Featuring the author Angus Deaton, Dwight D. Eisenhower Professor of Economic and International Affairs, Woodrow Wilson School of Public and International Affairs & Economics Department, Princeton University; with comments by Charles Kenny, Senior Fellow, Center for Global Development; moderated by Ian Vasquez, Director, Center for Global Liberty and Prosperity, Cato Institute.
The 2008-2009 financial crisis and Great Recession have vastly increased the power and scope of the Federal Reserve, and radically changed the financial landscape. This new ebook examines those changes and considers how the links between money, markets, and government may evolve in the future.
The American Economics Association, the granddaddy and most prestigious of professional economic organizations, opens its annual meeting in San Diego today. Even though not all of its 18,000+ members will show, it will certainly be a big affair.
One of the AEA’s founders was Prof. Richard T. Ely, an ardent Christian Socialist and prominent faculty member of The Johns Hopkins University. Ely and five other “young rebels,” as Ely describes them in his autobiography Ground Under Our Feet, were fresh from graduate studies in Germany when they founded the AEA in 1885. The young rebels had studied at the feet of the leaders of the German historical school of economics, who were at war—the great Methodenstreit—with members of the Austrian school of economics and others who harbored laissez-faire attitudes.
The AEA’s founding fathers saw themselves as social reformers. It should, therefore, come as no surprise that Prof. Ely described the primary motivation for the founding of the AEA as “a protest against the system of laissez faire, as expounded by the writers of the older ‘orthodox’ American school of economics.”
While they would probably frown on what their baby has become, Prof. Ely and the other rebels would certainly rejoice at the fact that their ideas are now en vogue in American political culture.
My good friend Mike Seidman, who’s taught constitutional law at Georgetown for nearly 40 years, who’s often been a willing foil at Cato forums, and with whom I myself sparred for an hour last April on C-SPAN’s “Washington Journal,” outdid himself last Sunday with a long and strange op-ed in the New York Times. Erroneously titled “Let’s Give Up on the Constitution,” it’s not everything in the document that troubles him: he likes the structure—two houses of Congress—and freedom of speech and religion—even “equal protection of the laws and protections against governmental deprivation of life, liberty or property.” But he’d justify those institutions and practices “on contemporary policy grounds, not abstruse constitutional doctrine.” And he’d do so because:
As the nation teeters at the edge of fiscal chaos, observers are reaching the conclusion that the American system of government is broken. But almost no one blames the culprit: our insistence on obedience to the Constitution, with all its archaic, idiosyncratic and downright evil provisions. …
Our obsession with the Constitution has saddled us with a dysfunctional political system, kept us from debating the merits of divisive issues and inflamed our public discourse. Instead of arguing about what is to be done, we argue about what James Madison might have wanted done 225 years ago.
Would that Seidman were right in that last lament. The fiscal cliff debate of the last few weeks has been about anything but what Madison might have wanted. It’s been all about “what is to be done”—as if there were no constitutional constraints whatever on “what is to be done.”
Seidman, however, would dispense with the law of the Constitution and reduce nearly everything to politics. In fact, he offers several historical examples of the “constitutional disobedience” he’s urging—Congress and the Alien and Sedition Acts in our first decade, Jefferson and the Louisiana Purchase, Lincoln and the Emancipation Proclamation—conspicuously ignoring the countless times the Constitution has saved us from political lawlessness. Indeed, in a passage that gives the game away, Seidman writes:
In his Constitution Day speech in 1937, Franklin D. Roosevelt professed devotion to the document, but as a statement of aspirations rather than obligations. This reading no doubt contributed to his willingness to extend federal power beyond anything the framers imagined, and to threaten the Supreme Court when it stood in the way of his New Deal legislation.
Just so. And that treatment of the Constitution as “advisory only” is what has brought us to the fiscal chaos we’re enjoying today. A Progressive to the core, Seidman lays out the view that has dominated modern “constitutional law” for a century, enabling the rise of the modern, unsustainable welfare state the Founders sought expressly to avoid. And in the process, he illuminates the central flaw in that view.
With the “fiscal cliff” mess not solved but merely kicked down the road a few months, it’s a good time to summarize a few points I make in my book, The Financial Crisis and the Free Market Cure. I hope – but do not expect – that our elected representatives learn to take a more broad-thinking approach in their problem solving when they revisit this issue in the coming months. It would be useful for them to have these points in mind (excerpted from chapter 19 “Some Political Cures: Government Policy.”)
In the long term, we cannot consume more than we produce. Our standard of living is fundamentally driven by our ability to produce goods and services that improve our quality of life and the quality of life of those with whom we trade. The question is, how can government policy contribute to the kind of environment in which human productivity is maximized and in which individuals can pursue their personal happiness?
The following are government policy structures that lead to a better quality of life, based on observations of the impact of government policies and of psychological and philosophical incentives on human action – especially on the behavior of business leaders:
Low or neutral tax rates increase productivity and raise the standard of living for everyone, including the poor. High tax rates discourage investment and encourage high-income individuals to spend a great deal of their intellect and capital trying to avoid taxes.
Government spending as a percentage of GDP needs to be materially reduced.
The most important focal points for cost control are the massive entitlement programs: Social Security, Medicaid and Medicare.
Government regulations must be radically reduced. According to an annual study, the total cost of U.S federal government regulations in 2008 was $1.75 trillion, or 12 percent of GDP.
Free trade is essential for economic well-being.
Immigration of productive and hardworking individuals must be encouraged.
At the macro level, we must restore discipline to our political system. Above all, we need politics that encourage savings and investment and discourage unnecessary spending.
Right-to-work laws are back in the news after the one-time union stronghold of Michigan passed one.
Vinnie Vernuccio and Joe Lehman of Michigan’s Mackinac Center for Public Policy take a victory lap in the Wall Street Journal, agreeing with Governor Rick Snyder in calling the bill “pro-worker”:
Right to work does not change any aspect of collective bargaining other than preventing employees from getting fired for choosing not to join or remain in a union and pay union dues or agency fees, which may go toward political causes they don’t support. Collective bargaining still exists in right-to-work states, and workers are of course free to organize.
right-to-work laws are designed to restrict an employer’s freedom of contract. They prohibit an employer from making union membership a condition of employment.
Jenkins sees this restriction of contract as a “bad fix trying to compensate for a prior bad law,” the 1935 Wagner Act. Jenkins prefers what he calls a “principled” approach to the problem of worker-employer freedom – the “deregulation of labor relations.” That would allow employers the ability to make union membership a condition for employment if they so choose. Or not.
Sheldon Richman, a longtime libertarian who was for many years editor of the Freeman at the Foundation for Economic Education and is now vice president of the Future of Freedom Foundation, similarly views right-to-work laws as a bad intervention trying to counterbalance another bad intervention. He quotes Percy Greaves Jr., a student of Ludwig von Mises: “Intervention creates problems that, unless the original intervention is repealed, beget further intervention, and so on.” Richman urges instead that we “let states opt out of the Wagner regime….Rather than prohibiting voluntary union-shop agreements between employers and unions, a state legislature could pass a bill simply declaring that the NLRB had no jurisdiction in that state.” He also examines the views of scholars such as Hayek and Mises on right-to-work laws.
Gary Chartier, whose book Anarchy and Legal Order: Law and Politics for a Stateless Society, is about to come out from Cambridge University Press, also says, “Right-to-work laws limit workers’ and employers’ freedom of contract. They prevent workers and employers from making mutually beneficial agreements. They don’t belong in a free society.”
Economist David Henderson counters with an argument about second-best solutions:
Gary avoids mention of the word “monopoly.” He recognizes that federal labor law gives unions the power to negotiate for the whole labor force in a plant or a firm. That’s monopoly. Many libertarians, including me, have looked much more favorably on “right to work” laws as an offset to this illegitimate government-created monopoly. It’s only a small offset, as we’ll see.
So what do you do, given that we have this federal law that Gary and I agree is a bad law? Try to abolish it, of course. But what do you do meanwhile? Many libertarians have argued that you work within the existing law to try to minimize the harm done by monopoly unionism. And a way to do that is with right-to-work laws.
It’s true that such laws make it illegal for employers to do what some of them mightwant to do: namely hire only union workers, require everyone who works for them to join unions, or require everyone who works for them to pay dues to a union. But are there really likely to be many such employers? I don’t think so.
Shikha Dalmia of the Reason Foundation hammers home that point:
To oppose all reform that does not deliver total freedom in one fell swoop is a recipe for policy paralysis. Right-to-work laws are desirable because, although they are partial, they are still pareto-optimal: By limiting the powers of union bosses, they leave employers no worse off and workers somewhat better off.
Once again, there are disagreements about policy among libertarians who share very similar economic and philosophical principles.
The late William A. Niskanen was an astute observer of Washington policymaking for more than 40 years, as assistant director of the federal Office of Management and Budget, director of special studies in the Office of the Secretary of Defense, director of the Program Analysis division at the Institute of Defense Analysis, chief economic adviser to President Ronald Reagan, and then for more than 25 years as chairman of the Cato Institute. Late in his life, as Congress hurriedly considered President Obama’s “stimulus” spending bill, he offered these reflections on the results of legislating in haste. (I would add the Patriot Act, passed immediately after the 9/11 attacks, as another example.) His cautions are worth reading again.
Slow Down the Political Response to a Perceived Crisis
By William A. Niskanen
Repeating his plea for the fiscal stimulus plan on February 5, President Obama said that “The time for talk is over. The time for action is now, because we know that if we do not act, a bad situation will become dramatically worse. Crisis could turn into catastrophe for families and businesses across the country.”
This is the fifth time in my adult life that the president has asked for or asserted unprecedented authority on an expedited basis with little or no congressional review. Each of the prior occasions turned out to be a disaster.
The first of these episodes was in August 1964. Following a reported attack by North Vietnamese torpedo boats on two U.S. destroyers operating on an electronic intelligence mission in the Gulf of Tonkin on August 4, President Johnson ordered a U.S. air strike on where these boats were based. On August 5, President Johnson asked Congress to approve a resolution “expressing the unity and determination of the United States in supporting freedom and protecting peace in southeast Asia,” with express support “for all necessary action to protect our Armed Forces,” although he repeated prior assurances that “the United States seeks no wider war.” On August 10, after less than nine hours of congressional debate, Congress approved a joint resolution which authorized the president “to take all necessary steps, including the use of armed force, to assist any member of the Southeast Asia Collective Defense Treaty requesting assistance in defense of is freedom,” a resolution that passed the House with no dissenting vote and passed the Senate with only two dissenting votes. At the time, Senator Morse warned that “I believe this resolution to be an historic mistake.” As it was. In 1967, a Senate committee learned that the Navy communications center in the Philippines had questioned whether there was any attack on the U.S. destroyers on August 4. After huge fatalities to Vietnamese, Cambodians, and Laotians, and 58,000 U.S. combat fatalities, the war did not end until the North Vietnamese captured Saigon in April 1975. In contrast with the administration’s. “domino theory” rationale for the war, there was no spread of communism to the rest of southeast Asia. The U.S. and the unified Vietnam now have peaceful and productive relations, and the U.S. has acquired another exotic Asian cuisine.
The second of these episodes was on August 15, 1971 when President Nixon announced his New Economic Policy on Sunday night television when Congress was in their summer recess. Provoked by a flight from the dollar that spooked Treasury Secretary John Connally and acting on his own authority without consulting Congress or the international financial authorities, Nixon imposed a comprehensive system of wage and price controls for 90 days, imposed a 10 percent surcharge on all imports, and ended the Bretton Woods system of buying and selling gold at a fixed dollar price. In the name of increasing employment, he also asked Congress to approve a package of budget measures, none of which were approved. The import surcharge was dropped in December 1971. The wage and price controls were gradually changed into “guidelines” by President Ford and President Carter. Continued price controls on gasoline, however, led to queues at service stations until these controls were finally eliminated by one of President Reagan’s first actions in January 1981. What were the effects of Nixon’s New Economic Policy? The consumer price inflation increased from 4.4 percent in 1971 to 13.5 percent in 1980, and real GDP declined in 1974, 1975, and 1980. Congress should clearly have reviewed the major measures that Nixon implemented on his own authority.
The third of these episodes was in early October 2002 when Congress approved the Iraq War Resolution, giving President George W. Bush almost complete discretion on whether, when, and how to go to war with Iraq. The resolution cited numerous conditions to justify a war with Iraq without mentioning whether Iraq was a direct threat to the United States. This resolution was approved by a large bipartisan majority in both the House and the Senate, including the approval by Joe Biden and Hillary Clinton, and five proposed amendments to limit the discretion of President Bush on this issue were also defeated by a large bipartisan majority. The outcome was that the U.S. military forces initiated war against Iraq in March 2003. Early in the war, it became clear that Iraq did not have any weapons of mass destruction and had not supported al-Qaeda, so the argument for the war shifted to more nebulous rationales, such as creating and preserving democracy in the Middle East. The U.S. experience in both Iraq and Afghanistan proved that our military can defeat most existing governments quickly but that we do not have the knowledge or patience to be a successful occupying power in a hostile environment. In any case, the new status of forces agreement with the Iraqi government commits U.S. forces to be withdrawn by the end of 2011, making the Iraq war one of our longest wars with a yet uncertain outcome. This is another case in which Congress did not take sufficient time to review a very important issue, in part because of the rush to go home to run for reelection.
The fourth of these episodes was in October 2008 when Congress approved the Emergency Economic Stabilization Act of 2008, incorporating the Troubled Asset Relief Program (TARP) that gave the Secretary of the Treasury almost complete authority to spend up to $700 billion (!) to purchase “troubled” assets, primarily mortgage-backed securities, and to increase the capital in selected banks. This act is the outgrowth of a three-page proposal by Treasury Secretary Henry Paulson on September 19 that, in turn, was the result of a concern by Paulson and Fed Chairman Ben Bernanke that lending among the major Wall Street banks had almost ceased after the collapse of Lehman Bros. The proposed law was expanded to 110 pages but was defeated in the House on September 29. The Senate expanded the bill to 451 pages, adding about $150 billion of expenditures for unrelated measures, and approved the expanded bill on October 1. The expanded bill was then approved by the House and signed by the president on October 3, making it possible for Congress to go home to run for reelection. The only significant constraint that Congress added to Paulson’s original proposal was to require subsequent congressional approval to release the second $350 billion of the authorized expenditures. As it turns out, Secretary Paulson was not clear what he would do with all this money. He originally expected to use most of this money to purchase mortgage-backed securities from the banks. On October 14, however, the program shifted to buying preferred stock and warrants from the nine largest banks and then from hundreds of smaller banks. As it turns out, this program was an expensive failure. On February 5, 2009, a congressional panel that oversees TARP reported that the Treasury paid $254 billion for preferred stocks and warrants that may only be worth about $176 billion. And to the administration’s irritation, most of the banks used the Treasury money to increase their capital ratio rather than to increase lending. The Obama administration and Congress have yet to determine what to do with the remainder of the appropriation for this program.
The fifth of these episodes, of course, is the current congressional deliberation on the fiscal stimulus plan for over $800 billion (!) of additional spending and tax reductions. Most of the details of this plan were apparently selected by House Speaker Nancy Pelosi, but the guiding principle seems to be White House Chief of Staff Rahm Emanuel’s advice that “You never want a serious crisis to go to waste. And this crisis provides the opportunity for us to do things that you could not do before.” President Obama and the congressional Democrats have used this opportunity to seek approval for policies that they have supported for years, wrapping them in a package and calling it a fiscal stimulus plan. The only coherence in this plan is political, not whether it is an effective or efficient method to stimulate the economy. The House passed this plan with little congressional debate or a single Republican vote on January 29. As I write, a group of moderate Republican Senators is bargaining for larger tax reductions consistent with maintaining a $800 billion limit on the sum of spending and tax measures. Again, as in the four prior episodes, there is every reason not to rush to approve a program of such magnitude. The primary reason for the current financial crisis is that many banks cannot evaluate their own solvency or that of their current or potential counterparties, primarily because of the difficulty of valuing mortgage-backed securities and other complex derivatives, and neither TARP nor the fiscal stimulus plan addresses this problem. Our political system, unfortunately, is strongly biased to try to protect people against the effects of a crisis without addressing the causes of the crisis. To Congress: Slow down. Make sure you understand the causes of the financial crisis and the potential solutions before you burden your children and your grandchildren with another trillion dollars of federal debt. Your present course is best described as fiscal child abuse.
Last month, a Massachusetts ballot initiative that would have legalized physician-assisted suicide in that state narrowly failed. It was only the latest in a decades-long set of legal and electoral battles over what we might call the last choice: when and how we may end our own lives, and with what forms of assistance.
Powerful ethical and legal questions surround this choice. While a libertarian might be tempted to affirm that physician-assisted suicide is an exercise in personal autonomy, the matter is by no means so simple. The legal and constitutional traditions of our country have only occasionally affirmed such a right, and the potential for abuse in various assisted-suicide regimes may be unacceptably high. Add to this the concerns raised by those who argue for the essential dignity, not of a painless death, but of a natural one, and we confront a vast terrain of ethical issues.
As always, Cato Unbound readers are encouraged to take up our themes, and enter into the conversation on their own websites and blogs, or on other venues. We also welcome your letters. Send them to jkuznicki at cato dot org. Selections may be published at the editors’ option.
Today is Bill of Rights Day. So it’s an appropriate time to consider the state of our constitutional safeguards.
Let’s consider each amendment in turn.
The First Amendment says that “Congress shall make no law… abridging the freedom of speech.” Government officials, however, have insisted that they can gag recipients of “national security letters” and censor broadcast ads in the name of campaign finance reform.
The Fifth Amendment says that private property shall not be taken “for public use without just compensation.” Government officials, however, insist that they can use eminent domain to take away our property and give it to other private parties who covet it.
The Sixth Amendment says that in criminal prosecutions, the person accused is guaranteed a right to trial by jury. Government officials, however, insist that they can punish people who want to have a trial—“throwing the book” at those who refuse to plead guilty—which explains why 95 percent of the criminal cases never go to trial.
The Seventh Amendment guarantees the right to a jury trial in civil cases where the controversy “shall exceed twenty dollars.” Government officials, however, insist that they can impose draconian fines on people without jury trials.
The Ninth Amendment says that the enumeration in the Constitution of certain rights should not be construed to deny or disparage others “retained by the people.” Government officials, however, insist that they will decide for themselves what rights, if any, will be retained by the people.
The Tenth Amendment says that the powers not delegated to the federal government are reserved to the states, or to the people. Government officials, however, insist that they will decide for themselves what powers they possess, and have extended federal control over health care, crime, education, and other matters the Constitution reserves to the states and the people.
It’s a disturbing snapshot, to be sure, but not one the Framers of the Constitution would have found altogether surprising. They would sometimes refer to written constitutions as mere “parchment barriers,” or what we call “paper tigers.” They nevertheless concluded that having a written constitution was better than having nothing at all.
The key point is this: A free society does not just “happen.” It has to be deliberately created and deliberately maintained. Eternal vigilance is the price of liberty. To remind our fellow citizens of their responsibility in that regard, the Cato Institute has distributed more than five million copies of our pocket Constitution. At this time of year, it’ll make a great stocking stuffer.
Let’s enjoy the holidays but let’s also resolve to be more vigilant about defending our Constitution. To learn more about Cato’s work in defense of the Constitution, go here. To support the work of Cato, go here.