Tariffs, rising state and federal taxes, and currency devaluation ruined the 1930s, and they could do the same today.

By ARTHUR B. LAFFER

Wall Street Journal – SEPTEMBER 22, 2009 – link to original

The 1930s has become the sole object lesson for today’s monetary policy. Over the past 12 months, the Federal Reserve has increased the monetary base (bank reserves plus currency in circulation) by well over 100%. While currency in circulation has grown slightly, there’s been an impressive 17-fold increase in bank reserves. The federal-funds target rate now stands at an all-time low range of zero to 25 basis points, with the 91-day Treasury bill yield equally low. All this has been done to avoid a liquidity crisis and a repeat of the mistakes that led to the Great Depression.

Even with this huge increase in the monetary base, Fed Chairman Ben Bernanke has reiterated his goal not to repeat the mistakes made back in the 1930s by tightening credit too soon, which he says would send the economy back into recession. The strong correlation between soaring unemployment and falling consumer prices in the early 1930s leads Mr. Bernanke to conclude that tight money caused both. To prevent a double dip, super easy monetary policy is the key.

While Fed policy was undoubtedly important, it was not the primary cause of the Great Depression or the economy’s relapse in 1937. The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products. Huge federal and state tax increases in 1932 followed the initial decline in the economy thus doubling down on the impact of Smoot-Hawley. There were additional large tax increases in 1936 and 1937 that were the proximate cause of the economy’s relapse in 1937.

In 1930-31, during the Hoover administration and in the midst of an economic collapse, there was a very slight increase in tax rates on personal income at both the lowest and highest brackets. The corporate tax rate was also slightly increased to 12% from 11%. But beginning in 1932 the lowest personal income tax rate was raised to 4% from less than one-half of 1% while the highest rate was raised to 63% from 25%. (That’s not a misprint!) The corporate rate was raised to 13.75% from 12%. All sorts of Federal excise taxes too numerous to list were raised as well. The highest inheritance tax rate was also raised in 1932 to 45% from 20% and the gift tax was reinstituted with the highest rate set at 33.5%.

But the tax hikes didn’t stop there. In 1934, during the Roosevelt administration, the highest estate tax rate was raised to 60% from 45% and raised again to 70% in 1935. The highest gift tax rate was raised to 45% in 1934 from 33.5% in 1933 and raised again to 52.5% in 1935. The highest corporate tax rate was raised to 15% in 1936 with a surtax on undistributed profits up to 27%. In 1936 the highest personal income tax rate was raised yet again to 79% from 63%—a stifling 216% increase in four years. Finally, in 1937 a 1% employer and a 1% employee tax was placed on all wages up to $3,000.

Because of the number of states and their diversity I’m going to aggregate all state and local taxes and express them as a percentage of GDP. This measure of state tax policy truly understates the state and local tax contribution to the tragedy we call the Great Depression, but I’m sure the reader will get the picture. In 1929, state and local taxes were 7.2% of GDP and then rose to 8.5%, 9.7% and 12.3% for the years 1930, ‘31 and ‘32 respectively.

The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I’d give to all who will listen, it is that U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s. Net legislated state-tax increases as a percentage of previous year tax receipts are at 3.1%, their highest level since 1991; the Bush tax cuts are set to expire in 2011; and additional taxes to pay for health-care and the proposed cap-and-trade scheme are on the horizon.

In addition to all of these tax issues, the U.S. in the early 1930s was on a gold standard where paper currency was legally convertible into gold. Both circulated in the economy as money. At the outset of the Great Depression people distrusted banks but trusted paper currency and gold. They withdrew deposits from banks, which because of a fractional reserve system caused a drop in the money supply in spite of a rising monetary base. The Fed really had little power to control either bank reserves or interest rates.

The increase in the demand for paper currency and gold not only had a quantity effect on the money supply but it also put upward pressure on the price of gold, which meant that dollar prices of all goods and services had to fall for the relative price of gold to rise. The deflation of the early 1930s was not caused by tight money. It was the result of panic purchases of fixed-dollar priced gold. From the end of 1929 until early 1933 the Consumer Price Index fell by 27%.

By mid-1932 there were public fears of a change in the gold-dollar relationship. In their classic text, “A Monetary History of the United States,” economists Milton Friedman and Anna Schwartz wrote, “Fears of devaluation were widespread and the public’s preference for gold was unmistakable.” Panic ensued and there was a rush to buy gold.

In early 1933, the federal government (not the Federal Reserve) declared a bank holiday prohibiting banks from paying out gold or dealing in foreign exchange. An executive order made it illegal for anyone to “hoard” gold and forced everyone to turn in their gold and gold certificates to the government at an exchange value of $20.67 per ounce of gold in return for paper currency and bank deposits. All gold clauses in contracts private and public were declared null and void and by the end of January 1934 the price of gold, most of which had been confiscated by the government, was raised to $35 per ounce. In other words, in less than one year the government confiscated as much gold as it could at $20.67 an ounce and then devalued the dollar in terms of gold by almost 60%. That’s one helluva tax.

The 1933-34 devaluation of the dollar caused the money supply to grow by over 60% from April 1933 to March 1937, and over that same period the monetary base grew by over 35% and adjusted reserves grew by about 100%. Monetary policy was about as easy as it could get. The consumer price index from early 1933 through mid-1937 rose by about 15% in spite of double-digit unemployment. And that’s the story.

The lessons here are pretty straightforward. Inflation can and did occur during a depression, and that inflation was strictly a monetary phenomenon.

My hope is that the people who are running our economy do look to the Great Depression as an object lesson. My fear is that they will misinterpret the evidence and attribute high unemployment and the initial decline in prices to tight money, while increasing taxes to combat budget deficits.

Mr. Laffer is the chairman of Laffer Associates and co-author of “The End of Prosperity: How Higher Taxes Will Doom the Economy—If We Let It Happen” (Threshold, 2008).

Salon.com – link to original post

Tom Wolfe says is the best and most important revisionist history in a very long time

“We’re all fascists now”

An interview with conservative pundit Jonah Goldberg, who argues that fascism is left-wing, not right-wing, and that contemporary liberals are fascism’s intellectual offspring.

By Alex Koppelman

Jan. 11, 2008 | Jonah Goldberg is not a popular man among liberals. The son of Lucianne Goldberg, the literary agent who played a pivotal role in the Monica Lewinsky scandal, he already had that as a strike against him when he began his career as a conservative political commentator in the late 1990s. A writer and blogger for the National Review and a columnist for the Los Angeles Times, he’s now a frequent target for the mockery of liberal bloggers.

But nothing has inspired the ire of liberals quite like Goldberg’s new book, “Liberal Fascism: The Secret History of the American Left From Mussolini to the Politics of Meaning.” There was the provocative cover, which adds a Hitler mustache to the familiar yellow smiley-face icon. Then there was the book’s ever-changing subtitle. Originally “The Totalitarian Temptation From Mussolini to Hillary Clinton,” it became “The Totalitarian Temptation From Hegel to Whole Foods,” before landing on bookstore shelves in its current form.

In the book, Goldberg attempts to convince readers that six decades of conventional wisdom that have placed Italy’s Benito Mussolini, Germany’s Adolf Hitler and fascism on the right side of the ideological spectrum are wrong, and that fascism is really a phenomenon of the left. Goldberg also attributes fascist rhetoric and tactics to Woodrow Wilson and Franklin Delano Roosevelt, and describes the New Deal’s descendants, modern American liberals, as carriers of this liberal-fascist DNA. In a sense, “We’re All Fascists Now,” as Goldberg puts it in one of his chapter titles. Salon spoke with Goldberg by phone.

What’s the book about?

It’s a revisionist history. It’s an attempt to reconfigure, or I would say correct, the standard understanding of the political and ideological context that frames most of the ideological debates that we have had since, basically, World War II. There’s this idea that the further right you go the closer you get to Nazism and fascism, and the further left you go the closer you get to decency and all good things, or at least having the right intentions in your heart.

For 60 years most historians have been putting fascism on the right, or conservative, side of the political spectrum. What are you able to see that they weren’t?

There are a lot of historians who get fascism basically right. There are a lot of historians who don’t. I think the Marxists have been part and parcel of a basic propaganda campaign for a very long time, but there are plenty of historians who understand what fascism was and are actually quite honest about it.

To sort of start the story, the reason why we see fascism as a thing of the right is because fascism was originally a form of right-wing socialism. Mussolini was born a socialist, he died a socialist, he never abandoned his love of socialism, he was one of the most important socialist intellectuals in Europe and was one of the most important socialist activists in Italy, and the only reason he got dubbed a fascist and therefore a right-winger is because he supported World War I.

Originally being a fascist meant you were a right-wing socialist, and the problem is that we’ve incorporated these European understandings of things and then just dropped the socialist. In the American context fascists get called right-wingers even though there is almost no prominent fascist leader — starting with Mussolini and Hitler — who if you actually went about and looked at their economic programs, or to a certain extent their social program, where you wouldn’t locate most if not all of those ideas on the ideological left in the American context.

You write about how historians have had difficulty defining fascism. How did you come up with the definition of fascism that you use in the book?

Well, yeah, it’s very hard to come up with a definition of fascism. And one of the things that I’ve found that was kind of amazing in this process, especially since the book has come out, is how people can’t let go of fascism as a morally loaded term for evil. [George] Orwell says fascism has come to mean anything not desirable as early as 1946, and it is amazing how it is so ingrained in our political psychology to see “fascist” basically just as a code word for “evil.”

So anyway, I’m sorry — my definition of fascism I get in large chunks from Eric Voegelin, the political philosopher. He wrote this book “The Political Religions,” and I see fascism as a political religion. That doesn’t mean I think there’s some book, like a bible, that if you read it you will become a convert to this political religion. Rather I think it is a religious impulse that resides in all of us — left, right, black, white, tall, short — to seek unity in all things, to believe that we need to all work together to go past any of our disagreements and that the state needs to be, almost simply as a pragmatic matter, the pace-setter, the enforcer of this cult of unity. That is what I believe fascism is.

Related to your definition, at least as I read the book, was something that’s been controversial about it. Especially because of one of the earlier iterations of the subtitle, ["Liberal Fascism: The Totalitarian Temptation From Hegel to Whole Foods"] there’s a perception that your argument comes down to things like both Nazis and liberals being proponents of organic food. Is that how it works? Because the Nazis liked dogs and I like dogs, I’m a Nazi?

No, no. I mean, I try to reject that kind of thing … I don’t believe that liberals are Nazis; I believe that if Nazism came to the United States it is entirely possible that liberals would be at the forefront of the battle to stop it. So would conservatives. I’m not trying to do any argument ad Hitlerum in this book.

But what I am trying to do, at least in the chapter that you’re talking about, is show how — [take] Robert Proctor, who wrote an award-winning, widely esteemed book called “The Nazi War on Cancer.” He points out that this organic food movement, the whole-grain bread operation, the war on cancer, the war on smoking, that these things were as fascist as death camps and yellow stars. They were as central to the ideology of Nazism as the extermination of the Jews. Now, that is not the same thing. And I want to be really clear about this: That is not the same thing as saying that banning smoking is as morally disgusting and reprehensible as trying to wipe out the Jewish people. You can say that something is as much part and parcel of an ideology and not say that it is as evil.

Similarly, in terms of this organic stuff, I think it’s important to understand that Mussolini is the guy who coins the word “totalitarian.” “Totalitarian” has come to mean this Orwellian oppression, this political evil. Orwell uses the image of stomping on a human face forever. That is not what Mussolini meant by it. I’m not a big fan of Mussolini’s, but he meant a society where everyone belongs, everyone counts, everyone is included. The most famous definition of fascism that he offers is, “Everything in the state, nothing outside the state.” … Today we don’t use the word “totalitarian,” because the connotations have been so hardened in our minds. But we use these other words like “holistic” all the time. This quest for wholism, this idea that everything goes together, that we are all part of a single political, social organism … was deeply and profoundly central to the intellectual movements and eddies that fed into Nazism.

Along those lines, you write, “What is fascist is the notion that in an organic national community, the individual has no right not to be healthy; and the state therefore has the obligation to force us to be healthy for our own good.” And you cite the example of a state legislator who wants to ban using iPods when crossing the street. Under that definition, how are, say, seat-belt laws, helmet laws, laws against drunk driving, the drinking age, all that, not fascistic?

First of all, again, I think we need to remember that something can be fascistic just like something can be socialistic and not be evil. It can just be wrong … And so I think you can make the argument that a lot of the things you cite are fascistic in one sense, but that doesn’t mean they’re automatically bad ideas. The autobahn was fascistic — that doesn’t mean that we should ban highways.

That said, a lot of the things you listed, if I heard you right, are laws for preventing people from harming others. And that is a legitimate function of government: to protect the general welfare, to protect people’s privacy and property and lives. That is perfectly within the Anglo-American tradition of constitutional law and all the rest. But where you get into scarier territory is when you have people saying that you can’t smoke in your own home or that you can’t eat certain foods or that because of the healthcare system that we have and that Democrats want to expand, since harming yourself costs the taxpayer money, you have no right to harm yourself.

I mentioned seat-belt laws, which are really aimed at the individual who’s supposed to be wearing the seat belt. And on the right, there’s the Terri Schiavo debate.

Yeah. Well, but the Terri Schiavo debate is an interesting example. The Nazis were grotesque euthanizers. Long before they went to the Jews they started exterminating the mentally ill, the enfeebled, what they called “useless bread gobblers,” people who couldn’t contribute to the society. And there are all sorts of criticisms that I think are legitimate that you can aim at pro-lifers, but you can not argue that pro-lifers are somehow Nazi-like in their support of the pro-life cause, because it is exactly contrary to the way the Nazis operated to believe that every life is sacred.

You write, “[Liberalism] is definitely totalitarian — or ‘holistic,’ if you prefer — in that liberalism today sees no realm of human life that is beyond political significance, from what you eat to what you smoke to what you say. Sex is political. Food is political. Sports, entertainment, your inner motives and outer appearance, all have political salience for liberal fascists.”

Couldn’t that just as easily be said of the American right? You’ve got, certainly, conservatives judging entertainment from political perspectives; I remember discussion on [National Review group blog] the Corner of the 2006 Steelers-Seahawks Super Bowl through a political lens. There were “Freedom Fries” and boycotts of French food and wine. And, I mean, your wife worked for [former Attorney General] John Ashcroft, so you know that on the right, sex can certainly be political.

I will first stipulate right upfront that I agree with you that there are lots of places on the right where this is so, and I don’t like that stuff either … That said, I don’t think that the equation between liberalism and conservatism goes as far as you would like to take it. You know, you have environmental groups giving out kits and instructions about how to have environmentally conscious sex. You don’t have conservative groups talking about what kind of condoms you should use or what positions you can be in. That kind of thing doesn’t really go on.

I don’t have any problem with liberals or conservatives criticizing stuff that goes on in the popular culture … [I]t’s when you want to dragoon the state into these things, everything from hate crimes to these early interventions in childhood. You read “It Takes a Village” and Hillary [Clinton] declares that basically we’re in a crisis from the moment we’re born and that justifies the helping professions from breaking into the nuclear family at the earliest possible age.

You have a lot of this stuff on the right, I agree. [George W.] Bush had his marriage counseling stuff that he wanted to propose, I didn’t like that. I think Ashcroft gets a very bad rap, but one of the things I did not like was him basically having this philosophy that since the federal government was an agent for a left-wing agenda that therefore it should be an agent for a right-wing agenda. I agree with you to that extent, that that stuff is bad, and it constitutes a kind of right-wing progressivism that I really do not like and I see in people like Mike Huckabee and I see to a certain extent in compassionate conservatism, as I discuss at the end of the book.

You write about militarism being central to fascism, and a militaristic strain remaining in today’s liberalism — the war on cancer, the war on drugs, the War on Poverty. Why include the war on drugs formulation with liberalism? It was Richard Nixon who declared it, then it withered under Jimmy Carter and then Ronald Reagan really brought it back and was the drug warrior.

I think that’s probably a fair criticism. But I should start at the beginning … What appealed to the Progressives about militarism was what William James calls this moral equivalent of war. It was that war brought out the best in society, as James put it, that it was the best tool then known for mobilization … That is what is fascistic about militarism, its utility as a mechanism for galvanizing society to join together, to drop their partisan differences, to move beyond ideology and get with the program. And liberalism today is, strictly speaking, pretty pacifistic. They’re not the ones who want to go to war all that much. But they’re still deeply enamored with this concept of the moral equivalent of war, that we should unite around common purposes. Listen to the rhetoric of Barack Obama, it’s all about unity, unity, unity, that we have to move beyond our particular differences and unite around common things, all of that kind of stuff. That remains at the heart of American liberalism, and that’s what I’m getting at.

As for the war on drugs part, I think you make a perfectly fine point, except I would argue that Nixon was not a particularly conservative guy. Measured by today’s standards and today’s issues, Nixon would be in the liberal wing of the Democratic Party.

You’ve talked about Mussolini remaining on the left and remaining a socialist, and in your book you’ve got a lot of quotes from the 1920s about that, but I’m wondering — how does that fit in with what he wrote and said later, especially “The Doctrine of Fascism” in 1932?

I’d need to know specifically what he wrote in “The Doctrine of Fascism.” It’s been about three years since I’ve read it.

He says, for example, “Granted that the 19th century was the century of socialism, liberalism, democracy, this does not mean that the 20th century must also be the century of socialism, liberalism, democracy. Political doctrines pass; nations remain. We are free to believe that this is the century of authority, a century tending to the ‘right ‘, a Fascist century.”

Yeah, I’m perfectly willing to concede there’s a lot of stuff Mussolini says, but you’ve got to remember, by ‘32, socialism is starting to essentially mean Bolshevism. And if you get too caught up in the labels, rather than the policies, you get yourself into something of a pickle. The right in Europe back then was authoritarian; the right was a kind of right-wing socialism … What was dead, according to intellectuals across the ideological spectrum, was 19th century classical liberalism.

But in the book you say, “Mussolini remained a socialist until his last breath,” and in 1932 he’s writing, “When the war ended in 1919 Socialism, as a doctrine, was already dead; it continued to exist only as a grudge,” and he also says, “Fascism [is] the resolute negation of the doctrine underlying so-called scientific and Marxian socialism.”

Yeah, but that’s the point. Scientific and Marxist socialism, and certainly the people who subscribed to that stuff, was international socialism. That’s what made Mussolini a right-winger, because he was against international socialism and he was for national socialism.

But [Mussolini] never gave up on the program of socialism, he never gave up on this idea that the state was the ultimate arbiter and director of economic arrangements. He never gave up on the idea that the rich should be brought under the heel of the state. And there’s this funny thing — we still live with these categories where nationalism and socialism are supposed to be these opposite things. This is sort of a hangover from the days where socialism was defined as international socialism and nationalism was defined as national socialism. But at the end of the day, nationalism and socialism are essentially the same thing. When we nationalize an industry, we’re socializing it. And when we say we want socialized medicine, we’re saying we want nationalized medicine. We need to understand that that’s the context Mussolini was coming from.

And he said a lot of stuff. He was sort of a buffoon in that sense; he was constantly changing his definitions of fascism and talking out of one side of the mouth, then out of the other side of his mouth, largely because of the sort of pragmatic idea he had about politics. But in terms of the policies he implemented and where he came to, once again, at the end of his life, he always clung to the policies that were associated with the left side of the political spectrum.

That brings up something else I wanted to ask you — if I’m reading this right, one of the things you’re saying about the student radicals in the 1960s is that they were essentially fascist even if they might have called themselves Marxist.

Yeah.

But isn’t it easy to distinguish, since Mussolini repudiated the central doctrine of Marxism?

Well, I mean, I bet you if you gave me an hour I could find places where he once again says nice things about Marxism in 1933 or 1937.

But he repudiated historical materialism, dialectical materialism.

Yeah. But I think the problem is you get into one of these sort of overly doctrinal, “let’s go to the text” approaches where words get confused for things. Stalin never repudiated Marxism, but in almost every way, the checklist for the anatomy of fascism applies to Stalinism … Saying that you still believe in the dialectic and the cold impersonal forces of history found in “Das Kapital” or “The Communist Manifesto” isn’t an abracadabra thing where all of a sudden that means Stalin was really a Marxist or wasn’t a fascist in terms of how he actually operated.

And I think the same thing applies to the radicals in the 1960s; quoting the Port Huron Statement doesn’t really change what the radicals did in the streets when they were actually fighting, when they were blowing things up, when they were supporting the Black Panthers, who wanted to assassinate police, when they were taking over universities. The fact that they said they were in favor of peace and Marxism is almost meaningless when compared to their actual actions, and their actions were fascistic.

What I thought was interesting about your definition of fascism was that nationalism seemed to be missing … Stanley Payne, whom you quote and say is “considered by many to be the leading living scholar of fascism,” in his definition of fascism, the first thing he says is that it’s “a form of revolutionary ultra-nationalism.” How does that fit with contemporary liberalism, which is often derided as being unpatriotic, anti-American?

That’s a perfectly legitimate question. I think classical fascism, the fascism that we all think of when we hear the word “fascism” — Italy, Germany and to a certain extent Spain, they were ultra-nationalistic, I don’t dispute that, I think that is absolutely the case. I just would want to emphasize that that ultra-nationalism comes with an economic program of socialism. There’s no such thing as a society undergoing a bout of ultra-nationalism that remains a liberal free-market economy. The two things go together.

I don’t say that contemporary liberalism is the direct heir of Nazism or Italian fascism. I say it’s informed by it. It’s like its grandniece. It’s related, they’re in the same family, they share a lot of genetic traits, but they’re not the same thing.

I think that you do have nationalism percolating up in the form of left-wing economic populism, the John Edwards branch of liberalism, which is for raising trade barriers. He says time and again, the first thought of every economic decision of a president should be what protects the American middle class, which — according to some fairly doctrinaire understandings of fascism, it’s an ideology of the middle class, nationalist economics and all that kind of stuff — there’s some meat there. So I do think you do see nationalism in that regard, in terms of economics.

Today’s liberalism, there’s a strong dose of cosmopolitanism to it, which is very much like the H.G. Wells “Liberal Fascism” I was talking about … These trans-national elites, the Davos crowd who really want to get beyond issues of sovereignty so they can organize and guide the planet on issues like global warming, invest a lot more in the U.N. I think that is much more of the threat coming from establishment liberalism today, but I do think there is a lot of nationalism there too.

Payne also says that a “fundamental characteristic” of fascism was “extreme insistence on what is now termed male chauvinism and the tendency to exaggerate the masculine principle in almost every aspect of activity.” How does that fit in with contemporary liberalism, especially Hillary Clinton, who was at one point in the subtitle of your book?

It’s a great question. I’ve actually thought a lot about that, and I wish I had quoted that thing from Payne, because I say at the end of the book that the classical fascisms of mid-20th century were essentially masculine phenomena. They fit in the Orwellian dystopian vision of the future, where you have the strong father figure. … That was the vision of a more sexist time when leadership was inherently male. I think one of the things that marks contemporary liberalism is that it’s much more feminine. And I think that’s probably to the better; I would much rather [get] hugs than blows from a billy club.

But there’s another dystopian understanding of the future, which we get from [Aldous] Huxley’s “Brave New World.” That was a fundamentally American vision … [T]he vision of the Huxleyian “Brave New World” future is one where everyone’s happy. No one’s being oppressed, people are walking around chewing hormonal gum, they’re having everything done for them, they’re being nannied almost into nonexistence. That’s the fascism in Hillary Clinton’s vision. It’s not the Orwellian stamping on a human face thing, it’s hugs and kisses and taking care of boo-boos. It is the nanny state. That is a much more benign dystopia than “1984,” but for me at least, it’s still a dystopia. An unwanted hug is still as tyrannical or as oppressive — not as oppressive, but an unwanted hug is still oppressive if you can’t escape from it … [O]ne of the biggest distinctions between what I’m calling liberal fascism … and classical fascism, is that classical fascism was masculine and violently oppressive and today’s liberalism is feminine and not oppressive but smothering with kindness.

One of the things Mussolini also wrote in “The Doctrine of Fascism” was, “In rejecting democracy Fascism rejects the absurd conventional lie of political equalitarianism, the habit of collective irresponsibility, the myth of felicity and indefinite progress.” So I’m wondering again how that fits.

I’m not trying to dodge anything, I just would have to look at it in the context and see where he is coming from on that. I do think that there is a fundamentally undemocratic passion running through parts of contemporary liberalism.

Again, invoking lines from something Mussolini wrote and trying to say, “This contradicts what we see in front of us,” has some utility, but it can only take you so far when you have to look at what Mussolini actually did. Mussolini was a pragmatist … Pragmatists say what’s useful. They do what’s useful. There are other things you could point out in Mussolini’s record that are inconvenient for me. For a time he was a free trader, in the very early days of fascism … What unites, in some sense, fascism and contemporary liberalism and a lot of other isms is their pragmatic sense that the government is smart enough and morally empowered to do good wherever and whenever it sees fit. That is an undemocratic and illiberal perspective.

How do you feel about the reaction to your book so far, especially from the liberal blogosphere?

I think most of them should be ashamed. I think it’s been fairly idiotic; you look at — Who’s that weirdo, the guy with the “Too Hot for TNR” blog? Spencer Ackerman. That’s absurd, and it’s childish. Type my name into Daily Kos. As hilarious as some people might think it is to call me a “Doughy Pantload,” at some point if that is the crux of your objection to a 500-page book that Tom Wolfe says is the best and most important revisionist history in a very long time, that says a lot more about those people than it does about me. I would love to see some serious liberals take on the book in a serious way, I really would. I am sure I get things wrong, I know there are counter-arguments to be had, I’ve heard some of them from very sharp conservatives that I admire, but so far the response from the left-wing blogs I just ignore, because it’s childish … All I would really want is an interesting conversation. I don’t expect everyone to automatically agree with me, I know that the book is controversial.

And you say you’re not calling liberals Nazis, but…

I must say it 25 times in the book.

Yeah. But the cover has the smiley face with the Hitler mustache. Does that undermine that message and lead to some of these reactions?

Well, I’m perfectly glad to concede that people who do judge books by their covers or think it’s more important to read a title rather than read a book will be confused and jump to conclusions. But these are people that I don’t generally respect. The cover was Random House’s invention, and I’m still sort of ambivalent about it, but you make covers to sell books, you make titles to sell books, even though my title comes from a speech by H.G. Wells … The cover, the smiley face with the mustache, is a play on something I explain on basically Page One of the book, and it’s a reference to what George Carlin and Bill Maher call smiley-face fascism. And if you can’t get past the cover and the title, then you’re not a serious book reader and you’re not really a serious person.

– By Alex Koppelman

Since the buzz is starting, I thought Corner readers might be interested in what Tom Wolfe had to say about the book: [Jonah Goldberg]

The Corner – national Review Online - link to original

“In the greatest hoax of modern history, Russia’s ruling “socialist workers party,” the Communists, established themselves as the polar opposites of their two socialist clones, the National Socialist German Workers Party (quicknamed “the Nazis”) and Italy’s Marxist-inspired Fascisti, by branding both as “the fascists.” Jonah Goldberg is the first historian to detail the havoc this spin of all spins has played upon Western thought for the past 75 years, very much including the present moment.  Love it or loathe it, “Liberal Fascism” is a book of intellectual history you won’t be able to put down—-in either sense of the term.”
—Tom Wolfe, author of Bonfire of the Vanities and I Am Charlotte Simmons

by Jeff Jacoby

The Boston Globe
September 16, 2009

http://www.jeffjacoby.com/6256/the-man-who-hated-hunger

HE WAS AWARDED the Nobel Peace Prize, the Presidential Medal of Freedom, the National Medal of Science, and the Congressional Gold Medal. Scores of universities conferred honorary degrees upon him. Research institutions and facilities on three continents were named after him. He was greatly honored, and for good reason: He is reckoned to have saved more lives — hundreds of millions, perhaps a billion — than any man in human history.

Yet until last weekend, when he died of cancer at 95, you could have asked 1,000 people at random on the street, and chances are 998 of them would never have heard of Norman Borlaug. Almost as many would likely never have heard of the “Green Revolution” Borlaug spearheaded — the spectacular increase in agricultural productivity he first achieved in Mexico in the 1960s and then worked to spread through much of the Third World. Instead of the worldwide famine so confidently predicted by population alarmists of the time, Borlaug’s agricultural miracle sent wheat and rice harvests soaring, outstripping the growth in population. The result was a world in which food became more abundant and affordable than it had ever been before.

“In 1950 the world produced 692 million tons of grain for 2.2 billion people,” journalist Gregg Easterbrook wrote in a profile of Borlaug for The Atlantic in 1997; “by 1992 production was 1.9 billion tons for 5.6 billion people — 2.8 times the grain for 2.2 times the population. Global grain yields rose from 0.45 tons per acre to 1.1 tons; yields of corn, rice, and other foodstuffs improved similarly.” Even more remarkable, this burgeoning of the world’s harvests barely affected the amount of land under cultivation. Between 1950 and 1992, cropland increased by less than 1 percent.

Borlaug grew up on a farm in northern Iowa, and experienced the hardships of the Depression and the terrible “Dust Bowl” drought that devastated much of the Midwest. The sight of Americans suffering from hunger “left an indelible imprint on me,” he later said, and instilled in him a smoldering “hatred against hunger and misery and human poverty.” That hatred eventually drew him to the study of plant pathology, and to the crucial insight that unleashed the Green Revolution.

That insight was to breed tall tropical wheat varieties, which responded well to chemical fertilizer but tended to fall over from the weight of their seed heads, with short-stalked “dwarf” wheat sturdy enough to support the large and heavy kernels Borlaug’s improved strains were producing. The results were extraordinary: Wheat output could be tripled or even quadrupled without needing to plow more land. (The principle was later applied to rice, with comparable effects.) Within a few years of adopting Borlaug’s methods, Mexico was self-sufficient in wheat.

When he took his innovations to India and Pakistan, the outcome was much the same. “The Indian wheat crop of 1968 was so bountiful,” the New York Times observed, “that the government had to turn schools into temporary granaries.” By 1970, India was producing 20 million tons of wheat, up from 12.3 million just five years earlier. The 2009 harvest is estimated at more than 78 million tons.

Like all great men, Baurlog had his critics and naysayers. It is often the case that those who can, do, while those who can’t write passionate manifestos explaining why it can’t be done. “The battle to feed all of humanity is over,” gloom-and-doomer Paul Ehrlich declared in The Population Bomb, his 1968 bestseller. Hundreds of millions of people were going to starve to death, he and other warned, and there was nothing anyone could do to prevent it. Yet by 1968, as science writer Ronald Bailey points out, Borlaug’s successes had already been dubbed a “Green Revolution” by the US Agency for International Development.

“He was one of the worst critics we had,” Borlaug recalled in a 2000 interview with Bailey. “He said, ‘You aren’t going to make any major impact on producing the food that’s needed.’” Such relentless pessimism might have been comical if it hadn’t been so influential. Under pressure, some of Borlaug’s funders backed away. Environmental critics faulted his embrace of chemical fertilizers or genetic modification. Others accused him of failing to respect the earth’s natural constraints on food production.

But Borlaug had seen too much of hunger to be cowed by such censure. The complaints of his well-fed Western detractors would vanish, he said, were they to live for just one month — as he had for 50 years — among the world’s poorest and hungriest people. Man may not live by bread alone, but he must surely die without it. Because Norman Borlaug lived, hundreds of millions of human beings were spared that terrible fate.

(Jeff Jacoby is a columnist for The Boston Globe. To follow him on Twitter, click here.)

By Israel M. Kirzner • 

The Freeman – September 2009 • Volume: 59 • Issue: 7 – link to original

A great book, it has been remarked, is like a great castle. It can be viewed from many different angles, each offering a unique perspective. Viewing Ludwig von Mises’s monumental work from the vantage of 2009 permits one to see with great clarity one fascinating aspect of the book–the sheer drama of its emergence at the time that it appeared. This is a theme on which I have touched more than once over the years. I am grateful for the present opportunity to articulate this theme in somewhat greater detail.

Some 13 years ago (in the May 1996 , which celebrated the first 50 years of public service splendidly contributed by the Foundation for Economic Education), I dwelt on the pivotal role played by FEE in upholding the flag of Austrian economics. I dwelt especially on the role it played (most importantly by providing Mises with a congenial “base”) in nurturing the Austrian economics tradition during decades in which the professional reputation of the school was at its very lowest. That paper focused, in part, on the contribution of the Foundation to the subsequent revival of Austrian economics in this country. The present note complements that earlier piece by focusing on the altogether dramatic character of the long-run impact of this magnum opus of Mises, a work that anchored everything which Mises was to write under FEE auspices, and to which the Austrian economics revival is, unquestionably, to be attributed.

The Intellectual Drama of Human Action

The term “drama” may seem out of place in regard to a serious tome on the foundations of a serious discipline. But Human Action is no ordinary work. It is a work which, at the time, was seen as written in starkly uncompromising fashion, articulating a particular worldview and a particular understanding of economics–at a time when that worldview and that understanding were thought to have been decisively nudged off the professional stage. The book came to be summarily dismissed, and subsequently ignored, as the last gasp of a dying intellectual tradition. But this judgment was grievously mistaken.

Human Action was not a work merely presenting, once again, the ideas of an earlier tradition. The book in fact represented, we must point out, a dramatic revision, a dramatic deepening of the insights of the Austrian school. Precisely when the Austrian economics tradition was widely seen as virtually dead, as material only for treatises on the history of economic thought–precisely at that time that very tradition brilliantly produced a sparkling, fresh, fundamentally new interpretation of its central tenets. Six decades later we can see how Mises’s revision and reinerpretation inspired a revival of serious academic and scholarly interest in Austrian economics. Seen from this perspective, the 1949 publication of Human Action must surely be recognized as a dramatic episode in the history of economics.

The Decline of Austrian Economics, 1932–1945

At the outset of the 1930s the Austrian school of economics was recognized on the continent, in the United Kingdom, and in the United States as an important component of contemporary academic economics. For young scholars from America visiting the European academies at that time, an invitation to present their work at a seminar at the University of Vienna was a highly valued professional achievement. In Britain, Lionel Robbins, the most prominent economist at the University of London, published his 1932 classic, An Essay on the Nature and Significance of Economic Science, replete with insights and citations the author had culled from the Austrian literature and from his visits to Vienna. In that same year Robbins invited the brilliant young Friedrich Hayek (a close associate and protégé of Mises) to join the London faculty in a prestigious professorship. And Hayek’s appearance on the British academic scene had an almost dramatic impact on British economics discussion, especially in regard to capital and monetary theory.

Yet just a few short years later, it seemed, this success had evaporated. The advance of economic theory in the ’30s (advances related in particular to the work of Piero Sraffa and John Maynard Keynes, to theories of imperfect and monopolistic competition, to the theories of socialist economics, and to sophisticated advances in mathematical economics) seemed to have left the Austrians far behind. They were seen to have been defeated by Keynes (in regard to macroeconomic issues), by Frank Knight (in regard to capital theory), and by Oskar Lange and by Abba Lerner (on the possibility of efficient socialist economic planning), and to have failed to keep pace with the exciting developments in welfare theory, econometrics, and mathematical economics. The physical dispersal of the circle of Vienna economists who had attended Mises’s famed privatseminar as a result of the political turmoil of the times certainly contributed to the impression that the Vienna tradition was no longer a live component of modern economic thought. (Mises himself had left Vienna for Geneva in 1934.) Although Mises published Nationalökonomie in Geneva in 1940 and Hayek published The Pure Theory of Capital in 1941, the economics profession paid virtually no attention to these works. By the end of World War II, with Mises a refugee in New York and without a regular academic position, the outlook for the future of the Menger-Böhm-Bawerk tradition seemed bleak indeed.

Moreover, it can be argued, certain aspects of the developments in mainstream economic theory during the ’30s–despite their overall thrust away from the path of Austrian theory–may well have seemed to erode the case for a distinctive Austrian presence. In its early years the Austrian school had gained its distinctiveness from its pioneering challenge to the dominance of the German Historical School. But by the 1930s, that war (on behalf of the legitimacy of abstract economic theory) had been decisively won; all the major schools of European economic thought were on the side of the Austrians in regard to the role of pure theory. And in 1932 Mises himself had written to the effect that all “modern” schools of economic thought subscribe to the same set of economic principles, albeit in different languages and with different modes of exposition. Mises himself, it seems clear, had (in 1932) not recognized the gulf that (as would later become amply clear!) separated the dominant Anglo-American mainstream from the economics that Mises himself identified with the Austrian tradition. So a number of Mises’s disciples (including, perhaps, Fritz Machlup, Gottfried Haberler, and Paul Rosenstein-Rodan) might be excused for thinking that what was important to the Austrian tradition was by now (the ’30s) well-accepted in mainstream economics. There was no intellectual profit, such Austrians came to believe, to be gained by insisting on the distinctiveness of the Austrian label.

The Socialist Calculation Debate and the Mises-Hayek Revolution

Yet if the immediate post-World War II scene appeared so wholly inhospitable to a distinctive Austrian economics, both Mises and Hayek were in fact working, independently but along parallel paths, toward a revolutionary reinterpretation of their intellectual heritage. (This note is, of course, focusing on Mises’s classic work of 1949. But it would be a serious mistake to fail to note that the “drama” we have seen in the appearance of Mises’s book had its parallel in the appearance of Hayek’s 1948-49 volume of essays, Individualism and Economic Order. I have elsewhere discussed the complementarity between those two contributions in “Ludwig von Mises and Friedrich von Hayek: The Modern Extension of Austrian Subjectivism,” republished as chapter 7 in my The Meaning of Market Process: Essays in the Development of Modern Austrian Economics.)

The “socialist economic calculation debate” that raged in the prewar decade had, it seems reasonable to believe, induced the revolutionary revisions in their understanding of markets. The uncritical acceptance by the economics profession of the Lange-Lerner thesis–that socialists can plan efficiently by modeling their plan after general equilibrium conditions (postulated by mainstream theorists as governing competitive market systems)–taught Mises and Hayek that their own understanding of how markets work differed fundamentally from that of their neoclassical colleagues. Mises, in particular, now realized that mainstream neoclassical theorists do not subscribe to the same understanding of the economic principles governing markets to which Austrian economists (or, at any rate, he) subscribe. Mises wrote Human Action to articulate with utmost conviction his refusal to accept that mainstream neoclassical interpretation of how markets work. Human Action was a defiant declaration of theoretic independence–a declaration spelling out explicitly what had hitherto (at least in Mises’s view) been implicit in earlier neoclassical (and particularly in Austrian) market theory. (See Frank M. Machovec’s Perfect Competition and the Transformation of Economics.)

This explicit articulation constituted a dramatic, revolutionary deepening and extension of existing Austrian theory. That it came to inspire the late-twentieth-century revival of Austrian economics, although ignored and overlooked when it was first published, is in large part what made the publication of Human Action an episode of intellectual drama.

Market Process Versus Market Equilibrium

What the socialist economic-calculation debate taught Mises, I believe, is that it is necessary, in order to promote economic understanding of what the market system achieves, to replace expository emphasis on attainable market equilibrium patterns with an emphasis on the character of the processes of equilibration. (For an exhaustive exploration tending to support this assertion, see Don Lavoie’s Rivalry and Central Planning:The Socialist Calculation.)

This latter emphasis reveals the essentially entrepreneurial character of the market process and underscores the role of dynamic competition (as against the state of so-called “perfect competition”) in this entrepreneurial process. (In Hayek’s work a parallel shift of emphasis was being articulated: namely, a replacement of a world of imagined perfect mutual knowledge by a world in which the market “learning” process tends continually to expand the scope of mutual knowledge–subject, of course, to the continual disruptions generated by exogenous changes in demand patterns, resource availabilities, and so on.) The writers who believed that central planners could emulate market efficiency had overlooked, in Mises’s view, the subtle processes of entrepreneurial discovery, through which alone one could postulate any systematic tendencies toward market equilibrium.

By focusing on the entrepreneurial process at work in markets unhampered by governmental obstacles to competitive entry, Mises offered much more than a reinterpretation of traditional price theory. His insights offered a brilliant new understanding of the meaning of market competition and thus also a revolutionary perspective on the theory of monopoly. Mises’s understanding of the market process implied not only the rejection of mainstream orthodoxy in the theory of socialism, but also far-reaching implications for the theory of antitrust policy and, more generally, for the theory of government regulatory policy.

For many years this new emphasis in Misesian-Austrian economics was completely ignored. In the immediate post-World War II decade the focus of professional attention was not on the precise formulation of the foundations of microeconomics, but on the extent to which microeconomics must, in the real world, be superseded, as a practical matter, by Keynesian macroeconomic considerations. Moreover, the increasing sophistication of mathematical economics, and its applications in the elaboration of the ambitious Walrasian general-equilibrium theoretic enterprise, combined to make Mises’s ideas seem old-fashioned, elementary, and even primitive. As is now well-known, these were decades (stretching from after the 1921 publication of Knight’s Risk, Uncertainty and Profit until William Baumol’s pioneering work almost half a century later in the resurrection of the entrepreneurial role) in which mainstream economic theory almost completely lost sight of the entrepreneur.

The Drama of the Austrian Revival

But Mises’s great work was not destined to be buried forever under this deafening silence. By the 1960s and ’70s younger students and scholars were beginning to discover Mises’s work and to recognize the sparkling freshness of his ideas. The economics profession–or at least some of its more daring and independent-minded graduate students–was at the same time beginning to take note of and to acknowledge the stultifying irrelevance of much of what was being taught in mainstream graduate departments. The downfall of Keynesian economics during the latter decades of the century focused renewed attention on the foundation of microeconomics. In Human Action more and more young scholars rediscovered ideas that enabled them to make sense of the complex world that economic science is supposed to help us understand. The downfall of the Soviet Union focused attention on the profound truths about socialism to be extracted from the Misesian foundations. That downfall taught many that the mainstream of the profession, which had for decades defended the possibility of socialist economic efficiency and had contemptuously dismissed those who had challenged that possibility, was simply and ingloriously wrong.

The modest revival of interest in the Austrian economics tradition over the past four decades has highlighted, in my opinion, the drama inherent in the first appearance of Human Action. This work was the courageous manifesto of a scholar of incorruptible integrity who, close to the seventh decade of his life, contributed a brilliantly fresh articulation of economics truths. That this work was ignored for decades and only subsequently won recognition (albeit modest) adds to the intellectual drama of this episode in the twentieth-century development of economic thought. Speculation concerning the future influence that may yet be exerted by this towering work only enhances the excitement sparked by this drama.

There Are 3 Responses So Far. »

• Comment by Palladio on 26 August 2009:
  Human Action is still absolutely as devastating to statists as it is liberating to those who “proceed ever more boldly against them.”
  I always used the excuse, “Hey, from what I already know about him, I don’t have to read it all to agree with Mises.” Within pages I realized that I should’ve read it sooner, and if you haven’t, consider yourself deprived.
• Comment by Troy on 31 August 2009:
  Mises learned a great deal from his intellectual forbears, and pushed the logic of their position as far as it could go (at least in his life). Mises built on the work of Menger and Böhm-Bawerk; he could not refrain from pursuing a libertarian position, because that is where subjectivism took him.
  He saw the failure of Historicism, Socialism and logical-positivism. The only alternative was peaceful exchange between individuals in a market economy. It is amazing that he sacrificed so much advantage for himself in pursuit of the cause for freedom from tyranny and economic oppression.
• Comment by Peter Manousakos on 2 September 2009:
  mises was an intellectual marvel. He presented his ideas without compromise and yet with total decorum and dignity toward those who challenged him. I try to accomplish only a fraction of what this great man did. I am not as erudite as he was but I do try to be a bridge between his ideas and those willing to tap into their inner instinct at self-determinism.
  God Bless you Ludvig von Mises. You have no equals but you do have friends and champions.

Freeman

By Randall G. Holcombe • September 2009 • Volume: 59 • Issue: 7 – link original article

Randall Holcombe is the DeVoe Moore Professor of Economics at Florida State University.

George W. Bush’s and Barack Obama’s “stimulus” programs will permanently transform the American economy. The market-based system that has produced unprecedented prosperity relies on profit and loss, which rewards individuals and firms that add value to the economy and penalizes those that detract value. The various stimulus programs undermine that system.

My discussion will focus on four distinct components of the 2008–09 stimulus: Federal Reserve policy, the Troubled Asset Relief Program (TARP), the Obama stimulus spending package, and the bailouts of automobile and financial firms. Because there is a temptation to stereotype political parties, labeling the Democrats the party of big government and the Republicans the party of limited government and fiscal conservatism, it is worth emphasizing that these policies were bipartisan. The Federal Reserve policies came during the Bush administration and under Fed Chairman Ben Bernanke, a Bush appointee. TARP was implemented by Bush and his Treasury Secretary Henry Paulson, and the bailouts of automobile and financial firms were initiated in the Bush administration.

My message is one of hope and change. The change is the four stimulus programs. The hope is this: I hope I am wrong about the permanent negative effects these programs will have on America.

Federal Reserve Policy

Two fundamental elements of Federal Reserve policy changed in 2008: The Fed began making loans to nonbank financial institutions and buying financial assets other than securities issued by the U.S. Treasury.

The Fed was established in 1913 primarily to lend money to member banks based on their assets that could be used to pay off the loans. Until 2008 the only firms the Fed would lend to were member commercial banks. Then the Fed began making loans to nonbank financial institutions. It did so to provide those firms with liquidity, but in doing so it broke with precedent in two ways. First, it made loans to firms that were not members of the Federal Reserve System, and second, it made loans based on questionable assets, running the risk that the borrowers might not be able to repay the loans.

The second major change was that the Fed bought financial assets not issued by the Treasury–so-called toxic assets held by private banks and other firms. The true value of the assets was questionable, so the Fed risked losses. The Fed can afford to take those losses, however. The biggest problem with this change in policy is that by buying some assets rather than others, the Fed was supporting some firms over others.

For example, it bought assets from AIG, an insurance company, to keep it from failing and ultimately has taken over ownership of AIG with an 80 percent equity interest. The Fed also purchased assets of questionable value from investment bank Bear Sterns to facilitate its acquisition by JPMorgan Chase. Meanwhile, investment bank Lehman Brothers went into bankruptcy and failed. Why save Bear Sterns but not Lehman Brothers? The Fed also initiated the Term Asset-Backed Securities Loan Facility (TALF) to make loans to holders of various types of securities. TALF borrowers do not have to be banks.

These two new policies are problematic because they constitute an “industrial policy.” I am not questioning the effects of these policies. Hindsight will provide a better answer. Rather, I am questioning the precedent that the policies create for future Fed involvement in the economy.

The Fed has now established the precedent of making loans to firms that, at its discretion, it deems worth supporting, based on assets of questionable value. That puts the Fed in the position of picking winners and losers in the economy. Similarly, by choosing to buy “toxic assets” only from some sellers it is supporting some investors while letting others fend for themselves. Again, the Fed is picking winners and losers.

Its conduct is much like what the Japanese government has done for decades. In the 1980s that government, coupled with Japanese banks, directed assets to the firms they viewed as most important to the economy. This industrial policy was hailed by many observers as giving the Japanese economy a growth advantage. In the early 1990s the booming Japanese real-estate market collapsed, much as the U.S. market did in 2006–08, and many Japanese banks were left holding assets of questionable value, collateralized with mortgages with higher face values than the mortgaged property. Rather than allow insolvent banks to fail, the Japanese propped them up, maintaining their precarious positions, and the Japanese economy has stagnated ever since.

Japanese industrial policy is no longer held in such high regard, but the Federal Reserve’s recent actions have it engaging in the same type of industrial policy. Having set that precedent, the long-run effects are likely to be pernicious. Unless the Fed firmly repudiates its industrial policy, clearly saying it made a mistake that won’t be repeated, financial firms will take the same risks, believing the Fed will step in to help if the market turns against them.

Many think that to avoid a repeat of the 2008 meltdown, the government should more tightly regulate the financial markets. President Obama has proposed a major overhaul of the regulatory apparatus.Yet financial firms are already among the most highly regulated firms in the nation, and it is implausible to think that the problems were the result of too little regulation. If anything, they were the effect of too much government involvement in those markets.

Market discipline is far superior to government regulation because firms that choose losing strategies will and should be allowed to fail. This would give every firm an incentive to choose profitable strategies and would weed out those that do not. The Fed’s industrial policy moves in the opposite direction, so more regulation would change nothing.

TARP

In September 2008 Bush Treasury Secretary Henry Paulson announced that the financial markets had frozen. Lending had ground to a halt, he said, and banks would not even lend to each other because their “toxic assets” called into question their solvency. Paulson asked Congress to pass emergency legislation providing him $700 billion to buy up those assets, creating liquidity in the financial sector so that normal lending activities could resume. TARP, approved on October 3, 2008, provided the money and gave the secretary the discretion to spend it as he saw fit.

Paulson claimed the money was needed immediately to prevent a collapse of the financial system. However, none of the TARP money went toward buying toxic assets. Instead the Treasury used the money to purchase equity interest in banks–that is, to partially nationalize many banks.

Paulson also pressured the nine largest banks to take the TARP money whether they needed it or not because if only some took the money, they would be stigmatized as weak, which could further undermine their financial positions. So now the federal government is the owner of a substantial share of the American banking industry.

Some of the strings attached to that money did not appear until after the government already bought into those banks. Obama and Treasury Secretary Timothy Geithner wanted to regulate the pay of bank executives, claiming that the federal government, as part-owner of those banks, should limit excessive pay. As a result, many recipients of TARP money are anxious to repay it and to buy back the stock the federal government now owns. But the federal government has put roadblocks in the way of banks that want to get out from under the burdens that come with TARP. The government likes that control. One fear that Geithner expressed is that if some banks escape the strings attached to TARP, they might raise executive pay, leading the better bank execs to leave the TARP-encumbered institutions for the higher pay at those banks that are free of TARP. (Some banks have started to pay the money back.)

The Obama Stimulus Package

Immediately after his election, Obama pushed hard to get Congress to pass a nearly $800 billion spending bill to stimulate the economy, which some claimed was mired in the worst recession since the Great Depression. While history will judge whether the recession was that severe, the rhetoric served to pass the bill. However, it is difficult to identify the features that make it a stimulus bill rather than just a big spending bill. In fact, the spending is largely for items Obama campaigned on. Much of it will occur after 2009 and so does not qualify as a stimulus for a depressed economy.

A lot of the alleged stimulus money was directed toward sectors that were holding up relatively well during the recession, such as healthcare and state and local governments. Government employment was steadier than private-sector employment when the bill was passed and can be expected to do even better with the money. Directing money toward relatively strong sectors is hardly the best way to stimulate the economy, even though it does further the goals that Obama campaigned on when he was running for president.

Even the economic analysis underlying the stimulus program can be called into question. The Keynesian idea is that by running budget deficits and increasing government spending, aggregate demand will be increased, pushing the economy toward prosperity. Of course, to spend that money, the government must first borrow it from elsewhere in the economy. There’s no free lunch. Moreover, if increasing government spending and running large budget deficits really led to prosperity, the economy would have been in nirvana by 2008. When Bush was elected in 2000 the federal budget was in surplus, and for Bush’s eight years government spending and the budget deficit continually increased, which by Keynesian logic should have produced a robust and maybe overheated economy, not an economy mired in recession. The Obama stimulus package was simply a continuation, on a much grander scale, of the eight years of Bush fiscal policy, a policy of continually increasing government spending and continually increasing budget deficits.

The Obama stimulus package was really just a big spending bill that did not offer much stimulus, but that will saddle the economy with bigger government from now on, hindering economic growth, slowing the recovery, and reducing prosperity

Bailouts

In addition to bailing out many failing banks and other financial firms, Bush and Obama also used taxpayer money to bail out Chrysler and General Motors. Bear in mind that when Obama campaigned for office and gasoline prices spiked above $4 a gallon, he advocated a windfall profits tax on oil companies. That idea fell by the wayside as prices fell in 2009, but these two policies provide a chilling example of how to undermine the very foundation of the market: When companies are successful and profitable–like oil companies in 2008–single them out for extra taxes, and when companies are unsuccessful and unprofitable–like auto companies in 2009–single them out for government subsidies.

One need understand only the most basic of economic principles to see how pernicious these policies are. If firms in an economy can take resources and combine them into products that are more valuable than the resources they started with, they are adding value to the economy and should be rewarded. In a market economy they are–through profits. If firms take resources and combine them into products that are less valuable than the resources they started with, they are harming the economy and they should be penalized. In a market economy they are–through losses. Profit and loss are essential to the operation of a market economy and provide the signals and incentives that have led to the remarkable economic progress that has characterized America (hampered as the economy is by government).

The bailouts began as loans to Chrysler and General Motors, which the firms had no chance of being able to pay back. The administration’s way of addressing this has been to negotiate to convert those loans into an equity interest in the firms, thus nationalizing the automobile companies in a manner similar to how TARP has nationalized banks. The federal government carries a big stick and is in a position to use that stick to its advantage. Under Obama’s bankruptcy plan for General Motors, the government will control 60.8 percent of the company, with 17.5 percent for a United Auto Workers trust fund. Bondholders could wind up with a 10 percent equity interest in the company.

On the surface this appears quite unfair to bond holders, whose bonds had a face value of $27 billion. Some bondholders objected, rightly saying that the claims of holders of secured debt should come before the claims of the firm’s employees in any bankruptcy proceeding. But while some bondholders objected, many did not–because they were recipients of TARP money and therefore effectively under government control. TARP recipients JPMorgan Chase, Citigroup, Morgan Stanley, and Goldman Sachs owned about 70 percent of Chrysler’s debt. The government supported them with bailout money and then bullied them to give up their assets to the UAW.

The pernicious consequences go well beyond these transactions. How will this affect other union-heavy companies when they try to raise money in the bond market? The precedent is set for employees to move ahead of secured-debt holders in bankruptcy proceedings. Debt finance will become much more difficult for firms with unionized labor forces. One critic argued that the favoring of the UAW over bondholders amounted to shaking down lenders for the benefit of Obama’s political supporters, which is corruption and abuse of power. We would have done better to let the market and the bankruptcy court determine the fate of Chrysler and GM.

Fundamental Transformation

When we step back and look at the bipartisan efforts to rescue the economy from recession, those changes represent a fundamental transformation in the nature of the American economy. In the longer run Obama wants to substantially increase government’s role in health care, which is already largely in government’s hands with Medicare, Medicaid, SCHIP (health insurance for children), and the regulations that govern healthcare providers and pharmaceutical companies. Obama has also stated his intention to further regulate the energy industry to limit emissions and to shift production toward renewable energy sources. His cap-and-trade initiative would impose billions in costs on the economy and would effectively dictate the technologies by which energy is produced.

Few commentators are looking at the long-run implications of these changes, focusing instead on how much the proposed Obama deficits will increase the national debt or on how the Federal Reserve’s increases in the monetary base will impact inflation in coming years.

Déjà Vu All Over Again

I have described the changes. My hope is that I am overestimating their long-run impact. Indeed, the nation has found itself in similar situations before. In the 1970s we faced economic stagnation, rising unemployment, and rising inflation, which soared into the double digits. There were government-mandated price controls and frequent lines at the gas pumps as a result of shortages caused by those price controls. There was every reason to be pessimistic, but in the 1980s the Reagan administration turned many of those things around. Tax rates were slashed; the price controls were abandoned; and a more deregulated  economy led to two decades of growth and prosperity. At least some of the credit for this, as well as much of what happened in Margaret Thatcher’s England, must be attributed to the power of ideas emanating from Milton Friedman and other free-market thinkers.

Similarly, in the 1940s socialism seemed such an attractive alternative to American capitalism that F. A. Hayek wrote The Road to Serfdom, arguing that socialism was that road, and Joseph Schumpeter, in Capitalism, Socialism, and Democracy, lamented that in democracies people could vote away their freedoms and that the people who benefited the most from a free economy were unwilling to defend it. Yet America prospered. When the Berlin Wall collapsed in 1989, followed by the demise of the Soviet Union in 1991, there was every indication that everyone would recognize that market allocation of resources is better for everyone than government planning.

Now we stand, two decades later, on the brink of the most significant erosion of the market economy since the New Deal, with relatively few dissenters. In a few short centuries markets have taken much of the world’s population from subsistence to remarkable prosperity and continuing economic progress. Are we really ready to abandon that system and replace it with something similar to what resulted in the collapse of the Soviet Union?

England’s regime change in 1688—soon called “glorious”—was a revolution with a difference

AUGUST 31, 2009

Wall Street Journal - link to original

By WILLIAM ANTHONY HAY

Samuel Pufendorf, a 17th-century German historian, described the English people as “having been ­always inclined to rebellion and intestine commotion.” But England’s regime change in 1688—soon called “glorious”—was a revolution with a difference. Instead of overthrowing the existing order in violent upheaval, it put “government upon its ancient and proper basis, which the measures of a mad bigot had almost ­destroyed.” The “mad bigot” was, in this case, James II, the Stuart king (and a Catholic) who was deposed in ­favor of William of Orange, a Protestant from the Dutch Republic. Edmund Burke famously contrasted England’s balance of change and continuity in 1688 with the ­ferocity in France a century later.

In “1688: The First Modern Revolution,” Steve Pincus challenges this received account to argue that the ­Glorious Revolution marked a much greater break with history than Burke realized—and proved to be an ­emblem of the West’s future. James II, Mr. Pincus notes, sought to extend state power at the expense of Parliament and the privileges of local communities. James’s adversaries preferred the dynamism of commerce; they believed that wealth sprang from the limitless striving of human endeavor rather than the finite availability of land. France under Louis XIV provided James with a pattern for absolutism; the Dutch Republic provided his opponents with a commercial ideal. The Glorious ­Revolution is often seen as a clash ­between ­”popery”—the term for authoritarian ­Catholicism—and ­ancient English liberties. But Mr. Pincus persuasively describes it as the collision of two ideas about the state in society. In a sense, he implies, we are all Dutchmen now.

In the decades before the Glorious Revolution, Mr. Pincus observes, Britain’s economy had grown exponentially, thanks to ever more productive manufacturing and ever more ­expansive overseas trade. Cities grew, drawing workers away from the countryside. Britain’s landed ­interests did not lose out: Profits attached them to the new economy in a way that was not true for elites on the Continent. By 1680, ­England had become the first consumer society. And it possessed a thriving public sphere that ­anticipated ­William Blackstone’s later ­description of the English as a polite and commercial people.

Such was the world that James II inherited. Although a Catholic ruling a Protestant realm, he had broad ­support when he became king in 1685, and the Duke of Monmouth’s attempt to overthrow him then won little support. Most Englishmen backed James, and little ­wonder. The civil war, not to mention Cromwell’s ­authoritarian interregnum, was within living memory: An Englishman might well have thought that his country had more to lose from a regime of Protestant ­enthusiasts than from a Catholic king pledged to defend English liberties and even the Church of England. So what changed to bring about James’s downfall?

James turned out to be a revolutionary, Mr. Pincus suggests, working to transform England’s ­government into a centralized bureaucracy. With his standing army, his subservient judges and his efforts to control ­parliamentary elections, James extended state authority deep into English society. The idea was to ­establish ­England as a great power, beholden to state subsidies for its commercial wealth and ready to pursue yet more imperial conquest. Given such ambitions, Mr. Pincus says, James’s willingness to promote religious toleration was a pretext for favoring Catholicism as a faith more conducive to royal power—and for exalting the king’s authority by reducing the pope’s. Even English Catholics found this idea troubling.

France served as James’s model. As Mr. Pincus ­reminds us, prolonged war—and the financial burden of sustaining large armies—had created a crisis for ­Continental Europe in the decades before the Glorious Revolution: a Hobbesian war of all against all. Louis XIV solved the crisis by building a centralized, bureaucratic state and making France the strongest power in Europe. At the same time, he turned the French nobility into courtiers and crushed all rival centers of power. ­Government became the king’s secret rather the public’s trust.

What James II took as a model, though, his countrymen feared as a threat. Eventually a broad section of the English elite, and a good part of the English populace, repudiated James and his absolutism in favor of his daughter, Mary, and her husband, William. When ­William landed in England with a Dutch army, he faced little opposition, and James soon fled into exile. The revolution, if glorious, was not entirely bloodless, ­especially in Scotland and Ireland, where the Catholic Stuart claim was especially strong. But at least there was no clash of armies or civil war. A relatively peaceful ­transition secured English liberties and a ­facade of royal continuity—Mary was a Stuart, after all.

Unanimity quickly faded, inevitably, as Whigs pushed a reform program that included establishing the Bank of England and borrowing money from private sources for Continental war. Tories balked at such changes, ­believing them to favor metropolitan interests over the public good. Behind the contest over England’s ­future—that is, between the French and Dutch ­models—lay a commitment to England’s past that Mr. Pincus understates.

The next several decades would see a polarizing of parties within England, but a quarrel among competing interests, rather than rule by ­decree, is what the ­Glorious Revolution aimed to make possible. The English predilection for “intestine ­commotions” checked James II’s plan to transform ­England absolutely while ­hastening the decentralized, commercial transformation already under way. John Locke noted that “people are not so easily got out of their old forms,” preferring the imperfect system they know to a new one they don’t. Rulers who ignore that lesson—as James II ­discovered—do so at their peril.

Mr. Hay, a historian at Mississippi State University, is the author of “The Whig Revival, 1808-1830.”