A critique of Ron Paul's "End the Fed"

In the December 29, 2009 TIME magazine article "Visiting Ron Paul's Fed-free utopia," Justin Fox provides a critique of Ron Paul's book, End the Fed.

The comments posted with the link above also provide interesting, but perhaps not erudite, reading.

After being urging to do so by several readers, I finally read Ron Paul's End the Fed. I was about to buy it for the Kindle I got for Christmas, but when I got to work Monday morning there was a package in my mailbox from Gary Howard at Paul's Campaign for Liberty with two copies of the book. I gave one to my colleague Stephen Gandel, and started reading the other. I had told Hunter Lewis that I was going to read his Where Keynes Went Wrong first, but when I saw how short End the Fed was (and how few words per page it contained) I figured I could finish it in a couple of hours. It took about three, and it was worth the time and effort. I didn't learn anything new about monetary economics or the Federal Reserve, but I did learn a lot about the thinking of Ron Paul. It turns out to be a curious mix of the sensible and the delusional. To put it differently, Paul has wrapped a mostly cogent critique of central banking in general and the Fed in particular inside a decidedly utopian view of what a world without central banks would look like. At one point in the first chapter he warns that "ending the Fed is not a magic pill to usher in Utopia." Then, throughout the rest of that chapter and the rest of the book he describes how ending the Fed would usher in a state of affairs that sounds an awful lot like, well, Utopia.

Here's the list of happy consequences that Paul says ending the Fed would bring, with my annotations in italics:

1. "It would bring an end to dollar depreciation." You betcha. Paul wants to replace the Fed with a return to a strict gold standard—in which dollars would be redeemable in gold. If that happened, and we stuck to it, the dollar would indeed maintain its value better than it has since the Federal Reserve was created in 1913. (More on this in item 4.)

2. "It would take away from government the means to fund its endless wars" and its "massive expansions of the welfare state that has turned us into a nation of dependents." Paul is right that governments in the U.S. and elsewhere have often printed money to pay for major wars. They've done that even without the help of central banks (as the U.S. did during both the Revolution and the Civil War), but having a central bank institutionalizes the mechanism for money-printing and thus presumably makes it easier to get away with. As for his welfare state argument, there's surely something to it, but not nearly as much as Paul seems to think. In the post World War II era, Germany has followed much more of a hard-money (that is, Ron-Paulish) line than the U.S., yet it has a much bigger welfare state. So the growth of government can be a political choice, not just the result of the machinations of central bankers.

3. It would "stop the business cycle." Really? Paul utterly fails to back this claim up in the book, because he can't. We've had recessions and depressions in the U.S. both with central banks (the Fed and its two predecessors, the First and Second Banks of the United States) and without them. It's true that Fed backers have repeatedly claimed through the decades that wise central bankers had figured out how to stop the business cycle, and repeatedly been wrong about that. There's also an argument to be made—although the evidence is mixed at best—that central banks exacerbate the business cycle. But saying that we would have no more economic ups and downs if the Fed were shut down is utopian fantasizing.

4. It would "end inflation." Correct. If we returned to a gold standard and stuck to it, there would be periods of inflation and periods of deflation, but over the long run prices would hold more or less steady. Unless we discovered that alchemy worked or the moon was made of gold, in which case we would get raging inflation. Paul also completely ignores all the economic problems that deflation, especially sharp deflation as we had in the early 1930s, can bring with it. He's apparently been too busy with his beloved Austrian economists to ever read any Irving Fisher (pdf!).

5. It would "build prosperity for all Americans." Paul does a pretty good job of explaining why the Fed's money-printing can't build prosperity, but in general this country's record of building prosperity has been about as good in the Fed era as in the pre-Fed era. Which leads me to think that monetary policy may not be the key variable in determining prosperity over time.

6. It would "end ... the corrupt collaboration between government and banks that virtually defines the operations of public policy in the post-meltdown era." He's onto something about the corrupt collaboration, of course, but he's also being either naive or disingenuous. Does he think there wasn't any corrupt collaboration between government and banks in the 19th and early 20th centuries, before there was a Fed?

7. It would "put the American banking system on solid financial footing" and "customers' deposits would be safer than they are today." The argument here is that if banks didn't have a government safety net, they'd be more careful and their customers would be too. Jim Grant makes this case far more exhaustively in his wonderfully cranky book Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken. The flip side is that lots of banks failed and lots of depositors lost most or all of their money in the pre-safety-net days. That's what made the survivors careful. The bank-failure solutions offered up by Washington—the Fed and the FDIC, mainly—have created new problems of their own. But banks are naturally unstable, because they borrow on a short-term basis from depositors and turn around and hand most of that money back out as longer-term loans. Paul nods to this in a brief discussion of the evils of fractional-reserve banking, but fails to acknowledge that fractional-reserve banking predated the Fed and is both a product of and enabler of free-market capitalism. Banning it would thus represent a pretty severe encroachment on the economic liberty he so cherishes. It would probably also be a serious economic downer.

8. It would "end the way in which our electoral cycles have been corrupted by monetary manipulation." There's no hard evidence of such corruption since Arthur Burns' tenure as Fed chairman in the 1970s, but Paul is right that the risk is always there. Then again, a Fed that was more closely controlled by Congress—which Paul advocates as an intermediate step before the Fed is completely abolished—might be even more prone to election-year shenanigans.

9. "The national wealth would no longer be hostage to the whims of a handful of appointed bureaucrats whose interests are equally divided between serving the banking cartel and serving the most powerful politicians in Washington." Instead, it would be hostage to the ups and downs of the gold-mining industry, because under a gold standard the supply of money is determined by the supply of gold. The economic argument for central banks was that wise technocrats could do a better job of managing the money supply than gold miners could. That faith may have been misplaced, and a lot of people more hard-headed than Ron Paul have been calling lately for at least a partial return of gold to the global monetary system. But returning to gold almost certainly wouldn't be the silver (gold?) bullet that Paul makes it out to be.

There's lots of wisdom in Paul's Fed critique, and his espousal of the virtues of prudence and saving and hard work. But in this book, at least, he succumbs to the temptation of promising an easy way out. Guess he's more of a typical politician than I'd been led to think.

GOP seizes on terror issue - and the post hoc ergo propter hoc fallacy of logic

In the December 28, 2009 Politico article "GOP seizes on terror issue," Glenn Thrush and Martin Kady II explain that Republicans want to make defense against terrorism a political issue. They warn that the attacks may backfire because of the Republicans' own spotty record.

Critics should be especially careful if they want to argue that the Christmas Day security screening failures are the fault of the Obama administration because it was in power when the lapses occurred. By that logic, the September 11, 2001 terrorist attacks should be blamed on President George W. Bush and his Republican administration. The point of emphasis is the fallacy of logic known as post hoc ergo propter hoc in which one assumes that because one event precedes another, the first event caused the second one. In this case, the (erroneous) reasoning is that because the Christmas Day attempted bombing occurred after Obama became President, then his ascendency to power must be the cause of the security failure. That is likely to be no more accurate than an assertion that Bush's ascendency in 2001 caused the 9/11 attacks.

Republicans have wasted no time in attacking Democrats on intelligence and screening failures leading up to the failed Christmas Day bombing of Flight 253 — a significant departure from the calibrated, less partisan responses that have followed other recent terrorist activity.

The strategy — coming as the Republican leadership seeks to exploit Democratic weaknesses heading into the 2010 midterms — is in many ways a natural for a party that views protecting the U.S. homeland as its ideological raison d’etre and electoral franchise.

President Obama’s GOP critics have been emboldened during the past 48 hours by the stumbling initial response of Homeland Security Secretary Janet Napolitano, who spent Monday retracting her Sunday claim that “the system worked” in the aftermath of Umar Farouk Abdulmuttalab’s near takedown of a jet ferrying nearly 300 people from Amsterdam to Detroit.

“In the past six weeks, you’ve had the Fort Hood attack, the D.C. Five and now the attempted attack on the plane in Detroit … and they all underscored the clear philosophical difference between the administration and us,” said Rep. Pete Hoekstra (R-Mich.), the ranking Republican on the House Intelligence Committee.

“I think Secretary Napolitano and the rest of the Obama administration view their role as law enforcement, first responders dealing with the aftermath of an attack,” Hoekstra told POLITICO. “And we believe in a forward-looking approach to stopping these attacks before they happen.”

Sen. Jim DeMint (R-S.C.) went even further, telling FOX News that the Christmas attack proved President Obama’s talk-to-your-enemies approach might actually be encouraging terrorists.

“[S]oft talk about engagement, closing Gitmo, these things are not going to appease the terrorists,” he said. “They’re going to keep coming after us, and we can’t have politics as usual in Washington, and I’m afraid that’s what we’ve got right now with airport security.”

Obama didn’t address his critics during a brief appearance in Hawaii on Monday, saying only that "the American people should be assured that we are doing everything in our power to keep you and your family safe and secure during this busy holiday season. … As Americans, we will never give into fear and division."

A White House spokesman says the administration wants to avoid making the national security and terrorism a partisan issue.

“The president doesn't think we should play politics with issues like these. He hasn't. His response has been fact-based and appropriate and will continue to be as such,” said deputy White House press secretary Bill Burton.

But other Democrats say the GOP’s yuletide political offensive could backfire on Republicans, putting the spotlight on the party’s own less-than-spotless record on homeland security.

Exhibit A: DeMint’s controversial “hold” on Obama’s choice to lead the Transportation Safety Administration, Erroll Southers, which has left the agency leaderless during a critical period of reappraisal and potential reorganization.

“Considering that this group has been playing politics with the TSA for months, their new-found concern about safety seems a bit contrived,” said Rep. Anthony Weiner (D-N.Y.), who acknowledged “legitimate beefs” about lapses leading up to the Christmas Day bombing attempt.

DeMint says he’s blocking Southers because the top cop at Los Angeles International Airport hasn’t vowed to block TSA unionization. And spokesman Wes Denton said the agency is better off headless than with big labor running the nation’s airports.

“This is an important debate because many Americans don't want someone running the TSA who stands ready to give union bosses the power to veto or delay future security measures at our airports,” Denton said.

DeMint isn’t the only Republican raising concerns that Abdulmuttalab was allowed to board the plane despite being placed on a list of potentially dangerous foreign nationals and that he managed to escape detection despite carrying a large amount of explosive powder sewn into his underwear.

Early Monday morning, the House Republican Conference blasted an e-mail offering up a half-dozen GOP lawmakers to discuss national security — and to criticize the Obama White House.

Rep. Peter King (R-N.Y.), the top Homeland Security Committee Republican, criticized the Obama administration for not going public more quickly to reassure Americans that the skies are safe.

Hoekstra, for his part, blamed the president for “downplaying” the threat of terrorism and slammed the White House for failing to provide detailed bipartisan briefings.

Democrats, on the other hand, say they have plenty of ammunition for a homeland security counterattack.

Over the summer, 108 House Republicans voted against the final conference report of the 2010 appropriation bill for the Department of Homeland Security, which included funding for explosives detection systems and other aviation security measures.

The no voters cited a procedural dispute over the appropriations process. They included Minority Leader John Boehner (R-Ohio), Hoekstra and a who’s who of big-name House Republicans: Reps. Mike Pence, Michelle Bachmann (R-Minn.), Marsha Blackburn (R-Tenn.), Darrell Issa (R-Calif.) and Joe Wilson (R-SC).

The conference bill included more than $4 billion for "screening operations," including $1.1 billion in funding for explosives detection systems, with $778 million intended for buying and installing the systems.

“It’s a base political calculation,” said one senior House Democratic aide. “It’s risky to play politics with something like this. The morning after [the attempted bombing], Republicans had already drawn a bright line on this.”

In June, both parties overwhelmingly backed Utah Republican Rep. Jason Chaffetz, who inserted an amendment into the House's massive Homeland Security appropriations bill barring the use of full-body image scans as "primary" screening tools at airports.

The amendment, which died in the Senate, passed the House on a bipartisan 310 to 118 vote, with conservative libertarians joining liberals, all decrying the scans as a major invasion of privacy.

It would also have given passengers the option of getting a pat-down — which might have also detected the Christmas bomb — while banning the storage and copying of the images, which show a virtual picture of a person's naked body.

The measure was little-noticed at the time, but it could have a big impact if the Obama administration follows through on its pledge to increase such imaging, which experts say could have detected the explosives hidden on the body of the would-be airplane bomber.
Chaffetz, for his part, doesn’t regret the amendment, telling the Salt Lake Tribune, "It's a difficult balance between protecting our civil liberties and protecting the safety of people on airplanes," adding, “I believe there's technology out there that can identify bomb-type materials without necessarily overly invading our privacy."

In the coming days, GOP criticism of the administration’s actions may give way to a louder, if more decorous din from Democrats questioning security procedures here and abroad.

A handful of key congressional chairmen have already scheduled hearings to see what did go wrong on that Northwestern Airlines flight.

Sen. Joe Lieberman (I-Conn.), who chairs the Senate Homeland Security and Government Affairs Committee, says his panel will investigate how the attempted bomber slipped through security and screening procedures.

"I view Umar Farouk Abdulmutallab as a terrorist who evaded our homeland security defenses and who would have killed hundreds of people if the explosives he tried to detonate had worked," Lieberman said.

"What we know about the Abdulmutallab case raises two big, urgent questions that we are holding this hearing to answer: Why aren't airline passengers flying into the U.S. checked against the broadest terrorist database, and why isn't whole body scanning technology that can detect explosives in wider use?"

Democratic Party Factions

In the December 22, 2009 Salon article "A progressive divorce?," Michael Lind divides the Democratic Party into three factions: neoliberals, New Dealers, and Greens. According to Lind:

Does the growing rift between most progressives and the Obama administration represent merely tactical disagreements among people who share the same values and goals? Or is there a deeper, philosophical divergence on display?

In a thoughtful essay for the New Republic, "Taking Ideological Differences Seriously," Ed Kilgore of the Democratic Strategist argues that the divide within the Democrats is ideological. (See Glenn Greenwald's comments here). In an earlier Salon column I argued that Obama, like Bill Clinton before him and neoliberals in general, is a practitioner of "creeping subsidism" -- a strategy of subsidizing and incentivizing individuals and corporations to achieve public goals. Three examples of neoliberal subsidism have been in the news: bailing out giant financial firms instead of temporarily nationalizing them and putting them through bankruptcy; taxing Americans to subsidize health insurance companies to cover the uninsured; and deliberately increasing utility bills to indirectly subsidize Wall Street by means of cap-and-trade legislation. I contrasted the approach of President Obama and other "New Democrats" with the New Deal liberal tradition's preference for direct regulation, government social insurance and state capitalism in areas like infrastructure.

While Kilgore is associated with the New Democrats and I consider myself a New Dealer, his description of the contrast is similar to mine:

o put it simply, and perhaps over-simply, on a variety of fronts (most notably financial restructuring and health care reform, but arguably on climate change as well), the Obama administration has chosen the strategy of deploying regulated and subsidized private sector entities to achieve progressive policy results. This approach was a hallmark of the so-called Clintonian, "New Democrat" movement, and the broader international movement sometimes referred to as "the Third Way," which often defended the use of private means for public ends. (It's also arguably central to the American liberal tradition going back to Woodrow Wilson, and is even evident in parts of the New Deal and Great Society initiatives alongside elements of the "social democratic" tradition, which is characterized by support for publicly operated programs in key areas).]

This is accurate, including the point that the neoliberals are inspired by Woodrow Wilson's relatively conservative New Freedom rather than the New Nationalism of Theodore Roosevelt or the New Deal of his cousin Franklin. Kilgore is also right when he says that rival factions are sometimes too quick to dismiss the philosophical foundations of the rival camp:

[But ideology, however muddled, is part of what makes most politically active people tick. And if we don't talk about it -- and about differences in strategic thinking as well, which should be the subject of future discussions -- then all we are left with to explain our differences on this issue or that is questions of character. And anyone paying attention must recognize there's far too much of that going on. "Progressive pragmatists" -- the camp with which I most often personally identify, as it happens -- often treat "the Left" condescendingly as immature and impractical people who don't understand how things get done. Meanwhile, people on "the Left" often treat "pragmatists" as either politically gutless or personally corrupt. This is what happens when you don't take seriously other people's ideological and strategic underpinnings; whatever you gain in ignoring or minimizing differences in perspective or point of view is lost in mutual respect.]

As long as Kilgore's New Democrats treat his social democrats as failed New Democrats who are too naive about politics, and as long as his social democrats treat New Democrats solely as unprincipled corruptionists, there can only be a dialogue of the deaf.

The center-left can learn from the right. Back in the 1950s and 1960s, William F. Buckley Jr. and the circle around National Review tried to promote a "fusionist conservatism" that would unite Cold War hawks, social conservatives and free marketeers in a single philosophy. But the attempt to create a common conservative public philosophy by blurring important differences was a miserable flop. By the end of the 1980s Buckley's so-called movement conservatism had been sidelined by three distinct and energetic schools of thought on the political right: neoconservatives, libertarians and the religious right.

Each movement was willing to focus on some issues rather than others, as the price of being part of a hoped-for lasting Republican majority. The neocons, for example, specialized in hawkish foreign policy, the libertarians in deregulation. But the distinct schools on the right remained more or less internally coherent; they never degenerated into single-issue movements. Neoconservatives to this day, reflecting their Cold War liberal origins, tend to be relaxed about big domestic government and social insurance programs. In the Bush years, for example, the Weekly Standard published a critique of Social Security privatization. And many libertarians and religious conservatives are isolationists who disagree with the GOP's hawkish foreign policy.

Each of the three schools of thought on the right has a comprehensive vision of all of society -- foreign policy, domestic policy, morality -- even if its operatives choose to emphasize only the issues most important to them. Each vision, moreover, is incompatible with the vision of the other right-wing factions. Libertarians would not want to live in a world designed by neoconservatives, who in turn would not want to live in a Christian fundamentalist theocracy. In short, there is no such thing as "American conservatism." There are three rights, which have a shaky alliance of convenience under the umbrella of the Republican Party. Instead of a broad church, there are three denominations.

Is it time to admit that the American center-left, like the American right, is divided into groups of people who may agree on defeating the Republican Party but otherwise disagree on fundamental values and goals? Kilgore identifies two groups -- "New Democrats" and "social democrats." I prefer to call them "neoliberals" and "New Dealers." Perhaps "progressive" could be used for the New Dealers, if neoliberals who call themselves "pragmatic progressives" would agree to surrender the term.

Along with the neoliberals and New Dealers, I would identify a third significant faction to the left of center -- ideological Greens. While remaining true to the conservationist heritage of the two Roosevelts, New Dealers need to distinguish themselves from pessimistic, technophobic and antinatalist Green Malthusians. You can't be a New Deal liberal and view poverty in either the American South or the global South as a problem of too many dark-skinned people instead of too little social justice and too little economic development. You can't celebrate FDR's Tennessee Valley Authority as a symbol of economic and social progress and condemn it as a monstrous assault on the purity of an idealized natural world in which humans, unlike other animals, are intruders. And because one of the achievements of the New Deal was to use federal investment to promote electrification, the automobile and industrialized agriculture, you can't be a New Deal liberal and weep for a vanished early-industrial world of steam railroads, trolleys, tenements and locally grown food. (For opponents of coal, Greens seem to share a surprising nostalgia for the densely populated, transit-based cities of the ephemeral steam engine era.)

If we distinguish neoliberals, New Dealers and Greens from one another, then the center-left coalition, at the level of first principles, is not a marriage of two partners but a ménage à trois. It resembles the ménage à trois on the right that unites libertarians, Christian conservatives and neoconservatives. Recognizing that there are indeed distinct and fundamentally incompatible public philosophies to the left of center does not prevent cooperation among the schools for common purposes. The three factions can work together to maintain a Democratic majority, just as the neocons, libertarians and social conservatives disagree on first principles but unite in elections to support Republicans against Democrats.

Democrats should learn from Republicans how to manage a ménage à trois.

Economist Samuelson, Nobel laureate, dead at 94

In the December 13, 2009 obituary "Economist Samuelson, Nobel laureate, dead at 94," Associated Press writer Polly Anderson briefly describes his contributions to the field.

NEW YORK – Economist Paul Samuelson, who won a Nobel prize for his effort to bring mathematical analysis into economics, helped shape tax policy in the Kennedy administration and wrote a textbook read by millions of college students, died Sunday. He was 94.

Samuelson, who taught for decades at Massachusetts Institute of Technology, died at his home in Belmont, Mass., the school said in a statement announcing his death.

President Barack Obama's chief economic adviser, Lawrence Summers, is his nephew.

In 1970, Samuelson became just the second person, and first American, to win the Nobel Memorial Prize in Economic Sciences, created in 1968 by the Central Bank of Sweden. The other Nobels have been awarded since 1901.

The award citation said Samuelson "has done more than any other contemporary economist to raise the level of scientific analysis in economic theory."

A 1970 New York Times profile said his mind "possesses the agility of a Nijinsky and the endurance of a cross-country runner." When he won the Nobel, he said it was "nice to be recognized for hard work."

Samuelson was a liberal, and like many of his generation a follower of British economist John Maynard Keynes, who proposed that a nation needs an activist government that could foster low unemployment by steering tax and monetary policies, even if it meant deficit spending at times.

"In the old-fashioned laissez-faire economy, prosperity was indeed a fragile blossom," he wrote in a 1970 article for The New York Times. "But for a modern 'mixed economy' in the post-Keyensian era, fiscal and monetary policies can definitely prevent chronic slumps, can offset automation or under-consumption, can insure that resources find paying work opportunities."

He was among a circle of JFK advisers, who also included John Kenneth Galbraith and Walter Heller, who led Kennedy to recommend the historic income tax cut that Congress eventually passed in early 1964, three months after the president was assassinated.

"A temporary reduction in tax rates on individual incomes can be a powerful weapon against recession," Samuelson had written in a report to Kennedy in early 1961.

The cut was widely credited with helping foster the 1960s economic boom. When Heller died in 1987, Samuelson said, "In Kennedy's Camelot, he was chairman of the greatest team ever assembled. He was a great policy economist and a witty, phrase-making economist."

Conservative Criticism of Obama's Jobs Plan

Still Killing Jobs
by James Sherk
December 10, 2009 |

In his economic speech yesterday, President Obama made it clear that his administration will take a step forward on job creation. Unfortunately, it's also taking three steps backward -- which all adds up to more unemployment.

The good news is that Obama understands why unemployment has risen so sharply.

Media coverage strongly implies that joblessness has risen because layoffs are up -- but that's only part of the equation.

The number of jobs lost by firms rose 15 percent from the start of the recession to the first quarter of this year. These layoffs are real and painful for the workers involved. But they're not the driving force behind the doubling of unemployment.

The US economy usually loses millions of jobs each month as technology and consumer preferences change. But in normal times, new and expanding businesses create millions of new jobs -- more than replacing those that disappear. Twelve years ago, for example, Google didn't exist; today, it employs 20,000 Americans.

In regular economic times, most workers who leave jobs find new ones in two or three months. On balance, job creation offsets job losses, keeping unemployment under control.

In this recession, however, those new jobs aren't being created. Business startups have dropped 18 percent. Expanding or startup companies are creating 25 percent fewer jobs than before the recession. That represents 1.9 million jobs not created in the first quarter of the year.

Rather than investing in new projects that would create jobs, businesses have retrenched wherever they can.

In other words, unemployment has risen mainly because of the new jobs that entrepreneurs haven't created.

Obama understands this: "We are not creating jobs at a [sufficient] pace," he said yesterday; to reduce unemployment, America needs to "accelerate the pace of private-sector hiring."

So he announced one small step toward doing that: eliminating capital-gains taxes on small businesses and extending write-offs for small-business investment. Both these moves will indeed encourage entrepreneurs to take the risk of investing in their businesses -- and thereby create new jobs.

But then there are those three large steps back.

First, the president announced another stimulus (though without calling it that). He wants to use hundreds of billions in unspent TARP funds on more government spending: more highways and "cash for caulkers" home-weatherization funds.

And, despite Obama's rhetoric, most of his "pro-employment" proposal consists of such government spending to create more taxpayer-funded jobs.

This government spending doesn't make new businesses more likely to succeed. So it won't encourage entrepreneurs to invest, unless they receive the federal contracts. Bigger government doesn't encourage entrepreneurs to create jobs.

Worse, it discourages them. The more resources Washington consumes, the fewer entrepreneurs have to invest in their own projects.

The academic research is quite clear that government jobs are created at the expense of a greater number of private jobs -- with the one reliable study (Algun et al, in Economic Policy, April 2002) suggesting that for each 100 jobs "created" in the public sector, another 150 private-sector jobs vanish.

So it should surprise no one that private-sector hiring has remained low -- and unemployment has kept rising -- since the last stimulus became law.

Second, Obama reiterated his support for the health-care reform bills before Congress. But a trillion-dollar government health-care takeover won't create jobs. Indeed, these bills would raise taxes on employers and make providing health coverage (i.e., employees) more expensive while penalizing employers who don't offer it. Such laws would make businesses more likely to fail.

Yet the president yesterday signaled his determination to press forward with health "reform" no matter what it does to business prospects. How are entrepreneurs likely to react?

The third step back came Monday -- an administration action that's guaranteed to make businesses fear the future. The Environmental Protection Agency announced it had classified carbon dioxide as a pollutant under the Clean Air Act. Unless stopped, the EPA will start regulating CO2 -- giving it enormous power over every business in the country. Energy will grow far more expensive, and business costs will rise -- and no one knows just how bad the damage will be.

Obama yesterday did nothing to relieve the confusion or assure businesses that EPA's actions won't destroy jobs en masse. Waiting to see what the EPA does is the rational choice for many entrepreneurs. Why risk millions on a business project that might become unprofitable under new regulations?

Unemployment has risen because private-sector job creation has fallen. It won't fall until private-sector investment and hiring return to normal rates. Obama's tax breaks for small business are a small step forward. But his plans for spending hikes and health-care "reform," plus the EPA's impending carbon regulations, are three large steps back.

James Sherk is Bradley Fellow in Labor Policy in the Center for Data Analysis at The Heritage Foundation.

First Appeared in the New York Post

Fed Up With Federalism: How U.S. commitment to states' rights is undermining its economic recovery.

In the December 2, 2009 American Prospect article "Fed Up With Federalism," Harold Meyerson explains "how America's commitment to states' rights is undermining our economic recovery."

By accident of its birth -- a collection of separate colonies that slowly came together to form an independent union and revolted against the remote power of the British government -- the United States has an enduring bias toward localism, an aversion to centralized government that is part of its DNA. For some on the left, this has been seen as a positive. "It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country," Justice Louis Brandeis once wrote.
Even though progressives such as Brandeis have celebrated our federalism, it's important to remember that Brandeis lived and worked at a time when the federal government was icebound in conservative orthodoxy and the cause of social justice could be advanced only in a small number of states and cities. Segregationists like George Wallace and Richard Russell have celebrated our federalism, too, arguing for states' rights at a time when the national government was moving to abolish the Jim Crow laws throughout the South.

Conversely, liberals have argued for the right of the nation to move beyond its federalist constraints during those periods when they controlled the national government (the 1930s and, especially, the 1960s). And during the late, lamentable Bush presidency, conservative justices on the Supreme Court frequently forbade the states from enacting stricter regulations on business than those that Bush's administration had put in place.

The love of federalism is a sometime thing; its critics and champions switch places depending on who is in power at which level of government. But the problem with our allegedly ingenious federal system is not simply that half the time, if not more, it is an effective way to protect all that is biased and unfair in the American nation. The problem is also that federalism inherently subverts a coherent national response to many fundamental challenges the United States faces, at a time when other major nations -- our competitors in an increasingly global economy -- face no such structural impediment.

Given the sheer size of America and the distinct cultural identity of its many regions, federalism has always made a certain amount of sense. The abolition of the slave trade and the legalization of gay marriage had to begin somewhere. As the rise of national government, transportation, and media have eroded regional identities, traditions, and isolation, however, more conservatives than liberals have found a refuge in federalism.

But even though federalism is more often the refuge of reactionaries than of visionaries, it has an even deeper flaw: setting the nation at cross-purposes with itself, and never more so than during a recession.

***
There is a classic algebra problem in which water pours into a bathtub from the tap at a specified rate but also exits the tub at a different rate because someone has neglected to stop the drain. If you know the rates, you should be able to figure when the water will rise to a certain level. During a recession, the United States becomes a version of that bathtub. The federal government is the tap. The state and local governments are the drain.

That's no way to fight a recession. When investment, production, and consumption are all in decline, the only way to keep the economy from shrinking is for the federal government to deficit spend and create a stimulus. But while the federal government pours money in, the state and local governments, which cannot deficit spend, see their tax revenue shrinking, so they cut spending, raise taxes, or both -- taking money out of the economy. America's distinct brand of federalism inherently impedes an economic recovery.

Consider the state with the biggest tap and the biggest drain: California. The sum total of the federal tax cuts for Californians included in last year's Bush administration stimulus legislation and this year's Obama administration stimulus came to $15.5 billion for the years 2008 to 2010 -- money desperately needed to boost consumer spending in the midst of the worst downturn since the Depression, says Jean Ross, executive director of the California Budget Project. But the sum total of state tax increases enacted by the California Legislature and signed into law by Gov. Arnold Schwarzenegger in 2008 and 2009, Ross says, came to $12.5 billion for the years 2008 to 2010 -- money desperately needed to keep public services in California from grinding to a halt in the midst of the worst downturn since the Depression. "The state negated 80 percent of the feds' tax cut," Ross says. "And the cuts and the increases pretty much targeted the same lower-income groups."

Nor were the negations limited to tax cuts. Ross calculates the federal government's direct aid to education, its block-grant programs and other education-related expenditures for California total $9.5 billion from 2008 to 2010. The state government's cuts to K-12 schools, community colleges, the California State University, and the University of California add up to $17.4 billion for the same years.

California leads the fiscal--disaster pack, but it is anything but alone. A September paper from the Center on Budget and Policy Priorities reports that since the recession began, at least 41 states and the District of Columbia have slashed their budgets for a wide range of services -- 27 for health care, 25 for aid to the elderly and disabled, 26 for K-12 education, 34 for higher education, and some states for all of these. Forty-two states have reduced wages to state workers through layoffs, furloughs, and salary cuts. At least 30 states have raised taxes during the same period. "All of these steps remove demand from the economy," the center concludes. They "reduce the purchasing power of workers' families, which in turn affects local businesses."

Without the Obama stimulus, which appropriated roughly $140 billion to the states to reduce their budgetary shortfalls during 2009 and 2010, these numbers would be even worse -- though keep in mind that $140 billion in federal funds isn't engendering growth; it's merely offsetting state cutbacks. The center estimates that the federal bailout enabled states to reduce their budget gaps by 40 percent. But with state financial shortfalls in those two years coming to a whopping $350 billion, that leaves $210 billion in unrecompensed state budget shortfalls, which the states have to make up by cutbacks or tax hikes or financial gimmicks. Dean Baker and Rivka Deutsch of the Center for Economic and Policy Research estimate that the cutbacks and tax hikes of cities, counties, and school districts in 2009 and 2010 will come to an additional $15 billion.

So how much does the government's stimulus come to when we subtract the amount the states and localities are taking out of the economy from the amount the feds are putting in? The two-year Obama stimulus amounted to $787 billion, of which $70 billion was really just the usual taxpayers' annual exemption from the alternative minimum tax, and $146 billion was actually appropriated for the years 2011 to 2019. That leaves $571 billion that the federal government is pumping into the economy during 2009 and 2010. Subtract the amount that state and local governments are withdrawing from the economy (they have a combined shortfall of around $365 billion, but let's say they do enough fiscal finagling so that the total of their cutbacks and tax hikes is just $325 billion), and we're left with $246 billion.

At $787 billion, the stimulus came to 2.6 percent of the nation's gross domestic product for 2009 and 2010 -- not big enough, but a respectable figure. At $246 billion -- the net of the federal stimulus minus the state and local anti-stimulus -- it comes to just 0.8 percent of GDP, a level lower than those of many of the nations that the U.S. chastised for failing to stimulate their economies sufficiently.

But other major nations don't have federal systems that turn them into unstopped bathtubs in times of recession. They have states and municipalities, to be sure, but either the responsibility for funding most functions of government resides with the national government, or, as in Japan, state and local governments are not required to run annual balanced budgets. In China, which probably has had the most robust recovery of any major nation, taxes and spending for everything are set in Beijing (including the lower tax rates for provinces in which manufacturing for export is the main economic activity). In France, taxing and spending has been controlled by the national government at least as far back as Louis XIV. In Britain, funding for local government also comes from the national government; "local taxation," says Thomas Barry, first secretary for economic affairs in the British Embassy in Washington, D.C., "is a very small fraction of the total tax burden in the U.K."

Such is obviously not the case in the U.S. The national government alone funds defense and the two great social programs, Social Security and Medicare, created at moments (1935 and 1965) when liberals controlled both Congress and the White House. But state and local governments, which can't run deficits, remain the primary funders of education, transportation, local infrastructure, and public safety and split the cost of health care for the poor with the feds. What this means is that the governmental impediments the United States encounters during a recession are far greater than those encountered by the other major nations with which we compete in the ever more global economy. What this means is that our federal system is, in this very significant particular, massively dysfunctional.

***
This September, the Los Angeles County Metropolitan Transportation Authority, the agency that runs LA's growing subway system and its far-flung bus lines, struck a novel deal with an Italian rail manufacturer. In return for its purchase of 100 light-rail cars from the company, the MTA got the company to agree to locate a unionized factory in Los Angeles. Problems with the manufacturer caused the deal to collapse, though, and the MTA is now searching for another company that will build the trains in Los Angeles. The agency's attempt to bolster local industry with a Buy-LA policy has encountered opposition, however, from the Los Angeles Times, which noted in an editorial that federal funds available for buying clean, green rail transport are denied to states and cities that insist on making the product locally. To be sure, the Obama administration has allotted billions of dollars to incubate an electric-car industry. But it is not insisting on domestic content, nor has it cut a deal with a foreign manufacturer to locate a factory here, as Los Angeles is trying to do with rails and as Southern states have done for years with foreign automakers.

The federal government doesn't do that. Well, our federal government doesn't do that. Foreign federal governments do that all the time. China has spared no expense to attract foreign manufacturers, routinely abating their taxes, holding wages in check, offering help to construct new facilities. In the U.S., states and cities woo foreign and domestic investors with an array of tax and zoning incentives; right-to-work states promise to hold down wages, too. But the kinds of sweeping guarantees that national governments can offer are beyond the capacity of states and localities to promise, much less deliver.

China, for instance, is halfway through a stunningly ambitious project to build 100 university science parks roughly modeled on North Carolina's fabled Research Triangle. On average, the parks, according to the testimony of attorney Alan Wolff to the U.S.?China Commission, are 150 percent the size of North Carolina's triangle. "China has taken our model and expanded dramatically on it," Rick Weddle, CEO of the Research Triangle Foundation, testified to the commission. "We toured a research park in Suzhou that is a joint venture between the Chinese government and Singapore. We wouldn't even think about that."

The industrial policies of American states are dwarfed by those of foreign nations, while the one entity with the resources to compete with foreign nations -- the federal government -- stays out of the game. States seek new factories while the federal government shuns domestic content requirements. As with stimulus policy during recessions, state and federal industrial policies seem totally at cross-purposes.

Federalism also enables federal and state governments to punt the responsibility for funding politically contentious programs to each other -- a pretty good way of ensuring that the programs will end up underfunded. A quick way to grasp the contrasting levels of political power wielded by the elderly (considerable) and the poor (negligible), for instance, is to look at how the government funds their health care. Medicare, for seniors, is entirely federally funded. Medicaid, for the poor, has the responsibility for its funding split between the federal government and the states. Despite the fact that Medicaid is nominally a national program, the levels of financial support that states allot it vary considerably. During the current recession, many states have opted to slash Medicaid benefits, even as federal Medicare benefits have largely stayed intact.

The perverse consequences of this hybrid funding have seldom been clearer than during the health-care reform battle, in which the Senate Finance Committee's bill to open Medicaid rolls to more Americans without pledging full federal funding for the program has presented recession-wracked states with a problem they could do without. After Gov. Schwarzenegger stated that the increased cost to his state could amount to $8 billion annually, Sen. Dianne Feinstein of California, who backs the health-reform efforts, announced that she couldn't support a bill that increased the state's costs. (In the House bill, the federal government picks up almost all of the states' increased Medicaid costs.) Federal mandates on states that must balance their budgets during recessions are problematic policy, and they illustrate the buck-passing that is inherent in the federal system. Historically, the price for this feature of federalism has been paid neither by the federal nor state governments but by the poor.

In regulatory matters, the gap between federal and state standards can work as Brandeis thought it should, but it can also enable businesses to comparison shop for the lowest level of regulations. While federalism is an effective way to create multiple governmental power centers in a nation, it creates a system that powerful private players can game. The diffusion of power inherent in federalism works best when power in the private economy and civil society is also diffused, so that, for instance, business will get push-back from labor when it attempts to arbitrage the gaps between state and federal law.

The boundary between federal and state functions in the United States has always been a flexible one, and one that has moved slowly and haltingly toward the federal level throughout most of the nation's history. By the standards of nearly every other major nation, however, and increasingly by the standard of common sense, the United States retains a system of government that frequently subverts its own policies and enables federal and state governments to negate each other's endeavors. Federalism has its points, but in a growing number of ways, and especially during a recession, it makes no damn sense at all.

The Republican Party - United in its Opposition to President Obama but otherwise Split

In the November 30, 2009 Washington Post article "A party both united and divided," Jon Cohen and Dan Balz report "opposition to Obama is strong, but Republicans are split on GOP's direction and leaders."

The Republican rank and file is largely in sync with GOP lawmakers in their staunch opposition to efforts by President Obama and Democrats to enact major health-care legislation, but a new Washington Post poll also reveals deep dissatisfaction among GOP voters with the party's leadership as well as ideological and generational differences that may prove big obstacles to the party's plans for reclaiming power.

Republicans and GOP-leaning independents are overwhelmingly negative about Obama and the Democratic Party more broadly, with nearly all dissatisfied with the administration's policies and almost half saying they are "angry" about them. About three-quarters have a more basic complaint, saying Obama does not stand for "traditional American values." More than eight in 10 say there is no chance they would support his reelection.

But for all the talk among Republican elected officials about a nascent comeback after gubernatorial victories in Virginia and New Jersey this month, there is also broad frustration among Republican voters about the party's direction, detachment from its congressional representatives and a schism over its priorities.

Fewer than half of the Republicans and Republican-leaners surveyed by The Washington Post see the party's leadership as taking the GOP in the "right direction," down sharply from this time four years ago. About four in 10 are dissatisfied with the policy proposals being offered by congressional Republicans, and similar numbers see the current crop of GOP legislators as out of touch with their problems and personal values. Nearly a third say the Republicans in Congress are not standing up for the party's core values.

This portrait of how Republicans see their party is part of an ongoing series of stories examining the GOP at the midpoint between its disastrous losses in the 2006 and 2008 elections, and the midterm elections in 2010 and the 2012 presidential contest. The findings are based on a national survey of 1,306 adults, including additional interviews with Republicans and Republican-leaning independents and a set of focus groups in Arapahoe County, Colo., a GOP-leaning county that Obama carried handily in 2008.

No clear leader

Asked who leads the Republican Party at this point, one group participant, Ryan Brown, a computer programmer, cited two men who are often at odds: Sen. John McCain (Ariz.), the party's 2008 presidential nominee, and Rush Limbaugh, the conservative radio talk show host. But he was hesitant: "I'll bet you could go around here, and either people would not have an answer or they would have a different answer for that," he said. He was right, and the poll reveals similar threads of uncertainty.

Nearly three in 10 of those surveyed expressed no opinion about who in the GOP best reflects the party's principles or volunteered that no one does. Topping the list of named leaders was former Alaska governor Sarah Palin, the party's 2008 vice presidential nominee.

In the poll, taken amid the media whirlwind surrounding the release of her memoir "Going Rogue," more cite Palin than other Republicans as best reflecting the party's core values and as the top vote-getter in hypothetical presidential nomination contests. But on neither question did she exceed 20 percent backing among all Republicans.

Just 1 percent pick George W. Bush as the best reflection of the party's principles, and only a single person in the poll cites former vice president Richard B. Cheney. About seven in 10 say Bush bears at least "some" of the blame for the party's problems.

At the recent Republican Governors Association meetings in Austin, party officials discounted the absence of a single clear leader, arguing that what is most important is for Republicans to resist Obama's domestic agenda, reaffirm conservative principles and begin to articulate an alternative set of ideas. These officials expect to pick up seats in Congress and win more governorships in next year's elections, and think new, formidable leaders will emerge from those victories.

In the meantime, Republicans are faced with significant discord within their ranks. They are divided over how much to work with Obama on energy and climate-change legislation. There are generational differences on the role of religion in public life and how much emphasis the party should put on hot-button issues such as same-sex marriage. And the party's moderate and conservative wings have widely divergent views on a number of issues.

If there is one thing the party's strategists have in their favor at the outset of their push to regain majority status, it is broad public dissatisfaction with the way the country's political system is working -- the same force that helped propel Obama into office a year ago.

Overall, more than six in 10 Americans say they are unhappy with the way things are going politically, and half are discontent or downright angry about the policies of the Obama administration. On each of these fronts, dissatisfaction among Republicans is nearly universal.

In the Colorado focus groups, Republican voters expressed strong concerns about the first year of the Obama presidency. Pam Hyde, 53, who works at an elementary school, said new government spending worries her. "We'll never recover from that," she said. "I can't imaging recouping the money that he's proposing to spend. Unbelievable."

Health care was a particular concern in the groups, and a point of strong GOP unity in the poll. Talking about the legislative initiative, Karon Dawson, 59, a data processing manager, said that "there are no provisions in there to save any money or do anything to make a difference. . . . [It] is a waste right now unless they change it. It's like: 'Okay, we've got a bill out there but it's not going to be any good.' "

When to cooperate?

In the poll, nearly eight in 10 Republicans and GOP-leaners alike want party lawmakers to try to stop the health-care-reform proposals Obama and his Democratic allies in Congress are pitching; almost all these GOP voters feel "strongly" about their opposition to health-care reform.

More Republicans have compromise in mind when it comes to Democratic efforts to revamp the country's energy policy. On this front, as many of them want congressional Republicans to work with Democrats on these changes as those who want the process halted. When it comes to their general position, 56 percent want Republicans to engage Democrats in an effort to get GOP ideas into legislation; 41 percent would prefer simply to stop the Democratic agenda.

The debate over whether to seek compromises cuts to the heart of the question about the party's future. The party's "very conservative" bloc is strongly opposed to it; others are more open to the idea, even on health-care reform.

Overall, though, the GOP is a party that has become increasingly conservative, particularly on fiscal issues. Obama's stimulus package of nearly $800 billion, bailouts for banks and the auto industry, and a health-care bill with a price tag of nearly $900 billion over 10 years have aroused strong opposition on the right.

Almost three-quarters of Republicans and GOP-leaners identify themselves as "conservative" on most issues, up sharply from a couple of years ago. (In some part, the rise is attributable to fewer Americans calling themselves Republicans; with an average of just 22 percent in Post polls this year saying so, the lowest number in polls since 1981.)

On fiscal issues, the percentage calling themselves conservative has soared to more than eight in 10. More striking is that a majority considers themselves to be "very conservative" on fiscal issues, up about 20 points in two years. On social issues, two-thirds of Republicans say they are conservative, and about a third of Republicans say they are very conservative. Overall, about two in 10 are both fiscally conservative and moderate-to-liberal on social issues.

Republicans are now debating whether and how much candidates should be allowed to stray from party doctrine. That issue caused a split in the special election in New York's 23rd Congressional District. Former House speaker Newt Gingrich and others backed the Republican candidate and other leaders, including Palin, endorsed the Conservative Party candidate.

Last week, some Republican National Committee members began circulating a resolution, to be taken up early next year by the RNC, setting out a purity test for candidates.

In the new poll, 69 percent of Republicans and GOP-leaners say they think it is all right for the party's candidates to take moderate positions on some issues; 27 percent say they want candidates to hew exclusively to conservative positions.

Support for allowing some deviation from conservative views is particularly high among the two in 10 who describe themselves as conservative on fiscal issues but moderate to liberal on social ones. Among that group, more than eight in 10 say it is okay for Republican candidates to veer from conservative positions.

Among those who see themselves as very conservative in their views (about a third of the sample), however, 53 percent say candidates should embrace only conservative positions, highlighting the potential for continued divisions and GOP primary battles next year.

Splits on the issues

The GOP's internal fissures are also pointed up on the question of what issues voters think the party should focus on in its attempt at resurgence.

About a third of Republicans and GOP-leaners say the party is putting "too little" emphasis on same-sex marriage, but nearly as many say it is spending "too much" time on it. Here, there are big divisions by group, with younger people evenly divided between whether the party overemphasizes or underemphasizes the issue. More than four in 10 moderates say too much, with a similar proportion of the very conservative saying too little.

There is a similar split within the GOP on abortion. Moderates and non-religious Republicans are on one side, and staunchly conservative ones and white evangelical Christians are on the other.

Younger Republicans are also much more apt to advocate for increased emphasis on environmental concerns, with 44 percent saying the GOP focuses on environmental concerns too little and 14 percent too much.

Most Republicans, regardless of age, see the party as paying too little attention to federal spending. Most strongly oppose the government's use of hundreds of billions of dollars over the past two years to bolster the economy. Illegal immigration, which caused a major rift within the party during Bush's presidency, is another area in which most Republicans would like to see party leaders pay more attention.

Which way GOP?

Throughout the year, some "tea party" protesters and others at congressional town hall meetings have expressed grievances with the leaders of both parties. That disconnect between the party's congressional leadership and rank-and-file Republicans shows up in the Post poll when people were asked several questions about those leaders.

One year out from the 2006 midterm elections, 76 percent of Republicans and GOP-leaners said the leadership of the party was taking it in the right direction; now, 49 percent say so.

Barely more than a third of Republicans and GOP-leaners in the poll say the party shares their views on "most issues." Although most say congressional Republicans understand the concerns of people like themselves, share their personal values and are true to the party's core values, sizable numbers disagree.

Citing incidents in which Republican elected officials have confessed to extramarital affairs, Stephany Reed, 27, a student and stay-at-home mother, said: "Their moral character is totally not moral. . . . When your personal life is in shambles and your house is not in order . . . then it's going to affect how you lead us."

One rallying point for the GOP, though, is a broad perception among moderates, conservatives, and younger and older Republicans alike that television news is biased against the Republican Party and tilted highly in favor of Obama and Democrats. Nearly nine in 10 see the news media's treatment of Palin as unfair.

But that does not mean they are ready to get behind her, or any other potential candidate, to take on Obama. Perhaps no single indicator reveals the party's current fractures as do the poll's findings on the question of who Republicans are looking to in 2012: About four in 10 said they do not have an opinion or cited "nobody" as their preferred candidate.

The Most Influential Conservative Voice? Rush Limbaugh!

According to the November 29, 2009 Associated Press article "Poll: Limbaugh is most influential conservative":

By a wide margin, Americans consider Rush Limbaugh the nation's most influential conservative voice.

Those are the results of a poll conducted by "60 Minutes" and Vanity Fair magazine and issued Sunday. The radio host was picked by 26 percent of those who responded, followed by Fox News Channel's Glenn Beck at 11 percent. Actual politicians - former Vice President Dick Cheney and former vice presidential candidate Sarah Palin - were the choice of 10 percent each.
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The random national telephone sample of 855 adults was conducted by CBS News from Nov. 6-8. The margin for error is plus or minus three percentage points.

Laissez-faire

According to laissez-faire philosophy, business firms should be allowed to operate without government regulation and interference.

This laissez-faire video lacks sound reasoning, however.

For example, it suggests that any government interference with the pursuit of one's happiness is immoral. But government regulation is an essential component of PROTECTING the rights of individuals and the broader society. Laws are necessary to reduce the ability of one person to unfairly impede another's pursuit of happiness. Unregulated markets create too much of some things (such as pollution, poverty, and market power) and too little of others (such as national defense, education, disease control, and other public goods.)

Read more about laissez-faire on Wikipedia.

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel has been awarded 41 times to 64 Laureates between 1969 and 2009.

The winners of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel:

2009 - Elinor Ostrom, Oliver E. Williamson
2008 - Paul Krugman
2007 - Leonid Hurwicz, Eric S. Maskin, Roger B. Myerson
2006 - Edmund S. Phelps
2005 - Robert J. Aumann, Thomas C. Schelling
2004 - Finn E. Kydland, Edward C. Prescott
2003 - Robert F. Engle III, Clive W.J. Granger
2002 - Daniel Kahneman, Vernon L. Smith
2001 - George A. Akerlof, A. Michael Spence, Joseph E. Stiglitz
2000 - James J. Heckman, Daniel L. McFadden
1999 - Robert A. Mundell
1998 - Amartya Sen
1997 - Robert C. Merton, Myron S. Scholes
1996 - James A. Mirrlees, William Vickrey
1995 - Robert E. Lucas Jr.
1994 - John C. Harsanyi, John F. Nash Jr., Reinhard Selten
1993 - Robert W. Fogel, Douglass C. North
1992 - Gary S. Becker
1991 - Ronald H. Coase
1990 - Harry M. Markowitz, Merton H. Miller, William F. Sharpe
1989 - Trygve Haavelmo
1988 - Maurice Allais
1987 - Robert M. Solow
1986 - James M. Buchanan Jr.
1985 - Franco Modigliani
1984 - Richard Stone
1983 - Gerard Debreu
1982 - George J. Stigler
1981 - James Tobin
1980 - Lawrence R. Klein
1979 - Theodore W. Schultz, Sir Arthur Lewis
1978 - Herbert A. Simon
1977 - Bertil Ohlin, James E. Meade
1976 - Milton Friedman
1975 - Leonid Vitaliyevich Kantorovich, Tjalling C. Koopmans
1974 - Gunnar Myrdal, Friedrich August von Hayek
1973 - Wassily Leontief
1972 - John R. Hicks, Kenneth J. Arrow
1971 - Simon Kuznets
1970 - Paul A. Samuelson
1969 - Ragnar Frisch, Jan Tinbergen

Contrary to Popular Opinion, Democrats made Government Smaller, Republicans made it Bigger

Click on the table above to enlarge it.

Contrary to its claims and popular perception, the modern Republican Party has been the true practitioner of big government in recent decades. Democrats reduced the relative size of the U.S. federal government in the 1990s and Republicans expanded it in the 2000s. Under President Bill Clinton's leadership, Congress reduced the size of U.S. federal government expenditures from 22.1% of gross domestic product in 1992 to 18.4% of GDP in 2000. Under President George W. Bush, public expenditures increased to 20.5% of GDP in 2008.

Different Perspectives on the Cause of Human Suffering

“In the last chapter of Up from Eden (“Republicans, Democrats, and Mystics”), I made the observation that, when it comes to the cause of human suffering, liberals tend to believe in exterior causes, whereas conservatives tend to believe in interior causes. That is, if an individual is suffering, the typical liberal tends to blame external social institutions (if you are poor it is because you are oppressed by society), whereas the typical conservative tends to blame internal factors (you are poor because you are lazy). Thus, the liberal recommends exterior social interventions: redistribute the wealth, change social institutions so that they produce fairer outcomes, evenly slice the economic pie, aim for equality among all. The typical conservative recommends that we will instill family values, demand that individuals assume more responsibility for themselves, tighten up slack moral standards (often by embracing traditional religious values), encourage a work ethic, reward achievement, and so on.”

-- Ken Wilber, A Theory of Everything, page 84.

Click here to read more about Ken Wilber and Integral Theory.

Republican Party factions

Former U.S. Congressman Bill Bradley describes the factions of the Republican Party in his book, A New American Story:

corporatists – seek control of government to enhance their profits and pockets. Had favored protective tariffs in the early 1900s. Now seek to reduce their taxes. Support government programs that give them money. Oppose government regulation. Tend to favor free trade now.

fundamentalists – Christians who believe in the literal truth of the Bible. The world is good and evil. Suspicious of science. (Creationism vs. evolution) Anyone who disagrees with them is ignorant or evil. Reluctant to negotiate or cooperate. Want to control government to impose their morality on society. Culture is coarse. The media have a liberal bias.

libertarians – want to abolish government interference in private lives. Pro-choice. Legalize drugs. Against military interventions. Favor lower taxes, free trade, free speech. Worried about privacy. (Oppose large government databases.) Free market advocates. (Example: Ron Paul)

supply-siders – believe tax cuts solve everything from urban decay and economic downturns to third-world development. Deficits are unimportant. Think tax cuts promote economic growth. Repeat JFK´s “a rising tide lifts all boats.” Little interest in defense policy or foreign affairs.

subsidists – primarily westerners (where the federal government owns up to 90% of the area´s land). Want to end most regulation and oversight of public resources. But want to increase federal subsidies to timber, mining, grazing, and agriculture.

Main Streeters – small-town virtures. Church-goers, but don´t impose their values on others. Support local civic organizations, give to the United Way, serve on the school board. Do not seek federal subsidies. Favor less government spending and a balanced budget.

messianists (also called neoconservatives or neocons) – believe in U.S. destiny. Seek to liberate the world for democracy. Believe the U.S. government is the world´s best and our economy the most important. Little to be learned from other nations. Want to impose our systems and thinking on other countries. Favor a strong military and use it to pursue our goals.

realists – combine post World War II optimism with post-Vietnam pessimism. Hesitant to commit troops abroad. Oppose nation-building. (Doubt it is doable.) Insist on an exit strategy before going to war.

crime busters – believe the death penalty is the all-purpose answer to violence and pathology. Favor giving more authority to police. Question the validity of the right to legal counsel before questioning. Favor the war on drugs.

liberals – Believe in government regulation and helping the poor. Seek bipartisan solutions. Favor civil rights and protection of the environment. (Example: Barry Goldwater)

racemongers – maintain prejudice. Oppose affirmative action. Want to reduce or cut funding for programs that benefit blacks and Hispanics. Oppose immigration.

The corporatists seem to be the most dominant faction of the current Republican Party. The supply-siders have successfully made tax cuts a Republican mantra, to the dismay of the Main Streeters who favor personal responsibility and balanced budgets. The fundamentalists are much more influential than the libertarians and convince many middle and lower-income Americans to advocate policies that hurt them economically. The messianists (neocons) now dominate foreign policy discussions and drown out realist voices. Liberals have almost disappeared from the party.

What Democrats Believe

According to their website (dnc.org), Democrats believe:

The Democratic Party is committed to keeping our nation safe and expanding opportunity for every American. That commitment is reflected in an agenda that emphasizes the strong economic growth, affordable health care for all Americans, retirement security, open, honest and accountable government, and securing our nation while protecting our civil rights and liberties.

We come together at a defining moment in the history of our nation –- the nation that led the 20th century, built a thriving middle class, defeated fascism and communism, and provided bountiful opportunity to many. We Democrats have a special commitment to this promise of America. We believe that every American, whatever their background or station in life, should have the chance to get a good education, to work at a good job with good wages, to raise and provide for a family, to live in safe surroundings, and to retire with dignity and security. We believe that quality and affordable health care is a basic right. We believe that each succeeding generation should have the opportunity, through hard work, service and sacrifice, to enjoy a brighter future than the last.

But today, we are at a crossroads. As we meet, we are in the sixth year of a two-front war. Our economy is struggling. Our planet is in peril.

A land of historic resourcefulness has lost its patience with elected officials who have failed to lead. It is time for a change.

We can do better.

What Republicans Believe

According to their website (gop.com), Republicans believe:

We're fortunate to live in America

The Republican Party believes that the United States has been blessed with a unique set of individual rights and freedoms available to all.

You can be what you are, and become what you are capable of becoming

The Republican Party is inspired by the power and ingenuity of the individual to succeed through hard work, family support and self-discipline.

Helping those around you is worthwhile

The Republican Party believes in the value of voluntary giving and community support over taxation and forced redistribution.

Small government is a better government for the people

The Republican Party, like our nation's founders, believes that government must be limited so that it never becomes powerful enough to infringe on the rights of individuals.

You know what to do with your money better than government

The Republican Party supports low taxes because individuals know best how to make their own economic and charitable choices.

Free markets keep people free

The Republican Party is supportive of logical business regulations that encourage entrepeneurs to start more businesses so more individuals can enjoy the satisfaction and fruits of self-made success.

Our Armed Forces defend and protect our democracy

The Republican Party is committed to preserving our national strength while working to extend peace, freedom and human rights throughout the world.

The Republican Party is guided by these principles as it develops solutions to the challenges facing America.

A Source of Republican Talking Points: Albert Jay Nock in the 1930s

In his November 5, 2009 Salon article "Hated Roosevelt, Hate Obama: Paleoconservative Persuasions," writer Steve Klingaman provides a 1930s source of current Republican talking points:

In the crusade against Obama administration efforts on behalf of economic recovery and health care reform, we encounter lies, damn lies, and Republican talking points. Touchstones like: “government takeover,” “government-run,” “profligate spending,” “usurpation of power”—where did they all come from? Well, in a word, they all came from this guy named Albert Jay Nock.

Albert Jay Nock was one of the most virulent critics of President Roosevelt and his administration’s efforts to extract the nation from the Great Depression. Nock’s opus, Our Enemy, the State, published in 1935, attacked the New Deal in terms that, well, you’d have to listen to Glen Beck to replicate. Or Michele Bachmann. Or Rush. It is the source code for anti-Obama talking points.

Born in Pennsylvania and based for much of his life in New York and Brussels, Nock was a visiting professor at Bard College and a lecturer at University of Virginia. He was a failed Episcopalian cleric who wrote proto-libertarian works rooted in a philosophical tradition that would never fly today. Yet many of his sound bites endure.

Nock saw the state as “them,” not “us,” and “them” really came to mean Roosevelt. You must know that Roosevelt was hated by many during the Great Depression. Not disliked, hated. The laissez faire crowd saw every move toward government relief of intolerable conditions as government self-aggrandizement—Nock’s term, not mine. Despite the fact that people were desperate in the streets, extreme-sport capitalists saw only usurpation of the powers of the church (as the precursor to the modern social relief agency) and the individual—that old fall-back, the rugged individual—Nock’s term, not mine.

Nock preferred alms-to-beggars to a hand-up from the government, and said so, as he does here in lamenting government involvement in social relief programs as somehow causing individuals to fall away from the ethos of mutual assistance:

We can get some kind of rough measure of this general atrophy by our own disposition when approached by a beggar. Two years ago we might have been moved to give him something; today we are moved to refer him to the State's relief-agency.

Initiatives like the legendary Civilian Conservation Corps, the CCC, were presented as Mr. Roosevelt “announcing the doctrine, brand-new in our history, that the State owes its citizens a living.” And such a measure, he felt, was simply a pretext for increasing government control. “Thus the State,” he wrote, “‘turns every contingency into a resource’ for accumulating power in itself…”

Hated Roosevelt, Hate Obama

The issue was with Roosevelt himself:

State power has not only been thus concentrated at Washington, but it has been so far concentrated into the hands of the Executive that the existing régime is a régime of personal government.

Professor Nock pulls no punches. With a Beckian flourish he proclaims, “This regime was established by a coup d'État of a new and unusual kind, practicable only in a rich country.” Yup. A coup d’etat. You almost want to ask for Mr. Roosevelt’s birth certificate.

Nock’s antipathy to Roosevelt knew few boundaries. Perversely, Nock saw in the New Deal, “the erection of poverty and mendicancy into a permanent political asset.” As if, rather than responding to a national emergency, Roosevelt was amassing poverty as political capital, as an opportunistic end in itself even during the depths of the Great Depression. To a Republican of a certain brand, this was gospel.

Socialists by Any Other Name

Here is Nock’s take on the form of relief that would become known as Social Security:

The method of direct subsidy, or sheer cash-purchase, [as if Roosevelt was literally buying the poor] will therefore in all probability soon give way to the indirect method of what is called “social legislation”; that is, a multiplex system of State-managed pensions, insurances and indemnities of various kinds.

Instead of socialists, Nock railed against “collectivists.” Nock remarked, “One of my friends said to me lately that if the public-utility corporations did not mend their ways, the State would take over their business and operate it.” Of course, Nock felt this was repugnant. But what he doesn’t say is the utilities weren’t bothering to electrify vast expanses of rural America because there was no money in it.

Nock was an adherent of mid-19th century English proto-libertarian Herbert Spencer. Spencer was to contemporary social thought what the reptilian brain is to Einstein. Spencer characterized any government-run effort as “slow, stupid, extravagant, unadaptive, corrupt and obstructive.” Interestingly, Nock professed this belief as his own just ten years before the “greatest generation” went to war under Roosevelt and saved the world, for a while anyway, from fascism.

Birthing Cato

“Every intervention by the State enables another, and this in turn another, and so on indefinitely…” wrote Nock. And every intervention, life-saving or not, was seen as usurpation of individual power. In that jealousy he established that elected government was a thing to be hated, and ultimately, abolished. In this respect, his thought was a precursor to the anarcho-capitalists, or as I call them, anarcho-libertarians. Little known but influential libertarians such as Frank Chodorov and Murray Rothbard were his intellectual progeny, as was William F. Buckley, Jr., who got to know Nock, a supplicant of Buckley senior, while still a child. Ayn Rand fits in here, too. So we see these two strands emanating from the visiting professor’s thought, tangling and untangling over time, but always united in opposition to the State, enemy of freedom.

In Nock’s construct, individual perogatives were manifest as social power, as opposed to State power. Corporate power, too, was social power:

Does social power mismanage banking-practice in this-or-that special instance - then let the State, which never has shown itself able to keep its own finances from sinking promptly into the slough of misfeasance, wastefulness and corruption, intervene to "supervise" or "regulate" the whole body of banking-practice, or even take it over entire.

In a rare moment of informality, Nock bends to facetiousness. Having the State take over failed financial institutions is represented pretty much as a crime against nature. And somehow, Nock manages to see the Crash of ’29 as a mere “special instance,” an “Oh, that” moment. Furthermore, he has the temerity to go on the offensive against any and all regulation after the nation’s life savings have been wiped out. And what were they wiped out by? The market abuses of a decade of laissez faire government. One can only think, “Cato Institute, here we come!”

To Nock, as to libertarians today, social power is locked in a zero sum gain struggle with state power. If state power can in any way said to be increasing, then social power must be decreasing. Sarah Palin rushes to these ramparts with her codified rhetoric under the banner of freedom. Michele Bachman is her lesser echo. Freedom from government. Freedom from them—us.

There is a technical political term, called paleoconservatism—you can’t make this stuff up—that describes Nock-inspired thought. Paleoconservatism espouses anti-communism, isolationism, “family values,” Americanism, rugged individualism, anti-Statism, and religion (Christians only, thank you). The term is used in opposition to neocon. The paleoconservative motto might be, “Praise God, but get even.”1 Visiting professor Nock may have been the original paleoconservative, the Lucy of his ilk.

Nock’s thought arises a multi-layered 19th century tradition of philosophy. He was well-read in the Federalist papers. He is about Hegel. And early 20th century anti-statist Franz Oppenheimer. He even critiques Plato. Serious scholarship could be performed on this guy. But why bother? In his heart of hearts, he was like Beck, a mouthy polemicist.

“History? We don’t need no stinkin’ history!”

It is an overworn truism that those who do not learn from history are destined to repeat it. But who would have guessed that any party could break its back to repeat it so thoroughly, in the carbon copy reaction we see in the Republicans at this moment?

The Obama administration will never be able to prove that financial catastrophe was avoided by its interventions (and by the impossibly ironic Paulson-led interventions of the dying Bush regime). You can’t prove a negative like that. And, in that respect at least, the present moment is far different than the Great Depression, when they went over the falls. History, I predict, will attest to the very great likelihood that the Obama administration did stem the tide of disaster. And it will show that for the most part the administration held its nose as it did so. Despite this, Obama will forever wear the mantle of usurper, government overstepper, just like Roosevelt, in the rhetoric of that obscure, somewhat creepy (he wrote an essay in the Atlantic Monthly titled "The Jewish Problem in America") ex-cleric from Scranton.

Let them—the Republicans—say what they will, history proclaims Roosevelt was right, and that only a cohesive federal government can marshal the forces necessary to counter a national economic collapse.

But we have an entire party, a party bereft of a moderate wing, standing in the town square, fingers in ears, screaming “Redo, redo!” And while the Republicans still envy the spoils that control of the State entails, in their mushy heart of hearts that tiny anarcho-libertarian muscle is beating away, a little Energizer Bunny from a paleolithic era of political thought.



Note to Scholars: I readily acknowledge that Nock was in no way the only Depression-era antecedent for current conservative talking points. He was merely one of the most visible and audacious. We would not want to forget Mr. Hoover, who railed against Roosevelt for the better part of a decade after losing office.

* * *

1 Credit to Robert MacLeay for the disarranged proverb submitted to the New York Times blog, Schott’s Vocab.

Major Schools of Economic Theory

The word "economics" is derived from oikonomikos, which means skilled in household management. Although the word is very old, the discipline of economics as we understand it today is a relatively recent development. Modern economic thought emerged in the 17th and 18th centuries as the western world began its transformation from an agrarian to an industrial society.

Despite the enormous differences between then and now, the economic problems with which society struggles remain the same:

* How do we decide what to produce with our limited resources?
* How do we ensure stable prices and full employment of our resources?
* How do we provide a rising standard of living both for ourselves and for future generations?

Progress in economic thought toward answers to these questions tends to take discrete steps rather than to evolve smoothly over time. A new school of ideas suddenly emerges as changes in the economy yield fresh insights and make existing doctrines obsolete. The new school eventually becomes the consensus view, to be pushed aside by the next wave of new ideas.

This process continues today and its motivating force remains the same as that three centuries ago: to understand the economy so that we may use it wisely to achieve society's goals.

Mercantilists

Mercantilism was the economic philosophy adopted by merchants and statesmen during the 16th and 17th centuries. Mercantilists believed that a nation's wealth came primarily from the accumulation of gold and silver. Nations without mines could obtain gold and silver only by selling more goods than they bought from abroad. Accordingly, the leaders of those nations intervened extensively in the market, imposing tariffs on foreign goods to restrict import trade, and granting subsidies to improve export prospects for domestic goods. Mercantilism represented the elevation of commercial interests to the level of national policy.

Physiocrats

Physiocrats, a group of 18th century French philosophers, developed the idea of the economy as a circular flow of income and output. They opposed the Mercantilist policy of promoting trade at the expense of agriculture because they believed that agriculture was the sole source of wealth in an economy. As a reaction against the Mercantilists' copious trade regulations, the Physiocrats advocated a policy of laissez-faire, which called for minimal government interference in the economy.

Classical School

The Classical School of economic theory began with the publication in 1776 of Adam Smith's monumental work, The Wealth of Nations.

The book identified land, labor, and capital as the three factors of production and the major contributors to a nation's wealth. In Smith's view, the ideal economy is a self-regulating market system that automatically satisfies the economic needs of the populace.

He described the market mechanism as an "invisible hand" that leads all individuals, in pursuit of their own self-interests, to produce the greatest benefit for society as a whole. Smith incorporated some of the Physiocrats' ideas, including laissez-faire, into his own economic theories, but rejected the idea that only agriculture was productive.

While Adam Smith emphasized the production of income, David Ricardo focused on the distribution of income among landowners, workers, and capitalists. Ricardo saw a conflict between landowners on the one hand and labor and capital on the other. He posited that the growth of population and capital, pressing against a fixed supply of land, pushes up rents and holds down wages and profits.

Thomas Robert Malthus used the idea of diminishing returns to explain low living standards. Population, he argued, tended to increase geometrically, outstripping the production of food, which increased arithmetically. The force of a rapidly growing population against a limited amount of land meant diminishing returns to labor. The result, he claimed, was chronically low wages, which prevented the standard of living for most of the population from rising above the subsistence level.

Malthus also questioned the automatic tendency of a market economy to produce full employment. He blamed unemployment upon the economy's tendency to limit its spending by saving too much, a theme that lay forgotten until John Maynard Keynes revived it in the 1930s.

Coming at the end of the Classical tradition, John Stuart Mill parted company with the earlier classical economists on the inevitability of the distribution of income produced by the market system. Mill pointed to a distinct difference between the market's two roles: allocation of resources and distribution of income. The market might be efficient in allocating resources but not in distributing income, he wrote, making it necessary for society to intervene.

Marginalist School

Classical economists theorized that prices are determined by the costs of production. Marginalist economists emphasized that prices also depend upon the level of demand, which in turn depends upon the amount of consumer satisfaction provided by individual goods and services.

Marginalists provided modern macroeconomics with the basic analytic tools of demand and supply, consumer utility, and a mathematical framework for using those tools. Marginalists also showed that in a free market economy, the factors of production -- land, labor, and capital -- receive returns equal to their contributions to production. This principle was sometimes used to justify the existing distribution of income: that people earned exactly what they or their property contributed to production.

Marxist School

The Marxist School challenged the foundations of Classical theory. Writing during the mid-19th century, Karl Marx saw capitalism as an evolutionary phase in economic development. He believed that capitalism would ultimately destroy itself and be succeeded by a world without private property.

An advocate of a labor theory of value, Marx believed that all production belongs to labor because workers produce all value within society. He believed that the market system allows capitalists, the owners of machinery and factories, to exploit workers by denying them a fair share of what they produce. Marx predicted that capitalism would produce growing misery for workers as competition for profit led capitalists to adopt labor-saving machinery, creating a "reserve army of the unemployed" who would eventually rise up and seize the means of production.

Institutionalist School

Institutionalist economists regard individual economic behavior as part of a larger social pattern influenced by current ways of living and modes of thought. They rejected the narrow Classical view that people are primarily motivated by economic self-interest. Opposing the laissez-faire attitude towards government's role in the economy, the Institutionalists called for government controls and social reform to bring about a more equal distribution of income.

Keynesian School

Reacting to the severity of the worldwide depression, John Maynard Keynes in 1936 broke from the Classical tradition with the publication of the General Theory of Employment, Interest, and Money. The Classical view assumed that in a recession, wages and prices would decline to restore full employment. Keynes held that the opposite was true. Falling prices and wages, by depressing people's incomes, would prevent a revival of spending. He insisted that direct government intervention was necessary to increase total spending.

Keynes' arguments proved the modern rationale for the use of government spending and taxing to stabilize the economy. Government would spend and decrease taxes when private spending was insufficient and threatened a recession; it would reduce spending and increase taxes when private spending was too great and threatened inflation. His analytic framework, focusing on the factors that determine total spending, remains the core of modern macroeconomic analysis.


Summary

Economic theories are constantly changing. Keynesian theory, with its emphasis on activist government policies to promote high employment, dominated economic policymaking in the early post-war period. But, starting in the late 1960s, troubling inflation and lagging productivity prodded economists to look for new solutions. From this search, new theories emerged:

Monetarism updates the Quantity Theory, the basis for macroeconomic analysis before Keynes. It reemphasizes the critical role of monetary growth in determining inflation.

Rational Expectations Theory provides a contemporary rationale for the pre-Keynesian tradition of limited government involvement in the economy. It argues that the market's ability to anticipate government policy actions limits their effectiveness.

Supply-side Economics recalls the Classical School's concern with economic growth as a fundamental prerequisite for improving society's material well-being. It emphasizes the need for incentives to save and invest if the nation's economy is to grow.

These theories and others will be debated and tested. Some will be accepted, some modified, and others rejected as we search to answer these basic economic questions: How do we decide what to produce with our limited resources? How do we ensure stable prices and full employment of resources? How do we provide a rising standard of living both for now and the future?

The information in this publication was taken from The World of Economics, a unique exhibition on economics and the U.S. economy located in the lobbies of the Federal Reserve Bank of San Francisco and its Los Angeles Branch.