The Network Neutrality Trojan Horse

President Obama has come out swinging for “net neutrality” as his first post-midterm initiative. While on the surface the concept of “net neutrality” seems like a wonderful idea—who isn’t for a level playing field? It is when you get into the details of what “net neutrality” really means and how it is to be implemented that reality intrudes.

Network neutrality may sound good in theory, but it is a Trojan Horse for government control over the internet.

What President Obama means by “net neutrality” is to regulate internet providers as “public utilities” under Title II of the Telecommunications Act rather than as an “information service” under Title I of the Act. This may seem like a completely uninteresting change, but it means that internet providers would be under a radically different landscape. It would allow the government to regulate essentially every part of your internet provide, right down to the rates they charge. While President Obama has said that the FCC would not go so far as to regulate the rates your ISP can charge, that promise is only as good as the other promises that this President has made and broken.

So why should you oppose Obama’s approach to “net neutrality?” For one, it’s a solution in search of a problem. Advocates of net neutrality paint a picture of a world in which ISPs charge you extra for certain sites and make you pay extra for YouTube or Netflix or certain sites. This picture is simply not realistic. There is little to nothing preventing ISPs from doing that now, and none of them have done so. If they did, the backlash would be enormous. The reason why ISPs have not gone to a tiered system is because it’s technologically difficult and offers little benefit. That isn’t going to change—in fact, in an open marketplace it would be even dumber for an ISP to do that because consumers would have plenty of other options. If you don’t like what Comcast does, you can switch to DSL, satellite, or wireless services. As I’ll discuss later on, consumer choice, not government regulation, is the better path forward.

The other reason is that heavily-regulated industries are not consumer friendly. The internet depends on rapid innovation. A three-letter government agency like the FCC is about as far away from innovative as you can get. Andy Kessler outlines how the FCC stifled the development of major telecommunications technologies in the past due to overregulation and regulatory capture. Right now most broadband internet is delivered through cable or DSL—but wireless internet is growing in popularity. Cellular networks, satellite networks, and future technologies like Google’s Project Loon are changing the way we get broadband internet. If the FCC tries to fit these new technologies (or technologies we haven’t even invented yet) into their old-world regulatory framework bad results will happen. Would Google Fiber exist if Google had to climb through miles of red tape just to get started? No, even a hugely profitable company like Google would say it just wasn’t worth it. Would the next method of high-speed internet appear in a heavily regulated market? Forget it–because when you have a heavily-regulated market the playing field does not become equal, it becomes the exclusive playing field of the big boys who can use political power and lobbying to tilt the rules in their favor.

While President Obama says that ISPs should not be allowed to “block” or “throttle” content, that ties the hands of ISPs to regulate quality on their network. If the teenager next door to you starts flooding your upstream internet connection by downloading gigabyte after gigabyte of data and streaming multiple 4K movies, it would make sense for the ISP to throttle that user. He’s degrading service for others, and that’s a problem. But Obama’s proposed net neutrality rules would leave ISPs virtually powerless to make common-sense moves that are designed to improve network quality. Trying to regulate just when and how a provider could throttle would mean another several-thousand page stack of regulations that just makes the situation harder. President Obama’s bright-line rules may not always work so well in practice.

Finally, a more heavily-regulated internet makes it easier to start clamping down on speech that the President doesn’t like: regulation under Title II makes it easier for the FCC to start regulating content as well as carriage. In this case, net neutrality is the proverbial camel’s nose under the tent. Once regulated as a public utility, the FCC has virtually unfettered discretion to change how ISPs do business. Want a low-cost, low-speed, but high-reliability service for a small business? Too bad, because the FCC will tell your ISP what they can and cannot offer. This is what Ted Cruz inarticulately warned about with his comparison to Obamacare. When government rights the rules, the rules become one-size-fits-all and consumers suffer.

Some of what the President proscribes in not bad. For instance, ISPs should report when and how they are shaping traffic. Markets need a certain level of transparency, and government can create narrowly-tailored and clear rules to provide market transparency. But even this must be done carefully. Even rules designed to promote transparency can be twisted to stifle legitimate competition.

If regulating ISPs as a “public utility” is such a bad idea, why is President Obama pushing it? There are several possible explanations. The first is that net neutrality is a popular cause among major Democratic campaign contributors like Google, Apple, and Facebook. The second is that it’s a technical issue that the public doesn’t understand, and if Obama wins on it, he can spin it to make it look like a political win for himself—by the time the rules are implemented, Obama will be out of office.

What is a better way of dealing with this situation? Instead of regulating ISPs under Title I, the FCC should butt out. There is not a problem with networks blocking content or throttling content (except when you go over a data allotment, which is a content-neutral restriction). Unless and until there is a problem that’s worthy of sweeping regulation, it’s better to leave the system where it is. Instead of proposing a top-down, one-size-fits-all solution written from on high, the internet should be allowed to continue in the same way its prospered: by developing its own rules of the road.

The internet went from being a little-known and seldom-used academic and defense network to being the way billions across the world connect. This happened because the FCC and other regulatory agencies took a light hand in regulating this new form of communication. While on the surface “net neutrality” sounds good in principle, it is when you get to the harder questions that it becomes clear than regulating the internet would stifle its continued growth and development.

No Longer California Dreamin’

The reason why I am not a liberal is because liberal means can never achieve liberal ends—and nowhere is that more apparent than in the state of California. For decades, California has been an enclave of liberalism, an experiment in liberal governance and liberal ideology. Even when Arnold Schwartzenegger was elected governor, ostensibly as a Republican, he governed as a center-leftist. The Republican Party in California has become a virtual irrelevancy, and the California Legislature is now subject to Democratic super-majorities in both houses.

And what is the result of California’s full-throated embrace of liberal policy? This article in The Washington Examiner lays the truth bare:

What are Californians getting for all this government spending? According to a new census report released Friday, almost one-quarter, 23.5 percent, of all Californians are in poverty. One-third of all the nation’s welfare recipients live in the state, despite the fact that California has only one-eighth of the country’s population. That’s four times as many as the next-highest welfare population, which is New York. Meanwhile, California eighth-graders finished ahead of only Mississippi and District of Columbia students on reading and math test scores in 2011.

Middle-class families that want actual jobs, not welfare, are fleeing California in droves. According to IRS data compiled by the Manhattan Institute, since 2000, almost 2 million Americans have left California for other states. Their most popular destination: Texas.

It is ironic that the Democratic Party champions itself as guardians of the middle class, when California shows how liberal policies have the effect of hollowing out the middle class. California has become an enclave for the super-wealthy and the super poor—those in the middle take the worst squeeze. California has become a state where income inequality is some of the highest in the country, despite the notion that liberal social and fiscal policies will create a more equitable society. Despite years of liberal policymaking, California has not become a more equitable place to live.

At the same time, California’s tax rates are some of the highest in the nation. While liberals love to argue that Proposition 13, which limited the Legislature’s powers to raise property taxes, are the reason for California’s woes, the truth is far different. California has some of the highest tax rates of any state in the country, and has a highly progressive tax structure with seven brackets. Despite having a tax system that does everything that the left argues should be done, California is a fiscal basket case.

So what is California’s real problem?:

The real cause for California’s fiscal crisis is simple: They spend too much money. Between 1996 and 2012, the state’s population grew by just 15 percent, but spending more than doubled, from $45.4 billion to $92.5 billion (in 2005 constant dollars).

California simply spends far more than it takes in, despite having some of the richest parts of the country, California’s unquestionable prosperity cannot accommodate the needs of an ever-expanding government. And the response of California’s left-wing government has been to further raise taxes, forcing an even-greater exodus of middle-class jobs to states like Arizona and Texas. What we are seeing is a state that is coasting by on past successes, but rapidly reaching the inflection point where California threatens to become a failed state.

If that seems like hyperbole, it is not. We can already see it happening on the municipal level. The city of Stockton, California has become the largest municipality in the country to file Chapter 9 bankruptcy. (Chapter 9 is a rarely-used part of the federal Bankruptcy Code that allows cities and counties to reorganize their debts in the same way that companies may file Chapter 11 bankruptcy.) But Stockton isn’t alone: three other California cities have also filed for bankruptcy protection, an almost unprecedented event.

The root causes of these bankruptcies are overly-generous public-sector pensions that are no longer sustainable, massive public spending, and tax revenues that are shrinking as the middle class flees for more sustainable climates. Yet these trends are not being fixed, they are being exacerbated as Sacramento continues to push for more and more spending and higher and higher taxes.

Indeed, California faces a fiscal time bomb that could swamp the entire state. CalPERS, the public-sector pension system in California is facing a fiscal crisis. It has even resorted to filing lawsuits against bankrupt cities to try and get additional money to remain solvent. As California’s tax base becomes increasingly polarized, the flow of money needed to give public-sector employees lavish benefits decreases. But the powerful public sector unions have a stranglehold over state government, which makes meaningful reform virtually impossible. When CalPERS goes bust, as is inevitable, the economic effects would be dire.

And that doesn’t even get to immigration: California’s lax immigration enforcement and lavish welfare benefits have created a massive Latino underclass. Illegal immigration costs California taxpayers up to $1.6 billion every year, a sizable fraction of California’s overall yearly deficit. Even if those costs are inflated, the very real cost of providing benefits to hundreds of thousands of illegal immigrants is having an effect on California’s already-precarious fiscal situation.

The California Canary in the Fiscal Coal Mine

California’s looming failure is a warning to the rest of us. California is being buoyed by its prior good fortune, it’s abundant natural resources, and its excellent climate and geography. But even these natural advantages cannot hold its decline at bay forever. Should nothing change, California will face fiscal collapse, and it could take the rest of the country down with it. A fiscal crisis in California would have massive ripple effects across the entire United States economy. But the political will for reform is simply not there. With no effective resistance to the liberal orthodoxy in California, there is nothing to slow down the stream of bad policies contributing to this mess.

But what cannot go on forever will not, and sooner or later the results of these bad policies will hit in full force. Sooner or later the unsustainable trajectory that California is on will meet the ground, and when it does, the end result will be messy at best—and that’s the most optimistic way of putting it.

What California show us is that liberalism is rife with internal contradictions. Liberalism teaches that economic inequality is dangerous, yet years of liberal policies have produced shocking inequality in California, The rich Los Angeles suburbs like Beverly Hills, Malibu, or Brentwood exist just miles from some of the most blighted urban landscapes in the country. Liberalism says that the middle class must be defended, yet California’s middle class is fleeing the state, and those that remain are getting squeezed ever tighter by high prices and high taxes. Liberalism says that government should be the solution to our problems, but California’s government is one of the most dysfunctional in the country. California is proof that liberal means can never achieve liberal ends—and each year those contradictions only grow.

What California needs is a complete reorganization. California can succeed, it has all the natural benefits in the world and still enjoys the benefits of being a center for technology, aerospace, biotech, and other fields. Despite California’s brain drain, it still has a substantial part of its educated workforce left. The ingredients for success are all there, but California’s dysfunctional government and left-wing hegemony is keeping it from success.

Restoring California’s Dream

What California needs is to reform its pension system, even if it creates massive political costs. It needs to dramatically cut unnecessary spending, including stopping giving such lavish benefits to illegal immigration. Proposition 13 may have kept California’s property taxes artificially low, but that’s been offset in some areas by insanely high property values in certain areas of the state. Property tax reform may well be necessary, but it should be combined with a simpler, flatter, and less punitive income-tax system and a reduction in both business taxes and unnecessary regulations.

California has benefitted from a highly-educated workforce, but that cannot continue so long as California’s schools are failing, both K-12 and higher education. Instead, California needs to do what the rest of the country must do: reform the educational system from a sinecure for bureaucrats into a result-driven system that teaches the skills needed for the 21st Century workforce. Right now many of the people working for California’s high-tech industries are foreigners on H1B visas—and while those workers add a great deal to the state, it’s not sustainable over the long term. Developing a better educational system will make sure that California can maintain its high-tech economy into the future. If they fail to do that, California will become an also-ran.

California demonstrates the reasons why liberalism doesn’t work: because if you do everything that liberalism says, you don’t get a more equitable or modern economy. The problem is that for many of the stakeholders in California’s broken system, there is no impetus to reform. The public sector unions have every reason to keep sucking at the teat until it runs dry. The educational bureaucracy has no desire to reform and threaten its gravy train. The ultra-rich don’t care what tax rate they pay because they have enough wealth that the difference between losing 10% to taxation and losing 5% ultimately doesn’t impact their standard of wealth. A Hollywood movie star doesn’t care what their tax rate is, they are paid an obscenely large amount of money and their finances are handled by an army of lawyers and accountants. The small business owner who can only afford a part-time bookkeeper is acutely aware of the impact of taxation. Yet the Hollywood celebrity has far more political clout than the small-business owner.

Sadly, the only way that this system will likely be reformed is when there is no other way possible. The liberal welfare state is ultimately unsustainable, but is extremely difficult to reform. California was once a symbol of America’s cultural, technological, and economic might. Yet now it is becoming a warning. If we fail to heed that warning, California dreamin’ will become a national nightmare.

Milton Friedman’s Century

Today would have been the 100th birthday of Milton Friedman, the economist and author who helped inspire some of the most important economic policies of our time and helped millions of people escape poverty. Friedman doesn’t get much recognition outside of economic circles, but his achievements in that field were more than just writing a few textbooks. He helped change the face of the American economy for the better.

When Milton Friedman won the Nobel Prize for Economics in 1976, the world was enamored with the ideas of John Maynard Keynes, who taught that government spending would somehow produce a “mulitplier effect” that would lead to economic growth. The theory was that if the government were to spend $1 it would produce more than $1 in economic activity. In the 1960s, Friedman famously wrote that “we’re all Keynesians now”—a position later adopted by Richard Nixon in 1971.

In the 1950s through the 1970s, one could credibly think that the future lay not with free markets but with centrally-planned economies. Keynesianism was the dominant theory in economics and government policy. Governments across the globe were expanding the reach of central planning in a whole host of economic sectors. The ideas of the Austrian Economic School were dismissed as crackpot theories.

But then, the crash hit.

Friedman’s Revolution

In the 1970s, the world economy entered into a massive downslide. The Arab oil embargo pushed gas prices through the roof. But more critically, something happened that Keynesian theory said was impossible: stagflation – high inflation and economic recession. Conventional Keynesian theory taught that inflation and economic recession were opposites and could not happen at the same time. Yet in the 1970s, that is precisely what happened.

Across the globe, politicians tried the conventional Keynesian remedies. In the United States, Richard Nixon instituted wage and price controls to try to stop inflation, an effort that appeared to work at first until it led to massive shortages of goods. Governments tried to spend their way out of the recession, to little forward growth. The world economy was hanging by a thread, and the conventional economic theories were not helping the world pull out of its economic recession.

But it was Milton Friedman that popularized the way out of the mess. Friedman had already chipped away at the intellectual foundations of Keynesianism. He observed that Keynesian spending and the Keynesian multiplier did not work in practice—once the spigots were turned off, a fiscal hangover resulted. Because there was no new production happening to support all the extra spending, the result of Keynesian stimulus was inflation and recession. Governments wanted to try to inflate their way out of the borrowing costs of all the extra spending, which only made things worse. Further, government “investment” was taking place at the expense of private investment that would produce long-term growth.

Friedman’s theories were right, and his work led him to receive the Nobel Prize in 1976. It was not until the end of the 1970s into the early 1980s that leaders such as Ronald Reagan and Margaret Thatcher embraced his ideas that the world economy truly began to recover.

Free To Choose

But Friedman was more than just a theoretical economist. He was a gifted philosopher and writer as well, and his work on why free markets are so important to a free society is some of his most important work. His first major popular work, Capitalism and Freedom went into the details of why the economic theory of capitalism was so deeply entwined with having a free society. When it was first published, Capitalism and Freedom was a revolutionary work: Friedman advocated such bizarre notions as a “negative income tax,” an all-volunteer military, and school vouchers.

Friedman continued to popularize his pro-free market ideas in the press, writing columns for Newsweek and other publications. But it was in 1980 when Friedman published one of his most accessible works, Free to Choose, that Friedman’s ideas started truly influencing the popular conversation.

Friedman dedicated himself to pursuing advocacy for free markets and limited government, and he did it with a sense of clarity and purpose. He was able to explain why even the most well-intentioned government programs are thwarted by the complexity of a modern economy. The following clip from the Donohue show in the 1980s shows Friedman at his best:

Friedman, of course, had the better argument, and was able to not only write about economics, but to get millions of people to look at economics in a new way. Instead of viewing economics as the “dismal science,” concerned with the shuffling of abstract value, Friedman popularly imbued economics with a moral aspect. Economics was about maximizing the freedom of the individual rather than the collective or the State. It was about ensuring that individuals were best able to pursue their own ends, provide for their own families, grow their own businesses, and prosper. This shift seems common-sense to us now, and that is due in large part to the influence of Milton Friedman.

A Legacy of Freedom

Today, some of the revolutionary ideas in Capitalism and Freedom are a common part of our day-to-day lives. Milton Friedman pushed for an all-volunteer military prior to the Vietnam War, and today the military is and will remain an all-volunteer force. Friedman’s idea of a “negative income tax” blossomed into the Earned Income Tax Credit, a system where people in poverty who choose to work are rewarded for their efforts with a payment from the government. Instead of welfare, which subsidizes poverty, the EITC encourages work and employment. In 2010 alone, the EITC was responsible for lifting an estimated 5.4 million Americans out of poverty. Friedman’s ideas have lifted 200 million people from poverty into prosperity, an achievement that will stand the test of time.

Now, more than ever, we need leaders who will carry Friedman’s mantle of freedom. Keynesianism, discredited in the 1970s and later by the Japanese “lost decade” in the 1990s is making a resurgence. It isn’t that Keynesian theories suddenly work better than they did in the past, it is that governments are using Keynesianism as a rationale for consolidating political power and justifying more and more control over the world economy. Friedman would have seen right through these efforts.

Just as it was in the 1970s, what the world needs now is not more central State planning, but more economic freedom. The solution to our economic problems is to unleash the creative energies of our people and to get government out of the way of economic growth. Friedman understood this from both a philosophical and a practical viewpoint. Friedman was right back then, and he is right today. And if we listed to his wise counsel again, our economy can come roaring back once again. Milton Friedman’s legacy of freedom can bring millions more from poverty to prosperity again if we are only willing to listen.

Why The Economy Sucks

The news on the economy continues to be bleak—while unemployment is down from nearly hitting double digits, it’s still stuck well above the historical average. GDP growth continues to be sluggish. Businesses are skittish about hiring, which only adds to the troubles. Despite the yearly promises from the Obama Administration about a “recovery summer” (this year’s theme: “third time’s the charm, right?”) this summer is not looking to have much more economic growth than past summers. To put it succinctly: this economy blows.

But why? What is it that’s keeping the economy in the doldrums?

President Obama has his answer: it’s all George W. Bush’s fault. And a plurality of Americans even agree with that. The problem with that theory is Bush hasn’t been President for almost four years and all the things that he did that were supposedly so terrible (Foreign wars! Tax cuts for the rich! Wasteful government spending!) have all been ratified by the Obama Administration.

They’re All Keynesians Now

The other theory popular on the Democratic side and advanced by people like New York Times columnist Paul Krugman is that what we really need is massive government spending – or what economists would call “Keynesian stimulus.”

Keynesianism is named (appropriately enough) for John Maynard Keynes, a British economist and one of the most crucial (if frequently wrong) economic minds of the 20th Century. While Keynesian economic theory is far more advanced than could be explained in a blog post (no less one that anyone would want to read), the sort of “dimestore Keynesianism” that’s popular among today’s Democrats involves the simple theory that government spending produces economic growth.

Here’s how that theory is supposed to work: it posits that the reason why the economy sucks is because of a lack of “aggregate demand.” What that means in more conventional terms is that people aren’t buying enough shiznit. And because people aren’t buying enough shiznit, factories that make said shiznit aren’t running and are laying people off, and the economy is swirling the toilet.

That sounds pretty convincing at first blush – the reason why the economy sucks is because a lack of demand. It’s simple, it’s intuitive, but as I’ll get to later, it’s also wrong.

But first let’s look to what the dimestore Keynesians think is the solution. And they say that if the problem is a lack of aggregate demand, let’s stimulate demand! We take all those unemployed workers and we put them to work on “shovel-ready” jobs. They work for 8 hours a day repairing infrastructure and the government gives them a paycheck for it. Then, they go out and spend that paycheck, which creates demand. Suddenly those people are buying shiznit again, and the shiznit factories are producing their shiznit again, and the economy restarts.

Again, on the surface this all makes sense – it’s a nice and simple description of the problem, it’s a nice and simple solution, and maybe it just might work.

But it doesn’t.

The Economy Is Turning Japanese

In fact, we know that demand stimulus doesn’t work. It’s been tried before. In the 1990s, Japan’s economy took a nosedive after a major financial crisis and a housing bubble. (Sound familiar?) So the Japanese government engaged in a massive orgy of spending. (Sound familiar again?—and I mean the spending part, not the “Japanese orgy” part…) And what was the result? The Japanese economy went into a “lost decade” in which economic growth stagnated.

In 2009, President Obama passed the American Reinvestment and Recovery Act that was supposed to have created thousands of “shovel-ready” jobs and get the economy moving again. Obviously, it didn’t. Instead, unemployment continued to increase at a much higher rate than predicted. Even President Obama was forced to admit that those “shovel-ready jobs” weren’t exactly “shovel ready.” The stimulus didn’t produce the kind of job growth or GDP growth that President Obama promised. But why?

On the surface, Keynesianism makes sense, if you want to get the economy moving, get people jobs and get them to spend money. But once you scratch the surface, it all falls apart. Reason explains why in discussing the Japanese stimulus efforts:

In an attempt to encourage growth, the Japanese embarked on a massive, multi-billion-yen infrastructure program. They built roads, bridges, and airports, all with the goal of creating jobs and reviving the economy. This didn’t work either.

During the 1990s, Japan passed 10 fiscal stimulus packages, focused largely on public works, totaling more than ¥120 trillion ($1.4 trillion in today’s dollars). When one construction plan failed to stimulate economic growth, another was tried. Those plans did not succeed in reviving the economy, but they did saddle the nation with a mountain of IOUs that helped postpone recovery for years. Including “off-budget” borrowing, Japan’s debt was estimated to exceed 200 percent of GDP in 2001.

Construction plans often set job growth targets but rarely focused on project prices. From 1992 to 1999, the Japanese government spent more than $500 billion (in today’s dollars) on public works projects. Yet the construction jobs were not long-term and did not lead to sustained economic growth. Public debt sky-rocketed, unemployment actually doubled from 2.3 percent to 5 percent, and the economy remained stagnant. As Gavan McCormack, a historian at Australian National University, noted in his 1996 book The Emptiness of Japanese Affluence, “The construction state is in some respects akin to the military-industrial complex in Cold War America (or the Soviet Union), sucking in the country’s wealth, consuming it inefficiently, growing like a cancer and bequeathing both fiscal crisis and environmental devastation.” The government failed to properly identify which projects should be pursued, ignoring demand signals that the private sector is better at recognizing and responding to.

Taking Keynes To The Woodshed

So we know that Keynesian stimulus didn’t work in Japan and it didn’t work here in 2009. The passage above gives us some reasons why. Stimulus spending doesn’t work because of the way government spends money. Government does not spend money based on an economic calculus, they spend it based on a political calculus. This difference is crucial to understanding why most attempts at government intervention in the economy fails.

In a normal market, goods and services are allocated based on price signals. How does the economy know what to produce and how much of it? It’s all based on prices: when there’s too little of something the price shoots up—suddenly it makes sense to produce more of it. Then when there’s too much, the prices fall again. Supply and demand will, under normal circumstances, find an equilibrium.

The problem with government spending is that it doesn’t follow the rules of supply and demand. If a powerful Senator from South Dakota says that we need a six-lane superhighway between Podunk and East Armpit, that Senator can have the political clout to make it happen. The problem with that is that suddenly the government is spending millions to build a six-lane superhighway that isn’t actually needed and won’t produce economic growth over the long term.

“But wait!,” the Keynesians say, “Doesn’t building that six-lane superhighway to Warehouse 13 mean that workers will be employed and then they’ll have money to spend, creating economic growth?” The answer is yes, you’ll be paying people, but you won’t get economic growth from it. Why? Because the only way the government has money to spend is taxation or borrowing—so for every dollar you spend on that six-lane superhighway, you have to either take a dollar from elsewhere or borrow it and pay it back with interest.

There’s also a phenomenon called “crowding out.” This article explains the “crowding out” effect of stimulus spending in some detail. The short version is that if you take a dollar from the private sector and devote it to public spending, that’s a dollar that the private sector doesn’t have to spend. In other words, the government isn’t doing anything new, it’s just taking spending that the private sector would have done and doing itself. The net economic impact is, to put it in highly technical terms, bupkis. And if you assume that government spending is less efficient than private spending—and you should for the reasons above—the net economic impact is negative.

“But wait!” say the Keynesians again, “What about the infamous Keynesian multiplier?” The Keynesian multiplier is the theory that $1 in government spending produces more than $1 in economic growth. And whenever you hear President Obama argue that the stimulus saved “3 million jobs” and the like, here’s how he arrived at that conclusion. He had the Congressional Budget Office (CBO) assume that certain government programs had Keynesian multipliers, and then calculate based on what was spent in stimulus funds. So if you assume that infrastructure spending produces $2 in growth for every $1 spent, magically the stimulus was a fantastic success.

But the Keynesian multiplier is a myth: because of the inefficiencies in government spending and “crowding out,” the assumption that $1 in Keynesian spending produces at least $2 in economic growth is a very bad assumption to make. More rigorous studies have said that the real Keynesian multiplier ranges from zero to just over 1—which supports the idea that stimulus doesn’t produce growth over the long term.

And here is the other problem: when you try to “stimulate demand” in this way, what happens when the stimulus ends? The only thing propping up that artificial demand was government spending—and once the government spending ends, so does the stimulus. The conventional Keynesian theory is that the economy would come back, and once it did the government could retract the stimulus payments. But as Japan found out, that never happens. Stimulus becomes a vicious circle because once the stimulus ends the economy takes a nosedive—which just produces the argument that we need more stimulus to fix it. And indeed, you have Paul Krugman making the argument that we need more stimulus to get the economy moving, and if all else fails maybe we can hope for an alien invasion to get it. Someone has watched Watchmen one too many times.

The Myth Of Austerity

But the dimestore Keynesians have one more argument up their sleeves: they say that lowering government spending certainly won’t work, and will make things worse. They look to Europe, where they argue that the EU’s austerity has caused even more problems for the Eurozone. If Europe has been cutting government spending and Europe is now an economic basketcase, doesn’t that mean that fiscal austerity is a bad idea?

There are two problems with that argument: first, European governments really haven’t slashed spending as Krugman intimates they have. Except for Greece (which had little choice), most European countries have only slowed the rate of spending growth rather than cutting spending. That’s hardly “austerity” any more than only getting a 2% raise is a “pay cut.”

Second, Europe did something else that would depress economic growth—they raised taxes. European countries raised income taxes, their Value Added Taxes (VATs), and taxes on business. And sure enough, raising taxes when businesses and consumers are already feeling the pain of a recession is not a smart idea in the slightest. But the dimestore Keynesians propose doing the same thing: increasing government spending and raising taxes to pay for it. What Europe shows is not that austerity is a bad idea, it’s that government spending and tax increases are. What Krugman is doing is applying exactly the opposite message than what Europe is telling us. And the old saying goes, those who fail to learn from history are condemned to repeat it.

So, How Do We Fix This Mess?

So far I’ve been painting a pretty bleak picture: we can’t use government spending to get us out of this mess. The preferred Keynesian solution of raising taxes to stimulate aggregate demand won’t work because government spending doesn’t produce lasting economic growth. So, what can we do to get out of this hole?

Ultimately, what we need is to encourage economic growth in the private sector. But that’s not something that can be done with government policy—other than a policy of getting the hell out of the way. Government can offer tax credits for R&D and the like, but even that is an example of government picking winners and losers, which doesn’t have a particularly sterling record.

The most important thing is for the government to get its fiscal house in order. We can’t grow the economy with a huge amount of public debt hanging over our heads. We need to cut spending in real terms, not just slow the rate of increase. We need to pay down our national debt, not add to it. If we want to get more revenue into the hands of the government we need to increase growth rather than taxes. Has this been done before? Yes—and quite successfully. But that is a post for another day…

Rebooting America

Niall Ferguson has an excellent article in Newsweek on how American civilization can avoid a precipitous collapse. His advice boils down to a proposition that’s simple in theory, but difficult in practice: the United States must return to the system of values that made it what it is today.

Specifically, Ferguson identifies six “killer applications” that made the West stand out from the rest of the world from the 1500s through the end of the 20th Century. He identifies competition, the scientific revolution, the rule of law and representative government, modern medicine, the consumer society, and the work ethic as the factors that led success of the West for five hundred years.

The challenge that America faces, and Western nations face generally, is that at the same time we are turning our backs on those values, other civilizations have figured out that they can copy our success. India, which gained some benefits from its days as a British colony, is rapidly industrializing and developing its own transnational elite. The industrialization of China has transformed it from a Maoist hellhole to a unique hybrid of state oligarchy, crony capitalism, and small-scale free markets. Despite its lost decade, in 50 years Japan transformed from a bombed-out shell to a global powerhouse. Other Asian countries, from Singapore to Taiwan to even Communist Vietnam are combining their cultural work ethic with open markets to power a major economic boom. The 21st Century could see the world’s centers of economic power shift from London, New York, and Berlin to Mumbai, Beijing, and Taipei—and in many ways, this is already happening.

But the biggest enemy that the West faces isn’t other upstart civilizations—it is its own complacency. As Ferguson implies, the rise of the modern welfare state undercuts many of the factors that led the West to success in the first place. For example, a society with a cradle-to-the-grave welfare state will always be a society that has a lesser work ethic. The hard truth of the matter is that if you remove many of the risks of failure, there’s less incentive to work hard. If the state takes care of you no matter what, then why bother with hard work? This harm is not a theoretical one—we can already see it playing out across multiple sectors of American society today. The same is true of competition. Why should GM be truly innovative? They have already gotten bailed out by the government, and their main market is no longer the American consumer, but their government keepers. The Chevy Volt is not a vehicle designed for American drivers, it’s a vehicle designed to meet the artificial mandates of the United States Government. When the state picks winners and losers, the market will start being more responsive to the state’s preferences rather than the consumers.

America cannot simply keep going on like this. Ferguson is right—we’re heading for an “Oh, shit!” moment. The continuing collapse of the Eurozone is a preview of our own future. Greece is just further ahead on our same path.

Hard Choices

In theory, all we have to do is get everyone to embrace the values that made America strong and things will sort themselves out. After all, they did in the past. We survived the Great Depression, World War II, and the Cold War all in a row, didn’t we?

The problem is that the theory and the practice of “rebooting America” as Ferguson calls it are two entirely different things. The self-absorbed Baby Boomer generation systematically turned its back on the values that made America what it was (and Jesse Jackson got Stanford students to attack Western civilization itself). We replaced competition with a radical and false sense of egalitarianism. We replaced the rule of law and representative government with an administrative state that has sweeping and largely unconstrained powers. We replaced modern medicine with the inane idea that health care is a “right” and that medicine should be free. We replaced the value of the consumer society with a parody of itself fueled by cheap credit. And finally we replaced our work ethic with a culture of entitlement. In short, we made a mockery of our own success. We chipped away at our own cultural foundation, slowly but surely undermining it.

But that was the past. The question is how do we go back? And that will be more challenging than anything this country has ever faced. How do we tell an entire society that all the things they’ve thought that they were entitled to they will have to earn from now on? We can’t make minor changes to our entitlement programs without huge controversy? How do we expect to start facing the difficult reality that those programs are fundamentally broken and can’t survive into the future?

To be pessimistic, I don’t see this country making those hard choice until that “Oh, shit!” moment actually comes. We will have to suffer a collapse before the body politic will embrace substantial reform. We will have to face something worse than a Greek-style debacle before things can get better. We are simply too attached to the status quo. In most circumstances, that’s a benefit—we don’t want a society prone to wild swings in the social status quo. Those seeking to change society rightfully bear the burden of persuasion to get people to change. But in this case, our status quo is unsustainable, and the body politic wants to cling to their comfortable illusions for as long as possible. They will not let go until all other avenues are exhausted.

But there is an optimistic side to all of this—if there is to be a collapse of the current status quo, the values that underpin our society haven’t been erased. America is still a land of innovative people. America is still a land with an incredible work ethic. America is still a nation, and will be so even if the state were to evaporate overnight. If tomorrow Washington DC were hit by a rogue asteroid and the entire federal government were to stop, America would not stop running. We would form voluntary organizations to take care of each other—it’s what we’ve always done. In fact, many of those voluntary organizations would be better off than they would be if the state could coopt them as it so frequently does.

Starting from the Ground Up

Can America reboot itself? It is possible, but it is going to require this country to make substantial sacrifices and be willing to make substantial changes. Our political system is not designed for that. Ultimately, if we want to look to Washington D.C. for change, we will never find it. The changes necessary to reboot America are not going to come from the halls of government, they will come from the people.

The fact is that culture influences politics much more strongly than politics influences culture. Washington can create some of Ferguson’s “killer applications,” such as enforcing the rule of law, but ultimately there can never be a law that creates a strong work ethic. The focus must be on instilling small-r republican values in the population—which requires strong families and a culture that rewards hard work, thrift, and the entrepreneurial spirit. We can create such a culture, but that takes time, and a willingness to shed cultural baggage from the failed counterculture of the 1960s. And it must come from the bottom up, not the top down.

And that’s the problem. We want easy solutions, and pushing our problems off on Congress is as easy as it gets. Finding out that we are personally responsible for America’s future success is a hell of a lot more daunting. But at the same time, it’s also an acknowledgment of something positive: that we are part of America’s success when it fails. And those values still exist, waiting to be unleashed.

It’s time to reboot America by first rebooting the American spirit, which is the fuel for the engine of American prosperity. We have the “source code” for America’s “killer applications.” It’s time we used it again by first getting government out of the way as much as possible and secondly by working on an individual level to restore our commitment to the culture that makes this country the world’s preeminent superpower.

Stimulus II: High-Speed Rail Bugaloo

As the old saying goes, “insanity is doing the same thing over and over again and expecting different results.” By that definition, President Barack Obama is frigging bugnuts.

This evening, President Obama called on Congress to pass the “American Jobs Act,” which is little more than another round of the same failed stimulus that was passed back in 2009. Since then, unemployment has hovered near double-digit levels, the economy has been limping, and our national debt has skyrocketed.

Instead of admitting what the majority of Americans can see with their own eyes, President Obama decided to double-down with more of the same. It was the same plans for “shovel-ready jobs” and high-speed rail, all to be paid with tax increases on the “rich,” of course.

Take the bizarre fascination with “high-speed rail.” It has been tried over and over again and it has never worked. It has always cost more than planned, required massive subsidies to work, and ended up being little more than a massive white elephant. emulating China’s failures is not the way to the future. Yet politicians keep pretending like the way to improve American infrastructure is to create a bunch of expensive high-speed rail lines. And even if China’s high-speed rail network makes sense for China, it doesn’t make sense in the slightest for the United States.

And then there’s the usual blather about “shovel ready jobs” and how if we just build a bunch of roads and bridges we can employ the millions of Americans who are just sitting idle. Now, I know that the President and most of the political elites know virtually nothing about manual labor, but if one is going to propose a jobs plan, it might be a good idea to learn about jobs.

President Obama needs to learn that not all “construction workers” are monolithic drones who can do anything that remotely resembles putting things together. You can’t take an unemployed sheet rocker or house framer and tell them to grab a shovel and build a bridge. Even in construction, the basic concept of division of labor still applies. There’s something vaguely condescending about the idea that all manual labor is basically interchangeable.

And finally, there’s the idea that taxing the “rich” will magically pay for all of this. Someone needs to inform the President (provided he would listen) about the concept of deadweight loss. It works like this:

Let’s say you take a million dollars from Warren Buffet. Had you not done that, Warren Buffet would have invested that million dollars in the hope of earning a nice return on his money. That million dollars would go to different companies, where it would pay for capital improvements, wages, new factories and offices, etc.

But that didn’t happen. The government took that million dollars. But that million dollars doesn’t get pumped directly into the economy. Instead part of it pays the salary of the government apparatchiks that process all the paperwork necessary to take the money, distribute it to the right agencies, and so on. Now, some will say that those salaries help the economy, and they do, but only to a point. Those bureaucrats don’t actually produce anything—they just push paper. That’s in contrast to someone who could take that money and invest it in something that would add value along the way. And it’s not just one layer of bureaucracy that the money has to get filtered through, it’s dozens or even hundreds. And each time, some of that million dollars gets lost.

And not only that, but the government does not spend money on what the best investment is. The government allocates money based on what the most politically well-connected want. When then happens is that money gets shoveled into politically-connected firms that quickly go best when the government turns the money spigots off. The failure of President Obama’s pet “green jobs” generator Solyndra is just one example of how government allocation of assets is not the way to build an economy.

So, by taking more money from Warren Buffet, the money has gone to government bureaucrats and the politically well-connected, but hasn’t produced any additional value. Had the government not taken the money from Warren Buffet, that money would have been invested prudently, and everyone would have been better off.

That’s why the idea of a Keynesian multiplier is a myth—government spending $1.00 does not magically produce $2.00 of value. But investing $1.00 in Apple in 1997 would produce way more than $2.00 today. The question is not whether the Keynesian multiplier exceeds 1, it’s whether it exceeds zero.

It may well be that building roads and bridges is a good idea—there are certainly valuable and needed infrastructure projects that constitute real public goods. (For example, the Stillwater Lift Bridge here in Minnesota is near collapse and serves thousands of motorists each day.) But why does it make sense to tax someone in California, send the money through Washington D.C. and then distribute it to local governments in Minnesota? That’s the problem of deadweight loss—government is not free, and while there are some projects that make sense to be done by government, those are few and far between.

President Obama’s speech tonight laid out yet another tired argument for “stimulus” spending that will fare no better than the already-tired arguments that he trotted out in 2009. Since then, the economy has suffered, leaving millions of Americans without the hope they were promised in 2008.

We need to change directions, and instead of empowering Washington D.C., we need to empower the American entrepreneur. We need to unleash America’s creative impulses and make it easier for Americans to start their own business and live their dreams. More of the same will not produce any different results. It is time for the President to end the madness and change direction.

Income Inequality, The Higher-Ed Bubble, And The Crash

In The New Republic, Raghuram G. Rajan argues that income inequality is the real reason for the financial crash. Income inequality is one of the favorite themes of the left, but Rajan’s argument has some merit to it. He observes:

Economists argue over the reasons for the growing inequalityâ€”changes in taxation, increasing trade, weaker unions, stagnant minimum wages, and growing immigration have all been flagged. Perhaps the most important, according to Harvard professors Claudia Golden and Larry Katz, is that although technological progress requires the labor force to have ever greater skills, our educational system has not kept pace by providing the labor force with greater education and skills. While a high school diploma may have been sufficient for our parents, an office worker in many knowledge-based industries today canâ€™t get hired without an undergraduate degree. Yet, according to Golden and Katz, rates of graduation from high school in the United States have barely budged since the 1970s, and neither have male graduation rates from college. For the middle class, that has meant a stagnant paycheck and growing job insecurity, as the old well-paying, low-skilled jobs with good benefits disappear.

There’s something to this: to get a decent job these days, one is practically required to have a four-year college degree. Employers won’t hire you without it. But the simple fact of the matter is that most people don’t need a four-year college degree. How much of that education is wasted? Is it really necessary for someone to spend four years partying, barely passing mediocre classes, delaying their ability to earn income for themselves, and taking on massive amounts of debt to do it? This process ends up leaving entire generations starting out in debt and without valuable skills. A college degree is simply a poor proxy for real-world skills. How many college graduates can’t balance their own checkbook. How does a humanities degree prepare one to be a manager? How many people actually use their degree unless they go into a specific profession?

All of that does create income inequality. We push people into getting an expensive degree when they don’t need it, and substantial portions of their income go into paying off that debt.

Ultimately, we have to take a new look at education in America. But that’s not easy. We have to reform K-12 education in this country—but good luck doing that if the teacher’s unions don’t get their demands met. We have to reform higher education, but right now student lenders, public and private universities, and educational companies all want to keep the gravy train running as long as they can. And the public has taken the idea that “education is fundamental” to the extreme—assuming that a college degree from a four-year institution is necessary to do jobs that don’t remotely require it.

And of course, most (but not all) of that pushback comes from the left, especially the politically powerful teacher’s unions.

Rajan is at least partially right: income inequality can be a problem, although it’s a stretch to say that it’s the cause of the crash. He’s also right that many of the steps that politicians have taken to address it have failed. If we want to have a country in which people have less debt, we can’t just look at housing or credit: we have to look at educational debt as well. And with the housing market, we are in the midst of a higher-education bubble, and that bubble is threatening to pop.

If we really care about income inequality, we need to stop pushing everyone into a one-size-fits-all system that leaves them with tens of thousands of dollars in debt before they ever have a chance to start working. Whether that means emphasizing technical and vocational education, whether that means more emphasis on non-traditional students, or whether that means tying student loans to academic performance, every option needs to be on the table.

All The Things I Missed…

I’ve been outside the world of politics for the past year, and what a year it has been! When I started my job, Obama’s approval ratings were still sky-high, and the Tea Party movement was just getting started. Now, we face a political dynamic that’s looking a lot more like 1994 than 2008. What a long, strange year it’s been!

The passage of the health care bill was a Pyrrhic victory for the Democrats. They sold their souls for a watered-down version of the single-payer European-style system they wanted and will likely lose the House as a result. The health care bill was the classic version of why laws and sausages are made in much the same way. It was an unholy mish-mash of bad ideas wrapped in false promises, and presented as though it were the greatest bill ever. It was a 2,700 page monstrosity that has already begun wreaking havoc with private employers. What the Democrats failed to realize is that many employers have their open-enrollment periods in November—which means that the immediate effects of the health care bill will be felt right around Election Day. When employees, who are already struggling, learn that their insurance premiums are going through the roof and their HSAs are less useful than before, that’s not exactly going to make them happy.

The economy is the albatross around the Democrats’ necks. Unemployment is stuck at 9.5%, and the real figure (counting unemployment, discouraged workers, and workers taking the only jobs they could get) is more like 20%. We’re facing a crisis of unemployment. And the reaction from the Democrats has been to do exactly the wrong things. More taxes, more regulations, more social experimentation. The results have been predictable: the level of joblessness is at crisis levels. We can’t have a functioning economy when we’ve got a developing underclass that are essentially shut out of employment. If this trend continues, the effects on both our economy and society will be dire.

As I write this, the last combat troops are leaving Baghdad. Remember when Sen. Harry Reid said that the war was “lost?” Thank heavens that we didn’t listen to him. We still have 50,000 troops left in Iraq, and we may have close to that number in the country for a very long time. The truth is that Iraq’s journey is just beginning. But what has happened in Iraq is something extraordinary: in 7 years Iraq has gone from the iron grip of tyranny to a failed state, to a developing nation that has the chance to prosper and flourish. The future of the Iraqi people is now in their hands, as it should be. We can and should help where asked, but now the main threat to the future of Iraq isn’t related to terrorism, but corruption. That may be a more dangerous enemy than al-Qaeda, but the Iraqi people have the ability to fight corruption and establish a better life for themselves. I cannot, nor can anyone else, say whether or not they will succeed in rebuilding their country. I hope and pray they will. But a chapter has been turned, and a battle has been won. Our military did an amazing job under intense pressure. We have never fought a war quite like this, and the conflicts of the future will be far less deadly because of the lesson’s we’re learned in Iraq.

Afghanistan is another story. I don’t know if we can “win” in Afghanistan. I’m not sure what the goal is—other than to keep the Taliban and al-Qaeda at bay. Can we rebuild a nation that’s never really been a nation in modern times? I’m not so sure that we can. Especially not when elements of the Pakistani government are working to destabilize Afghanistan. Yes, we need more troops and a better strategy to have any hope of success—but we also need to realize that Pakistan is part of the problem, and to find ways of ensuring that Pakistan is an ally rather than an enemy.

Finally, some site news. I’m planning on revamping the site in the next few days to have a new HTML 5 template that will look great on all sorts of devices from Droids to iPads. So forgive the dust as that transition gets underway.

Cash For A Clunker Of A Policy

Law prof Richard A. Epstein has a withering look at the “Cash for Clunkers” program that gave car buyers a $4500 check to trade in an old car for a new one. As with any government program, the intentions of the program and the reality of the program were not quite at odds with each other:

Yet exactly what does the American people get for this expenditure? On the bright side, the beleaguered automotive industry gets yet another shot in the arm. But that cheery argument repeats the common mistake that I addressed two weeks ago: Using tax dollars to stimulate one industry necessarily impairs the recovery prospects of everyone else. To make matters worse, some stimulus payments are just outright gifts, because lots of last week’s eager sellers might have traded in their clunker in the near future anyhow. And no one has a clue as to how many miles would be put on these clunkers anyhow.

The problem with the “Cash for Clunkers” program is that it won’t provide much stimulus, but it will burn through billions in in taxpayer dollars. Is the possible increase in overall gasoline efficiency worth the $1 billion now spent and the billions more that may be spend reviving the program? It’s doubtful we’ll know, because the actual results don’t matter. Congress is essentially buying support by raiding the public fisc under dubious pretenses.

Two thousand years ago, the called it panem et circenses—but “Cash for Clunkers” seems to have much more consonance, even if the concept remains essentially the same.

Soaking The Rich… Again

Carlos Watson argues that the solution to our fiscal problems is to tax the living daylights out of the “rich” in the hopes of making up for a $5 trillion hole in our national finances.

That solution will not work.

For one, there aren’t enough “rich” people to make up for the current deficit. We could raise taxes to 99% and not came close—and then the rich people would either cease to be rich, or get their assets out of the country faster than you can say “Nancy Pelosi.” What you would have would be capital flight on a truly nightmarish scale.

In order to make up that kind of shortfall, you would not have to tax only the Bill Gateses or Warren Buffetts of the U.S.—you’d have to start taxing everyone who makes a decent living. Our professional classes are already taking a huge hit in this economy—engineers and lawyers are applying for $10/hour jobs because of the economic downturn. If we start taxing them, they will buy less, they will use less services, and the ripple effect will continue right on down the line. It will make the economy worse rather than better.

Taxing the “rich” isn’t going to solve this mess, nor is more government intervention. The sad state of our economy is due to too much government intervention and far too much debt, both public and private. In order to fix this mess we all need to start spending in line with our realistic priorities and not spending money we don’t have.

Taking more money from people with their heads barely above water and giving it to an irresponsible government is not a solution for this economy; it is economic suicide.