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?

Preschool is a ‘Magic’ Answer

I’ll get to the boring Oklahoma data dispute soon, but first I’d like to respond to a small point in my ongoing debate with Sara Mead of the New America Foundation.

Mead thinks I’m being uncharitable in my characterization of how she and the New America Foundation approach preschool policy: “And, Schaeffer is most definitely wrong, given our commitment to pre-k as one part of a broader school reform agenda, to lump me in with the silver bullet crew.”

First, I’ve never said that these folks claim preschool is a silver bullet, or an inoculation, or what-have-you. I’ve said they wildly oversell what preschool can do. But I guess I should have looked more closely at their website, which seems more nuanced than I first thought.

From their website’s Education Policy Program Overview: “Early Education. There is no magic answer in education policy, but preschool comes close.”

I didn’t expect to agree with their characterization … preschool really is close to a “magic” answer! It provides the illusion of an answer to our educational problems. But that’s all it is: an illusion.

Preschool is, at best, of marginal long-term value to at-risk children. The real answer to our educational problems lies in reforming the k-12 system.

Instead of chasing magical solutions like universal pre-k, we should focus on the one proven and potentially systemic k-12 reform: educational freedom.

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?

Losing Elections, Losing Wars

Senator John McCain’s advisers evidently told him to crank up the rhetoric a bit yesterday, because his longstanding stump speech line about “rather lose an election than lose a war” became this:

When we adopted the surge, we were losing the war in Iraq, and I stood up and said I would rather lose a campaign than lose a war. Apparently Sen. Obama, who does not understand what’s happening in Iraq or fails to acknowledge the success in Iraq, would rather lose a war than lose a campaign.

There’s something strange about the logic of that statement. McCain’s implying that “losing” the war will win Obama the election — that the American people want to “lose.”

And, it turns out, by McCain’s definition of losing, he’s correct. A Rasmussen/FOX survey reports today that 63% of Americans want troops home from Iraq within one year:

Twenty-four percent (24%) would like to see the troops brought home immediately while 39% say they should be brought home at some point within a year.

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.

A Monumental Tribute to Adam Smith

Kudos to the Adam Smith Institute of London, which has succeeded in remarkably short order in commissioning, funding, and erecting a statue of Adam Smith “on Edinburgh’s Royal Mile – right in the heart of Scotland’s capital city, where Adam Smith worked and died.” Appropriately enough, the statue stands on the site of an ancient marketplace.

Adam Smith’s importance as a founder of modern liberal society can hardly be overestimated. As Ludwig von Mises wrote in 1952,

The ideas that found their classical expression in the two books of Adam Smith demolished the traditional philosophy of mercantilism and opened the way for capitalist mass production for the needs of the masses. Under capitalism the common man is the much-talked-about customer who “is always right.” His buying makes efficient entrepreneurs rich, and his abstention from buying forces inefficient entrepreneurs to go out of business.

Smith’s wisdom might be especially useful in this election season when Republicans and Democrats compete to spend more taxpayer dollars:

“[Governments are] … without exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.”

“Great nations are never impoverished by private, though they sometimes are by public prodigality and misconduct…. Those unproductive hands … may consume so great a share of their whole revenue … that all the frugality and good conduct of individuals may not be able to compensate the waste and degradation of produce occasioned by this violent and forced encroachment.”

For a lively and readable introduction to Adam Smith, read P. J. O’Rourke’s On the Wealth of Nations or watch him discuss the book here.

Fannie and Freddie

Paul Gigot has an outstanding piece on Fannie Mae and Freddie Mac today in the WSJ. “The abiding lesson here is what happens when you combine private profit with government power.” Exactly.

Here’s what I said about the twin-headed hydra in my 2005 Downsizing the Federal Government:

Federal taxpayers also face financial exposure from the mortgage giants Fannie Mae and Freddie Mac. These ‘government-sponsored enterprises’ are private firms, but taxpayers might become responsible for their debts because of their close ties to the government. The value of these ties created an implicit federal subsidy of $23 billion in 2003. The large size of GSEs threatens to create a major financial crisis should they run into trouble. Balance sheet liabilities of the housing GSEs grew from $374 billion in 1992 to $2.5 trillion by 2003.

A benefit of fully privatizing the GSEs would be to end the corrupting ties that these entities have with the federal establishment. Fannie Mae’s expansive executive suites are filled with political cronies receiving excessive salaries. They spend their time handing out campaign contributions to protect the agency’s subsidies.

Federal Reserve Chairman Alan Greenspan and others have argued that Fannie and Freddie need to be subject to more regulatory control because they pose a threat to financial market stability. But a better solution is to make these and other GSEs play by the same rules as other businesses, and to end the distortions caused by federal subsidies. The federal government should completely sever the ties with Fannie, Freddie, and the other GSEs.

My analysis sadly proved to be correct, and my policy solution is more needed than ever.