Topic: Government and Politics

Losing Faith in What?

In the Los Angeles Times, Peter Gosselin offers a “news analysis” on the theme that “Americans may be losing faith in free markets.”

For a generation, most people accepted the idea that the core of what makes America tick was an economy governed by free markets. And whatever combination of goods, services and jobs the market cooked up was presumed to be fine for the nation and for its citizens — certainly better than government meddling.

No longer.

This kind of crisis of confidence occurs every time the economy temporarily heads south — which it inevitably does from time to time. What does this tell us? It tells us that people do not understand the economy very well. And what do stories like Gosselin’s tell us? That most journalists don’t either.

But economic downturns do offer the motivated reporter an opportunity to speculate on the possible political consequences of unflagging public and media ignorance. The causes for our current economic troubles are evidently too complex to fathom, so instead of writing intelligibly about what is actually happening and why, we are asked to wonder (hope? fear?) whether voters can be made to demand a “New Deal Lite,” before the economy regains steam and we become too satisfied to regulate ourselves into oblivion.

It would be useful if journalists could find a way to report on the actual nature of the American economy. This would be a real public service. The American economy is in fact a byzantine amalgam of market and state institutions enmeshed in a thicket of regulation. Gosselin maintains that “most people” in the U.S. think there is something out there called “the free market” that operates without “government meddling.” I’m not really sure that most people think that, but it seems Gosselin does, because he goes on to structure his “news analysis” as if the story is that dissatisfaction with a kind of laissez faire we do not have may be generating demand for basically the kind of dirigisme we’ve already got. But since economic systems we haven’t got can’t cause our economic problems, the result is confusion.

Consider the fact that the Federal Reserve is a central planning committee. We are lucky, I think, to have intelligent, highly professional planners, but there are in-principle limits to what they can do with limited information, and so there is no way they are not going to get it wrong sometimes, or a lot of times. The housing “bubble,” which has turned out very badly for a lot of people, and the historically high price of gas, which is to a large extent a function of the low value of the American dollar, probably has had a lot to do with the policies chosen by our monetary central planners. Failures of government planning don’t discredit free markets. Rather, they suggest free markets might be worth trying some time.

Did the ratings agencies and investment banks screw up royally in their assessment of the risk of certain classes of mortgage-backed securities? Yes they did. Did assurances of bailouts, implicit and explicit, from the government to the financial industry encourage dangerous risk-seeking? Yes they did. Many market institutions, like our advanced financial markets, are very far from being self-organizing outgrowths of unregulated market exchange. Instead they are, by and large, creatures of the vast body of law and government regulation that defines the rules of market exchange — that determine what may be bought and sold, and how — and are tightly integrated with more or less freestanding government institutions like the Fed. When these markets stumble, it’s just a rookie mistake of political economy to see that as problem with markets, per se, rather than as a problem with the way regulation and government institutions happen to have structured those markets and thereby structured the incentives of the individuals and firms that act within them.

Here’s another example of the mixed economy. Food is expensive these days, which hits poorer Americans especially hard. Part of the price hike is due to normal market forces; supply has yet to catch up with the increased demand from the rising middle class in China and India and elsewhere. But a large part of it comes from our own government’s frankly idiotic policy of subsidizing corn ethanol, which pushes up the price of all sorts of foods, from wheat to milk to meat. So the conclusion we should draw from this is what? Damn you free market!?

Gosselin winds down on what to many must be a hopeful note:

Historians watching the nation’s current economic and financial troubles say that just because Americans don’t throw up their hands about markets and rush to an opposite pole, such as socialism, it doesn’t mean that change isn’t underway.

As UC Davis’ Rauchway pointed out, the devastating panics and depressions of the late 19th century eventually resulted in the progressive reforms of the early 20th century and, later, the New Deal of the 1930s.

Before we get too excited about “progressive reforms” once again saving capitalism from itself, perhaps we should try a little harder to comprehend the way the actually-existing economy works (journalists might think about helping with this!), so that we can pinpoint the most likely institutional causes of the recent gloom and effectively focus our reforming zeal. Were the media willing or able to explain how our mixed economy actually functions, this downturn might just as well inspire a loss of faith in the government meddling we’ve already got. But what would be the point of writing an article like that?

The Mechanics of Government Gaining Ground

Over at the new WashingtonWatch.com blog, I’ve posted a piece illustrating the simple modern mechanics of something Jefferson warned against: “The natural progress of things is for liberty to yield and government to gain ground.”

Congress is considering a bill to cancel the scheduled termination of a commission that studies minority veterans issues. It would only cost three cents per U.S. family to keep it going, but it’s one of nearly 10,000 bills of all different stripes pending in the current Congress.

Did minority veterans fight for a country where each group looks to the government for special treatment or a little cut of the loot from taxpayers? Or for the country where the people’s spirits are still free?

What’s Charlie Rangel Hiding?

A man who is willing to show how clean he is by initiating an ethics probe into his own fundraising activities surely wouldn’t mind explaining his motivation for terminating a study on Chinese trade practices that he himself commissioned to great fanfare. Until he does give this explanation, we can only speculate.

On May 23, 2007, House Ways and Means Committee Chairman Charles Rangel (D-NY) asked the U.S. International Trade Commission to undertake a comprehensive study of interventionist Chinese government policies and the role those policies play in exacerbating the U.S.-China trade imbalance. A three-part study was requested, whereby the first part would describe the role and policies of the Chinese government concerning all aspect of the economy. Seven months were afforded to the ITC to complete the first phase, and a 272-page study was published in December 2007.

The second phase was to focus on sectors and policies “which are the primary drivers of the U.S.-China trade deficit” to determine how much of that deficit can be attributed to interventionist Chinese policies like subsidization, currency manipulation, and export promotion. Phase two was to be published by today (no later than 14 months after the May 23, 2007 letter). But it wasn’t.

In a letter to then-ITC chairman Dan Pearson dated April 1, 2008, Rangel expressed his disappointment with the ITC’s report so far, but took care to place the blame for the report’s faulty conclusions on the absence of transparency on the part of the Chinese government:

The inability to access within the time agreed upon key information, and to analyze this information thoroughly and rigorously, has led to numerous inadvertent mischaracterization in the draft. These mischaracterizations are understandable given several characteristics of the Chinese economy and Chinese society, including the lack of transparency in Chinese policymaking, the absence of a clear demarcation between central and provincial government responsibilities, the pace at which laws and regulations are being written and re-written, and the incomplete development of the rule of law in China. Similarly, the breadth of the Committee’s request may have been too great, given the limitations on the Commission’s time, resources and lack of experience to date in investigating, identifying, obtaining and analyzing the kinds of information critical to the analysis sought in the Committee’s request.

Rangel went on to express confidence that the ITC would “develop the capacity to address the central and critical issues identified in the study,” but that he was suspending the work of the ITC on this matter, while his staff “work[ed] with the Commission staff to ensure that the Commission has the resources, time, and guidance it needs.”

I guess the ITC didn’t take the hint, so on June 25, 2008, Rangel terminated the study altogether. 

Why did Rangel pull the plug? At a minimum, the move to terminate the study raises suspicions that the ITC’s conclusions were not in line with the hopes or expectations of Rangel, the Committee, or the Democratic majority in Congress. The Dems have been hard-peddling the line that unfair trade explains the trade deficit, the “decline” in U.S. manufacturing, and the growing aversion of Americans to trade and globalization. 

The ITC’s conclusions were probably more in line with the views of those of us who acknowledge that the Chinese government continues to play an oversized role in the Chinese economy, but who also believe those interventions have only a marginal impact on the trade balance. 

Allowing those conclusions to come out in the midst of an election campaign that features clear distinctions on trade policy between the political parties, and which would clearly undermine the Democratic Party line, could be uncomfortable for Chairman Rangel and his fellow Democrats. 

At this point, the ITC economists and researchers who spent a minimum of six months on this study are probably more than a bit frustrated. And taxpayers have been forced to subsidize yet another wasteful government effort. 

At the very least, then, the ITC should publish its results, since it has already come this far. It would be interesting to see exactly what scared Chairman Rangel. And I suspect the results would be vindicating for those of us who know that the trade deficit has nothing to do with trade policy and everything to do with providing a fig leaf for the protectionist agenda of some of Chairman Rangel’s party’s biggest benefactors.

Barack Obama Walks the Walk

After telling a gathering of the American Federation of Teachers that he opposes school voucher programs over the weekend, Senator Obama added that: “We need to focus on fixing and improving our public schools; not throwing our hands up and walking away from them.”

Senator Obama sends his own two daughters to the private “Lab School” founded by John Dewey in 1896, which charged $20,000 in tuition at the middle school level last year. Though he says “we” should not be “throwing up our hands and walking away” from public schools, he has done precisely that.

That is his right, and, as a wealthy man, it is his prerogative under the current system of American education, which allows only the wealthy to easily choose between private and government schools. But instead of offering to extend that same choice to all families, Senator Obama wants the poor to wait for the public school system to be “fixed.”

I could editorialize about this, but I really don’t see the need. Readers of this blog are perfectly capable of drawing the obvious conclusions.

Rep. Wexler: “Don’t Vote for My Iran Bill, Please!”

A few weeks ago, I puzzled over what the heck Congress was doing on Iran. Turns out I wasn’t the only one puzzled.

We now have one of the co-sponsors of the House bill, Rep. Robert Wexler (D-Fl.), posting on the Huffington Post begging his colleagues not to vote for his own bill. Why? Because:

It is clear that despite carefully worded language in H. Con. Res. 362 that “nothing in this resolution should be construed as an authorization of the use of force against Iran” that many Americans across the country continue to express real concerns that sections of this resolution will be interpreted by President Bush as “a green light” to use force against Iran.

The language that is most disconcerting in the resolution is the third resolved clause, which demands that the president initiate among several things an “international effort to impose stringent inspection requirements on all persons, vehicles, ships, planes, trains, and cargo entering or departing Iran.”

I firmly believe it was not the intention of the authors of this resolution to open the door to a US blockade or armed conflict with Iran. However, I fully understand and share the American public’s mistrust of President Bush and his administration, which has abused its executive powers, willfully misled this nation into a disastrous war in Iraq and disturbingly continues to beat the Iran war drum.

Now, it takes a big person to say “I made a mistake,” and if that’s what Rep. Wexler believes, he should be commended for magnanimity. But it isn’t such a long bill. The wording isn’t complicated. And presumably if he holds this skeptical view of the Bush administration, it didn’t emerge in the time since he signed on to the bill. Which raises the question, “Why did you co-sponsor the bill, then?”

Yet another puzzle for the civics teacher attempting to teach America’s youth “how bills become law.”