Topic: Government and Politics

Bailout Nation

“If only we had a Republican administration in office, none of this would have happened,” my friend Deroy Murdock emailed me this morning. He meant the nationalization of two large companies, of course, though he could have been talking about a trillion-dollar spending increase, the expansion of entitlements, the federalization of education, or indeed the great leap forward to the imperial presidency.

But the bailout of Fannie Mae and Freddie Mac is another giant step toward government control of the economy. NPR reported this morning that the government takeover “could turn out to be a smart one.” Yes, if you think nationalization of the means of production just might work. The government is writing a blank check on the taxpayers. It might cost nothing, it might cost $25 billion, it might end up costing trillions of dollars, given the size of Fannie Mae and Freddie Mac’s portfolios and the risk of further large declines in housing prices.

And speaking of the imperial presidency–all these huge new powers and expenditures are being conducted without any sanction from Congress and with little public debate. This isn’t Venezuela, but the executive branch is certainly expanding its powers on its own authority. If only President Bush would put his new powers to a public referendum, maybe a Yon Goicoechea could arise to block them. Certainly no Friedman Prize candidate has stood up in Congress.

But the Fannie-Freddie takeover is not the only bailout in the works these days. There was the Bear Stearns bailout back in March. Which might not be considered a real bailout, as Bear Stearns shareholders lost most of their investment, though it was certainly a then-unprecedented assertion of federal power. Arnold Kling noted in April that the housing bill, at least, was a pure bailout for homebuilders. Now the Big Two and a Half automobile makers are asking for $50 billion of federal help. (Didn’t we already bail out Chrysler once? How many bailouts does one company get?) And now Congress is talking about “a second economic stimulus package, totaling $50 billion in the form of money for infrastructure projects, relief for state governments struggling with rising Medicaid costs, home heating assistance for the Northeast and upper Midwest, and disaster relief for the Gulf Coast and the Midwestern flood zone.” And Transportation Secretary Mary Peters wants “an $8 billion infusion” for the federal highway trust fund. It’s a good thing that the federal government is so flush with money these days, or we might be risking a large deficit.

Capitalism is a system of profit and loss. It works because each person and each company, in seeking its own interest, is led “as if by an invisible hand” to supply goods and services that others want. Companies that satisfy consumers prosper. Companies that can’t produce goods that consumers want–like Chrysler, repeatedly–suffer and sometimes go out of business. The failures are often painful. But as Dwight Lee and Richard McKenzie wrote in their book Failure and Progress (or at least in this column based on the book), “Economic failure is to the economy what physical pain is to the body. No one enjoys pain, but without it the body would lack the information needed to maintain its health.” Government subsidies to prevent business failure simply keep pouring money into businesses that are relatively unsuccessful at satisfying consumer desires. They are, among other things, censorship of vitally needed information. Employees, entrepreneurs, and investors need to know where their money and talent are most valuable. Profits and losses are key indicators of that.

When businesses make bad decisions, they should suffer economic losses. That’s how we keep the system honest and productive. Caroline Baum of Bloomberg points out that the bailout for subprime borrowers involved helping people to stay in homes that they couldn’t afford, in many cases because they misled lenders or connived with lenders who knew they could package and resell bad mortgages. When governments make bad decisions, they should not pour good money after bad. Instead, they should try to repeal burdensome regulations, privatize functions that ought to be private, and be willing to sell purchases they shouldn’t have made, even at a loss.

Plenty of people had warned about the problems of Fannie Mae and Freddie Mac. As Arnold Kling notes in a new Cato Briefing Paper, the current crisis ” may have been the most avoidable financial crisis in history.” Treasury Secretary Larry Summers was one of those Cassandras back in 1999. So was Lawrence J. White in a 2004 Cato Policy Analysis calling for privatization, or failing that, a clear removal of the federal guarantee for the two companies. Instead, Congress and successive administrations continued to push Fannie and Freddie to get bigger and to buy mortgages that were in clear jeopardy of default. And now, having created this crisis, the federal government proposes not to wind down the overextended companies but to take them over so they can get all the benefits of crack federal financial management. Kling proposes a better exit strategy.

What Do TV Ratings for Speeches Mean?

Last week it was reported that Barack Obama’s acceptance speech was the most-watched convention speech ever, with 38.4 million viewers. Then, six days later, the Republican vice presidential nominee came within an inch of his record total. And then Nielsen reported that John McCain’s speech edged out Obama’s, making him the most-watched presidential nominee ever.

But there’s a footnote to this victory. Nielsen rates the audiences on commercial networks. But PBS says that 3.5 million people watched its broadcast of Obama’s speech, while only 2.7 million watched McCain on PBS. Why? Need you ask? PBS is a government-funded network for liberals. More people watched McCain on the conservative Fox News Channel, more people watched Obama on the liberal PBS. So if you add in the PBS figures, Obama probably has a very slight edge in total viewers. (Nielsen also doesn’t rate C-SPAN, which doesn’t release viewing figures.)

But does any of this matter? Dudley Clendinen reported in the New York Times [$] on August 26, 1984, that more people watched Walter Mondale’s acceptance speech than President Reagan’s. Reagan went on to win the election by 59 to 41 percent. And Jesse Jackson’s convention speech drew more viewers than either Reagan or Mondale.

And that wasn’t the only time, Clendinen reported: “Mr. Humphrey outdrew Mr. Nixon on television [in 1968], but not in the polls. The same thing happened with Gerald R. Ford and Jimmy Carter [in 1976]. And it happened again four years ago, when President Carter lost to Ronald Reagan.”

So enjoy your Nielsen victory, Republicans. But don’t assume that a victory at the boob tube presages a victory a the ballot box.

(Footnote: I wondered if today’s candidates were really drawing more viewers than earlier nominees, in the days of three networks and no cable competition. As far as I can tell, yes they are. Reagan and Mondale in 1984 drew 19 million viewers each. Cable was already taking big bites out of the networks by then. Nielsen says that 35 million watched Jimmy Carter’s speech in 1976. He got a much larger percentage of a smaller population.)

Bipartisan Nonsense on “Energy Independence” and Trade

Sen. John McCain reinforced his bipartisan credentials Thursday evening by sounding as confused as the Democrats on the nation’s assumed need for “energy independence.”

In his acceptance speech at the GOP convention in St. Paul, McCain pledged federal support for alternative energy so the United States can reduce the amount of energy it imports from abroad. “When I’m president,” McCain told cheering delegates, “we’re going to embark on the most ambitious national project in decades. We are going to stop sending $700 billion a year to countries that don’t like us very much. We will attack the problem on every front.”

He then pledged his support for more offshore drilling, nuclear power plants, wind, tide, solar and natural gas.

Whoa! Before we embark on a project that could cost tens or hundreds of billions of dollars, let’s get the facts straight. Specifically, where did that $700 billion number come from?

That is far more than what we pay for imported energy. In 2007, Americans spent less than half that amount—$319 billion—for imported energy of all kinds, including oil and natural gas. Even with higher energy prices in 2008, our total bill for imported energy this year will be nowhere near $700 billion.

Contrary to popular perception, most of our oil imports come such friendly countries as Canada, Mexico, Colombia, Brazil, and the United Kingdom, or from more neutral suppliers such as Iraq, Kuwait, Nigeria, Angola, Chad and Congo (Brazzaville).  Only a third of our imported oil comes from the major problem countries of Saudi Arabia, Venezuela, Algeria, Ecuador and Russia. We don’t import any oil directly from Iran. [You can check out the latest Commerce Department figures here.]

The $700 billion that Sen. McCain probably had in mind is America’s total trade balance, known as the current account. Last year, Americans rolled up a $731 billion current account deficit with the rest of the world. That account includes not just energy but also manufactured goods, farm products, services, and income from foreign investments.

The current account deficit is not driven by energy imports but by the underlying level of savings and investment in the U.S. economy. We run a current account deficit because, year after year, more is invested in the American economy than Americans save to finance that investment. Foreign capital fills the gap, and the resulting net inflow of foreign investment more or less directly offsets the gap between what we import and what we export.

If the federal government dramatically increases spending on alternative energy, as Sen. McCain and his Democratic opponent both seem to want, the result will be a bigger federal budget deficit, a smaller pool of domestic savings, more foreign capital flowing into the United States, and an even larger current account deficit.

You’re No Reagan—or Lincoln

Last night John McCain proclaimed himself the candidate of “the party of Lincoln, Roosevelt and Reagan.”

One of Abraham Lincoln’s most famous speeches was his 1852 eulogy for Henry Clay. “He loved his country partly because it was his own country,” Lincoln declared, ”but mostly because it was a free country.”

John McCain managed to give a lengthy tribute to America’s virtues without mentioning that it was a free country:

I fell in love with my country when I was a prisoner in someone else’s. I loved it not just for the many comforts of life here. I loved it for its decency; for its faith in the wisdom, justice and goodness of its people. I loved it because it was not just a place, but an idea, a cause worth fighting for. I was never the same again. I wasn’t my own man anymore. I was my country’s.

Fine sentiments, and he did mention that America is “an idea, a cause worth fighting for.” But what is that idea or that cause? He didn’t say. He never mentioned the Constitution, or the Declaration, or the freedom that has made America a beacon to the world. Indeed, his message seemed less like Lincoln’s and more like John F. Kennedy’s “Ask not what your country can do for you — ask what you can do for your country.”

Gerson to McCain: Move Left Fast

Bush speechwriter Michael Gerson, one of the big-government-conservative columnists who are all the rage with the Establishment Media, denounces Barack Obama for having “the ideology of Walter Mondale” and then calls on John McCain to adopt the ideology of Walter Mondale. Here’s his prescription for a winning acceptance speech:

McCain needs to announce new and unexpected reform proposals. Perhaps he should courageously follow the logic of his health plan and promise health coverage as a universal right guaranteed by subsidies for the purchase of private health insurance. Perhaps he should embrace the goal of getting all American electricity from renewable and non-carbon sources by some ambitious but realistic date. Perhaps he should offer guaranteed funding of higher education in exchange for national service.

With Republicans like that, who would need Democrats? If you want the big government of Walter Mondale, you might as well elect Walter Mondale, or his contemporary successor.

And of course it’s not at all clear that such a program would distinguish McCain from the Bush-Hastert-Frist Republicans who have become so unpopular. Ever since Gerson wrote for Bush the words “There is another destructive mindset: the idea that if government would only get out of the way, all our problems would be solved. An approach with no higher goal, no nobler purpose than ‘Leave us alone,’” the Republican party has been eagerly embracing openhanded government. Taxpayer funding for prescription drugs. Subsidies for every form of energy. Huge increases in federal education funding. How would Gerson’s proposed agenda for McCain be “the right address for a rebel?” It would in fact confirm the Bush-McCain alliance to destroy the remnants of Goldwater-Reagan conservatism.

McCain-Palin vs. Obama-Biden on Earmarks

Robert Bluey of the Heritage Foundation beat me to the punch by detailing the differences between McCain-Palin and Obama-Biden on earmarks.

Bluey makes an important point: even unquestioned reformers like Jim DeMint (R-SC) only recently found earmark religion. Better late than never. Especially in a state like Alaska, which is basically a welfare state where corruption is the status quo, Sarah Palin has built an impressive record of reform. Important questions remain to be answered about her stances on tax and budget policy, but compared to Obama and Biden, there’s no question the appropriations cardinals would be sweating bullets under a McCain-Palin administration.