienced legal scholar calmly replied, "Young man, if it's justice you want, go across the street and enroll in the divinity school; THIS is the law school."

It seems to me that Mr. Snyder didn't receive justice from the Supreme Court. May he be healed of his pain and find his justice in a court higher than the erroneously named "Supreme Court." *

Saturday, 05 December 2015 04:34

Hendrickson's View

Hendrickson's View

Mark W. Hendrickson

Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are from V & V, a web site of the Center for Vision & Values.

The Debt-Ceiling Dance and the Annual Budget Ritual

Once again it's time to talk about raising the statutory limit on the U.S. government's debt - the so-called "debt ceiling." Treasury Secretary Timothy Geithner has estimated that Uncle Sam will reach the debt ceiling before Tax Day, possibly even before the end of March.

Even earlier, on March 4 to be precise, the current appropriations resolution that is funding government spending will expire.

Are these two stories giving you a sense of dj vu? They should. These two closely related issues are perennial events. Congress has raised the debt ceiling 74 times in the past 70 years, and, of course, passing an annual budget is necessarily an annual event.

The same two sides square off against each other on both issues. On the one side are the (relatively) fiscal conservatives, the so-called "deficit hawks," the belt-tighteners; on the other are the budget-busters, the "deficit doves," the big spenders.

The big spenders are riding a long winning streak. Every time federal debt has reached the debt ceiling, Congress has raised it.

Prediction: There may be some fireworks first, but Congress will soon raise the debt ceiling again, and raise it significantly. Look at the numbers: President Obama has mentioned a possible $30-billion reduction in spending from a pending $1.65-trillion deficit this year. Speaker Boehner has countered with a proposal that is doubly large: $61 billion. One is tempted to say that the hotly contested debate between shrinking the deficit 2 percent or 4 percent is a tempest in a teapot.

Let's look at the numbers another way: Even if $61 billion ends up being trimmed from the budget, Uncle Sam will still spend over $3.6 trillion this year. Here's a trivia question for you: Who was president when Uncle Sam spent $2 trillion in a year for the first time? Give yourself an "A" if you answered George W. Bush.

Federal spending has nearly doubled in the last decade - a decade of anemic economic growth, as is the rule when government expands at the expense of the private sector. Obama has talked about hitting "reset" buttons on other issues. Why not get serious about runaway government and reset federal spending to where it was, say, five years ago? The sad thing is, even such a gigantic pruning as that would still leave Congress having to raise the debt ceiling, because the deficit would still be enormous, further adding to the national debt.

Every year, we go through the same ritual before passing a red-ink-drenched budget. Deficit hawks protest the immorality of burdening the next generation with debt and warn of potential catastrophe if the government goes further into debt. What they are up against is this: There are far more lobbyists defending specific dollars of federal spending than there are in favor of cutting them, and besides, the big spenders don't worry about deficits because national bankruptcy serves their agenda. Perhaps someday there will be enough tea partiers in Congress to force across-the-board cuts or eliminate rafts of federal agencies, but not yet.

As for the debt-ceiling dance, it, too, follows a familiar pattern. The belt-tighteners warn of eventual chaos when the federal debt finally reaches a breaking point; the big spenders warn of the immediate inconveniences that would result from failing to raise the debt ceiling, and thereby partially shutting down government.

In what amounts to a high-stakes game of "chicken," the big spenders always win, because the fiscal conservatives always blink. They know that a majority of the public fears the disruption of a government shutdown today more than they do a potential major upheaval at some unspecified date in the future. We fiscal conservatives have come across like the boy who cried, "Wolf!" We have warned about the perils of red ink for years, but Armageddon hasn't come. I think we will be proven right eventually, but we can no more foretell when the federal debt will blow up than we can predict which straw will break the camel's back.

Have you asked yourself why we are debating raising the debt ceiling above $14.3 trillion? Answer: because earlier congresses didn't rein in spending and curb the national debt at $10 trillion, $5 trillion, $1 trillion, or less. The big spenders always prevail in the annual budget ritual and the debt-ceiling dance. Someday, we will mourn that fact.

Wisconsin Unions vs. Governor Walker: A Battle for the Soul of America

Editor's note: A version of this article was first published by the Christian Science Monitor.

It is hard to overstate what is at stake in the dramatic showdown between Wisconsin's teachers and their Republican governor and legislature. The political and economic course of our country hinges on how the issue of public-sector unions is resolved, in Wisconsin and elsewhere.

For the sake of our country's political and economic future, Gov. Scott Walker and his Republican colleagues need to prevail in the current contest with the Wisconsin teachers' union and their allies.

That isn't easy for me to say. As an educator, I have great respect for all those (and they are many) in my chosen profession who capably and even brilliantly serve our nation's youth. The fact is, though, that the status quo is untenable.

The budget crunch isn't merely a projected crisis some 30 years in the future. Right now, several state and local governments are careening toward fiscal disaster. There are many factors, of course, but a major one is that retirement plans for public-sector workers are spectacularly underfunded, perhaps by as much as $3 trillion nationwide.

Governor Walker is being cast as the ogre for proposing to avert the onrushing flood of red ink, but the blame properly belongs to his predecessors who made unaffordable and unkeepable promises. All but the most zealous ideologues will admit that you can't spend what you don't have, and even some Wisconsin teachers are now indicating a willingness to help balance the state's budget by contributing more to their pension and health benefits.

Politically, this battle is the ultimate partisan clash. Unions and the Democratic Party are joined at the hip. Unions collect mandatory dues from their members, then contribute massive financial and human support to the electoral campaigns of their political allies (overwhelmingly Democrats). Democrat office-holders repay these favors by granting unions generous legislated benefits, both monetary and in the form of rules that strengthen the political power of union officials. Wisconsin's Democratic senators took the extraordinary step of fleeing the state in what appears to be a desperate ploy to preserve the flood of union money coming to them, while Republicans seem every bit as hopeful of reducing the flow of tax dollars to their political opponents.

Indeed, it is the use of tax dollars to lobby for more government spending, and thus for more taxes, that is the crux of the problem. Public-sector unionism is the ultimate conflict of interest, because the necessary objective of these unions is to capture control of the very legislatures that vote on their compensation packages.

Even the strongly pro-union Franklin Roosevelt believed that key tactics employed by private-sector unions were inappropriate for workers on the public payroll. In his words, "The process of collective bargaining, as usually understood, cannot be transplanted into the public service" due to "distinct and insurmountable limitations."

I share FDR's conviction that, in a government of the people, by the people, and for the people, those who work for the government must be servants of the people. When public-sector unions threaten to withhold their services unless the taxpayers, through their elected representatives, pay up, it creates a process of political extortion by which the majority of citizens is made subservient to the public-employee minority. This is the way things work under feudalism or socialism, but is the exact inverse of the proper order in a truly democratic republic.

Some have called the Republican proposals in Wisconsin "union busting." This is inaccurate. Walker is proposing to reform unions, not to abolish them. He seeks to make the payment of union dues voluntary instead of compulsory.

If teachers believe that what the union leadership is doing is worthwhile, they can continue to support those activities through voluntary contributions. If, on the other hand, Republican teachers would rather not contribute to Democratic candidates, they could follow their conscience and opt out. In a democratic republic, people should be free from being coerced into supporting candidates and causes to which they are opposed.

What is really at stake in the Wisconsin donnybrook is whether individual liberty or government power has the upper hand in our country. We are witnessing a battle for the soul of the republic.

America's Debts: Even More Calamitous Than We Thought

Brace yourself. This isn't going to be pleasant. If you're in a bad mood or get easily upset, you may wish to pass on reading this article.

The country is in even worse shape economically than we thought. We awoke on Feb. 14 to find that this year's federal budget deficit is going to be larger than previously projected - a record $1.65 trillion.

Recently, the official accumulated debt of the federal government passed the $14 trillion threshold. A trillion is a gigantic number. If you stacked $100 bills flat on top of each other, then turned that stack on its side, a trillion dollars would stretch from where I live in western Pennsylvania to somewhere past St. Louis. That's just ONE trillion. Multiply that by 14, and it would stretch from here to Honolulu and back with plenty to spare.

The really bad news is that Uncle Sam's debt is significantly greater than $14 trillion, and I am not referring to the tens of trillions of dollars of unfunded liabilities representing undeliverable government promises. According to data released by the U.S. Treasury on January 21, the public debt is $20.7 trillion, an increase of $3.3 trillion in just the last year.

The larger sum - actual existing debt of $20.7 trillion - includes such off-budget items as bailouts, Fannie Mae and Freddie Mac, student loans, and who knows what else? I have to say "who knows what else," because the leviathan federal government long ago became too large to keep track of. For example, 25 years ago the Grace Commission, instituted by Ronald Reagan in the hope of identifying ways to streamline the federal government, was unable to tabulate how many people worked for the federal government, although they did manage to identify 963 federal programs that redistributed wealth.

Not only is our current national indebtedness more than 40 percent greater than the already horrendous commonly cited figure, the Social Security program is in worse shape than expected, too. As recently as a month or two ago, it was widely accepted that payouts from Social Security would start to exceed revenues in 2016. In a stunning development, the nonpartisan Congressional Budget Office released a report on January 26 which projected that revenue shortfalls will begin this year and continue uninterrupted until all unfunded IOUs are exhausted by 2037 (if not much sooner). The CBO projects what would have been a $45 billion shortfall this year, but thanks to the terrible deal that President Obama and congressional Republicans forged in December - the one that included a 2-percent reduction in Social Security withholding from workers' paychecks - this year's Social Security red ink is expected to hit $130 billion.

At the state level, finances are deteriorating at a sickening speed. Governors are starting to ask the Obama administration for permission to drop people from Medicaid (280,000 people in Arizona alone). Moody's, the debt-rating agency that seems to wait until after a collapse has happened to lower its rating of an entity's finances, is making noises about downgrading the credit rating of several states.

At the municipal level, many bonds continue to tank as municipalities careen toward bankruptcy. Of the three largest bond insurers, two are already bankrupt while the survival of the third is in doubt.

Meanwhile, Obamacare is ripping us apart. The administration itself has already granted over 200 waivers to well-connected businesses and labor unions from having to comply with its unaffordable costs (meaning that wealth is being redistributed from those who don't receive the exemptions to those that do).

Two federal judges have upheld Obamacare while two others have ruled it unconstitutional. The result is that some state governors and attorneys general are voiding it within their jurisdictions while others are not. Obama is proceeding with costly implementation despite the bill's uncertain status. Besides the confusion and uncertainty that this is sowing, valuable time will be consumed in waging this titanic constitutional struggle - time that could and should be spent addressing the ballooning spending/debt crisis.

Given the magnitude of governmental fiscal woes, the struggle in Washington between Democrats who talk about (but don't propose) a possible spending freeze in one small corner of the federal budget, and Republicans who claim to want to cut $100 billion of annual spending, is a cruel joke. Talk about fiddling while Rome burns!

The financial condition of governments at all levels is worse than it ever has been. Neither political party seems ready to address the crisis in any meaningful way. As a result, our financial predicament is even worse than most of us had thought.

Hu's in Town, Time to Talk "Money"

China's President Hu Jintao is visiting the United States this week [This article was published on January 19]. This means we can count on two things: 1) a proliferation of Hu/who jokes (think: Abbott and Costello, "Who's on first?"); and 2) disputes about the respective monetary policies of the two countries.

Chinese officials gripe about the Federal Reserve's cheap-dollar policy. American officials denounce China's policy of preventing the yuan from appreciating vis--vis the dollar. The fact is that both China and the United States are currency manipulators. Like a dysfunctional couple, the two constantly squabble, each complaining about the other's shortcomings while ignoring its own.

In this latest round of bickering about currencies, Hu told reporters that the dollar's dominance in the world currency markets is a "product of the past."

Literally, this is indisputable. In 1944, the Bretton Woods agreement established the dollar as the international reserve currency. What rankles some Americans, though, is Hu's clear implication that dollar dominance is a relic of the past, that the buck is a "has-been" in terms of suitability for serving as the world's reserve currency.

While we may resent a foreign leader taking this stance, Hu is correct. At the time of Bretton Woods, the adoption of the dollar as the anchor for the global monetary markets made sense. The United States accounted for more than a third of the world's economic production, had abundant gold reserves backing our currency, and expressed a readiness to redeem dollars for gold that made the dollar "as good as gold."

The situation has changed radically since then. As other countries experience explosive economic growth, U.S. dominance correspondingly diminishes. Even more to the point, this isn't your grandfathers' dollar. It has been nearly 40 years since President Nixon reneged on our solemn promise to redeem paper dollars with gold upon demand by our foreign trading partners. Decades of government over-spending and currency debasement have produced a diminished, sickly dollar that - far from providing stability to global currency markets - produces uncertainty, disruptions, and losses throughout the global economy.

At some point, the dollar will cease to function as the world's reserve currency - not because of any demands by Chinese leaders, but of necessity. The dollar is on a path of self-destruction and foreigners will not passively sit still and go down with a sinking ship.

Looking ahead, President Hu stated that he desires a "fair, just, inclusive and well-managed international financial order." That sounds reasonable enough. But what constitutes a "well-managed" international financial order? Are there central bankers in other countries who could manage the system better than the Fed? Since China's central bank has increased its money supply by 180 percent in just the last five years, I wouldn't trust them to manage a currency well. (Despite cranking up their printing presses, the Chinese are trying to blame us for the inflation that they are currently suffering!)

Unfortunately, neither American nor Chinese officials are considering the two reforms that are needed in order to establish a viable international monetary regime. They are not only "off the table," but off the radar screen.

The two insuperable problems that afflict the international monetary order today are the acceptance of fiat currencies and government monopolies. It is impossible for a country, let alone the entire world, to build a durable monetary order on the weak foundation of an un-backed paper currency. Indeed, history demonstrates that fiat currencies inevitably end up being worth exactly what they are - insignificant scraps of paper. And if you ever have wondered why consumer products get better and better over time, while our money - the most commonly traded good of all - continues to deteriorate in quality, the answer is simple: The former are subject to competition and consumer choice, while government's money monopoly denies consumers a choice. People pick good stuff over bad stuff when free to choose, but governments deny us that freedom and instead impose on us the most pernicious monopoly of all - a monopoly on money.

If President Hu and American leaders truly want a well-managed international currency regime to emerge, they need to make these two reforms: 1) repeal legal-tender laws so that free competition can determine what will be used as money; and 2) have a separation of money and state comparable to our separation of church and state (what Nobel Prize-winning economist F.A. Hayek called "the denationalization of money"). Human governments have never demonstrated the honor and integrity needed to preserve the purchasing power of the money they issue, and the world is poorer as a result.

Welcome to America, Mr. Hu. I'm sorry that your dialog with American leaders about money will be such a waste of time.

The New-Old Barack Obama

The 2012 presidential campaign has begun. Not being a political junkie, it gives me no pleasure to report this phenomenon. And no further proof of this assertion is needed than Barack Obama's tactical shift.

You may recall, during the first two years of his presidency, Obama's statements that he didn't care if he turned out to be a one-term president. So dedicated was he to his progressive agenda, so desirous was he of ushering in an era of permanent big government, that he refused to compromise with Republicans, conservatives, Tea Party activists and other assorted atavistic types. He would build a progressive utopia or get voted out of office trying.

My, how a mid-term electoral "shellacking" changes things. Since November, Obama has seemed to be moving toward the political center. There can be only one possible explanation for this apparent transformation: The man wants to be re-elected, and will do what he has to do to achieve his goal.

Even before the New Year dawned, President Obama swallowed his egalitarian pride and accepted a two-year extension of the Bush tax cuts. This was an outstanding deal for Obama, enhancing his plausibility as a moderate while receiving Republican support for hundreds of billions of dollars in spending that benefit Democratic Party special interests.

In the first week of January, Obama replaced, as chief of staff, the partisan pit-bull Rahm Emmanuel, with the more moderate (at least, in tone) Bill Daley.

In his State of the Union address, Obama played to the middle, paying lip service to free enterprise while making the case that it's up to government to ensure future prosperity. His call for a five-year freeze on "discretionary spending" was brilliant. While wooing independents and moderates with his talk of fiscal restraint, he must have delighted his leftist allies with his proposal to make the Pentagon bear the lion's share of spending cuts. (A pre-speech release went so far as to describe defense spending as "nonsecurity" spending, but somebody wisely deleted that gaffe from the final version).

According to Obama's own calculations, this freeze will realize savings of $400 billion over the next decade. That sounds like a lot, but it amounts to less than one percent of planned spending.

Reversing his earlier opposition to bi-national trade agreements, Obama has begun to push for ratification of long-pending trade deals with Panama, Colombia, and South Korea. These deals make economic and political sense. They should help contribute to economic growth - always a plus for a president seeking re-election - and will enable Obama to portray himself as more pro-business.

If gas prices rise to $4 per gallon, don't be surprised if Obama reverses his administration's two-year-old policy of stifling domestic oil production. His team will, of course, spin this as a heroic Obama riding to the rescue, when, in fact, the prudent policy would have been to unleash domestic producers from day one of his term.

Obama's strategy is masterfully conceived. It is a classic "two steps forward, one step back" tactic for advancing his larger progressive goal of increasing the federal government's power over the distribution of wealth in our society.

Some of his leftist supporters, less mature and less canny than the president, have already started to howl in protest of his perceived move to the center. This can only help Obama to appear more centrist, and disguise the fact that his compromises are relatively minor concessions.

If Obama were to continue trying to ram through his big-government agenda after the mid-term election, he would have sealed his fate as a one-term president and triggered a conservative backlash. Instead, he is positioning himself to win a second term and so solidify his progressive agenda.

Obama, to his credit, has learned patience. He wants four more years to empower unelected bureaucrats to extend their stranglehold on the economy, four more years to appoint federal judges and Supreme Court justices who share his disdain for the Constitution's restraints on executive power, four more years to veto any legislative attempts to reverse the trend toward bigger government.

Democrats should take heart and Republicans had better watch out. This man means business, and he is already doing what he does best: campaigning. The "new Obama" that some people see is really just the old Obama - a clever, driven politician committed to a permanent expansion of government power.

The Economics of the State of the Union

The news from Egypt has thrust President Obama's State of the Union off the front pages. While that news is critical, so is further analysis of the State of the Union, especially from an economic perspective. My previous column focused on the political dimensions of the State of the Union address, about how Barack Obama has already entered full campaign mode in an attempt to woo the 5 or 10 percent of the swing vote that he needs for re-election. Today, let's look at the economic aspects of the speech.

One would hope that, after two years of failed policies and economic stagnation, President Obama would have seen the need for a changed economic strategy. Alas, beyond a few cosmetic touches, Obama's approach to economics remains substantially unchanged.

Here are a few examples:

In the address, Obama stated a self-evident truth: "None of us can predict with certainty what the next big industry will be."

Agreed. But then, apparently unaware of the incongruity, the president proceeded to advocate increased government funding to three specific industries: biomedical research, information technology, and clean energy. So deeply ingrained is Obama's love of central planning, so confident is he in his ability to foresee what future generations will need, that he specifically called for 80 percent of electricity to come from renewable energy sources by the year 2035, as if anyone knows what relative costs will be or what new technologies will be available that far ahead.

Indeed, President Obama seemed blithely unaware of the sad history of federal support for alternative energies - wasteful boondoggles, such as Synfuels and ethanol. At least he was consistent, though. He also appealed for federal support of high-speed railroads, another industry in which the federal government already has shown its incompetence. In the 1800s, there was only one railroad connecting the Midwest to the Pacific Coast that did not go bankrupt - James J. Hill's Great Northern, notable for being the only such railroad not to have received federal subsidies.

Obama stated the obvious truth that Uncle Sam's deficit spending is "not sustainable."

How could he say this with a straight face when the current fiscal year's deficit is projected to be $1.65 trillion - an all-time record? How serious is he, given that he offered only two specific areas for spending cuts: defense spending and subsidies to oil companies?

Well, he did say something about cuts for community action groups, but since ACORN is drowning in criminal charges, cutting spending there was a foregone conclusion. And, for the record, I support withdrawing all subsidies for oil companies. But let's withdraw taxpayer-funded subsidies from all energy producers. Percentage-wise, the subsidies for wind and solar are many times as great per kilowatt of energy than they are for oil. Amazingly, President Obama wants to increase subsidies to - actually, he uses the words "invest in" - those wretchedly uneconomic forms of energy.

The president mentioned a government loan to a company that became successful. Fine. But private loans are just as capable of starting businesses and creating jobs, and they do it without dipping into the taxpayers' pockets. Government doesn't need to be "encouraging investment," as Obama said; rather, government should stop discouraging investment and job creation, which it does when it siphons precious resources from the productive private sector.

Let's have "a government that is more . . . efficient," proclaimed President Obama.

Sounds good, but how? Government bureaucracies, insulated from the profit-loss discipline of competition, are inherently inefficient. Why single out the Pentagon for spending cuts? ALL bureaucracies are wasteful. That's the nature of the beast. If he really wanted a more efficient government, Obama would have recommended the elimination of specific agencies and bureaucracies.

Obama called for more government "investment" in infrastructure. (At least he's not calling it this kind of spending "stimulus" anymore.)

Yes, infrastructure clearly needs some repairs, but I don't trust Team Obama to do it right. I'm mindful of the nearby exit ramp that was widened to two lanes as part of Obama's stimulus package, even though it is so lightly used that mine is usually the only vehicle on it.

Obama promised a new website that would show us where our tax dollars are going. When I recall how inaccurate was his stimulus/jobs website, my response to the president is, "No thanks, save the money."

The State of the Union address showed an appalling ignorance of basic economics and the lessons of history. Sadly, President Obama still thinks like a central planner, even as he seeks to widen his appeal to the middle. He is decades behind the times. His is the path that leads to stagnation.

Honoring Reagan's Memory in the Most Honorable Way

It is fitting that we are pausing to remember President Ronald Wilson Reagan on the centennial anniversary of his birth this February, a month that also includes Presidents' Day. There continue to be many poignant remembrances and fitting tributes to our 40th president. Indeed, the Gipper accomplished much, and we, his countrymen, are grateful.

One of Reagan's greatest accomplishments was engineering our victory in the Cold War. And one of the key factors that made this victory possible was Reagan's deep understanding of economics. He knew that the Soviet economy was brittle, weak, moribund. He knew that it couldn't hold up in an arms race against our vibrant free-market economy.

In hindsight, the decrepitude of the Soviet Union's centrally planned socialist economy is obvious, but it was by no means so in the 1980s. Believing the Iron Curtain's propaganda lies and a Potemkin village appearance of prosperity, many intellectuals, experts, and Sovietologists believed that socialism was the wave of the future. In the 1980s, the CIA reported to Reagan that the Soviet economy was vigorous and thriving. The Nobel prize-winning economist, Paul Samuelson, confidently wrote that the Soviet economy was booming and quickly catching up to the United States.

How could Reagan be so sure that he was right when most of the experts were saying that he was wrong?

The answer lies in the fact that Ronald Reagan understood economics better than any other American president. Reagan was influenced by the economic writings of Grove City College professor Hans F. Sennholz. He also read The Freeman, the monthly publication of the Foundation for Economic Education (it still exists today). This means that Reagan was familiar with the Austrian school of economics - the only school that has supplied a logical proof of why socialist economies are inherently self-destructive and doomed to fail.

The Austrian economist Ludwig von Mises, in his 1922 masterpiece, Socialism: An Economic and Sociological Analysis, had demonstrated logically the impossibility of rational economic calculation under central planning. Anyone who grasped that theory would know, as Reagan did, that the Soviets' centrally planned economy was programmed for stagnation and decrepitude - that it was a paper tiger, and all we had to do to prevail against the Soviet challenge was to stand firm and keep our government from crippling our economy the way the Soviet government had crippled theirs.

This points to a scandal, perhaps a tragedy, today. As we commemorate the life of a great president whose understanding of the superiority of the private-property order over socialism contributed so much to freedom and prosperity, both at home and abroad, in the aftermath of the Cold War - the economic understanding that was one of the key pillars of Reagan's philosophy and policies remains largely unknown today. The Austrian analysis of socialism - one of the greatest advances in economic science and one of the keys to understanding the 20th century - remains untaught except at Grove City College and on a few other campuses. As a result, Americans elected a president who is doing his best to take us in a socialistic direction - the direction of economic suicide.

As we pay tribute to Ronald Reagan, we look back at an era when people around the world voted with their feet for capitalism over socialism. Refugees fled from East Germany to West Germany, North Korea to South Korea, and mainland China to Hong Kong - always away from less freedom and prosperity toward greater freedom and prosperity.

Human beings still have the same preference and make the same choice today. Sadly, though, today businesses and individuals are leaving the United States in favor of less economically oppressive locations.

Demagogues on the left denounce these people as traitors for rescuing their property from government's redistributive plans. The rest of us should regard this phenomenon as a warning sign that, for the first time in American history, a significant number of people are leaving America so that they can be economically freer.

If we really wish to honor Reagan's memory in a meaningful way, then let us reverse the Big-Government policies that are driving productive citizens out of our country. Let us remember Reagan's lesson that government is the problem - not the solution - to our economic challenges. Let us re-establish America as the land of liberty, the favored destination of those who love liberty. Ronald Reagan would be honored to be honored in that way. *

Saturday, 05 December 2015 04:30

Hendrickson's View

Hendrickson's View

Mark W. Hendrickson

Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are from V & V, a web site of the Center for Vision & Values.

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.

Consider:

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

Sunday, 29 November 2015 03:51

Hendrickson's View

Hendrickson's View

Mark W. Hendrickson

Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision and Values at Grove City College, Grove City, Pennsylvania. These articles are from V & V, a web site of the Center for Vision & Values.

Tough Times Ahead: Gridlock and Quantitative Easing Are Not Enough

Now that the elections are over, attention is turning to the economy.

The stock market rose steadily from the end of August up to the elections. Since the stock market tends to be forward-looking, its recent strong and steady rise suggests that investors have been optimistic. In my opinion, two factors have generated that optimism:

1) The expectation that significant Republican gains in Congress would produce political gridlock, thereby putting the brakes on the Obama/Pelosi/Reid/progressive spending binge.

2) The Federal Reserve's promise of "QE2," a second round of "quantitative easing," the currently fashionable euphemism for creating mind-boggling sums of new money out of thin air.

Sorry to rain on anyone's parade, but I don't believe that gridlock (assuming it happens) and QE2 will be sufficient to turn the economy around. There are several reasons for my tepid outlook.

Surely, gridlock -- a political stalemate between the Democratic president and congressional Republicans -- will change the game. There will be no more enormously expensive and economically crippling legislation, like the mega-non-stimulus and healthcare/insurance reforms that were passed, or the cap-and-trade monstrosity that was barely averted.

To use a medical metaphor, compare the economy to a human body that has been bludgeoned. Obviously, it helps when the bludgeoning stops. But just because additional blows aren't being struck, it doesn't mean the patient is healthy; the patient is still at risk from internal injuries. Our economy urgently needs a trip to the emergency room for radical surgery and intensive care. The government needs to undo the massive damage it has inflicted on the economy over the last several years. It needs to reverse, not merely halt, runaway spending, and to shrink, not just slow, the growth of the federal bureaucracy.

Recently, the Congressional Budget Office released a study projecting total federal spending of $44.5 trillion during this decade. Since we are already choking on $3.7 trillion of spending this year, the implication is that Uncle Sam is on track to spend over $5 trillion in other years later this decade. Will the new Congress, even with the addition of several dozen fiscal conservatives, be able to overcome Obama's resistance to canceling trillions of dollars of planned spending? I doubt it.

Those longing for a return to the economic good times of the 1990s by replicating the gridlock that existed between the Clinton White House and Gingrich Congress need to realize that circumstances are significantly different today. Gridlock tends to preserve the status quo. That was desirable in the mid-1990s, when the economy was healthy and growing; preserving today's economic stagnation, by contrast, is not desirable; it is unacceptable.

Even if Obama and the new Congress surprise us by reducing the annual rate of growth of federal spending to the modest 2.9 percent level that Clinton and Gingrich achieved (highly unlikely, given Obama's ideology), the ticking time bomb of Social Security, Medicare, and Medicaid's unfunded liabilities will continue to push us inexorably onward toward ruin.

At any time, the world's bond investors may demand a higher interest rate to compensate for the risk of insolvency. That would cause the cost of financing our trillions of dollars of debt to soar, consuming hundreds of billions of dollars of tax revenues.

The see-no-evil optimists would say, "Hey, why worry? The Fed will buy all those bonds." That's the purpose of QE2.

The problem here is that bond investors will still demand a higher interest rate to compensate them for the cheapening of the dollar (what we call an "inflation premium") that will inevitably result from the Fed creating so many new dollars to buy the Treasury's debt. In anticipation of QE2, major bond-buyers -- notably the Chinese and PIMCO, the largest American bond fund -- have already started to sell Uncle Sam's bonds. I wouldn't want to bet against PIMCO chief Bill Gross, who is to bonds what Warren Buffett is to stocks. If the exit from bonds becomes a stampede, Katy, bar the door, because QE2 may then go to infinity, as in "hyperinflation." Adios, greenback!

Ben Bernanke has to know that QE2 cannot possibly produce prosperity. QE2 is another instance of "the money illusion" that all Econ 101 students (at Grove City College, at least) learn: Money isn't wealth, and even if the central bank created a million dollars for every single American, we wouldn't be any richer in real terms.

Yes, it's possible that a flood of new dollars may buoy stock prices, but in terms of real wealth and real jobs for Americans in general, lots of luck. Those pinning their hopes for a vigorous economic turnaround on political gridlock and QE2 are likely to be sorely disappointed.

Breakdown

You've probably seen the headlines about major banks suspending foreclosure proceedings to reclaim houses from borrowers who have defaulted on their mortgages. This has the potential to be hugely disruptive -- a milestone development comparable to the failure of Lehman Brothers in 2008, after which all hell broke loose.

Let me emphasize the word "potential." The core of the problem is that there are serious problems in proving who actually has clear, lawful title to specific houses.

This situation arose because of the last two decades' common practice of "securitization" -- the bundling of large numbers of mortgages into a new interest-paying, tradable security. These securities are then sold and resold, often several times. This has lead to widespread confusion. I read of one case in which no fewer than four different firms claimed to own a particular title, and thus the right to foreclose, on the same property.

Because many judges have blocked foreclosure proceedings on the grounds of unclear title, Bank of America, GMAC, and other financial giants have declared a moratorium on foreclosures until the legal picture becomes less muddied.

Some commentators insist that the problem is nothing more than a few technical glitches that can be easily corrected. Others assert that there has been massive fraud, false attestation (attesting to facts without having ascertained those alleged facts), and forgery (creating documents after the fact to produce a fictitious paper trail). Apparently, the states' Attorneys General feel there might be fire among all the smoke, because all 50 of them have initiated investigations, and many of them appear as though they are about to go on the prosecutorial warpath.

If, in fact, the problem is not easily rectified and the various allegations of malfeasance are sustained, here is what is at stake:

We are looking at a breakdown of the housing market. Would-be buyers can't obtain title insurance or loans to buy property without clear title. The country's entire real-estate market could freeze up, further torpedoing home prices and throwing a monkey wrench into the plans of millions of people who want or need to relocate.

The financial industry could break down. Currently, 4.5 percent of existing mortgages are in some stage of foreclosure. If banks can neither collect mortgage payments nor replace that lost income by selling the related properties, losses could be massive, perhaps catastrophic. Then the bailout issue would be back on the front burner.

If courts rule that "robo-signing" -- lenders mechanically signing off on thousands of foreclosures without taking the time to review the facts of each individual case as required by law -- constitutes fraud, then the resulting tsunami of fines and lawsuits could cripple or wipe out many lenders. Here again, would be a breakdown of the financial sector.

If either the housing market freezes up and/or the financial industry cracks up, then the process of economic recovery itself will break down.

If lenders can no longer foreclose on properties, how many millions of other mortgage-holders will decide to stop making their monthly payments? Anecdotal evidence indicates that there are already hundreds of thousands of "strategic defaulters." These are people who can afford their monthly payments, but have chosen to stop making payments, figuring that, at the very least, they can get away with living rent-free for a year or two before getting evicted. These numbers are bound to soar. The whole "strategic default" epidemic represents a breakdown of respect for law and also for the moral code (of honoring contracts) that constitutes the very heart of a viable economy.

The issue of clear legal titles to property is indispensable to a thriving capitalist economy, as the Peruvian economist Hernando de Soto explained in his bestseller The Mystery of Capital. We either restore the clarity and inviolability of titles to property, or our capitalist system breaks down.

At the center of the foreclosure controversy is an entity named Mortgage Electronic Registration Systems. MERS was hatched by Fannie Mae, Freddie Mac, and other giant players in the mortgage business to speed up the mortgage-backed securitization process and bypass various local property laws. If, in fact, MERS trampled on state and local laws, this represents a breakdown of constitutional federalism and a direct assault on the rule of law.

If all of the breakdowns listed above continue unabated, then we are peering over the precipice at a potential breakdown of social, civil, and political order, too. That's the nightmare scenario. Let's get back on track before it's too late.

Reflections on the GOP Pledge

Last week, thirteen Republicans released a "Pledge to America." What is most surprising to me is its length. At twenty-one pages, it was many times the length of the GOP's hugely successful 1994 "Contract with America." Why ditch a winning formula?

Furthermore, our increasingly unpopular president is known for being long-winded, and his progressive allies in Congress are infamous for concocting ridiculously long bills. Wouldn't a simple, concise list of objectives accentuate the contrast between the two parties?

Instead of sticking to the main theme of reining in an insanely expensive and increasingly intrusive government, the pledge was padded with statements designed to rally the traditionally Republican pro-life, pro-military, and small business constituencies. Yes, those areas are important, but the single issue that unites the largest number of Americans today is the concern that if we don't check runaway government soon, we never will. The too-broad pledge ends up being a hodgepodge of cliched sloganeering. It offers superficially bold but often frustratingly vague proposals, occasionally dubious math, and at least one glaring omission.

Here are some examples of the pledge's faults:

It expresses an intent to "make government more transparent . . . careful in its stewardship and honest in its dealings." But doesn't every party claim this? Why not pledge to drastically shrink government instead?

It also promises "a better America." Who would promise a "worse" America?

It offers "[a plan whereby] the best ideas trump the most entrenched interests." Sure. Then why not put entrenched interests on notice by forswearing earmarks? (This is the glaring omission I spotted.)

It aims to "eliminate wasteful and duplicative programs . . . while still fulfilling all necessary obligations." Everyone promises to trim waste, but it never happens; instead, too-big bureaucracies proliferate and expand. More fundamentally, where do Republicans differ from Democrats on the "necessary obligations" of government?

It seeks to "require congressional approval of any new federal regulation that may add to our deficit and make it harder to create jobs." Why not insert a period after "regulation" and leave out the qualifiers that follow? Currently, rules proposed by federal bureaucracies take effect automatically unless Congress -- which is too busy to even read its own bills, much less reams of bureaucratic regulations -- explicitly rejects them, and so they are almost never challenged. Change it so that no rule proposed by unelected bureaucrats takes effect unless Congress explicitly votes to adopt it.

The pledge suffers from occasional ambiguity. Its proposal to replace Obamacare with reforms like liability reform and permitting interstate sales of health insurance makes sense. But then the Republicans sound just like Democrats when they promise to "ensure [do they mean "mandate?"] that those with pre-existing conditions gain access to the coverage they need."

Remember the promise to eliminate "duplicative" programs? Then why promise "a net hiring freeze" for federal employees instead of reducing the federal payroll after Obama's rapid expansion of it?

The pledge calls for "preventing the expansion of unfunded liabilities." Fine, but simply freezing the amount of those unpayable promises isn't enough. If we don't eliminate many trillions of those liabilities, our financial doom is sealed.

Another intriguing proposal is to require every bill to include a citation of constitutional authority. Do Republicans regard such authority as the letter of the Constitution itself or merely judicial opinions written about the Constitution?

Overall, the pledge is not very bold. The authors' numbers suggest very modest plans for downsizing Uncle Sam. At one point, they write about rolling spending back to "pre-stimulus, pre-bailout levels." That sounds like at least a trillion-dollar cut to me, but then they say that such a step would save $100 billion. Huh?

The pledge has its redeeming features. Invoking the Declaration of Independence at the outset is inspiring. Some of the facts cited hit home -- e.g., how much higher taxes will be next year for middle class families and single moms if the Bush tax cuts expire; the existence of 2,050 federal programs providing economic assistance to Americans.

At best, though, the "Pledge to America" is a mixed bag. Clearly, its Republican authors sought to chart a middle path between Democrats and the Tea Party movement. In that, they succeeded.

This is probably a sound political strategy for the GOP. With voters weary of heavy-handed, hatch-it-behind-closed-doors-in-the-middle-of-the-night-then-ram-it-into-law-before-anyone-reads-it legislation (not to mention counterproductive "stimulus" plans, in-your-face cronyism, and soaring national debt), 2010 is the Republicans' election to lose. All they have to do is run to the right of Obama and they will make large gains in Congress.

Would the "Pledge to America," even if adopted in its entirety, be enough to turn us off our current road to national bankruptcy? No. But perhaps it will prove to be the first of many steps needed to restore economically sound governance to our country.

Understanding "Austerity"

A couple of years ago, the terms "too big to fail" and "bailout" were the trendy buzzwords. Currently, the "in" word seems to be "austerity." On both sides of the Atlantic, public officials and media pundits are debating the need for "fiscal austerity programs," i.e., shrinking government deficits by increasing tax revenues and/or reducing expenditures.

The term "austerity" is problematic. It connotes sacrifice and deprivation. While "austerity" programs include cutbacks in some persons' lifestyles, it seems odd to say that learning to live within one's means is a sacrifice. What some call "austerity" is simply the recognition of reality: A society cannot chronically consume more than it produces.

Favoring "austerity" are those worried that today's swollen budget deficits and national debts, if not corrected, will trigger an economic catastrophe through a sovereign debt crisis (i.e., the inability of governments to find buyers for their bonds). Opposing it are those who profess concern about the economic hardship that would be endured by innocent victims, and/or those who believe that the right economic policy is for governments to increase spending and budget deficits even more than they already have.

Traditionally, "austerity programs" have been International Monetary Fund (IMF) bailouts of heavily indebted, virtually bankrupt Third World governments. For governments to obtain a loan, the IMF has required them to get their fiscal affairs in order by reducing their budget deficits.

Today, by contrast, we find that some of the wealthiest countries in the world require "austerity programs." The dangerous indebtedness of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) is well known. This has deflected our attention from the salient reality that the United States has comparable degrees of debt and deficits to those European countries. We, too, are in danger of either a sovereign-debt and currency crisis.

We should be ashamed and alarmed that we are even talking about "austerity programs" for the United States of America. The very fact that we are doing so means that we have lapsed into a Third-World-style quagmire of fiscal incompetence and over-indebtedness. Like a banana republic, we have allowed a self-serving political class to spend tax dollars and borrowed funds to "buy" popularity and take us to the brink of national bankruptcy.

Uncle Sam has behaved like a guy earning $40,000 per year who -- with the help of borrowing -- has been spending $60,000 per year. Obviously, that can't continue indefinitely. In fact, such a person can't repair his balance sheet even if he reduces his annual consumption to $40,000; he has to consume less than $40,000 to be able to serve his debt obligations. So it is with Uncle Sam.

In recent years, our government has gone on a spending binge. As a result, today's economy is sluggish and severely hung over. Yet Keynesian economists like Paul Krugman tell us that we haven't binged enough. We've been belting down doubles, but Krugman says that the cure for our fiscal hangover is to go back to the bar and start chugging triples. No thank you.

Other pundits on the left are calling for tax increases instead of spending cuts. Their primary goal is the redistribution of wealth, and so they object to the alleged unfairness of spending cuts. This raises the issue of whether existing government payments to individuals ever were fair. There isn't space to debate this now, but the overriding problem is this: If federal spending isn't cut significantly, we will end up with a financial crisis and economic crack-up that will cause more economic pain for more people, including those that the redistributionists claim to want to help. What could possibly be fair about that?

It is clear what we must do: slash government spending. Tax rates should not be raised while we are in this weakened economic condition.

What some call "austerity" is simply a return to fiscal sanity and economic reality. We cannot continue to spend more than we produce. The adjustments will be painful, but the longer we wait to bite the bullet, the more painful those necessary adjustments will be.

One more point: The blame for the pain caused by "austerity" belongs, not to those who make the politically difficult decisions to cut spending, but, to those in the past who made politically facile decisions to spend beyond our means. They are the ones who got us into this mess.

Exchange-Rate Mythology and Weak-Dollar Nonsense

If you read the financial press or listen to what politicians say, you have probably heard many times how important it is for the Chinese renminbi (yuan) to strengthen against the dollar. Indeed, it sometimes sounds as though a weaker dollar is the key to a prosperous economic future for Americans. Nonsense!

Let's look at this issue from an individual standpoint. Are you better off with a stronger or weaker dollar? In other words, do you hope to be able to buy a lot or a little with a dollar? Silly question, isn't it?

I first learned the advantage of a strong dollar when I lived in Colombia, South America, as a 19-year-old. When I first got there, I could exchange one U.S. dollar for 16 Colombian pesos. Several months later, I could get close to 20 pesos per dollar. At that exchange rate, I could buy a steak dinner and a beer in a nice restaurant on Carrera Septima, the main street of the capital city, Bogota, for the equivalent of one dollar. For an impecunious college kid, that was a real treat!

A strong currency is a consumer's best friend. Why, then, do politicians fixate on exchange rates and lobby for a weaker dollar?

There are two reasons for this anti-consumer attitude: an obsession with balance of trade data and the problem of debt. Let's examine the trade question first.

We hear the constant refrain that we have such a large trade deficit with China because China manipulates the dollar-yuan exchange rate, keeping the yuan artificially cheap. True, the Chinese do manipulate the exchange rate. But if the yuan were to strengthen significantly over the next several years -- say, even if it doubled vis-a-vis the dollar (although there is no guarantee that it would in a free, unmanipulated exchange-rate market) -- would China's trade surplus with the United States shrink? Probably not.

Nearly 40 years ago, the exchange rate for the Japanese yen was over 300 to a single dollar. Japan was running a large trade surplus with the United States. Some experts believed that the way to shrink the Japanese surplus (i.e., the U.S. trade deficit) was for the yen to appreciate.

Fast forward to the 1990s. The exchange rate was about 90 yen to the dollar. In other words, the yen bought more than three times as many dollars as before. And guess what? The U.S. trade deficit with Japan hardly budged.

In fact, Japan derived some considerable benefits from the stronger yen. For example, since the global market for oil is priced in dollars, the real cost of higher oil prices to the Japanese has been only about 1/3 of ours. Advantage, Japan.

Just as other factors outweighed the impact of the currency exchange rate in the trade balance between Japan and the United States, this has also been the case in recent years with China. Between July 2005 and July 2008, the yuan strengthened 21 percent against the dollar, and yet the annual trade deficit rose from $202 billion to $268 billion.

American imports from China increased by 39 percent during that period in spite of the stronger yuan. In theory, a stronger yuan is supposed to reduce American demand for Chinese goods by pushing their prices higher. In practice, though, most Chinese goods are labor-intensive, meaning that labor is the major component in their price -- yet even if Chinese wage rates rose by several multiples, the goods they produce would still be competitively priced here.

This isn't to say that no Americans benefit from a weaker dollar. The weak buck increases the sales of some exporters. I'm sure they are delighted to contribute to the reelection campaigns of politicians who are weak-dollar proponents, even though most Americans are net losers due to reduced purchasing power.

Besides exporters, the other special interest group that benefits from a weaker dollar is official Washington itself. Throughout history, debtors have favored monetary debasement and depreciation. It is easier to repay debts that way. Since Uncle Sam is the largest debtor in the history of the world, Washington insiders have the strongest incentive to weaken the dollar.

Even though a weaker dollar defrauds our creditors, foreign creditors prefer getting repaid in cheaper dollars to an outright default and suspension of payments, so they will hold their noses and settle for what they get. Through this ethically dubious device, our profligate, dissolute, bankrupt government bleeds the wealth of productive citizens and manages to prolong its misrule for a while longer. We the people are left to hold our noses -- just like the Chinese and our other creditors. *

"Liberty must at all hazards be supported. We have a right to it, derived from our Maker." --John Adams

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