A Lesson for Krugman, et al, about Canada’s Real Fiscal Restraint vs. the United Kingdom’s Faux Austerity « International Liberty

A post well worth reading.

A Lesson for Krugman, et al, about Canada’s Real Fiscal Restraint vs. the United Kingdom’s Faux Austerity « International Liberty

Myths of the Great Depression by Lawrence Reed

This essay by economist Lawrence Reed challenges the current mantra of the Left claiming that our current economic ills are being caused by the excesses of the free market and too little government regulation. Reed is president of the Mackinac Center for Public Policy, a nonprofit, nonpartisan research and educational institute.

The genesis of the Great Depression lay in the inflationary monetary policies of the U. S. government in the 1920s. It was prolonged and exacerbated by a litany of political missteps: trade-crushing tariffs, incentive-sapping taxes, mind-numbing controls on production and competition, senseless destruction of crops and cattle, and coercive labor laws, to recount just a few. It was not the free market which produced 12 years of agony; rather, it was political bungling on a scale as grand as there ever was.

California's war on itself - Opinion - The Orange County Register

This article - California's war on itself - Opinion - The Orange County Register - nicely details the policies and their consequences that lead California to its current state, so to speak. It doesn't go into the philosophy behind these policies (a subject for a future post) but does explain the sequence of decisions leading up to the current crisis.

California's supposedly progressive economics have had profound demographic consequences. After serving as a beacon for millions of Americans, California now ranks second to New York – and just ahead of New Jersey – in the number of moving vans leaving the state. Between 2004 and 2007, 500,000 more Americans left California than arrived; in 2008, the net outflow reached 135,000, much of it to the very "dust bowl" states, like Oklahoma and Texas, from which many Californians trace their origins. California now has a lower percentage of people who moved there within the last year than any state except Michigan.

What is enough?

Earlier this week I saw a post titled Obama and Sowell: who can tell when people have made enough money? on the always-excellent neo-neocon about a speech Obama gave regarding the recent push for financial reform. Neo-neocon’s post has the following quote from this speech (which, in the interest of full disclosure, I have not dug up and read, yet).

Here is the quote.

“We’re not, we’re not trying to push financial reform because we begrudge success that’s fairly earned. I mean, I do think at a certain point you’ve made enough money. But, you know, part of the American way is, you know, you can just keep on making it if you’re providing a good product or providing good service. We don’t want people to stop, ah, fulfilling the core responsibilities of the financial system to help grow our economy.”

Neo-neocon’s response:

One of the most interesting things about the Obama quote under discussion is that, if you look at his scripted speech, he was trying to do his version of supporting what Sowell says—that is, of praising the power of capitalism’s ability to allow the aggregate forces of private enterprise and personal initiative to grow an economy. He knows that’s the American way, and that it is necessary for a president to pay some sort of lip service to it. But he couldn’t help blurting out what for him is the truth—that he doesn’t really believe in it at all—and that he and the other brilliant intellectuals surrounding him know much better, both practically and morally.

Let’s unpack what he says. There is a lot in this one paragraph consisting of four sentences.

“I do think at a certain point you’ve made enough money.” Enough for whom and for what? Is the $5,000,000 Obama made last year primarily from his book sales the level that demarks what is enough? What happens if you exceed what is considered “enough”? Does the government cap it so you can’t receive it? Is it taxed at a 100% rate? Notice too the elitism inherent in this statement, that he and his cohorts know better than the rest of us what is “enough.”

“But, you know, part of the American way is, you know, you can just keep on making it if you’re providing a good product or providing good service.” Maybe I’m reading too much into his choice of words but it seems as though he harbors disdain for what is known as the American dream, especially with his choice of “just keep on making it.” Apparently once you’ve had enough you’re supposed to do what? Stop? Give away what is considered excess? Or, if you’re enlightened like Obama you don’t strive to just keep on making money in the first place.

“We don’t want people to stop, ah, fulfilling the core responsibilities of the financial system to help grow our economy.” Here he seems to be saying that the justification for people succeeding economically is not because it is their right to do so (provided they’re not violating the rights of others). No, he seems to be saying it’s OK for them to succeed (up to a point defined by him, of course) as long as it’s fulfilling a responsibility to grow our economy (i.e., benefit others). I don’t see personal economic success and benefiting others as necessarily being mutually exclusive. Obama seems to be hinting that this success is justified onlybecause others benefit too.

I would argue that socialism and planned economies, which aim to stifle or punish the individual drive for success while supposedly helping the “disadvantaged” accomplishes less of both than free markets. While the free market does a better job of enabling people to achieve personal economic success and benefiting others through the ripple effect of this success in creating opportunities for others or by generating the tax revenue the government needs to fund programs that help others. And that for me is more than enough.

Obama to End Recession in December -- by Holding "Jobs Summit" by Robert Bidinotto

On another website I visit, somebody was complaining about news that Barack Obama was planning to hold a "jobs summit" in December to solve, once and for all, the dire problem of soaring unemployment. How could another meeting at the White House possibly end our recession? this Doubting Thomas demanded to know.

His angry outburst struck me as the woefully short-sighted rant of a Tea Party Nazi. It certainly demonstrated a fundamentally feeble grasp of the nuances and subtleties of modern economic theory, which are clearly understood by our president.

Of course Mr. Obama's "Jobs Summit" will create jobs! Let me count the ways:

First, think of all the boosted employment we will witness in the "Useless Summit" industry: conference organizers, badge-makers, PowerPoint experts, flower-arrangers, coffee-pourers, table-cloth folders -- I mean, the list just goes on and on.

But that's merely AT the conference. What about all the preparations for travel TO the conference?

Think of how many attendee business suits will go to dry cleaners. Think of the airline tickets purchased. The cab rides. The airports. Ponder the army of accountants who will have to go over all the expense reports from this crucial event. Consider all the wear and tear on the transportation vehicles involved -- jets, cabs, limos -- putting them just that much closer to being replaced by new purchases, which in turn will stimulate the auto and airline industries. Consider the White House electric bill alone, and what it will mean for the local power company. Think, too, of all the fuel that will be used up coming and going to the Summit, stimulating the oil and gasoline industries.

And regarding that fuel: Reflect for a moment, if you will, on all the CO2 that attendee jets and limos will emit en route to the Summit. This ginormous release of carbon into our atmosphere would not have occurred, except for the Summit. Yes, Barack Obama would be the first to acknowledge that it creates an environmental crisis; but, as Rahm Emmanuel would say, there is always opportunity to be found in a good crisis.

For example, the CO2 emissions no doubt will be carefully monitored by atmospheric scientists and climate-modelers, leading to scores of "jobs created or saved" in this vital field. Consider also the longer-term ramifications. Emergency remediation efforts for the increased CO2 emitted by the conferees will stimulate entire new cottage industries of new jobs. A "Keynesian multiplier effect" will occur: Each dollar spent by atmospheric scientists and conference attendees on issuing dire reports and forecasts will, in turn, generate $3.26 spending in the printer-paper industry, $1.82 in the lumber industry, $4.37 for Kinko's, $1.85 for the ink industry, $5.50 for overnight deliveries by Federal Express, $7,223.44 in overtime for postal workers -- plus 378,498 downstream jobs created or saved in federal and international regulatory bureaucracies.

These calculations, of course, do not even begin to include the boost to peripheral service industries, such as Washington-area restaurants, hotels, bars, tourist traps, and hookers.

In short, this single event alone could generate enough economic activity to pull us out of the recession! Why, it would be treasonously irresponsible if Barack Obama did NOT hold this summit!

So, enough of the criticism, already. We should be gladdened and relieved that, at last, we have a firm and steady hand on the tiller of our economy. And I, for one, just can't wait for the next stimulative product of his ever-fertile brain.

John Stossel's "20/20" special airing tonight, March 13, on "Bailouts and Bull"

Just received this notice from Flowidealism.org regarding John Stossel special on the bailout. Here is an excerpt from Stossel's notice.

Hi,

Please forgive the impersonal email, but I want to let you know about my bailout special! With the help of Drew Carey and Reason TV, we look at Big Government's promise to "fix" the economy and other bull.

You can find the outlets in your area on http://abcnews.go.com/2020

Here's what ABC lets me say about it:

The Conceit of the Ruling Class 

Politicians and pundits say government must do "something." It sound like a Viagra ad: "Does your economy have performance issues? If it's hard to achieve and maintain growth, 'stimulus' is right for you!" But shouldn't "stimulus" come with a warning label? "Side effects may include hyper-inflation, dollar devaluation, horrible debt, growth of welfare state, and unrealized expectations. Stimulus has not been proven successful, so it should not be used in the hopes of achieving actual growth ..."

While politicians claim that "all" or a "consensus" of economists agree that something "big" must be done, more than 300 economists say that the government's action do more harm than good. I interview some, calculate the amount the stimulus costs per taxpayer (about $16,000) and ask lawmakers: Where will you get the money? If too much debt was a problem, why is more debt now a solution?

I confront House Majority Leader Steny Hoyer about his claim that "all economists agree."

Is the market striking?

Anyone who has read Ayn Rand’s epic novel Atlas Shrugged would remember the question people asked throughout the story, “Who is John Galt?” The question expressed the confusion and resignation people felt as the United States slowly deteriorated under the yoke of government controls and edicts. John Galt helps to accelerate this decline by recruiting the leaders of various industries to join him in a strike against the forces in government and society who supported confiscating and usurping the wealth they created. Along these lines a Human Events article by Dr. Arthur Robinson titled John Galt Effect proposes that the “men of the mind” (to borrow Ayn Rand’s term) are withdrawing their abilities and contributions in face of growing government intervention in the economy.

As the pendulum of politics now swings toward tyranny in the United States and dangers to those whom they love increase, these men and women partially turn their talents more toward their personal responsibilities. Part of their thoughts, efforts, and ingenuity are lost to society -- and this loss cannot be recovered by either negative or positive incentives.

Throughout our country today, the men of the mind (women, too) are watching the awful scene in Washington and its reflection in state and local capitals throughout the United States. They understand the consequences of the government oppression that has dogged their own footsteps for many years and that will grow much worse in the near future. So, they are taking actions to protect themselves and their families.

We have no way to measure the societal effects of this distraction of the men of the mind. There are immediate effects upon our well being and long term effects from the things that they are no longer working full time to create.

While I agree with the sentiment expressed by Robinson’s piece it is extremely difficult to prove his claims. However, this piece in Forbes DigitalRules, Stocks Hate Obeynomics, seems to provide some empirical support for Robinson’s case.

The results are clear. The market hates Obama’s stimulus package and just about everything related to Obamanomics. … Stocks are down 27% since the Nov. 4th election. Stocks have plummeted more than 40% since Obama sewed up the Democratic nomination in June.

Capital is on strike. And why wouldn’t it be? Private capital has no idea what the future holds in terms of taxes, regulation, trade, deficits and the value of the dollar. None whatsoever.

Capital has figured out one thing, however. The politicians in Washington most hostile to private investment are running the show.

…

Here’s a question. Why did President Obama let an economic fool and earmark liar like David Obey write the stimulus plan that is so disliked by a majority of Americans and positively hated by the stock market? This is the mystery, isn’t it?

… David Obey is its chief architect, after all. During Obey’s near 40-year career in the House, he has nearly always voted for more government subsidies and less trade, according to the libertarian think tank Cato Institute. Let me repeat: The most anti-libertarian Congressman is in charge of the legislative wing of Obama's economic plan.

If you voted for Obama, you might ask: Why? And where is Austan Goolsbee? Even George Will liked the University of Chicago economist and pro-market centrist who was held up as Obama’s economic brain during the presidential campaign.

Goolsbee is missing in action. His ideas are missing in action. They’ve been replaced by the socialist hack David Obey. And the market has noticed.

As I’ve mentioned before, Obama’s proposed solutions to the current economic mess consists of continuing to apply the same Keynesian policies that got us here. The electorate bought the message of change and (appropriately) rejected the legacy of the last eight years. However, the market has seen the future and doesn’t like it. It doesn’t believe the promised “change” is fundamentally different. We can only hope that the state of the country four or eight years from now will bear no resemblance to the dismal collapse depicted in Atlas Shrugged.

Stimulus Package: Saving us from … our saviors?

Historic' Stimulus Is Egregious Waste
Taxing The Truth

These two editorials from Investor’s Business Daily touch on the errors of the stimulus package. In earlier blog posts I’ve discussed how government policies that encouraged banks to loosen their lending policies and the role of Freddie Mac and Fannie Mae have helped set the stage for the current crisis. Seeing all of the drama and demagoguery surrounding the stimulus package brings to mind an analogy: our current situation is similar to a doctor injecting poison into the victim’s blood, causing a person to almost die, then the same doctor heroically tries to “stimulate” the victim’s heart back to life. We’re supposed to gratefully grovel to the same person who induced the illness in the first place! It would be funny if it wasn’t going to cost us nearly a trillion dollars.

Does the government create wealth or redistribute it?

I recently received this e-mail containing a quote by the late Dr. Adrian Rogers (1931 to 2005) Memphis, TN, that seems particularly appropriate in light of the Obama election.

You cannot legislate the poor into freedom by legislating the rich out of freedom. What one person receives without working for, another person must work for without receiving.

The government cannot give to anybody anything the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend is about the end of any nation.

You cannot multiply the wealth by dividing it.

While I agree with this sentiment it will most likely carry little or no weight with those who, like Obama, want to “spread the wealth” as he said in the famous exchange with “Joe the Plumber” during the election. I’m sure Obama and Democrats don’t argue that the government creates wealth. Instead they feel it is the appropriate vehicle to redistribute wealth.

A key premise behind redistributionism is the idea that the free market unfairly distributes the wealth, that businessmen and the wealthy ultimately don’t deserve what they have, that they succeeded by exploiting others. (In other words, they hold a form of watered-down Marxism.) Therefore redistributionists believe it is moral to use progressive taxation and other measures to right past wrongs and to create a more egalitarian society.

So in order to make any kind of impact on those who argue this way is to show that:

1. The free market isn’t rigged to exploit the lower classes and that everyone has an equal chance to succeed.
2. The distribution of wealth is such that you could tax the top earners at 100% and still not make a major impact on the people at the other end of the income spectrum.
3. It is moral to pursue one’s own interests as long as you don’t violate the rights of others.
4. Perhaps most important, it is immoral to take what one has earned by their own efforts and give it to others.

Obviously accomplishing all of this is more than I can cover here. I’d recommend sites like the Ludwig Von Mises Institute for the economic counter-arguments and the Ayn Rand Institute for the individualist defense.

Obama's "American Recovery and Reinvestment Plan"

The World Tribune has an article titled “In the propaganda department, Obama's linguists are leaving Republicans in the dust” that is written by Cliff Kincaid, of Accuracy in Media (a conservative media watchdog group). Buried in this article is a short quote from Peter Schiff of Euro Pacific Capital who offers a warning and a nice, concise explanation of the folly of government spending our way out of the current recession.

[He] warns that a proposal of this kind is comparable to an individual trying to “forestall a personal recession by taking out newer, bigger loans when the old loans can’t be repaid.”

He explains, “Governments cannot create but merely redirect. When the government spends, the money has to come from somewhere. If the government doesn’t have a surplus, then it must come from taxes. If taxes don’t go up, then it must come from increased borrowing. If lenders won’t lend, then it must come from the printing press, which is where all these bailouts are headed. But each additional dollar printed diminishes the value of those already in circulation. Something cannot be effortlessly created from nothing.”

Corporatism: The Wave of the Present

David Boaz of the Cato Institute penned an article titled “Bush and Obama Opt for Corporatism Over Freewheeling Capitalist Economy” for the Investor’s Business Daily December 17 edition. It starts with the following.

Is Barack Obama a socialist? Not really. Is George W. Bush a free marketer? Not hardly. In fact, right now they both seem to be pursuing policies that are neither socialist nor laissez-faire but rather corporatist.

The Bush administration has spent close to a trillion dollars to keep the managers of big companies in the driver's seat. Instead of a free-market policy of letting the market determine winners and losers, the administration says Bear Stearns, AIG, Citigroup and other big Wall Street firms are "too big to fail." They can take dramatic risks and the taxpayers will cover them.

…

Corporatism was seen as an alternative to both the egalitarianism of the French Revolution and the laissez-faire economics of Adam Smith, with the state working closely with the different elements of society, especially labor and business.

As the Nobel laureate Edmund Phelps wrote: "The fundamental corporatist idea was to retain the private income, private wealth and private ownership of firms that (were) so central to capitalism (and found in avant-garde examples of market socialism too) but to remove the brain of capitalism — to curtail and to modify the mechanism of experiments and discoveries undertaken by unorganized entrepreneurs and financiers on which capitalism relied. . . . Corporatism sought to interpose the interests of the whole society in a range of decisions affecting the directions taken in the business sector."

We've always had some elements of the corporate state in America — subsidies, tariffs, monopoly privileges, regulatory cartels — but we've prospered because of the freewheeling entrepreneurship and creative destruction that characterizes most of our economy.

I think the most interesting part of this excerpt is Phelps’ comment about corporatism wanting to “remove the brain of capitalism.” By this Phelps means that capitalism is able to provide the endless flow of goods and services because entrepreneurs, managers and employees apply their creative forces to answer the challenges of competing against other enterprises for the customer’s business. Corporatists believe that the wisdom of government bureaucrats can replace these undirected creative, messy forces while still providing the same results.

I’d describe the corporatist’s position somewhat differently than Boaz. The corporatist wants to replace the many minds working independently with one mind, theirs. To modify Adam Smith’s “invisible hand” description of the free market, the corporatist wants to replace the independently operating invisible minds of the free market with the one visible mind of the bureaucrat who omnisciently pulls the levers of the economy.

Phelps (who won a Nobel Prize in 2006) shows in his writings that the record of corporatism fails to supports the claims of its proponents. (See the Wikipedia entry and his own web site.)

A second part of the Phelps quote stands out: “Corporatism sought to interpose the interests of the whole society in a range of decisions affecting the directions taken in the business sector.” Therefore, corporatists believe not only that bureaucrats can steer the economy better than the undirected free market but also they have the moral imperative and the right to steer the economy to better serve our “true” interests.

I agree with Boaz that corporatism is neither socialism (in which “the people” own the means of production) nor capitalism but a hybrid in which they want to harvest the benefits of the free market while giving it a lobotomy. They want to reap the effect while severing the cause.

Making Sense of the Current Crisis

Greg Ransom has a nice compendium of articles at PrestoPundit that explain the current financial crisis primarily from the Austrian economics point of view. (This is the school of thought that includes Ludwig von Mises and Friedrich Hayek.)

He also has a long post on "Who Is Barack Obama" that I also recommend.

The Day After

No, I’m not referring to the post-apocalyptic ABC miniseries from 1983. I’m referring to another disaster, also man-made: the McCain campaign. The American Thinker has a good analysis titled Why McCain Lost (posted November 5, 2008) of why the McCain campaign imploded. The key point is that McCain is a Reagan Democrat who wanted to play the nice moderate. However he hamstrung himself by not choosing not to challenge Obama on a number of issues. And he lacks as much understanding of economics as Obama so McCain was unable to question Obama’s economic “plan” (which essentially is a collection of spending programs).

You can't bring moderation to an ideology fight. An honorable, sincere moderate who is behind really hasn't a chance against a cynical ideologue who is ahead. Obama simply dissembled at the debates, while McCain's tongue-tied references to Ayers, ACORN, Khalidi, "most liberal senator," etc., sounded unfairly abrupt, even desperate. Maybe they were? To the bitter end, McCain refrained from "bringing Jeremiah Wright into the campaign," even though Hillary had...Why not?

It wouldn't have looked moderate enough.

It’s tough to position yourself a fundamentally different from your opponent, especially on economics, when you’re really not. National security was the major difference that McCain could have tried to capitalize on but the recent economic troubles pushed security off the electorate’s radar of concerns.

Speaking of the economy here is a prediction. If the economy is still in the doldrums (or, more likely, it’s in even worse shape) at the end of his first term the Obamacrats (Obama + the Democrats) will argue that they need another term to fix all of the abuses of Bush’s eight years. In a way they’d be right but for the wrong reasons. Bush was far from an advocate of the free market. One of my earlier posts describes the work of the Fraser Institute which has devised a measure of economic freedom. This index dropped during the Bush era, thus indicating that Bush didn’t drastically deregulate the economy. Of course, that won’t matter to the Obamacrats. To borrow the phrase of one of their heroes, the facts about Bush’s economic legacy are an inconvenient truth.

Spreading the Wealth and Selfishness: Obama’s Altruist Trojan Horse

I’ve posted links to Investor’s Business Daily (IBD) because I consistently agree with their editorials. I highly recommend their series titled The Audacity of Socialism. Like most right-of-center publications they properly decry the abuses of liberal policy but fall short of challenging the moral premises behind liberal policy. Therefore it is refreshing to see this quote in the editorial “Defining Problems With Socialism For The Post-Cold War Generation” posted on October 27, 2008.

[Socialists] see capitalism with its profit motive as vulgar and immoral
because it's at odds with altruism — the idea that the general welfare of
society is the proper goal of individuals.

What they fail to realize is society is the greatest beneficiary of our
system of rational self-interest. The poorest of the poor and the laziest of the
lazy still benefit from the genius of the entrepreneur and the risk-taking of
the venture capitalist.

The article starts off also with good advice to McCain: slapping the label socialist onto Obama won’t make nearly as much impact as spelling out the personal consequences of Obama’s socialist policies. To most people, especially the younger generations, the term socialism has no meaning. They would take more offense to saying Obama doesn’t like “Dancing With The Stars.”

Returning back to the first point about the altruist premise behind socialism IBD does fall somewhat into the trap that most conservatives do: saying that the invisible hand of the market ultimately helps people more than government handouts. While I agree this doesn’t go far enough. This answer looks at the recipients, not at those who create values. We also need to reinforce the idea that people own the values they created and obtained. Redistribution inevitably means taking -- by force -- values from people who obtained them by investing their time, energy and resources. Everyone has heard the well known saying that “Time is money.” Well, the reverse is true too: money is time. When someone advocates increasing taxes to pay for their pet redistributionist programs they essentially are laying claim to the time it takes for us to pay for the increased taxes. If you dig deep enough what they are saying is that your life and your time is ultimately not yours.

A lot of issues are packed into the idea of redistribution which I’ll get to shortly. Suffice it to say a moral case can be made against “spreading the wealth around” as Obama would say. Congratulations to IBD for bringing this into the light.

UPDATE: As reported Jack Tapper's ABC blog he quotes how Obama responded recently to McCain's and Palin's charges of Obama being socialistic. His reply followed by Tapper's comment:

"John McCain and Sarah Palin they call this [Obama's policies] socialistic," Obama continued. "You know I don’t know when, when they decided they wanted to make a virtue out of selfishness."

It's unclear if this was a nod to the Ayn Rand book "The Virtue of Selfishness," with all that the invocation of Rand implies.

It would seem to be, given the themes of Rand's work, what happens when independent achievers are demonized.

Which would fit with this description of those who want to keep their hard-earned tax dollars as "selfish."

Atlas may not be shrugging, but Obama is.

It's interesting as we come into the home stretch to see Obama slipping a bit in his normally well-controlled efforts to disguise his agenda. First was his "spreading the well comment with Joe the plumber." Now this. In any case bravo to Tapper for his catch.

The cause of our problems: the perils of a liberal Republican administration – Addendum

In my earlier post I provided the rankings the Fraser Institute gave to the U.S. and other countries using a number of different criteria. As I dug deeper into their report several more interesting facts come out that shed light on the claims that our financial problems are caused by 8 years of unfettered capitalism.

Consider this. The U.S. ranks as follows in these categories. The country in parenthesis ranked first in that category.

Credit market regulations: 23 (New Zealand)
Business regulations: 25 (Iceland)
Size of government: 42 (Hong Kong)
Legal system and property rights: 21 (Finland)

Not one of the U.S. rating falls in the top ten. Doesn’t exactly paint the picture of rampant capitalism, does it?

The cause of our problems: the perils of a liberal Republican administration

While researching recent posts on the financial crisis I found a publication by the Fraser Institute, a Canadian based organization “measures and studies the impact of markets and government interventions on the welfare of individuals. In our research, we bring together academics, economists, and policy analysts from around the world. The Institute's list of researchers has grown to include more than 350 authors in 22 countries (six of whom have been awarded Nobel Prizes), comprising more than 600 Institute publications and thousands of articles.” The publication, titled “Economic Freedom of the World: 2006 Annual Report,” contains some interesting tidbits that undercuts the accusations that “unfettered capitalism” caused our recent financial woes.

The report analyzes economic freedom in 42 different measures falling into four broad categories:

1. personal choice
2. voluntary exchange coordinated by markets
3. freedom to enter and compete in markets
4. protection of persons and their property from aggression by others.

Results? The U.S. ranks 8^th out of 141 countries. The countries ahead of us (starting with #1): Hong Kong, Singapore, New Zealand, Switzerland, the United Kingdom, Chile, Canada and Australia.

I find it interesting the Switzerland is the only European country ahead of us even though it is clear that Obama’s and the Left’s agenda is to turn the U.S. into another European socialist/welfare state. We can see how well that’s working!

The report reaches several conclusions. The following list is quoted verbatim.

1. Countries with more economic freedom have substantially higher per-capita incomes.
2. Countries with more economic freedom have higher growth rates.
3. Countries with more economic freedom attract more foreign investment.
4. Total investment is slightly higher in countries with more economic freedom.
5. Private investment spending is much higher in countries with more economic freedom.
6. The share of income by the poorest 10% of the population is unrelated to the degree of economic freedom in a nation.
7. The amount of per capita, as opposed to the share, of income going to the poorest 10% of the population is much greater in nations with the most economic freedom than it is in those with the least. [HCS note: the average annual income in the least free quartile is a measly $961 as compared to $8,730 in the most free quartile.]

You might say, so what? Maybe economic freedom isn’t all that it’s cracked up to be, that there are other things more important than making money. Fair enough. Let’s take a look at the rest of the conclusions the report draws from their data.

8. Life expectancy is over 20 years longer in countries with the most economic freedom than it is in those with the least.
9. With fewer regulations, taxes, and tariffs, economic freedom reduces the opportunities for corruption on the part of public officials.
10. Political rights (e.g., free and fair elections) and civil liberties (e.g., freedom of speech) go hand in hand with economic freedom.
11. Environmental stresses on human health are lower and ecosystem vitality is greater in countries with more economic freedom.

However, a closer look at the data in this report also refutes the claims that the 8 years of Republican deregulation lead us to our current financial predicament. The Fraser Report provides the previous freedom rankings all the way back to 1970. Here are the rankings broken down by President.

Reagan (1981 – 1989): rank increased from 4th to 3^rd, economic freedom score increased from 7.5 to 8.3 (with 10 being the maximum score).

Clinton (1993 – 2001): rank stayed at 3^rd, score dropped from 8.3 to 8.2 but peaked at 8.6 in 2000.

Bush (2001 – 2009): rank dropped from 3^rd to 8^th (!), score continued to drop to 8.0 in 2006, the last date available.

Conclusions: economic freedom increased 0.6 points during the Reagan years and peaked during the Clinton administration but started to drop before the end of his term. More importantly, our ranking and score dropped 0.6 points and our ranking slipped 5 spots during the Bush years. To be fair the comparative ranking could indicate that other countries overtook us. However, the decline in our overall freedom score shows that we’re back to where we were in 1990, the end of Bush Senior’s term. How about that for irony!

What Caused the Loan Crisis

The following condensation of a series from the Investor's Business Daily explaining "What Caused the Loan Crisis" has been circulated via e-mail. (Hat tip to Frank for sending this to me.)

1977: Pres. Jimmy Carter signs into Law the Community Reinvestment Act the foundation and cornerstone for the impending disaster.. The law pressured financial institutions to extend home loans to those who would otherwise not qualify.

The publicized premise: Home ownership would improve poor and crime-ridden communities and neighborhoods in terms of crime, investment, jobs, etc.

The Results: Statistics bear out that it did not help.

How did the government get so deeply involved in the housing market?

Answer: Bill Clinton wanted it that way.

1992: Republican representative Jim Leach (IO) warned of the danger that Fannie and Freddie were changing from being agencies of the public at large to money machines for the principals and the stock-holding few.

1993: Clinton extensively rewrote Fannie Mae and Freddie Mac's rules turning the quasi-private mortgage-funding firms into semi-nationalized monopolies dispensing cash and loans to large Democratic voting blocks and handing favors, jobs and contributions to political allies. This potent mix led inevitably to corruption and now the collapse of Freddie and Fannie.

1994: Despite warnings, Clinton unveiled his National Home-Ownership Strategy, which broadened the CRA in ways congress never intended.

1995: Congress, about to change from a Democrat majority to Republican. Clinton orders Robert Rubin's Treasury Dept to rewrite the rules. Robt. Rubin's Treasury reworked rules, forcing banks to satisfy quotas for sub-prime and minority loans to get a satisfactory CRA rating. The rating was key to expansion or mergers for banks. Loans began to be made on the basis of race and little else.

1997 - 1999: Clinton, bypassing Republicans in Congress, enlisted Andrew Cuomo, then Secretary of Housing and Urban Dev elopement, allowing Freddie and Fannie to get into the sub-prime market in a BIG way. Led by Rep. Barney Frank and Sen. Chris Dodd, congress doubled down on the risk by easing capital limits and allowing them to hold just 2.5% of capital to back their investments vs. 10% for banks. Since they could borrow at lower rates than banks their enterprises boomed.

With incentives in place, banks poured billions in loans into poor communities, often "no doc", "no income", requiring no money down and no verification of income. Worse still was the cronyism: Fannie and Freddie became home to out-of work-politicians, mostly Clinton Democrats. 384 politicians got big campaign donations from Fannie and Freddie. Over $200 million had been spent on lobbying and political activities. During the 1990's Fannie and Freddie enjoyed a subsidy of as much as $182 Billion, most of it going to principals and shareholders, not poor borrowers as claimed.

Did it work? Minorities made up 49% of the 12.5 million new homeowners but many of those loans have gone bad and the minority homeownership rates are shrinking fast.

1999: New Treasury Secretary, Lawrence Summers, became alarmed at Fannie and Freddie's excesses. Congress held hearings the ensuing year but nothing was done because Fannie and Freddie had donated millions to key congressmen and radical groups, ensuring no meaningful changes would take place. "We manage our political risk with the same intensity that we manage our credit and interest rate risks," Fannie CEO Franklin Raines, a former Clinton official and current Barack Obama advisor, bragged to investors in 1999.

2000: Secretary Summers sent Undersecretary Gary Gensler to Congress seeking an end to the "special status". Democrats raised a ruckus as did Fannie and Freddie, headed by politically connected CEO's who knew how to reward and punish. "We think that the statements evidence a contempt for the nation's housing and mortgage markets" Freddie spokesperson Sharon McHale said. It was the last chance during the Clinton era for reform.

2001: Republicans try repeatedly to bring fiscal sanity to Fannie and Freddie but Democrats blocked any attempt at reform; especially Rep. Barney Frank and Sen.Chris Dodd who now run key banking committees and were huge beneficiaries of campaign contributions from the mortgage giants.

2003: Bush proposes what the NY Times called "the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago". Even after discovering a scheme by Fannie and Freddie to overstate earnings by $10.6 billion to boost their bonuses, the Democrats killed reform.

2005: Then Fed chairman Alan Greenspan warns Congress: "We are placing the total financial system at substantial risk". Sen. McCain, with two others, sponsored a Fannie/Freddie reform bill and said, "If congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole". Sen. Harry Reid accused the GOP ;of trying to "cripple the ability of Fannie and Freddie to carry out their mission of expanding homeownership" The bill went nowhere.

2007: By now Fannie and Freddie own or guarantee over HALF of the $12 trillion US mortgage market. The mortgage giants, whose executive suites were top-heavy with former Democratic officials, had been working with Wall St. to repackage the bad loans and sell them to investors. As the housing market fell in '07, sub prime mortgage portfolios suffered major losses. The crisis was on, though it was 15 years in the making.

2008: McCain has repeatedly called for reforming the behemoths, Bush urged reform 17 times. Still the media have repeated Democrats' talking points about this being a "Republican" disaster. A few Republicans are complicit but Fannie and Freddie were created by Democrats, regulated by Democrats, largely run by Democrats and protected by Democrats. That's why taxpayers are now being asked for $700 billion!!

Postscript: ACORN is one of the principal beneficiaries of Fannie/ Freddie's slush funds. They are currently under indictment or investigation in many states. Barack Obama served as their legal counsel, defending their activities for several years.

Federal Reserve and the financial crisis: "Coin in the fuse box"

Much of the commentary from the free market economists has centered on the role of Fannie Mae, Freddie Mac and the Community Reinvestment Act have in creating the housing bubble which lead to our current financial woes. The Federal Reserve hasn't been mentioned as much. The Prudent Bear has a good article explaining how the Fed "helped" by artificially lowering interest rates. (Hat tip to Greg Nyquist.) Ironically the term "coin in the fuse box" comes from an article Alan Greenspan wrote before he was Fed chairman.

Premises behind the financial crisis

It has been fascinating to note the host of premises and beliefs that lie behind the current financial fiasco, many of which are implicit or simply are not noticed. (When I say fascinating I mean akin to the kind we feel when driving by a horrific traffic accident where you can’t resist looking.) Due to the length of the list I’m not going to comment in detail. It would take a book the size of the bailout bill to address all of them.

Here they are in no particular order of importance.

Economic egalitarianism: the belief that government should ensure equal economic outcomes. (I discussed this idea in an earlier post.)

Psychology trumps economics: that greed is a more fundamental and better explanation than the principles of economics and the impact of government policy on economic decisions. Misses the point that most people and businesses are motivated to improve their condition and that this force is always at work. Why did greed suddenly cause this meltdown? What allowed it to get out of control? Answer: laws that encouraged banks to lower their lending standards, plus the role of Fannie Mae’s management who aggressively marketed their company as a safe investment while cooking the books.

• Question: if banks were driven by pure greed why do they need to be forced to loan more money? Answer: because they also have to protect their bottom line. In order to make a profit they need to ensure that the people to whom they lend money will be able to pay it back. Greed therefore is balanced by prudence.
  
  I have issues with using the term greed which I believe is used as a derogatory, emotion-laden synonym for self-interest and the desire to improve one’s situation. The dictionary definition of greed is “excessive desire for having.” What is considered excessive? Who determines what is excessive?

Punishment of the good for being good: people who did not overextend themselves by buying homes they couldn’t afford and/or didn’t leverage their home’s equity into credit will pay for the sins of those who did.

The best defense is a strong offence (along with denial of responsibility): blame the mess on the 8 years of Bush, on “deregulation,” “greed” without explaining exactly how. Deny the role of your own policies in the fiasco then demand more of the same to “fix” it.

Good intentions (desire to help the people who couldn’t afford homes) absolve you of blame. This includes the management of Fannie Mae who cooked the books to make their business look better than it really was and to maximize their bonuses.

No distinction made between kinds of “greed”: While I dislike how this word is bandied about I’ll use it for the purpose of illustration. As I said above greed is being used as a purposely negative term for self-interest and the desire to improve one’s condition. Having said that there are at least two breeds of greed: (1) the drive to create or produce value (which is what motivates the businesses in the free market), or (2) the greed of obtaining the unearned (Freddie Mac and Fannie Mae senior management plundering tax payers to line their pockets, people buying homes knowing full well they couldn’t make the payments, lawmakers adding pork programs to the bailout bill, and so on.)

Ends justify the means: the “good” intentions of wanting to help people buy homes justify strong arming banks into suspending prudent underwriting standards (e.g., ACORN [to which Obama has ties] fostering activities to intimidate banks, passage and enforcement of the Community Reinvestment Act.)

Ends justifies the means – Part 2: using the bailout plan as an opportunity to shoe horn additional pork into it for unrelated programs and to get the toe in to door for carbon footprint taxes.

Wishes override reality: if banks don’t make loans according to sound underwriting principles let’s encourage them to be more “flexible.” Reality is negotiable!

The role of government is to ensure businesses are serving the community. This is the foundation of arguments for passing the CRA and other laws. However this flies in the face of the greed argument. If businessmen wanted to rape and pillage, I mean maximize profit, you wouldn’t have to force them to loan money. Their profit motive gives them an incentive to “serve” the community. If certain communities aren’t being served that signals the presence of other forces dissuading businessmen from selling their product or service. Implicit in this argument is the belief that customers have a right to demand the services and goods provided by businesses. Of course, this idea underlies arguments for universal health care and whatever other service or good deemed to be too valuable to trust to the market. (Another topic that’s big enough to fill a book.)

The Fannie Mae Implosion: A bolt out of the blue? Don’t think so!

Robert Bidinotto has posted a link to a damning video showing Congressmen including Barney Frank chastising Armando Falcon, director of the Office of Federal Housing Oversight, who blew the whistle on Fannie Mae in 2004. If you’re interested here are links to the web site and to the most recent (2006) report. The report runs 348 pages but reading the 13 page executive summary gives the lowlights of this appalling story. I have provided some quotes below.

What is even more sickening is the fact that the same web page lists reports going back to 2003. All of them share the same theme: Fannie Mae violated standard accounting rules and engaged in dubious (to put it mildly) practices to accomplish the goals of senior management.

When Franklin Raines became Chairman and Chief Executive Officer (CEO) of Fannie Mae in 1999, he sought to lead the Enterprise into a new era of growth in business volumes and profits by challenging senior management and employees to double EPS in five years. Mr. Raines also made changes in Fannie Mae’s compensation programs that enhanced incentives to achieve that goal.

A combination of factors led Fannie Mae senior management, through their actions and inactions, to commit or tolerate a wide variety of unsafe and unsound practices and conditions. Those factors included the Enterprise’s enormous financial resources and political influence, the expectation that senior management could write the rules that applied to Fannie Mae, financial rewards tied to a measure of profits that management could easily manipulate, and the relative disinterest of senior executives in adhering to standards of prudent business operations.

Fannie Mae’s Board of Directors contributed to those problems by failing to be sufficiently informed and to act independently of its chairman, Franklin Raines, and senior management, and by failing to exercise the requisite oversight over the Enterprise’s operations.

That misconduct ultimately led to the Securities and Exchange Commission (SEC) directing Fannie Mae to restate its financial results for 2002 through mid-2004, the departure of Mr. Raines and the Enterprise’s Chief Financial Officer (CFO), Timothy Howard, losses of tens of billions of dollars in market capitalization for Fannie Mae shareholders, and expenses for the restatement process, regulatory examinations, investigations, and litigation that the Enterprise has recently estimated will exceed $1.3 billion in 2005 and 2006 alone.

Improper earnings management at Fannie Mae increased the annual bonuses and other compensation linked to EPS that senior management received. Compensation for senior executives that was driven by or linked to EPS dwarfed basic salary and benefits. For CEO Franklin Raines, for example, two compensation components directly tied to meeting EPS goals accounted for more than $20 million for the six years from 1998 through 2003. Three-year EPS goals also played a crucial role in determining the size of the approximately $32 million awarded to Mr. Raines during that six-year period under a long-term executive compensation program. In total, over $52 million of Mr. Raines’ compensation of $90 million during the period was directly tied to achieving EPS targets.

The image of Fannie Mae communicated by Mr. Raines and his inner circle and promoted by the Enterprise’s corporate culture was false. In the words of one current member of Fannie Mae’s Board of Directors, the picture of the Enterprise as a “best-in-class” financial institution was a “façade.” To maintain that façade, senior executives worked strenuously to hide Fannie Mae’s operational deficiencies and significant risk exposures from outside observers—the Board of Directors, its external auditor, OFHEO, the Congress, and the public. The illusory nature of the Enterprise’s public image and senior management’s efforts at concealment were the two essential features of the Enterprise’s corporate culture. Those features, which were both supported by repeated improper manipulation of earnings, are a major theme of the report.