Tag: free markets

Obama the Planner

New Republic editor John Judis has a couple of insights about the Obama administration’s economic and social goals. He points out that, for more than a century, Progressive and free-market forces have gone through cycles of “reform and reaction.”

The Progressives — who my friend John Baden calls the “American counterrevolutionaries” — have repeatedly sought to increase the size and scope of government: railroad regulation, public land agencies, and the income tax in the 1900s; Social Security, low-interest home loans, and government ownership of power plants in the 1930s; Medicare, the war on poverty, and environmental laws in the 1960s.

In between, friends of free markets tried to roll back those reforms, but were never completely successful. Thus, each successive reform era has further increased government power and reduced free markets.

This reminds me of the basic strategy used by the wilderness movement (in which I was active from about 1975 through 1993). Wilderness activists basically considered land that had already been preserved as wilderness or some other classification to be “theirs,” while all remaining land was “potentially theirs.” Successive congressional land-use bills or presidential decrees would put more land in “their” category, but no matter how much they got, it was never enough.

At the time, I called this the “scorched earth policy,” meaning wilderness advocates embedded so many poison pills in the protected lands that no one would ever try to declassify them. This isn’t necessarily a deliberate strategy, just an effect of our political system.

Judis goes on to outline the ways in which Obama wants to build on past reforms. First, he wants to use “the budget to shift the locus of industrial production toward ‘green’ jobs and products.” He also wants to “make dramatic changes in transportation with [government’s] intervention in the auto industry and in its funding of high-speed rail.” Finally, he wants to institute a form of “national planning” in order to “reverse existing trends” towards “suburban housing [and shopping] malls.”

People who are attracted to such policies tend to judge them based on their intent rather than their results. In fact, these interventions have nearly all either backfired or had huge unintended consequences.

Railroad regulation was imposed just as trucks appeared on the scene in 1907, leaving railroads helpless against growing competition. “Progressive” income taxes ended up with so many loopholes that they weren’t really progressive. The federal loan companies, such as Fannie Mae and Freddie Mac, played a key role in the current crisis when they succumbed to political pressure to buy increasingly risky loans.

Social Security is a giant Ponzi scheme that is also one of the most regressive taxes on the books, not to mention that it has provided billions of dollars of surpluses for Congress to borrow with little hope of ever paying it back. Medicare is an even bigger Ponzi scheme, while the war on poverty created a semi-permanent underclass that has been all but forgotten by the liberals who claim to care most about them.

Environmental laws produced many benefits when they focused on technical solutions, but they failed miserably when they attempted to change people’s behavior. As transportation expert Alan Pisarski recently told the Institute of Transportation Engineers, technical solutions to air pollution are responsible for 95 to 105 percent of the improvements in air quality in the past 40 years, while behavior solutions produced only minus 5 to 5 percent of the improvements — minus 5 meaning some behavioral solutions made pollution worse.

Unfortunately, Obama’s plans are all about changing behavior. This means two things: they will be expensive — especially when counting the unintended consequences — and they won’t work. High-speed rail and urban revitalization, for example, are all about redesigning the country for yuppy elites, not ordinary Americans. The question for free-market advocates is: how can we minimize the damage now and roll back the reforms later?

Cleveland Park Embraces Free Markets

Cleveland Park, an upscale neighborhood here in the District of Columbia, might be the last place you would expect appeals to the principles of the free market.  It is, after all, the home of what David Brooks once called ”Ward Three Morality,” an outlook that celebrates government control of the economy. But not always.

Recently an entrepreneur proposed opening a new wine store in Cleveland Park. He sought the support of the advisory neighborhood commission, a local government board, before making his case for a liquor license to DC’s Alcohol Beverage Control Board.  The most serious opposition to the entrepreneur’s plans seems to have come from an existing wine store nearby. According to its attorney, the existing wine store was “a beloved extension of the community.” More candidly he noted the new store would offer competition to the existing business. At this point, you might think: the Cleveland Park commission blocked opening of the new business while congratulating themselves on protecting the town from a ruthless “capitalist logic.”

Well, not quite. Peter Fonseca, the lawyer for the entrepreneur, reportedly “urged the commissioners to consider free-market principles when making their decision. ‘This is America.’” And they did: “Commissioner Richard Rothblum agreed, saying commissioners should not get in the way of free enterprise. ‘I don’t think we have any place telling people what their business plan should be.’” The commission then voted 8-0 to support the entrepreneur’s effort at the Alcohol Control Board. The appeal to “free market principles” seems to have carried the day in Cleveland Park!

Perhaps this is only the beginning. If the free market is desirable for fine wines, why not the auto industry and the banks?

Tarred by TARP

Government-backed equity was offered to adequately capitalized banks in order to remove the “stigma” from banks receiving TARP funds, and the management of these institutions took the bait and accepted the money.

Surprise, surprise: now they discover that the money came with strings.

Some banks want to pay back the TARP money to extricate themselves from government restrictions on compensation and pressure to make loans the banks view as unprofitable. Treasury Secretary Geithner has made it clear that the decision to pay back the funds early won’t be left to the banks, but to the Treasury: “My basic obligation is to make sure the system as a whole … has the ability to provide the credit that recovery requires.”

The banking system has thus become a tool for the government to further its policies. And the bankers themselves put their institutions in that position. While taxpayers may understandably feel the bankers got their comeuppance, there are at least two major problems with the Bush/Obama policy.

First, Mr. Geithner has misdiagnosed the problem.

We are in recovery from the effects of the bursting of a massive housing and finance bubble funded by debt. That boom in turn financed a consumption binge of monumental proportions.

The only resolution of a spending binge is restraint in the form of saving. Recovery requires not more credit and another boom, but a dose of economic sobriety.

Individuals and firms know that and are de-leveraging – unwinding what they now realize is excessive debt. That will take the rest of this year and the better part of 2010. Overall, credit is down because demand is down.

Second, and even more disturbing: it appears that the Obama Administration wants to control the financial sector in order to gain control over what Lenin called the “Commanding Heights” of the U.S. economy: the major industries and sources of employment. The auto industry is a prime example, and one in which the administration has involved itself directly. It is also pressuring major recipients of TARP funds to ease the terms of the loans they have made to firms such as Chrysler. Treasury is attempting to use the banks to conduct fiscal policy through credit allocation.

The bankers taking TARP funds got their firms into a mess and deserve no sympathy. Anyone believing in free markets, however, must oppose this power grab by the Obama Administration.

Let the banks pay the funds back and let it be a lesson for CEOs and their stockholders: If you take government funds, you have taken on an unreliable business partner.

Miron, Calabria Join Cato Institute

Jeffrey Miron, Director of Undergraduate Studies at Harvard’s Department of Economics, has joined the Cato Institute as a Senior Fellow.

“I am delighted to be working with Cato,” Miron said. “This is a crucial moment in our nation’s history, and Cato’s mission - increased understanding of the virtues of limited government, free markets, individual liberty, and peace - has rarely been more important.”

Miron will help Cato’s economic team promote dynamic market capitalism and economic freedom through media appearances and policy analyses, in addition to speaking engagements and outreach to the academic community.  He is the author of Drug War Crimes: The Consequences of Prohibition (Independent Institute, 2004) and The Economics of Seasonal Cycles (MIT Press, 1996), in addition to numerous opeds and journal articles.

Miron will retain his affiliation with Harvard.  Prior to joining Harvard, he served as chairman of the Department of Economics at Boston University.  Miron received his Ph.D. in economics from the Massachusetts Institute of Technology.

Mark Calabria, a veteran staff member of the Senate Committee on Banking, Housing & Urban Affairs, has joined the Cato Institute as Director of Financial Services Regulation.

“I join Cato with a great sense of excitement and urgency,” Calabria said. “Cato has long been a strong, and sometimes the only, voice for expanding and protecting individual choice.  We are confronted with stark choices regarding the regulation of our financial markets: whether to expand the role of politics in deciding who will get credit and what institutions will fail.  In a time when markets and freedom are being questioned and attacked, Cato’s mission of understanding the impact of government proposals is all the more necessary.”

Calabria will lead Cato’s efforts in developing solutions to what ails the U.S. financial markets that do not include more oppressive government regulation.  He will also help educate the public, via media appearances and other outreach, as to how the government itself contributed heavily to the disruptions now occurring in the financial sector.

In addition to his work on Capitol Hill, Calabria served as Deputy Assistant Secretary for the Office of Consumer and Regulatory Affairs, U.S Department of Housing and Urban Development, and was also senior economist at the National Association of Realtors. Calabria earned his  Ph.D. in economics from George Mason University.

“We are delighted to have two of the nation’s most effective proponents of free markets and individual liberty on board now at Cato,” said Cato founder and president Ed Crane. “Mark Calabria and Jeff Miron are distinguished economists who will play an important role in advancing Cato’s mission in the months and years ahead.”

Topics:

Week in Review: No End to Spending and Regulation in Sight

Geithner to Propose Unprecedented Restrictions on Financial System

geithnerThe Washington Post reports, “Treasury Secretary Timothy F. Geithner plans to propose today a sweeping expansion of federal authority over the financial system… The administration also will seek to impose uniform standards on all large financial firms, including banks, an unprecedented step that would place significant limits on the scope and risk of their activities.”

Calling Geithner’s plan another “jihad against the market,” Cato senior fellow Jerry Taylor blasts the administration’s proposal:

What President Obama is selling is the idea that government must be the final arbiter regarding how much risk-taking is appropriate in this allegedly free market economy. It is unclear, however, whether anybody short of God is in the position to intelligently make that call for every single actor in the market.

Cato senior fellow Gerald P. O’Driscoll reveals the real reason behind the proposal:

Federal agencies have long had extensive regulatory powers over commercial banks, but allowed the banking crisis to develop despite those powers. It was a failure of will, not an absence of authority.   If the authority is extended over more institutions, there is no reason to believe we will have a different outcome.  This power grab is designed to divert attention away from the manifest failure of, first, the Bush Administration, and now the Obama Administration to devise a credible plan to deal with the crisis.

A new paper from Cato scholar Jagadeesh Gokhale explains the roots of the current global financial crisis and critically examines the reasoning behind the U.S. Treasury and Federal Reserve’s actions to prop up the financial sector. Gokhale argues that recovery is likely to be slow with or without the government’s bailout actions.

In the new issue of the Cato Policy Report, Cato chairman emeritus William A. Niskanen explains how President Obama is taking classic steps toward turning this recession into a depression:

Four federal economic policies transformed the Hoover recession into the Great Depression: higher tariffs, stronger unions, higher marginal tax rates, and a lower money supply. President Obama, unfortunately, has endorsed some variant of the first three of these policies, and he will face a critical choice on monetary policy in a year or so.

Obama Defends His Massive Spending Plan

President Obama visited Capitol Hill on Wednesday to lobby Democratic lawmakers on his $3.6 trillion budget proposal. Both the House and Senate are expected to vote on the plan next week.

obama-budget1In a new bulletin, Cato scholar Chris Edwards argues, “Sadly, Obama’s first budget sets a course for more government bloat, more economic distortions, and ultimately lower standards of living for everyone who is not living off of federal hand-outs.”

On Cato’s blog, Edwards discusses Obama’s misguided theory on government spending:

Obama’s budget would drive government health care costs up, not down. But aside from that technicality, the economics of Obama’s theory don’t make any sense.

Obama’s budget calls for a massive influx of government jobs. Writing in National Review, Cato senior fellow Jim Powell explains why government jobs don’t cure depression:

If government jobs were the secret of success, then the Soviet Union wouldn’t have collapsed, because it had nothing but government jobs. Communist China, glutted with government jobs, would have generated more income per capita than Hong Kong where, at least before the Communist takeover, there were hardly any government jobs, but Hong Kong’s per capita income was about 20 times higher than that on the mainland.

Multiplying the number of government jobs did nothing then and does nothing now to revive the private sector that pays all the bills, in large part because of the depressing effect of taxes required to pay for government jobs.

Cato on YouTube

Cato Institute is reaching out to new audiences with our message of individual liberty, free markets and peace. Last year, we launched our first YouTube channel, which has garnered thousands of views and subscriptions. Here are a few highlights:

Regulations We’ve Got. Geithner’s Seeking Something Else

Another day, another mad power grab by Treasury Secretary Tim Geithner.

Only in government does failure bring more responsibility.

Federal agencies have long had extensive regulatory powers over commercial banks, but allowed the banking crisis to develop despite those powers.

It was a failure of will, not an absence of authority.

If the authority is extended over more institutions, there is no reason to believe we will have a different outcome.

This power grab is designed to divert attention away from the manifest failure of, first, the Bush Administration, and now the Obama Administration to devise a credible plan to deal with the crisis.