Jay Reding.com

As the media fixates on the death of Michael Jackson, Congress stands ready to enact the largest and most regressive tax hike in history in the guise of “cap-and-trade.” Jim Lindgren explains why this bill is so dangerous:

The cap-and-trade bill, if passed by the Senate and actually implemented over the next few decades, would do more damage to the country than any economic legislation passed in at least 100 years. It would eventually send most American manufacturing jobs overseas, reduce American competitiveness, and make Americans much poorer than they would have been without it.

The cap-and-trade bill will have little, if any, positive effect on the environment — in part because the countries that would take jobs from US industries tend to be bigger polluters. By making the US — and the world — poorer, it would probably reduce the world’s ability to develop technologies that might solve its environmental problems in the future.

Cap-and-trade is a joke—it is a policy that has already failed in Europe and in virtually guaranteed to fail here in the United States. By giving in to the demands of radical environmentalists, Congress is preparing to take our current recession and plunge it into depression.

As the media focuses once again on celebrity, the advent of the next Great Depression comes closer. Cap-and-trade is terrible policy enacted for foolish reasons, and we will all pay the price for it if we allow it to pass.

In The New York Times, John Tierney has an excellent column about why getting rich is the best way to improve the environment:

As their wealth grows, people consume more energy, but they move to more efficient and cleaner sources — from wood to coal and oil, and then to natural gas and nuclear power, progressively emitting less carbon per unit of energy. This global decarbonization trend has been proceeding at a remarkably steady rate since 1850, according to Jesse Ausubel of Rockefeller University and Paul Waggoner of the Connecticut Agricultural Experiment Station.

“Once you have lots of high-rises filled with computers operating all the time, the energy delivered has to be very clean and compact,” said Mr. Ausubel, the director of the Program for the Human Environment at Rockefeller. “The long-term trend is toward natural gas and nuclear power, or conceivably solar power. If the energy system is left to its own devices, most of the carbon will be out of it by 2060 or 2070.”

The best way to “save the environment” is to grow the economy and embrace new technologies. That means stopping our irrational fear of nuclear power. That means working to make solar a reasonable means of producing power. That also means, however, that we can’t just let some government bureaucrat decide what is best—we have to have a competitive marketplace for green technologies in which the best system wins.

It also means that we must stop looking at dangerous and economically unsound policies like “cap and trade”. As this article notes, cap and trade systems do not work and fail to reduce CO2 emissions while simultaneously hurting the economy. That kind of strategy will reduce capital that can be applied to new technologies, raise the price of energy through the roof, and end up raising the cost of living for everyone, disproportionately hurting the worlds’ poor who cannot pay extra for their electricity. Such a program would end up turning into a massive tax increase on America’s vulnerable middle class. Cap and trade is not the right solution.

The right solution is a system that fosters innovation. That means reducing the barriers that keep green technologies off the market, and giving tax incentives to those willing to take the risks of bringing new technologies to market.

Finally, we have to stop believing the cheap energy and green energy are opposed to each other. Basic economics teaches that as supply goes down, costs will go up. If we are running low on fossil fuels, then the prices for those fuels will only rise until the cost of “green” energy is substantially less. At that point, without of hint of government intervention, there will be a green revolution.

But government doesn’t want to wait. By scaring people into seeing an environmental “crisis” they want people to give them unprecedented power and control&madsh;power and control that they can use and abuse. Yes, we need a clean environment. But we don’t need scare tactics. We must take measured and rational steps rather than being frightened into radical and ill-conceived ventures.

200 years ago the streets of every major city were awash in horse manure, water supplies were unsafe, and soot darkened every building. Today, we have made incredible advancements in expanding human quality of life without damaging the environment. Tomorrow, who knows how far we will come if we abandon the politics of environmental fear and embrace the value of human ingenuity and the entrepreneurial spirit.

In The Spectator, Fraser Nelson has a searching piece on the myth that laissez-faire conservatives led to the current economic troubles:

So while it’s a statement of the obvious, the obvious can’t be stated enough at a time when we’re fighting (or should be) for the future of capitalism and the open society. The last ten years were not laissez-faire, as even Gordon Brown suggests. The crash was the result of bad regulation, not insufficient regulation. Brown told the Guardian last month that “laissez-faire had its day” and it did – in the 1880s. The problem this time was a blind, almost fundamentalist, faith in rules-based economics – the idea that, if inflation was low, everything else would be fine. And this stems from a blind faith in the power of governments.

He’s right. The crash was caused not be “Wild West capitalism” or anything similar. It was caused by a regulatory climate that encouraged systemic risk. The mortgage meltdown was not the product of evil capitalists meeting in smoky rooms to screw over everyone, it was the product of government meddling in the economy.

Our system of financial regulations has been based on a rules-based approach. Far from being unregulated, the financial markets are covered by a number of regulatory agencies—the Securities and Exchange Commission regulated the trade of stocks and other securities, along with FINRA (formerly the NASD) acting as a quasi-private regulatory body. Banks were governed by a massive amount of regulations by bodies like the Federal Deposit Insurance Company (FDIC) and the U.S. Treasury. Corporate books were governed by the Sarbanes-Oxley bill that was passed in the wake of the Enron and Worldcom scandals. The housing markets were heavily regulated by the Housing and Urban Development department, the Community Reinvestment Act, and the presence of Fannie Mae and Freddie Mac (who everyone know were “too big to fail” and would be bailed out by the government if things got too bad).

With all that going on, the argument that somehow the financial markets were totally unregulated is hardly justified by the facts. Quite the opposite, the government was doing plenty to tilt the market for various social policy reasons. Since President Carter signed the Community Reinvestment Act in 1977, it’s been government policy to expand home ownership to minorities and low-income people. President Bush’s “ownership society” was hardly a new direction from government policy, but rather a continuation of what came before.

Tilting the Playing Field: Why the Rules-Based Approach Failed

There are two rather huge problem with the rule-based approach: first, it gives incentives for industry to try to tilt the rules to their benefit, and secondly such an approach can’t work fast enough to effectively regulate a modern economy.

On the first point, it’s obvious to all that there was a cozy relationship between the regulators of the financial markets and those people they were supposed to be regulated. Take the example of Sen. Chris Dodd, who while having been supposed to be in charge of regulating the financial industry was getting sweetheart loan deals from Countrywide and raking in tons of cash from AIG. This is, sadly, not a case of one bad apple in a bunch—Rep. Barney Frank was one of the biggest impediments to reforming Fannie Mae and Freddie Mac and fixing the problems with the mortgage market.

This cozy relationship meant that efforts at substantive reform like the Federal Housing Enterprise Regulatory Reform Act of 2005 could never get off the ground. The regulators were in the pockets of the regulated agencies like Fannie Mae and Freddie Mac, and no way would they allow the world to inspect their books and see just how deeply in trouble they were.

Even if federal regulators were uniformly brilliant and far-sighted (and some of them are), they’re no more insulated from political pressure than the corrupt politicians. Regulatory capture remains a major and persistent problem. There is enormous political pressure, not only from the financial companies, but from special interest pressure groups like ACORN and the unions to push rules through that try to expand home ownership to those who would be enable to afford it. In the end, it wasn’t just about turning a profit, it was about “helping the poor” by lowering lending standards so that more people could buy homes they couldn’t otherwise afford.

A rules-based approach will always produce these results. Ban the giving of money and the transactions go under the table. There’s no way to prevent this kind of influence-peddling so long as there is influence to be peddled. As long as people like Barney Frank, Chris Dodd, and the rest of our corrupt legislative class can tilt the playing field, entities like AIG, Fannie Mae and Freddie Mac, and others will have every incentive to see that the rules get tilted in their favor. That is human nature, what James Madison called “faction” all the way back in Federalist #10 in 1787.

The other problem with a rules-based approach is that it’s slow. The process of passing a new federal regulatory rule takes at least a year on average. Yet the financial markets move much faster. New financial equations and methods like David X. Li’s Gaussian copula function (which Wiredcalls “the formula that killed Wall Street”) is something that is difficult for anyone, especially federal regulators to understand and predict. Trying to craft a rules-based approach to deal with a modern financial system in the Internet age is ultimately futile: by the time there’s been a rule that’s survived the rule-making process, the system has already changed.

It’s not possible to have a regulatory system that works fast enough to meet the demands of today’s economy. Even if it were, we don’t want to have a system that produces rules without time for interested parties to have some say. Even worse than our deliberative rule-making process is one that pushes through rules without considering the potential ramifications.

Preventing the Next Crisis: Make Regulations Simpler, Fairer, and Automatic

The rules-based approach is not going to work in the 21st Century, at least not in the form that we have it now. There’s too many opportunities for regulatory capture and the system cannot keep pace with the needs of a rapidly-evolving market. We need a better approach to the financial system.

That approach should come in the form of a smarter system of regulations. Gary Becker wisely suggests that regulations be automatic rather than subject to the discretion of regulators—such as capital requirements that keep financial institutions from getting “too big to fail”. This approach would reduce regulatory capture, but it may be difficult for regulators to set the right ratio of assets to capital. Still, it’s a step in the right direction.

In addition to that, what we need is a set of financial rules that are dramatically simpler. The more complexity there is in a rule-based system, the easier it is for companies to find loopholes. The large and sophisticated players can find their way around the rules, the smaller and less sophisticated players are easily caught up in a system they can scarcely understand. That tilts the playing field away from smaller competitors and towards the bigger ones. That is not a smart way to run any kind of economic system.

We need to clear away the layers of over-complicated, overlapping, and over-burdensome regulations and replace them with a comprehensive system based on simpler rules that anyone can follow. That will naturally be met with huge cries from both the government agencies and the companies that have captured them, but it’s a necessary step to fixing this mess.

We also have an urgent need to reduce moral hazard. Fannie Mae and Freddie Mac knew they could get away with anything because they were “too big to fail” and their close ties with government would mean they would be the recipients of a federal bailout. That means that they could take far more risks than was safe, and once they did it, others started to follow suit. In a functioning free market system, there has to be a system in which smart risks get rewarded and dumb risks get punished—otherwise everyone will start making dumb and risky moves.

Finally, we have to recognize that more government is not the right solution. More bad regulations will only make the system worse. They will continue to create even more problem with regulatory capture and corruption, and it’s quite likely that they will have a host of negative side effects that won’t be foreseeable for quite some time. Too much bad regulation got us into this mess, and trusting the same government actors that created the mess in the first place to get us out is a fool’s errand.

This crisis was not the result of laissez-faire capitalism, it was the result of bad regulation and corrupt government. In order to repair the damage and move ahead we must stop the culture of bailouts and expanding the power of the corrupt technocrats and move to a system that is fairer, less needlessly complicated, and less prone to regulatory capture. That will not make people like Chris Dodd and Barney Frank happy, nor will it be very welcome within the industries that have grown accustomed to buying favor with the government. But for the future of the American economy, it is the right thing to do.

Next Big Future reports on a joint Chinese-South African project to advance pebble bed reactor technology. Pebble bed reactors are an advanced type of nuclear reactor design that promises to be significantly safer than conventional designs, for more details see here.

One of the reasons I’ve said that the future may well belong to the East is because the Chinese are willing to invest in this kind of technology while Western governments are too motivated by short-term political pressure to invest in projects such as these. The only way we will be able to meet the energy needs of the future and preserve the environment is to start moving towards nuclear energy. The truth is that wind, solar, geothermal, and other “green” technologies cannot produce enough power to meet our needs. They may be supplements to a nuclear infrastructure, but they will never supplant it.

If President Obama wished to be truly forward-looking, he would commission a similar program in the United States. For all the talk about the “Republican war on science,” the Democrats remain in thrall to an environmental lobby that wants to push for forms of alternative energy that will never be able to meet America’s needs. So instead, we keep our inefficient fossil fuels and push for stopgap solutions like “clean coal” rather than investing in an energy infrastructure that truly meets the needs of the 21st Century.

Pebble bed reactors promise a safer, cleaner, and more plentiful form of energy for America and for the world. If we are to remain a superpower into the 21st Century, we cannot turn our back to advances such as this. We cannot let the stigma of the word “nuclear”—and the irrational fear it engenders—stand in the way of our future.

Hat tip to Glenn Reynolds for the link.

The United States of America is now a de facto socialist nation.

That may seem like hyperbole, but there’s more than enough evidence to suggest that it’s true. Look at the definition of socialism from that font of all knowledge: Wikipedia:

Socialism refers to a broad set of economic theories of social organization advocating public or state ownership and administration of the means of production and distribution of goods, and a society characterized by equality for all individuals, with a fair or egalitarian method of compensation.

Let’s assume that definition is roughly accurate. Does the U.S. fall under that definition?

Well, we now have a system in which the government has a controlling interest in several major sectors of the U.S. economy. Whether the banking system is officially nationalized or not is largely irrelevant—it has already been de facto nationalized. The U.S. government now has effective control over all of AIGs operations, right up to the the amount that it may pay its workers. At least for a huge swath of the financial sector, the government has effective control.

Now, President Obama has set his sights on the auto industry, essentially firing GM’s president. The fact that the President just ordered an official of a private company to step down should be deeply troubling to all. What if President Bush had demanded that the Democratic president of a major arms manufacturer resign? The left would have been in an uproar. Regardless of Wagoner’s competency, to have the President of the United States order a private company to fire an employee should not happen in our system. The government is now calling the shots at GM. This isn’t forced nationalization, but like AIG, GM and Chrysler are now de facto state-run enterprises.

The government now controls the means of production in two huge swaths of two major industries. Even if we have not arrived at full-scale socialism yet, we are at the very least perilously close.

Economist Arnold Kling calls the current state of affairs “Progressive Socialism“—although it is really another version of state socialism. Socialism doesn’t require the government to own all the means of production (as does Communism), but merely to have effective control over the economy. Right now, the Obama Administration is effectively in the driver’s seat of the U.S. economy. Looking at the markets, it’s quite clear that the aimless direction that Obama is taking us is destroying trillions of dollars of actual value.

The Fall of Capitalism, The End of Freedom

Why should we care? The reason why the advent of American state socialism is such a problem is because political freedom and economic freedom are really two sides to the the same coin. As Janet Daley notes in The Telegraph an attack on capitalism is ultimately an attack on human freedom itself:

When we make the case for capitalism, we are defending the political principle of freedom, not arguing for one kind of rigid economic organisation over another. The debate is being hopelessly muddied by those late converts to free enterprise – politicians like Mr Brown who believe that markets should only survive if they can be made to serve Left-wing purposes.

Capitalism is premised on individual agency. Socialism is premised on the power of the state. The second we give government—which has the legal ability to use force—all of our economic power, what do we really have left? In essence, socialism is really a more “enlightened” form of feudalism in which the serfs trade their freedom for the protection of the elites.

The United State should not fall into the trap of socialism. Socialism is not a workable economic model. The larger and more diverse the nation, the more quickly socialism fails. Industrious and homogenous Sweden can ride out the problems of strong government control longer than could the large and diverse United States. If we continue down this road, our economic collapse will only get worse.

The United States has become a de facto socialist state, and the crisis on Wall Street is a reaction to this untenable and unsustainable trend. If we want to preserve our quality of life, we cannot have our economy being run by the same Washington apparatchiks who have caused this crisis in the first place. Obama’s shift of the U.S. economy to a more centralized and socialized one will lead this country ever closer to disaster.

E.J. Dionne does what Democrats love to do, except when running for public office: call for a massive increase in American taxes. Again, he demonstrates the fundamental flaws in the Democratic understanding of basic economics:

He’s right that a large share of any increase should hit those who enjoyed the biggest income gains over the last decade. But in the end, no politician (with the possible exception of libertarian Ron Paul) is willing to cut the budget enough to contain the deficit without a general tax increase down the road.

Every budget analyst knows this, and every politician knows that it’s far easier to bemoan deficits in the abstract than to risk spending cuts or tax increases that hurt sizeable groups of voters. “There are no more low-hanging fruit,” says Tom Kahn, the staff director for the House Budget Committee. “The low-hanging fruit have already been picked. Any tax increase or spending cut is going to trigger opposition from somewhere.”

In an ideal world, Obama would come right out and say we’ll need broad-based tax increases. But that would be suicidal right now. Witness the reaction to his effort to put a 28 percent ceiling on deductions. His proposal would affect only 1.2 percent of taxpayers, yet even that idea is about to die in Congress.

Dionne is correct in one aspect: just raising taxes on the “top 5 percent” isn’t going to do anything. President Obama could raise the top marginal tax rate to 99% and still never get nearly enough money to pay for his additional proposed spending, no less the entire federal deficit. The idea that raising the top marginal tax rate from 36% to 39% will be anything more than a tiny drop in the bucket compared to Obama’s radical spending plans is ridiculous. Even combining that with removing payroll tax caps, limiting deductions, etc., won’t nearly be enough.

So, is a broad tax increase the answer? Dionne suggests yes. But that answer is self-evidently incorrect. Exactly what is going to be accomplished by adding to the tax burden of the American people in the middle of a recession that is precipitously close to becoming a depression? Where is the average American member of the middle class going to get the extra money to pay off Uncle Sam’s never-ending appetites? People are already cutting back on their spending—raising taxes would cause them to cut back even more. When the economy is already having problems with paradox of thrift, why would policymakers try for a plan that would reduce consumer activity even more?

The root of this whole problem was bad policy. We let everyone get over-leveraged, homeowners, banks, and even the government. Now, instead of tightening their belts, our “leaders” in Washington D.C. are trying to find every inventive new way they can to spend even more money. Dionne is also right in that just nibbling away at the margin will not do it—we have to re-evaluate the massive and virtually uncontrolled growth of government.

Raising taxes and having government “invest” that money will not work. Government is subject to the political process, which virtually guarantees waste. If anyone thinks that Congress will rationally allocate money based on the national interest, then they have a fundamentally irrational faith in government unjustified by facts or common sense.

Raising taxes is simply not the answer. In a time when the American people are cutting back, losing their jobs, and losing their homes, it is grotesquely irresponsible for government to demand even more of their hard-earned money—they don’t have the money to give. The argument that somehow the government will spend its way out of this recession is completely unjustified. Those who think that we should follow the example of FDR had better hope the Europeans start slaughtering each other so we can bomb them to rubble and then help them rebuild—it was World War II and not the New Deal that finally ended the Great Depression. We do not have the ability to spend our way out of this—and all Dionne would have us do is feed the beast more.

What needs to be done? For one, we need to re-evaluate our view of what government does. Nearly all of our current problems can be traced to government intervention. Fannie Mae and Freddie Mac could cook their books because they (and everyone else) knew that they were “too big to fail” and if anything went wrong, Uncle Sam would bail them out. For all the talk about how it was deregulation that caused this mess, the reality is that the less heavily regulated industries are doing better than the most heavily regulated ones. The idea that banks were living in some kind of libertarian paradise and government wasn’t watching everything they did is completely wrong. The banking industry was, and is, heavily regulated. The problem was that the big players (Countrywide, for example) could “buy” Congress and get them to pass laws and rules favorable to them.

The answer is to make sure that this kind of capture can’t happen again. The best way to do that is to make sure that Congress can’t rewrite the rules to line their own pockets. That means not only tougher ethics reform in Congress, but also preventing Congress from being able to screw around with the nation’s economy. Everyone treats this as a demand problem—but it’s really a supply problem. If Congress could only do so much to regulate the industry, there would be no incentive for companies to spend billions on influence peddling. There would be no point to doing so—even if they wanted to, Congress couldn’t stack the deck in their favor.

That means restricting the power of government, except in making sure that companies act transparently. The government does have some need to interfere with the market, but what we are seeing now is when government substitutes the “wisdom” of someone like Tim Geithner for the judgment of the market—quite literally making Geithner the one who gets to make all the rules. Even if Geithner were an unqualified genius, this sort of concentration of power is dangerous.

What we need is less government, not more. What we need is the development of the private sector, not more reliance on government employment. What we need is less of a tax burden, not more. We need a government that does a few things and does them well, not a government that tries to do everything and ends up failing more often than not.

Dionne is wrong at the core of his argument—the level of government spending is unsustainable, and we can never raise taxes enough to cover the difference—and if we tried it would further depress the economy. We cannot keep hoping that the same top-down solutions will work. We cannot just assume that substantive entitlement reform is off the table.

This nation is at a crossroads. We can either continue to spend our way into bankruptcy or we can start looking at alternatives. Raising taxes only makes things worse. We cannot blindly put our faith in government, but must look back to the basics of what makes our economy strong: hard work, a government that promotes opportunity, and a government that is small but effective. The more we stray from those basics, the harder things will be in the future.

Bloomberg has a deeply critical piece written by Kevin Hassett arguing that Obama has declared “war” on American business. This may seem like hyperbole, but the evidence bears it out:

Imagine that some hypothetical enemy state spent years preparing a “Manchurian Candidate” to destroy the U.S. economy once elected. What policies might that leader pursue?

He might discourage private capital from entering the financial sector by instructing his Treasury secretary to repeatedly promise a brilliant rescue plan, but never actually have one. Private firms, spooked by the thought of what government might do, would shy away from transactions altogether. If the secretary were smooth and played rope-a-dope long enough, the whole financial sector would be gone before voters could demand action.

Another diabolical idea would be to significantly increase taxes on whatever firms are still standing. That would require subterfuge, since increasing tax rates would be too obvious. Our Manchurian Candidate would have plenty of sophisticated ideas on changing the rules to get more revenue without increasing rates, such as auctioning off “permits.”

Now, Obama is no “Manchurian Candidate”, but he is doing everything he can to bring the economy into depression. His policy goals will continue the already unprecedented destruction of American wealth that has resulted since his elections. The markets, looking ahead to the Obama Administration, have reacted with panic. They see the future wealth-destroying effects of higher taxes, more government intrusion into the markets, a socialized system of health care, and a reckless “cap and trade” system that will push energy prices sky-high.

The markets are seeing Obama clearly for what he is: a weapon of mass wealth destruction.

If Obama wants to restore the economy, he would restore the engine of American prosperity: American business. Yet through higher taxes and more unnecessary and unneeded regulations, the Obama Administration has already put itself out as strongly anti-business. Small business owners are already trying to do whatever they can to get through the next four years, and that means continuing to stockpile rather than sell and cutting as many jobs as we can.

I have always said that liberalism will always fail because its premises are wrong. Obama has barely started to enact his agenda, and already the results speak for themselves. Into Year Two of the Obama Recession, it’s going to be very hard for the left to blame the previous President for the bad economy—not that they won’t. But the reality will be that Obama’s policies will not create wealth, they will destroy it. We will all suffer due to this reckless experimentation. What we are seeing in the markets is a clear-headed response to Obama’s policies—and the markets will continue to sink unless this nation changes its current, disastrous course.