Gingrich Explains What’s Wrong Today

Former Speaker of the House Newt Gingrich appeared on Comedy Central’s The Daily Show last night to talk about what’s wrong in American politics today.

Gingrich, who spearheaded the so-called Republican Revolution of the 1990s which ended over forty years of Democratic rule in the House of Representatives, remarked that both parties have allowed government spending to spin out of control. “We’ve gotten into a cycle of spending money on a scale that’s unsustainable,” he said, admitting that the process begun while George W. Bush was in office.

Under President Clinton, Gingrich worked with the Democratic administration to keep spending under control, balance the budget and actually pay off part of the country’s national debt. Why didn’t Republicans do the same under Bush, asked Stewart, who, for six years, could count on Republican majorities in both House of Congress. They lowered taxes but didn’t downsize government. “And they got punished for it,” Gingrich replied.

A radical reconstruction of the entitlement programs currently financed by the American government is necessary to truly bring down costs, said Gingrich. Without reforming Medicare, Medicaid and Social Security, government will continue to run deficits because Republicans, according to the party elder, rather lower taxes and borrow to keep “the smallest possible share of the economy going to the government.”

Republican Hypocrisy At Its Best

Republican legislators who have publicly been denouncing the Obama Administration’s stimulus measures as fiscally irresponsible privately sought to obtain stimulus money for their home states, reveals The Washington Times.

The paper discovered that over a dozen GOP lawmakers have been lobbying with the Department of Agriculture to invest millions of dollars of stimulus funding in their states

Senator Christopher Bond of Missouri defended himself, stating that although he “strongly opposed the stimulus, […] the only thing that could make it worse would be if none of it returned to the taxpayers of Missouri.”

Congressman Joe Wilson of South Carolina invoked the same excuse, having his spokeswoman declare that although he believed the stimulus amounted to a “misguided spending bill,” once passed, the people of South Carolina deserved to get “their share of the pie.”

Senators Mike Johanns of Nebraska, Lamar Alexander of Tennessee and Robert Bennett of Utah, as well as Congressmen John Linder of Georgia and Pat Tiberi of Ohio were among other Republican lawmakers who criticized the stimulus but secretly sought funding.

Their apology — that they were merely looking out for their constituents — seems insincere, since rather than earmarking spending bills, which would have disclosed their efforts, these Republicans wrote personal letters which normally aren’t subject to public scrutiny.

The incident is the latest show in the Republican Party’s blatant lack of direction. Rather than objecting to the stimulus on principal, Republicans attacked it because it was a Democratic initiative. They could easily sell it as being part of the governing party’s supposed attempt to steer the United States down the path of socialism.

Unless the Republicans take a firm stand as defenders of free-market capitalism, they cannot honestly condemn the Keynesian spending frenzy of the current administration. So long as they rather resort to simplistic populism and scaremongering, expect to see more hypocrisy from the party that is supposed to favor small government.

New Consumer Protection Agency

The upcoming financial regulatory reform bill currently under consideration with the United States Senate Banking Committee will probably call for an agency dedicated to protecting consumers from abusive financial practices and products, reports The Huffington Post. Committee chairman Christopher Dodd of Connecticut is expected to release the latest version of the bill later this month.

According to The Huffington Post, the agency will be authorized to regulate mortgages, credit card policies and consumer loans with a budget of its own, separate from the congressional appropriations process “so it can’t be harmed by lawmakers bent on taking away its power.” In other words: the agency will be able to set its own budget and determine its own policies, with the Senate allowed to confirm candidates nominated by the White House for its executive.

The proposal comes after months of bipartisan negotiations with Dodd and the committee’s ranking Republican, Richard Shelby of Alabama, spearheading the two camps. Where Dodd championed an agency solely tasked to protect consumers, Shelby was anxious about establishing a new institution independent of existing financial oversight.

Last Friday, Dodd admitted that he and Shelby had “reached an impasse” but it would appear that the senior Senator from Connecticut won the argument for, so claims The Huffington Post, “the new organization’s decisions will likely not be subject to vetoes by the regulators in charge of overseeing the health of banks and the financial system as a whole.” That way, it can focus on protecting consumers without having to worry about fellow regulators overruling its decisions for the sake of safeguarding banks.

The danger involved in establishing an array of oversight and protection agencies for different segments of the same market is that each becomes fixated on its own special interest, losing sight of the sector’s interests on the whole — let alone, the economy’s interests on the whole.

There is also a good argument to be made against consumer protection in principle. Such statues elevate the consumer to a status superior to that of the producer for although “consumer protection” applies to everyone, the implication that there exists a separate caste of “consumers” in society opens the door to the creation of a multitude of “protective” agencies, each with varying degrees of independence but all obstructing the workings of the free market — which, of course, is precisely their purpose.

There ought to be no special group rights of any kind; only individual rights which apply equally to all men. All men are protected from injury or fraud, not just “consumers”. If a business willfully injures or cheats men, it is a matter to be proved and punished in a court of law. There is no justice in preventive law which presumes businessmen guilty until proven innocent — especially not when such law is practiced by agencies that can operate almost free of congressional oversight. Who then protects society against the corruption, cupidity and vindictiveness of its so-called protectors?

Ukraine: Europe’s Missed Opportunity

Ukraine’s pro-Russian opposition leader Viktor Yanukovich appears to have secured a narrow victory in the country’s presidential elections of last Sunday. Yanukovich comes back from a humiliating 2004 defeat, signaling Ukraine’s disillusionment with Westernization.

Six years after the promise of European Union membership brought hundreds of thousands of Ukrainians to the streets of Kiev, the country remains as corrupt and dysfunctional as ever and squarely, it seems, in Moscow’s pocket.

Prime Minister Yulia Tymoshenko, who spearheaded the Orange Revolution, proved unable to modernize the country effectively. Although relations with neighboring Russia soured, Brussels responded to her overtures with utter indifference. The EU was too concerned with internal reforms and a population increasingly weary of expansion: people feared Eastern European jobseekers while the governments of the smaller nations dreaded the prospect of a big new member state diluting their voting power in Parliament. Ukraine represented a bridge too far and now, an exceptional opportunity to draw the country into the Western camp has been lost.

With hopes of European membership positively shattered and the economy in shambles, Ukrainian voters chose the lesser of two evils: Yanukovich, at least, offers stability and security. A series of gas disputes over the past several years were a powerful show of Russian force which left many Ukrainians wondering whether upsetting their former Soviet overlord had really been a good idea. Yanukovich then has announced that he will not seek NATO membership while president — a move undoubtedly welcomed in the Kremlin which is evermore nervous about Western infringement upon its traditional sphere of influence.

European policymakers should have remembered however that while Russia dreads NATO expansion, it has never opposed the European Union’s growth eastward.

As she loses the presidency, Tymoshenko will stay on as prime minister for the time being, with the ability to disrupt her opponent’s agenda until he is able to form a coalition in parliament. Her popularity has diminished however and in spite of recent pleas to seek warmer relations with Moscow, she won’t be able to stage a comeback any time soon.

Yanukovich is unlikely to allow the Ukraine to become little more than a Russian satellite state, but the coming years will be marked by a more pro-Russian course nonetheless and quite possibly, by continued animosity between Western Europe and its powerful eastern neighbor.

The Immorality of Deficit Spending

The current American government seems ambivalent, at best, about deficit spending. In his State of the Union address President Barack Obama warned that, “If we don’t take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery.” Yet besides offering a spending freeze that won’t effect the greatest expenditures of government — defense, Medicare, Medicaid and Social Security — the president volunteered no solution the problem.

In all fairness, the record debt that America now struggles with is not Obama’s fault entirely. Massive bailouts of banks, insurers and automakers as well as billion-dollar government guarantees produced an $8.7 trillion increase in federal obligations in the second half of 2008 alone. To put this number in perspective, consider that one year earlier, the United States’ entire debt amounted to $9.3 trillion; that the country’s economic output in 2007 was $14 trillion; and that government spent about $3 trillion that year.

The Obama Administration went with the current however and budgeted a spending of $4 trillion in 2009 which represents 28% of GDP, compared to 21 percent in 2008.

There are those, like economist Paul Krugman, who demand that government spend even more. Obama is “wrong”, he argues, to suggest that more spending isn’t “necessary” while the economy hasn’t fully recovered yet. The announced three-year spending freeze meets Krugman’s strong disapproval therefore.

Krugman is an economist of the Keynesian school which always promotes government spending whenever the economy suffers a downturn. Only the state can boost the flow of credit and the recovery of consumer demand under such precarious circumstances, say the Keynesians. As proof, they offer President Franklin D. Roosevelt’s “New Deal” which, supposedly, dragged the American economy out of the Depression through a massive expansion of government compulsion and controls.

The truth is that after two of President Roosevelt’s terms in office, the economy hadn’t recovered at all. Indeed, in 1938, five years after the “New Deal” was enacted, the United States underwent a second recession in spite of all of Roosevelt’s efforts to get the country moving again. The reason? Prosperity demands freedom. Men cannot and will not produce under restraint.

Compared to the trillions of dollars borrowed and owed by the American government today, the New Deal was a fairly modest package, costing, adjusted to inflation, about $500 billion. If ever a Keynesian will admit that it didn’t work (and that it was, in fact, the massive production surge demanded by America’s involvement in World War II which prompted recovery), he will probably argue that Roosevelt spent too little; that the New Deal wasn’t big enough. Reiterating Paul Krugman: if the economy is in trouble, government must always spend — and spend more if things don’t get any better.

Yet, until the early twentieth century, the United States had largely done without “big government.” Throughout the century before, government spent little; it had to borrow little; and it interfered in few industries. Consequently, the United States prospered. As industrialism reached the American shores after the Civil War, the country experienced unprecedented growth and peoples’ lives improved significantly as a result.

This experience had its roots in the philosophy which the United States were founded upon. From its very inception, the United States were a nation of limited government whose constitution didn’t so much dictate what government should, rather what government shouldn’t do: never restrict peoples’ freedoms nor infringe upon their rights; some of which the Declaration of Independence had even referred to as “inalienable”.

The Founding Fathers were staunch proponents of small government and the principal author of the Declaration of Independence, Thomas Jefferson (1743-1826) explicitly warned against mounting government debt.

In July of 1816, writing in a letter to Samuel Kercheval, Jefferson declared that in order to preserve the independence of the people, on whom the “continued freedom” of the nation depended, “we must not let our rulers load us with perpetual debt.” According to Jefferson, “We must make our election between economy and liberty, or profusion and servitude.”

If we run into such debts, as that we must be taxed in our meat and our drink, in our necessities and our comforts, in our labors and our amusements, for our callings and our creeds, as the people of England are, our people, like them, must come to labor sixteen hours in the 24, give the earnings of fifteen of these to the government for their debts and daily expenses; and the sixteenth being insufficient to afford us bread, we must live, as they now do, on oatmeal and potatoes; have no time to think, no means of calling the mis-managers to account; but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers.

Observe that many countries, in Europe especially, maintain a value-added tax on all goods, typically adding 20 percent or so to the cost of products. Most American states know a retail sales tax instead which is more modest than their European counterparts but still follows the logic which Jefferson so dreaded. And note that House speaker Nancy Pelosi suggested in October 2009 that a VAT is “on the table” to help the federal government garner needed revenues.

Jefferson warned against such endeavors. “A departure from principle in one instance becomes a precedent for a second,” he wrote; “that second for a third; and so on, till the bulk of the society is reduced to be mere automatons of misery, and to have no sensibilities left but for sinning and suffering.”

Then begins, indeed, the bellum omnium in omnia [war of all against all], which some philosophers observing to be so general in this world, have mistaken it for the natural, instead of the abusive state of man. And the fore horse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression.

Losing Iceland

The ravage left by the Icesave debacle still frustrates relations between Iceland and the United Kingdom and the Netherlands. The latter two insist that the island nation repay the four billion euros which they spent compensating consumers who nearly lost all their savings last year when the Iceland bank went under. Although the country’s parliament, the Althing, which is actually the oldest of its kind in the world, decided that the money must be repayed, President Olafur Ragnar Grimsson has vetoed their bill. Four billion euros is a lot of cash for a country of 300,000 people. In fact, it amounts to a third of their yearly GDP. A referendum March 6 will decide the confrontation between president and parliament. Read more “Losing Iceland”

TARP Didn’t Work

Statue of President George Washington in Wall Street, New York, December 23, 2008 (Natasja Valentijn)
Statue of President George Washington in Wall Street, New York, December 23, 2008 (Natasja Valentijn)

Three weeks ago, while announcing the Financial Crisis Responsibility Fee, President Barack Obama described the Troubled Asset Relief Program (TARP) as “a distasteful but necessary thing to do.” Although most of the money had been recouped already, the administration promised to get back “every single dime” the banks owed the American government.

A few days later, Nicole Gelinas, author of After the Fall: Saving Capitalism from Wall Street — and Washington (2009), warned that punishing banks won’t work so long as bondholders are convinced that “the government will bail them out again the next time they screw up.” TARP, in this sense, was a mistake.

Special Inspector General Neil M. Barofsky seems to agree in his Quarterly Report to Congress (PDF) of January 30. The TARP watchdog dreads the very mentality Gelinas described while concluding that “even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car.”

Unlike so many in Washington, Barofsky remembers where the recession started.

To the extent that the crisis was fueled by a “bubble” in the housing market, the federal government’s concerted efforts to support home prices […] risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.

Many of TARP’s stated goals, notes Barofsky, “have simply not been met.” Both businesses and consumers continue to struggle with the finding of loans while a TARP program designed specifically to address small business lending, although announced in March 2009, hasn’t been implemented by the Treasury Department as of yet.

Notwithstanding the fact that preserving home ownership and promoting jobs were explicit purposes of the Emergency Economic Stabilization Act of 2008 (“EESA”), the statute that created TARP, nearly 16 months later, home foreclosures remain at record levels, the TARP foreclosure prevention program has only permanently modified a small fraction of eligible mortgages, and unemployment is the highest it has been in a generation.

Barofsky doubts that the aforementioned objectives “can effectively be met through existing TARP programs” but the reality is much simpler than that — these objectives cannot be met effectively through any government program. Whether Congress will draw the same conclusion or consider his report all the more reason to pass further regulation remains to be seen however.

The Dissatisfaction of Compromise

In the modern political discourse, the search for compromise is revered beyond convictions. It is thought of as righteous to surrender one’s staunchest of principles — which are easily denounced as “extreme” — in favor of consensus. More and more “moderates” are voted into public office while radicalism of any kind is scorned.

Barack Obama’s approach to health-care reform is a case in point. Even before his election to president, he announced that his administration would seek a bipartisan approach to reform. Although the Democrats managed to gain overwhelming majorities in both houses of Congress, Republicans, too, would be involved in the passing of legislation which they opposed in principle. Read more “The Dissatisfaction of Compromise”

The Toyota Recall

Things haven’t been going too well for Toyota lately. World’s largest automaker was forced to recall a number of vehicles in November of last year already when the incursion of a wrong floor mat was found to cause pedal entrapment. Last month, the company announced a recall of so much as 1.8 million cars from across Europe and 2.3 cars from the United States after a problem with the accelerator pedal was discovered. Eight different models are affected by the problem, sales of which have been suspended. An additional 1.1 recalls were issued last Thursday.

Tadashi Arashima, chief executive of Toyota Motor Europe, understands “that the current situation is creating concerns” which he deeply regrets. No accidents resulting from the malfunctioning accelerator pedals have been reported yet. “The potential accelerator pedal issue only occurs in very rare circumstances,” according to Arashima. Nevertheless, the company is taking millions of cars off the market.

How could this be allowed to happen in the so carefully regulated markets of the Western World? Shouldn’t agencies as the National Highway Traffic Safety Administration and the National Transportation Safety Board in the United States as well as the dozens of similar organizations across Europe and in Japan protect the consumer from this sort of corporate irresponsibility? Shouldn’t the regular safety inspections as required by law, which demand of citizens that they pay up every so many years for the knowledge of driving a safe vehicle, have noticed this flaw in Toyota’s latest models? How is it possible that millions of unsafe cars hit the roads across Europe and America in spite of all the taxpayers’ money spent on trying to prevent exactly that?

The reality, of course, is that unless perhaps in a totalitarian state that controls every single aspect of production and sales, no amount of regulation can prevent that mistakes are made.

Does that mean that regulatory agencies are useless altogether? No. The fact that a private automaker as Toyota takes care of its own problems, does.

Safety defects and production errors will probably always happen. But the free market provides the most efficient and the most righteous mechanism for solving it. Toyota demonstrates that. Rather than risking lawsuits and a shattered consumer trust in its products, the company is acting rationally and responsibly by recalling millions of cars even if, in the short run, it suffers financially. It needs no government bureaucrat to protect the public safety. In a free market, prestige, especially for corporations that operate worldwide, is a powerful asset. If the consumer loses confidence in the reliability of its products, even the largest automaker in the world can go bankrupt — which is precisely why Toyota will go a long way to ensure that such confidence is maintained.

No Bank “Too Big To Fail”

In a speech delivered before the New York Association for Business Economics in New York City on February 3, Governor Kevin Warsh of the Federal Reserve declared that it is “a time for choosing” for the American economy. “Efficacy,” said Warsh, “not convenience, should be the foremost goal of policymakers.”

The youngest member of the Federal Reserve’s board of governors pointed out that a “broader understanding of what occurred” is required before any effective reform can be passed. Where his boss continues to cite “regulatory failure” when pressed on the causes of the recession, Warsh referred to “a multitude of flawed private and public practices.” Specifically, the so-called government-sponsored enterprises Fannie Mae and Freddie Mac “were given license and direction to take excessive risks,” according to Warsh.

The private sector is not free of blame, said Warsh, and he believes that “the financial architecture requires additional reforms to mitigate the too-big-to-fail problem.” No bank, he stressed, should be “too big to fail.” “The growing specter of government support threatens to weaken market discipline, confuse price signals, and create a class of institutions that operate under different rules of the game. This state,” he warned, “is not acceptable.”

To address the problem, Warsh sees a number of options: First, the sharing of information. “Stakeholders can then make better informed judgments of potential risks and rewards.” Second, more robust competition. “Market entry and market exit can be a more effective means of developing a stronger, more resilient financial system.”

Competition is undermined when a privileged class of financial firms has the implicit support of the government. No firm ought to be entitled to favored consideration by regulators or government policy.

Lastly, Warsh favors stronger capital and liquidity buffers as well as “more rigorous risk-management practices” to operate as safeguards. “Simplifying corporate forms and structures so firms can quickly be unwound, particularly across borders, would be a welcome development.”

The current trend toward Washington “micromanagement” of banks is a dangerous development, said Warsh; one that “can harm an economy that desperately needs a competitive, vibrant, sustainable banking system.” Indeed, the whole of the American economy “runs grave risks if we slouch toward a quasi-public utility model.”

I worry that some systemically significant firms may end up willing to accept new, permanent government masters and supplementary public purposes in order to protect their status. Apportioning economic rents to appease the official sector may appear rational to some firms. But, it is destructive to the financial and economic system overall. We should not want clients of the state at the core of our financial system. We do not want some new social contract between government and large banks. Now more than ever, we need more private firms competing to serve client needs and make markets.