G-20 accounting rules, not bank bonuses, put the system at risk.

Wall Street Journal – September 24, 2009 – link to original

By JEFFREY FRIEDMAN

The developed world’s financial regulators and political leaders have, as one, decided what caused the financial crisis: the compensation systems used by banks to reward their employees. So the only question to be discussed at the G-20 summit that begins today in Pittsburgh is how draconian the restrictions on banker compensation should be.

The compensation theory is a familiar greed narrative: Bank employees, from CEOs to traders, knowingly risked the destruction of their companies because their pay rewarded them for short-term profits, regardless of long-term risks. It’s conceivable this theory is true. But thus far there is no evidence for it—and much evidence against it.

For one thing, according to Rene Stulz of Ohio State, bank CEOs held about 10 times as much of their banks’ stock as they were typically paid per year. Deliberately courting risk would have put their own fortunes at risk. Richard Fuld of Lehman Brothers reportedly lost almost $1 billion due to the decline in the value of his holdings, while Sanford Weill of Citigroup reportedly lost half that amount.

In the only scholarly study of the relationship between banker pay and the financial crisis, Mr. Stulz and his colleague Rüdiger Fahlenbrach show that banks whose CEOs held a lot of bank stock did worse than banks whose CEOs held less stock. (The study was published in July on SSRN.com.) Another study by compensation consultant Watson Wyatt Worldwide in July shows a negative correlation between firms’ Z scores—a measure of their risk of bankruptcy—and their use of such widely criticized practices as executive bonuses, variable pay and stock options. These studies suggest that bank executives were simply ignorant of the risks their institutions were taking—not that they were deliberately courting disaster because of their pay packages.

Ignorance of risk is also suggested in a study by Viral V. Acharya and Matthew Richardson of New York University (just published in the journal Critical Review). Their research shows that 81% of the time the mortgage-backed securities purchased by bank employees were rated AAA. AAA securities produced lower returns than the AA and lower-rated tranches that were available. Bankers greedy for high returns and oblivious to risk would have bought BBBs, not AAAs.

Even more relevant to the question of culpability in the financial system’s crisis is why banks were buying mortgage-backed securities at all.

Commercial bank capital holdings are governed by the Basel regulations, which are set by the financial regulators of the G-20 nations. In 2001, U.S. regulators enacted the Recourse Rule, amending the Basel I accords of 1988. Under this rule, American banks needed to hold far more of a capital cushion against individual mortgages and commercial loans than against mortgage-backed securities rated AA or AAA. Similar regulations, contained in the Basel II accords, began to be implemented across the other G-20 countries in 2007. The effect of these regulations was to create immense profit opportunities for a bank that shifted its portfolio from mortgages and commercial loans to mortgage-backed securities.

Bankers were of course seeking profits by purchasing mortgage-backed securities, but the evidence is that they thought they were being prudent in doing so. They bought AAA instead of more lucrative AA tranches, and they bought credit-default-swap and other insurance against default. None of this can be explained unless, on balance, the banks’ management and risk-control systems kept in check whatever incentives to ignore risk had been created by the banks’ compensation systems.

Banks did not behave uniformly. Citigroup bought as many mortgage-backed securities as it could; banks such as J.P. Morgan Chase did not. Were incentives at work? Yes. But all bankers faced the same artificially created incentive to buy mortgage-backed securities. Most bankers seem to have agreed with the regulators that the profit opportunity created by the regulations outweighed any risk in these securities, especially when they were rated AAA. But some bankers, like Morgan’s Jamie Dimon, disagreed.

That type of disagreement, otherwise known as “competition,” is the beating heart of capitalism. Different enterprises compete with each other by pursuing different strategies. These strategies encompass everything an enterprise does—including how it manages and pays its employees.

At bottom, all the practices of an enterprise are tacit predictions about which procedures will bring the most reward and which ones will avoid excessive risk. Accurate predictions bring profits and survival; mistaken predictions bring losses and bankruptcy. But nobody can know in advance which predictions are right. By allowing different capitalists’ fallible predictions to compete, capitalism spreads a society’s bets among a variety of different ideas. That, not the pursuit of self-interest, is the secret of capitalism’s achievements.

To be sure, capitalists’ different ideas are all, in the end, about how to gain profit. That’s why incentives matter. But what matters even more are diverse predictions about where profits—and losses—are likely to be found. For this reason, herd behavior is a danger to capitalism, if the herd bets wrong. But herd behavior is imposed on capitalists every time a regulation is enacted—and regulators, being as human as bankers, can be wrong.

Regulations homogenize. The Basel rules imposed on the whole banking system a single idea about what makes for prudent banking. Even when regulations take the form of inducements rather than prohibitions, they skew the risk/reward calculations of all capitalists subject to them. The whole point of regulation is to make those being regulated do what the regulators predict will be beneficial. If the regulators are mistaken, the whole system is at risk.

That was what happened with the G-20’s own Basel rules. Now the G-20 has decided to blame the crisis on bank compensation systems, which it proposes to homogenize just as it had previously homogenized bank capital allocation. What has not been explained is why we should trust that the G-20’s regulations won’t be mistaken once again.

Mr. Friedman is a visiting scholar in the government department at the University of Texas, Austin, and the editor of the journal Critical Review, which has just published a special issue on the causes of the financial crisis.

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).

After the Fall
by Jeffrey Friedman

The Weekly Standard
09/21/2009, Volume 015, Issue 01 – link to original

A Failure of Capitalism
The Crisis of ‘08 and the Descent into Depression?by Richard A. Posner?Harvard, 368 pp., $23.95

As we would expect from Richard Posner, the distinguished and polymathic writer, law professor, and circuit court judge, his book on the financial crisis is thoughtful, rigorous, and balanced.

It has also been hailed as “an event” by some on the left, such as Nobel laureate economist Robert Solow, in whose eyes it marks the conversion of Posner, a former free-marketeer (albeit no ideologue), to the tenets of progressive common sense. For this volume claims that, since 2008, we have been experiencing “a failure of capitalism,” and Posner’s takeaway point is that “we need a more active and intelligent government to keep our model of capitalism from running off the rails.”

Strictly speaking, Posner is right: We would need an active and intelligent government to keep the model of capitalism used by Posner from running off the rails. But in truth, Posner’s model tells us little about the real world factors that produced the financial crisis. And once we take account of facts that Posner overlooks, it seems that the cause of the crisis was not the “laissez-faire economic regime” that Posner imagines might have been responsible, but the legal regulations that actually shaped the behavior of our banks.

Many different economic models can explain what might have caused the crisis. But readers will want to know what actually did cause the crisis. Posner tells us much about the economics of depressions in the abstract, the economics of housing in the abstract, the economics of banking in the abstract, and the economics of corporate compensation in the abstract. All of this economic theory is valuable; but in principle, most of it could have been written in 1999, 1989, or 1939–any time after Keynes’s General Theory appeared in 1936. (Posner is a recent convert to Keynes’s macroeconomics.) What A Failure of Capitalism lacks is evidence showing that any of these theories explains the crisis of 2008.

The heart of Posner’s case against “capitalism” is the following theory, which has been embraced by no less than the president of the United States: Perverse incentives, created by banks’ executive-compensation systems, caused the crisis. As Posner puts it, bank executives’ pay was structured so that bankers would think to themselves,

when the bubble bursts you’ll be okay because you have negotiated a generous severance package with your board of directors. .??.??. The board will have hired a compensation consultant who will have advised generosity in fixing the compensation of senior management and as part of that largesse will have recommended that senior executives receive a fat severance package (a “golden parachute”) if they are terminated.

Moreover, according to Posner, subordinate employees had essentially the same incentives as top executives. Subordinates received bonuses for making money but were not penalized for losing it.

The theory is perfectly logical, and it might explain the crisis, but Posner does not show that it actually does explain the crisis.

For one thing, he doesn’t show that all banks used the same compensation system and paid the same bonuses for risk-taking. There are, in fact, differences among banks’ compensation systems, so Posner might have been able to test his theory by seeing if the banks that took more risks were the ones that provided bigger golden parachutes or paid higher bonuses. But Posner treats “banks” as a homogeneous lump. This makes it difficult for him to check his theory against reality.

Moreover, despite having written the bible of the “law and economics” movement–his 1973 treatise Economic Analysis of the Law–Posner tells us too little about the many laws that regulate real world capitalism, which surely must have affected bankers’ behavior. For instance, some of the investment banks that avoided mortgage-backed securities, such as Brown Brothers Harriman, are structured as partnerships; this encourages prudence because each partner has a lot at stake if the firm goes under. As the huge law firms demonstrate, partnerships need not be small–there can be hundreds or thousands of partners. But Richard Rahn has pointed out that the tax code–not capitalism–discourages partnerships in banking and other industries.

A Failure of Capitalism contains a devastating rebuttal of widely popular “irrational exuberance” explanations of the crisis. This leaves Posner to solve the puzzle of why rationally self-interested bankers seemed to ignore risk. But in the real world of contemporary capitalism, rational self-interest does not conform to the patterns it would follow under “a laissez-faire economic regime.” Instead, rational self-interest follows the tens of thousands of pages of the tax code; it follows the millions of pages of the regulatory code. And these tortuous legal pathways are largely overlooked by Posner.

Thus, he argues that the most important risky behavior prompted by the banks’ compensation structures was that bankers increased their leverage ratios. But banks’ leverage ratios are regulated by law, and this law, unmentioned by Posner, was probably the main cause of the crisis.

A bank’s leverage ratio consists of its capital divided by its assets, and its assets include its loans, such as mortgages. We usually think of loans as debits because most of us are borrowers. But to a lender, a mortgage (for instance) is an asset because it is supposed to be paid back. All assets are risky in an uncertain world, but a loan is especially risky, since any number of factors might cause a borrower not to pay it back. By increasing the ratio of mortgages and other loans to its capital, a bank is taking on more risk, even if the mortgages themselves aren’t riskier–and subprime mortgages were riskier.

“Banks wanted to make risky mortgage loans,” Posner writes, but this seemingly irrational behavior was mainly due, he explains, to the bankers’ rational-self interest: They were being paid to ignore risk. But since Posner homogenizes “banks” into an undifferentiated mass, he cannot tell us which bankers are supposed to have known they were taking excessive risks. And they would have had to know that if they were, as the executive-compensation theory maintains, deliberately ignoring risk in pursuit of a bigger bonus.

Nor can Posner tell us whether all banks “leveraged up” to the same degree (they didn’t) or made subprime loans to the same degree (they didn’t). If all bankers had essentially the same incentives because of the way they were paid, what could explain their actually heterogeneous behavior?

Meanwhile, Posner does not discuss the legal rules that govern banks’ leverage ratios in the real, far-from-laissez faire world. These regulations go under the name of the “Basel accords” after the Swiss town where, in 1988, the developed world’s central bankers agreed to them. The Basel accords set a ceiling on banks’ leverage by regulating the amount of capital banks must hold–and, crucially, the type of assets they may hold.

The Basel accords required a minimum level of 8 percent capital for lending banks (as opposed to investment banks) yielding a 12.5-to-1 ratio of assets to capital–once assets were adjusted for the riskiness that the Basel regulators saw in different types of assets. For instance, they saw zero risk in cash but 50 percent risk in mortgages, so a bank needed to hold no capital against cash but 4 percent capital against mortgages. To the Basel accords, each country’s regulators were free to add their own fillips.

Ten years after the Basel accords were implemented in the United States, the American regulators amended them. Under the “Recourse Rule,” adopted in 2001, mortgage-backed securities were risk-weighted at 20 percent, requiring 60 percent less capital than actual mortgages required. The only qualification was that the mortgage-backed securities had to be rated AA or AAA by one of the three “rating agencies,” Moody’s, Standard and Poor’s, or Fitch.

These three private companies had a legally protected oligopoly. The oligopoly found a way to give AA and AAA ratings to slices of mortgage-backed securities that consisted entirely of subprime mortgages. Thus, the Recourse Rule created an incentive for lending banks to “leverage up” by originating as many mortgages as possible, selling them for securitization to an investment bank such as Bear Stearns, and buying them back as part of an AA- or AAA-rated security. Thus could a bank increase its lending power–hence its potential profitability–by 60 percent per transaction.

Would this have been “normal business activity in a laissez-faire economic regime,” as Posner contends? No. But it was consistent with the rational self-interest of bankers under the amended Basel accords. The Recourse Rule did not force anyone to leverage up; but it richly rewarded those bankers who–like the regulators themselves–saw little risk in leveraging up by buying highly rated mortgage-backed securities.

The Recourse Rule, however, gave banks the same ability to increase their leverage whether they bought AA-rated or AAA-rated securities. If the reason that “banks” were leveraging up in the first place is, as Posner maintains, that they cared only about profits and ignored possible losses (because their executives and employees were compensated for short-term profits, regardless of the long-term risks), then banks should have bought AA securities every time: The AAs paid more than the AAAs–precisely because they were riskier.

But in fact, only 19 percent of the mortgage-backed securities held by the banks were rated AA or lower. Eighty-one percent were rated AAA, yielding less short-term profit because they carried less risk. This one fact may refute the executive-compensation theory all by itself.

Another inconvenient fact: If banks were seeking to maximize their leverage because they were heedless of the risk, then they should have driven their capital holdings down to the minimum allowed by law: 8 percent for “adequately capitalized” banks; 10 percent for “well-capitalized” banks, to which American regulators give privileges that most banks need. But in December 2007, as the crisis was getting underway, the average capital level of all American banks combined was roughly 13 percent–30 percent higher than the legal minimum.

This level had indeed declined from previous levels, so it is true that, in the aggregate, “banks” had leveraged up, just as the Recourse Rule would have led us to expect. The banks’ greater leveraging, however, cannot have been caused by the general indifference to risk blamed by Posner since, if there were any such indifference, the banks’ average capital ratio would have been 30 percent lower than it actually was.

These facts dovetail with a recent study by René Stulz and Rüdiger Fahlenbrach showing that banks with CEOs who held a lot of stock in the bank did worse than banks with CEOs who held less stock. Whatever mistakes they made, the CEOs were not making them deliberately, contrary to the executive-compensation theory.

What seems to have happened, then, is not that banks ignored risk. Rather, to the extent that generalizations can be made, banks tried to avoid “excessive” risk–but different bankers had different ideas about what was excessively risky and what wasn’t. Some bankers, such as those at Citigroup, saw little risk in leveraging up: Its capital level at the end of 2007 was 10.7 percent, barely above the legal minimum. Others, such as those at JPMorgan Chase, saw greater risk: Its capital level was 12.57 percent, and it avoided subprime securities despite the incentives offered by the Recourse Rule, because even those incentives were not large enough to compensate for the risk perceived by the Morgan bankers.

“Banks” did not homogeneously leverage up by buying mortgage-backed securities, heedless of the risk; their willingness to seize the rewards offered by the Recourse Rule varied according to their differing perceptions of the risk involved.

This thesis is borne out by two sensationalized but fact-stuffed books about Bear Stearns and JPMorgan: William D. Cohan’s House of Cards and Gillian Tett’s Fool’s Gold. From Cohan we learn that neither the Bear Stearns executives nor the subordinates whose actions brought down the bank had any idea that they were taking “excessive” risks. From Tett (whose book appeared too late for Posner to consider) we learn that the conservative risk perceptions of JPMorgan president Jamie Dimon and his subordinates counteracted the very real temptation to leverage up.

Was Dimon less rationally self-interested than Bear Stearns president Jimmy Cayne? No, but Cayne and his subordinates didn’t see the same risks that Dimon and his subordinates saw, or thought they saw, in AAA-rated mortgage-backed securities.

Under any version of capitalism, laissez faire or regulated, the rational pursuit of self-interest characterizes the successful companies, like JPMorgan. But it also characterizes the failures, like Bear Stearns and Citigroup. Therefore, a realistic “model” of capitalism has to contain more than rational self-interest if it is going to explain capitalists’ mistakes–and in the financial crisis of 2008, there were plenty of those.

If we are going to understand these errors, we have to bear in mind that capitalists have different ideas about how to pursue their self-interest–including different ideas about how to avoid undue risk. Unless capitalists’ ideas about these matters were different, there’d be no economic case for competitive capitalism. Competition is the only way to sort out the good ideas from the bad ones. The good ideas help a company survive and prosper; the bad ones cause losses or bankruptcy.

If anybody really knew in advance which ideas were good and which were bad, there’d be no point testing the ideas against each other through competition. But the hidden premise of banking regulations such as the Basel rules is that regulators can, indeed, know such things in advance. This premise puts the regulators in the position of trying to be omniscient judges of what constitutes “prudent” behavior. In 2001, the American regulators had decided that it would be more prudent for banks to hold AA or AAA rated mortgage-backed securities than to hold actual mortgages, so banks that made this switch were rewarded with 60 percent more potential profits.

Among fallible human beings, of course, what constitutes prudence is a matter of legitimate dispute. But unlike capitalists’ ideas about prudence, regulators’ ideas cannot compete against each other to sort out the bad from the good: Only one regulation at a time is the law of the land. So if we see a high proportion of capitalist enterprises making the same mistakes, as we do when we look back at the run-up to the crisis, we might suspect that a homogenizing force–such as the incentives imposed on all banks by mistaken regulations–were at work.

If one seeks the cause of a systemic problem, a logical place to look is among the laws that govern the system as a whole. Individual capitalists, of course, make mistakes all the time; we discover this when they go broke. And being human, they are as susceptible as anyone to herding around the conventional wisdom of their time and place, which is so often wrong. Thus, a systemic “failure of capitalism” is possible: In a “laissez-faire economic regime” capitalists could all make the same mistake. This is what Posner proves, and proves well.

But in the real world of 2008, the systemic tendency toward mistakes seems to have been caused not by any risk-insensitivity inherent to capitalism or to banking, nor by the banks’ executive-compensation systems–which, of course, are also subject to competition–but by the skewed incentives produced by particular regulations imposed on capitalism. The American amendments to the Basel rules created incentives for capitalists to buy mortgage-backed securities, tipping the risk-benefit calculations of many bankers toward what turned out to be disastrously imprudent behavior.

The regulators were human, and it turned out that their ideas about prudent behavior were wrong. Now the world is paying for their mistakes.

Jeffrey Friedman, a political scientist at the University of Texas, is the editor of Critical Review.

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

The data show government transfers and rebates have not increased consumption at all.

Wall Street Journal –  SEPTEMBER 17, 2009  - link to original article

By JOHN F. COGAN, JOHN B. TAYLOR AND VOLKER WIELAND

Is the American Recovery and Reinvestment Act of 2009 working? At the time of the act’s passage last February, this question was hotly debated. Administration economists cited Keynesian models that predicted that the $787 billion stimulus package would increase GDP by enough to create 3.6 million jobs. Our own research showed that more modern macroeconomic models predicted only one-sixth of that GDP impact. Estimates by economist Robert Barro of Harvard predicted the impact would not be significantly different from zero.

Now, six months after the act’s passage, we no longer have to rely solely on the predictions of models. We can look and see what actually happened.

Consider first the part of the package that consists of government transfers and rebates. These include one-time payments of $250 to eligible individuals receiving Social Security, Supplemental Security Income, veterans benefits or railroad retirement benefits–and temporary reductions in income-tax withholding for a refundable tax credit of up to $400 for individuals and $800 for families with incomes below certain thresholds. These payments, which began in March of this year, were intended to increase consumption that would help jump-start the economy. Now that a good fraction of these actions have taken place, we can assess their impact.

The nearby chart reviews income and consumption through July, the latest month this data is available for the U.S. economy as a whole.

Consider first the part of the chart pertaining to the spring of this year and observe that disposable personal income (DPI)–the total amount of income people have left to spend after they pay taxes and receive transfers from the government–jumped. The increase is due to the transfer and rebate payments in the 2009 stimulus package. However, as the chart also shows, there was no noticeable impact on personal consumption expenditures. Because the boost to income is temporary, at best only a very small fraction was consumed.

This is exactly what one would expect from “permanent income” or “life-cycle” theories of consumption, which argue that temporary changes in income have little effect on consumption. These theories were developed by Milton Friedman and Franco Modigliani 50 years ago, and have been empirically tested many times. They are much more accurate than simple Keynesian theories of consumption, so the lack of an impact should not be surprising.

Indeed, one need not have looked any further than the Bush administration’s Economic Stimulus Act of 2008 to find plenty of evidence that temporary payments of this kind would not jump-start consumption. That package made one-time payments and rebates to people in the spring of 2008, but, as the chart shows, failed to stimulate consumption as had been hoped. Some argued that other factors such as high oil and gasoline prices caused consumption to fall during this period and that consumption would have been even lower without the stimulus, but no significant impact of these rebates is found even after controlling for oil prices.

Consider next the government-spending part of the stimulus package. The Obama administration points to the sharp reduction in the decline in real GDP from the first to the second quarter of 2009 as evidence that the package is working. Economic growth was minus 6.4% in the first quarter and minus 1% in the second quarter, so the implied improvement of 5.4 percentage points is indeed big. But how much of that improved growth rate can be attributed to higher government spending due to the stimulus? If we rely on predictions of models, again we see disagreement and debate. According to our research with modern macroeconomic models, the increase in government spending would add less than a percentage point, a relatively small portion. The model predictions cited by the administration’s economists suggest a much larger portion: two to three percentage points. Prof. Barro’s model predicts zero.

So let’s look at the data on the contributions of government spending and other components of GDP to the 5.4 percentage-point improvement. By far the largest positive contributor to the improvement was investment–which went from minus 9% to minus 3.2%, an improvement of 5.8% and more than enough to explain the improved GDP growth. Investment by private business firms in plant, equipment and inventories, rather than residential investment, were the major contributors to the investment improvement. In contrast, consumption was a negative contributor to the change in GDP growth, because consumption growth declined following the passage of the stimulus package.

One is hard put to see what specific items in the stimulus act could have arrested the decline in business investment by such a magnitude. When one looks at monthly investment indicators–such as new orders for nondefense capital goods–one sees a flattening out starting early in the first quarter of 2009, well before the package went into operation. The free fall of investment orders caused by the financial panic last fall stabilized substantially by January, and investment has remained relatively stable since then. This created the residue of a very large negative growth rate from the fourth quarter of 2008 to the first quarter of 2009, and then moderation from the first quarter to the second of 2009. There is no plausible role for the fiscal stimulus here.

Direct evidence of an impact by government spending can be found in 1.8 of the 5.4 percentage-point improvement from the first to second quarter of this year. However, more than half of this contribution was due to defense spending that was not part of the stimulus package. Of the entire $787 billion stimulus package, only $4.5 billion went to federal purchases and $17.7 billion to state and local purchases in the second quarter. The growth improvement in the second quarter must have been largely due to factors other than the stimulus package.

Incoming data will reveal more in coming months, but the data available so far tell us that the government transfers and rebates have not stimulated consumption at all, and that the resilience of the private sector following the fall 2008 panic–not the fiscal stimulus program–deserves the lion’s share of the credit for the impressive growth improvement from the first to the second quarter. As the economic recovery takes hold, it is important to continue assessing the role played by the stimulus package and other factors. These assessments can be a valuable guide to future policy makers in designing effective policy responses to economic downturns.

Mr. Cogan, a senior fellow at the Hoover Institution, was deputy director of the Office of Management and Budget under President Ronald Reagan. Mr. Taylor, an economics professor at Stanford and a Hoover senior fellow, is the author of “Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis” (Hoover Press, 2009). Mr. Wieland is a professor of monetary theory at Goethe University in Frankfurt, Germany.

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.)

Coming to PBS – Oct 8

The Power of the Poor – link to original posting at Free to Choose

with Hernando de Soto

To those who watch television in the developed world, there doesn’t seem to be a better system on earth than the capitalist system. We are experiencing the longest economic expansion in modern history.  Soviet Communism has been defeated.

But make no mistake, as we will demonstrate in this program, capitalism is surprisingly vulnerable. The moment of capitalism’s greatest triumph is the moment of its greatest crisis, its “Moment of Truth.” In fact, capitalism is not working for the vast majority of humanity that lives on the planet. Two thirds of the world’s population has been locked out of the global economy, forced to operate outside the rule of law, they have no legal identity, no credit, no capital, and thus no way to prosper. To unlock The Power of the Poor is to change the world.  If we fail, these people will turn against capitalism as they have turned against other failed economic systems, and that could make for a very difficult, violent time.

Filmed on location from Latin America to Africa, The Power of the Poor will demonstrate how free markets, individual freedom and especially the right to property can transform the poor into the most powerful resource in the world.  At its heart is the potential triumph of capitalism as a system.

by Joseph Y. Calhoun, III -

Sep 13th, 2009 - Alhambra Investment – link to original article

From the NY Times, June 28: “At a time when the economy worldwide is still deep in recession and we’ve seen a significant drop in global trade,” Mr. Obama said, “I think we have to be very careful about sending any protectionist signals out there.”

WASHINGTON, Sept 9 (Reuters) - The U.S. Commerce Department said on Wednesday it had imposed preliminary duties ranging from 10.90 percent to 30.69 percent on $2.6 billion of steel pipe from China used to transport oil.

WASHINGTON, Sept. 11 – The Obama administration will put steep import duties of 35% in the first year on Chinese passenger and light truck tires, responding to what the U.S. International Trade Commission determined to be a surge of Chinese tire exports that has rocked the domestic U.S. tire industry and displaced thousands of jobs, U.S. Trade Representative Ron Kirk announced Friday night.

So how should we interpret this? Does this mean the recession is over? Or does it mean that imposing two new tariffs in one week is not a giant, flashing neon protectionist signal? Or does it mean that we should be careful about sending protectionist signals but actually taking protectionist actions is okay? Does it mean that President Obama has decided to emulate the Bush administration he spent an entire campaign railing against and manages to blame for every ill facing the country? Does it mean, that unlike other Democrats, President Obama has a secret admiration for Herbert Hoover?

There are a lot of contentious subjects in economics, but one area of near unanimous agreement is free trade. Even partisan political hack economists who disparage their former colleagues from the pages of the New York Times favor free trade:

If economists ruled the world, there would be no need for a World Trade Organization. The economist’s case for free trade is essentially a unilateral case – that is, it says that a country serves its own interests by pursuing free trade regardless of what other countries may do. Or as Frederic Bastiat put it, it makes no more sense to be protectionist because other countries have tariffs than it would to block up our harbors because other countries have rocky coasts. So if our theories really held sway, there would be no need for trade treaties: global free trade would emerge spontaneously from the unrestricted pursuit of national interest.  Paul Krugman

President Bush flirted with protectionism in his first term when he imposed steel tariffs. The move was intended to save a few steel jobs – and garner a few votes – but the overall economic effect was negative due to the loss of jobs in steel consuming industries. The tariffs were ultimately declared illegal by the WTO so the net result of the policy was a loss of jobs, no political gain, higher steel prices and a violation of world trading rules. Why President Obama would expect different results this time is a mystery.

President Hoover, of course, signed the infamous Smoot Hawley Act which raised tariffs in 1930 and most economists agree was a major factor in the Great Depression. Economists may disagree about the degree to which the act influenced events, but it is hard - if not impossible - to find an economist who dismisses it as a contributor. Hoover actually initially opposed the bill because he had pledged international cooperation to combat the economic downturn, but in the end he bowed to the political pressure from his party – Republicans were the protectionists back then – and signed the bill. Sound familiar?

Protectionism is not sound economic policy and as Hoover and Bush found out, it isn’t even sound political policy. The steel unions to which Bush deferred didn’t support him in the next election and FDR attacked Smoot Hawley almost from the day it was signed. By the time the 1932 election rolled around, the effects of the tariffs were so obvious even the farmers Hoover sought to protect voted for FDR. President Obama may find the political benefits just as elusive. The Chinese are already considering how to retaliate and they don’t lack for options:

Sept. 13 (Bloomberg) — China announced a probe into the alleged dumping of American auto and chicken products, two days after U.S. President Barack Obama imposed tariffs on imports of tires from the Asian nation.

Chinese industries have complained that they’re being hurt by “unfair trade practices,” the nation’s Ministry of Commerce said on its Web site today. The ministry is also looking into subsidies for the products, it said. It didn’t specify the imports’ value.

So anything we gain in the trade in tires and steel pipes will be lost in autos and chickens or something else. This might be a good time to recall that one of the few places on the planet where GM sales are rising is China. Tariffs are taxes which are borne by the consumer so the big losers in this high stakes game are American consumers and companies who will pay higher prices for tires and steel pipe. There may be a marginal benefit to US steel and tire workers, but higher prices will mean less steel and tires sold so the idea that this will increase employment in those industries is debatable at best. The effect on jobs at companies who sell the imported tires is anyone’s guess, but it won’t be a positive number. One also shouldn’t be fooled into believing the tariffs will be beneficial to tire and steel company profits. The tire companies did not support these tariffs – the steelworkers union filed the complaint – because they manufacture tires in China. In other words, the President of the United States just imposed tariffs on US based companies. Are higher prices, lower profits, fewer jobs and reduced exports too high a price to pay for union support for health care reform? Apparently not for President Obama.

President Obama’s economic policies may be sold as a benefit to the working class and the poor, but the overall effect is just the opposite. Cash for clunkers raised the price of used cars that are bought primarily by the working poor and while it was also intended to benefit GM and Chrysler workers, one cannot help but note that both companies reported lower sales during the program period. The tire tariffs are aimed at low priced Chinese tires that are bought primarily by – you guessed it – poorer Americans. The recently enacted higher minimum wages limit the ability of young Americans and especially young, minority Americans to gain entry to the workforce. It is not a coincidence that youth unemployment is at an all time high, over 25%. Higher wage costs also tend to hurt small businesses more than larger ones and therefore limit new job creation. The last administration signed off on the higher minimum wage, but President Obama supported the policy in Congress so I guess he shares the same level of concern for the poor as former President Bush. Poor Americans cannot be helped by punishing poor Chinese or by making it more expensive to hire them.

The policies of the Federal Reserve and the Treasury since the last recession have also been conducted  – allegedly – with the average American in mind, but again it hasn’t worked out that way. The weak dollar policy of the Bush administration – continued by the Obama administration – was intended to correct a persistent trade deficit which many viewed – wrongly – as costing American jobs. The Fed’s maintenance of low interest rates was intended to keep the credit spigot open wide for all Americans during the last recession. The weak dollar policy pushed up the price of commodities and while all Americans pay the price at the pump and grocery store, the poor are hurt the most since a higher proportion of their earnings are dedicated to the purchase of these necessities. The low interest rate policy induced many Americans to take on debt they couldn’t afford, but again the hardest hit were the poor who took on loans they didn’t understand and never had a prayer of repaying for houses inflated in value, at least partially, by the weak dollar. The end result of these policies has cost more jobs than could ever be plausibly – or even implausibly - blamed on free trade or a lack of credit.

The bailouts of various financial institutions over the last two years were also sold as being in the best interests of average Americans. Saving too large to fail banks, brokers and insurance companies was seen as critical to maintaining access to credit for US businesses and consumers. Tried to get a loan recently? One begins to suspect that no matter what party is in power, policy is driven more by concern for campaign contributors than the well being of the nation as a whole. The special interests may change somewhat (although the financial industry seems to be bipartisan in its politician buying), the rhetoric may change, but political corruption is eternal and bipartisan.

There is a lot of debate now about the health of the US economy. Is the recession over? If so, how robust will the recovery be? How long will it last? Will we have a double dip? A triple dip? Over the last few months, I have consistently predicted a more rapid recovery than most commentators and to this point I think I’ve been proven correct. I have also consistently said that the quality of the recovery will leave a lot to be desired. The reason for that is that the improvement in the economic statistics is primarily due to the intentionally inflationary policies of the Federal Reserve. Inflation provides an illusion of economic growth, but it cannot produce real growth. Real growth is encouraged through all the other policies that affect economic performance – tax policy, trade policy, regulatory policy, etc. And on that front, I see little that can be called encouraging.

President Obama’s rhetoric produced an historic political victory, but his smooth delivery cannot substitute for good economic policy. Paying lip service to free trade while enacting policies that are proven beyond any reasonable doubt to be economically damaging will not fool the market. The dollar’s recent descent is a warning about current economic policy that should not be ignored as it was by the Bush administration. The nascent recovery in economic activity is not self sustaining and could be derailed quickly if supportive pro growth policies are not enacted soon. Setting off a trade war would be right at the top of a long list of things we can’t afford right now.

The World War II German saboteurs’ case and writs of certiorari before judgment by the Court of Appeals: a tale of nunc pro tunc jurisdiction.

Excerpted from Boris I. Bittker.  Constitutional Commentary, Vol. 14, 1997.

Professor David J. Danelski has recently published an excellent account and analysis of the trial by military commission of the eight German saboteurs who landed on the beaches of Long Island and Florida during World War II, and of Ex parte Quirin, in which the Supreme Court, after two days of oral argument at an unusual special session called by Chief Justice Stone, upheld the constitutionality of the military commission’s jurisdiction.(1) Like other commentators, Professor Danelski focuses primarily on the central issue in Ex parte Quirin–the constitutional power of a military commission to try persons apprehended in the United States when the federal and state courts were open and functioning. Not surprisingly, the commentators, including Professor Danelski, have given little attention to two threshold issues that were the subject of intense inquiry during the oral argument but then faded from the forensic scene.

These preliminary issues were (1) whether the petitioners in Ex parte Quirin (the would-be saboteurs) had the right to seek any remedy in the federal courts and (2, text included following excerpt) whether the Supreme Court had jurisdiction to entertain and pass on their petitions for habeas corpus. Despite the fact that President Roosevelt’s Proclamation of July 2, 1942, entitled “Denying Enemies Access to the Courts of the United States,”(2) seemed to deny the Quirin petitioners all access to the federal courts, the first issue gave the Court little trouble: both during oral arguments and in the ultimate opinion, the Court easily–but without any analysis–concluded that the petitioners could properly seek the assistance of the federal courts. The more ticklish threshold issue was whether the Supreme Court itself had jurisdiction, and it is to that question that I now turn.

……….

According to gossip in the corridors of the Justice Department, the White House hoped that the drama of a military trial would help to convince the public that we were really at war, and to end the civilian complacency that prevailed even in 1942, six months after the debacle at Pearl Harbor. A military trial would also make death sentences possible, whereas the most heinous statutory federal crime for which the saboteurs could be prosecuted in the federal courts was probably conspiracy to commit a federal crime under the general conspiracy ([sections] 371 of Title 18), which at that time carried only a 2-year sentence.(5) Indeed, some corridor wits sardonically speculated that a prosecution in the regular federal courts might have to charge the saboteurs with such ludicrous offenses as entering the United States without valid passports or visas, importing explosives in violation of customs regulations, and failing to register for the draft under the Selective Service Act. The latter suggestion seemed (and was of course intended to seem) especially ridiculous, but life can imitate even satirical art: One of the petitioners actually registered for the draft after his surreptitious entry into the United States and before he was taken into custody by the FBI.(6)

The corridor speculation about possible offenses may have leaked out and inspired a popular cartoonist to portray J. Edgar Hoover holding the prisoners while the Attorney General stood on a ladder in front of an array of law books, saying “You hold on to them, Edgar, and I’ll find something here that we can punish them under.”(7)

The military commission, operating in secrecy except for terse public announcements, completed hearing the evidence on Monday, July 27, 1942, and adjourned for several days so that counsel could prepare their closing arguments. On the same day, Chief Justice Stone announced that the Supreme Court would convene on Wednesday in a special session. On the Tuesday between these two events, Mr. Cox summoned me from my Lend-Lease office to the Justice Department, where he and Lloyd Cutler informed me that Colonel Kenneth Royall, chief counsel for the saboteurs (and later Secretary of the Army), needed some help with his habeas corpus applications to the Supreme Court. They also informed me, to my surprise, that I must be well versed in federal practice and procedure because I had recently completed a clerkship with Judge Jerome N. Frank of the Court of Appeals for the Second Circuit.

…

Justice Frankfurter then unveiled the core of his jurisdictional issue, viz., that the 1891 legislation creating the circuit courts of appeal(28) precluded direct review of district court judgments by the Supreme Court. Colonel Royall acknowledged that Congress had the power to restrict the Supreme Court’s appellate jurisdiction, but asserted that the 1891 legislation did not apply to habeas corpus. He went to say that this issue had been settled, “almost upon the exact facts [of Ex parte Quirin]” by Exparte Yerger.(29)

But Justice Frankfurter pointed out that Ex parte Yerger had been decided before 1891. To this rejoinder, Colonel Royall responded that “the position that we must take and do take in this matter” was that the 1891 Act did not apply to habeas corpus: “[A]s a practical matter, this was all that we could do.” The practical problem, Colonel Royall explained, was that the Presidential Order establishing the military commission provides “for no review in the ordinary sense.”(30) Thus, the sentences imposed by the commission (which could include the death penalty) might be confirmed by the President and put into effect before any judicial review could be sought. (Before the trial began, President Roosevelt had said to the Attorney General “I won’t hand [the saboteurs] over to any United States marshal armed with a writ of habeas corpus Understand?”)(31) “[I]t is apparent,” Royall said, “that it would have been impossible, even in the matter of preparing papers, if nothing else, to have followed anything other than this procedure,” viz., an appeal to the Supreme Court directly from the district court’s denial of habeas corpus. Colonel Royall went on, almost plaintively, to say: “Defense counsel conceive that it is their duty to assert every right which these petitioners have to assert. They do not conceive it to be their duty to resort to anything of a dilatory nature; and this is a prompt method, if sound, of dealing with the matter.”(32)

(2.) The proclamation decreed: That all persons who are subjects, citizens or residents of any nation at war with the United States or who give obedience to or act under the direction of any such nation, and who during time of war enter or attempt to enter the United States or any territory or possession thereof, through coastal or boundary defenses, and are charged with committing or attempting or preparing to commit sabotage, espionage, hostile or warlike acts, or violations of the law of war, shall be subject to the law of war and to the jurisdiction of military tribunals; and that such persons shall not be privileged to seek any remedy or maintain any proceeding, directly or indirectly, or to have any such remedy or proceedings sought on their behalf, in the courts of the United States, or of its states, territories, and possessions, except under such regulations as the Attorney General, with the aproval of the Secretary of War, may from time to time prescribe.