Friday, April 30, 2010

Reflections on Arizona (part I)

Debates and protests have erupted across the nation regarding SB1070, Arizona's controversial immigration law. Before I continue I will state that after weighing the pros and cons of the law, I ultimately cannot support it. The biggest reasons being that not only does it pose a great risk of engendering racial profiling and harrasment of Latinos, it will prove to be a needlessly inefficient contentious means of addressing the border issues that Arizona faces. However, I strongly reject the claims of its opponents that racism and anti-immigrant sentiments are what compel 70% of Arizonans to support this law. Rather, I believe that it's a misguided attempt to address very real and very legitimate concerns. More than anything, Arizonans are deeply concerned that Mexico's very violent drug and war spill over the borders. And unfortunately drug trafficking and human trafficking have increasingly become intertwined. According to Latina.Com, which is hardly a right wing, anti-immigrant site:

"Phoenix, Arizona has recently received the dubious distinction of being named the kidnapping capital of the United States. Second only to Mexico City in the world in terms of rates of violent kidnappings, local officials have cautioned that Phoenix is caught in a dangerous and even deadly crime wave. Many blame the rise in violent crime on Mexico's drug cartels. With over 370 cases of kidnapping last year alone, the Phoenix authorities have been overwhelmed and are frustrated, "We're in the eye of the storm," Phoenix Police Chief Andy Anderson
told ABC News, "If it doesn't stop here, if we're not able to fix it here and get it turned around, it will go across the nation," he warned.

A 2007 report from the US Justice Department

In the population study of 55,322 illegal aliens (in Arizona), researchers found that they were arrested at least a total of 459,614 times, averaging about 8 arrests per illegal alien. Nearly all had more than 1 arrest. Thirty-eight percent (about 21,000) had between 2 and 5 arrests, 32 percent (about 18,000) had between 6 and 10 arrests, and 26 percent (about 15,000) had 11 or more arrests. Most of the arrests occurred after 1990. They were arrested for a total of about 700,000 criminal offenses, averaging about 13 offenses per illegal alien. ..Of those charged, 49% had previously been convicted of a felony: 20% of a drug offense; 18%, a violent offense; and 11%, other felony offenses.

What this means is that approximately 90% of undocumented immigrants in Arizona do not have serious criminal antecedents. The majority are good and hard working people, however a dangerous, criminal element that constitutes a minority of indocumented immigrants has wrecked havoc on Arizona and increased public apprehension about undocumented immigration. Even those who oppose this law have to admit that that the same porous frontier that allows benign immigrants to enter, permits drug traffickers and common criminals to infiltrate the United States. Several weeks ago, Robert Krentz who was known as "a good Samaritan who often helped injured illegal immigrants trying to cross the boiling desert border into Arizona" was "gunned down while tending to his ranch Saturday morning, and police suspect an illegal immigrant was to blame," because of tracks leading from the Mexican frontier. And just today (4-30-2010) a sheriff in Arizona was shot in the stomach with an AK-47 by suspected drug smugglers.

In order to persuade their fellow Arizonans and Americans that this law is misguided, it is essential that its opponents move beyond the trite and defamatory tactics of labelling its supports as "racist" and "anti-immigrant." They must acknowledge that however much they detest this law, most of its supporters are driven by legitimate concerns of the rising crime and lawlessness. And rather than obstruct all efforts at controlling undocumented immigration, they must work work together with their opponents to first controls the border and then then to craft more humane, intelligent interior enforcement measures that will not be so prone to racial profiling. Because, if progressives and pro-immigrants simply push for amnesty, unaccompanied by viable, reasonable enforcement measures, rising fears and frustrations will engender more bills like SB1070 in Arizona and throughout the nation.

Sunday, April 25, 2010

John Maynard Keynes on FDR (and Obama)

In a letter written to the New York Times, published in December 31, 1933, the liberal and generally statist economist John Maynard Keynes presented a critique of Franklin Delano Roosevelt's National Industrial Recovery Act (N.I.R.A) that describes some of the fundamental problems with the Obama Administration:

"I cannot detect any material aid to recovery in N.I.R.A., which heralded vast economic reforms and public works programs), though its social gains have been large. The driving force which has been put behind the vast administrative task set by the Act has seemed to represent a wrong choice in the order of urgencies...That is my first reflection - that N.I.R.A, which is essentially Reform and probably impedes Recovery, has been put across too hastily, in the false guise of being part of the technique of Recovery."

One could argue that the Obama Administration's policies, from the stimulus plan, to health care reform and cap-and-trade may be needed reforms, however they do very little to move the United States closer to true economic recovery. In fact, it could be argued that they, just like FDR's policies, have impeded recovery. By pursuing policies that raised the cost of labor and production, both FDR and Obama decreased the demand for labor, which is incredibly unwise to do in the face of high unemployment. By his own accounts, FDR aggressively pursued policies that increased wages and the rate of unionization, which was highly favorable for those with secure employment, but helped increase the already dangerously high level of unemployment. In addition he established price controls that actually sought to prevent the prices of goods and services from falling, which decreased aggregate demand and the purchasing power of the public, which further slowed recovery. And lastly, he dramatically raised taxes, which limited the ability and incentives of employers to create new jobs via expanded investment and production.

In the case of Obama, mandates for companies to provide health insurance to their workers may be noble, however it raises the cost of and lowers the demand for labor, which will ensure that fewer jobs are created. And although I am sympathetic to cap-and-trade and other environmental policies, they will raise the cost of production and decrease aggregate demand, which will certainly impede economic recovery. And needless to say, the explosion in spending we have witnessed will be followed by increased taxes, which coupled with an increased regulatory burden will impede long term economic health.

The fundamental problem we encounter is one of order. History shows that bold reforms and regulations are almost always pursued during times of economic distress. Such policies place greater burden on businesses and consumers, when economic activity and investments are most badly needed. A wise course of action would be to loosen the economic reigns placed on entrepreneurs during economic downturns and pursue social and economic reforms during economic booms, when businesses can bear their costs. Unfortunately few Americans, including Obama, have drawn the right lessons from the Great Depression and accordingly are pursuing many of the failed policies that deepened and extended it by many years. In the past it took a world war, massive deficit spending and the ensuing devastation of our economic competitors to pull us out of the depression. Unfortunately, we do not have those luxuries: we are already at war, we are already engaged in unsustainable spending and our economic competitors are booming.

The Conspiracy Against the Taxpayers

A prophetic piece by Steven Malanga from 5 years ago that predicted that rising public sector compensations would lead to rising taxes, debt and unfunded liabilities. Since then the situation has gotten markedly worse. While reading this keep in mind the fundamental differences that exist between public sector and private sector unions. The latter is disciplined by economic realities, whereas the former can utilize their political connections to increase their compensation at a high cost to tax payers. To view the full article, click on the following link:

The Conspiracy Against the Taxpayers

By Steven Malanga

Autumn 2005

For 50 years, public unions, health-care lobbyists, and social-services advocacy groups have doggedly been amassing power in state capitols and city halls, using their influence to inflate pay and benefits for their workers and to boost government spending. The bill for that influence is now coming due, and it is overwhelming state and local budgets. For instance:

In New Jersey, legislators wooing union votes in 2001 voted a 9 percent hike in already rich pensions for the state’s 500,000 public workers, even though a falling stock market was shrinking pension-fund assets. Today, those new perks have added $1 billion to Jersey’s deficit-riddled budget and will add another $4.2 billion over the next five years.

In Washington State, the powerful teachers’ union led a successful 2000 effort to win legislation mandating smaller class sizes, promising that it would cost taxpayers nothing, because surplus revenues could cover the program. This year, the cash-strapped state passed $500 million in new taxes to finance the mandate.

In California, then-governor Gray Davis and a union-friendly state legislature passed a series of bills that swelled the number of state employees who could claim disability retirement benefits and also expanded the number of ailments automatically classed as job-related to include HIV, tuberculosis, and lower-back pain. The flood of new disability claims will cost the state’s retirement system some $465 million over five years, much of which will come out of taxpayers’ pockets.

Such extravagances help explain why state and local government spending reached an all-time high relative to the national GDP during the 2002 recession, producing a fiscal hangover that continues today. Even in an expanding national economy, with tax revenues surging once more, state and local budgets teeter in precarious balance, long-term deficits pile up, and politicians hike taxes to close spending gaps. The budgetary excess has prompted the stirrings of America’s newest tax revolt, as overburdened taxpayers grope for ways to curb the often automatic expansion of state and local government and to reduce the power of public unions.

The tidal wave of local government spending that produced this crisis built up as tax revenues poured into state and municipal coffers during the 1990s boom. State tax collections rose by 86 percent, or about $250 billion, from 1990 through 2001, while local property-tax collections soared by $90 billion, or 60 percent, during a period when inflation increased by a mere 30 percent. Rather than give surpluses back to taxpayers, government went on a spree, lavishing opulent pensions on employees and expanding politically popular health and education programs.

Unions and social-services groups were perfectly positioned to funnel this flood of surplus tax revenues into their pockets rather than back to the taxpayers. Starting with virtually no representation in the public sector 50 years ago, unions have relentlessly organized workers, so that in some states as many as 60 to 70 percent of public employees now are members. As a result, these unions wield huge clout at the ballot box, and union dues give them vast resources to sway public opinion and influence legislation. Gradually, public unions have aligned with local social-services and health-care groups that federal (and later, state and local) government began funding heavily during the War on Poverty of the 1960s and early 1970s—creating a new class of organization that lives off government money. These government-financed nonprofits and their union allies now make up a powerful coalition for bigger government and higher taxes in statehouses and big cities across the land, and they didn’t let a nickel of the 1990s tax windfalls slip through their fingers.

All told, the swell of tax revenues produced about $93 billion in surpluses that state governments soaked up, the Cato Institute estimates; indeed, state general-fund spending alone increased by 85 percent from 1990 to 2001, much faster than the combined rate of inflation and population growth. Absurdly, this spending tempo carried over into the economic slowdown that began in late 2001 and lingered into 2003, as budgets that appeared to be on autopilot grew rapidly, producing $85 billion in collective state budget deficits in fiscal 2003 alone. To close their budget gaps, state and local governments boosted taxes and fees on citizens and businesses already hurting from the economic downturn. Local property-tax bills, for instance, grew by about 6 percent a year from 2001 to 2004, even though the consumer price index increased by only 6.7 percent for the entire period.
The prime budget buster has been the outlandish wage and benefits packages of public employees. Contractually guaranteed, they are untouchable even during economic slowdowns. Public-employee unions have so successfully used their political muscle that whereas public-sector compensation once lagged the private sector, now the reverse is true. Astonishingly, the average state and local government employee now collects 46 percent more in total compensation (salary plus benefits) than the average private-sector employee, according to the nonpartisan Employee Benefit Research Institute.

Wages average a hefty 37 percent higher in the public sector, but the differences in benefits are even more dramatic. Local governments pay 128 percent more, on average, than private employers to finance workers’ health-care benefits, and 162 percent more on retirement benefits. Although the private sector’s heavier concentration of low-wage service employment accounts for some of the wage and benefit gap, public-sector employees do better these days even when you compare similar jobs. Total compensation among professional workers in the public sector is on average 11 percent higher than for similar jobs in the private sector, for instance.

Other comparisons of public- and private-sector pay illustrate the same gap. The Citizens Budget Commission, a New York City fiscal watchdog, found that the average public-sector worker in the metropolitan region received 15 percent more in pay (not including benefits) than the average private worker. The gap was greatest in service-sector jobs, like security guards, health-care workers, and building-maintenance workers, where government on average paid 94 percent more than private firms. A 2001 Rhode Island Public Expenditure Council comparison of private- and public-sector average wages across the nation found that the average public-sector wage was higher in 35 states.

The public unions could only achieve this reversal because government is a monopoly, exempt from marketplace discipline. Competition can punish private companies that give away the store to employees or that perform ineffectively—driving the most profligate or inefficient out of business—but government is perpetual regardless of how it performs, and public unions have succeeded over the years in layering new perks and benefits on top of previous collective-bargaining gains that rarely get rolled back, even in tough times. Awash in contributions from the unions and agencies whose pay they set, the gerrymandered state legislatures and one-party city halls that hand out such largesse are well insulated from voter retribution. Thus taxpayers wind up being nicked by a thousand small benefits piled upon one another year after year.

The buildup of two benefits in particular—pensions and health care—is now producing major budget disasters nationwide. State and local governments used tax surpluses and the 1990s stock-market rise to gold-plate pension programs, with disastrous effect once the stock boom ended. By 2003, state and local pension funds had accumulated over $250 billion in unfunded liabilities, reports the National Association of State Retirement Administrators, leaving taxpayers on the hook. Pension costs in California’s state budget skyrocketed 14-fold, from $160 million in 2000 to $2.6 billion in 2005, and are headed to $3.6 billion in 2009. New Jersey’s pension costs are rising so quickly that without reform they will consume 20 percent of the state budget in five years, up from 8 percent this year. Illinois’ state budget pension obligations will reach $4 billion a year by 2010, which could make them a bigger share of the state budget than local aid to education.

The pensions for which taxpayers must now foot the bill far outshine what many of those same taxpayers in the private sector receive. In New Jersey, for instance, a 62-year-old state employee who retires after 25 years gets 50 percent more in yearly pension payments than an employee retiring with the same salary from the Camden, New Jersey plant of Campbell Soup, a Fortune 500 company, according to the Asbury Park Press. In addition, the state employee receives free health insurance for life to supplement Medicare, while full health benefits for private-sector retirees are now rare. In California, a public employee with 30 years of service can retire at 55 with 60 percent of his salary, and public-safety workers can get 90 percent of their salary at age 50. By contrast to these rich payouts, the small (and shrinking) number of private firms that still provide “defined benefit” pension plans—instead of the now-common “defined contribution” plans that transfer all risk to the worker—pay on average 45 percent after 30 years of service.

Retired public employees in many states also get cost-of-living adjustments to their pensions, which those private-sector workers who still have defined benefit plans rarely enjoy. In Illinois, for instance, where pension payments increase by 3 percent each year—faster than the rate of inflation for most of the last decade—an employee who retired ten years ago with a monthly pension of $4,000 would now be collecting $5,400 a month.

Features unheard of in the private sector drive up government pension packages still further. In New York and Oregon, public employees who contribute their own money to retirement plans get a guaranteed rate of return that is often far beyond what the market provides, and taxpayers must make up the difference. In Oregon, the return is 8 percent annually—about double what safe investments like treasury bonds provide today.

Yet even with states facing fiscal ruin, legislators continue to pour out new pension kickers and health benefits. New Jersey lawmakers recently proposed 86 bills that would increase pension benefits, even though Acting Governor Richard Codey has declared that “these entitlements are strangling the taxpayers of New Jersey.” In Illinois, legislators trying to craft an early retirement plan three years ago to help meet the state’s budget crisis so enriched the plan at the last minute that it cost about $200,000 per retiree, instead of the projected $80,000.

Though union leaders defend these porcine compensation packages by claiming that they help private workers by preventing a private-sector race to the bottom on wages and benefits, high public-sector pay is partly responsible for holding down private wages. Rhode Island is an especially telling example. The state ranks fourth in average pay in the public sector but only 23rd in average private-sector wages, according to the Rhode Island Public Expenditure Council. To cover its high public-sector employee costs, Rhode Island has consistently raised taxes, giving it the sixth-highest total state and local tax burden in the country, including one of the highest corporate tax rates and sky-high property taxes. Those high taxes drain investment capital out of private-sector firms, making it harder for them to finance improvements that boost productivity, which is what in turn allows private-employee wages to rise. Rhode Island businesses have among the lowest rates of investment capital per employee in the country—30 percent below the national average. Thus, the more the state enriches public workers, the further its private workers, who pay public-sector salaries, fall behind. Rhode Island should serve as a cautionary tale for other states: it has one of the highest rates of unionization in the public sector—62 percent, compared with 37 percent nationally.

In this environment, public-sector retirees have become the haves and private retirees the new have-nots. When New Jersey’s pension crisis hit, the state’s newspapers began chronicling the flight of private-sector retirees to states where taxes are lower. Beset by its high public-sector costs, New Jersey has the highest combined state and local taxes in the country, and the fourth-highest level of migration of citizens to other states. One retiree from a manufacturing job told a local newspaper that he moved to Delaware so that he could reduce his property taxes from $3,300 a year in Jersey to $615.

Such resources have made teachers’ unions among the biggest lobbyists and political givers at the state and local level. The Wisconsin teachers’ union plunked down a state-high $1.5 million for lobbying in Wisconsin’s most recent legislative session, while Minnesota’s union was number two in its state, spending nearly $1 million. Oregon’s teachers’ union, with $15 million in annual revenues, spent nearly $900,000 on political contributions in the state’s recent legislative races, and its support, according to the Oregonian, is one reason that Democrats now control the state’s legislature and that a union ex-president is the governor’s education advisor. In New Jersey’s last legislative elections, four-fifths of all incumbents got donations from the state’s teachers’ union.

In addition to higher wages and benefits, this mega-lobby increasingly has focused its might on schemes requiring big spending increases that will boost membership but are of dubious education value. A $2 million advertising campaign by California’s teachers’ union in the mid-1990s, for instance, won nearly $1 billion from the state government to cut class size, though considerable research shows that class-size reduction does little to improve student performance. The money set off a hiring frenzy that added 30,000 teachers (and union members) in three years, but a Rand Corporation study found no significant change in test scores of students who wound up in smaller classes. The program’s only tangible result is that those without full credentials jumped from 1.8 percent of all California teachers to 12.7 percent, as school districts snapped up warm bodies to get the extra state aid.

With no other group able to spend anywhere near so lavishly on education advocacy, voters now get most of their information—or disinformation—from union lobbying and advertising. By relentlessly repeating that mean-spirited taxpayers shortchange America’s kids, teachers’ unions and education bureaucrats, with help from PTAs, have helped spread the myth that public schools are underfunded. An Educational Testing Services poll found last year that nearly half of Americans think that the schools spend on average just $5,000 per pupil a year—half the real amount.

Unions have also convinced Americans that teachers are underpaid, when they now take home considerably better pay packages on average than professional workers in the private sector. The federal government’s national compensation survey estimates that local public school districts pay teachers an average of $47.97 per hour in total compensation, including $12.39 per hour in benefits—figures that far outstrip not only what private school teachers earn, but also the average of what all professional workers earn in private business, a category that includes engineers, architects, computer scientists, lawyers, and journalists.

Teachers’ unions use their power over state lawmakers to smother cost-saving reform ideas in their cradle. When school reformers sought support from Connecticut state legislators, they found teachers’ union representatives camped outside the office of the legislature’s education-committee chair, keeping tabs on who met with him. When the Yankee Institute for Public Policy, a Hartford free-market think tank, held a media briefing on the state’s budget, representatives of state-employee unions outnumbered the invited press. Institute board member George Schiele calls their pervasive presence in Hartford “Orwellian.”

If state pols find teachers’ unions so fearsome, little wonder that local school boards and municipal officials are no match for them at all. Lewis Andrews, a member of the Redding, Connecticut, board of finance, got a glimpse of their raw power when he proposed an innovative alternative to the town’s plans to build a new high school for a projected 50-student enrollment increase. Supporters mailed out a proposal to local residents, suggesting instead that the town pay to have 50 kids sent to private schools and save the millions on construction. The state’s education lobby, which resists any program that smacks of privatization, went ballistic. “At 11 o’clock on the morning the proposal started arriving in the local mail, the president of the State Senate stormed into my office and started screaming at me about it,” says Andrews. “I have no idea how they even found out about it so fast in the capitol.” Needless to say, Redding is building its high school.

The education lobby’s success most clearly shows up in the stunning growth of U.S. public education spending. In the last 30 years, per-pupil spending has nearly doubled, after accounting for inflation, to about $10,000 a year—far more than in most other industrialized countries, according to the Organisation for Economic Co-operation and Development, whose latest figures show that the U.S. outpaces Germany in per-pupil spending by 66 percent, France by 56 percent, and the United Kingdom by 80 percent. Even so, American students rank only in the middle of countries on student achievement tests, the OECD reports.

Municipalities have largely asked taxpayers to finance this spending through local property taxes. Since 1980, property-tax collections in the U.S have increased more than fourfold, from $65 billion to about $275 billion—“only” a doubling after accounting for inflation. Collections have well outpaced the combination of population and inflation growth, according to the Tax Foundation, which found that per-capita local tax collections rose by over 20 percent after inflation from 1987 to 1997. The reason is clear: Pennsylvania’s Commonwealth Foundation estimates that in the two decades before mandatory union dues, local property taxes in that state increased just 14 percent after inflation. But in the 13 years after the 1988 legislation, property taxes went up 150 percent in real terms. Across the nation, much of that tax revenue has gone to finance new local education hires. Local public education employment grew 24 percent, or by 1.4 million workers, in the U.S. during the 1990s.

Since 2003, Medicaid has surpassed even education funding as the biggest state budget item. California will spend $32 billion—29 percent of its budget—on subsidized health care this year, a 129 percent growth in the past decade. Ohio’s $10 billion Medicaid program, left unchecked, will consume half of the state’s general-fund spending by 2009. New York State’s $44 billion Medicaid budget not only constitutes 42 percent of state spending but also is now a larger budget item than education spending even for many of the state’s county governments, which are forced to share Medicaid’s costs (as is not the case in other states).

Health-care advocates insist that Medicaid spending is growing because of increasing need, but the numbers tell a different story. As tax revenues poured in during the 1990s, state politicians funneled the money into ever more generous programs. According to the Kaiser Family Foundation, two-thirds of Medicaid services that states now provide are optional under federal guidelines—from free ambulette rides to doctors’ offices to dental and podiatry services. From 1994 to 2000, when U.S. poverty rates were plunging, spending on Medicaid, originally a program for the poor, grew by 30 percent after accounting for inflation, an American Enterprise Institute study shows. By contrast, Medicare spending, entirely controlled by the federal government, grew only half as fast, and total U.S. health-care spending increased by 18 percent after inflation.

SEIU has managed to exploit other well-intentioned Medicaid programs for its own purposes. Washington State, for example, hoping to encourage family members to care for sick relatives at home, decided to allow Medicaid to pay family members or friends of recipients a nominal, state-subsidized fee to care for them, and such caregivers now account for about two-thirds of the state’s subsidized home-health-care workers. But SEIU, sensing opportunity, campaigned for the right to organize these caregivers, eventually spending $1 million on a ballot initiative that had little formal opposition, because few understood its implications and because no other special interest would lose from the legislation—just the taxpayer. When SEIU then successfully signed up the program’s 26,000 workers, doubling the union’s state membership, it demanded big increases in salaries as well as health and pension benefits. One local newspaper even quoted a newly organized mother whom the state was now paying to care for her retarded son as saying, without irony, “We need a decent wage.”

Having opened the door to this madness, Washington State can’t shut it. Not only has SEIU obtained two raises—costing the state, which had a budget deficit of $2 billion this fiscal year, tens of millions in extra payments—but now the union is pushing for a law requiring the state to pay these workers for services like shopping and cleaning, which by one estimate would push the cost of home health care beyond the cost of residential care, defeating the home-health-care program’s original purpose.

With so much power and money at stake, health care is witnessing the transformation of former professional organizations into militant unions, as happened earlier to the National Education Association. The bellicose California Nurses Association, for instance, is using its vocal opposition to Governor Schwarzenegger as a springboard to national organizing. The union won a political prize in 1999 when Governor Davis and the Democratic-controlled legislature mandated that hospitals have a five-to-one ratio of nurses to patients, despite warnings from hospitals that the law would cost the state’s health-care system $1 billion annually and be virtually impossible to implement because of a nursing shortage. Governor Schwarzenegger, responding to reports that hospitals were closing down emergency rooms and wards because they couldn’t meet the staffing demands, delayed implementation of the ratios for three years, igniting a firestorm. The union followed him on dozens of out-of-state visits to picket his appearances, hired a blimp to fly over a Super Bowl party at his private residence, and spent $100,000 on ads attacking his decision.

Government spending has bred strange alliances, as unions and managements put aside their differences to lobby for more public money. In Illinois, Maryland, and Ohio, for instance, the nation’s largest operator of private nursing homes, Trans Healthcare Inc., struck an agreement with SEIU locals not to oppose organizing efforts at its facilities if the union would help it lobby for higher Medicaid reimbursements. Together, the two groups created a separate lobbying arm, financed with a $100,000 union contribution and a company pledge to match that amount.

Unsurprisingly, the unions and nonprofit hospitals that have flourished in the shower of government money don’t want any private-sector competition. In Rhode Island, for instance, unions have joined with doctors and local hospitals to oppose the entry of for-profit hospitals into the state, arguing that nonprofits are more altruistic and more faithful to their mission than profit-making hospitals. This contention ignores the fact that nonprofit hospital executives often pocket huge salaries and that subsidized nonprofits without bottom-line motivation often become inefficient and offer overly costly care. Nonetheless, the coalition managed to push through one of the country’s strictest hospital-takeover laws, barring for-profits from entering Rhode Island on the false grounds that they funnel money out of health care to investors. Now Rhode Island is paying the price for its unwise policy. Far from siphoning money out of health care, for-profit hospitals can use their ability to raise money in the capital markets to invest in new technologies and facilities, exactly what Rhode Island needs, since it is beset by “an aging hospital infrastructure that requires significant investment,” according to a state health-care group.

Even so, the out-of-control cost of state and local government has sparked the stirrings of what could be the next great taxpayer revolt. In states where citizens have the right to get initiatives on the ballot and vote for them in referendums, campaigns to limit the growth of government are gearing up. Ohio secretary of state Ken Blackwell is stirring up taxpayer support for a constitutional amendment to cap state spending increases. Nevada voters recently said that they favor spending restraints by a 46-to-19 percent margin, encouraging anti-tax activists to go ahead with a ballot initiative after legislators shot down a bill to restrain state spending. Taxpayer groups are also pushing tax and spending limits in Maine and Oklahoma and exploring a ballot initiative in Tennessee after lawmakers there gobbled up $272 million in surplus revenues, squandering much of it on expanding the state’s Medicaid system, without providing any tax relief.

Plunder or Enterprise: The World's Choice

Plunder or Enterprise: The World's Choice

May 18, 2007

by Thomas E. Woods, Jr.

Although supporters of the market economy often have good reason for pessimism, it is important, especially in this age of globalization, not to lose sight of the genuine victories that the classical liberal tradition can boast. Half a century ago, Gunnar Myrdal could declare: "The special advisers to underdeveloped countries who have taken the time and trouble to acquaint themselves with the problem, no matter who they are …all recommend central planning as the first condition of progress." At that time, development economists who dissented from this consensus could have fit inside a phone booth. Today, economists who still favor central planning for the less-developed countries may as well hold their convention in a phone booth.

Public protests against globalization — protests that occur by and large in the prosperous West — denounce free trade and the mobility of capital as instruments of exploitation and oppression. The great development economist Peter Bauer used to say that if that were the case, then we should find the greatest prosperity among those less-developed countries that have the fewest economic connections to the West, and that those places that are altogether isolated — and therefore suffer from none of this alleged exploitation at all — should be paradise on earth. Needless to say, that is not even close to what we find, and most serious observers know it.

Today practically everyone agrees that some kind of market economy is essential if the less-developed countries are to progress to developed status. There are differences of opinion, to be sure, and the so-called "new development economics" of the past decade holds far more peril than promise. But that the terms of the debate have shifted there can be little doubt.

As globalization has proceeded, the subject of the market economy has attracted more and more attention, with friend and foe alike seeking to understand the implications of the creation of a truly global marketplace. One of the market's virtues, and the reason it enables so much peaceful interaction and cooperation among such a great variety of peoples, is that it demands of its participants only that they observe a relatively few basic principles, among them honesty, the sanctity of contracts, and respect for private property.

This is not to say that the philosophical principles the market embodies come naturally to every cultural milieu. Peter Bauer always insisted that a people's religious, philosophical, and cultural values could have important consequences for their economic success or failure. A people who believe in fatalism or collectivism, rather than in personal responsibility, will be less likely to undertake the risks associated with capitalist entrepreneurship, for example.

Or consider the example of tenth-century China. Rodney Stark points out that a substantial iron industry was beginning to flourish there at that time, producing an estimated thirty-five thousand tons of iron per year — a figure that ultimately grew to a hundred thousand. This abundance of iron translated into better agricultural tools, which in turn meant increased food production. Great wealth was being created, and China's economic prospects seemed excellent.

The imperial court, on the other hand, decided that all this accumulation of wealth by mere commoners amounted to an intolerable departure from pure Confucian principle, which imagined great wealth in the hands only of society's elite, and demanded that commoners be satisfied with their lot. The government simply seized the entire industry, and this wonderful example of innovation and wealth creation was crushed. Here is an example of cultural values that were incompatible with a market economy.[1]

"A people who believe in fatalism or collectivism, rather than in personal responsibility, will be less likely to undertake the risks associated with capitalist entrepreneurship."
But I want to go even further, and suggest that morality and the market are mutually reinforcing. It isn't merely that the market requires certain moral attributes in order to function properly. The market itself encourages moral behavior.

It takes little imagination to surmise how critics of the market would respond to such a claim. Doesn't the market encourage greed, rivalry, and discord? Does it not urge people to think only of themselves, accumulating wealth with no thought to any other concern?

The Communist Counter-Example

That human beings seek their own well-being and that of those close to them is not an especially provocative discovery. What is important is that this universal aspect of human nature persists no matter what economic system is in place; it merely expresses itself in different forms. For all their saccharine rhetoric, for example, communist apparatchiks were not known for their disinterested commitment to the common good. They, too, sought to improve their own well-being — except they lived in a system in which all such improvements came at the expense of their fellow human beings, rather than, as in a market economy, as a reward for serving them.

Communism brought out the worst in human nature, and crippled people's ability or ambition to participate in a market economy. "Traveling around the country," wrote American reporter Hedrick Smith in 1990, "I came to see the great mass of Soviets as protagonists in what I call the culture of envy. In this culture, corrosive animosity took root under the czars in the deep-seated collectivism in Russian life and then was cultivated by Leninist ideology. Now it has turned rancid under the misery of everyday living."[2]

The Soviet ruling class, with their cushy cars, clinics, and country homes, are a natural enough target for the wrath of the little people. But what is ominous for Gorbachev's reforms is that this free-floating anger, the jealousy of the rank and file, often lights on anyone who rises above the crowd — anyone who works harder, gets ahead, and becomes better off, even if his gains are honestly earned. This hostility is a serious danger to the new entrepreneurs whom Gorbachev is trying to nurture. It is a deterrent to even modest initiative among ordinary people in factories or on farms. It freezes the vast majority into the immobility of conforming to the group.

Under the system of tyranny and deprivation that the Russian people were forced to endure for seven decades, illicit "profiteering" — "think of the worker stealing wheelbarrows and multiply him by a million," one writer says — made it possible for countless Russians to acquire the goods they needed. We might therefore expect the profiteer to emerge as at least vaguely heroic, but the actual effect seems to have been to poison the idea of profit in the minds of many Russians, since they came to assume that anyone making a profit must be engaged in behavior that was somehow illicit or underhanded.

The countless stories in the Soviet press, as late in the socialist experiment as the 1980s, about vandalism and attacks on small shops by those who resented the success of their fellow man "bear witness to the powerful influence of decades of Leninist indoctrination," Hedrick Smith explained. "For great masses of Soviet people, capitalism is still a dirty word, and the fact that someone earns more, gets more, is a violation of the egalitarian ideal of socialism. Tens of millions of Soviets deeply mistrust the market, fearing they will be cheated and outsmarted. They see the profit motive as immoral."

The Supreme Soviet's Anatoly Sobchak once remarked, "Our people cannot endure seeing someone else earn more than they do…. They are so jealous of other people that they want others to be worse off, if need be, to keep things equal." Sobchak described this attitude as one of the chief obstacles to economic reform. Television personality Dmitri Zakharov put it this way: "In the West, if an American sees someone on TV with a shiny new car, he will think, 'Oh, maybe I can get that someday for myself.' But if a Russian sees that, he will think, 'This bastard with his car. I would like to kill him for living better than I do.'" That is what Marxism-Leninism did to these people.

Overlooked Perils of Interventionism

That system, the polar opposite of the free market, encouraged greed in the ruling class and apathy, envy, and alienation among everyone else. Scarcely anyone defends it any longer. At the same time, we are urged not to let the socialist debacle sour us on the state itself, which we are told is an indispensable instrument in the pursuit of "social justice." But the less predatory state that such critics have in mind carries its own moral and cultural perils, only a few of which we can consider here.

Economists speak of the disutility of labor. Albert Jay Nock referred to the human inclination to seek after wealth with the least possible exertion. In a formulation familiar to libertarians, Franz Oppenheimer described two ways of acquiring wealth: the economic means and the political means. The economic means involves the production of a good or service that is then sold to willing buyers seeking to improve their own well-being. Both parties benefit. The political means, on the other hand, involves the use of force to enrich one party or group at the expense of another — either to acquire someone else's wealth directly or to give oneself an unfair advantage over his competitors through the use or threat of coercion. That is a much easier way of enriching oneself; and since people tend to prefer an easier over a more difficult path to wealth, a society that hopes to foster both justice and prosperity needs to discourage wealth acquisition via the political means and encourage it through the economic means.

But the state, wrote Oppenheimer, was the organization of the political means of wealth acquisition. It was through this channel that people could find paths to their own economic well-being that involved the use of force — carried out on their behalf by the state — rather than their own honest work. For that reason, the baser aspects of human nature can find in the state an irresistible attraction. It is easier to become dependent on welfare than to work; it is easier to accept farm subsidies and thereby to increase food prices than it is to compete honorably and freely; and it is easier to file an antitrust complaint against a competitor than to outcompete him honestly in the marketplace. By making these and countless other predatory options possible, the state fosters unattractive moral attributes and appeals to the worst features of human nature.

In short order, society degenerates into a condition of low-intensity civil war, with each pressure group anxious to secure legislation aimed at enriching itself at the expense of the rest of society. The Hobbesian war of all against all that allegedly characterizes life under the pre-political state of nature creeps into political life itself, as even those who were initially reluctant to seek political favors pursue them with vigor, if only to break even (that is, vis-à-vis groups who are less scrupulous about using the state to secure their ends). All of this looting under cover of law is what Frédéric Bastiat memorably called "legal plunder."

The same phenomena are observable around the world, when misguided development aid programs have strengthened the interventionist state in less-developed nations. Ben Powell makes the important point, echoing Peter Bauer, that the fashionable proposals we hear about nowadays that seek to direct foreign aid to responsible, relatively non-predatory regimes miss the point: these aid programs are inherently bad, no matter how selectively the funds are allocated. Not only do they tend to enlarge the public sector of the recipient country, but competition for a share of the grant money also diverts private resources away from the satisfaction of genuine wants and into the wasteful, anti-social expenditure of time and resources for the purpose of winning government favors.

Some Virtues of the Market

If the state is the organization of the political means of wealth acquisition, then the market is the embodiment of the economic means. The market all but compels people to be other-regarding, but not by means of intimidation, threats, and propaganda, as in socialist and statist systems. It employs the perfectly normal, morally acceptable desire to improve one's material conditions and station in life, both of which can grow under capitalism only by directing one's efforts to the production of a good or service that improves the well-being of his fellow man. This is why the title of Frédéric Bastiat's book Economic Harmonies is such a beautiful encapsulation of the classical liberal message. (The American Anti-Imperialist League's George McNeill made essentially the same observation, if perhaps more vividly, in the late 1890s: "Wealth is not so rapidly gained by killing Filipinos as by making shoes.")

John Rawls famously argued in A Theory of Justice that we could judge a society on the basis of the material condition of the least well-off. The market wins according to that moral criterion as well. Capital University's Robert Lawson has shown that all around the world, the poor are consistently better off in the least interventionist, most market-oriented societies. America's poor are better off than much of the European middle class today, and better off than the American middle class of the 1950s.

This happy outcome follows from the very nature of capitalism. When businesses invest in capital equipment to render the production process more efficient, they make it possible to produce more goods at a lower unit cost. Competition then passes these cost cuts on to the consumer in the form of lower prices (a phenomenon not always so visible in an inflationary economy, but at work all the same). This greater abundance increases the purchasing power of all real incomes, and thereby redounds to the benefit of everyone.

The Enron Objection

Needless to say, the market possesses a great many virtues in addition to these. But what we might call the Enron objection will at this point be raised: doesn't that fiasco reflect a serious moral problem at the heart of capitalism? Enron, it is said, was the free market in action, and Ken Lay an apostle of laissez faire. In fact, neither claim is true. Time constraints limit me to recommending the Enron chapter in Tim Carney's important book The Big Ripoff: How Big Business and Big Government Steal Your Money (2006). To make a long story short, Enron was on the receiving end of countless waves of government subsidies. It also manipulated the bizarre regulatory thicket that was the California energy market in grotesquely anti-social ways that enriched Enron at the expense, quite literally, of everyone else. The Cato Institute's Jerry Taylor correctly described Enron on balance as "an enemy, not an ally of free markets. Enron was more interested in rigging the marketplace with rules and regulations to advantage itself at the expense of competitors and consumers than in making money the old-fashioned way — by earning it honestly from their customers through voluntary trade."

Enron was in fact punished by the market for its behavior, while the American government, awash in Ponzi schemes, accounting irregularities, and unfunded liabilities it can't possibly cover, goes about its business in peace. "Far from an example of a market failure," argues Jacksonville State University's Christopher Westley, "Enron's saga shows that firms which invest too much in politics can easily become complacent in the face of changing market conditions…. If there's a scandal to be found in the Enron debacle, it is this: Enron's faith that its political investments would eventually solve its problems caused it to avoid making necessary changes in its organization until it was too late. Anyone who checks Enron's stock price, now listed on one of the penny stock exchanges, knows that the market has penalized this strategy." and Kmart, on the other hand, were up front with their investors about their financial difficulties, and ended up doing much better — by and large, their investors, no doubt impressed by these firms' honesty and transparency, stuck by them.

"Capitalism stands its trial before judges who have the sentence of death in their pockets." –Joseph Schumpeter

The nature of the attacks on capitalism frequently changes: one day it's the corruption of businessmen, as with Enron, the next it's environmental degradation (which is typically the fault of poorly developed property rights and arbitrary regulatory regimes rather than of capitalism itself). Sometimes capitalism will be criticized for one alleged failing one day and exactly the opposite failing the next. Thus socialists once claimed that capitalism was less efficient than socialism, and could not produce in nearly the same abundance. Now that that argument has been silenced, we have begun to hear exactly the opposite claim: capitalism brings about too much wealth, and makes people materialistic and fat. As Joseph Schumpeter put it, "Capitalism stands its trial before judges who have the sentence of death in their pockets. They are going to pass it, whatever the defense they may hear; the only success a victorious defense can possibly produce is a change in the indictment." For a system that has brought about such astonishing and unprecedented advances in the well-being of the great mass of mankind, it is surprisingly vulnerable to attack.

Capitalism and Public Opinion

Murray Rothbard was fond of citing the arguments of Étienne de la Boétie (as well as those of such later figures as David Hume and Ludwig von Mises) to the effect that governments survive or perish on the basis of public opinion. Since those who rule are of necessity vastly outnumbered by those who are ruled, it is curious that any regime — much less the truly oppressive — should get away with it for so long. The only way they can do so, according to these men, is through the voluntary consent of the public. That consent need not take the form of wild enthusiasm, which is rarely forthcoming for any regime; passive resignation is quite enough.

If a critical mass of the population withdraws that consent, on the other hand, regimes collapse. The fall of the communist regimes in Eastern Europe was a textbook example of exactly what La Boétie meant: when next to no one obeys commands any longer, how can the ruling elite hold on to power?

It is not only political regimes but also economic systems that must pass a public opinion test if they are to endure. And here we encounter an essential cultural attribute for the maintenance of a free economy: a critical mass of the population must consider market exchange, and the institutional supports that make it possible, to be fundamentally just.

And yet from our major institutions here in the United States we hear something like the opposite. Schoolchildren are given the impression that the private sector is the source of all wickedness and oppression, from which public-spirited government officials, in their selfless commitment to justice, must rescue and protect us. The selection of subject matter itself exhibits a pro-state bias: students leave school knowing all about how a bill becomes a law, for example, but with no idea of how markets work.

All of this applies just as strongly to popular culture and the media, with of course a few noble exceptions like John Stossel. That is why I am surprised not by how much of the market economy has been suppressed in the United States, but by how much has managed to survive in the face of a hostile educational and cultural establishment. Europe's opinion molders, as Olaf Gersemann observes in his book Cowboy Capitalism, are utterly contemptuous of American capitalism, a phenomenon they do not understand, and it is not surprising that in such an intellectual milieu those countries find themselves burdened with even more statism than we do.

The Culture of Enterprise: Concluding Thoughts

"To my ear, the term 'culture of enterprise' suggests a society that possesses a conscious appreciation of the distinct virtues of the market economy."

We are being much too ambitious if we think even the best economic institutions can transform human beings from flawed creatures into saints. The correction of human failings is the business of families, churches, and voluntary organizations of all kinds. The twentieth century served, among other things, as an extended lesson in both the danger and the folly of state-led efforts to transform human nature. We can be more than satisfied if our economic system is content to take human beings as they are, direct their energies into productive rather than anti-social outlets, and reward them for satisfying the needs of their fellow men.

Thomas Jefferson once observed that the mass of mankind was not "born with saddles on their backs, nor a favored few booted and spurred, ready to ride them." That is what the free economy is all about: anyone is free to serve the public in the manner he thinks best, and no one, not even those who have been most successful in the past, can claim exemption from the daily referenda that take place whenever the public decides to buy or to abstain from buying what he has to sell.

To my ear, the term "culture of enterprise" suggests a society that possesses a conscious appreciation of the distinct virtues of the market economy, some of which I have described here, and why it is morally and materially superior to statist alternatives, as I have also described here. In other words, the points I have made in my remarks today are the kind of arguments that should resonate with and constitute important pillars for a culture of enterprise. Instead of being held up for condemnation and abuse, entrepreneurs in such a society would be respected and honored for the risks they assume with their own property in order to bring improvement to people's lives, from the latest technological innovation to the most mundane of necessities. For a true culture of enterprise to last, people must see in the unhampered market economy not merely the least intolerable system but a positive good, in which living standards consistently rise, human creativity is given free rein, and human interaction proceeds on the civilized basis of respect for others' person and property.

The decades following World War II taught anyone who was paying attention how not to encourage prosperity or escape from less-developed status: demonize producers and the successful, nationalize industry, harass foreign investors, make property insecure, institute "import substitution" policies, and suffocate entrepreneurship through regulation. Development aid programs, meanwhile, either expressly endorsed these policies (as in the case of import substitution) or enabled them to continue by masking the true effects of such disastrous measures or propping up the regimes that implemented them. If the less-developed countries are to enjoy the prosperity of such success stories as Hong Kong and South Korea, or enjoy the growth rates being observed today in Ireland and even China, they must abandon the destructive and wicked policies of the past, discard the culture of envy their leaders have fostered, and embrace the principles of freedom that have allowed more people than ever before in history to enjoy the material conditions of civilized life.

And at a time when our countrymen are being courted by all manner of interventionist politicians — with one noble exception, I hasten to add — peddling all kinds of grandiose schemes for human betterment, Americans themselves could stand to be reminded of the values that inform a culture of enterprise. There was something disturbing, and yet revealing, in the title of MSNBC's election coverage segment last year — Battleground: America. Every two years, but especially every four, the country becomes in effect a battleground between opposing forces, in which the winner acquires the power to take the country to war unilaterally, to impose a uniform social policy on 280 million Americans, and to implement all manner of policies on his own authority, by means of executive orders and signing statements. Americans typically take for granted that this is normal, and indeed how life must be.

But in fact we don't need Hillary Clinton or John Edwards, Rudy Giuliani or John McCain, to "run the country" (to use an infelicitous if unfortunately common phrase) or to make us prosperous. A free and responsible people can manage its affairs without the platitudes and paternal custodianship of a Great Leader, and exhibits no superstitious reverence toward the occupants of political office. Once a society begins to absorb this revolutionary discovery, it has already embraced the culture of enterprise.

Thomas E. Woods, Jr., is a resident scholar at the Mises Institute. He is the author of The Church and the Market: A Catholic Defense of the Free Economy. His other recent books include The Politically Incorrect Guide to American History (a New York Times bestseller) and How the Catholic Church Built Western Civilization. Send him mail. See his archive. Visit his website. Comment on the blog.

No, the Free Market Did Not Cause the Financial Crisis

Very insightful piece by Thomas Woods. Most people correctly point out that a major factor that brought on the great recession was that financial institutions X, Y & Z pursued paths of excessive risk and malinvestment. When asked what prompted this reckless behavior, many Americans will answer "greed" and "de-regulation." Both are flawed answers, because from Maine to Mumbai, businesses always seek to maximize their profits and static regulation can do little to prevent unwise investments in a market that is constantly evolving and constantly in flux. Mr. Woods goes beneath the surface and asked what forces and what policies prompted so many well established firms to simultaneously pursue unwise investments. I believe that he provides some compelling explanations. You be the judge.

No, the Free Market Did Not Cause the Financial Crisis

by Thomas E. Woods, Jr.

In March 2007 then-Treasury secretary Henry Paulson told Americans that the global economy was “as strong as I’ve seen it in my business career.” “Our financial institutions are strong,” he added in March 2008. “Our investment banks are strong. Our banks are strong. They’re going to be strong for many, many years.” Federal Reserve chairman Ben Bernanke said in May 2007, “We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.” In August 2008, Paulson and Bernanke assured the country that other than perhaps $25 billion in bailout money for Fannie and Freddie, the fundamentals of the economy were sound.

Then, all of a sudden, things were so bad that without a $700 billion congressional appropriation, the whole thing would collapse.

In the wake of this change of heart on the part of our leaders, Americans found themselves bombarded with a predictable and relentless refrain: the free market economy has failed. The alleged remedies were equally predictable: more regulation, more government intervention, more spending, more money creation, and more debt. To add insult to injury, the very people who had been responsible for the policies that created the mess were posing as the wise public servants who would show us the way out. And following a now-familiar pattern, government failure would not only be blamed on anyone and everyone but the government itself, but it would also be used to justify additional grants of government power.

The truth of the matter is that intervention in the market, rather than the market economy itself, was the driving factor behind the bust.

F.A. Hayek won the Nobel Prize for his work showing how the central bank’s intervention into the economy gives rise to the boom-bust cycle, making us feel prosperous until we suffer the inevitable crash. Most Americans know nothing about Hayek’s theory (known as the Austrian theory of the business cycle), and are therefore easy prey for the quacks who blame the market for problems caused by the manipulation of money and credit. The artificial booms the Fed provokes, wrote economist Henry Hazlitt decades ago, must end “in a crisis and a slump, and…worse than the slump itself may be the public delusion that the slump has been caused, not by the previous inflation, but by the inherent defects of ‘capitalism.’”

Although my recently released book, Meltdown explains the process in more detail, an abbreviated version of Austrian business cycle theory might run as follows:

Government-established central banks can artificially lower interest rates by increasing the supply of money (and thus the funds banks have available to lend) through the banking system. This is supposed to stimulate the economy. What it actually does is mislead investors into embarking on an investment boom that the artificially low rates seem to validate but that in fact cannot be sustained under existing economic conditions. Investments that would have correctly been assessed as unprofitable are falsely appraised as profitable, and over time the result is the squandering of countless resources in lines of investment that should never have been begun.

If lower interest rates are the result of increased saving by the public, this increase in saved resources provides the material wherewithal to see the additional investment through to completion. The situation is very different when the lower interest rates result from the Fed’s creation of new money out of thin air. In that case, the lower rates do not reflect an increase in the pool of savings from which investors can draw. Fed tinkering, in other words, does not increase the real stuff in the economy. The additional investment that the lower rates encourage therefore leads the economy down a path that is not sustainable in the long run. Investment decisions are made that quantitatively and qualitatively diverge from what the economy can support. The bust must come, no matter how much new money the central bank creates in a vain attempt to stave off the inevitable day of reckoning.

The recession or depression is the necessary, if unfortunate, correction process by which the malinvestments of the boom period, having at last been brought to light, are finally liquidated. The diversion of resources into unsustainable investments out of conformity with consumer desires and resource availability comes to an end, with businesses failing and investment projects abandoned. Although painful for many people, the recession/depression phase of the cycle is not where the damage is done. The bust is the period in which the economy sloughs off the malinvestments and the capital misallocation, re-establishes the structure of production along sustainable lines, and restores itself to health. The damage is done during the boom phase, the period of false prosperity that precedes the bust. It is then that the artificial lowering of interest rates causes the squandering of capital and the initiation of unsustainable investments. It is then that resources that would genuinely have satisfied consumer demand are diverted into projects that make sense only in light of the temporary and artificial conditions of the boom.

Adding fuel to the fire of the most recent boom was the so-called Greenspan put, the unofficial policy of the Greenspan Fed that promised assistance to private firms in the event of risky investments gone bad. The Financial Times described it as the view that “when markets unravel, count on the Federal Reserve and its chairman Alan Greenspan (eventually) to come to the rescue.” According to economist Antony Mueller, “Since Alan Greenspan took office, financial markets in the U.S. have operated under a quasi-official charter, which says that the central bank will protect its major actors from the risk of bankruptcy. Consequently, the reasoning emerged that when you succeed, you will earn high profits and market share, and if you should fail, the authorities will save you anyway.” The Financial Times reported in 2000, in the wake of the dot-com boom, of an increasing concern that the Greenspan put was injecting into the economy “a destructive tendency toward excessively risky investment supported by hopes that the Fed will help if things go bad.”

When things do go bad, pumping more money into the banking system, thereby lowering interest rates once again, only exacerbates the problem, because it encourages the continued wasteful deployment of capital in unsustainable lines that will eventually have to be abandoned anyway, and it forces healthy, wealth-generating firms to have to go on competing with bubble firms for labor and capital. When interest rates are made artificially low, they encourage the kind of investment that would normally occur only if more saved resources existed to fund them than actually do. Continuing to force interest rates down only perpetuates the allocation of capital into outlets that the economy’s current resource base cannot sustain.

In response to the dot-com and NASDAQ collapses and the modest recession that accompanied them in 2000 and 2001, that Alan Greenspan and the Fed chose to embark on a robust policy of inflation, an approach that culminated in lowering the federal funds rate (the rate at which banks lend to each other) to a mere one percent from June 2003 to June 2004. Already by early 2001 the Fed had begun to ease once again. That year saw no fewer than 11 rate cuts. The unsustainable dot-com boom could not, in the end, be reignited, and thank goodness – the resource misallocations in that sector were unhealthy for the economy. But the Fed’s easy money and refusal to allow the recession of 2000 to take its course led to an even more perilous bubble elsewhere. That was the only recession on record in which housing starts did not decline. Not coincidentally, that was also the moment at which people began to conclude that house prices never fall, that a house is the best investment one can make, and so on. By intervening in the market then, the Fed prevented the market from making a full correction, thereby perpetuating unsustainable investment and consumption decisions. In so doing it merely postponed what it was trying to avoid, and made the crash worse when it finally came.

Fiscal stimulus, meanwhile, merely diverts resources from the productive sector in order to fund money-losing enterprises arbitrarily chosen by government. These artificial expenditures, moreover, interfere with the market’s attempt to sort out genuine demand from bubble demand. “Stimulus” spending can in fact keep firms (construction companies, for example) in business that for the sake of genuine economic health need to be liquidated so their resources can be more sensibly employed in more urgently demanded lines of production.

The claim that “stimulus” spending is necessary to bring “idle resources” back into use also misfires, since it fails to consider why so many entrepreneurs – who have survived as long as they have on the market because of their skill at anticipating consumer demand – should suddenly have become, all at once, such poor forecasters that they’re all saddled with idle resources.

The reason for the idle resources is, obviously, some prior act of miscalculation. And what could have created such systemic miscalculation? Could it be the Fed’s artificially low interest rates, that distort entrepreneurial forecasting and encourage the wrong kind of investments at the wrong time?

Consider a restaurant owner who mistakes the temporary demand for his product deriving from the presence of the Olympics in his city with real, sustainable demand. Suppose he opens a new location to accommodate all this new demand. When the Olympics are over, he’s left with idle resources – labor with nothing to do and empty restaurant space for starters. Should we want to “stimulate” these resources back into activity? Of course not. They shouldn’t have been allocated this way in the first place. We should want the market, guided by the price system, to redeploy them into sensible channels.

The problem, therefore, isn’t that we lack enough “spending” or “demand,” and that we need government to fill in the “missing demand.” The problem is that in the wake of Fed-induced misallocations of resources we wind up with structural imbalances, a mismatch between the capital structure and consumer demand. The recession is the period in which the economy repairs this mismatch by reallocating resources into lines of production that actually correspond to consumer demand. The modern preoccupation with levels of spending instead of patterns of spending obscures the most important aspects of the question.

Had the market been allowed to work before the collapse, there would have been no housing bubble and no crisis in the first place. Had the market been allowed to work when the crisis hit, recovery would have been swift – as it was in 1920–21, when an even worse depression came to a rapid end without any open-market operations by the Fed, and without any fiscal stimulus. (In fact, the federal budget was cut in half from 1920 to 1922.)

What, in short, should we do now? Exactly the opposite of what our so-called experts, who in a sane world would be forever discredited, urge upon us.

May 8, 2009


Here are some brief (30 minutes) highlights of the troubling documentary "IOUSA", which addresses the issue of our staggering national debt. This film made Ebert's list of top 5 documentaries. The more I learn about our national debt, the more convinced I am that it trumps (and will eventually effect) all other issues. A government that pays billions and billions of dollars in interest to service its debt will have less money to address vital issues pertaining to the environment, national security, health, welfare, education and dare I say our very sovereignty.

The CFF Salutes: Archbishop Damaskinos of Athens

History is filled with countless cases of Jews being oppressed by Catholic and Orthodox Christian prelates. However, some heroes stand out, such as Archbishop Damaskinos of Athens (, who risked his life to save Greek Jews during the Holocaust. The churches under his jurisdiction were ordered by Damaskinos to distribute Christian baptismal certificates to Jews fleeing the Nazis, thus saving thousands of Greek Jews in and around Athens. When threatened by the SS with execution for publishing a letter protesting the abuse of Greek Jews (see below), Archbishop Damaskinos responded:

"According to the traditions of the Greek Orthodox Church, our prelates are hanged, not shot. Please respect our traditions!"

The Greek Orthodox Church and the Academic World of Greek People Protest against the Persecution... The Greek people were... deeply grieved to learn that the German Occupation Authorities have already started to put into effect a program of gradual deportation of the Greek Jewish community... and that the first groups of deportees are already on their way to Poland... According to the terms of the armistice, all Greek citizens, without distinction of race or religion, were to be treated equally by the Occupation Authorities. The Greek Jews have proven themselves... valuable contributors to the economic growth of the country [and] law-abiding citizens who fully understand their duties as Greeks. They have made sacrifices for the Greek country, and were always on the front lines of the struggle of the Greek nation to defend its inalienable historical rights...

In our national consciousness, all the children of Mother Greece are an inseparable unity: they are equal members of the national body irrespective of religion... Our holy religion does not recognize superior or inferior qualities based on race or religion, as it is stated: 'There is neither Jew nor Greek' and thus condemns any attempt to discriminate or create racial or religious differences. Our common fate both in days of glory and in periods of national misfortune forged inseparable bonds between all Greek citizens, without exemption, irrespective of race...

Today we are... deeply concerned with the fate of 60,000 of our fellow citizens who are Jews... we have lived together in both slavery and freedom, and we have come to appreciate their feelings, their brotherly attitude, their economic activity, and most important, their indefectible patriotism...[1]

Saturday, April 24, 2010

The CFF Salutes: Taner Akçam

Taner Akçam ( is part of a small but growing number of Turkish intellectuals who recognize the Armenian Genocide. For this Mr. Akçam has faced death threats and constant harassment. In the following clip he discusses "A Shameful Act", which is an clear and well cited exploration of the cultural, political and historic forces that led to the Armenian Genocide:

Armenian Genocide

Today (April 24, 1915) was the 95th Anniversary of the commencement of the Armenian Genocide.( On this day 240 of the leading cultural and commercial figures of the Armenian community were arrested in the city of Constantinople, most whom were later massacred. From there, at least 1,000,000 Armenians died from massacres, hunger and thirst in the cold mountains of Anatolia and the burning deserts of Syria. Countless women and children were kidnapped and forcibly converted to Islam. Since then the Turkish government has destroyed 100's if not 1000's of monasteries, churches and architectural treasures that attest to the 3,000 year Armenian presence in Anatolia.(

As a Jew who lost countless members of my family in the Holocaust, my heart goes out to the Armenian Community. An added element to the Armenian tragedy is that the Turkish government and majority of Turkish people do not recognize the genocide. I can only imagine the rage I would feel if the German government and people denied the holocaust. In addition, several world governments have failed to publicly recognize the Armenian Genocide. Most shamefully, the United States and Israel fall under this category. While I understand the strategic value of Turkey, this flight from moral responsibility is incomprehensible, especially in the case of Israel. Thankfully most Israeli historians and intellectuals do not share their government's position (

Saturday, April 17, 2010

The Hazards of Student Loan Reform

Obama's student loan program is an example of government policies that provide short term relief at the cost of long term economic health. While loan subsidies and debt relief may benefit their recipients, the long term hazard is that they provide perverse incentives for systemic increases in debt and economically unsound behavior. Here are a break down of the policies and their unintended consequences:

1. Eliminating the middleman: Obama claims that by having the federal government directly directly handle student loans (rather than subsidize private sector loans) he will save the tax payers billions of dollars. For the sake of the discussion, let's assume that there will be short term savings, based on the general track record of federal programs we can assume that over the long run the public sector has little if any incentives to allocate loans with even a modicum of economic logic. A private financial institution that does not enjoy lavish government subsidies is far more likely to factor in a student's capacity to repay the loan in their decision making criteria. Why? Because, the market would castigate them through decreased profits and eventually dissolution. On the other hand, when faced with systemic losses, the federal government's first impulse is to increase funding, which leads to a greater tax and debt burden.

2. Increase Pell Grants (and other subsidies): In the short run this will increase access to college, however in the long run this will contribute to the very serious issue of continued cost inflation in higher education. Economic laws dictate that when high demand is artificially sustained by government subsidies, incentives to control cost inflation are diminished. What this means is that universities will avoid taking necessary steps to control costs. The dangers of loose financing can be seen in the housing market; when housing finance was plentiful, demand soared, driving up prices and increasing debt. The same phenomena applies to the student loan market.

3.Increased Funding for Minority-Serving Institutions: The new legislation includes $2.55 billion in support for schools that primarily serve minorities. I question the constitutionality and economic logic of racial preferences in the allocation of federal funds.

4.Lower Income-Based Payments: After 2014, those who struggle to make loan payments will be able to take advantage of income-based repayment plans. Under the new rules, loan payments cannot exceed 10% of the borrower's discretionary income. This policy sound positive, however the question to ask is: will it encourage more people to take out loans that are beyond their means? And by lowering monthly payments (regardless of the size of the loan), many students will see the terms of their loan lengthened, which leads us to the 5th element of Obama's program:

5.More Forgiveness Opportunities: This part of the law also takes effect in 2014. Borrowers who stick with their income-based payment plan for 20 years will then no longer owe a balance, even if they haven't yet paid back all of their loans. Borrowers employed in public service will see their balances wiped out in 10 years.

Although this sounds appealing, coupled with longer term loans (see point 4) this will clearly provide perverse incentives to not pay back their loans at the cost to tax payers. This will also provide incentives for more individuals to opt for an already bloated public sector, rather than the private sector.

In many ways the sharp recession that we are facing was a market correction of more than a decade of unsound economic behavior, most notably the excessive debt and malinvestment that millions of individuals and enterprises undertook. Even in the face of higher unemployment and declining incomes, the American public began paying down their debt and undertaking wiser investments. And costs fell for most goods and services, except for sectors that are largely shielded from market forces: health care and education. And well meaning government intervention, such as Obama's student loan reforms, provides perverse incentives for Americans to return to the economically unsustainable behaviors of the past.

Read more:

Sunday, April 11, 2010

The Socialist Sickness Invades Little League

Pictured above: Jericho Scott, pitcher extraordinaire.

Socialism is a spiritual sickness, a resentment of success, a desire to achieve equality by lowering others rather than by raising yourself up. When I read that Youth Baseball League of New Haven, Connecticut banned a nice year old pitcher because he was too good I was truly disheartened; socialism has even crept into the little leagues. A telling anecdote was presented to me by a good friend: During a visit to his brother's house he was pleased to see that his nephew's has received several trophies. But, upon a closer look he realized that they like everyone else had received them for participation and effort. Of course children should be encouraged, but actively undermining the link between self esteem and achievement and promoting equality of results will produce more adults who are driven less by a need to achieve and more by a corrosive sense of entitlement.

Nine-Year Old Banned From Pitching In Youth League

Jericho Scott banned from pitching for being too good

NEW HAVEN, Conn. -- Nine-year-old Jericho Scott is a good baseball player -- too good, it turns out.

The right-hander has a fastball that tops out at about 40 mph. He throws so hard that the Youth Baseball League of New Haven told his coach that the boy could not pitch any more. When Jericho took the mound anyway last week, the opposing team forfeited the game, packed its gear and left, his coach said.

Officials for the three-year-old league, which has eight teams and about 100 players, said they will disband Jericho's team, redistributing its players among other squads, and offered to refund $50 sign-up fees to anyone who asks for it. They say Jericho's coach, Wilfred Vidro, has resigned.

But Vidro says he didn't quit and the team refuses to disband. Players and parents held a protest at the league's field on Saturday urging the league to let Jericho pitch.

"He's never hurt any one," Vidro said. "He's on target all the time. How can you punish a kid for being too good?"

The controversy bothers Jericho, who says he misses pitching.

"I feel sad," he said. "I feel like it's all my fault nobody could play."

Jericho's coach and parents say the boy is being unfairly targeted because he turned down an invitation to join the defending league champion, which is sponsored by an employer of one of the league's administrators.

Jericho instead joined a team sponsored by Will Power Fitness. The team was 8-0 and on its way to the playoffs when Jericho was banned from pitching.

"I think it's discouraging when you're telling a 9-year-old you're too good at something," said his mother, Nicole Scott. "The whole objective in life is to find something you're good at and stick with it. I'd rather he spend all his time on the baseball field than idolizing someone standing on the street corner."

League attorney Peter Noble says the only factor in banning Jericho from the mound is his pitches are just too fast.

"He is a very skilled player, a very hard thrower," Noble said. "There are a lot of beginners. This is not a high-powered league. This is a developmental league whose main purpose is to promote the sport."

Noble acknowledged that Jericho had not beaned any batters in the co-ed league of 8- to 10-year-olds, but say parents expressed safety concerns.

"Facing that kind of speed" is frightening for beginning players, Noble said.

League officials say they first told Vidro that the boy could not pitch after a game on Aug. 13. Jericho played second base the next game on Aug. 16. But when he took the mound Wednesday, the other team walked off and a forfeit was called.

League officials say Jericho's mother became irate, threatening them and vowing to get the league shut down.

"I have never seen behavior of a parent like the behavior Jericho's mother exhibited Wednesday night," Noble said.

Scott denies threatening any one, but said she did call the police.

League officials suggested that Jericho play other positions, or pitch against older players or in a different league.

Local attorney John Williams was planning to meet with Jericho's parents Monday to discuss legal options.

"You don't have to be learned in the law to know in your heart that it's wrong," he said. "Now you have to be punished because you excel at something?"

Copyright 2008 by The Associated Pres

Yes, he is a radical.

To listen to this 2001 NPR interview with Obama, click on the following link:

"If you look at the victories and failures of the civil rights movement and its litigation strategy in the court. I think where it succeeded was to invest formal rights in previously dispossessed people, so that now I would have the right to vote. I would now be able to sit at the lunch counter and order as long as I could pay for it I’d be o.k. But, the Supreme Court never ventured into the issues of redistribution of wealth, and of more basic issues such as political and economic justice in society. To that extent, as radical as I think people try to characterize the Warren Court, it wasn’t that radical. It didn’t break free from the essential constraints that were placed by the founding fathers in the Constitution, at least as its been interpreted and Warren Court interpreted in the same way, that generally the Constitution is a charter of negative liberties. Says what the states can’t do to you. Says what the Federal government can’t do to you, but doesn’t say what the Federal government or State government must do on your behalf, and that hasn’t shifted and one of the, I think, tragedies of the civil rights movement was, um, because the civil rights movement became so court focused I think there was a tendancy to lose track of the political and community organizing and activities on the ground that are able to put together the actual coalition of powers through which you bring about redistributive change. In some ways we still suffer from that."

Explaining the Immigration Divide. (Part II)

In our previous post we explored the philosophical divide between immigration liberalizers and restrictionists. Because no side has a clear majority, this divide has resulted in a dreadful gridlock in which neither side is able to push through reforms to fix a broken immigration system. The end result is that millions of individuals are stranded in a bureaucratic limbo in which the prospects for resolution, either through a normalization of their status or through deportation, remain unlikely. And even proposals that the majority of Americans consider reasonable are resisted, because each side views them as concessions that would erode their position and allow their opponents to push through even bolder measures. For example, most restrictionists oppose measures like the Dream Act that would expand access to higher education to the many undocumented young adults, most of whom spent the majority of their lives in the United States. This is clearly an unreasonable position, because education greatly increases the economic and social contributions of residents, regardless of their status. And liberalizers have vehemently protested against measures that would grant local police departments the power to check the immigration status of serious criminals. This is also an unreasonable position, because gang bangers and dangerous felons wreck the most havoc in their own communities.

Given the fact that neither side has sufficient power to push through their version of reform, the only way to end the deadlock is for both sides to cooperate to craft comprehensive reform. To do so we need to look at the roots of restrictionist opposition to amnesty. Surprisingly, most restrictionists agree with liberalizers: we logistically cannot and ethically should not deport 12,000,000 undocumented immigrants. Most restrictionists would be willing to work together with liberalizers to legislate a viable path to citizenship, IF they could be ensured that this would be the last and final amnesty. But, given the debacle of the 1986 Amnesty, most understandably do not trust politicians who promise that an amnesty would be followed by comprehensive enforcement. Given the 400% increase in undocumented immigration since then, they assume that an amnesty not accompanied by strong enforcement will encourage an increase in law breaking. And given the track record of ethno-political activists, we can assume that they would continue to protest the enforcement of laws, even after the enactment of comprehensive immigration reform.

Clearly the only way to have restrictionists work together with liberalizers to normalize the status of today's undocumented immigrants would be to include post-amnesty measures the would cut off future undocumented immigration. So, the essential question is how can this be achieved within a democratic framework? Immigration liberalizers are either woefully ignorant or completely disingenuous when they state that that the only options are non-enforcement or a police state that will round up and deport millions of residents. Economists will tell you that the surest way to reduce the occurrence of a behavior is to eliminate the economic incentives that encourage that behavior. This means we would have to enact policies that would disable the magnets that draw millions of undocumented immigrants to the United States.

The first and most powerful magnet is employment. Rather than waste billions of dollars harassing undocumented immigrants, the simple solution is to reduce the incentives of businesses to hire them. This can be achieved by imposing heavy fines on businesses that violate employment laws. In the name of fairness and economic logic, after paying the fine, businesses could be offered the option to sponsor their worker(s) if they were able to demonstrate that there truly were no legal residents willing and able to fill the position(s). And through E-Verify, a worker's status could be quickly and cost effectively determined.

The second magnet is automatic birth right citizenship via a wilful misrepresentation of the 14th Amendment. The chance of dramatically raising the living standards of your children via automatic citizenship just by being born in the United States provides a huge incentive for millions of individuals to cross the border. For this reason, a myriad of nations have eliminated (or never implemented) automatic birthright citizenship. Among them we find democratic, modern nations like: Australia, Belgium, the Czech Republic, France, Germany, Ireland, Israel, Italy, Japan, New Zealand, Norway, Poland, South Korea, Sweden, Switzerland, Taiwan and the United Kingdom..

By eliminating birthright citizenship, a third magnet would be eliminated: access to the welfare state. Contrary to right wing rhetoric, undocumented immigrants do not directly receive welfare benefits, however their native born children do at the cost of billions of dollars to tax payers.

In addition, laws could be passed that would provide incentives for other nations to discourage the unlawful immigration of their own citizens. Contrary to the rhetoric of some right wing zealots, civilized nations do provide medical care and education to all individuals regardless of their immigration status. However, civilized nations should not be responsible for the cost of those services. So, we can and should bill other governments for the cost of providing them to their citizens. Since the cost of health care and education in the United States is astronomically high, the political elites of other nations would be discouraged from outsourcing this responsibility to the United States and may be encouraged (or pressured) to provide better services for their own citizens.

Both sides must recognize that alone that cannot achieve comprehensive immigration reform. Paradoxically, in order to achieve their most cherished goals, they must support each other and swallow the "bitter bill" of policies that they fundamentally oppose. I believe that most Americans are humane and all but the most zealous restrictionists would be open to providing a viable path to citizenship to millions of undocumented immigrants as long as they were certain that this would be the last and final amnesty. To lead millions of good and hard working families out of the shadows is a humane and intelligent act, but to allow those shadows to be perennially filled is a sheer act of folly. The only question is if ethno-political activists would be willing to accept the necessity of a systematic enforcement of the law in order to achieve amnesty that their constituents and our nation so badly needs.