Questions and Observations

Free Markets, Free People

Socialism In America

Perhaps the time has come to be perfectly frank. We Americans live in a socialist country. In point of fact, we have for quite some time, even though private property has a long, continuing and still revered position in our society. To be sure, we aren’t an entirely socialist country, but instead a mixed one that teeters between the two extremes of collectivism and freedom (i.e. socialism and capitalism). In the past century or so, however, the scale tipped noticeably toward the socialism side, and we are now at the point where capitalism is not the dominant force. Of course, there are many who will disagree with my assessment.

Conor Clarke, for example, offers the following to dispel notions that we have become a socialist country:

Government vs. Private Ownership

Government vs. Private Ownership

Conor explains:

Have you heard that the United States is headed toward socialism? Jonah Goldberg says it is. Alabama Senator Richard Shelby says it is. Phyllis Schlafly says it is. Richard Viguerie says it is. The Republican National Committee says it is. We must be getting pretty close.

[…]

The hot-pink portion of this pie chart is the percentage of listed American business assets that have recently been nationalized by the American government (ie, General Motors). Obama’s version of socialism is so sneaky you can hardly see it!

(And there is some reason to think this actually overstates the portion of the corporate landscape that’s been nationalized, but more on that at the end of the post.*)

While the chart above would appear at first glance to be pretty dispositive of the issue (if the federal government owns so little, can we really be socialist?), it actually begs a huge question. If the segment of the economy effectively nationalized in the past several months is so vanishingly small, why is it necessary for taxpayers to fund trillions of dollars to save it? We’ll come back to that.

Next, Jon Henke observes:

NOTE: The fact is, American has always had a mixed economy, as do all modern, developed economies. The question is not one of category – capitalism or socialism? – but of degree.

[…]

Obama is not socialist. But he is more comfortable with centralizing economic power. As that centralization proceeds, the focus of public interest will shift from “how do we fix the immediate economic problems?” to “how do we fix the problems we created when we tried to fix that temporary problem?” That is when the pendulum can swing back towards decentralization and individual empowerment.

Jon takes a more organic view of the subject. That is, he posits the governing structure of the US as subject to the tolerance of the polity for centralized control of the economy. In his view, just because Obama “is more comfortable with centralizing economic power” that does not mean that we have become a socialist nation. Instead, we are merely experiencing a swing of the political pendulum towards socialism that will inevitably swing back towards the capitalism node. Left unsaid is how often that pendulum has swung away from socialism in the past 100+ years. More importantly, Jon’s assertions beg their own question — i.e. how “comfortable” must a politician and/or the populace be with centralized power before we can safely label it socialism?

In addition to the above, another line of argument is sure to be made (if it hasn’t been already) that we cannot possibly be a socialist country because private property has not been outlawed and the people as a whole do not own and control the means of production. Truly, this is the argument that Conor attempts to support with his graph (not that Conor necessarily agrees with that argument, just that he is holding up evidence that would tend to suggest socialism is not at hand). Essentially, although socialism comes in many forms, a primary ingredient is that the state (on behalf of the people) have dominance over the means of production instead of private concerns. The most extreme form, of course, is where all private property is abolished and the state decides what will be produced, by who, when and how much. Much milder versions such as social democracy exist today that, while they allow private property and much more freedom than, say, Stalinist North Korea, maintain a firm grip over the economy as a whole. Is there any doubt that Germany is a socialist country for example? The question then is, where does America fit when it this spectrum of socialist possibilities, if it fits at all?

At bottom, the problem with these sorts of arguments is almost always definitional. If I start arguing that communism never works and use the Soviet Union as an example, someone is sure to pipe up “that wasn’t real communism” followed by a neat explanation how Lenin and Stalin perverted what the true communists wanted in order to seize power for their own means. In order to avoid that annoyance, let’s at least agree on the dictionary definition of socialism:

An economic system in which the production and distribution of goods are [owned and] controlled substantially by the government rather than by private enterprise, and in which cooperation rather than competition guides economic activity. There are many varieties of socialism. Some socialists tolerate capitalism, as long as the government maintains the dominant influence over the economy; others insist on an abolition of private enterprise. All communists are socialists, but not all socialists are communists.

The definition above comes from the The American Heritage® New Dictionary of Cultural Literacy, Third Edition, and I think sums up the idea nicely. The one thing missing is the word “ownership” which, I expect, someone will insist upon, so I’ve inserted the words “owned and” into the definition. As luck would have it, this is the very concept that I think is missed by almost everyone who discusses whether or not we are a socialist country.

Specifically, what is the difference between ownership and control? Looking again to the dictionary, here is a good legal definition of “ownership”:

“one’s exclusive right of possessing, enjoying, and disposing of a thing.” 72 So. 891. The term has been given a wide range of meanings, but is often said to comprehend both the concept of possession and, further, that of title and thus to be broader than either. See 139 N.W. 101. See fee simple.

The primary concept behind ownership is that of exclusivity, such that if I own real property, for example, I can by right exclude all others. Without the ability to exclude, my “ownership” is something less than complete and the use, enjoyment and alienation (a fancy word for selling, trading or giving away) of property is limited.

To illustrate the idea, consider that you own a piece of real property (Blackacre) which is rich with gold and silver mines, oil, and an abundance of flora and fauna. In short, it is a little slice of heaven and it is all yours. Or at least it would be if were not for the fact that the flora are mostly designated as protected, the fauna are all listed as endangered, and the mineral deposits are tightly regulated, all to the extent that you cannot make any real use of your land except to look at it from a neighbor’s yard in humble admiration for its splendor. Not only are you prevented from drilling or mining on your property, you cannot even build a house or structure of any kind because that might disturb the protected species. The rules and regulations governing Blackacre are so ominous, that you can’t even sell it without first offering it to the government for a price it will set in its own arbitrary discretion. Furthermore, just on the other side of Blackacre is the Pacific Ocean fronted by a lovely beach, to which the law declares access must be allowed for the public, and there is nothing you can do to prevent them from traipsing across your wonderland. In short, you may own Blackacre in title, but you have very little, if any, control.

Of course, at least here in America, the laws and regulations aren’t quite that strict. And the vast majority of people would agree to at least some controls over private property to prevent the owners from harming other property or people (e.g. pollution, building setbacks to prevent fire, etc.)[ed. – let’s ignore Coasean bargaining for now, shall we?]. At some point, however, those restrictions on the owner’s use become so burdensome as to effectively deprive the owner of any real control. The same can be said for the ownership of capital, which can be anything from money to a large factory for building tractors. When the government sets up enough rules and regulations affecting the use and enjoyment of that capital, the fact that ownership is nominally in private hands does not somehow render that government as something other than socialist.

Now, getting back to our definition of socialism, which is more important, “ownership” or “control”? To my mind, this isn’t even a close call. Without control, ownership is next to meaningless. Therefore, if the state has the ability to control the means of production (a.k.a. capital), whether directly through ownership, or indirectly through law and regulation, I contend that such state should be deemed socialist.

Think of a scale that measures the owner’s rights in her own property and how, with each new government missive, that ownership indication drops a little more. Where the state’s intervention becomes intolerable will be different for each person, but from a definitional standpoint, that intervention represents socialism. When the scale registers a significant enough intervention into the owner’s rights, socialism becomes the prevalent factor in the control of property, and private, capitalist “ownership” is either dulled or altogether neutered. Again, without the ability to control that capital, ownership is a meaningless concept that should be left out of the conversation.

Accordingly, when Conor suggests that we are not a socialist nation because the government only owns an almost immeasurable portion of the corporate assets of this country, I suggest that he use a new measurement. Specifically, one that measures the amount of control that “owners” have over their property/capital/etc. That graph would look significantly different in my estimation.

Furthermore, when Jon states that Obama is not a socialist, he’s just comfortable with centralizing economic power, I ask that he consider what ways centralizing power (i.e. control over the means of production) is not socialist, and that he provide a few examples for clarification. Also, if the pendulum is going to swing back towards more decentralization (i.e. less control over capital), how far back would it have to go before most people could be reasonably certain that we are not, in fact, a socialist nation? How far back does he think it would have to go, or is his contention that the pendulum simply hasn’t swung into socialist territory? In considering those questions, I’d ask that the concept of control, rather than titular ownership, be the dominant factor in deciding where the state stands vis-à-vis socialism.

As I see it, we’ve been living with socialism in this country for a very long time. The only difference has been one of degree and magnitude. Its pervasiveness has ebbed and flowed over the decades, but American’s tolerance for it has grown substantially, even if many of us don’t like to call the governance we desire “socialism.” Unfortunately, that’s exactly what it is, and it’s only going to become more prevalent and intrusive. After all, why would anyone who is comfortable with centralizing economic power stop it? They’ll just call it something else and move on with asserting they’re control until one day you’ll be gazing longingly at Blackacre from the public beach, because that’s the only place where you can legally see it.

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Short-sighted Partisan Politics Makes For Bad Decisions

And nothing could make that point better than this:

Defense Secretary Robert Gates isn’t ruling out spending more on missile defense than what he’s asked for in next year’s budget if North Korea or other nations increase threats against the United States.

Gates said the missile tests by North Korea over the past week appear to have attracted more support on Capitol Hill for missile interceptors.

Candidate Obama was pretty darn sure that these interceptors just weren’t needed because, you know, they just weren’t! Russia isn’t our enemy anymore and we get along fine with China – where’s the threat?!

Well during the entire lead up to the 2008 presidential campaign, North Korea and Iran were flinging missiles around right and left each, seemingly, with longer ranges and larger carrying capacity.

Ignored. In fact, as I recall, Obama dismissed Iran as not much of a threat at all. Something about Iran being a ‘tiny’ country that ‘doesn’t pose a serious threat.’ Certainly not one that required a missile defense.

Politics. All politics. Nothing based in reality, but instead dismissive rhetorical hand-waves designed to please the base. And those who controlled Congress picked up on the tune and danced to it.

Now, suddenly, by doing almost exactly the same thing they’ve done for some years, North Korea has managed to resurrect the need for a missile defense?

Why now?

Well that’s easy. Now they’re governing, suddenly not having an armed missile land on friendly territory during their watch is a priority.

Politics. The only real reason they opposed it previously is because the other side wanted it.

Of course, if questioned about why this is different than when NoKo and Iran did this sort of thing the last few times, I’m sure they’d find a way to spin it that they think wouldn’t make them seem so short-sighted, petty and partisan (read the article, there’s plenty of spin included).

That won’t change the fact one bit that they were indeed short-sighted, petty and partisan.

~McQ

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Obama’s Cairo Speech

Yes, I’ve read it. As with most of Obama’s speeches, it is a good speech and as with most of his speeches, hits all the right notes and says all the right things. What it all means, however, remains to be seen. One of the things I’ve learned so far with Barack Obama is not to take what he says too seriously as he is prone to ignore his own words or change his mind.

I also wonder if it will be considered a goodwill speech or a lecture by many. I know Israel isn’t going to be particularly happy about portions of it.

I compliment him for addressing some rather controversial issues (and this is where my thoughts about “lecturing” come from) such as women’s rights, religious freedom and democracy. None of the problems he addresses will change because of his speech nor is what he said new or original. He also spoke about Jews and quoted the Torah in Egypt which I found rather interesting.

Terrorism? The word was never mentioned. The closest he gets is talking about “extremists”. While he addressed some controversial issues, he avoided this one altogether.

And, unfortunately, he validated an Al Qaeda talking point about torture by claiming “I have unequivocally prohibited the use of torture”. While he may feel that his point is important and the truth, it is a rookie mistake to hand enemies validation like this. He also tried to have it both ways with Iraq, claiming we’re better off without Saddam but essentially condemning the action that made that possible. Again, he probably thought that was an important point, but all it does is validate the other side’s talking (and recruiting) points.

Obama claims this speech establishes a framework for a new era of cooperation with the Islamic world. And, of course, that mostly has the US doing the giving and the “Islamic world” doing the taking. What that means, in real terms, about establishing a new era of cooperation with the nations of Islam, remains to be seen. But given what was outlined, it seems to pretty much be business as usual wrapped up in an eloquent rhetorical wrapper marked “new and improved”.

Anyway, just a few thoughts. You should take the time to read the speech. But, as I implied earlier, Obama is outstanding at talking the talk. Walking the walk, on the other hand, hasn’t yet proven to be his strong suit.

~McQ

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“Health Care Reform” Update (Updated)

A few new developments, none of them good.

One – Obama has indicated his willingness to entertain legislation that would tax your private health care benefits. What that means is you’ll be taxed on the money your employer spends on your health care insurance. Of course the obvious immediate effect would be to raise revenue to pay for the public portion of his health care plan.

Two – Obama has decided that making insurance mandatory may not be such a bad idea. This is 180 degree change from candidate Obama who attempted to hide his statist tendencies by pretending that he wouldn’t require mandatory insurance for Americans.

Threein a letter to Democratic senators:

He told Democratic Sens. Edward Kennedy (Mass.) and Max Baucus (Mont.) that their legislation must include a government-run insurance option that would compete against the private sector. He also reaffirmed his support for a Massachusetts-style insurance exchange.

What do you suppose will happen if government-run insurance is an option for all? Depending on how it is structured (if, for instance, if it is a universal pool), we could see massive dumping of private insurance by businesses pointing their employees to the government option.

Four:

[I]mbuing a federal panel with the power to make Medicare payment recommendations that Congress must either accept or reject in their entirety.

Obama likens this proposal, based on the current Medicare Payment Advisory Commission, to the way military base closure decisions are made. To Republicans, however, the notion smacks of the kind of “rationing” dictated by government-run healthcare programs in Europe and Canada.

Ezra Klein explains the “federal panel’s” proposed role:

The health system changes too quickly for Congress to address through massive, infrequent, efforts at total reform. New technologies and new care structures create new problems. A health care reform package signed in 2009 might miss some real deficiencies, or real opportunities, that present themselves in 2012. A health reform process that recognizes that fact is a health reform process that is continual, rather than episodic.

But the reason health reform is so infrequent is that it’s structurally difficult. Small tweaks are too technically complex for Congress to easily conduct and so are dominated by lobbyists. Large reforms attract broad interest but are impeded by polarization and the threat of the filibuster. The MedPAC changes under discussion are, in other words, nothing less than a new process for health care cost reforms. They empower experts who won’t be intimidated by the intricacy of the issues and sidestep the filibuster’s ability to halt change in its tracks.

In other words health care decisions that will directly effect you will be in the hands of an unelected and unaccountable panel of bureaucrats just as all the critics of this sort have program have been claiming since the beginning of the debate.

The effect?

MedPAC, of course, is restricted to Medicare. But there’s little doubt that where Medicare leads, the health care industry follows. Private insurers frequently set their prices in relation to Medicare’s payment rates. Hospitals are sufficiently dependent on Medicare that a reform instituted by the entitlement program becomes a de facto change for the whole institution, and thus all patients. A process that empowers Medicare to aggressively and fluidly reform itself would end up dramatically changing the face of American health care in general.

Klein is exactly right, but most likely not for the reasons he thinks he is. The level of care, innovation and incentive will follow the decline in prices driven by MedPAC. What the nation needs is insurance reform, not “health care reform”. And while that is how the proponents of this try to spin the issue as just that, MedPAC’s existence and proposed expanded role argues persuasively against that spin.

Watch carefully – the Democrats are going to try to move this quickly and with little debate.

UPDATE: Apparently the letter from Obama I spoke about above also had another effect:

President Obama’s letter to Senate lawmakers yesterday saying a healthcare package must include a public option may have stalled progress on a bipartisan deal, Sen. Judd Gregg (R-N.H.) said Thursday.

Gregg said that the president’s letter, which said a public option should be included in the legislation, stalled “significant progress” in negotiations.

“We were making great progress up until yesterday, in my opinion,” Gregg said during an interview on CNBC. “There’s a working group under Sen. Baucus that involves senior Republican and Senate senior members who are involved in the healthcare debate, and we were, I thought, making some fairly significant progress.”

The most discouraging thing about this update is the fact that Republicans, who are claiming government is too big and we’re spending too much are knee deep in negotiating more government and more spending (i.e. selling out – again) having apparently swallowed the Democratic premise that this is necessary whole.

~McQ

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Tiananmen Square 20 Years After

China, despite its economic progress, remains a rigidly totalitarian state that certainly doesn’t wish to be reminded of the pro-democracy rallies 20 years ago, or the bloody government crackdown that ended them:

China blanketed Tiananmen Square with police officers Thursday, determined to prevent any commemoration of the 20th anniversary of a military crackdown on pro-democracy protesters that left hundreds dead.

The government reacted angrily to a mention of the anniversary by Sec. State Hillary Clinton:

“The U.S. action makes groundless accusations against the Chinese government. We express strong dissatisfaction,” a Foreign Ministry spokesman, Qin Gang, told reporters at a regular briefing.

“The party and government have already come to a conclusion on the relevant issue,” he said. “History has shown that the party and government have put China on the proper socialist path that serves the fundamental interests of the Chinese people.”

And to ensure that the people of China have few venues in which to discuss this anniversary, the “fundmental interests of the Chinese people” are being “served” by blocking various internet sites:

Access was blocked to popular Internet services like Twitter, as well as to many university message boards. The home pages of a mini-blogging site and a video-sharing site warned users they would be closed through Saturday for “technical maintenance.

Known activists and dissidents are under close supervision:

One government notice about the need to seek out potential troublemakers apparently slipped onto the Internet by mistake, remaining just long enough to be reported by Agence France-Presse. “Village cadres must visit main persons of interest and place them under thought supervision and control,” read the order to Guishan township, about 870 miles from Beijing.

In a report released Thursday, the rights group Chinese Human Rights Defenders said 65 activists in nine provinces have been subjected to official harassment to keep them from commemorating the anniversary.

Ten have been taken into police custody since late May, the group said. Dozens of others, mostly from Beijing, are either under police guard or have been forced to leave their homes, according to the report.

The mass media has, as expected, cooperated with the state as well:

There was no mention of the day’s significance in Thursday’s Beijing newspapers. The state-run mass-circulation China Daily led with a story about job growth signaling China’s economic recovery.

An interesting counterpoint to the claims that China has become more democratic over the years, and is actually doing a much better job with human rights than it has in the past. The fear of a simple remembrance of government brutality 20 years ago says that’s not at all true. And the government’s concerted effort to wipe that memory away prove it.

~McQ

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Quote of the Day

Guess who is outdoing the avowed Socialists? And they’re jealous:

“Hey, Obama has just nationalized nothing more and nothing less than General Motors. Comrade Obama!” [Hugo] Chavez cheered on Venezuelan TV Tuesday. He gushingly added that he and Cuba’s Fidel Castro would now have to work harder just to keep up.

A real point of pride, huh?

~McQ

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Policy Maker or Neutral Legal Umpire?

Which of those descriptions in the title would best describe your understanding of a Supreme Court Justice?

If you wonder what President Obama wants in a Supreme Court Justice, take a look at this excerpt from his speech explaining why he couldn’t vote for Justice Roberts.

He’s describing that 95% of the cases before the court will find all justices coming to the same conclusions. However, it is the 5% that concerned Obama and determined his inability to vote for Roberts. Here’s what he said:

In those cases, adherence to precedent and rules of construction and interpretation will only get you through the 25th mile of the marathon. That last mile can only be determined on the basis of one’s deepest values, one’s core concerns, one’s broader perspectives on how the world works, and the depth and breadth of one’s empathy.

In those 5% of hard cases, the constitutional text will not be directly on point. The language of the statute will not be perfectly clear. Legal process alone will not lead you to a rule of decision. In those circumstances, your decisions about whether affirmative action is an appropriate response to the history of discrimination in this country, or whether a general right of privacy encompasses a more specific right of women to control their reproductive decisions, or whether the Commerce Clause empowers Congress to speak on those issues of broad national concern that may be only tangentially related to what is easily defined as interstate commerce, whether a person who is disabled has the right to be accommodated so they can work alongside those who are nondisabled — in those difficult cases, the critical ingredient is supplied by what is in the judge’s heart.

“Empathy” and “heart” do not equal “rule of law”.

Thomas Sowell distills the essence of the argument against Obama’s assertion:

Justice Oliver Wendell Holmes said that he “loathed” many of the people in whose favor he voted on the Supreme Court. Obviously, he had feelings. But he also had the good sense and integrity to rule on the basis of the law, not his feelings.

Laws are made for the benefit of the citizens, not for the self-indulgences of judges. Making excuses for such self-indulgences and calling them “inevitable” is part of the cleverness that has eroded the rule of law and undermined respect for the law.

[…]

It would be considered a disgrace if an umpire in a baseball game let his “empathy” determine whether a pitch was called a ball or strike. Surely we should accept nothing less from a judge.

And that is reason enough why all of his nominees should be subjected to rigorous examination that requires them to explain their judicial philosophies in light of the president’s stated desires.

~McQ

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Quote of the Day

Trying way too hard to be something we’re not:

In an interview with Laura Haim on Canal Plus, a French television station, Mr. Obama noted that the United States also could be considered as “one of the largest Muslim countries in the world.”

Uh, no.

4.5 million US muslims equal about 1.5% (the CIA Factbook lists muslims at 0.6% or about 1.8 million).

And if you thought he was talking about land mass, think again:

“And one of the points I want to make is, is that if you actually took the number of Muslim Americans, we’d be one of the largest Muslim countries in the world,” Mr. Obama said.

Not even close – Iraq, 26 million. Afghanistan – 23 million. Yemen – 23 million. Indonesia – over 200 million. Even the UAE has a few more muslims than we do (4.7 million).

What is this seeming compulsion to make things up like this when it comes to things “muslim”?

~McQ

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There Is A Solution

Although many people don’t want to hear it.

Arnold Schwarzenegger on the situation in California:

“People come up to me all the time, pleading ‘governor, please don’t cut my program,'” he said. “They tell me how the cuts will affect them and their loved ones. I see the pain in their eyes and hear the fear in their voice. It’s an awful feeling. But we have no choice.

“Our wallet is empty. Our bank is closed. Our credit is dried up.”

Then. Cut. Spending.

For real this time.

~McQ

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Japanese “Lost Decade” Redux

It certainly seems like it. Reason magazine finds the current way the US is addressing the economic crises to be pretty familiar:

The scenario was eerily familiar. A long real estate bubble that had expanded extra rapidly for the previous five years suddenly burst, and asset prices came crashing back down to earth. Banks and financial institutions were left holding piles of worthless paper, and the economy soon headed south. The national government responded to the crisis by encouraging more lending and spending previously unfathomable amounts of money on public works projects in an effort to stimulate consumer spending and restart growth.

Of course that’s where we are now and what that led too in Japan has come to be known as the “lost decade” (now three decades old).

One of the things we’ve pointed out is there is an element within this model that both Japan and now the US has used that is focused on “pain avoidance” (GM and Chrysler are prefect examples of that). Part of that is driven by the belief by those in power that the government can address problems within markets and lessen the impact. The second part of that, of course, is by convincing the public that’s the case, they then have to try to do what they claim they can do. But the law of unintended consequences has a bad habit of pushing its way into such situations and turning them sour:

The Japanese experience shows that when the government is an active participant in the market, many firms would rather accept state support than initiate the inevitable financial reckoning. Such a status quo does not provide a sustainable foundation for the economy. Instead, it restricts economic growth and creates a cycle of stagnation.

A friend, talking about the recession and eventual recovery, said that we’ll come out of it “okay” because “Americans are neurotically productive”. True. But so are the Japanese. While we have a fantastic workforce which is among the most productive in the world, even they won’t be able to overcome restricted economic growth caused by the government’s deep intrusion into various markets.

Comparing Japan’s reaction to the US reaction in similar circumstances is instructive:

When a recession began to set in after the 1990 stock market crash, Japan responded by reversing its tight money policy, cutting rates to 4.5 percent in 1991, 3.25 percent in 1992, 1.75 percent from 1993 to 1994, 0.5 percent from 1995 to 2000, and as low as 0.1 percent in September 2001.

A similar pattern took place in the United States. From 2000 to 2002, the Federal Reserve slashed the target discount rate from 6 percent to 0.75 percent. Fearing irrational exuberance, to borrow Alan Greenspan’s famous phrase, the Fed then raised the rate as high as 6.25 percent in June 2006. But now that the bubble has burst and the economy contracted, the Fed has cut the discount rate 12 times, lowering it to the current 0.5 percent. Federal Reserve Chairman Ben Bernanke has repeatedly stated that he sees interest rate cuts as a way to “support growth and to provide adequate insurance against downside risks.”

In both the Japanese and the American cases, post-bubble policy makers believed that lowering interest rates would make credit easier to obtain, thus recreating the environment that had spurred economic growth to begin with. But this meant that the supposed cure for a bubble created by easy credit was to extend even more easy credit.

These rate cuts only perpetuated the distortion of economic decisions and prevented savings, investment, and consumption from realigning with true preferences, as opposed to the illusory ones created by easy credit and artificially low interest rates. The lesson is that when monetary policy is used to “smooth” or “tweak” the market, it inevitably causes unintended consequences that in some cases can be very damaging to long-term economic growth.

Of course it is hard to say what future growth might be had the US government not done what it has done. But again, using Japan of that era vs. the US of that era, the difference is between 1.3% growth on average vs. 3.5% growth here. In economic terms that is a huge difference.

Reason also does a nice job of dismantling the “failure of regulation” argument. As they point out, what must be examined is how the regulatory environment then in place spawned the crisis vs. the claim that not enough regulation was in place.

For instance, government housing policy of the era:

The push to expand homeownership had two big effects. First, it greatly increased the number of buyers, driving up housing prices. Second, it provided mortgages to a large number of people who had a high risk of default.

That policy was further enabled by the capital reserve requirements which, in effect, encouraged heavy lending and an insensitivity to risk. Instead of admitting that and understanding that such policies are dangerous, the reaction has mostly been to ignore that and shift the blame to the private sector with calls for “more regulation”.

And then, going back to the “pain avoidance” point (justified as “too big to fail” by the government), what has happened is, as in the case of GM and Chrysler before the bankruptcies, government propping up failed businesses:

The Bank of Japan tried to ease economic pain by loaning large amounts to businesses. But the attempts to recapitalize the market ignored underlying management problems in the dying firms. It was a costly mistake. Intense lobbying from special-interest groups representing various sectors of the Japanese economy perpetuated the ill-fated loans and funneled government money to zombie businesses.

The United States has already begun to copy this policy, lending billions of dollars to financial institutions and auto companies and buying up billions more in bank equity in an effort to recapitalize the marketplace. The effect has been to keep poorly managed firms alive with taxpayer money.

Had they been allowed to fail and go through the reorganization process, those problems would have at least been addressed. They haven’t, at this point, in most of the financial sector and in the auto sector, it remains to be seen.

Of course the government’s deep involvement in these sectors and businesses sets up a natural conflict of interests. While a business is market oriented, and takes signals from consumers, governments are agenda driven and politically oriented. And it then comes down to a matter of incentives. In the first case the incentive of a business is to serve its consumer base. But that’s not the case with politicians necessarily, is it?

Lawmakers’ incentives are to serve their constituencies or their own political careers. This can put them at odds with the businesses they are suddenly attempting to manage. The more the government is involved in directing business activity, the less likely those firms will succeed in maintaining long-term growth, and the more likely they will turn into Japanese-style zombies.

While we’d like to believe that lawmaker’s constituencies consist of the people in their state or district, in reality they consist of special interests who help keep them in office. The ability to deliver to those special interests and keep their support and dollars flowing is just to much to resist for most.

Additionally:

Studies from Okimoto’s center and the Bank of Japan concluded that data revealing the scope of the economic malaise were suppressed and that regulations were developed with governmental interests in mind.

Given how the discussion has been driven here by the likes of Barney Frank and Chris Dodd, there’s little doubt that regulations will be “developed with governmental interests in mind”.

In reality it all comes down to power, or the illusion of power, and politics. Short-term politics with no real eye on the future impact of actions taken today. And these actions are based in a false premise that the market is not self-correcting and that it must be both controlled and tweaked by government.

Japan bought into that premise, and so has the US:

The principle of creative destruction—the economic mutation that continuously breaks down old forms and creates newer, more productive and efficient ones—was ignored in the hope that legacy corporations could somehow save Japan. From Wall Street to Detroit, under both George W. Bush and Barack Obama, the American government has been equally unwilling to let once-formidable companies fail.

And that, in my opinion, will see us repeat the Japanese experience, despite the small glimmers of hope we’ve been seeing in the reports in recent days. This isn’t about short term increases in home sales and construction spending. This is about the long term economic health of our economy.

Unsurprisingly, I’m not seeing moves by the government that work toward the most positive outcome in that regard.

~McQ

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