Krugman Says: Spend More!

Since the early days of the Obama Administration, economist Paul Krugman has been more than eager to defend every spending measure enacted by the Democrats newly in office.

Writing in August of last year, Krugman credited “big government” with saving the country from a Second Great Depression. While George W. Bush was in power, the economist used to complain about government spending running amok but after Obama moved into the White House, budget deficits were “actually a good thing.”

At the start of the Bush Administration Krugman argued in favor of lowering the interest rate in order to “promote spending on housing.” He even proposed a fiscal stimulus package that “should include only measures that really will promote spending,” he noted. “Giving money to lower-income families would also be sensible.”

Krugman might see things differently but President Bush followed his advice. The interest rate was lowered while the government-sponsored enterprises affectively known as Fannie Mae and Freddie Mac facilitated an irrational lending policy that ultimately undermined the whole of the American financial sector to bring about the meltdown of 2008. Banks are blamed but it was government that made the recession.

The answer, predictably, was: more government. At a time when the United States had already to finance two wars in the Middle East, both Democrats and Republicans approved of bailing out not only banks but much of the auto industry as well. Although journalists predicted that banks would mostly abuse the infamous Troubled Asset Relief Program (TARP) and although even Congress found (PDF) that it had in no way stimulated America’s ailing housing market, Krugman relishes in the “deliberate efforts of the government to pump up the economy.” Indeed, just a few months ago, he declared that the world “would be better off if governments were willing to run even larger deficits over the next year or two.”

This week, the High Priest of Keynesianism reiterated that sentiment, complaining that the stimulus was “too small”. He in part turned his back on his own party, claiming that the Obama Administration was “wrong” to think that more spending wasn’t “necessary.”

Still, at least the Democrats favor spending before anything else, right? “And aren’t you glad that right now the government is being run by people who don’t hate government?” Even though they are saddling up the American people with debts that their unborn great-grandchildren might, if lucky, be able to pay off. But who really cares about the future? As the grand master himself once professed, “In the long run we are all dead.”

The Government of Whim

“We want our money back,” cried President Obama yesterday, “and we’re going to get it!” Announcing a Financial Crisis Responsibility Fee — a tax perfectly named for an era in which banks are held responsible for a recession that was beyond their control — the president promised American taxpayers that they would get “every single dime” which they are “owed” back. Don’t expect a tax cut any time soon though. “Back” here means: right into the state coffers for the government had had to borrow that money in the first place.

The fee will be in place for at least a decade with the possibility of being prolonged for as long as it takes to get the TARP money back. Only “large” firms are subject to the new regulation. Banks that hold less than $50 billion in assets are not affected. Indeed, the White House boasts, so much as 60 percent of the revenue will come from just the ten largest banks.

Describing TARP as “a distasteful but necessary thing to do,” the president admitted that against expectations, most of the money has been recouped already. But “most” is not enough. “If these companies are in good enough shape to afford massive bonuses, they are surely in good enough shape to afford paying back every penny to taxpayers.”

Not only are banks distributing bonuses again — which in itself is something the administration thinks they should be ashamed of — they are “once again engaging in risky bets to reap quick rewards,” said Obama and that does not “reflect what the country has been through.” It looks like “business as usual” to the president and for whatever reason, America can’t go back to that.

Wall Street is protesting. First, the government bailed them out because they were supposedly “too big to fail,” upsetting the natural order of the free market by rewarding failing businesses. Next, the very same financial institutions were held responsible for a crisis that started in the single-most regulated sector of the American economy — the housing market. Now, they are further penalized for a crime they did not commit as the White House announces a largely redundant policy that only reinvigorates existing misconceptions and hatred of the financial sector at large.

The president sees things differently. He denounced the “twisted logic” of Wall Street that supposedly argues that it would be “more appropriate for the American people to bear the costs of the bailout, rather than the industry that benefited from it,” adding, “even though these executives are out there giving themselves huge bonuses.” And these monocle-wearing, cigar-smoking big shots are complaining they’re being treated unfairly?

In fact, they are. Most banks didn’t ask to be bailed out. Rather they were coerced into participating in TARP and they paid back the money as quick as they could. Getting it all back is one thing. Demanding that they change their way of doing business is a serious infringement on their freedom of enterprise and shouldn’t be the policy of any government. That public opinion appears to be against banks and bonuses shouldn’t be reason enough for the Obama Administration to persecute them or capitalism as such. Such is the government of whim and it does not become a republic as the United States.

Chávez Shuts Down Shops

Until a few years ago, Venezuelan dictator Hugo Chávez was sometimes described as the benevolent kind but in recent years, his reign has grown ever more authoritarian. He abolished presidential term limits, withdrew Venezuela from both the World Bank and the International Monetary Fund in 2007, nationalized the oil industry and built relations with countries as Iran, Libya and Syria — not exactly the most friendly of nations.

In Venezuela, opposition against what may turn out be a president-for-life is mounting however. Protests are far from an unusual sight in the streets of Caracas. Tens of thousands of Venezuelans have already abandoned the country: artisans, engineers, lawyers, managers and scientists all fled socialism en masse last year. So much as one million people are estimated to have left the country since Chávez came to power. The exodus sabotages the country’s future and no industry is hit harder than oil on which the Venezuelan economy still thrives primarily.

Unsurprisingly, the voice of the opposition is silenced. Dozens of radio stations and two television networks have been pulled off the air already with Chávez attempting to pass legislation that will further penalize “media crimes.”

Last week, amid enduring economic hardship, Chávez devaluated the currency, cutting the exchange rate of the bolivar against the dollar by half for oil incomes and for goods deemed nonessential in order to bolster the state coffers. Currency controls have been imposed to prevent capital flight while inflation is likely to sour.

Earlier today, authorities backed by soldiers closed dozens of retail outlets for price gouging after a shopping frenzy had plagued the nation in reaction to the currency devaluation. Thousands of shoppers mobbed stores during the past week to snap up imported television sets and computers, worried that their savings would lose value soon. Chávez responded by sending troops to monitor prices in shopping districts. So much as seventy retailers were shuttered while raids continue this very day.

It is the typical cycle of government intervention at work: regulation is passed “for the common good”; the regulation fails, or works only temporarily; the private sector takes a beating; the economy turns down — at which point more regulation is proposed to save society from the supposed ills of the “free market.”

Chávez’ struggle against free-market capitalism and what he calls the “imperialism” of American businesses operating overseas is well recorded as are his numerous social programs. As is typical of any movement that begins by “redistributing” wealth, Caracas ends up distributing sacrifices these days. The industrialists were first to fall victim to the new regime. Then came the journalists and the independent thinkers, many of whom fled the country in response. Shopkeepers and entrepreneurs in general are next as today’s news amply demonstrates. In all likelihood, the persecution of his minority will fail however, finally undermining Chávez’ crusade against free enterprise because there are simply too many retailers.

Sadly, the Venezuelan people will bare the burden in the end as their country is internationally isolated and their standard of living declining sharply — all, Chávez insists, because of that evil, American capitalism.

Capitalism Under Persecution

Although banks are not exclusively to blame for the financial meltdown and subsequent recession, it has become popular practice in both media and government to ascribe all of today’s economic woes to supposed greed and irrationality on Wall Street. The chairman of the American Federal Reserve, Ben Bernanke was only the latest in a series of officials to call for greater supervision and regulation of the banking sector. Indeed, it has become one of the outspoken goals of the Obama Administration as well as recent G20 summits.

As rumors persist that the White House is to propose legislation that will impose a fee on international transactions, echoing a suggestion offered by the European Union last December, banks worry.

Goldman Sachs recently came under fire as it turned out bonuses to its employeed once again. How dared they, journalists and politicians cried alike, though the company had repaid the United States Treasury’s $10 billion TARP investment in June of last year already — with 23 percent interest.

Nevertheless, Goldman Sachs is now considering to force its executives and top managers to give up part of their earnings each year — to charity. As The New York Times reports, the details of the charity initiative are still under discussion while the firm is “trying to understand whether such gestures would damp public anger over pay.”

Whatever one may think of demanding that employees donate part of their income possibly against their choice, the mere fact that Goldman Sachs is contemplating such a policy is telling of the economic climate in which it has to operate.

Things may be even worse across the Atlantic. In the United Kingdom, the Labour government is bashing the rich with an extra tax on bonuses while in France, President Nicolas Sarkozy explicitly distanced himself from what he called the “excesses of financial capitalism.” Although his government can’t seem to solve a 8.5 percent deficit on its budget, Sarkozy relishes in “the victory of the European model.”

Increasingly, in the popular press and in the words of lawmakers, it is not quite capitalism itself that is condemned. Rather its “excesses” are blamed for all of today’s trouble. Although capitalism brought immense prosperity to the West, it is “too much” of it that is stopping the rest from catching up. Although capitalism is the only socioeconomic system that guarantees individual rights to life and liberty (because it cannot properly exist without them), it is for the sake of “society” that it must be tempered. Capitalism is justified as a necessary evil. It is justified on altruistic and utilitarian grounds — because, it is grudgingly admitted, capitalism satisfies “the common good.”

Capitalism is a practical system. It does bring the greatest good to the greatest number of people. But that is of secondary concern. Primarily, capitalism is a moral system because it is only under capitalism that man can reap the rewards of his own labor. It is only under capitalism that man is free to choose his line of work, free to specialize in it, free to trade his products and services for those of others on a free market. It is only capitalism that ensures man’s unalienable rights to life, liberty and property and its ruling principle is: justice.

Twenty years after the Cold War ended, capitalism is in recession, to be compromised on at the first sign of trouble. Moreover, its greatest practitioners, the traders, the bankers, the industrialists, the businessmen have become a persecuted minority, carrying a burden of blame for a crisis that was beyond their control, subject to public scrutiny and special laws and penalized, not for their failures, but for their virtues; not for their incompetence, but for their ability; not for their errors, but for their accomplishments.

Businessmen have in part themselves to blame. Amid accusations of greed and selfishness, they appease, apologize and they compromise. They attempt to appease the loudest of their opponents who will never relinquish the struggle. They apologize for their very existence, denouncing “inhuman capitalism” as much as the most collectivist of commentators. And they compromise on capitalism, relying on lobbying, on private manipulation and on pull in order to extract momentary favors from government.

Businessmen have allowed themselves to be persecuted because they never stood up to defend capitalism. Rather they chose to undermine the system and let it take the fall for faults that were not its own. There are few capitalists today who ever bother to defend the philosophy they live by, if even they do so consciously. In their absence, capitalism can be vilified and destroyed almost soundlessly, at least until some remember the source of progress and prosperity again.

Deregulate the Banks!

Regulatory failure instead of a lax monetary policy bears the responsibility for the American housing bubble that produced the financial crisis of 2008, said Federal Reserve chairman Ben Bernanke this Sunday.

Bernanke rejected accusations that the Fed contributed to the fostering of the recession and argued that the interest rates set by the bank between 2002 and 2006 were appropriately low.

Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates.

“When historical relationships are taken into account,” noted the central banker, “it is difficult to ascribe the house price bubble either to monetary policy or to the broader macroeconomic environment.” Which historical relationships he was referring to, the man who used to scrutinize the causes of the Great Depression failed to specify.

Not too long ago, Bernanke took the blame for the Depression of the 1930s when he admitted that the Federal Reserve was to a large extent responsible for the decade’s hardships. Now he refuses to see that government intervention in the economy and too much rather than too little regulation directly caused the modern-day crisis.

Repeatedly “Wall Street greed” and “inhuman capitalism” are attacked for a recession that started in one of the single most regulated sectors of the American economy: the housing market. The past decade experienced President George W. Bush’s attempt to bring about his “ownership society” and the country today is witnessing the results of this experiment. Through consistent all time low interest rates set by the Federal Reserve and through an enormous increase in size and influence of the government-sponsored Fannie Mae and Freddie Mac enterprises, Washington promoted homeownership by artificially extending credit to people that, put simply, could never dream of affording their own house — let alone pay back their loans.

That is not to say that the private sector is free from blame entirely. But consider that Fannie Mae and Freddie Mac, supposedly privately owned, were publicly chartered and represented the archetype of unfair competition. Consider the Community Reinvestment Act of 1977 that “encouraged” banks to lend to uncreditworthy borrowers and sought to end “discriminatory” credit practices against low-income neighborhoods. And consider that the very banks who let themselves be pressured into participating in this madness were “bailed-out” by the government with billions of dollars of taxpayers’ money. Was this a free market at work?

Bernanke cites “regulatory failure” as responsible for the crisis. In the strictest sense, he is correct. It was the regulator, the very Federal Reserve he chairs, that in part brought about this recession. But instead of identifying the true causes of the turndown and learning from the mistakes made, Bernanke — and much of Washington with him — proposes more regulation to protect the people against the “irrationality” of Wall Street bankers!

Could things have been handled differently? Why, yes. If the chairman of the Fed had indeed examined the “historical relationships” between his institution and the market, he would have stumbled upon the experiences of the Panic of 1907: a major stock market bust that took place before the Federal Reserve System was created and forced many banks and businesses into bankruptcy. Within short time, J.P. Morgan and other New Yorker bankers stepped in to shore up the banking system however, restoring confidence and ending the financial contagion within a month.

Although today’s financial sector is globalized and much more interdependent, the 1907 crisis demonstrated that without a central bank, the market is perfectly capable of taking care of itself. Yes, banks would have failed but such is the norm in a free market: successful businesses that pursue realistic goals by rational means prosper while those that do not go down. What happened last year was the very opposite. Banks that were in part to blame for the financial meltdown were rescued while the ones that had done nothing wrong were left to deal with the blow of a recession that affected the entire market — only without billions of dollars of government aid. So much for “inhuman capitalism”.

Unfortunately, even a the time, the 1907 Panic was not interpreted as proof that the market was best left alone. Rather the government set up the Federal Reserve in spite of the overwhelming economic growth which the United States enjoyed during the unregulated period of 1870-1913. There were however many bank failures during this time, but these must be considered along the many business failures in general — banks were actually less likely to fail than were other enterprises. The number of failures represented no fragile financial sector; they represented a dynamic and growing market in which depositors and creditors handled their money with care exactly because banks could go bankrupt.

In a truly free market, failure is possible and consumers are aware of the risk — with the result that they rationally and voluntarily assume less of it. What the American economy needs is not more government oversight. What is needs is more personal responsibility.

Japan Must Get the F-35

Not too long ago, Richard D. Fisher Jr. writing for The Washington Times, argued in favor of letting Japan in on the groundbreaking F-22 fighter aircraft. Current American law prohibits Lockheed-Martin from selling the plane overseas.

According to Fisher there were two good reasons for letting Japan have the Raptor. “First,” he wrote, “the F-22 will be the only combat aircraft capable of countering China’s expected fifth-generation fighters.” With something of an Asian naval race already underway, selling Japan what is quite probably the most sophisticated fighter plane of our generation might discourage any dreams of acquiring nuclear weapons of which there were rumors last year. That, notes Fisher, is reason number two. “If Washington cannot provide decisive nonnuclear means to deter China, Japan may more quickly consider decisive deterrents such as missiles and nuclear weapons.”

No one can quite be sure what aircraft China is working on but in all likelihood it considers the F-35 stealth multirole fighter as its foremost of future adversaries. No wonder, for besides the United States, Australia, Canada, Denmark, Italy, the Netherlands, Norway, Turkey and the United Kingdom are all participating in the Joint Strike Fighter program.

Although the F-22 is a better plane, the Americans are now considering to allow Japan to take part in the Joint Strike Fighter program instead. Washington may allow Tokyo to participate in the project even without assurances from Japan that it will procure the F-35, reported Kyodo News quoting sources from both governments.

The move might be interpreted as a reassurance toward Japan that the traditional alliance with America is still in place as far as Washington is concerned. The newly-elected Democratic Party of Japan signaled last autumn that it might operate more independently of the United States than it used to. The country is growing more and more dependent on China in economic terms while many in Washington many still seem to fear the communist powerhouse before anything else.

Moreover, for many decades has America shared with Japan its latest defense technologies, giving the country a significant advantage over other East Asian powers. Refusing Japan to have both the F-22 and the F-35 could be taken as offensive in Tokyo and as a sign that the United States no longer consider the country the most important of its partners in the region.

Bomb, Bomb, Bomb Iran?

Had we had another man for president this year, Iran’s nuclear facilities might well have been carpet bombed already. Certainly the United States would not have discouraged Israel from undertaking such a venture. But would it have been the smart thing to do?

When even The New York Times advocates military action it must seem to the Iranians as though all of America is committed to attack their country. Fortunately, some voices of reason can still be heard. In the same newspaper, Roger Cohen argues that the American role in the 1953 coup has not been forgotten. “Any American attack would propel 56 year-old Iranian demons into overdrive and lock in an America hating Islamic republic for the next half century,” he warns.

Patrick Porter, writing for Kings of War adds that not only is a military strike unlikely to take out all of Iran’s nuclear facilities; it will only strengthen their resolve to develop nuclear energy while undermining the forces of reform.

It could make politics very difficult indeed for dissidents if America gave the regime an external enemy to unite against.

Iranians are still taking to the streets with the regime repeating their accusation that foreign interference is stirring the uprisings. An American airstrike would lend credibility to such a claim, strangling “the next Iranian revolution at birth.”

America’s best chance at diminishing the Iranian threat is to let events run their course for a while. A great portion of the Iranian people appears determined to bring about a modernization of the country’s politics — and hopefully with it, a moderation in its foreign policy.

The Polluted Health Care Debate

The United States Senate sets to vote on a health-care bill over Christmas this Tuesday after what have been months of fierce political debate. As the opposition warned of “socialized medicine” and “death panels”, public support for “Obamacare” and the president himself understandably plummeted.

Although America’s health care is among the most expensive yet one of the most restricted systems in the world, people began to fear that under the Democrats’ plans, they would face a further decline in quality against ever rising costs. Strangely enough, people also indicated that by majority that health care today is too costly on the whole and that it placed a serious burden on the already fragile American economy. President Obama repeatedly stressed that America’s health care is in desperate need of reform but critics seem to have a point when they say that the Democrats will only make it more expensive.

Unfortunately, Republicans prefer instead to devise little doomsday scenarios and warn people that their elderly will soon be put to death if the Democrats have their way. They point at countries as Canada and the United Kingdom and say, “look how bad things are over there.” In fact, health care in these both countries is far from terrible.

In spite of the rather communist qualities of the British National Health Service, it operates at a lower cost per capita ($2,560, compared to $6,096 for the United States in 2007) while providing better care (PDF). Canada on the other hand, while much cheaper per capita than the American system, provides an approximately similar quality of care. It would appear then that a collectivization of health care doesn’t necessarily make things better or worse. A lot of other factors are in play.

Rather than denouncing “socialized medicine” as being impractical therefore, opponents should point out that it is immoral.

The NHS in Britain was established after the end of World War II, in 1948, with the express purpose of providing health care to all, “regardless of wealth.” Its principles were that the service should “meet the needs of everyone,” “be free at the point of delivery” and “be based on clinical need, not ability to pay.” This gave all Britons a right to proper care, no matter whether they were able to afford it or not. Need, not ability became the standard according to which care would henceforth be distributed.

This is a strange twist of ethics. Imagine that the law were to give people a right to much more basic needs than health care such as food and shelter. No such laws exist of course, for if people indeed are entitled to such rights, others must inevitably provide for them at their own expense.

Granting people a right to health-care demands that others provide such care, for free if necessary. Only a government can allocate care under such conditions for few individual doctors and nurses would go about their work unpaid any more than a supermarket would remain in business for long if it is to meet peoples’ “right to food”.

Even the Republicans, supposedly the champions of the free market, dare not question the alleged right to health care in the United States. Probably because they know how most people would respond to such criticism: “Should we just stand by then and let people die?” they’ll ask

Perhaps proponents of collectivization are only more than willing to pay so that others need not insure themselves but as long as they can’t answer the simple question, “Why shouldn’t we?” to their own charge without speaking of non-existent rights and undeserved charity, no man should be held responsible for the health and care of others against his own choice.

That is what opponents of “Obamacare” should have argued. Because they didn’t, collectivized health care is now likely to become a reality in the United States.

Brown Bashing the Rich

It’s not good to be rich in Britain. One is properly punished there for making too much money as becomes a welfare state. From every Briton that earns over £150,000 (or $243,000) a year, the government takes half of that in income tax. The well-off now face a further cut to tax relief on their pension contributions. An announced increase in the inheritance tax threshold has been put on hold but the taxman is still going after those with offshore bank accounts for it seems that in Britain today no crime is worse than the outrageous practice of tax evasion.

Even The Economist is upset and it calls Gordon Brown’s bashing of the rich “bad politics and rotten economics.” With elections arriving in a little over six months, Labour is doing everything it can to prove that it is still the “party of the many” whereas the Conservatives are branded as the “protectors of privilege and gleeful spending slashers.”

An extra tax on bankers’ bonuses this year is meant to smooth over voters but it does little to aid Britain’s ailing economy. The last of the G20 countries to be mired in recession, all the Labour government can think of doing is spending more money in the hope that such Keynesian methods will save Britain from further stagnation.

Now, with what will probably turn out to be a dreadful election ahead, Gordon Brown and his party are throwing themselves up as defenders of the common man again. Bashing the rich isn’t all about class politics though. As The Economist points out, the government needs the additional funds badly to keep its social services running, the imperfectly reformed National Health Service first among them. These are “disproportionately used by the poor” while “their employees tend to vote Labour.” By looking after the state, the party is looking after its core vote. The paper doesn’t like it one bit:

Britain has much experience of class politics, and none of it has been good. Class politics makes for bad economics: the state swells, public money gets wasted and entrepreneurs grow nervous. And it makes for a sad country, too: divisions deepen, suspicion flourishes and the social contract frays. When the time comes to judge the parties’ electoral strategies, voters should remember that.

Communism in Green

While the revelations of “Climategate” are still making headlines and world leaders meet in Copenhagen to discuss global warming, slowly but steadily more and more commentators are questioning the dubious qualities of environmentalism. Indeed, some are comparing it outright to totalitarian ideologies of the past.

Charles Krauthammer, writing for The Washington Post, quoted Czech president Vaclav Klaus as warning that environmentalism is well underway to become the new socialism. Or, as Krauthammer puts it, “the totemic ideal in the name of which government seizes the commanding heights of the economy and society.”

Socialism having failed so spectacularly, the left was adrift until it struck upon a brilliant gambit: metamorphosis from red to green. The cultural elites went straight from the memorial service for socialism to the altar of the environment. The objective is the same: highly centralized power given to the best and the brightest, the new class of experts, managers and technocrats. This time, however, the alleged justification is not abolishing oppression and inequality but saving the planet.

Krauthammer calls on Congress to bring these overzealous bureaucrats to a halt. Saving the planet is one thing, but trampling on the United States Constitution and sacrificing the economic order that has long brought the country prosperity might rather be too high a price to pay for it.

Global warming is real but “Climategate” unveiled some of the weaknesses of the environmentalist school that cannot be ignored. The evidence that says man is responsible for the process appears inconclusive at this stage but that is not the most pressing question politically. Rather we should ask ourselves whether the alternative provided by the eco-socialists, which borders on a rejection of industrial society and promotes self-sufficiency, is realistic and morally justified.

For it is industry that provides many of the answers to climate change in the form of renewable energies, fuel efficient engines, genetically enhanced crops, dams to protect regions from flooding and systems to warn against imminent weather hazards. Turning back the clock three hundreds years and abandoning the enormous technological progress that has been made in the meantime is not just impossible — it wouldn’t solve our problems.