Archives: 06/2011

AEI on the Spectre of ‘Isolationism’

As David Boaz notes below, a few blocks away at 17th and M, the foreign policy and defense analysts at the American Enterprise Institute have discovered a threat that’s even more disturbing than the possibility of a Chinese “Space Force” armed with particle-beam weapons [.pdf].  It seems there’s a spectre haunting America–the spectre of “isolationism.”

It’s such a threat that AEI, one of our leading conservative think tanks, is calling on President Obama to man the bully pulpit and use his magic rhetorical skills to raise awareness. I did a double-take on Tuesday when I saw a post at AEI’s blog titled, “With Growing Isolationism, We Need Obama to Lead Now More Than Ever.” And yet, when I got up the next day, I heard AEI veep Danielle Pletka on NPR, lamenting “Republican isolationism” and the fact that Obama hadn’t yet stepped up to “explain to the American people” the “tough, important decisions” he’d made in foreign policy.

What’s the evidence for this supposedly burgeoning “isolationism” in the Republican party and the country at large? AEI’s Alex Della Rocchetta cites a recent poll showing that only 26 percent of likely voters support Obama’s Libyan adventure and the Pew Center survey David links to below, that has a rising number of Americans agreeing with the statement that the US should “mind its own business internationally.”

But is it “isolationism” to doubt the wisdom of bombing Libya, a country that the president’s own secretary of defense admits isn’t “a vital interest of the United States” or to think minding your own business abroad is better than minding other peoples’ business?  As my colleague Justin Logan has pointed out, “isolationism” has always been a smear word designed to shut off debate. Tim Carney’s sardonic definition has it right: “Isolationist: n. Someone who, on occasion, opposes bombing foreigners.”

But, rhetorical games aside, AEI’s hawks have reason to worry that interventionism is increasingly unpopular. It had to hurt when even sometime AEI scholar Newt Gingrich–a guy so threat-addled that he once called for zapping a North Korean missile test with lasers–struck a note of restraint at the last GOP debate. As the New York Times noted, that debate showed that “the hawkish consensus on national security that has dominated Republican foreign policy for the last decade is giving way to a more nuanced view.”

Maybe GOP pols are beginning to catch on that, for quite some time now, ordinary Americans have overwhelmingly rejected the globocop role forced on them by liberal and conservative elites. Indeed, there’s a huge disconnect between the foreign policies Americans favor and those the Beltway Consensus delivers. Nearly three-quarters of the American public wants to get out of Afghanistan yesterday; meanwhile, 57 percent of National Journal’s “National Security Insiders” think we need to waste more blood and treasure on armed “community organizing.”

It’s almost like there’s a “culture war” going on, but not one of the usual God, Guns, and Gays variety. On one side, you’ve got the sound, mind-your-business instincts of the American people; on the other, there’s a gaggle of intellectual elites, determined to extend the reach and power of the American state. A “Battle,” if you will. You could write a book about it.

Is There a Rise in Isolationism?

At the Encyclopedia Britannica Blog, I take a look at the new hysteria about “isolationism” in the Republican party. There’s lots of hand-wringing at the American Enterprise Institute, and the Sunday morning shows were full of denunciations. But, I note:

What they’re really worried about is not so much the Republican leaders as the people. The country folk just don’t see the British coming any more. Rubin noted “a distinct isolationist streak that was very much in evidence in the questions from the audience last night.” Della Rocchetta’s main concern was “a growing isolationist sentiment espoused by the U.S. public”…

But here’s the specter that is haunting the neocons, a graph from the Pew center (using Gallup data) showing a striking rise in “mind our own business” sentiment:

More here.

Boost the Money Supply, Raise Interest Rates

The rate of broad money growth (M3) in the United States is weak (see the accompanying chart).  The ultra-low federal funds rate (0.25%) has acted to keep a lid on broad money growth and, in turn, economic activity.  Yes, “low” interest rates imposed by the Fed are contributing to a credit crunch and anemic money growth.  But, wait.  This is counter-intuitive.  And if that’s not enough, it’s not what the textbooks tell us, either.

While the Fed has pumped huge quantities of so-called high powered money into the economy, the U.S. is paradoxically facing a credit crunch.  Banks have utilized their liquidity to pile up cash and accumulate government bonds and securities.  In contrast, bank loans have actually decreased since May 2008.  And since credit is a source of working capital for businesses, a credit crunch acts like a supply constraint on the economy.  Even though it appears as though the economy has loads of excess capacity, the supply-side of the economy is, in fact, constrained by the credit crunch.  It is not surprising, therefore, that the economy is not firing on all cylinders.

To understand why, in the Fed’s sea of liquidity, the economy is being held back by a credit crunch, we have to focus on the workings of the loan markets.  Retail bank lending involves making risky forward commitments.  A line of credit to a corporate client, for example, represents such a commitment.  The willingness of a bank to make such forward commitments depends, to a large extent, on a well-functioning interbank market – a market operating without counterparty risks and with positive interest rates.  With the availability of such a market, even illiquid (but solvent) banks can make forward commitments (loans) to their clients because they can cover their commitments by bidding for funds in the wholesale interbank market.

At present, the major problem facing the interbank market is what can be termed a zero-interest rate trap.  In a world in which the fed funds rate is close to zero, banks with excess reserves are reluctant to part with them for virtually no yield in the interbank market.  Accordingly, the interbank market has dried up – thanks for the Fed’s “zero” interest-rate policy.  And, with that, banks have been unwilling to scale up their forward loan commitments.

But, how can banks make money without making wholesale and/or retail loans?  Well, it’s easy and “risk free” to boot.  By holding the federal funds rate near zero, the Fed creates an opportunity for banks to borrow funds at virtually no cost and use them to purchase two-year U.S. Treasury notes which yield around 40 basis points.  That doesn’t sound like much.  But, considering that banks don’t have to hold capital against U.S. Treasuries, their positions in U.S. government securities can be leveraged to the moon.  Well, not really.  But, at a leverage ratio of 20, a bank can do quite well by playing the Treasury yield curve.

It’s time for the Fed to recognize market realities and raise the federal funds rate.  A higher fed funds rate would release the credit squeeze created by the Fed’s misguided “low” interest-rate policy.  If the Fed boosted the funds rate to 2%, the all-important broad money measure – M3 – would get a boost, and so would the slumping economy.

This Week in Government Failure

Over at Downsizing the Federal Government, we focused on the following issues this past week:

  • The threat of terrorism is so low in the United States and the efficacy of the funds in mitigating it so uncertain that the right amount of homeland security spending in most parts of the United States is none.
  • With trillion dollar deficits and mounting federal debt, will Congress finally get serious about cutting farm subsidies?
  • Sen. Jim DeMint cites Cato’s Downsizing Government work in a Wall Street Journal op-ed on the Economic Development Administration.
  • Chris Edwards on a debt limit deal: Will the cuts be phony?
  • I told the Senate Small Business Committee that the Small Business Administration should be abolished.

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Abolish the NLRB (and the NLRA)

The National Labor Relations Board is in the news for meddling in Boeing’s decision to build some aircraft in South Carolina rather than in Washington state. To most economists, the idea that a small regulatory board in D.C. should try to centrally plan $1 billion of private business investment is crackers.

However, the vast bureaucratic state in D.C. was built by overactive left-wing lawyers, not free-market economists. Consider that the federal government apparently has complex legal rules to determine when U.S. businesses are allowed to move investment and jobs from one state to another. The NLRB’s General Counsel Lafe Solomon said that in deciding whether it allows businesses like Boeing to adjust their production: “For us, it’s a motive analysis.”

“Motive analysis?” We’ve got obscure labor lawyers in the federal bureaucracy trying to mind-read the nation’s business executives on their huge capital investment decisions? That doesn’t sound like a very good prescription for U.S. competitiveness in the global economy.

This NLRB case highlights just one anti-growth and anti-freedom aspect of New Deal-era labor union laws. These laws–particularly collective bargaining–have no place in the modern economy. The NLRB should be abolished. Indeed, the entire National Labor Relations Act of 1935 ought to be repealed, according to Professor Charles Baird in his essay at DownsizingGovernment.org.

Economist Ludwig von Mises noted that “collective bargaining” is a euphemism for “bargaining at the point of a gun.” The system is not based on voluntarism and freedom of association. Voluntary unions would be fine, but current labor laws allow the creation of monopoly unions, which are inconsistent with a free economy and a free society.

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The Non-war War in Libya

On Sunday, the Obama administration will have made war in Libya for more than 90 days without authorization from Congress.  This violates both the Constitution and the War Powers Resolution. The administration claims it does not violate the latter because the war in Libya is not actually a war for legal purposes. The non-war war argument is not going over well; even the New York Times editorial page says the administration’s case “borders on sophistry.”

Beyond the headlines and the political struggle, the administration’s efforts to expand the presidential power to start wars also shifts political authority from the U.S. Congress to the United Nations. For more on the problems of Obama’s radical moves in foreign policy, see my essay here.