Good Politics but Unlikely Bipartisanship

James A. Davids
Assistant Dean, Robertson School of Government
Assistant Professor of Government & Law, Regent University

President Obama’s selection of Sonia Sotomayor as his first nominee to the Supreme Court certainly is good politics. Given Judge Sotomayor’s gender, ethnicity, and Roman Catholic background (she graduated in 1972 from Cardinal Spellman High School in the Bronx), the President tipped his hat to three important voting constituencies that favored him much more than John Kerry.

Good politics, however, does not necessarily ensure a good Supreme Court pick. Take President Eisenhower, for example. His first nomination (as Chief Justice) was a political rival for the 1952 Republican presidential nomination, and he later picked a New Jersey Catholic to curry the favor of northeast voters in the 1956 election. After Eisenhower left office, a reporter asked him whether he had made any mistakes as president. "Two," the former president replied. "They are both on the Supreme Court." Eisenhower’s selections of Earl Warren and William Brennan led to an unpopular explosion of criminal rights.

Other examples abound, including the selection of the “stealth nominee” whom Judge Sotomayor will replace if confirmed by the Senate. At the press conference announcing David Souter’s nomination, President George H.W. Bush said five times that the future Justice Souter was "committed to interpreting, not making the law." In promoting David Souter to conservatives, White House Chief of Staff John Sununu described his fellow New Hampshire citizen Souter as a “home run,” which conservatives foolishly interpreted as a “home run” for their team.

With this pick, it is unlikely that President Obama is repeating the mistakes of these Republican Presidents. First of all, the President is not politically indebted to Ms. Sotomayor, and although he seeks to curry favor with the fastest growing element of the electorate, he is not selecting a conservative Hispanic. Perhaps most importantly, the President has a very healthy majority of fellow Democrats in the Senate, and therefore does not have the problem usually confronted by Republican Presidents (while Republicans have enjoyed the White House for 36 of the past 57 years, they have controlled the Senate for only 14 of those years).
With confirmation assured, President Obama nevertheless will seek votes from Republican senators so he can claim bipartisan support similar to that achieved by President Clinton (the Senate approved Clinton’s choices of Ruth Bader Ginsburg and Stephen Breyer by votes of 96-3 and 87-9, respectively). Such bipartisan support is unlikely, however, since Republicans in the Senate cannot simply “roll over” like they did for Ginsburg and Breyer after the pitched confirmation battles for Chief Justice Roberts (confirmed 78-22) and Justice Alito (confirmed 58-42). Rest assured that the confirmation process, however, will not be as rancorous as that of Roberts and Alito, since the Republicans on the Judiciary Committee have no one comparable to Sen. Charles Schumer.

Republican Senators seeking cover for voting for Sotomayor should not look to the fact that the first President Bush nominated her to the federal bench. First of all, historically the selection of federal district court judges has been the prerogative of the U.S. Senators from the state where the vacancy exists. The White House and the Department of Justice’s Office of Legal Policy review the recommendations, of course, but given the nature of the work (the overwhelming majority of the 338,000 criminal and civil cases filed in 2008 are routine in nature) and the fact that few of these cases (less than 200, and some of these are appeals of State Supreme Court decisions) actually go to the Supreme Court, great deference is given to the recommendation of the Senators.

Moreover, any stamp of approval by the first Bush administration for Judge Sotomayor is particularly dubious because of the “New York Rule.” In New York (as well as other states that follow this practice), the two U.S. Senators divide their judicial selections with the U.S. Senator of the same party as the occupant of the White House getting three judicial picks and the Senator of the opposing party getting the fourth pick. The two U.S. Senators from New York during the first Bush administration were Republican Al D’Amato and Democrat Daniel Patrick Moynihan. Given Judge Sotomayor’s politics, she was most likely the pick of Senator Moynihan rather than Senator D’Amato, and the administration of George H.W. Bush merely complied with this recommendation.

Given the depleted ranks of Republican senators and their natures (which white Republican male senator from the South or West will want the role of being harsh to a Hispanic female?), the confirmation of Judge Sotomayor will not replicate the battles for Robert Bork and Clarence Thomas. Another reason for concluding that Sotomayor is a good political choice for President Obama.

Peter Schiff Advocates for New Treasury Head

“Peter Schiff of Euro Pacific Capital, who in 2006 publicly warned the subprime crisis would drag down financial markets, said Obama's policies will only re-inflate the credit bubble.

"As any drug addict knows, if you stop using drugs you will go through withdrawal. Government is making the situation worse," said Schiff. "We don't need any more stimulus. We are suffering from the stimulus we have already been given."

He joked years of misguided U.S. fiscal policy has created a Ponzi economy, where new Treasury bonds must be sold to repay existing investors just to keep Uncle Sam solvent.

"I don't know why we have Bernie Madoff in jail," Schiff said. "We should appoint him secretary of the Treasury."”

http://www.reuters.com/article/wtUSInvestingNews/idUSTRE54S5Y020090529

Peter David Schiff is the president of Euro Pacific Capital and is a frequent commentator on American financial news programs on CNBC, CNN, CNN International, Fox Business, Bloomberg TV, and Fox News. He is best known for having predicted the economic crisis of 2008. He is the author of the 2007 book Crash Proof: How to Profit From the Coming Economic Collapse, published in 2007.

His comment as to the wisdom of present and future stimulus plans to re-inflate the credit and housing markets is worth noting. Trying to restore us to 2006 is not a good strategy for the future, since as time and technology march on, the U.S. and world economy somehow will remain in a time warp. A far better strategy would be to take the “lumps” inherent in any economic reversal, but then move on to the next growth area.

Bernie Madoff cannot be secretary of the Treasury, of course, until his release from prison that will be announced about a month from now (June 29). The point is well taken, however. A Ponzi scheme centers, of course, on the perp paying off some client accounts with the investment of subsequent clients. The practice of the U.S. government over the past several decades has been similar. As Treasury bills are redeemed by older investors, new investors are found to pay off not only the principal but also interest. What the U.S. Treasury has done for decades would put others in prison.

A Tdj by Jim Davids.

Why “too big to fail” is bad policy

“If ‘too big to fail’ is incompatible with democracy, it also destroys the dynamism that is the central achievement of the market economy. In principle, there is no reason why disruptive innovations and radically new business models should not come from large, established, dominant companies. In practice, the bureaucratic culture of these organisations is such that this rarely happens. Revolutions in business generally come from new entrants. That is why so many of today's market leaders – Microsoft and Google, Vodafone and Easyjet – are companies that did not exist a generation ago. These companies could not have succeeded if governments had been committed to the continued leadership of IBM and AOL, AT&T and British Airways. ....

There should be a clear distinction in public policy between the requirement for essential activities to survive and the continued existence of particular companies engaged in their provision. There are many services we cannot do without – the electricity grid and the water supply, the transport system and the telecommunications network. ....

But the need to keep the water flowing does not establish a need to keep the water company in business. ....

‘Too big to fail’ – whether the claimant is a bank or an auto company – is not a status we can live with. It is both better politics and better economics to deal with the problem by facilitating failure than by subsidising it.”

John Kay, "Why `too big to fail' is too much for us to take", Financial Times (27 May 2009).

www.ft.com/cms/s/0/4f857c8c-4a2a-11de-8e7e-00144feabdc0.html


John Kay is a financial columnist for the Financial Times of London.

However bad “To big to fail” is as a policy, and it is very bad, even worse is “We can’t let our political supporters fail”, or even worse than that, “We can’t let our friends on Wall Street fail”. Unfortunately, all these seem to be the policies pursued in Washington.

A Tdj by Doug Walker.

The Administration’s Current Policy Approach is Not Working

In the minds of many the global financial crisis was caused by a collapse in the U.S. housing market and the disastrous effects it had on the financial sector here and abroad as packages of toxic American mortgages were sold far and wide. The story goes as follows: Once the housing bubble burst, a credit crisis unfolded, the worst since the 1930s, and in the uncertainty of the situation banks across the world refused to lend at all, even to qualified borrowers who had been customers for years. A sharp drop in the demand for goods and services and in capital investment and international trade resulted, leading to a severe worldwide recession.

In the U.S., the policy response has been twofold: First, restore liquidity to the financial system through monetary measures designed to move non-performing loans onto the balance sheet of the government while simultaneously injecting massive amounts of reserves into the banking system to promote lending; and Second, stimulate the demand for goods and services by ramping up government spending and running massive deficits, reaching to some 12 per cent of the GDP.

The inherent contradiction in these measures -- one aimed at keeping liquidity high and interest rates low and the other spiking demand, soaking up liquidity and driving interest rates up with heavy borrowing -- has been overcome by the Fed purchasing Treasuries by the carload. To date, however, these policies have not fundamentally changed the outlook, and the U.S. and the world remain mired in a deep and on-going recession. Moreover, by greatly expanding the monetary base, the Fed increased considerably the risk of inflation once a recovery gets underway.

Perhaps the reason the current policy stance has not been successful is the narrative related above about the cause of the crisis, and hence the appropriate policy response, is wrong. While it is true that a housing bubble burst and the financial sector froze, this may only be the proximate cause of the crisis, the trigger that initiated a more widespread breakdown as it exposed deeper problems.

As we have seen in recent months, the economy’s problems extend far beyond sour mortgages and disarray in credit markets. The auto industry, as one example, has been in desperate straits for many years and may well follow the American steel and electronics industries in a steep decline. The country has also been running a huge deficit on its trade account for decades, at times amounting to 6 per cent of its gross product; this deficit is reflective of massive global imbalances -- insufficient saving in the U.S. and surplus saving in Asia and elsewhere -- that must be eliminated if global growth is to be restored. Many states and localities have been running enormous deficits for years. And many public and private pension and health care finance systems are actuarially bankrupt, and not by a small amount. Similar problems plague other countries.

These latter problems are structural in nature and are not only far more persistent and difficult to overcome than those of the financial system but are the underlying reason for the disorder in financial markets. Given the country’s weak productive structure and unsustainable entitlements, no one should be surprised that current policies, focused as they are on short-term concerns, have yet to achieve results. More importantly, these short-term policies aggravate the longer-term structural imbalances that must be overcome to restore sustainable growth to the economy.

A more realistic narrative of the crisis would focus on the huge imbalances in the American economy and the need for the country to restructure its productive base, match incomes and outlays in its government and trade accounts, and reform its entitlements to sustainable levels. It will take many years to do this. If anything, the present policy stance pursued by the Administration makes overcoming structural problems much more difficult by raising taxes on the productive, implementing huge increases in government spending and entitlements, and introducing far-reaching governmental controls over private economic activity.

If the Obama Administration insists on its present policy course it will neither restore stability to the financial sector nor set the stage for a return to the rapid pace of economic advance the country enjoyed for decades.

A comment by Doug Walker.

Adam Smith on the government takeover of General Motors

“What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”

Adam Smith, The Wealth of Nations (1776), Book IV, Chapter II.

http://www.econlib.org/library/Smith/smWN13.html


Step-by-step, one error after another, going where it said it would never go, the Obama Administration continues to traverse the road it paved toward the inevitable nationalization of General Motors and the American automobile industry.

News reports say that the bankruptcy being planned for GM involves a quick sale of the company’s sound assets to some new entity owned by the government and the parking of its questionable assets in bankruptcy protection. Secured lenders would probably be made whole with other claims settled in bankruptcy proceedings. The amount the government will pay for General Motors has not yet been set.

Under the plan, the government will give a majority stake in the new company to the auto unions and a significant share to GM’s bondholders. It will also provide the new entity with a line of credit and forgive much of the $15 billion previously extended to GM as emergency loans. According to the report, GM has until 1 June to restructure its operations and lower its operating costs or the company will follow the Chrysler route to bankruptcy.

However the problems of GM are resolved, it is difficult to see how GM can ever be a viable company if the government insists on involving itself in the entire range of questions related to its organization, operation and product mix. Not only is the Administration restructuring the company along lines that correspond to the interests of its political supporters but it now has proposed fuel mileage and other mandates that correspond to its policy predilections of the moment. Taking the wealth of the stock and bond holders of GM and giving it to political allies of the Administration is of course contrary to the rule of law and a prescription for disaster for the company in its efforts to attract private capital; unions have, after all, little direct interest in the question of efficiency or the demands of marketing to fickle customers and few will invest when the asset they own can be transferred to the government’s political allies in a moment. Imposing draconian mandates on an industry already reeling under the pressures of corporate rigidities and union inflexibility is a formula for further weakening the industry; auto companies have, after all, regularly failed to achieve these standards in the past and regard them as tremendously complicating their ability to compete with foreign auto firms. It is very difficult to see how the American automobile industry can survive when the conditions under which they must operate are even more adverse than they have been in the past.

Adam Smith is right. Governments are not capable of running business firms. If allowed to do so, they will make decisions, as they are now, for the benefit of the special interests that support them and demand the production of products they regard as consistent with their political objectives, not those consistent with the public interest or those desired by consumers. In the end, a company can succeed only if it produces goods and services that its customers are willing to buy, and this must be determined in the competitive marketplace, not by government fiat. More importantly, the entire process of innovation and adaptation to change in a modern economy requires decision making and flexibility that is impossible once political objectives are introduced into what is supposed to be a profit maximizing calculation on the part of the firm. Any other approach to business decision making means bailouts today, bailouts tomorrow, bailouts forever.

A Tdj by Doug Walker, with a “Thank you” to Café Hayek for the reminder of Adam Smith’s advice on government involvement in business decision making.

Why greater financial regulation is not the answer to the financial crisis

“Human beings are as good at devising ex post facto explanations for big disasters as they are bad at anticipating those disasters. It is indeed impressive how rapidly the economists who failed to predict this crisis — or predicted the wrong crisis (a dollar crash) — have been able to produce such a satisfying story about its origins. Yes, it was all the fault of deregulation.

There are just three problems with this story. First, deregulation began quite a while ago (the Depository Institutions Deregulation and Monetary Control Act was passed in 1980). If deregulation is to blame for the recession that began in December 2007, presumably it should also get some of the credit for the intervening growth. Second, the much greater financial regulation of the 1970s failed to prevent the United States from suffering not only double-digit inflation in that decade but also a recession (between 1973 and 1975) every bit as severe and protracted as the one we’re in now. Third, the continental Europeans — who supposedly have much better-regulated financial sectors than the United States — have even worse problems in their banking sector than we do. …
…
The biggest blunder of [the financial crisis] had nothing to do with deregulation. For some reason, the Federal Reserve convinced itself that it could focus exclusively on the prices of consumer goods instead of taking asset prices into account when setting monetary policy. In July 2004, the federal funds rate was just 1.25 percent, at a time when urban property prices were rising at an annual rate of 17 percent. Negative real interest rates at this time were arguably the single most important cause of the property bubble.

All of these were sins of commission, not omission, by Washington, and some at least were not unrelated to the very considerable political contributions and lobbying expenditures of the financial sector. Taxpayers, therefore, should beware. It is more than a little convenient for America’s political class to blame deregulation for this financial crisis and the resulting excesses of the free market. Not only does that neatly pass the buck, but it also creates a justification for . . . more regulation. The old Latin question is highly apposite here: Quis custodiet ipsos custodes? — Who regulates the regulators? Until that question is answered, calls for more regulation are symptoms of the very disease they purport to cure.”

Niall Ferguson, “Diminished Returns”, The New York Times (15 May 2009).

http://www.nytimes.com/2009/05/17/magazine/17wwln-lede-t.html?_r=2&scp=1&sq=niall&st=cse


Niall Ferguson is a professor at Harvard University and the Harvard Business School and the author most recently of “The Ascent of Money: A Financial History of the World.”

With regard to financial institutions, there are basically two kinds of regulation: safety-and-soundness regulation and compliance regulation. Safety-and-soundness regulation focuses on protecting “fixed amount creditors” such as depositors at a bank or S&L or holders of CDs from losses and on ensuring the stability of the financial system. Investors in stock and bond funds are not fixed amount creditors, and their investments are not protected but allowed to fluctuate in value as financial markets determine. Compliance regulation focuses on protecting individuals from “unfair” dealings by financial institutions and criminal acts such as “money laundering”. Calls for greater regulation stress the need to strengthen safety-and-soundness regulation.

A large number of agencies are engaged in regulatory efforts directed at financial institutions, including the Federal Reserve, the FDIC, the Comptroller of the Currency, the Office of Thrift Supervision, the National Credit Union Administration, as well as others. In the case of stocks and bonds, the Securities and Exchange Commission regulates stockbrokers and their firms. The IRS is also involved in scrutinizing the activities of these and other firms, and of course equivalent agencies at the state level are also engaged in regulation activities.

Safety-and-soundness regulation looks at the overall solvency of a financial institution (i.e., that the value of its assets exceeds its liabilities)and its liquidity (that it can meet payment requests). It concerns itself with the question of whether the institution maintains a positive capital position, so that its assets exceed its liabilities by more than some stated proportion of its assets. Regulators are also concerned with such questions as asset diversity to guard against riskiness. As a general rule, financial regulators do not concern themselves with whether a particular transaction was wise or not, a question beyond their ability to determine. If the main problem before the banks is sour loans made by their own financial officers, it is not clear how greater regulation can help avoid another financial crisis.

It is true that financial regulation failed and failed badly in recent years. But the causes of the financial crisis go far beyond poor financial regulation, and as Ferguson points out the deregulation of recent decades does not seem to be strongly associated with the systemic financial failure we have suffered this past year. It is also difficult to see how greater financial regulation, especially by government agencies that have shown themselves to have failed in the past and subject to constant manipulation by special interests, can be relied upon to avoid financial crises in the future.

Perhaps it would be wiser to privatize financial institution regulation. After all, it’s difficult to see how private regulators could have done worse than the government regulators.

A Tdj by Doug Walker.

The huge tax increase in your future

“This week, the federal government published two important reports on long-term budgetary trends. …

The first report is from the trustees of the Social Security system. News reports emphasized that the date when its trust fund will be exhausted is now four years earlier than estimated last year. But in truth, this is an utterly meaningless fact because the trust fund itself is economically meaningless.
…
Most Americans believe that the Social Security trust fund contains a pot of money that is sitting somewhere earning interest to pay their benefits when they retire. On paper this is true; somewhere in a Treasury Department ledger there are $2.4 trillion worth of assets labeled "Social Security trust fund."

The problem is that by law 100% of these "assets" are invested in Treasury securities. Therefore, the trust fund does not have any actual resources with which to pay Social Security benefits. It's as if you wrote an IOU to yourself; no matter how large the IOU is it doesn't increase your net worth.
…
The trust fund is better thought of as budget authority giving the federal government legal permission to use general revenues to pay Social Security benefits when current Social Security taxes are insufficient to pay current benefits--something that will happen in 2016. …

What really matters is not how much money is in the Social Security trust fund or when it is exhausted, but how much Social Security benefits have been promised and how much total revenue the government will need to pay them.

The answer to this question can be found on page 63 of the trustees report. It says that the payroll tax rate would have to rise 1.9% immediately and permanently to pay all the benefits that have been promised over the next 75 years for Social Security and disability insurance.

But this really understates the problem because there are many people alive today who will be drawing Social Security benefits more than 75 years from now. Economists generally believe that the appropriate way of calculating the program's long-term cost is to do so in perpetuity, adjusted for the rate of interest, something called discounting or present value.

Social Security's actuaries make such a calculation on page 64. It says that Social Security's unfunded liability in perpetuity is $17.5 trillion (treating the trust fund as meaningless). The program would need that much money today in a real trust fund outside the government earning a true return to pay for all the benefits that have been promised over and above future Social Security taxes. …

To put it another way, Social Security's unfunded liability equals 1.3% of the gross domestic product. …

As bad as that is, however, Social Security's problems are trivial compared to Medicare's. Its trustees also issued a report this week. On page 69 we see that just part A of that program, which pays for hospital care, has an unfunded liability of $36.4 trillion in perpetuity. The payroll tax rate would have to rise by 6.5% immediately to cover that shortfall or 2.8% of GDP forever. …
But this is just the beginning of Medicare's problems, because it also has two other programs: part B, which covers doctor's visits, and part D, which pays for prescription drugs.

The unfunded portion of Medicare part B is already covered by general revenues under current law. The present value of that is $37 trillion or 2.8% of GDP in perpetuity according to the trustees report (p. 111). The unfunded portion of Medicare part D, which was rammed into law by George W. Bush and a Republican Congress in 2003, is also covered by general revenues under current law and has a present value of $15.5 trillion or 1.2% of GDP forever (p. 127).

To summarize, we see that taxpayers are on the hook for Social Security and Medicare by these amounts: Social Security, 1.3% of GDP; Medicare part A, 2.8% of GDP; Medicare part B, 2.8% of GDP; and Medicare part D, 1.2% of GDP. This adds up to 8.1% of GDP. Thus federal income taxes for every taxpayer would have to rise by roughly 81% to pay all of the benefits promised by these programs under current law over and above the payroll tax.

Since many taxpayers have just paid their income taxes for 2008 they may have their federal returns close at hand. They all should look up the total amount they paid and multiply that figure by 1.81 to find out what they should be paying right now to finance Social Security and Medicare.”

http://www.forbes.com/2009/05/14/taxes-social-security-opinions-columnists-medicare_print.html

Bruce Bartlett, “The 81% Tax Increase”, Forbes (15 May 2009).


Bruce Bartlett is a former Treasury Department economist and the author of Reaganomics: Supply-Side Economics in Action and Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy. He writes a weekly column for Forbes magazine.

And to think the 8.1 per cent of GDP increase in the taxes you will have to pay does not include higher costs for Medicaid, the new carbon-based energy taxes now making their way through Congress, Obama’s expected expansion of education, his proposed tax on employer-provided health care insurance, the loss of the charity and other deductions, the increase in the estate tax, interest on the national debt now being accumulated, or other proposed taxes and spending initiatives, such as greatly expanded health insurance subsidies for the poor. And all of this does not include any rise in taxes at the state and local levels.

Nor do we have any idea who will ultimately pay the taxes that finance this great increase in spending. In his tax program, Obama has proposed removing more low-income households off the personal income tax and providing them with a larger “earned income tax credit”, which is a “negative income tax”, or subsidy, to low-wage workers. By reducing the overall tax base and greatly increasing the tax burden on the remaining tax-paying households, taxes across all middle and upper-income groups will rise much more than most people realize.

In fact, looked at realistically there is no way that the tax burden implicit in all of this can actually be carried by middle and upper-income households. It amounts to a program of long-term financial suicide for the vast majority of American families. Add to this financing problems created by the deficits now being generated as a result of the tremendous increase in spending under the recent stimulus package and we have a program of short-term financial suicide for the government.

It is difficult to see how the course Obama has put us on is sustainable over either the short or the longer-term.

A Tdj by Doug Walker.

Are economists really necessary?

“Few things have less shelf life than a daily newspaper. Within less than 24 hours, the news is like day-old champagne: The fizz is gone. Nothing wrong with that, since newspapers never claim to be more than a snapshot of things as they seem to journalists at a point in time.

Economists are another matter. Economists claim to produce stuff that has greater value over a longer term, especially the forecasters. But as we've all come to learn from the global economic crisis, the longevity of the vast majority of work produced by economists isn't much better than your average newspaper. They didn't see the credit and economic meltdown coming, they don't know when it will bottom out, and they don't really know when growth will return and at what rate.

When Gordon Campbell, premier of British Columbia, visited the National Post editorial board a few months ago to discuss the deteriorating state of the B. C. economy, he expressed the frustration of someone who finds himself sailing a ship of state into a hurricane nobody forecast. "Why do we have economists?" he asked, only half joking. Why, indeed. Hundreds of economic forecasts and analyses fill up my e-mail every week. I save them all, and you could fill a book with their wildly off-the-market predictions. Like those of Bank of Canada Governor Mark Carney, who backtracked recently on optimistic outlooks for 2009 and 2010. The outlooks were only a few months old, but already overtaken by events. It's not as if the Bank is short of economic and forecasting expertise. It has upwards of 300 on staff, the biggest agglomeration of economic talent in Canada. Hundreds more economists churn out numbers at the federal department of finance, at the major banks and securities firms, and at investment houses. Not one produced an accurate prediction of the mess we're in now.
…
At heart, though, economic forecasting may be the empty mathematical game the great Austrian economist Ludwig von Mises said it was more than 60 years ago. "The mathematical method must be rejected not only on account of its barrenness. It is an entirely vicious method, starting from false assumptions and leading to fallacious inferences. ...There is no such thing as quantitative economics." Which doesn't say much about the confidence we should put in the latest forecasts for growth next year -- or any year.”

Terence Corcoran, “Why Do We Have Economists?”, National Post (5 May 2009).

http://www.nationalpost.com/opinion/columnists/story.html?id=655fd957-7e38-4186-a7d6-3963c7c792b6


Terence Corcoran is Editor of the National Post.

Economics is essential for economists, especially as a source of income. Where would we be without it? And in what other field can one pontificate endlessly about useless inanities in the classroom and still somehow command respect, even if it’s not much.

But honestly I don’t know if economics is of any use to anyone other than an economist. I cannot help but feel at times that economics and economists have set back government policy greatly and we are worse for it.

A Tdj by Doug Walker.

De Tocqueville on the administrative despotism into which we are falling

“I seek to trace the novel features under which despotism may appear in the world. The first thing that strikes the observation is an innumerable multitude of men all equal and alike, incessantly endeavoring to procure the petty and paltry pleasures with which they glut their lives. Each of them, living apart, is as a stranger to the fate of all the rest – his children and his private friends constitute to him the whole of mankind; as for the rest of his fellow-citizens, he is close to them, but he sees them not – he touches them, but he feels them not; he exists but in himself and for himself alone; and if his kindred still remain to him, he may be said at any rate to have lost his country.

Above this race of men stands an immense and tutelary power, which takes upon itself alone to secure their gratifications, and to watch over their fate. That power is absolute, minute, regular, provident, and mild. It would be like the authority of a parent, if, like that authority, its object was to prepare men for manhood; but it seeks on the contrary to keep them in perpetual childhood: it is well content that the people should rejoice, provided they think of nothing but rejoicing. For their happiness such a government willingly labors, but it chooses to be the sole agent and the only arbiter of that happiness: it provides for their security, foresees and supplies their necessities, facilitates their pleasures, manages their principal concerns, directs their industry, regulates the descent of property, and subdivides their inheritances – what remains, but to spare them all the care of thinking and all the trouble of living?

Thus it every day renders the exercise of the free agency of man less useful and less frequent; it circumscribes the will within a narrower range, and gradually robs a man of all the uses of himself. The principle of equality has prepared men for these things: it has predisposed men to endure them, and oftentimes to look on them as benefits.

After having thus successively taken each member of the community in its powerful grasp, and fashioned them at will, the supreme power then extends its arm over the whole community. It covers the surface of society with a net-work of small complicated rules, minute and uniform, through which the most original minds and the most energetic characters cannot penetrate, to rise above the crowd. The will of man is not shattered, but softened, bent, and guided: men are seldom forced by it to act, but they are constantly restrained from acting: such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies a people, till each nation is reduced to be nothing better than a flock of timid and industrious animals, of which the government is the shepherd.

I have always thought that servitude of the regular, quiet, and gentle kind which I have just described, might be combined more easily than is commonly believed with some of the outward forms of freedom; and that it might even establish itself under the wing of the sovereignty of the people. Our contemporaries are constantly excited by two conflicting passions; they want to be led, and they wish to remain free: as they cannot destroy either one or the other of these contrary propensities, they strive to satisfy them both at once. They devise a sole, tutelary, and all-powerful form of government, but elected by the people. They combine the principle of centralization and that of popular sovereignty; this gives them a respite; they console themselves for being in tutelage by the reflection that they have chosen their own guardians. Every man allows himself to be put in leading-strings, because he sees that it is not a person or a class of persons, but the people at large that holds the end of his chain.

By this system the people shake off their state of dependence just long enough to select their master, and then relapse into it again. A great many persons at the present day are quite contented with this sort of compromise between administrative despotism and the sovereignty of the people; and they think they have done enough for the protection of individual freedom when they have surrendered it to the power of the nation at large. This does not satisfy me: the nature of him I am to obey signifies less to me than the fact of extorted obedience.”

Alexis de Tocqueville, Democracy In America, Book Four, Chapter VI, “What Sort Of Despotism Democratic Nations Have To Fear” (In two volumes, 1835 and 1840), paragraphs added.

http://www.marxists.org/reference/archive/de-tocqueville/democracy-america/ch43.htm


In this excerpt, French political thinker and historian de Tocqueville imagines what life would be like in America if despotism were to become established on these favored shores and the small concerns of men were to come to occupy their minds in place of the grand passions that drove the building of America. It is important to note he does not see despotism being imposed by a foreign army that enslaves the American people and reduces the country to physical ruin. Rather, the vibrancy, independence and self-reliance of the country – the very attributes and characteristics that make Americans Americans -- are slowly smothered from within by an erosion of traditional American values and a failure to transmit these values to the next generation. In their morally weakened state, Americans allow their own government, which they trusted to preserve their freedoms, to replace those freedoms with a state of dependency.

De Tocqueville could see from afar how a weak-willed people could gradually yield their freedom and independence to an increasingly grasping and controlling government that has shed all limitations on its ambitions. It is surprising that so few today, so close to the events that unfold before our eyes, seem so blind to the erosion of liberties and the rule of law now underway in America.

A Tdj by Doug Walker, with a tip of the hat to George Will for his reference to de Tocqueville.

Adam Smith, markets and morality

“[N]ow that bankers are being castigated as the incarnation of greed, blindness and irresponsibility, the man who wrote in his famous Inquiry into the Nature and Causes of the Wealth of Nations that "it is not from the benevolence of the butcher, the brewer, or the baker" - or perhaps the banker in our day - "that we expect our dinner, but from their regard to their own interest" is again accused of being the chief advocate of heartless laissez-faire capitalism, a system that failed and had to fail. In this view, capitalism is nothing but a false religion, with Mammon as its god and Smith as its high priest. Critics worry that markets need a moral foundation that they automatically erode. They ridicule the naïve belief that free markets bring everybody happiness at no cost, a conviction allegedly lacking all philosophical underpinnings.

This is entirely off the mark. The last thing one can say about Smith is that he lacked philosophical depth. ....

Smith was the quintessential intellectual of his era. Intensely intelligent, knowledgeable about everything, he was painstaking, a perfectionist, often confused and a day-dreamer. ....

Absent-minded he may have been, but naïve he wasn't, let alone a cynic. Smith did not tolerate immoral behaviour. It would never have occurred to him that selfishness and greed might be viewed as being just normal - and even less that they might be morally laudable, let alone negligible. This differentiates him from Thomas Hobbes, in whose view man is a wolf to other men, and also from Bernard Mandeville, well-known for his poem "The Fable of the Bees", in which he - half satirically, half seriously - claims that private vices result in public benefits. Smith strongly objected to this view.”

Karen Horn, "Why Adam Smith Still Matters", Standpoint (April 2009).

www.standpointmag.co.uk/node/1069

As Karen Horn points out in this excellent article, The Wealth of Nations is in no sense an ideological pamphlet but an analytical treatise on the logic of the market as a system of economic liberalism. Underlying this treatment of the economy is the theory of the “natural” basis of ethics and of free societies that Smith set forth in his Theory of Moral Sentiments (1759). Smith points out we are all naturally endowed with a capacity for “sympathy” for one another (or, to use the President’s term, “empathy” for one another), that is, a capacity to share and understand each other’s emotions and feelings. These mutual “sympathies” interconnect each of us with one another and by doing so control our conduct and lead to a moral consensus and legal order that imposes reciprocal duties among all and protects the rights and liberties of all. It is the common moral climate and prevailing legal framework created by “moral sympathy” – by our very own conscience -- that underlies Smith’s theory and ideal of the self-adjusting market economy.

In short, in Smith’s view the self-interest of homo economicus was tempered by his conscience and concern for others. Properly channeled and tempered, the actions of all in a market were harmonized through the “invisible hand” of competition to achieve freedom, justice and prosperity. In this sense, Smith tells us, because the actions of everyone engaged in a market consider what might be called a full concordance of mutual feelings and sympathies towards one another, markets are highly moral and already incorporate the empathy towards others President Obama regards as so important.

For this reason, Smith would say that steps by government to override market relationships and outcomes are not only unnecessary but counterproductive to true social welfare.

A Tdj by Doug Walker.

Difference in Worldviews II: Effect of Creation/Evolution

Yesterday’s Tdj focused on the difference between a Christian view of creation (God created man in His image, thereby giving man inherent dignity) and atheistic evolution (man is the result of matter, time, and chance). Today’s excerpt looks at the implication of these two worldviews with respect to having families.

“Now imagine two groups of people -- let's call them the secular tribe and the religious tribe -- who subscribe to these two worldviews. Which of the two tribes is more likely to survive, prosper, and multiply? The secular tribe is made up of people who are not sure why they exist at all. The religious tribe is composed of individuals who view their every thought and action as consequential. The secular tribe is made up of matter that cannot explain why it is able to think at all.

“Should evolutionists... be surprised, then, to see that religious tribes are flourishing? Throughout the world, religious groups attract astounding numbers of followers and religious people are showing their confidence in their way of life and the future by having more children. By contrast, atheist conventions draw only a handful of embittered souls. One of the largest atheist organizations, American Atheists, has around 2,500 members....

“The important point is not just that atheism is unable to compete with religion in attracting followers, but also that the lifestyle of practical atheism seems to produce listless tribes that cannot even reproduce themselves....

“Russia is one of the most atheist countries in the world, and abortions there outnumber live births by a ratio of two to one. Russia's birthrate has fallen so low that the nation is now losing 700,000 people a year. Japan, perhaps the most secular country in Asia, is also on a kind of population diet: its 130 million people are expected to drop to around 100 million in the next few decades. Canada, Australia, and New Zealand find themselves in a similar predicament.

“Then there is Europe. The most secular continent on the globe is decadent in the quite literal sense that its population is rapidly shrinking. Birth rates are abysmally low in France, Italy, Spain, the Czech Republic, and Sweden. The nations of Western Europe today show some of the lowest birth rates ever recorded, and Eastern European birth rates are comparably low. Historians have noted that Europe is suffering the most sustained reduction in its population since the Black Death in the fourteenth century, when one in three Europeans succumbed to the plague. Lacking a strong religious identity that once characterized Christendom, atheist Europe seems to be a civilization on its way out. Nietzsche predicted that European decadence would produce a miserable ‘last man’ devoid of any purpose beyond making life comfortable and making provision for regular fornication. Well, Nietzsche's ‘last man’ is finally here, and his name is Sven.

“Eric Kaufman has noted that in America, where high levels of immigration have helped to compensate for falling native birthrates, birthrates among religious people are almost twice as high as those among secular people. This trend has also been noticed in Europe. What this means is that, by a kind of natural selection, the West is likely to evolve in a more religious direction. This tendency will likely accelerate if Western societies continue to import immigrants from more religious societies, whether they are Christian or Muslim. Thus we can expect even the most secular regions of the world, through the sheer logic of demography, to become less secular over time.”

Dinesh D’Souza, What's So Great About Christianity? 16-17 (2007)

D’Souza’s point that more religious societies have more children appears beyond serious question. The issue is whether religion or some other factor drives the decision to bear children. Many professed Christians, for instance, claim that religion motivates them not to have children. That is, they desire to be good stewards of God’s creation by not bringing into the world more people to consume even more of the earth’s resources. Other Christians maintain that their responsibility is to bring many new children into the world, to fulfill the biblical mandate to be fruitful and multiply. The premise that children are a blessing given by God is the basis of the “quiver full” movement -- http://www.quiverfull.com.

D’Souza argues from a worldview perspective, that religious people have more hope than secularists and that’s why they have more children. This argument is based on the premise that people who believe in eternal life and the return of Jesus Christ to conquer evil and establish a new Kingdom have hope for the future and are willing to bear children in light of this hope. The hope of the secularists, on the other hand, was dashed at the collapse of Nazi Germany, which was the “high water mark” of secularism. In Nazi Germany, science unrestrained by morality had its full fruition, together with master races (the logical consequence of Darwinian “survival of the fittest”) and eugenics testing. The consequential inhumanity of the concentration camps was too much to bear for even hard core secularists, resulting in a lack of hope for a redemptive society based on science. Without hope for a better society or life after death, there is little to inspire a secularist other than pleasure and material goods, and children interfere with both. It is, therefore, no mystery why religious people have more children than secularists.

A Tdj by Jim Davids.

Who Predicted Socialism’s Demise?

“But what spokesman of the present generation has anticipated the demise of socialism or the ‘triumph of capitalism’? Not a single writer in the Marxian tradition! Are there any in the left centrist group? None I can think of, including myself. As for the center itself—the Samuelsons, Solows, Glazers, Lipsets, Bells, and so on—I believe that many have expected capitalism to experience serious and mounting, if not fatal, problems and have anticipated some form of socialism to be the organizing force of the twenty-first century.

... Here is the part hard to swallow. It has been the Friedmans, Hayeks, von Miseses, e tutti quanti who have maintained that capitalism would flourish and that socialism would develop incurable ailments. Mises called socialism “impossible” because it has no means of establishing a rational pricing system; Hayek added additional reasons of a sociological kind (“the worst rise on top”). All three have regarded capitalism as the “natural” system of free men; all have maintained that left to its own devices capitalism would achieve material growth more successfully than any other system.”

Robert Heilbroner, “The World After Communism”, Dissent (Fall 1990), pp. 429–430.


Robert Heilbroner (1919-2005) was Norman Thomas Professor of Economics (emeritus) at the New School for Social Research and author of the best-seller The Worldly Philosophers, a book on the lives and ideas of The Great Economists. A socialist for most of his adult life, he famously wrote in a 1989 New Yorker article:

“Less than 75 years after it officially began, the contest between capitalism and socialism is over: capitalism has won...Capitalism organizes the material affairs of humankind more satisfactorily than socialism.”

Ludwig von Mises, Friedrich von Hayek and Milton Friedman stood almost alone for decades in insisting that a socialist economic system was impossible because of its inherent difficulties of social coordination -- the need to decide to “produce this and not that” -- and because of its threat to freedom – the planners’ need to compel economic actors to do that which they would not otherwise be willing to do. Mises contended that socialism provided no way for planners to gain the information on which to base rational economic decisions, Hayek stressed that only the rise and falling of prices emerging spontaneously in the markets of capitalism could serve as the basis for allocating resources and that socialism would come to be dominated by unthinking and dangerous bureaucrats, and Friedman became the intellectual leader in what became a growing movement to minimize the role of government in the economy as a threat to prosperity and freedom.

The message they sent is simple: There is no example of an economic system other than free market capitalism that provides both liberty and prosperity, and everywhere socialism has been tried, in whatever form, centralized or decentralized, it has degenerated into tyranny and poverty.

It is less than 20 years since the fall of the Soviet Union and it would appear that the warnings of these men about socialism and government involvement in the economy have already been forgotten. We have now embarked on a program of massive government intervention in many industries and almost complete government control of the financial sector. If the message of Mises, Hayek and Friedman is right, the course we are on cannot succeed and will set us back economically and politically for many years to come.

Posted by Doug Walker

Difference in Worldviews I: Creation/Evolution

“The Rev. Randy Alcorn, founder of Eternal Perspective Ministries of Oregon, sometimes presents his audiences with two creation stories and asks them whether it matters which one is true. In a secular account, ‘You are the descendent of a tiny cell of primordial protoplasm washed up on an empty beach three and a half billion years ago. You are the blind and arbitrary product of time, chance, and natural forces. You are a mere grab bag of atomic particles, a conglomeration of genetic substance. You exist on a tiny planet in a minute solar system in an empty corner of a meaningless universe. You are a purely biological entity, different only in degree but not in kind from a microbe, virus, or amoeba. You have no essence beyond your body, and at death you will cease to exist entirely. In short, you came from nothing and are going nowhere.’

“In the Christian view, by contrast, ‘You are the special creation of the good in all-powerful God. You are created in His image, with capacities to think, feel, and worship that set you above all other life forms. You differ from the animals not simply in degree but in kind. Not only is your kind unique, but you are unique among your kind. Your Creator loves you so much and so intensely desires your companionship and affection that He has a perfect plan for your life. In addition, God gave the life of His only son that you might spend eternity with Him. If you're willing to accept the gift of salvation, you can become a child of God.’”

Dinesh D’Souza, What’s So Great About Christianity, 15-16 (2007)

Dinesh D’Souza (1961-) is a the author of several best-selling books including Illiberal Education, The End of Racism, Ronald Reagan: How an Ordinary Man Became an Extraordinary Leader, The Virtue of Prosperity: Finding Values in an Age of Techno Affluence, What’s So Great About America, Letters to a Young Conservative, The Enemy at Home, and What’s So Great About Christianity. D'Souza's articles have appeared in virtually every major magazine and newspaper, including the New York Times, Wall Street Journal, The Atlantic Monthly, Vanity Fair, New Republic, and National Review.
D’Souza’s latest book, What’s So Great About Christianity, explores the positive societal aspects of Christianity. Today’s excerpt merely contrasts the worldview of secularists and Christians. Tomorrow and subsequent days will highlight how this different worldview perspective affects societies.

A post by Jim Davids.

Professor James Davids joins the crew of the Tdj with this missive. Jim will focus on “Faith, the Law and the Contemporary Scene”.

James Madison on Obama’s auto industry takeover

“Bills of attainder, ex-post-facto laws, and laws impairing the obligation of contracts, are contrary to the first principles of the social compact, and to every principle of sound legislation. The two former are expressly prohibited by the declarations prefixed to some of the State constitutions, and all of them are prohibited by the spirit and scope of these fundamental charters. Our own experience has taught us, nevertheless, that additional fences against these dangers ought not to be omitted. Very properly, therefore, have the convention added this constitutional bulwark in favor of personal security and private rights; and I am much deceived if they have not, in so doing, as faithfully consulted the genuine sentiments as the undoubted interests of their constituents.

The sober people of America are weary of the fluctuating policy which has directed the public councils. They have seen with regret and indignation that sudden changes and legislative interferences, in cases affecting personal rights, become jobs in the hands of enterprising and influential speculators, and snares to the more-industrious and less informed part of the community. They have seen, too, that one legislative interference is but the first link of a long chain of repetitions, every subsequent interference being naturally produced by the effects of the preceding. They very rightly infer, therefore, that some thorough reform is wanting, which will banish speculations on public measures, inspire a general prudence and industry, and give a regular course to the business of society.”

James Madison, “Restrictions on the Authority of Several States”, Federalist Papers # 44 (25 January 1788), para break added.

http://www.foundingfathers.info/federalistpapers/fedindex.htm

James Madison (1751 – 1836) was the fourth President of the United States (1809–1817), and one of the Founding Fathers of the United States. He is considered to be the "Father of the Constitution", and wrote over a third of the Federalist Papers, still the most influential commentary on the Constitution.

In an example of crude crony capitalism the Obama Administration has moved to give the auto firm Chrysler to its political supporters in the auto workers union. Needless to say, this is not an easy task, given the sad state of the industry and this firm in particular. Because the owners of Chrysler, Cerberus Capital Management, was too smart to put its own cash into the business, the government had to pump tens of billions of dollars just to keep the company alive so that it could “save” it once it figured out how to do so at the expense of others. It would appear it found a management team for the company in the form of an Italian car company, Fiat, to whom the government is initially giving 20 per cent of the American firm to an in return for nothing accept access to small car technology. No doubt this is being done because the government intends to dictate Chrysler’s future output mix to ensure the company produces only “green” autos. So much for the idea of free enterprise and the Administration statement it doesn’t want to run companies. It is reported that more than half the company will go to the union, although the UAW says they will sell their stake in the firm to fund a trust for retiree health care costs.

It is the hedge funds, pension funds, mutual funds, and individuals who have purchased equity in Chrysler and hold its bonds who the Administration expects to take the financial hit. They are being offered pennies on the dollar in negotiations they describe as “a farce”. Some of the creditors say they were taken aback by the hardball tactics employed to force them to agree with the Administration’s plans to restructure the car company. Many of the creditors claim the demands of the Administration undercut their rights under the law and want to resstructure Chrysler through normal bankruptcy. The President seeks to avoid this procedure and insists on implementing his own plan. Because some creditors have disagreed, he has called them “unpatriotic” and worse. Indeed, some lawyers for the creditors have charged the Obama Administration with threatening them and using unrelated TARP payments as leverage in the negotiations.

It is difficult to see the lawless treatment of the Chrysler's creditors by the Obama Administration as anything other than gangster government of the kind we see in third-world dictatorships. The Administration is using the power of the government to advance the interests of its political allies and its own social and political agenda. This is not right.

But it is precisely the kind of abuse of governmental power Madison warned about. It is destructive of the rule of law and erodes the foundations of stability on which a free and vibrant economy rests. One can only hope that a bankruptcy court and an independent judiciary can treat all parties involved in a needed restructuring of America’s automobile industry in a fair and equitable manner.

Thanks to Don Boudreaux of Cafe Hayek and his friend Lyle for the Madison quote.

Should we tax the foreign profits of American multinationals?

“Tax policy toward American multinational firms would appear to be approaching a crossroads. The presumed linkages between domestic employment conditions and the growth of foreign operations by American firms have led to calls for increased taxation on foreign operations - the so-called end to tax breaks for companies that ship our jobs overseas. At the same time, the current tax regime employed by the U.S. is being abandoned by the two remaining large capital exporters - the UK and Japan - that had maintained similar regimes. The conundrum facing policymakers is how to reconcile mounting pressures for increased tax burdens on foreign activity with the increasing exceptionalism of American policy.

This paper address these questions by analyzing the available evidence on two related claims - i) that the current U.S. policy of deferring taxation of foreign profits represents a subsidy to American firms and ii) that activity abroad by multinational firms represents the displacement of activity that would have otherwise been undertaken at home.

These two tempting claims are found to have limited, if any, systematic support. Instead, modern welfare norms that capture the nature of multinational firm activity recommend a move toward not taxing the foreign activities of American firms, rather than taxing them more heavily. Similarly, the weight of the empirical evidence is that foreign activity is a complement, rather than a substitute, for domestic activity.

Much as the formulation of trade policy requires resisting the tempting logic of protectionism, the appropriate taxation of multinational firms requires a similar fortitude.”

Mihir A. Desai, Abstract of “Securing Jobs or the New Protectionism? Taxing the Overseas Activities of Multinational Firms”, Harvard Business School Finance Working Paper, No. 09-107 (20 March 2009).

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1365907

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)


Mihir A. Desai is a professor at the Harvard Business School.

A key policy question now before many countries is what to do with the corporate profits tax, both on domestically generated profits and those attributable to foreign operations. For the past 25 years across the world the statutory corporate income tax rate has been lowered in country after country. In 1982, the average corporate income tax rate in OECD member countries was almost 50 per cent. By 2000, the average had fallen to 33.6 per cent, and by 2007 it had fallen further to 27.6 per cent.

The long-term decline in the average corporate tax rate reflects two concerns. Business taxes in general tend to be distortionary of economic efficiency because they are not applied proportionately across all products and are shifted forward to consumers and backward to stakeholders in ways that cannot be easily assessed. In addition, a high corporate income tax rate reduces the international competitiveness of a country, and income and employment are lost when multinationals leave to establish operations in a more business-friendly country. In an era of globalization, large corporations are not only mobile in their production activities but may raise needed capital internationally, which loosens their ties to their “home” country. One might add that at a time of financial turmoil, many countries are concerned about the financial health of their corporations, and a more favorable treatment of corporate income strengthens them to survive in a much more competitive international trading environment.

At almost 40 per cent, the U.S. corporate tax rate remains among the highest in the world, with only Japan imposing a slightly higher rate than the United States. The distance between the American and Japanese rates and those of other countries can be large.

The President has recently called attention to what he called “off-shore tax havens” and proposes eliminating corporate “tax loopholes” and “tax havens” for high-income Americans. It is difficult to see how making an already unfriendly business environment even more unfriendly is likely to stem the flow of incomes and jobs abroad. Moreover, as Desai points out, the foreign operations of American firms are an integral part of their domestic operations, and help keep their production costs low. Increasing the tax burden of American corporations and interfering with their decisions about how to organize their production can only increase their costs and reduce their competitiveness at home and abroad.

In a word, the Administration’s policy is stupid.