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.

Crystal Ball Watch 2012

A long-standing tradition here is to come up with some prediction for the New Year, and at the end of the year see how right or wrong I was. And this year shall be no exception. So, without further ado, it is time to mercilessly skewer last year’s set of predictions:

Mitt Romney will be nominated as the GOP’s candidate in 2012. He will defeat President Obama by a small margin, but by a large margin in the Electoral College. Pennsylvania, Indiana, North Carolina, and Florida will all shift to the GOP column on Election Night.
Partially Right: I was right in predicting that Romney would get the nomination, but his campaign failed to take on the data-driven Obama reelection effort, which stomped Romney in key battleground states. No longer will I predict that Pennsylvania will swing into the GOP column, as the chances of that are slim to none. Indiana and North Carolina did swing back to the GOP, but Romney’s losses in critical states like Florida, Ohio, Colorado, and Iowa doomed his candidacy.
The GOP will retake the Senate as the Democrats lose seats in North Dakota, Nebraska, Florida, Ohio, Missouri, and Virginia. The GOP will hold their margin in the House.
Wrong: The GOP did not retake the Senate—in fact, they lost races that they should have won. The damage to the GOP brand is clear, not only in Romney’s loss, but in the Senate results as well. The GOP did retain the House, but much of their success is due to gerrymandering on the district level. The GOP has serious issues that they need to address if they want to be a competitive national party again.
Unemployment will remain between 7-8%, and the number of discouraged workers will continue to cause problems. Efforts to spin the economy as recovering by the Obama White House will sound painfully out of touch.
Correct: The Obama team managed to win reelection in spite of a bad economy, but the real state of the economy continues to be poor at best.
The Eurozone will collapse in 2012 as Greece is unable to maintain its austerity package. Greece will leave the Euro and redenominate its debts in drachmas. Following that Italy, Spain, Portugal, and Ireland will all threaten to leave the Euro, leaving the future of the currency in doubt.
Wrong: The Eurozone teeters on the edge of collapse, but has not tipped over yet. The question is whether German money can keep the Eurozone afloat and whether the Germans have any interest in keeping that spigot running. With France doing its best to kill its economy, 2013 might be the year that the EU faces the biggest crisis in its history, and the Euro goes down.
Apple will release an iPad 3 with a Retina display as well as an iPhone 5 with a new form factor. They will sell like hotcakes. Apple will not sell a TV, however.
Correct: What I wouldn’t have seen last year was the iPad mini and an updated iPad coming so soon after the launch of the retina iPad. Apple seems to be wanting to push the pace of its product update cycles to keep ahead of the competition.
Iran will continue to threaten to close off the Strait of Hormuz, but will not actually try. Sanctions will serve to weaken Ahmadinejad and internal corruption will cause a new round of riots in Tehran and other major cities.
Incorrect: Iran has been relatively quiet this year, especially given that Syria has so dominated the headlines.
Iraq will fall into civil war, with the Shi’ites fighting the Kurds and the Sunnis. President Obama will do nothing to help the Iraqis, but will blame everything on Bush.
Thankfully incorrect: However, the situation in Iraq remains highly restive, and there is a risk of Iraq becoming a powder keg thanks to U.S. indifference. But thankfully, Iraq is holding together despite some flares of violence.
China will face a banking crisis that will spread throughout Asia. Along with the problems in Europe, the global economy will take yet another beating.
Incorrect: China’s economy may be much more troubled than the Chinese authorities will ever admit, but so far the country’s problems have been successfully papered over.
“The Avengers,” “Hunger Games,” and “Prometheus” will do well with both audiences and critics, but amount of total box office receipts will continue to decline as even more people discover that it’s cheaper and easy to stay home and watch Netflix.
Correct: Despite some decent tentpole movies this year, the box office continues to take a beating while upstarts like Netflix continue to gain marketshare and support.
SpaceX’s first resupply mission to the ISS will be a complete success, just as heads start rolling at Russia’s Roscosmos. As Russia’s Soyuz launcher starts having more and more technical issues, NASA will fast-track plans for private companies to lift astronauts to the ISS.
Correct: Despite an engine failure on their second mission, SpaceX has shown that it can perform resupply missions to the ISS and is rapidly moving towards being able to lift astronauts into orbit. And amazingly, the Obama Administration has been willing to support the development of private spaceflight in a way than the Republicans have not. Space policy is the one area that this Administration gets right.
On December 21, 2012, the universe will end when the Mayan god Kukulkan descends from the heavens and decrees an end to all existence. Unfortunately for Kukulkan, he arrives in the middle of a Lady Gaga concert, where a blood-soaked feathered serpent would attract little notice. Disgusted by everything, he figures that non-existence would actually be better than what we have, so he ascends back up into the heaven and has a few too many glasses of wine with Zeus and Thor as they complain that no one actually believes in them any more.
Incorrect?: While neither the Yellowstone volcano nor a reversal of the Earth’s magnetic poles nor aliens nor Planet X doomed all life on Earth, one never knows how close to doomsday we actually came… Then again, we have our own ignorance which presents a far greater threat to humanity than anything else.

On a more personal note, I have not been blogging much in the last few years, as is obvious from the state of this site. Being employed full-time as an attorney makes the prospect of doing more rigorous analytical writing much less fun. Further, 2012 was an annus horribilis for me in a great many ways, and has left me utterly drained. For those who still come to visit, thank you for your patronage, and hopefully 2013 will be much brighter. (But for those who will read my forthcoming predictions, don’t count on it…)

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…

Tom Friedman: Losing The Future

Tom Friedman phones it in again, in yet another New York Times column filled with the same old cliches we’ve heard a thousand times. This time, instead of kissing the asses of the Butchers of Beijing, Tom Friedman decides to give the GOP some unsolicited and unwelcome advice. Apparently, what the Republican Party needs to do is just agree with the Democratic Party on everything, and all will be well.

The problem with Friedman’s ideology is that we’re already watching it fail. The blue-state model is failing here, and the European welfare-state model that the Democrats want to emulate is teetering on the edge of chaos. (Just observe the inevitable end-state of the European welfare state as exemplified in Greece.)

Friedman argues that we need spend more on infrastructure and education—the same old cliched thinking we’ve heard before. The problem with such spending is that it doesn’t produce anything: it’s the equivalent of digging ditches to keep people busy. Take “high speed rail,” the fetish of statophiles everywhere. Nearly every rail project in this country goes massively over-budget and few people ride in them. Yet we spend billions of dollars developing “solutions” no one wants to problems no one has. But that’s how America is supposed to compete in the 21st Century.

What we don’t need is more bureaucratic pipe-dreams. We don’t need more top-down initiatives made by Washington D.C. that have no basis in the needs of real people. Have we learned nothing from the 20th Century: central planning does not work. No government agency, no matter how well-functioning, has the level of knowledge necessary to make better economic decisions than the people who are actually effected by those decisions. Trying to direct the economy from afar does not work, never has worked, and won’t work in the future.

And of course, Friedman wants to “raise revenue” to fulfill all of his dreams of high speed trains and elaborate (and pointless) fights against global warming. The problem with “raising revenue” is every dollar taken out of the productive economy and put into wild-eyed government initiatives is a dollar that can’t be invested in something actually worthwhile—the fact is that the “Keynesian multiplier” is a myth and $1 in government spending does not magically produce more than $1 in growth.

And that’s why we shouldn’t listen to people like Tom Friedman. It’s not that the Republican Party lacks ideas, it’s that the Democratic Party is threatened by change. The poles of American politics have reversed. From the union battles in Wisconsin to the 2012 Presidential race, it’s been the conservative upstarts trying to overturn the sclerotic and malfunctioning status quo while the left tries to defend their fiefdoms from substantive change.

Friedman doesn’t want to embrace the 20th Century, he wants to repeat its mistakes. The 21st Century is all about the decentralized over the centralized, autonomous and intelligent networks over large institutions, the agile over the cumbersome. And there is nothing that is less agile, less intelligent, and less willing to delegate power and authority than the United States federal government. Yet Friedman and his ilk would imbue that same broken system with more and more power over every facet of our lives. It’s like arguing that we should take down the Internet and put everyone on Minitel.

If the United States is to be successful in the 21st Century, it can’t emulate the failed policies of the last century. If there’s one side in this equation that is horribly out of step with the times, it’s the one embracing the failed strategies of the past. Perhaps it’s President Obama and his cast of Clinton-era retreads that should simply give up.

Predictions 2012

It’s time to close out 2011 and ring in the New Year, 2012. And as I do every year, it’s time for some predictions for the new year. So here, in no particular order, are my predictions for 2012:

Mitt Romney will be nominated as the GOP’s candidate in 2012. He will defeat President Obama by a small margin, but by a large margin in the Electoral College. Pennsylvania, Indiana, North Carolina, and Florida will all shift to the GOP column on Election Night.
The GOP will retake the Senate as the Democrats lose seats in North Dakota, Nebraska, Florida, Ohio, Missouri, and Virginia. The GOP will hold their margin in the House.
Unemployment will remain between 7-8%, and the number of discouraged workers will continue to cause problems. Efforts to spin the economy as recovering by the Obama White House will sound painfully out of touch.
The Eurozone will collapse in 2012 as Greece is unable to maintain its austerity package. Greece will leave the Euro and redenominate its debts in drachmas. Following that Italy, Spain, Portugal, and Ireland will all threaten to leave the Euro, leaving the future of the currency in doubt.
Apple will release an iPad 3 with a Retina display as well as an iPhone 5 with a new form factor. They will sell like hotcakes. Apple will not sell a TV, however.
Iran will continue to threaten to close off the Strait of Hormuz, but will not actually try. Sanctions will serve to weaken Ahmadinejad and internal corruption will cause a new round of riots in Tehran and other major cities.
Iraq will fall into civil war, with the Shi’ites fighting the Kurds and the Sunnis. President Obama will do nothing to help the Iraqis, but will blame everything on Bush.
China will face a banking crisis that will spread throughout Asia. Along with the problems in Europe, the global economy will take yet another beating.
“The Avengers,” “Hunger Games,” and “Prometheus” will do well with both audiences and critics, but amount of total box office receipts will continue to decline as even more people discover that it’s cheaper and easy to stay home and watch Netflix.
SpaceX’s first resupply mission to the ISS will be a complete success, just as heads start rolling at Russia’s Roscosmos. As Russia’s Soyuz launcher starts having more and more technical issues, NASA will fast-track plans for private companies to lift astronauts to the ISS.
On December 21, 2012, the universe will end when the Mayan god Kukulkan descends from the heavens and decrees an end to all existence. Unfortunately for Kukulkan, he arrives in the middle of a Lady Gaga concert, where a blood-soaked feathered serpent would attract little notice. Disgusted by everything, he figures that non-existence would actually be better than what we have, so he ascends back up into the heaven and has a few too many glasses of wine with Zeus and Thor as they complain that no one actually believes in them any more.

Crystal Ball Watch 2011

It’s that time already (where did 2011 go?!)—time to see how my New Year’s predictions faired in the cold, hard light of reality.

Last year’s New Year’s predictions forecasted an unpopular Obama, an unraveling Europe, and a Verizon iPhone. And, surprisingly enough, we had an unpopular Obama, an unraveling Europe, and a Verizon iPhone. On the other hand, Fidel Castro hasn’t yet gone off to his villa in Hell, and the Bush tax cuts aren’t permanent—yet. Let’s see how I did:

Politics

President Obama, increasingly embittered by the political process and the Republican House, retreats from the public eye and rumors swirl that he will not run for a second term.

More-or-less right: President Obama made a few speeches through the year, but for a politician that was elected based on his oratory, he’s made himself scarce over the past year. As his approval ratings have declined, the President has been trying to sell his unpopular policies to a diminishing office. But he’s made no bones about it: he’s running again.
The GOP won’t have a much better year. Their commitment to fiscal discipline will be continually tested, meaning that there will be plenty of difficult votes on spending in 2011.

Right: Indeed, the Tea Party-backed GOP has been trying to be fiscally-responsible, but have not been able to do much to slow the rapacious growth of government.
Sarah Palin will continue to tease a run for the Republican nomination in 2012, but won’t actually commit to anything.

Wrong: Sarah Palin is, mercifully, not running for President, and while she remains popular with the Republican base, her celebrity is fading.
The Democrats will once again learn the wrong lessons from their 2010 drubbing, and will embrace the far left instead of running to the center.

Correct: Instead of moving to the center, the Democrats have decided that it’s time to stop pretending that they’re anything but a party owned by the left. Their supportive reaction to the Occupy movement and their embrace of populist rhetoric demonstrates foretell their strategy for 2012.
Redistricting battles will end up getting fought in court as the Democrats try to fight to keep as many Democratic seats as they can.

Correct
ObamaCare suits will be appealed, and will eventually end up on the Supreme Court’s docket. But because Congress will end up removing the mandates from the bill, the Supreme Court will declare the issue moot.

Half-Right: The Supreme Court will take up the ObamaCare issue in three days of oral arguments this March. But despite Republican opposition, the GOP just doesn’t have the votes to repeal ObamaCare… yet.

International

The last vestiges of democracy in Venezuela will be cast aside as Hugo Chavez extends his emergency rule into a lifetime dictatorship.

Correct: And even though the Venezuelan dictator is nearly ready to join Osama bin Laden, Mohammar Qadafi, and Kim Jong-Il in Hell, what will happen to the country he has plundered is still very much in the air. But it looks like Chavez will be the Venezuelan dictator for life—what little life he has left.
The conflict in Afghanistan will continue to be bloody and difficult. By the end of the year the conventional wisdom will be that Afghanistan is Obama’s Vietnam, and the future of the US mission there will be in doubt.

Partially Right: As the mission in Iraq winds down, the mission in Afghanistan continues to drag on. But the media, ever faithful to Obama, has avoided turning Afghanistan into another Vietnam. But if the situation there continues to destabilize over the next year, it may become harder to sweep it all under the rug.
North Korea will continue to rattle their saber, but they will stop just short of provoking a full-scale war.

Right: And now that Kim Jong-Il has shuffled off this mortal coil, and his son is (allegedly) in power, all bets are off for the future.
Iraq’s biggest problem in 2011 will be corruption rather than terrorism, and civilian casualties will remain low.

Right, Maybe: So far Iraq has been relatively quiet, although now that the U.S. has pulled out, the country is once again in danger of flying apart. The fact that sectarian tensions are once again bubbling to the surface may mean that Iraq will be a hotspot once again. Let’s all hope the Iraqis will be able to keep a republic.
Fidel Castro will die, and Raul Castro will begin implementing policies similar to the glasnost and perestroika of the old Soviet Union in order to liberalize the Cuban economy and pave the way for a free-market system.

If Only It Were True: Even though Cuba is very slowly liberalizing, it has a very long way to go.

Economics

The US economy will improve, but much too slowly. Unemployment will remain high, only retreating to around 8%.

True: Unemployment has retreated—but much of the decline is due to people leaving the workforce. The endemic level of unemployment is both an economic and a societal disaster that we will be dealing with for a very long time.
The Bush tax cuts will be made permanent, and while President Obama will complain, he will still sign the tax reductions into law.

Wrong: The tax cuts were extended, but have not yet been made permanent. And while Obama campaigns on raising taxes for the rich, he still signed off on extending the Bush tax cuts.
The Eurozone will face collapse as the fiscal crisis in nations like Greece and Portugal tug at the Euro’s foundations. Germany will refuse to bail out European banks and will threaten to leave the Euro.

Right and Wrong: The first sentence was right on the money, as we’ve seen in the last few months. But Germany has (thus far) gone along with bailing out the debts of the countries on the periphery in order to keep the Eurozone afloat—but they will not be willing or able to do that for very long, especially if a large country like Spain or Italy starts failing.
The Chinese economy will begin to slow, stoking fears of another worldwide economic panic.

Not Yet: There are serious concerns about China’s economy, but they haven’t yet manifested themselves as serious worries yet. The world seems more concerned about the situation with the Euro.

Society/Culture/Technology

The iPhone will come to Verizon, and will sell like hotcakes. The next version of the iPad will also come to Verizon, and will be accompanied by a major push by Apple to get the iPad into the business market.

Correct: I got this one right, but it wasn’t that bold a prediction…
The battle between Google’s Android and Apple’s iOS will continue, but the Verizon iPhone will put a serious dent in Android’s growth.

Wrong: Android continues growing like gangbusters. But don’t think that means that Android is “winning.” Apple does not compete based on market share, they compete based on making the best products and making the most money selling them. On that front, Apple remains the key player. Given that Apple is using the 3GS to try and compete in the entry-level market, they are not ceding anything to Google. Android’s growth seems to be more driven by people trading in their dumbphones or featurephones for smartphones—just try and buy a cellphone that isn’t a smartphone these days, it’s not easy. And most of those cut-rate smartphones that the carriers are pushing run some variant of Android.
The SyFy Channel will stop airing real science fiction.

Correct: SyFy has a few decent shows that arguably qualify as science fiction (I’ve heard Warehouse 13 and Eureka are good), but is basically a dumping ground for B-movies, shitty reality shows, and wrestling. NBC/Universal have completed what former channel head Bonnie Hammer started in killing what made the network unique.
Global warming hysteria will officially jump the shark after 2011 sees record cold temperatures.

Correct, Sort Of: Winter 2011 was miserable, and Summer 2011 was not the scorcher that some were predicting. But despite even more leaked emails demonstrating that “climate science” has become an echo chamber, global warming hysteria has not gone away. That’s because global warming is less about science than it is about creating a quasi-religion, complete with all the trappings.
SpaceX will successfully dock a Falcon capsule to the International Space Station and will announce that they will be ready to bring tourists to the ISS before 2016.

Not Yet: But it looks like they will dock with the ISS early in 2012, and that 2016 date might be optimistic, but it’s within the realm of possibility.
The 3D movie trend won’t save Hollywood from declining box office figures and their own creative stagnation.

Correct: Hollywood’s creative bankruptcy knows no ends: now they’re re-releasing the same old crap, but this time in 3D! Kids, the extra D in the re-release of Star Wars: Episode I is for an extra dose of disappointment…

Wrapping Up

So, I didn’t do too badly on my predictions, although a lot of them were fairly obvious even back then. What I didn’t predict is notable: I wouldn’t have thought that this year would have seen the deaths of Osama bin Laden, Mohammar Qadafi, and Kim Jong-Il. I would not have imagined that the self-immolation of a Tunisian fruit dealer would lead to a wave of revolution that would remake the Middle East. I wouldn’t have imagined in December 2010 that Newt Gingrich would have been a front-runner for the 2012 GOP nomination (albeit briefly).

And sadly, I wouldn’t have predicted that Steve Jobs would leave us, even though it wasn’t that great a surprise. Genius is often fleeting.

What a long, strange year it has been—and who knows what 2012 may bring… but that won’t stop me from making another set of predictions for the next year…

Andy Stern’s Liberal Fascism

Andy Stern, the head of the SEIU and one of President Obama’s biggest supporters has a shockingly honest piece in The Wall Street Journal calling for the United States to mimic China’s model of state-run economic development. Say what you will about Stern’s piece, it’s probably the most honest description of where the American left wants this country to go.

Let’s ignore the fact that China, while having improved its human rights record somewhat, is still a single-party totalitarian society that routinely arrests political dissenters, engages in torture of political prisoners, and censors the free exchange of information. Even beyond all those horribles, China is no model for the United States.

Here’s what Stern has to say about China:

. . .I was part of a U.S.-China dialogue—a trip organized by the China-United States Exchange Foundation and the Center for American Progress—with high-ranking Chinese government officials, both past and present. For me, the tension resulting from the chorus of American criticism paled in significance compared to reading the emerging outline of China’s 12th five-year plan. The aims: a 7% annual economic growth rate; a $640 billion investment in renewable energy; construction of six million homes; and expanding next-generation IT, clean-energy vehicles, biotechnology, high-end manufacturing and environmental protection—all while promoting social equity and rural development.

Some Americans are drawing lessons from this. Last month, the China Daily quoted Orville Schell, who directs the Center on U.S.-China Relations at the Asia Society, as saying: “I think we have come to realize the ability to plan is exactly what is missing in America.” The article also noted that Robert Engle, who won a Nobel Prize in 2003 for economics, has said that while China is making five-year plans for the next generation, Americans are planning only for the next election.

There are times when I think that it’s hyperbole to accuse the left of being closet socialists, when that attack is over the top. Then I see something like this. Here is the head of one of the Democratic Party’s most important constituency, a friend and informal advisor to President Barack Obama, saying that America should start adopting a five-year plan. Stern doesn’t even try to hide his arguments, or finesse them as does Sinophile Thomas Friedman. He goes right out and says that America should emulate a country that is 100% controlled by the Communist Party.

Liberal Fascism Is Right

Stern’s argument is the same argument that has been made time and time again about totalitarian states. The phrase “Mussolini made the trains run on time” came from somewhere—and as Jonah Goldberg demonstrated in his important and utterly misunderstood book Liberal Fascism, the statist intelligentsia of the 1920s and 1930s saw Fascist Italy as a model for the rest of the world. Stern’s love letter to Communist China is in the same vein.

In the 1930s, American journalist Walter Duranty of The New York Times covered for the crimes of Stalin’s Soviet Union, and held Stalinism as a model for the West to follow. He won the Pulitzer Prize for his work. Stern is just following in Duranty’s footsteps.

Stern argues that free-market capitalism has failed, and that the state-run model as exemplified by China is superior. Anyone who believes that has some screws loose—China’s development is not a model for anyone, not even the Chinese. Yes, the Chinese have boosted their economy and are rapidly industrializing and becoming a 21st Century powerhouse. But their fortune is not due to their model of government. If anything, within my lifetime we are likely to see a catastrophic economic collapse unless China fundamentally reforms.

Clean energy vehicles? Look at China’s high speed rail system—the one held up as a model by Sinophiles like Andy Stern and Thomas Friedman. It is not only massively over-budget, but what has been completed is shoddily constructed and unsafe. This has already lead to fatal accidents and a reexamination of the whole project.

Environmental protection? The environmental ruin of China provides more evidence why the China model is not one to emulate. Beijing and other major Chinese cities are filled with smog, and the government has been attempting to hide the truth about how bad China’s air is from its own citizens. The construction of the Three Gorges Dam caused massive environmental and cultural damage, but the Chinese government steamrolled it through. There’s no Chinese equivalent of the Sierra Club to lobby against the government on projects, at least nothing with anywhere near the power of the American environmental lobby. Is that a model that Stern would like the U.S. to adopt?

Economic equality? China’s level of corruption is endemic, as Freedom House notes in its Index of Economic Freedom. Bribery is all too common in China at all levels. The Chinese system is a system where the politically well-connected receive the spoils, and the rest mire through. Now, for someone like Andy Stern, who is part of the politically well-connected set, that’s not a bug, it’s a feature. But for those not part of the political elite, Chinese-style corruption is the antithesis of economic equality.

And that’s just the tip of the iceberg. China is rapidly industrializing in the way that the post-World War II Soviet Union rapidly industrialized. The Chinese government is not as totalitarian as the Soviets were, but the result will be the same. China can produce all the “five-year plans” that it wants—just as the Soviet Gosplan did for decades. But the 20th Century was filled with the littered husks of governments that tried and failed to execute state-run central planning and failed. Even the ones that didn’t practice Stalinism failed. They failed not because they weren’t good enough at central planning, they failed because central planning of an economy doesn’t work.

And let me make a bold prediction—within my lifetime the Chinese system will either substantially reform or end up in a messy collapse that sends ripple effects across the globe. In fact, I don’t think that prediction is particularly bold, because that is what has happened every time a state has embraced central economic planning.

This Is What They Actually Believe

All of this supports Jonah Goldberg’s thesis in Liberal Fascism—not that American liberals want to strap on jackboots and invade Poland, but that American liberals have an ideological blind spot that causes them to embrace state control of the economy, which inevitably leads to totalitarianism. What liberals like Andy Stern miss is that the Chinese government has the power to implement “five-year plans” because it also has the power to arrest dissidents, attempt to culturally eradicate the Tibetan people, and censor the free expression of its citizens. Once you give the government virtually unfettered power to control the economic affairs of the people, you’ve given them virtually unfettered power to control everything else.

That’s the lesson of the 20th Century, the one that American liberals never seem to have grasped. You cannot get to Bismarck’s welfare state without eventually getting to Adolph Hitler. You cannot get a Mussolini that makes the trains run on time without getting a Mussolini that oppresses the people. You cannot have a Chinese economy without emulating the bad parts of China either. Political power in a controlled market is a zero-sum game—every bit of power and authority you give to the government has to be taken from somewhere else.

That’s why America should not emulate China. America should start emulating America. Our Founding Fathers figured out, centuries ago, that the best way to have a successful and prosperous country was to unleash the people and allow them to flourish. The Founding Fathers didn’t fully understand this concept at the time, but they got it right.

Stern argues that free-market capitalism is failing America. Bullshit. What is failing in America is the very model that Stern wants—a system where the government controls ever more functions of the economy. Over the last few decades the size and scope of government has grown at an almost exponential rate—but has life gotten better because of it? What parts of the economy are the biggest messes? We have an education system that’s a basket case and is harming the future of this country. The education system is controlled almost entirely by the government, either directly or indirectly. Our healthcare system is a mess. Who’s the biggest power in healthcare? It’s Uncle Sam, through Medicare and Medicaid and a whole host of other programs. Our financial system has lurched from one disaster to another. And contrary to the spin, the financial fatcats by and large supported President Obama and have been getting rich off of his largesse since he was elected.

No wonder Stern wants more of the same. His union has gotten fatter and more powerful under President Obama, and if the United States emulated China, Andy Stern would be even more powerful.

China is no model for the United States. China is no model for China. The fact that one of the most powerful figures in American liberalism in the Democratic Party would openly embrace central planning in such stark terms is shocking—even though it’s been clear for some time that’s what they believe in private.

Predictions 2011

It’s been a long tradition on this site to make some predictions for the new year just before the ball drops in Times Square. This year is no exceptions. So here are some predictions for 2011.

In the meantime, I hope everyone has a wonderful New Year, and that 2011 brings much health and happiness…

Politics

President Obama, increasingly embittered by the political process and the Republican House, retreats from the public eye and rumors swirl that he will not run for a second term.
The GOP won’t have a much better year. Their commitment to fiscal discipline will be continually tested, meaning that there will be plenty of difficult votes on spending in 2011.
Sarah Palin will continue to tease a run for the Republican nomination in 2012, but won’t actually commit to anything.
The Democrats will once again learn the wrong lessons from their 2010 drubbing, and will embrace the far left instead of running to the center.
Redistricting battles will end up getting fought in court as the Democrats try to fight to keep as many Democratic seats as they can.
ObamaCare suits will be appealed, and will eventually end up on the Supreme Court’s docket. But because Congress will end up removing the mandates from the bill, the Supreme Court will declare the issue moot.

International

The last vestiges of democracy in Venezuela will be cast aside as Hugo Chavez extends his emergency rule into a lifetime dictatorship.
The conflict in Afghanistan will continue to be bloody and difficult. By the end of the year the conventional wisdom will be that Afghanistan is Obama’s Vietnam, and the future of the US mission there will be in doubt.
North Korea will continue to rattle their saber, but they will stop just short of provoking a full-scale war.
Iraq’s biggest problem in 2011 will be corruption rather than terrorism, and civilian casualties will remain low.
Fidel Castro will die, and Raul Castro will begin implementing policies similar to the glasnost and perestroika of the old Soviet Union in order to liberalize the Cuban economy and pave the way for a free-market system.

Economics

The US economy will improve, but much too slowly. Unemployment will remain high, only retreating to around 8%.
The Bush tax cuts will be made permanent, and while President Obama will complain, he will still sign the tax reductions into law.
The Eurozone will face collapse as the fiscal crisis in nations like Greece and Portugal tug at the Euro’s foundations. Germany will refuse to bail out European banks and will threaten to leave the Euro.
The Chinese economy will begin to slow, stoking fears of another worldwide economic panic.

Society/Culture/Technology

The iPhone will come to Verizon, and will sell like hotcakes. The next version of the iPad will also come to Verizon, and will be accompanied by a major push by Apple to get the iPad into the business market.
The battle between Google’s Android and Apple’s iOS will continue, but the Verizon iPhone will put a serious dent in Android’s growth.
The SyFy Channel will stop airing real science fiction.
Global warming hysteria will officially jump the shark after 2011 sees record cold temperatures.
SpaceX will successfully dock a Falcon capsule to the International Space Station and will announce that they will be ready to bring tourists to the ISS before 2016.
The 3D movie trend won’t save Hollywood from declining box office figures and their own creative stagnation.