Topic: Political Philosophy

Nostalgianomics: If the Shoe Fits…

In a recent post commenting on my new Cato paper, Matt Yglesias just doesn’t get why I would accuse Paul Krugman of peddling nostalgia for the good old days of his boyhood. Indeed, Matt says my whole argument is “kind of silly.” Here’s the gist of Matt’s critique:

In his paper, Lindsey takes the unusual-for-a-libertarian tack of agreeing with Krugman (and others) that public policy changes have played an important role [in increasing inequality]. But he argues that the changes have mostly been changes that, on net, are positive. So it’s wrong of Krugman to espouse nostalgianomics and support a return to the policies of the 1950s. Which is fine, except I read almost every Krugman column and I’ve read Conscience of a Liberal (and, indeed, other works of Krugmanania such as Pop Internationalism and Peddling Prosperity) and it’s not as if the book ends with a call for the return of comprehensive regulation of airline fares or the re-establishment of the AT&T monopoly. To observe that the growth of inequality has policy roots isn’t to say that the right response to it is to methodically reverse every policy change of the past thirty years. It’s simply to deny the previous conventional wisdom – that it would be impossible to reverse the growing inequality of our society.

I think Matt misunderstands both my argument and what Krugman has been doing. I quite agree that Krugman doesn’t want a full-scale reinstatement of the corporatist, cartelistic policies of yesteryear. I say as much in the paper. What Krugman does want, however, is to portray the economic policies of the early postwar decades as an inspiration for progressives today – an example of how activist, interventionist government can simultaneously promote growth and reduce inequality. To quote Krugman’s Conscience of a Liberal: “During the thirties and forties, liberals managed to achieve a remarkable reduction in income inequality, with almost entirely positive effects on the economy as a whole. The men and women behind that achievement offer today’s liberals an object lesson in the difference leadership can make.”

To get to that ideologically convenient punch line, Krugman is forced to systematically misrepresent the policies and culture of the early postwar decades. He has to leave out all the things he doesn’t like, all the things that virtually all his fellow economists and fellow progressives don’t like, about the supposedly good old days – for example, the widespread cartelization efforts of the thirties, farm supports, price and entry controls on large sectors of the economy, restrictions on retail competition, high trade barriers, racist immigration laws, and the sexist confinement of working women to a pink collar ghetto. All of these contributed to the compression of incomes, yet they don’t serve Krugman’s ideological purposes. So he ignores them. That’s nostalgia-mongering, plain and simple: the selective recall of the past to make it seem better than it really was.

The relevance of all this to today’s situation is both real and important. Progressives have returned to power, and because of the current economic crisis the policymaking environment is incredibly fluid. Big changes are possible, indeed almost inevitable. In particular, proposals to substitute government control for market competition on a massive scale are now on the table: large-scale industrial policy in the name of creating “green” jobs, a full-court press to restore the power of private-sector unions, a qualitative increase in government’s role in health care, and “temporary” (such a dangerous word in Washington) government control of large parts of the financial system. We run the risk right now of making disastrous mistakes that will haunt us for many years to come. And that risk is exacerbated by the nostalgic fantasy, peddled by Krugman and others, that the record of the early postwar decades shows that Big Government and Big Labor are actually good for the economy.

So What Is Wrong with “Ideology?”

In its lead editorial today, the New York Times dismisses criticism of the stimulus bill that passed the House last night as “mostly ideological.” Similarly, a McClatchy News story about the economists who signed Cato’s newspaper advertisement opposing the stimulus bill, dismissed signers as “ideologically opposed” to government spending. This is part of a trend we’ve seen since President Obama’s election. Opposition to Obama’s programs is dismissed as “ideological,” whereas the belief by President Obama and Congressional Democrats in ever bigger and more activist government is, in the word’s of EJ Dionne, “anti-ideological.”

After all, President Obama has called for “a new declaration of independence, not just in our nation, but in our own lives — from ideology and small thinking, prejudice and bigotry.”

Apparently then, to believe in free-markets, limited government, and individual liberty is to be “ideological,” on a par with being a small-thinking bigot. On the other hand, to believe that government should run more and more of our lives, that government functions better than markets, and that government should redistribute wealth is…what? 

This country was founded by men who believed in such ideological ideas as “all men are created equal”  and are “endowed by the creater with certain unailenable rights.”  Since when is that a bad thing?

Responsibilities

President Obama delivered an interesting inaugural speech yesterday. His theme was responsibility, a theme that provides a useful frame for his administration.

The individual versus the collective: Americans generally affirm individual or personal responsibility for one’s life. To be an adult – to put aside childish things - means taking responsibility for one’s actions and outcomes. Yet language permits another possibility. “We” can take responsibility for this outcome or that injustice. Putting aside childish things means taking collective responsibility through government action. In this view, emphasizing the individual suggests a childish selfishness that should be overcome. Obama seems to be about both kinds of responsibility right now. But extending state control over society vitiates personal responsibility. The new president will have to choose between the two.

The rule of law versus charisma: In a free society, individuals associate together through consent within a set of impersonal rules enforced by an impartial judiciary. Societies may also be ruled by charismatic leaders who are thought to have special powers granted by divine favor or by other means. Charismatic authority undermines both individual and collective responsibility. No one need do anything: the special man will say the magic words and everything will change for the better. Moreover, charismatic men with special powers should not be restrained by mere laws. They are above such restraints and must be so to do their work.

Consequences versus absolute ends: In an ethic of responsibility, leaders and followers look to consequences in acting politically. President Obama alluded to an ethic of responsibility yesterday. We want a government that works; programs that do not work will be ended. The thought is admirable, the reality unpromising. Ronald Reagan eliminated two federal programs, one of which was a training program that worsened the lot of its clients. Reagan was thought to have a mandate to cut back government. Obama was elected for many reasons, none of which were constraining the federal government. More than a few of his followers expect he will, as he put it yesterday, “remake the world.” Those who set out to remake the world rarely notice the immediate consequences of their crusade. After all, the benefits of bringing heaven to earth will more than overcome the costs of the crusade.

Obama’s modest demeanor suggests an understanding of his own limitations.  If that is true, he may turn out to be more a politician and less a priest, a president content to live within the laws and achieve marginal changes in public policy.

But I wonder. Living in Washington, DC, I have recently had reason to recall Samuel Johnson’s remark about Shakespeare: “In his plays, there are no heroes, only men.” Obama seems to be telling a different story, a tale about charismatic heroes and utopian aspirations. When the talking stops and the doing begins, one question will be answered: Do Americans really want to live out a play where there are no men, only heroes?

Bush’s Gift to Obama: A More Powerful State

Friends of freedom, the Constitution, and limited government have plenty of reasons to deplore the past eight years. But in case you thought we might get some relief now, this Washington Post article from inauguration morning will change your mind. One of the points it makes – as some of us warned during the past few years – is that powers claimed by one president are left in the hands of the next, even though the first president’s supporters might have less confidence in his successor’s integrity and wisdom. So here’s the government that President Bush and the Republicans have turned over to President Obama and the Democrats:

Barack Obama takes office today with a realistic prospect of joining the ranks of history’s most powerful presidents….

Historians, recent White House officials and senior members of the incoming team expressed broad agreement that Obama begins his term in command of an office that is at or near its historic zenith….

The federal government itself is a far more potent instrument, in its breadth and depth of command over national life, than it has ever been before. Largely in response to the threat of terrorism, the Bush years and President Bill Clinton’s two terms saw “an incredible period of state-building that’s unrivaled in American history except by the creation of the national security state in the 1940s and ’50s,” said Jack Balkin, a professor of constitutional law at Yale whose blog, Balkinization, is often cited by members of the Obama team.

By necessity or design, and most often by passive acquiescence, Congress and the courts have let presidents do most of the steering of the new and expanded institutions that govern finance, commerce, communications, travel, energy production and especially intelligence gathering. When there were struggles for dominance among the three branches, most of them ended with lopsided victories for the executive.

The legislative power to declare war and ratify treaties, for example, has been deeply eroded by the practice of presidents to launch military operations on their own and to make major international commitments – such as December’s “status of forces” pact with Iraq – by “executive agreement” rather than by treaty requiring a two-thirds Senate vote. After lengthy controversy over warrantless domestic surveillance in the Bush administration, Congress authorized the program without obtaining any details about what, exactly, is collected and how it is used.

“Really, in the last 80 years we’ve seen a gradual, and at times not gradual, concentration of power in the executive office,” said William P. Marshall, who served as deputy White House counsel under Clinton….

Even in its first iteration, the government’s $700 billion expenditure to shore up U.S. financial systems will rival the roughly $1 trillion a year in “discretionary” federal spending – the portion of the budget, not including interest on loans and mandatory benefits such as Social Security, that is negotiated each year between the White House and Congress. Obama, who told The Post last week that he must “go big” in response to “the biggest emergency since World War II,” has spoken elliptically of the prospect that the cost could double.

Congress, the principal power of which is thought to be control of the national purse, has made little pretense of managing these vast expenditures. It will fall to Obama and his subordinates to decide winners and losers in the banking, financial services, automobile and other major industries, a span of control that dwarfs President Harry S. Truman’s attempt to seize control of steel production.

We don’t know yet whether President Obama will prove to be FDR or Jimmy Carter. But it’s clear that the freedom movement faces challenges that aren’t going away.

Making Work, Destroying Wealth

Journalists are telling us that John Maynard Keynes, the intellectual inspiration of the New Deal and its tax-and-spend philosophy, is all the rage again. The Wall Street Journal offers an interesting vignette on Keynes’s view of how to create jobs:

Drama was a Keynes tool. During a 1934 dinner in the U.S., after one economist carefully removed a towel from a stack to dry his hands, Mr. Keynes swept the whole pile of towels on the floor and crumpled them up, explaining that his way of using towels did more to stimulate employment among restaurant workers.

Now I should say that various people report this story, including Ludwig von Mises, but no one cites an original source. Assuming it’s true, though, it just seems to underline the absurdity of the whole “make-work” theory that is back in vogue. Keynes’s vandalism is just a variant of the broken-window fallacy that was exposed by Frederic Bastiat, Henry Hazlitt, and many other economists: A boy breaks a shop window. Villagers gather around and deplore the boy’s vandalism. But then one of the more sophisticated townspeople, perhaps one who has been to college and read Keynes, says, “Maybe the boy isn’t so destructive after all. Now the shopkeeper will have to buy a new window. The glassmaker will then have money to buy a table. The furniture maker will be able to hire an assistant or buy a new suit. And so on. The boy has actually benefited our town!”

But as Bastiat noted, “Your theory stops at what is seen. It does not take account of what is not seen.” If the shopkeeper has to buy a new window, then he can’t hire a delivery boy or buy a new suit. Money is shuffled around, but it isn’t created. And indeed, wealth has been destroyed. The village now has one less window than it did, and it must spend resources to get back to the position it was in before the window broke. As Bastiat said, “Society loses the value of objects unnecessarily destroyed.”

And the story of Keynes at the sink is the story of an educated, professional man intentionally acting like the village vandal. By adding to the costs of running a restaurant, he may well create additional jobs for janitors. But the restaurant owner will then have less money with which to hire another waiter, expand his business, or invest in other businesses. Before Keynes showed up in town, let us say, the town had three restaurants among its businesses, each with neatly stacked towels for guests. After Keynes’s triumphant speaking tour to all the Rotary Clubs in town, the town is exactly as it was, except the three restaurants are left to clean up the disarray. The town is very slightly less wealthy, and some people in town must spend scarce resources to restore the previous conditions. The man built an economic theory on this!

Now we are told that “Keynes is back,” and we need a new New Deal, and the Obama administration is going to create millions of jobs by shuffling money through the federal government. And the theoretical underpinning of this plan comes from a man who thought you could stimulate employment by breaking things.

As Jerry Jordan wrote in the Cato Journal, the real challenge for society is not creating jobs but creating wealth – that is, a higher standard of living for more people. There are many destructive ways, beyond messing up the towels in a restroom, to create jobs:

I am reminded of a story that a businessman told me a few years ago. While touring China, he came upon a team of nearly 100 workers building an earthen dam with shovels. The businessman commented to a local official that, with an earth-moving machine, a single worker could create the dam in an afternoon. The official’s curious response was, “Yes, but think of all the unemployment that would create.” “Oh,” said the businessman, “I thought you were building a dam. If it’s jobs you want to create, then take away their shovels and give them spoons!”

President-elect Obama proposes that the federal government “create or save” jobs by spending upwards of $600 billion. Where would this money come from? If it comes from taxes, it will be taken out of the more efficient private sector to be spent in the less efficient government sector, and the higher tax rates will discourage work and investment. If it is borrowed, it will again simply be transferred from market allocation to political allocation, and our debt burden will grow even greater. And if the money is simply created out of thin air on the balance sheets of the Federal Reserve, then it will surely lead to inflation.

There is no magic road to wealth. You have to work, save, and invest. And when the government lures individuals and businesses into making bad investments with cheap money, the malinvestment has to be liquidated. Avoiding that truth, prolonging the process of adjustment, is a good way to turn a recession into a depression. And you can’t get economic growth back by breaking windows, throwing towels on the floor, or spending money you don’t have.

Helen Suzman, R.I.P.

Helen Suzman, the longtime leader of the parliamentary opposition to apartheid, has died at 91. The Times of London writes:

Helen Suzman had a special place in South African history, being generally recognised as the most effective parliamentary fighter against apartheid policies.

For 13 years - from 1961 to 1974 - she was the sole representative in Parliament of the liberal Progressive Party, forerunner of the Democratic Party.

In South Africa they knew the difference between liberals and leftists. Plenty of leftists and communists opposed the National Party and its apartheid system. But so did liberals like Suzman, people committed to human rights, freedom of thought, and a market economy. She did not forget her liberalism when apartheid finally fell and the African National Congress came to power. She continued to speak out against repressive policies and the Thabo Mbeki government’s continuing support for Robert Mugabe.

I loved reading about her quick wit in parliamentary debates. She sent the minister of law and order a postcard from the Soviet Union, saying, “You would like it here. Lots of law and order.” Once she told a government minister to go into the black townships and see their appalling conditions for himself. He would be quite safe, she said, if he went “heavily disguised as a human being.” In a famous exchange a certain minister shouted: “You put these questions just to embarrass South Africa overseas.” To which she coolly replied: “It is not my questions that embarrass South Africa – it is your answers.” When an Afrikaner in Parliament sneered at her Jewish roots and asked what her ancestors were doing when his were bringing the Bible to the “savages,” she snapped, ”They were writing the Bible.”

In 1989 Helen Suzman was a Distinguished Lecturer at the Cato Institute. See a picture on page 55 of this very large pdf of our 25-Year Annual Report. Her remarks were reprinted in Cato Policy Report and then in Toward Liberty, our compilation of essays from our first 25 years, and can be read here.

On the first day of the new year, the world has lost one of its great champions of freedom. May she inspire many more.