The Myth Of The Laissez-Faire Meltdown

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.

The United Socialist States Of America

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.

You Can’t Squeeze Blood From A Turnip

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.

Weapon Of Mass Wealth Destruction

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.

Getting To A Real Stimulus

Carl J. Schramm has a great piece on why the real focus on stimulating the economy should be on growing the entrepreneurial class:

Only private enterprise — in particular high-growth start-ups — will create the jobs and the wealth to right America’s listing economy. That is, if we let them.

What our economy most needs is another outbreak of entrepreneurial energy. It is waiting to happen all around us. As people face layoffs, many take with them wonderful ideas for entirely new products and services. Layoffs are tough, but they need not spell doom. The average age of those who found high-tech companies in this country is 39. In fact, twice as many founders are older than 50 as are younger than 25. The end of one career can be the beginning of another.

Some people getting pink slips might have ideas that could become entire new industries. Indeed, some of America’s largest and most successful firms were started in recessions or bear markets or both — including General Electric (founded in the wake of the Panic of 1873), IBM (started in the last year of the recession that followed the Panic of 1893), United Technologies (same year as the 1929 crash), Microsoft (1975 depth of “stagflation”) and Guess (1981, worst post-World War II recession to date).

He’s absolutely right—in a normal recession, the way to rebuild is through what Joseph Schumpeter called the process of “creative destruction”. Basically, the old system that had failed is replaced at the grass roots with a new system—new businesses, new ways of doing things, new technologies. Those new businesses form the basis for not only an economic recovery, but a stronger economy.

That is, so long as government doesn’t try to prop up the old, unsustainable system.

Schramm is right: what we so desperately need now is not more bailouts, but more creative destruction. The seeds for our economic renewal are being planted all around us. The future is not with General Motors, it’s with Tesla Motors and Aptera Motors. There are a million garage inventors out there who right now are creating advances that will fundamentally change our world.

34 years ago on this date, a group of these inventors met in Menlo Park, California. This was deep in another recession. They were visionaries and dreamers who didn’t have the backing of government research programs or big corporations. They were the Homebrew Computer Club, and if that meeting had never happened, your iPod, iPhone, and probably even your PC would likely never had existed.

Now, imagine an alternate reality in which the government, concerned about the very real environmental impact of all these people working with heavy metals and dangerous components, decided to heavily regulate or even ban their use. The only way to build a computer would be to get a government license and go through an elaborate set of “safeguards” to prevent any potentially hazardous materials from being introduced into the environment. There would, of course, be major fines for violating these rules. If a young Steve Wozniak’s first Apple I prototype fizzled, it would cost him $25,000 to properly dispose of it.

Would Wozniak and Jobs have gone on to found Apple? Would the Mac I’m using to write this post have existed? Almost certainly not. Our world would have no iPods, no iPhones, and the Internet would remain a military communications network accessible only be a handful of tightly controlled machines. The microcomputer revolution would have been strangled in its crib.

The hypothetical government regulations weren’t all that unreasonable—early computers were filled with all sorts of dangerous contaminants, from lead to PCBs. One could have made a perfectly reasonable case for doing exactly what the government did in that hypothetical—and people do much the same all the time.

Yet the results would have been a much weaker economy and a much less prosperous world. Without the Homebrew Computer Club, there would have been no Apple Computers—and Apple employs tens of thousands of Americans today.

That is why we need entrepreneurs in this country. That is why a top-down program will never work. When government picks winners and losers, they will inevitably pick some of them wrong. In fact, they are quite likely to get all of them wrong. The “winners” in a top-down system will be the firms with the most political clout. Such a system rewards the ones with the most lobbyists, not the best ideas.

Right now businesses are scaling back. It’s not just Obama’s promise to increase the highest marginal tax rates, it’s also his promise to raise the cap on FICA and reduce the phase-outs on crucial deductions. Add to that an increasing state and local tax burden, and the very class of people most likely to give us those future jobs are hurting and expecting to hurt even more.

A real stimulus would be to get government as far out of the way as possible. That means government should promote innovation from the bottom up rather than the top down. We need more tax credits for American small businesses—the employers of half of the American workforce. We need fewer painful regulations that that end up hurting entire industries. We need to ensure that people like those visionaries who met in Menlo Park 34 years ago have a chance to bring their dreams to fruition.

Scramm goes further with even more substantive ideas for beating this recession: a payroll tax holiday, exempting new business owners from capital gains, cross-state purchasing of health plans, and other very strong and very achievable ideas for rebuilding this economy. These are ideas that should take precedence over yet another top-down bailout of industries that have already failed.

Creative destruction is really just creative reconstruction. America needs to look forward, not try to prop up a system that just isn’t working. Government is the friend of big business, and efforts to regulate benefit those with the biggest lobbyists who can influence the rules and grease the right palms. If we want a better future, it will come not from the top down, but from the bottom up. Schramm is right: entrepreneurs are the key to getting out of this mess. If we’re not going to give them the opportunity to succeed, then we are potentially losing the chance for the next Apple, Microsoft, or even General Electric to transform our future for the better.

We’re All Merrily Skipping Down The Road To Serfdom

For those who want to know what our future will look like, here’s a brief preview. F.A. Hayek’s brilliant The Road to Serfdom in a short illustrated form.

I’ve never been more bleak about the future of this country. The road to serfdom isn’t obvious. Nobody intentionally elects a dictator for the purpose of electing a dictator. Instead they pour the ill-conceived hopes and dreams into a Leader who promises them the world so long as they give him the power to create it.

Now, I don’t necessarily think that Barack Obama is a dictator. But the point is that he doesn’t have to be. He’s just creating the ideal conditions for one. What truly saddens me, what truly sickens me, is if that Obama passed the “Fairness Doctrine” to silence his critics, created “civilian work corps” to put an army of young men and women into his service, and arrested business owners, nearly half of the county would go along. Nearly half are so filled with irrational love for Obama that they’d let him become a Caesar. It isn’t about issues, it isn’t about the country, it’s about some gauzy notion of “hope.”

To hell with “hope.”

As Charles Murray says, everything Obama is promising has already been tried and failed. There’s nothing new. This isn’t “change we can believe in” this is “I can say whatever the hell I want and you simpletons will slurp it up.” It’s the wish list of every statist in the last 40 years, and it represents a radical and dangerous turn away from tested principles and towards abject statism.

Universal healthcare? It means the government will have to ration what we get. That’s the only way such a system can possibly work. Even worse, it doesn’t scale up at all. Which means America’s larger population will make the endemic and innate problem with universal healthcare worse than in a smaller country like Sweden or even Canada. Which means that we had better get used to dying in lines, and forget risky or experimental treatments.

Universal college education? For most people, a four-year college degree is a waste of time and money. I believe in a liberal arts education, but I’m not so arrogant as to say that it’s right for everyone. But now Obama will make the value of that degree effectively zero—and a four-year college degree is already worth nowhere near what people pay for it. My suspicion is that the real reason for this is ideological: make everyone go through the like-minded public university system and you’ll have an ideologically “pure” citizenry. Even if that’s not the plan, that will be the effect. A better solution would be to make our existing system actually work, but that doesn’t concentrate any political power into the President’s hands.

A cap-and-trade system for carbon emissions? It’s already been tried and failed. It’s a way of creating a stealth tax increase on energy consumption. A more honest approach would be to just slap a tax on energy. But Obama doesn’t want to be honest, he wants to play to the mob. That cap-and-trade programs hurt the Third World doesn’t seem to matter.

I don’t like to ascribe the worst motives for people, but even so President Obama is taking this country farther down the Road to Serfdom than it even has been. It may take decades for America to recover from what he is doing. He is pouring sugar into the engine of American prosperity, and we will suffer for it.

I love this country. I want this country to succeed, regardless of who is the occupant of the Oval Office or what party is in power. But the end result of what Obama wants will be a United States that is following the disastrous path of statism. At best America will suffer a “Lost Decade” like Japan.

At worst? America takes the road to serfdom to its inevitable conclusion.

I wish this were merely sour political grapes. But the future of this country truly is in deep peril. The way to the future is through individualism, hard work, limited government, thrift, ingenuity, and political pluralism. Today, we have a President who wants a cradle-to-the-grave welfare state and has the audacity to not only hope for one, but to say it in no uncertain terms.

I fear that if we continue down this road, the future will belong to India and China, while this nation lives out its twilight years in increasing obsolescence.

We Need Real Jobs

Bob Herbert writes in The New York Times that that what America needs to recover from the recession are more jobs. On that point, he’s absolutely right. The problem is that the jobs he would choose to create won’t do anything to help the economy. Like a good Times columnist, his preferred solution is more government intervention:

What Americans need is new employment on a massive scale, and one of the most effective ways to get that started is to invest extraordinary amounts in the nation’s infrastructure, to rebuild America in a way that creates a world-class platform for a sustainable 21st-century economy.

President Obama’s stimulus package is just a first step in the government’s effort to stabilizing the hemorrhaging economy. It contains infrastructure spending, but nothing comparable to the vast amounts it will take to make the desperately needed improvements.

Funds spent on those improvements, which will have to be made sooner or later, are also cracker-jack investments in putting people to work. The idea that the government is spending trillions on wars, bank bailouts, tax cuts, and so on, while still neglecting its infrastructure needs — and at a time when Americans are desperate for jobs — is mind-boggling.

Here’s the problem with that line of argument. What we need is not a bunch of make work jobs. Exactly what would Mr. Herbert’s plan look like? Should we take an unemployed financial analyst from Manhattan, hand him a shovel and have him dig a ditch or fix potholes on I-95? Is that really an effective use of his skills? Of course it isn’t&madash;it’s a waste of human capital.

We do need to fix infrastructure, but don’t kid yourself that doing so will make a bit of difference in job growth. Unless we want to start building roadways to the moon, there’s just no reason for millions of people to pick up shovels for all those “shovel ready” projects. What stimulus infrastructure spending produces is very limited and not terrifically effective.

Here’s where the standard argument about government jobs comes in: “but you’ve built a road!” they exclaim. Great, you have a road. Does that mean anyone will use that road? Sure, that road would be nice for all the trucks that aren’t going anywhere to take all the goods that aren’t being produced, but here in the real world just building a road produces a strip of concrete that may or may not get used. “If you build it, they will come” is a line from a movie, it’s not a theory of economics.

So, what do we really need? We really do need jobs, and we really do need infrastructure fixes. But those are two different problem with two different solutions.

If we want to get out of this mess, we need to tear down walls rather than build them up. The first bill that President Obama signed into law was an act that dramatically expanded liability for employers. You want to create jobs? Try not hobbling the people who create them.

Instead, Congress continues to punish American small businesses at every turn with higher taxes, more regulation, and expanded liability. If you’re a small business owner, now is the last time that you’re thinking about expanding your business. Yet now is also the time when we most need new job creation. Congress and the President continue to put policies in place that harm job creation, then they wonder why the economy is swirling the tubes. Then their solution to the problem is to punish the creators more with even more regulation while lavishing more and more money on the irresponsible.

If job creation is the goal, then Congress should start making it easier for small businesses to start and become big businesses. There are a number of ways to do this. For one, President Obama could sign an Executive Order today that nullifies regulations that harm small businesses—it wouldn’t solve all the problems caused by over-regulation, but it would certainly help. He could then push Congress to pass regulation that would shield small businesses from the biggest liability-increasing laws like the Lily Ledbetter Act. If you’re going to punish business for their excesses, at least punish the people with the deep pockets rather than tilting the playing field more and more against the little guy.

The next step is an across-the-board cut to the corporate tax rate to 25%. The U.S. has the highest corporate tax rates in the developed world—even Sweden has a lower corporate tax rate. Alternately, small businesses (with 25 or fewer employees) should not pay corporate taxes at all. While small businesses can elect to become Subchapter S corporations that make their income exempt from federal taxes, that rule puts more hurdles in their way. Why bother making small businesses jump through the hoops of a Subchapter S election rather than simply getting rid of all the headaches? Small businesses should not be punished with either double taxation or having to elect to go Subchapter S—the process should be as simple as possible.

Forget bailing out the Big Three auto companies. They’re dinosaurs. It’s like giving a bailout to the horse-drawn carriage industry in 1920. Somewhere in a garage an American inventor is coming up with the next revolution in transportation, free of the restraints of conventional thinking. I’d rather throw a few hundred grand to a hundred garage labs than a few billion to the dinosaurs. If just one of those innovators pans out, a new industry is born. HP, Apple, Microsoft, and even Google started not as the product of giant government R&D programs, but in garages and college campuses. You want the most bang for your stimulus dollar? Then give it to the little guys with the big ideas, not the big guys who are too constrained by their own bureaucratic inertia to revolutionize American industry.

We’re not going to fix America’s problem by repairing bridges and digging ditches. Most of our infrastructure problem should be solved by just shifting our priorities. Yes, it’s nice to have millions for the arts. But we also have to fix bridges, and we have to start making rational choices about how we spend our money. If we want to repair American infrastructure, we should do that, but it should be done in as apolitical a way as possible. That means saying that we are not going to spend millions on bike path or “community centers” that only help a small number of people. Instead, we’re going to fix the big problems like failing airports, falling bridges, and chemical plants that might as well have a “BOMB ME” sign painted on them. That means insulating these decisions from Congress, who have every incentive to put the needs of their campaign contributors above the public good.

If we want to fix the economy, we can’t follow Herbert’s single-minded focus on government as the solution to every problem. The reason why things are so bad is that our private-sector is failing. Neglecting the real engine of growth—private-sector, small-business jobs—is only going to make this recession turn into a full-blown depression.

This is the 21st Century. We can’t play with the handbook of the 1930s. If we want a 21st Century economy, we have to look beyond the top-down centralized approach and start looking at the economy in the same way we look at the Internet. Instead of a “central server” in Washington, we need a “cloud” economy that spurs innovation. Centralized networks are slow, inefficient, insecure, and costly. Distributed networks are fast, resilient, efficient, and effective. Our economy is the same way. If we’re to build a better future for ourselves and our children, we have to concentrate not on centralizing economic power, but putting it back into the hands of the people who create jobs that last.

Krugman’s Fantasy World

Francis Cianfrocca has an interesting critical look at why Paul Krugman’s call for a massive Keynesian stimulus is the wrong policy. His thesis is right: Krugman and many other economists are stuck in a world of rigid mathematical models that have little bearing on the way the world actually works—which is one of the causes of this mess in the first place. Those models keep getting proven wrong, but Krugman’s ideology is blinding him to their faults.

Take Krugman’s belief in the “Keynesian multiplier”. The Keynesian multiplier argues that for every dollar spend in government infrastructure spending, $1.50 in economic growth is realized. If this seems like “voodoo economics” to you, it’s because it largely is. Why sound investments can produce economic multipliers, the chances of the government making those sound investments is rather small.

The Keynesian multiplier might work if government was good at allocating investments in a rational manner. The problem is that government is based on political realities rather than economic ones. So, instead of allocating money on a rational basis (i.e. to where it’s actually needed), Congress allocates money based on the political clout of the campaign contributors. So, there’s no Keynesian multiplier in practice even if all of Krugman’s models say that there should be one: the government’s political mode of allocating resources is not economically efficient, and never will be. As Cianfrocca notes, the real problem is much different:

Let’s note that Krugman is a sober, first-rate economist, but also a woolly-eyed, low-grade political hack. He firmly believes that government is better qualified than private actors to direct the country’s economy, and has advocated a Federal government share of 28% of GDP, compared to the current 22% or so. Since he understands economic efficiency as few do, the conclusion is that he’s committed to the social outcomes that come with government control, as opposed to the free-marketer’s commitment to maximizing utility. But that’s a side point.

But why is the economy performing below capacity in the first place? Many reasons, too many to list here. And why won’t it simply recover on its own, as it has many times in the past? Here things get a bit more interesting. Like many economists, Krugman points to Keynes’s “paradox of thrift”: in uncertain times, ordinary people defer consumption and businesses postpone investments. The economy shrinks below capacity, because of people’s desire to save money.

It’s hard to escape the sense that the best economists and the President of the United States are blaming ordinary people for the economic crisis. If only we’d spend our money instead of save it, we wouldn’t be in such a big mess.

Cianfrocca goes on to argue that the “stimulus” won’t work because people don’t want to spend right now—the intuitively know that they are overleveraged and the country is highly overleveraged, and all this spending is just going to make things worse. Cianfrocca is right on that point.

He’s right because perceptions matter. He correctly points out that all this public indebtedness is exacerbating people’s own personal fears. Only 38% of people believe the stimulus will aid the economy, and that number will drop over time as the stimulus fails to produce any lasting growth. The more consumers feel like the economy is going down the tubes, the less they will spend. The less consumers spend, the fewer businesses will stay afloat, pushing unemployment up and feeding the cycle even more.

That doesn’t even count the pernicious effect of government regulation and liability rules which further decrease business’ willingness to invest and create new jobs. With passage of laws like the Lily Ledbetter Fair Pay Act, businesses may now be sued for alleged paycheck discrimination stemming out of events that happened years in the past. This makes every employee a potential timebomb and increases the overall cost of labor. The more Congress kowtows to the unions and enacts “employee-friendly” bills, the more likely it is that jobs will be lost. This spurs Congress to legislate even more to “save jobs” and the cycle continues. The resurgence of union political power could not come at a worse time.

Krugman’s fantasy world in which government rationally allocates money so that it grows the economy has little to do with the realities of our political system. Instead, what Krugman proposes will further erode public confidence in our government. The stimulus bill is an example of Congress giving special breaks to those with the most influence—and those with the most influence tend to be rich special interests rather than small businesses or ordinary citizens. People feel that their government is broken, and they are right.

No matter what the mathematical models predict, psychology is crucial. Krugman’s fantasy is a fantasy because he makes basic and incorrect assumptions about the way the economy functions. His Keynesian spending will not fix the “paradox of thrift” because part of what is fueling people’s unwillingness to spend is the state of government finances. Borrowing trillions more and running up the national debt is not going to make that better, it will make it much, much worse.

A real stimulus would involve the same sort of conditions we regularly impose on other countries in our situation. If we were Argentina, the IMF would be telling us to slash our spending and get our balance sheets in order. That we’re perfectly comfortable telling other countries to go through painful austerity while our government does the opposite sends exactly the wrong message. That isn’t to say government spending is all bad, but the first order of business should be to more rationally allocate the spending we have without adding trillions more in debt.

What is most dangerous about Krugman’s fantasy is that it will never end. The more existing stimulus measures push down the economy, the more Krugman would call for yet more spending. The result would be the same as it always has been: massive hyperinflation due to massive public debt. Krugman’s policies won’t work, and Krugman’s natural response to their failure would be to call for ever more.

We can’t indulge in such fantasies. Desperate times call for desperate measures, and unless we start austerity measures now, the pain is only going to get worse.

Atlas Is Shrugging

The U.S. economy shed 598,000 jobs in January, the worst job loss since 1974. There is no doubt that the U.S. economy is in a state of crisis. Our government is only making it worse.

It is more than mere coincidence that this huge job loss occurred in the same month that President Obama signed the Lily Ledbetter Fair Pay Act into law. The Ledbetter Act basically means that employers can be sued for “paycheck discrimination” years after the events occurred. In Ms. Ledbetter’s case, the alleged discrimination happened so far ago that the supervisor involved had not only left the company, but died. This Act, instead of making things “fairer” for employees, puts a massive burden on employers who now have to worry about lawsuits stemming from events decades old.

This is what the business environment will be like under the Obama Administration. There will be more regulations and those regulations will be written by representatives of big industries and radical special interests. There will be higher taxes on everything from corporate income taxes to personal income taxes to the estate tax, and there is a strong possibility of a carbon tax that will raise prices on every single good that needs shipping. The web of regulations, higher taxes, and the way society is treating the very idea of entrepreneurialism is making American business falter.

The result: more lost American jobs.

This “stimulus” bill will not help. It will give hundreds of billions to political contributors, and barely anything to American small business. Big business, the ones with the lawyers and lobbyists, have already gamed the system. The Democratic Party has no room for the interests of American small business, even though their employees are half of the American workforce. The situation for American small business will be dire: not only will there be more taxes, more regulation, and more self-righteous condemnation from Washington, but the credit markets are still tight. Unless you’re in a field that will be the recipient of government spending, like health care or road construction, forget hiring employees, you have to cut expenses to the bone right now.

American jobs are being lost because we are punishing the people who create them.

President Obama and the irresponsible Congressional Democrats are pushing this recession into a depression. Their wrong-headed pro-government economic policy is turning America into a banana republic. It is crucial that they be stopped.

Atlas is shrugging, and the world is at the brink of tumbling right off.

‘Shovel Ready’ BS

Popular Mechanics has a great piece on the myth of “shovel ready” infrastructure projects:

The programs that would meet the bill’s 90-day restriction are, for the most part, an unappealing mix of projects that were either shelved after being fully designed and engineered, and have since become outmoded or irrelevant, or projects with limited scope and ambition. No one’s building a smart electric grid or revamping a water system on 90 days notice. The best example of a shovel-ready project, and what engineers believe could become the biggest recipient of the transportation-related portion of the bill’s funding, is road resurfacing—important maintenance work, but not a meaningful way to rein in a national infrastructure crisis. “In developing countries, there are roads that are so bad, they create congestion, because drivers are constantly forced to slow down,” says David Levinson, an associate professor in the University of Minnesota’s civil engineering department. “That’s not the case here. If the road’s a little bit rougher, drivers will feel it, but that’s not going to cause you to go any slower. So the economic benefit of those projects is pretty low.”

That might be acceptable to people focused purely on fostering rapid job growth‹but, ironically, such stimulus spending could fall short on that measure, as well. “In the 1930s, when you were literally building with shovels, that might have made sense. That was largely unskilled labor. Today, it’s blue collar, but it’s not unskilled,” Levinson says. “The guy brushing the asphalt back and forth is unskilled, but the guy operating the steamroller isn’t. And there’s an assumption out there that construction workers are interchangeable between residential and highway projects. But a carpenter isn’t a whole lot of help in building a road.”

It’s ironic given the I-35W bridge collapse being used as a symbol of America’s “failing infrastructure”—that collapse was the result of a design flaw that should have been spotted in the design phase. And what is our reaction to such problems? Push through a bunch of projects in a hurry rather than perform the sort of painstaking design that needs to be done before a project is truly “shovel ready.”

There is some wisdom to spending on infrastructure, but let us be honest. It won’t make a dent in the unemployment rate unless you believe that you can take a stockbroker and put her into a bulldozer and call that good enough. It won’t stimulate the economy because the money will go to government contractors who are the least affected by the economic slowdown. And what stimulus it does produce won’t be likely to come about until well after the slowdown is past. Justifying this sort of spending on the grounds of economic stimulus isn’t realistic.

If we want to spend money on infrastructure, we should do it right. That means assessing our needs in a realistic manner, spending only on projects that will make a real difference, having a realistic plan to build these projects, building them right the first time, and having a competitive bidding process to make sure that money isn’t being funneled to campaign contributors.

This bill is not about stimulus. It’s about the Democratic Party looting the future to pay off their political supporters. It is nearly 100% pure pork that will saddle the future with at least another $1,000,000,000,000 in debt—not counting interest. Even the Congressional Budget Office finds that the “stimulus” bill will just shift the costs to future generations. We can’t rob Peter to pay Paul and expect to get away with it. Recent history should demonstrate all too well why such ideas don’t work.

We need a real stimulus package, not an act of wanton irresponsibility. If President Obama were to demonstrate real leadership, he would tell Reid and Pelosi to stop playing childish partisan games and send him a bill that is nothing but stimulus and no pork—and if they refuse, he should veto it. We need real infrastructure repair, not political cronyism. The only shovel that’s ready to go is the shovel needed to clear out all the B.S. surrounding this bill.