Wash​ing​ton​Watch​.com has the details.

A front-page story in the February 23 Wall Street Journal describes a plan to let the government convert its preferred shares in Citigroup to common stock, taking 25–40% ownership.

It could be worse. A brilliant February 19 Journal report by Peter Eavis warned that “Government capital injections sit like ill-disguised Trojan horses in the nation’s largest banks,” showing that under Treasury Secretary Geithner’s socialist scheming the government could seize 74% of Citigroup and 66% of Bank of America. Meanwhile, most other reporters kept claiming bank stocks collapsed simply because Geithner had left out a few details. On the contrary, he said too much, not too little.

The newer Journal report says, “When federal officials began pumping capital into U.S. banks last October, few experts would have predicted that the government would soon be wrestling with the possibility of taking voting control of large financial institutions.… Citigroup’s low share price already reflects, at least in part, a fear among shareholders that their stakes might be further diluted. A government move to take a big stake could backfire, potentially spurring investors to flee other banks, even healthier ones [emphais added].”

Why is any of this a surprise? Even before the scary “capital purchase program” was unveiled, I wrote in the October 20, 2008 issue of National Review that, “Conservative legislators who expressed fear about letting the Treasury buy mortgage-backed bonds were strangely enthusiastic about inviting the Treasury to acquire equity in companies. Critics of derivatives became enthusiasts for warrants … which would give the Treasury secretary virtually unlimited power to confiscate the wealth of stockholders of any company foolhardy enough to play this game.” 

More recently, in a February 11 New York Post piece (subtly titled “A Plan to Kill Banks”) I explained that, “Once a bank or insurance company gets in bed with the government, the property rights of that company’s stockholders become uniquely insecure. When the government jumps into the cockpit, smart stockholders bail out. And depressed stock prices deflate the banks’ capital cushion.”

If “few experts” predicted these consequences of Treasury purchases of bank preferred shares and warrants, then why are they called experts?

The European Union held a summit over the weekend at which the assembled politicoes announced a variety of steps to increase regulation of European financial markets. But that isn’t all.

Reports the Daily Telegraph:

The EU communique also called for punitive action against tax havens. “A list of uncooperative jurisdictions and a toolbox of sanctions must be devised as soon as possible,” it said.

Ah, so now we see what is really important to European governments: squeezing more money out of their peoples.

As Cato’s Dan Mitchell has oft pointed out, competition among taxing jurisdictions is good for everyone other than governments. Tax havens, so-called, are an important tool for promoting such competition. Similar efforts are underway in the U.S. with efforts to tax the internet, for instance.

Back in 1977 I gave a talk at the Tax Foundation which was quickly added to Campbell McConnell’s best selling Economics textbook. At the back of each chapter, McConnell added just one select reading, called “The Last Word.” He gave me the last word on fiscal policy.

I found out about it many years later when my daughter Melissa found her dad inside her college textbook (a much newer edition). Apparently my old words had been confusing or enlightening the youth of America for well over a decade.

Because I failed to explain all that, my blog was edited in a way that makes it look as though I was inserting my old remarks to argue with McConnell.

On the contrary, that excerpt of mine was quoted directly from his book. It still holds up fairly well, I imagine, as heresies go.

And now you know the rest of the story.

I normally enjoy reading Jonathan Rauch and Bruce Bartlett. Rauch has written extensively about the failure of govenrment, and Republicans might not be in such terrible shape if they had paid more attention to Bruce’s book exposing Bush’s fiscal profligacy. Yet even though both of them seem to understand that excessive government is bad, they want to throw in the towel. Rather than redouble efforts to reduce — or at least restrain — bloated government, they argue that conservatives (and presumably libertarians) now should focus on how best to raise taxes to finance the welfare state. Here are excerpts from Rauch’s article, which seems almost entirely based on an interview with Bartlett:

For decades, everyone pretended to have a profound ideological disagreement about the size of government, but the reality was a comfortable standoff between 21 percent liberalism and 18 percent conservatism. In the end, both sides got what they most wanted: 21 percent spending for liberals, 18 percent revenues for conservatives — at the politically tolerable cost of a deficit averaging 2 to 3 percent of GDP. This result was handy for politicians and acceptable to the public. …Conservatives…face a doctrinal crisis. …Many conservatives insist that structural reforms of entitlement programs — benefit cuts, means-testing, privatization, and so on — could keep spending at or even below 21 percent of GDP going forward. Dream on, Bartlett says. …The only really workable option, Bartlett argues, is a value-added tax or its equivalent: a broad-based tax on consumption. “It’s the only way of preserving incentives and keeping the economy alive.” Because it taxes spending rather than saving or investment and is inhospitable to market-distorting loopholes, this kind of tax raises a lot of money at relatively low economic cost. Reaganites hate the value-added tax precisely because it is such an efficient cash cow. But Reagan, Bartlett contends, would have known better. Reagan was a conservative who admired FDR, and what he conserved was FDR’s welfare state. He understood that the most practical way to make government less economically burdensome was to grow the economy. …as Bartlett wrote recently in Politico, “Conservatives would better spend their diminished political capital figuring out how to finance the welfare state at the least cost to the economy and individual liberty.”

In effect, Rauch and Bartlett assert that the American right should copy the European right: Make peace with big government and raise taxes in order to keep the budget balanced. In the real world, though, that is a recipe for ever-growing government. What inevitably happens is that the left increases the burden of government, which leads the supposed right to acquiesce to higher taxes. But, as Milton Friedman famously warned, governments will always spend whatever they collect in taxes plus whatever amount of borrowing they think is politically and economically feasible. So every time the right capitulates to a tax increase, the left has more leeway to increase spending — which is one reason why the burden of government in Europe is significantly higher than it is in the United States. If the American right listens to Rauch and Bartlett, they will be like Charlie Brown in this youtube clip. Last but not least, I must quibble with this line from the article about Bartlett’s book:

Conservatives mistrust him because in the 2000s he broke publicly with President Bush, in a book called Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy.

That’s not true. Republicans distrust Bruce because of this book. Conservatives distrust Bruce because he wants to be the tax collector for the welfare state. I’ve been buddies with Bruce for years, so I will not give up trying to help him see the truth. Fighting excessive spending with higher taxes is akin to pouring gasoline on a fire.

Business Week reports that the national capital area is barely sensing the recession:

Washington is getting a boost from government spending to fight the recession and fix the financial system, as well as the ongoing expenses of fighting wars in Iraq and Afghanistan and promoting homeland security. While President Barack Obama pointedly left Washington for Denver to sign the $787 billion stimulus package on Feb. 17, locals expect the metro area to garner a big share of the dollars.

“Oversight alone will (mean) tons of new jobs,” enthuses Jill Landsman, a spokeswoman for the Northern Virginia Assn. of Realtors, who says the pace of home sales has picked up over the past year even as prices have continued to fall.

Cato analysts propose to slash jobs in Washington–at least 100 agencies and programs [pdf]. It’s no big mystery why tons of people in the capital oppose Cato proposals.

Companies tend to like getting bailed out. Heck, I wouldn’t mind a personal bail-out. I mean, that nice Nigerian fellow promised me a share of the unclaimed bank account from his country’s late dictator. It isn’t my fault the deal didn’t work out!

Government cash has led naturally to restrictions on employee compensation. It has also encouraged people to turn to politicians to get loans from banks. There was the notorious case in Chicago (full, it seems, of notorious cases!) where workers demanded that Bank of America bail out their failing firm because it canceled the line of credit to the firm. After all, BoA had received federal money. That meant it was supposed to willy-nilly give cash away, irrespective of the prospect of being repaid. Illinois politicians piled on and naturally the bank caved.

Now people are calling their congressmen when they get rejected for a loan at banks that collected government checks. Reports McClatchy Newspapers:

Rep. Mel Watt is used to dealing with constituents who need help with government agencies.

But once Congress passed a $700 billion bailout of the banking system, some people started turning to the Charlotte Democrat for help with the private sector. They’ve asked him to assist their appeals of rejected loan applications from banks that collected federal bailout money.

It’s an unusual type of request for Watt, who views the pleas as a sign of the times. An increasingly unsettled American public is looking for help with their own economic hardship but also asking for accountability because banks and other big businesses are getting bailed out by the government.

On the one hand, this is outrageous. On the other hand, if the taxpayers have to support the banks, why shouldn’t the banks support the taxpayers? The logic is obvious even if the consequences are potentially catastrophic.

It won’t be easy to roll back the federal government’s leap into socialism American-style. But if we don’t halt the federal subsidy express, there might not be much real “free enterprise” left in America when we finish.