We are in difficult economic times. The collapse of the housing bubble has had repercussions in other aspects of the economy. Banks, faced with default mortgages, are now unwilling to lend. With capital frozen, business cannot expand or grow. Hiring freezes, and employees are let go to cut costs. In this climate, everyone looks to government to create jobs and protect jobs. Populism and protectionism become popular.
This is evident in the creation of the current economic stimulus package that is being debated on Capitol Hill. The House and the Senate have passed two different bills, which must be resolved in conference committee. The House version contains, “Buy American,” clauses to insure that the government money spent will go to American businesses, buy only American products and, “protect,” American jobs.
It is easy to understand why such measures might be popular in these economic times, but they are extremely short sighted. No one makes an effective argument for truly free trade. Trade proponents argue that it creates jobs, opponents point to the jobs lost. The truth is, in any free and competitive market there will be winners and losers. This gives each side examples to point to, but confuses the public at large that is trying to decide, on balance, whether open trade or protectionism would be better.
However, these, “practical,” arguments about whether free trade costs or creates jobs miss the larger moral issue at stake. What defines a free society is freedom of choice. Our Constitution enshrines some freedom of choice in the First Amendment – our government is not allowed to dictate what you can say (or think), cannot prevent you from assembling peacefully, and cannot tell you what to believe or what god to worship. True liberty, however, requires that this freedom of choice extend to economic activity as well. What empowers consumers is having multiple businesses providing goods and services competing for the consumers' business. The consumer then can choose amongst various options the product he or she judges is of reasonable quality and/or a reasonable price. Monopolies or trusts exploit the consumer by denying choice and either force the consumer to accept inferior quality or charge the consumer exorbitant prices. The competition of a free market prevents this economic exploitation.
Protectionism similarly exploits consumers. Freedom and both political and economic power are maximized when the consumer has more choice. Limiting access to foreign goods, or subsidizing domestic ones, or inflating the prices of imports through tariffs, limits choice and forces the consumer to accept higher prices than the market would otherwise bear. What helps a narrow segment of the population (those that work in the industry being protected) exploits everyone who consumes goods and services and hurts us all. Economic freedom of choice is so crucial to liberty that, in the same sentence of the Declaration of Independence that charges King George III with the tyranny of taxing the colonies without representation, Jefferson also labelled George III a tyrant, “for cutting off our trade with all parts of the world.” It is no less exploitive to restrict consumer’s access to the fullest selection of goods and services today through trade barriers as it was in Mr. Jefferson’s day or when the lord of the manor would insist that all his serfs use the lord's mill exclusively.
Furthermore, economic protectionism is no longer practical in the 21st century. The world and the U.S. economy have changed over the last century. The airplane, the telephone, the cellular phone, the computer, the internet, and broad-band internet access have made the world smaller. The world is now, to borrow Tom Friedman’s phrase, flat. It is now much easier to market goods and services to all parts of the globe, buy from and sell to all parts of the globe, and collaborate with others in every corner of the world. These technological innovations make it impossible to build a wall around fortress America and remain internally self-sufficient. As developing countries can manufacture simpler things less expensively, our economic growth depends on being a center of innovation for the new goods and services of tomorrow. We cannot continue to do that unless we take advantage of the same tools – a worldwide talent pool and the ability to maximize profit by outsourcing tasks that others do better or less expensively – as our competitors will. The truth is, we have no business manufacturing something if we can’t make it better or cheaper and we will need to have open access the world’s resources if we are to continue to innovate. This means our workforce will have to have more flexible skill sets and gone are the days where working on the same assembly line provides a lifetime of job security. This is neither bad nor good, it simply is. Our policies must reflect this reality and trying to protect the industries of the 20th century, burying our heads in the sand, will lead to a long-term lack of competitiveness that stunts our economic growth and allows competitors to pass us by. Buy American provisions will simply encourage others to close their markets to our goods and services and lead to escalating trade wars that will deprive us of the competitive advantages and opportunities of full participation in the global marketplace.
The Buy American provisions in the economic stimulus package are a poison pill that threatens our liberty and long-term economic prosperity. President Obama has voiced his disapproval of these provisions, but if they remain in the final bill, they will prove and interesting test of the new President’s leadership. If such provisions are in the final bill, President Obama should veto it. President Clinton took on elements in his own party when he promoted NAFTA, can President Obama do the same? If these provisions are in the final bill, will President Obama have the political courage to veto a stimulus package that most of the country believes we need in the face of the economic crisis and ask Congress for a new bill without these provisions? I, for one, certainly hope so.
Monday, February 9, 2009
Trade
We are in difficult economic times. The collapse of the housing bubble has had repercussions in other aspects of the economy. Banks, faced with default mortgages, are now unwilling to lend. With capital frozen, business cannot expand or grow. Hiring freezes, and employees are let go to cut costs. In this climate, everyone looks to government to create jobs and protect jobs. Populism and protectionism become popular.
This is evident in the creation of the current economic stimulus package that is being debated on Capitol Hill. The House and the Senate have passed to different bills, which must be resolved in conference committee. The House version contains, “Buy American,” clauses to insure that the government money spent will go to American businesses, buy only American products and, “protect,” American jobs.
It is easy to understand why such measures might be popular in these economic times, but they are extremely short sighted. No one makes an effective argument for truly free trade. Trade proponents argue that it creates jobs, opponents point to the jobs lost. The truth is, in any free and competitive market there will be winners and losers. This gives each side examples to point to, but confuses the public at large that is trying to decide, on balance, whether open trade or protectionism would be better.
However, these, “practical,” arguments about whether free trade costs or creates jobs miss the larger moral issue at stake. What defines a free society is freedom of choice. Our Constitution enshrines some freedom of choice in the First Amendment – our government is not allowed to dictate what you can say (or think), cannot prevent you from assembling peacefully, and cannot tell you what to believe or what god to worship. True liberty, however, requires that this freedom of choice extend to economic activity as well. What empowers consumers is having multiple businesses providing goods and services competing for the consumers business. The consumer then can choose amongst various options the product he or she judges is of reasonable quality and/or a reasonable price. Monopolies or trusts exploit the consumer by denying choice and either force the consumer to accept inferior quality or charge the consumer exorbitant prices. The competition of a free market prevents this economic exploitation.
Protectionism similarly exploits consumers. Freedom and both political and economic power are maximized when the consumer has more choice. By limiting access to foreign goods, or subsidizing domestic ones, or inflating the prices of imports through tariffs, limits choice and forces the consumer to accept higher prices than the market would otherwise bear. What helps a narrow segment of the population (those that work in the industry being protected) exploits everyone who consumes goods and services and hurts us all. Economic freedom of choice is so crucial to liberty that, in the same sentence of the Declaration of Independence that charges King George III with the tyranny of taxing the colonies without representation, he also labelled him a tyrant, “for cutting off our trade with all parts of the world.” It is no less exploitive to restrict consumer’s access to the fullest selection of goods and services today through trade barriers as it was in Mr. Jefferson’s day or when the lord of the manor would insist that all his serfs use his mill exclusively.
Furthermore, economic protectionism is no longer practical in the 21st century. The world and the U.S. economy have changed over the last century. The airplane, the telephone, the cellular phone, the computer, the internet, and broad-band internet access have made the world smaller. The world is now, to borrow Tom Friedman’s phrase, flat. It is now much easier to market goods and services to all parts of the globe, buy and sell to and from all parts of the globe, and collaborate with others in every corner of the world. These technological innovations make it impossible to build a wall around fortress America and remain internally self-sufficient. As developing countries can manufacture simpler things less expensively, our economic growth depends on being a center of innovation for the new goods and services of tomorrow. We cannot continue to do that unless we take advantage of the same tools – a worldwide talent pool and the ability to maximize profit by outsourcing tasks that others do better or less expensively – as our competitors will. The truth is, we have no business manufacturing something if we can’t make it better or cheaper and we will need to have open access the world’s resources if we are to continue to innovate. This means our workforce will have to have more flexible skill sets and gone are the days where working on the same assembly line provides a lifetime of job security. This is neither bad nor good, it simply is. Our policies must reflect this reality and trying to protect the industries of the 20th century, burying our heads in the sand, will lead to a long-term lack of competitiveness that stunts our economic growth and allows competitors to pass us buy. Buy American provisions will simply encourage others to close their markets to our goods and services and lead to escalating trade wars that will deprive us of the competitive advantages and opportunities of full participation in the global marketplace.
The Buy American provisions in the economic stimulus package are a poison pill that threatens our liberty and long-term economic prosperity. President Obama has voiced his disapproval of these provisions, but if they remain in the final bill, they will prove and interesting test of the new President’s leadership. If such provisions are in the final bill, President Obama should veto it. President Clinton took on elements in his own party when he promoted NAFTA, can President Obama do the same? If these provisions are in the final bill, will he have the political courage to veto a stimulus package that most of the country believes we need in the face of the economic crisis and ask Congress for a new bill without these provisions? I, for one, certainly hope so.
This is evident in the creation of the current economic stimulus package that is being debated on Capitol Hill. The House and the Senate have passed to different bills, which must be resolved in conference committee. The House version contains, “Buy American,” clauses to insure that the government money spent will go to American businesses, buy only American products and, “protect,” American jobs.
It is easy to understand why such measures might be popular in these economic times, but they are extremely short sighted. No one makes an effective argument for truly free trade. Trade proponents argue that it creates jobs, opponents point to the jobs lost. The truth is, in any free and competitive market there will be winners and losers. This gives each side examples to point to, but confuses the public at large that is trying to decide, on balance, whether open trade or protectionism would be better.
However, these, “practical,” arguments about whether free trade costs or creates jobs miss the larger moral issue at stake. What defines a free society is freedom of choice. Our Constitution enshrines some freedom of choice in the First Amendment – our government is not allowed to dictate what you can say (or think), cannot prevent you from assembling peacefully, and cannot tell you what to believe or what god to worship. True liberty, however, requires that this freedom of choice extend to economic activity as well. What empowers consumers is having multiple businesses providing goods and services competing for the consumers business. The consumer then can choose amongst various options the product he or she judges is of reasonable quality and/or a reasonable price. Monopolies or trusts exploit the consumer by denying choice and either force the consumer to accept inferior quality or charge the consumer exorbitant prices. The competition of a free market prevents this economic exploitation.
Protectionism similarly exploits consumers. Freedom and both political and economic power are maximized when the consumer has more choice. By limiting access to foreign goods, or subsidizing domestic ones, or inflating the prices of imports through tariffs, limits choice and forces the consumer to accept higher prices than the market would otherwise bear. What helps a narrow segment of the population (those that work in the industry being protected) exploits everyone who consumes goods and services and hurts us all. Economic freedom of choice is so crucial to liberty that, in the same sentence of the Declaration of Independence that charges King George III with the tyranny of taxing the colonies without representation, he also labelled him a tyrant, “for cutting off our trade with all parts of the world.” It is no less exploitive to restrict consumer’s access to the fullest selection of goods and services today through trade barriers as it was in Mr. Jefferson’s day or when the lord of the manor would insist that all his serfs use his mill exclusively.
Furthermore, economic protectionism is no longer practical in the 21st century. The world and the U.S. economy have changed over the last century. The airplane, the telephone, the cellular phone, the computer, the internet, and broad-band internet access have made the world smaller. The world is now, to borrow Tom Friedman’s phrase, flat. It is now much easier to market goods and services to all parts of the globe, buy and sell to and from all parts of the globe, and collaborate with others in every corner of the world. These technological innovations make it impossible to build a wall around fortress America and remain internally self-sufficient. As developing countries can manufacture simpler things less expensively, our economic growth depends on being a center of innovation for the new goods and services of tomorrow. We cannot continue to do that unless we take advantage of the same tools – a worldwide talent pool and the ability to maximize profit by outsourcing tasks that others do better or less expensively – as our competitors will. The truth is, we have no business manufacturing something if we can’t make it better or cheaper and we will need to have open access the world’s resources if we are to continue to innovate. This means our workforce will have to have more flexible skill sets and gone are the days where working on the same assembly line provides a lifetime of job security. This is neither bad nor good, it simply is. Our policies must reflect this reality and trying to protect the industries of the 20th century, burying our heads in the sand, will lead to a long-term lack of competitiveness that stunts our economic growth and allows competitors to pass us buy. Buy American provisions will simply encourage others to close their markets to our goods and services and lead to escalating trade wars that will deprive us of the competitive advantages and opportunities of full participation in the global marketplace.
The Buy American provisions in the economic stimulus package are a poison pill that threatens our liberty and long-term economic prosperity. President Obama has voiced his disapproval of these provisions, but if they remain in the final bill, they will prove and interesting test of the new President’s leadership. If such provisions are in the final bill, President Obama should veto it. President Clinton took on elements in his own party when he promoted NAFTA, can President Obama do the same? If these provisions are in the final bill, will he have the political courage to veto a stimulus package that most of the country believes we need in the face of the economic crisis and ask Congress for a new bill without these provisions? I, for one, certainly hope so.
Saturday, January 3, 2009
An Open Letter to President George W. Bush
Dear Mr. President:
Shortly before Christmas, sixteen years ago, I wrote your father to thank him for his service to our nation as President. I thanked him for his leadership and, to this day, believe our country is better off because of it.
It is with a heavy heart that I cannot do the same today. While I realize that your administration was dealt a difficult hand (9-11, financial crisis, etc.), I am forced to conclude, as a majority of Americans have, that your administration has failed this nation and your leadership has been detrimental to it.
In my opinion, Mr. President, this is a direct result of being conservative in rhetoric only, rather than in policy. Yours has been the most left-leaning administration in decades, and certainly more leftist than your three predecessors. Other than tax cuts, which I do thank you for, your administration has not pursued any conservative policies. You have presided over the largest increases in domestic, non-defence, discretionary spending since LBJ’s great society. You had been in office for six years before you finally vetoed a spending bill. Your administration created a brand new healthcare entitlement (the Medicare prescription drug benefit). Industrial subsidies for agriculture, wool, sugar, and ethanol have increased on your watch. Both your father and President Reagan were committed to free trade with other nations. Although you have negotiated free trade agreements with our Latin American neighbours, you have also placed (at least temporarily) protective tariffs on European steel and engaged in trade disputes over the purchase of lumber from Canada. This free spending domestic policy has saddled us with debt, undoing the 104th Congress’ work in balancing the federal budget, and is a record Jimmy Carter or Bill Clinton could have been proud of.
While President Reagan wanted to abolish the federal department of education, you expanded the role of federal government in education with the No Child Left Behind Act, which makes the federal department of education the watchdog of schools in every state. What policy could be more antithetical to the Reagan-Goldwater view of devolving power out of Washington? I am shocked that, as a former governor, your administration would make a mockery of state sovereignty. In addition to No Child Left Behind, your administration, under Attorney General Ashcroft, attempted to use the Controlled Substances Act to prosecute doctors in Oregon that assisted in suicide. While I am not an advocate of assisted suicide, I would defend to my last breath the right of the state of Oregon to decide what is acceptable medical practice in Oregon. Similarly, your administration has disrespected laws allowing medical use of marijuana in several states. Wading into the Terry Schiavo case was truly shameful. Clearly such end of life decisions belong to families and state laws should govern who is an appropriate decision maker. The federal government clearly has no role in such cases. Fortunately you chose not to pursue it in your second term, but your proposal for a Constitutional Amendment to ban gay marriage is also a frontal assault on state sovereignty and states rights.
The intrusiveness of federal government under your administration does not stop with the trampling of states rights. Rights of individuals have also been threatened by illegal detentions, aggressive interrogation tactics, and illicit eavesdropping. I appreciate that stronger measures may be necessary in the post 9-11 world, and I am consoled by the fact that provisions of the USA PATRIOT act are subject periodic review and renewal by Congress. However, it is worth remembering that when similar anti-terrorism measures were proposed in the wake of the Oklahoma City bombing by President Clinton, it was Republicans that defeated those measures with concerns that they threatened civil liberties. I miss the days when Republicans concerned themselves with keeping the federal government off the back of the people… Your administration’s expansive view of executive authority is frightening. In a recent appearance on Fox News Sunday, Vice President Cheney argued that the War Powers Act was unconstitutional, not because it strips Congress of its constitutionally defined role to declare war, but because it allows Congress to interfere (after 90 days) with the President’s execution of his role as Commander-in-Chief! I can understand, in the 21st century, why a War Powers Act is necessary to allow a President to act in a time-sensitive manner while Congress convenes, debates, and votes. But, make no mistake sir, under our Constitution it is Congress alone that has the authority to decide when and if the United States goes to war.
Your foreign policy has been no less leftist. In your second inaugural address, you set as a goal of U.S. foreign policy, the elimination of tyranny in our world. This is certainly a noble ideal, but not a suitable guiding principle for the foreign policy of any nation. Foreign policy must always be based on national interest. Aiding freedom fighters to prevent communist hegemony may have met that goal, but toppling all dictators in every corner of the globe does not. Your policies resemble the nation-building zeal of the Clinton administration (Haiti, Bosnia, Somalia), the, “make the world safe for democracy,” philosophy of President Wilson, and the human rights agenda of President Carter more than the, “humble foreign policy,” that you promised in your 2000 presidential campaign. I would agree that things have changed because of 9-11, but we knew before invading that Iraq had no role in 9-11. We also knew Saddam was not anywhere near the largest state sponsor of terrorism (Iran has been a much bigger sponsor of terrorists), his military had been cut down in size by Desert Storm, his country was under tough economic sanctions, a third of his country was under a no-fly zone, and Iraq had not threatened another country outside its own borders in over a decade. Even assuming the accuracy of intelligence reports of WMD (which I did at the time), it is clear from these facts that there was no justification for invading Iraq. Possession of WMD is not enough. That would be justification for invading dozens of countries (including the U.S.). Only intelligence of an imminent attack with those weapons could justify pre-emptive military action. As a Christian, I cannot believe you asked, “What would Jesus do?” and concluded that He would invade Iraq. The consequences have been staggering. Not only have lives, American and Iraqi, been needlessly lost, but this unnecessary, unjustifiable war has cost billions of dollars, alienated our allies and strengthened the hand of Iran, a country that actually does sponsor terrorists and has an active nuclear program. In this, too, your administration’s policies have been contrary to the principles of previous Republican administrations. Your father explained why military occupation of Iraq was a bad idea:
Trying to eliminate Saddam, extending the ground war into an occupation of Iraq, would have violated our guideline about not changing objectives in midstream, engaging in, “mission creep,” and would have incurred incalculable human and political costs…. We would have been forced to occupy Baghdad and, in effect, rule Iraq. The coalition would have instantly collapsed, the Arabs deserting it in anger and other allies pulling out as well. Under those circumstances, there was no viable, “exit strategy,” we could see, violating another of our principles. Furthermore, we had been self-consciously trying to set a pattern for handling aggression in the post-Cold War world. Going in and occupying Iraq, thus exceeding the United Nations mandate, would have destroyed the precedent of international response to aggression we hoped to establish. Had we gone the invasion route, the United States could conceivably still be an occupying power in a bitterly hostile land. It would have been a dramatically different - and perhaps barren – outcome.
George H.W. Bush and Brent Scowcroft
A World Transformed, p.489 (1998)
Finally, I would like to say a few words about the financial crisis. The most basic conservative principle is the limitation of government’s influence in the market place. Conservatives believe that this not only encourages economic growth, but also establishes an important economic component of individual liberty. We all know that the financial crisis, while global, began with the collapse of a real estate bubble in the United States. What is often not discussed is that the real estate bubble was created by the type of government intervention in the market places that all conservatives should eschew. As you know, the Community Reinvestment Act indirectly encourages subprime lending by mandating home loans to low-income families. A revision of the act on your watch in 2005 made it easier for lenders to participate in the program by allowing smaller banks to participate solely as lenders, with less oversight. In addition, in 2004, your administration increased the affordable housing goals of both Fannie Mae and Freddie Mac and allowed them to include securitized subprime loans toward their affordable housing goals. The goal was to increase home ownership and in your 2004 State of the Union address, you boasted about the success of these policies, noting that new home construction was the highest in twenty years and home ownership was at an all-time high in the U.S. But, these policies ignore the fundamental conservative principle that government intervention in the market place has unintended consequences. Add to these policies a Federal Reserve that kept interest rates artificially low and you have an artificial market that encourages exuberant lending. Furthermore, the Feds policies devalued the dollar, which raised the price of fuel and food, and made it more difficult for those with subprime mortgages to make their payments. Your administration’s manipulation of the marketplace for a public policy goal of affordable housing helped create this financial crisis. Such policies are anathema to conservatives who believe in free market principles. Your administration’s response to the crisis has been even more shocking. Bailouts of industries, government ownership of financial institutions, and a, “car czar,” to direct business decisions of the automakers that take government money. In short, the response to a crisis created by ignoring free market principles and has been socialism – government purchase and ownership of private industry. These policies can in no way be seen as anything other than leftist.
In summary, the policies of your administration have abandoned almost every conservative principle: free trade and laissez-faire economic policies, strict interpretation of and adherence to the Constitution, limited government intrusiveness and the protection of individual liberty and states’ rights, fiscal discipline, and non-interventionist foreign policy. Your administration has systematically undone and reversed the policies of previous Republican Presidents and Congresses. The result has been an unpopular war, disaffected conservative voters, the decimation our political party and policies that lay the groundwork for President-elect Obama to establish a new American socialism. This is not what we conservatives thought we were voting for in 2000.
Mr. President, it is not my goal to be disrespectful. I understand that you had to make difficult decisions in real time, and it is easy for me, or anyone else, to play, “Monday morning quarterback.” However, I felt compelled to explain to you why so many of us conservatives feel let down by your administration. On January 20, 2001, I stood in the cold, pouring rain, on the Mall in front of the Capitol while you took the oath of office. I was excited about your election and hopeful and optimistic about where you would lead this country. As I have watched your administration do nothing but expand the scope of federal government for eight years, I feel betrayed. I think you need to understand that a number of conservatives feel this way and I hope you will reflect on what I have said.
Let me close, Mr. President, by wishing you, Laura, the twins, your folks, and all of your family a happy, healthy, and prosperous New Year. Regardless of our differences, I wish you the best and hope you enjoy some much deserved time off.
Shortly before Christmas, sixteen years ago, I wrote your father to thank him for his service to our nation as President. I thanked him for his leadership and, to this day, believe our country is better off because of it.
It is with a heavy heart that I cannot do the same today. While I realize that your administration was dealt a difficult hand (9-11, financial crisis, etc.), I am forced to conclude, as a majority of Americans have, that your administration has failed this nation and your leadership has been detrimental to it.
In my opinion, Mr. President, this is a direct result of being conservative in rhetoric only, rather than in policy. Yours has been the most left-leaning administration in decades, and certainly more leftist than your three predecessors. Other than tax cuts, which I do thank you for, your administration has not pursued any conservative policies. You have presided over the largest increases in domestic, non-defence, discretionary spending since LBJ’s great society. You had been in office for six years before you finally vetoed a spending bill. Your administration created a brand new healthcare entitlement (the Medicare prescription drug benefit). Industrial subsidies for agriculture, wool, sugar, and ethanol have increased on your watch. Both your father and President Reagan were committed to free trade with other nations. Although you have negotiated free trade agreements with our Latin American neighbours, you have also placed (at least temporarily) protective tariffs on European steel and engaged in trade disputes over the purchase of lumber from Canada. This free spending domestic policy has saddled us with debt, undoing the 104th Congress’ work in balancing the federal budget, and is a record Jimmy Carter or Bill Clinton could have been proud of.
While President Reagan wanted to abolish the federal department of education, you expanded the role of federal government in education with the No Child Left Behind Act, which makes the federal department of education the watchdog of schools in every state. What policy could be more antithetical to the Reagan-Goldwater view of devolving power out of Washington? I am shocked that, as a former governor, your administration would make a mockery of state sovereignty. In addition to No Child Left Behind, your administration, under Attorney General Ashcroft, attempted to use the Controlled Substances Act to prosecute doctors in Oregon that assisted in suicide. While I am not an advocate of assisted suicide, I would defend to my last breath the right of the state of Oregon to decide what is acceptable medical practice in Oregon. Similarly, your administration has disrespected laws allowing medical use of marijuana in several states. Wading into the Terry Schiavo case was truly shameful. Clearly such end of life decisions belong to families and state laws should govern who is an appropriate decision maker. The federal government clearly has no role in such cases. Fortunately you chose not to pursue it in your second term, but your proposal for a Constitutional Amendment to ban gay marriage is also a frontal assault on state sovereignty and states rights.
The intrusiveness of federal government under your administration does not stop with the trampling of states rights. Rights of individuals have also been threatened by illegal detentions, aggressive interrogation tactics, and illicit eavesdropping. I appreciate that stronger measures may be necessary in the post 9-11 world, and I am consoled by the fact that provisions of the USA PATRIOT act are subject periodic review and renewal by Congress. However, it is worth remembering that when similar anti-terrorism measures were proposed in the wake of the Oklahoma City bombing by President Clinton, it was Republicans that defeated those measures with concerns that they threatened civil liberties. I miss the days when Republicans concerned themselves with keeping the federal government off the back of the people… Your administration’s expansive view of executive authority is frightening. In a recent appearance on Fox News Sunday, Vice President Cheney argued that the War Powers Act was unconstitutional, not because it strips Congress of its constitutionally defined role to declare war, but because it allows Congress to interfere (after 90 days) with the President’s execution of his role as Commander-in-Chief! I can understand, in the 21st century, why a War Powers Act is necessary to allow a President to act in a time-sensitive manner while Congress convenes, debates, and votes. But, make no mistake sir, under our Constitution it is Congress alone that has the authority to decide when and if the United States goes to war.
Your foreign policy has been no less leftist. In your second inaugural address, you set as a goal of U.S. foreign policy, the elimination of tyranny in our world. This is certainly a noble ideal, but not a suitable guiding principle for the foreign policy of any nation. Foreign policy must always be based on national interest. Aiding freedom fighters to prevent communist hegemony may have met that goal, but toppling all dictators in every corner of the globe does not. Your policies resemble the nation-building zeal of the Clinton administration (Haiti, Bosnia, Somalia), the, “make the world safe for democracy,” philosophy of President Wilson, and the human rights agenda of President Carter more than the, “humble foreign policy,” that you promised in your 2000 presidential campaign. I would agree that things have changed because of 9-11, but we knew before invading that Iraq had no role in 9-11. We also knew Saddam was not anywhere near the largest state sponsor of terrorism (Iran has been a much bigger sponsor of terrorists), his military had been cut down in size by Desert Storm, his country was under tough economic sanctions, a third of his country was under a no-fly zone, and Iraq had not threatened another country outside its own borders in over a decade. Even assuming the accuracy of intelligence reports of WMD (which I did at the time), it is clear from these facts that there was no justification for invading Iraq. Possession of WMD is not enough. That would be justification for invading dozens of countries (including the U.S.). Only intelligence of an imminent attack with those weapons could justify pre-emptive military action. As a Christian, I cannot believe you asked, “What would Jesus do?” and concluded that He would invade Iraq. The consequences have been staggering. Not only have lives, American and Iraqi, been needlessly lost, but this unnecessary, unjustifiable war has cost billions of dollars, alienated our allies and strengthened the hand of Iran, a country that actually does sponsor terrorists and has an active nuclear program. In this, too, your administration’s policies have been contrary to the principles of previous Republican administrations. Your father explained why military occupation of Iraq was a bad idea:
Trying to eliminate Saddam, extending the ground war into an occupation of Iraq, would have violated our guideline about not changing objectives in midstream, engaging in, “mission creep,” and would have incurred incalculable human and political costs…. We would have been forced to occupy Baghdad and, in effect, rule Iraq. The coalition would have instantly collapsed, the Arabs deserting it in anger and other allies pulling out as well. Under those circumstances, there was no viable, “exit strategy,” we could see, violating another of our principles. Furthermore, we had been self-consciously trying to set a pattern for handling aggression in the post-Cold War world. Going in and occupying Iraq, thus exceeding the United Nations mandate, would have destroyed the precedent of international response to aggression we hoped to establish. Had we gone the invasion route, the United States could conceivably still be an occupying power in a bitterly hostile land. It would have been a dramatically different - and perhaps barren – outcome.
George H.W. Bush and Brent Scowcroft
A World Transformed, p.489 (1998)
Finally, I would like to say a few words about the financial crisis. The most basic conservative principle is the limitation of government’s influence in the market place. Conservatives believe that this not only encourages economic growth, but also establishes an important economic component of individual liberty. We all know that the financial crisis, while global, began with the collapse of a real estate bubble in the United States. What is often not discussed is that the real estate bubble was created by the type of government intervention in the market places that all conservatives should eschew. As you know, the Community Reinvestment Act indirectly encourages subprime lending by mandating home loans to low-income families. A revision of the act on your watch in 2005 made it easier for lenders to participate in the program by allowing smaller banks to participate solely as lenders, with less oversight. In addition, in 2004, your administration increased the affordable housing goals of both Fannie Mae and Freddie Mac and allowed them to include securitized subprime loans toward their affordable housing goals. The goal was to increase home ownership and in your 2004 State of the Union address, you boasted about the success of these policies, noting that new home construction was the highest in twenty years and home ownership was at an all-time high in the U.S. But, these policies ignore the fundamental conservative principle that government intervention in the market place has unintended consequences. Add to these policies a Federal Reserve that kept interest rates artificially low and you have an artificial market that encourages exuberant lending. Furthermore, the Feds policies devalued the dollar, which raised the price of fuel and food, and made it more difficult for those with subprime mortgages to make their payments. Your administration’s manipulation of the marketplace for a public policy goal of affordable housing helped create this financial crisis. Such policies are anathema to conservatives who believe in free market principles. Your administration’s response to the crisis has been even more shocking. Bailouts of industries, government ownership of financial institutions, and a, “car czar,” to direct business decisions of the automakers that take government money. In short, the response to a crisis created by ignoring free market principles and has been socialism – government purchase and ownership of private industry. These policies can in no way be seen as anything other than leftist.
In summary, the policies of your administration have abandoned almost every conservative principle: free trade and laissez-faire economic policies, strict interpretation of and adherence to the Constitution, limited government intrusiveness and the protection of individual liberty and states’ rights, fiscal discipline, and non-interventionist foreign policy. Your administration has systematically undone and reversed the policies of previous Republican Presidents and Congresses. The result has been an unpopular war, disaffected conservative voters, the decimation our political party and policies that lay the groundwork for President-elect Obama to establish a new American socialism. This is not what we conservatives thought we were voting for in 2000.
Mr. President, it is not my goal to be disrespectful. I understand that you had to make difficult decisions in real time, and it is easy for me, or anyone else, to play, “Monday morning quarterback.” However, I felt compelled to explain to you why so many of us conservatives feel let down by your administration. On January 20, 2001, I stood in the cold, pouring rain, on the Mall in front of the Capitol while you took the oath of office. I was excited about your election and hopeful and optimistic about where you would lead this country. As I have watched your administration do nothing but expand the scope of federal government for eight years, I feel betrayed. I think you need to understand that a number of conservatives feel this way and I hope you will reflect on what I have said.
Let me close, Mr. President, by wishing you, Laura, the twins, your folks, and all of your family a happy, healthy, and prosperous New Year. Regardless of our differences, I wish you the best and hope you enjoy some much deserved time off.
Wednesday, November 5, 2008
Decision 2008
I have made it a point not to discuss the Presidential race or endorse a candidate in my postings because I want this blog to be about issues and ideas and not about personalities. However, I would like to suspend that custom today and comment on the results of yesterday's historic U.S. Presidential election.
I must admit that I did not vote for Barack Obama yesterday. Other than his opposition to the war in Iraq, his views are antithetical to those presented in this blog. However, today I am proud of my country for electing him. Although he had a number if advantages - fund raising, George Bush's unpopularity, John McCain's link to an unpopular war and the simple truth that the party that holds the White House during an economic downturn always loses it - any of those could have been negated by racial prejudice, and they weren't. I may not agree that President-elect Obama's policies will be the best for our future, however 63 million Americans did and they didn't let Barack Obama's race dissuade them. That may seem like a small thing, but in a country that as recently as 150 years ago enslaved people of colour and as recently as 50 years ago had laws designed to deny them access to the voting booth, it is a big deal.
But more than that, Barack Obama is a bi-racial person, and on his father's side, a first generation American (the son of a Kenyan immigrant). His origins are humble, raised by a single parent and grandparents. From this improbable beginning, he will become President of the United States. His election is an affirmation that the American Dream is alive and well. He has demonstrated that we speak the truth when we tell our young people that in this great land, you can be anything you want to be and achieve anything you set your mind to achieve. Regardless of who your parents are or the colour of your skin, the United States of America is a land of opportunity for all.
I am sure that in the years to come I will be posting criticism of some of President Obama's policies. But today it is my sincere hope that his administration will be a successful one during which our nation enjoys peace and prosperity. It is my hope that his election will transform how the world views the U.S. by demonstrating to the world that we are not simply a nation of gun-slinging cowboys, but a nation of diverse peoples.
I did not support Senator Obama's candidacy, but his election reminds my of why I love this country.
I must admit that I did not vote for Barack Obama yesterday. Other than his opposition to the war in Iraq, his views are antithetical to those presented in this blog. However, today I am proud of my country for electing him. Although he had a number if advantages - fund raising, George Bush's unpopularity, John McCain's link to an unpopular war and the simple truth that the party that holds the White House during an economic downturn always loses it - any of those could have been negated by racial prejudice, and they weren't. I may not agree that President-elect Obama's policies will be the best for our future, however 63 million Americans did and they didn't let Barack Obama's race dissuade them. That may seem like a small thing, but in a country that as recently as 150 years ago enslaved people of colour and as recently as 50 years ago had laws designed to deny them access to the voting booth, it is a big deal.
But more than that, Barack Obama is a bi-racial person, and on his father's side, a first generation American (the son of a Kenyan immigrant). His origins are humble, raised by a single parent and grandparents. From this improbable beginning, he will become President of the United States. His election is an affirmation that the American Dream is alive and well. He has demonstrated that we speak the truth when we tell our young people that in this great land, you can be anything you want to be and achieve anything you set your mind to achieve. Regardless of who your parents are or the colour of your skin, the United States of America is a land of opportunity for all.
I am sure that in the years to come I will be posting criticism of some of President Obama's policies. But today it is my sincere hope that his administration will be a successful one during which our nation enjoys peace and prosperity. It is my hope that his election will transform how the world views the U.S. by demonstrating to the world that we are not simply a nation of gun-slinging cowboys, but a nation of diverse peoples.
I did not support Senator Obama's candidacy, but his election reminds my of why I love this country.
Sunday, October 26, 2008
D.C. v. Heller Revisited
A friend of mine recently sent me this article from The New York Times:
www.nytimes.com/2008/10/21/washington/21guns.html?_r=1&ei=5070&emc=eta1&oref=slogin
The article presents arguments critical to Justice Scalia's majority opinion in D.C. v. Heller from the right.
The gist of the article is that the Justice Scalia's opinion in Heller is politically motivated and at odds with an originalist interpretation of the Constitution. It is an example of judicial activism on the right, the way Roe v. Wade is an example of judicial activism on the left. The argument runs that it makes a mockery of federalism by restricting the states ability to establish their own gun laws (as Roe restricts the states ability to have their own abortion laws).
Those that have read my post from April 26, 2008 (freemarkets-freeminds-freesociety.blogspot.com/2008/04/district-of-columbia-v-heller.html) will already know that I disagree with this view. I came to the same conclusion, by the same reasoning as Justice Scalia did.
Unlike Justice Scalia, who is an avid hunter (I think he's even survived hunting trips with the Vice President), I have never and will never own a gun. I don't hunt and I detest handguns. The only purpose of a handgun is to shoot a person, and I would agree no one needs one. I would favour the DC handgun ban, if I thought the Constitution allowed it. I came to the conclusion that it didn't independent of any political pro-gun agenda.
Justice Scalia's decision does not impair localities ability to regulate ownership - in the same way speech is still regulated (no profanity on publicly owned broadcasting venues, speech that incites violence isn't protected, speech that creates a danger (the old, "yelling fire in a crowded theatre,") isn't protected and slander isn't protected). In my view, there is nothing different about the right to keep and bear arms (which the framers clearly viewed as an individual right) and the right to free speech, free assembly, a free press, or freedom of religion. They are all quite explicit in the Bill of Rights. I agree with the point, later in the article, that comparing D.C. v. Heller with Roe is unfair because gun rights are explicitly mentioned in the Constitution and abortion rights are not.
I can see how some would view the decision (DC v. Heller) as activist. The idea that this decision is an assault on federalism is certainly a very originalist way of looking at the issue as the Bill of Rights was initially felt to apply only to federal law (and therefore the original interpretation to the 2nd Amendment is that the federal government shall not infringe the right to keep and bear arms - important because of the preceding clause that explains the reason: so that States will always have an armed citizenry to resist a federal standing army if necessary). Jefferson and the Democratic-Republicans viewed the Alien and Sedition Acts as unconstitutional, and they were, but after they were repealed there will still plenty of state sedition laws viewed completely acceptable under the Constitution that provided that only the federal government couldn't restrict speech or the press.
However, the 14th amendment changed all that. The equal protection clause mandates that those rights extend to everyone equally, in any state. So now state legislatures can't pass laws restricting free speech, free press, free assembly and so on. The argument from the right against Scalia's decision is an argument that they should be able to. In my view, if the 14th amendment extends all other rights guaranteed in the Constitution into every state and locality, it does so for second amendment rights as well, just as Scalia observed. We would not tolerate a different law with regard to free speech in New York city compared to Wichita Falls, Kansas would we? There are perhaps good reasons to have different gun laws in those two places, but the Constitution, extended to the states by the 14th amendment, forbids it.
I am not in favour of a national gun ban. I am, in priniciple, in favour of letting states and localities figure what gun laws work best for them as the critics of the Scalia decision suggest. I would be all for a constitutional amendment that restricted the second amendment to the federal government and allowed states and localities to be autonomous on this issue. But, I remain convinced that it takes an amendment to do that, and to do it without an amendment sets precedent that puts the remainder of the Bill of Rights at risk.
www.nytimes.com/2008/10/21/washington/21guns.html?_r=1&ei=5070&emc=eta1&oref=slogin
The article presents arguments critical to Justice Scalia's majority opinion in D.C. v. Heller from the right.
The gist of the article is that the Justice Scalia's opinion in Heller is politically motivated and at odds with an originalist interpretation of the Constitution. It is an example of judicial activism on the right, the way Roe v. Wade is an example of judicial activism on the left. The argument runs that it makes a mockery of federalism by restricting the states ability to establish their own gun laws (as Roe restricts the states ability to have their own abortion laws).
Those that have read my post from April 26, 2008 (freemarkets-freeminds-freesociety.blogspot.com/2008/04/district-of-columbia-v-heller.html) will already know that I disagree with this view. I came to the same conclusion, by the same reasoning as Justice Scalia did.
Unlike Justice Scalia, who is an avid hunter (I think he's even survived hunting trips with the Vice President), I have never and will never own a gun. I don't hunt and I detest handguns. The only purpose of a handgun is to shoot a person, and I would agree no one needs one. I would favour the DC handgun ban, if I thought the Constitution allowed it. I came to the conclusion that it didn't independent of any political pro-gun agenda.
Justice Scalia's decision does not impair localities ability to regulate ownership - in the same way speech is still regulated (no profanity on publicly owned broadcasting venues, speech that incites violence isn't protected, speech that creates a danger (the old, "yelling fire in a crowded theatre,") isn't protected and slander isn't protected). In my view, there is nothing different about the right to keep and bear arms (which the framers clearly viewed as an individual right) and the right to free speech, free assembly, a free press, or freedom of religion. They are all quite explicit in the Bill of Rights. I agree with the point, later in the article, that comparing D.C. v. Heller with Roe is unfair because gun rights are explicitly mentioned in the Constitution and abortion rights are not.
I can see how some would view the decision (DC v. Heller) as activist. The idea that this decision is an assault on federalism is certainly a very originalist way of looking at the issue as the Bill of Rights was initially felt to apply only to federal law (and therefore the original interpretation to the 2nd Amendment is that the federal government shall not infringe the right to keep and bear arms - important because of the preceding clause that explains the reason: so that States will always have an armed citizenry to resist a federal standing army if necessary). Jefferson and the Democratic-Republicans viewed the Alien and Sedition Acts as unconstitutional, and they were, but after they were repealed there will still plenty of state sedition laws viewed completely acceptable under the Constitution that provided that only the federal government couldn't restrict speech or the press.
However, the 14th amendment changed all that. The equal protection clause mandates that those rights extend to everyone equally, in any state. So now state legislatures can't pass laws restricting free speech, free press, free assembly and so on. The argument from the right against Scalia's decision is an argument that they should be able to. In my view, if the 14th amendment extends all other rights guaranteed in the Constitution into every state and locality, it does so for second amendment rights as well, just as Scalia observed. We would not tolerate a different law with regard to free speech in New York city compared to Wichita Falls, Kansas would we? There are perhaps good reasons to have different gun laws in those two places, but the Constitution, extended to the states by the 14th amendment, forbids it.
I am not in favour of a national gun ban. I am, in priniciple, in favour of letting states and localities figure what gun laws work best for them as the critics of the Scalia decision suggest. I would be all for a constitutional amendment that restricted the second amendment to the federal government and allowed states and localities to be autonomous on this issue. But, I remain convinced that it takes an amendment to do that, and to do it without an amendment sets precedent that puts the remainder of the Bill of Rights at risk.
Tuesday, October 14, 2008
Anatomy of a Financial Crisis
Two weeks ago, Congress passed a $700 billion dollar spending bill to buy mortgage loans in danger of default. Doing so bailed out numerous lenders who made these risky loans and will require the federal government to figure out a way to realize payment on these loans. The purpose of bailout was to prevent the financial collapse of the nation’s mortgage companies and banks. The move comes after purchasing the failing AIG and was aimed at preventing a massive credit crunch as loans would default, banks would collapse and failing companies would send the stock market in a tail spin. There would be no money to lend, no loan that would be considered safe, stockholders (and people with a 401K) would see their savings evapourate and a run on banks could jeopardize cash savings as well. This crisis, we were told, had the potential to develop into the next Great Depression.
Our politicians have a penchant for labelling everything a “crisis.” Whether it is the tide of illegal immigration, or the number of Americans without health insurance; whether it is the war on drugs, or the war on poverty; whether it is the threat of WMD in Iraq or the threat of global climate change; we are always told by our leaders that the sky is falling and only decisive action by government can fix the problem. Although our political leadership has, “cried wolf,” on many occasions, it is easy to see how the current situation could degenerate into the misery described above. Whether or not the government’s action will stop this economic collapse is, of course, another story.
What has been missing, however, from the rhetoric of both the President and the Congress and from most politicians on both sides of the aisle, is a frank discussion about how we got to this point in the first place. Politicians on the left have, predictably, laid the blame on greedy predatory lenders who took advantage of folks to make a quick buck. They argue that this is what naturally follows from too little regulation of the economy and that if only the government had regulated the mortgage industry more tightly then all of this could have been avoided. The current situation is a failure of deregulation. Even the Republican candidate for Vice President railed against the, “greed and corruption on Wall Street,” during the Vice Presidential debate. Almost no one has the political courage to assign any blame to the borrowers that took out mortgage loans that were beyond their means.
Although both lenders and borrowers are clearly at fault here, the notion that this crisis was created by a lack of government influence in the market place could not be further from true. Our government actively fostered the economic climate that created this housing bubble. Far from being a failure of deregulation, government intervention in the market place had a hand in creating this financial crisis.
The first piece of the puzzle is the Community Reinvestment Act. First passed in 1977 and then modified in 1995 and 2005, this act was passed with the goal of increasing home ownership among the working poor. It requires lenders in impoverished areas to maintain a quota of loans (often subprime loans) to underprivileged individuals. In other words, a percentage of the subprime loans contributing to this crisis were specifically mandated by the federal government. The act requires federally regulated banks to meet the credit needs of the community in which it is chartered by offering mortgage loans to low income families.(1) Although the act specifically states that banks are not required to make high risk loans to meet community needs, a study by the Federal Reserve Bank of Cleveland in 2000 of 143 of the 500 largest CRA-regulated banks revealed that the security of such loans is variable from loan to loan and institution to institution and that, on average, such loans are more likely to default or be unprofitable than other loans.(2) The same study estimated that 25% of CRA loans were, “unprofitable or marginally unprofitable.”(2) The CRA encourages predatory lending in two ways. First, some CRA banks will issue subprime loans to low income families directly because they would still get CRA credit for these loans and improve their CRA rating. Secondly, banks can get CRA credit by securitizing predatory subprime loan, buying them with federally guaranteed letters of credit.(3) Banks can even get credit for making subprime loans to low or middle income individuals that qualify for prime rates.(3) New federal regulations in 1995 and 2002 expanded the CRA, making it easier for smaller banks to participate by focusing on just lending.(4) In 2002, when several states, including Georgia(5), tried to limit credit for subprime lending, federal regulators blocked those efforts.(6)
In addition to the CRA, a 1992 federal law required Fannie Mae and Freddie Mac to devote a percentage of their activities to meeting affordable housing goals(4) and at the height of the housing bubble in 2003-2004 the federal government was directly securitizing nearly half of the nation’s subprime loans through Fannie Mae and Freddie Mac (government subsidized corporations).(7) In 1999, Fannie Mae was pressured by the Clinton administration to securitize more high risk loans, in an effort to expand home ownership among low and middle income Americans.(8) The Clinton administration also moved, in 1995, to allow Fannie Mae and Freddie Mac to count subprime mortgage securities toward their affordable housing goal.(9) Although this directive was later rescinded in 2001, in 2004 the Bush administration raised the affordable housing goal from 50% to 56% and again allowed Fannie and Freddie to count securitized subprime mortgages toward this goal, further encouraging predatory lending. Although some, such as University of Michigan Law Professor Michael Barr would call easing these restrictions on Fannie and Freddie, “an abject failure to regulate,”(9)nothing could be further from the truth. This was no failure to regulate. This was a specific government tampering with market forces to encourage subprime lending as a mechanism for increasing home ownership. President Bush bragged about the success of this policy in his 2004 State of the Union address noting that new home construction was the highest in twenty years and home ownership at its highest levels ever in the U.S.(10) He was, of course, describing the housing bubble that has now burst. Far from being created by an unfettered free market, this bubble was created, intentionally, by government policies aimed at loosening credit to expand home ownership.
However, Professor Barr pointed out that about half of the subprime mortgages were made by lenders not under the CRA’s jurisdiction and another 20-25% were made by small lenders and only later securitized under the CRA (although we have seen how this is a direct result of government policy and encourages predatory lending), leaving only 25-30% if subprime loans made by CRA institutions.(11) Robert Gordon, senior fellow at the Center for American Progress, offers as proof that the mortgage crisis was caused by a lack of regulation a statistic provided by Janet Yellen of the San Francisco Federal Reserve, “Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts.”(12),(13) However, this does not negate the fact that CRA lending is responsible for thousands of subprime and high risk loans. In communities where CRA institutions were conservative in lending, there was demand for other institutions to offer higher risk loans.(3),(4) This was also encouraged, actively, by the federal government as we have seen through its mandate to Freddie and Fannie to increase the percentage of their business that is directed to affordable housing goals and by giving other banks incentives to securitize these mortgages by guaranteeing their investments or allowing these banks to claim that activity as CRA credit. Therefore, many of these loans made by independent mortgage companies ultimately do fall under the CRA.(14) But even the subprime lending completely outside the CRA was encouraged by federal government policies. From 2003-2005, the Federal Reserve held interests low, below the expected level of inflation.(15) This reduced the cost of borrowing money dramatically and allowed lenders to offer subprime mortgages with very low introductory, but variable, rates easily. It was a policy that changed market dynamics from encouraging people to save to encourage them to borrow. Furthermore, the Fed lowers interest rates by buying bonds from banks and thereby injecting more cash into the economy. The increased supply in money reduces the “cost,” of borrowing it, or the interest rate. The increased supply in money also devalues the dollar, and we have seen the U.S. dollar plummet in value over the past few years (yet few talk about the fact that it is the policies of our federal government that are responsible for its devaluation). Oil is sold on the world market in U.S. dollars, therefore, even without the increased demand for oil from India and China, the rise in oil prices is directly linked to the falling value of the dollar. The Feds’ inflationary policies have not only encouraged the exuberant lending that is at the root of this financial crisis, but they have also contributed to rising energy and food prices, putting an economic pinch on those low income homeowners that the government wanted to have mortgages. When these people can no longer afford to pay their mortgage, put food on the table, heat their homes, or put gas in their car to get to work, all at the same time, they then default or are at risk for defaulting on that loan, and hence the bursting of the bubble and the beginning of the financial crisis. Because many U.S. securities are owned by foreign lenders, this has become an international credit crunch. Another mechanism by which government policy helped create the crisis are government regulations that limit assessment of credit risk to a handful of credit agencies, who inaccurately assessed the risk of these loans, leading to, ironically, the most regulated banks making some of the worst mortgage investments.(15)
In summary, the federal government set a goal of increasing home ownership among low and middle-income families, an ostensibly laudable goal. The government employed several mechanisms to achieve this goal. First, it mandated lending to lower income families through the Community Reinvestment Act. Sometimes this was done responsibly, and sometimes not. Secondly it put pressure on lenders to increase their CRA activity and allowed smaller lenders to participate in the CRA. Third, it subsidized subprime lending, both directly by ordering Fannie Mae and Freddie Mac to securitize more of these loans to increase its activity to meet affordable housing goals, and indirectly by allowing secondary mortgage market banks to count securitized subprime loans towards their CRA ratings. Fourth, it encouraged non-CRA lenders to join the party by keeping interest rates artificially low and fifth, it pumped capital into the economy to lower the interest rates, thereby devaluing the dollar and putting an economic pinch on the lower income families that made the loans. Those that argue that this crisis was caused by a failure to regulate the financial industry are simply wrong. Ironically, those on the left who are blaming the, “deregulatory policies of the Bush administration,” actually opposed Bush administration plans in 2003 to increase oversight of Fannie and Freddie (Barney Frank (D-MA) argued that Fannie and Freddie were not, “facing any kind of financial crisis,” and that, “The more people exaggerate these problems, the more pressure we see on these companies, the less we will see in terms of affordable housing.”)(16) This crisis was not caused by a lack of government oversight. It was caused by government policies specifically designed to create a housing bubble (to increase home construction and home ownership). Alan Greenspan cheered it on,(12) Barney Frank made sure no one put on the brakes,(16) and President Bush bragged about its success.(10) Certainly in a free market, at times, individuals or groups will act irrationally. But, a correction will occur and those who acted imprudently will pay the price, often with minimal effect on the economy as a whole. In the current situation, however, our government encouraged exuberant borrowing and lending, through a combination of mandates and incentives, creating a national economic mess. The lemmings didn’t jump off the cliff, they were pushed. These actions were taken for a good cause, affordable housing, but illustrate clearly the principle that government intervention in the market place often has unforeseen, unintended, negative consequences. This isn’t what happens when the government keeps its hands off the market, this is what happens when your government fights for you.
Unfortunately, understanding how the crisis occurred is not the same as knowing what to do about it. Much like the invasion of Iraq, the mess was caused by misguided policies but how to clean it up isn’t as obvious. Personally, I am inclined to be distrustful of government action to, “fix,” the problem, since it was government action that created it in the first place. I am distrustful of this government when it tells me there is a crisis that requires immediate governmental action, for history shows that usually politicians call something a crisis that isn’t simply to expand the government’s (and therefore their own) power. Certainly many on the left are taking just that opportunity right now, using the current situation as an excuse to expand the government’s influence in the market place (so we can have more crises like this in future). And of course it really irritates me that the solution proposed is to bailout all those greedy lenders (who, yes, do share responsibility with the federal government) who made risky loans and now don’t have to pay the price for taking a risk (which will encourage similar risky economic behaviour in the future because it is without consequence). Where is this $700 billion dollars coming from? Our Treasury certainly doesn’t have this money as our federal government is in debt. I suspect the Federal Reserve will simply print it, further devaluing the dollar and causing greater inflation (the value of the dollar compared the British Pound and the euro has increased over the last week because national banks in Europe have already pumped large amounts of capital into their economies and devalued their currencies). And, as I write this, President Bush is proposing another cash injection to capitalize banks by having the government buy ownership shares in the nation’s major banks (alas, we are back to the 200-year-old Hamilton-Jefferson debate about whether or not there should be a national bank…). Those of the Austrian school of Economics, such as Loyola College (Maryland) economics professor Thomas DiLorenzo and Congressman Ron Paul (R-TX) would argue that this bailout only has the effect of prolonging economic misery by attempting to stop, but only delaying, a necessary correction in the market (in his book, How Capitalism Saved America, Professor DiLorenzo argues that the market interventionism of both Presidents Hoover and Roosevelt extended the duration of the Great Depression, whereas previous economic crises had been much briefer).(17),(18) While I am convinced that this is true and that allowing the market to correct would be quicker, the real question is, at what cost? Would the losers be only those who acted irresponsibly, or does the crunch in credit have the ability to affect those who did the right thing, as illustrated in the opening paragraph. If the savings of those who were fiscally responsible are at risk in the correction, then that, in my view, is market failure and I would be willing to sacrifice my laissez-faire principles if it would prevent another Great Depression. But how can we trust that our leaders will do the right thing (even if the right thing is doing nothing) when they are always telling us of crises government needs to address, demonstrate so little understanding of how this crisis was created, and use the crisis to advance a pro-regulatory political agenda? Understanding the genesis of the crisis may not help us determine the best course of action (or inaction) to take going forward, but it does tell us something useful about future policy. The lesson to learn here is that this kind of government interventionism in the market place that creates artificial incentives to promote certain economic behaviour and devalues our currency, leading to boom and bust business cycles, has got to stop.
See also: http://online.wsj.com/article/SB122298982558700341.html for another nice summary of how government policies helped create the housing bubble.(19)
_______________________
(1)Full text of Community Reinvestment Act available at: http://www.fdic.gov/regulations/laws/rules/6500-2515.html
(2)Avery RB, Bostic RW, and Canner GB, “The Performance and Profitability of CRA Regulated Lending,” Economic Commentary, Federal Reserve Bank of Cleveland [November 2000]. Available at: http://www.clevelandfed.org/research/Commentary/2000/1100.htm
(3)Engel KC and McCoy PA, “The CRA Implications of Predatory Lending,” Fordham Urban Law Journal, Vol. XXIX, April 2002. Available at: http://lsr.nellco.org/cgi/viewcontent.cgi?article=1029&context=uconn/ucwps
(4)Bernanke BS, “The Community Reinvestment Act: It’s Evolution and New Challenges.” Speech at the Community Affairs Research Conference in Washington, D.C., on March 30, 2007. Available at: http://www.federalreserve.gov/newsevents/speech/Bernanke20070330a.htm
(5)Georgia Fair Lending Act. dbf.georgia.gov/vgn/images/portal/cit_1210/56/7/64943073GAFLA-OCGA7-6A.pdf#12
(6)Bagley N, “Crashing the Subprime Party: How the Feds Stopped the States from Averting the Lending Mess,” Slate, January 24, 2008. Available at: http://www.slate.com/id/2182709/pagenum/all
(7)http://www.washingtonpost.com/wp-dyn/content/graphic/2008/06/10/GR2008061000059.html
(8)Holmes SA, “Fannie Mae Eases Credit to Aid Mortgage Lending,” The New York Times, September 30, 1999. Available at: http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260
(9)Leonnig CD, “How HUD Mortgage Policy Fed the Crisis,” The Washington Post, June 10, 2008, p. A01.
Available at: http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.html
(10)Bush GW, State of the Union Address to Congress at the Capitol in Washington D.C. on January 20, 2004. Available at: http://www.whitehouse.gov/news/releases/2004/01/20040120-7.html
(11)Barr MS, “The Community Reinvestment Act: Thirty Years of Accomplishments, but Challenges Remain,” Testimony before the Committee on Financial Services, U.S. House of Representatives on February 13, 2008. Available at: http://www.house.gov/apps/list/hearing/financialsvcs_dem/barr021308.pdf
(12)Gordon R, “Did Liberals Cause the Sub-Prime Crisis?” The American Prospect (on-line), April 7, 2008. Available at: http://www.prospect.org/cs/articles?article=did_liberals_cause_the_subprime_crisis
(13)Yellen JL, Opening Remarks to the 2008 National Interagency Community Reinvestment Conference. San Francisco, California. March 31, 2008. Available at: http://www.frbsf.org/news/speeches/2008/0331.html (statistic referenced in the Gordon article is actually in footnote 16, not the text of the speech).
(14)DiLorenzo TJ, “The CRA Scam and It’s Defenders,” Ludwig von Mises Institute, Daily Article for April 30, 2008. Available at: http://mises.org/story/2963
(15)“A Mortgage Fable,” The Wall Street Journal, September 22, 2008. Available at: http://online.wsj.com/article/SB122204078161261183.html?mod=special_page_campaign2008_mostpop
(16)Labaton S, “New Agency Proposed to Oversee Freddie Mac and Fannie Mae,” The New York Times, September 11, 2003. Available at: http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&sec=&spon=&pagewanted=print
(17)Paul R, “Bailouts Will Lead to Rough Economic Ride,” CNN Commentary (online), September 23, 2008. Available at: http://www.cnn.com/2008/POLITICS/09/23/paul.bailout/index.html
(18)DiLorenzo TJ. How Capitalism Saved America. Crown Forum 2004.
(19)Roberts R, “How Government Stoked the Mania,” The Wall Street Journal, October 3, 2008.
Our politicians have a penchant for labelling everything a “crisis.” Whether it is the tide of illegal immigration, or the number of Americans without health insurance; whether it is the war on drugs, or the war on poverty; whether it is the threat of WMD in Iraq or the threat of global climate change; we are always told by our leaders that the sky is falling and only decisive action by government can fix the problem. Although our political leadership has, “cried wolf,” on many occasions, it is easy to see how the current situation could degenerate into the misery described above. Whether or not the government’s action will stop this economic collapse is, of course, another story.
What has been missing, however, from the rhetoric of both the President and the Congress and from most politicians on both sides of the aisle, is a frank discussion about how we got to this point in the first place. Politicians on the left have, predictably, laid the blame on greedy predatory lenders who took advantage of folks to make a quick buck. They argue that this is what naturally follows from too little regulation of the economy and that if only the government had regulated the mortgage industry more tightly then all of this could have been avoided. The current situation is a failure of deregulation. Even the Republican candidate for Vice President railed against the, “greed and corruption on Wall Street,” during the Vice Presidential debate. Almost no one has the political courage to assign any blame to the borrowers that took out mortgage loans that were beyond their means.
Although both lenders and borrowers are clearly at fault here, the notion that this crisis was created by a lack of government influence in the market place could not be further from true. Our government actively fostered the economic climate that created this housing bubble. Far from being a failure of deregulation, government intervention in the market place had a hand in creating this financial crisis.
The first piece of the puzzle is the Community Reinvestment Act. First passed in 1977 and then modified in 1995 and 2005, this act was passed with the goal of increasing home ownership among the working poor. It requires lenders in impoverished areas to maintain a quota of loans (often subprime loans) to underprivileged individuals. In other words, a percentage of the subprime loans contributing to this crisis were specifically mandated by the federal government. The act requires federally regulated banks to meet the credit needs of the community in which it is chartered by offering mortgage loans to low income families.(1) Although the act specifically states that banks are not required to make high risk loans to meet community needs, a study by the Federal Reserve Bank of Cleveland in 2000 of 143 of the 500 largest CRA-regulated banks revealed that the security of such loans is variable from loan to loan and institution to institution and that, on average, such loans are more likely to default or be unprofitable than other loans.(2) The same study estimated that 25% of CRA loans were, “unprofitable or marginally unprofitable.”(2) The CRA encourages predatory lending in two ways. First, some CRA banks will issue subprime loans to low income families directly because they would still get CRA credit for these loans and improve their CRA rating. Secondly, banks can get CRA credit by securitizing predatory subprime loan, buying them with federally guaranteed letters of credit.(3) Banks can even get credit for making subprime loans to low or middle income individuals that qualify for prime rates.(3) New federal regulations in 1995 and 2002 expanded the CRA, making it easier for smaller banks to participate by focusing on just lending.(4) In 2002, when several states, including Georgia(5), tried to limit credit for subprime lending, federal regulators blocked those efforts.(6)
In addition to the CRA, a 1992 federal law required Fannie Mae and Freddie Mac to devote a percentage of their activities to meeting affordable housing goals(4) and at the height of the housing bubble in 2003-2004 the federal government was directly securitizing nearly half of the nation’s subprime loans through Fannie Mae and Freddie Mac (government subsidized corporations).(7) In 1999, Fannie Mae was pressured by the Clinton administration to securitize more high risk loans, in an effort to expand home ownership among low and middle income Americans.(8) The Clinton administration also moved, in 1995, to allow Fannie Mae and Freddie Mac to count subprime mortgage securities toward their affordable housing goal.(9) Although this directive was later rescinded in 2001, in 2004 the Bush administration raised the affordable housing goal from 50% to 56% and again allowed Fannie and Freddie to count securitized subprime mortgages toward this goal, further encouraging predatory lending. Although some, such as University of Michigan Law Professor Michael Barr would call easing these restrictions on Fannie and Freddie, “an abject failure to regulate,”(9)nothing could be further from the truth. This was no failure to regulate. This was a specific government tampering with market forces to encourage subprime lending as a mechanism for increasing home ownership. President Bush bragged about the success of this policy in his 2004 State of the Union address noting that new home construction was the highest in twenty years and home ownership at its highest levels ever in the U.S.(10) He was, of course, describing the housing bubble that has now burst. Far from being created by an unfettered free market, this bubble was created, intentionally, by government policies aimed at loosening credit to expand home ownership.
However, Professor Barr pointed out that about half of the subprime mortgages were made by lenders not under the CRA’s jurisdiction and another 20-25% were made by small lenders and only later securitized under the CRA (although we have seen how this is a direct result of government policy and encourages predatory lending), leaving only 25-30% if subprime loans made by CRA institutions.(11) Robert Gordon, senior fellow at the Center for American Progress, offers as proof that the mortgage crisis was caused by a lack of regulation a statistic provided by Janet Yellen of the San Francisco Federal Reserve, “Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts.”(12),(13) However, this does not negate the fact that CRA lending is responsible for thousands of subprime and high risk loans. In communities where CRA institutions were conservative in lending, there was demand for other institutions to offer higher risk loans.(3),(4) This was also encouraged, actively, by the federal government as we have seen through its mandate to Freddie and Fannie to increase the percentage of their business that is directed to affordable housing goals and by giving other banks incentives to securitize these mortgages by guaranteeing their investments or allowing these banks to claim that activity as CRA credit. Therefore, many of these loans made by independent mortgage companies ultimately do fall under the CRA.(14) But even the subprime lending completely outside the CRA was encouraged by federal government policies. From 2003-2005, the Federal Reserve held interests low, below the expected level of inflation.(15) This reduced the cost of borrowing money dramatically and allowed lenders to offer subprime mortgages with very low introductory, but variable, rates easily. It was a policy that changed market dynamics from encouraging people to save to encourage them to borrow. Furthermore, the Fed lowers interest rates by buying bonds from banks and thereby injecting more cash into the economy. The increased supply in money reduces the “cost,” of borrowing it, or the interest rate. The increased supply in money also devalues the dollar, and we have seen the U.S. dollar plummet in value over the past few years (yet few talk about the fact that it is the policies of our federal government that are responsible for its devaluation). Oil is sold on the world market in U.S. dollars, therefore, even without the increased demand for oil from India and China, the rise in oil prices is directly linked to the falling value of the dollar. The Feds’ inflationary policies have not only encouraged the exuberant lending that is at the root of this financial crisis, but they have also contributed to rising energy and food prices, putting an economic pinch on those low income homeowners that the government wanted to have mortgages. When these people can no longer afford to pay their mortgage, put food on the table, heat their homes, or put gas in their car to get to work, all at the same time, they then default or are at risk for defaulting on that loan, and hence the bursting of the bubble and the beginning of the financial crisis. Because many U.S. securities are owned by foreign lenders, this has become an international credit crunch. Another mechanism by which government policy helped create the crisis are government regulations that limit assessment of credit risk to a handful of credit agencies, who inaccurately assessed the risk of these loans, leading to, ironically, the most regulated banks making some of the worst mortgage investments.(15)
In summary, the federal government set a goal of increasing home ownership among low and middle-income families, an ostensibly laudable goal. The government employed several mechanisms to achieve this goal. First, it mandated lending to lower income families through the Community Reinvestment Act. Sometimes this was done responsibly, and sometimes not. Secondly it put pressure on lenders to increase their CRA activity and allowed smaller lenders to participate in the CRA. Third, it subsidized subprime lending, both directly by ordering Fannie Mae and Freddie Mac to securitize more of these loans to increase its activity to meet affordable housing goals, and indirectly by allowing secondary mortgage market banks to count securitized subprime loans towards their CRA ratings. Fourth, it encouraged non-CRA lenders to join the party by keeping interest rates artificially low and fifth, it pumped capital into the economy to lower the interest rates, thereby devaluing the dollar and putting an economic pinch on the lower income families that made the loans. Those that argue that this crisis was caused by a failure to regulate the financial industry are simply wrong. Ironically, those on the left who are blaming the, “deregulatory policies of the Bush administration,” actually opposed Bush administration plans in 2003 to increase oversight of Fannie and Freddie (Barney Frank (D-MA) argued that Fannie and Freddie were not, “facing any kind of financial crisis,” and that, “The more people exaggerate these problems, the more pressure we see on these companies, the less we will see in terms of affordable housing.”)(16) This crisis was not caused by a lack of government oversight. It was caused by government policies specifically designed to create a housing bubble (to increase home construction and home ownership). Alan Greenspan cheered it on,(12) Barney Frank made sure no one put on the brakes,(16) and President Bush bragged about its success.(10) Certainly in a free market, at times, individuals or groups will act irrationally. But, a correction will occur and those who acted imprudently will pay the price, often with minimal effect on the economy as a whole. In the current situation, however, our government encouraged exuberant borrowing and lending, through a combination of mandates and incentives, creating a national economic mess. The lemmings didn’t jump off the cliff, they were pushed. These actions were taken for a good cause, affordable housing, but illustrate clearly the principle that government intervention in the market place often has unforeseen, unintended, negative consequences. This isn’t what happens when the government keeps its hands off the market, this is what happens when your government fights for you.
Unfortunately, understanding how the crisis occurred is not the same as knowing what to do about it. Much like the invasion of Iraq, the mess was caused by misguided policies but how to clean it up isn’t as obvious. Personally, I am inclined to be distrustful of government action to, “fix,” the problem, since it was government action that created it in the first place. I am distrustful of this government when it tells me there is a crisis that requires immediate governmental action, for history shows that usually politicians call something a crisis that isn’t simply to expand the government’s (and therefore their own) power. Certainly many on the left are taking just that opportunity right now, using the current situation as an excuse to expand the government’s influence in the market place (so we can have more crises like this in future). And of course it really irritates me that the solution proposed is to bailout all those greedy lenders (who, yes, do share responsibility with the federal government) who made risky loans and now don’t have to pay the price for taking a risk (which will encourage similar risky economic behaviour in the future because it is without consequence). Where is this $700 billion dollars coming from? Our Treasury certainly doesn’t have this money as our federal government is in debt. I suspect the Federal Reserve will simply print it, further devaluing the dollar and causing greater inflation (the value of the dollar compared the British Pound and the euro has increased over the last week because national banks in Europe have already pumped large amounts of capital into their economies and devalued their currencies). And, as I write this, President Bush is proposing another cash injection to capitalize banks by having the government buy ownership shares in the nation’s major banks (alas, we are back to the 200-year-old Hamilton-Jefferson debate about whether or not there should be a national bank…). Those of the Austrian school of Economics, such as Loyola College (Maryland) economics professor Thomas DiLorenzo and Congressman Ron Paul (R-TX) would argue that this bailout only has the effect of prolonging economic misery by attempting to stop, but only delaying, a necessary correction in the market (in his book, How Capitalism Saved America, Professor DiLorenzo argues that the market interventionism of both Presidents Hoover and Roosevelt extended the duration of the Great Depression, whereas previous economic crises had been much briefer).(17),(18) While I am convinced that this is true and that allowing the market to correct would be quicker, the real question is, at what cost? Would the losers be only those who acted irresponsibly, or does the crunch in credit have the ability to affect those who did the right thing, as illustrated in the opening paragraph. If the savings of those who were fiscally responsible are at risk in the correction, then that, in my view, is market failure and I would be willing to sacrifice my laissez-faire principles if it would prevent another Great Depression. But how can we trust that our leaders will do the right thing (even if the right thing is doing nothing) when they are always telling us of crises government needs to address, demonstrate so little understanding of how this crisis was created, and use the crisis to advance a pro-regulatory political agenda? Understanding the genesis of the crisis may not help us determine the best course of action (or inaction) to take going forward, but it does tell us something useful about future policy. The lesson to learn here is that this kind of government interventionism in the market place that creates artificial incentives to promote certain economic behaviour and devalues our currency, leading to boom and bust business cycles, has got to stop.
See also: http://online.wsj.com/article/SB122298982558700341.html for another nice summary of how government policies helped create the housing bubble.(19)
_______________________
(1)Full text of Community Reinvestment Act available at: http://www.fdic.gov/regulations/laws/rules/6500-2515.html
(2)Avery RB, Bostic RW, and Canner GB, “The Performance and Profitability of CRA Regulated Lending,” Economic Commentary, Federal Reserve Bank of Cleveland [November 2000]. Available at: http://www.clevelandfed.org/research/Commentary/2000/1100.htm
(3)Engel KC and McCoy PA, “The CRA Implications of Predatory Lending,” Fordham Urban Law Journal, Vol. XXIX, April 2002. Available at: http://lsr.nellco.org/cgi/viewcontent.cgi?article=1029&context=uconn/ucwps
(4)Bernanke BS, “The Community Reinvestment Act: It’s Evolution and New Challenges.” Speech at the Community Affairs Research Conference in Washington, D.C., on March 30, 2007. Available at: http://www.federalreserve.gov/newsevents/speech/Bernanke20070330a.htm
(5)Georgia Fair Lending Act. dbf.georgia.gov/vgn/images/portal/cit_1210/56/7/64943073GAFLA-OCGA7-6A.pdf#12
(6)Bagley N, “Crashing the Subprime Party: How the Feds Stopped the States from Averting the Lending Mess,” Slate, January 24, 2008. Available at: http://www.slate.com/id/2182709/pagenum/all
(7)http://www.washingtonpost.com/wp-dyn/content/graphic/2008/06/10/GR2008061000059.html
(8)Holmes SA, “Fannie Mae Eases Credit to Aid Mortgage Lending,” The New York Times, September 30, 1999. Available at: http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260
(9)Leonnig CD, “How HUD Mortgage Policy Fed the Crisis,” The Washington Post, June 10, 2008, p. A01.
Available at: http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.html
(10)Bush GW, State of the Union Address to Congress at the Capitol in Washington D.C. on January 20, 2004. Available at: http://www.whitehouse.gov/news/releases/2004/01/20040120-7.html
(11)Barr MS, “The Community Reinvestment Act: Thirty Years of Accomplishments, but Challenges Remain,” Testimony before the Committee on Financial Services, U.S. House of Representatives on February 13, 2008. Available at: http://www.house.gov/apps/list/hearing/financialsvcs_dem/barr021308.pdf
(12)Gordon R, “Did Liberals Cause the Sub-Prime Crisis?” The American Prospect (on-line), April 7, 2008. Available at: http://www.prospect.org/cs/articles?article=did_liberals_cause_the_subprime_crisis
(13)Yellen JL, Opening Remarks to the 2008 National Interagency Community Reinvestment Conference. San Francisco, California. March 31, 2008. Available at: http://www.frbsf.org/news/speeches/2008/0331.html (statistic referenced in the Gordon article is actually in footnote 16, not the text of the speech).
(14)DiLorenzo TJ, “The CRA Scam and It’s Defenders,” Ludwig von Mises Institute, Daily Article for April 30, 2008. Available at: http://mises.org/story/2963
(15)“A Mortgage Fable,” The Wall Street Journal, September 22, 2008. Available at: http://online.wsj.com/article/SB122204078161261183.html?mod=special_page_campaign2008_mostpop
(16)Labaton S, “New Agency Proposed to Oversee Freddie Mac and Fannie Mae,” The New York Times, September 11, 2003. Available at: http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&sec=&spon=&pagewanted=print
(17)Paul R, “Bailouts Will Lead to Rough Economic Ride,” CNN Commentary (online), September 23, 2008. Available at: http://www.cnn.com/2008/POLITICS/09/23/paul.bailout/index.html
(18)DiLorenzo TJ. How Capitalism Saved America. Crown Forum 2004.
(19)Roberts R, “How Government Stoked the Mania,” The Wall Street Journal, October 3, 2008.
Saturday, August 9, 2008
On Libertarianism
This entry is a discussion of the meaning and importance of libertarian principles, or principles of limited government that was composed as a response to a challenge to those principles. It is presented as the second part of a dialogue between the ideological Publius and his more practical friend, Pragmaticus. In the first part of the dialogue, Pragmaticus championed a traditional conservative view of as small a government as reasonably possible, but asserted that the libertarian view of as little government as possible was dangerous because it left society's moral compass in the hands of industry, which cares little for the people. He offered as evidence the business practices of the cigarette and restaurant industries, the latter of which serves unhealthy food in large portions to the detriment of society. He argued that communism failed because it ignored its moral compass and that public policy should be based on a sound moral compass and scientific method to determine correct policy. Publius responds:
Let me start, dear Pragmaticus, with the fact, that we don’t seem that far apart on our view on the proper role of government. The only real difference is your willingness to compromise on the philosophical view of small government for the right cause (public health, school funding, etc.) and my ideological insistence that, no matter how well meaning the goal, the aggrandizement of government is, in the long run, a dangerous precedent which threatens the liberty of the individual (government power always comes at that price). The road to Hell is paved, as they say, with good intentions. The unintended consequences of government intervention are often ignored and the principle of rule of law is sacrificed by political expediency and the overwhelming, although completely human, desire to “do something,” to address a potential problem. You are a very reasonable, rational, and thoughtful person as is evident in your discussion of how reason, fact and evidence should be used to shape public policy. What I would contend, however, is that it is a small step from conceding that government can or should intervene in a particular aspect of social policy and engaging the type of demagoguery we have seen with regard to climate change or invading Iraq, to bludgeon rational debate about facts and evidence into oblivion. Having conceded the principle of government intervention, it then becomes impossible to stem the tide of those who will then view it as their moral responsibility to use whatever means necessary to achieve a goal that they are convinced is right and just, regardless of whether our Constitution grants our government that kind of authority and whether or not they need to play fast and loose with the truth to achieve what they are convinced is a morally just end. I think that conceding a role for government in things in which it has no Constitutionally defined role leads inevitably to the type of decay of scientific method and reason that you lament.
I would disagree that a libertarian view leaves society’s moral compass in the hands of business or corporations. Libertarianism leaves the moral compass in the hands of individuals, where it belongs. I think there is no more fundamental human right than the right to self-determination – the right to make choices for yourself, the right to think independently and voice those thoughts publicly, the right to worship as one pleases, the right to engage in business and recreation as one sees fit, the right to keep what one has earned and use it as one sees fit. Is this not the philosophical premise behind the Bill of Rights? Is this not the philosophical premise of our Revolution? That we hold, “these truths to be self-evident: that all men are created equal; that they are endowed by their Creator with certain inalienable rights; that among these are life, liberty, and the pursuit of happiness; that to secure these rights, governments are instituted among men, deriving their powers from the consent of the governed; that whenever any form of government becomes destructive of these ends, it is the right of the people to alter or abolish it…”(1) This is the creed of a free society. The individual is his own king. The individual is free to live his or her life as he or she sees fit, so long as it does not threaten the life, liberty, or property of another.
A truly free society, therefore, requires a system of self-government. Your comments on the importance of a moral compass and scientific method in governance are eerily similar to Plato’s proposed benign and enlightened rule by philosopher-kings. I recently read The Republic (how I got through college philosophy courses without reading it, I am not sure) and Plato raises the same issues you do. He argued that popularly elected rulers, that are eager rather than reluctant to govern, use office for their own aggrandizement and hold and maintain it by pandering to the masses rather than pursuing good governance. His solution? Groom the most intelligent to be philosophers and rulers from day one to have an educated pool of rulers who understand science and justice, that must take a turn at ruling regardless of their will, to rule for the benefit of society. However, this philosophy presupposes that happiness is maximized in a society when everyone’s individual will is subjugated to the benefit of the state. You come close to this philosophy with your suggestions that government has a role to make sure industry does, “what’s right for society.” Plato took the argument one step further. He made the case that too much freedom for individuals to pursue their own desires, rather than simply good and productive desires as defined for them by the philosopher-kings, causes men to become slaves to their passions and allows a tyrant to rise that can play to the hopes and fears of the masses to rise to power. “The excess of liberty, whether in States or individuals, seems only to pass into the excess of slavery.”(2) Eerily similar to Orwell’s, “FREEDOM IS SLAVERY.”(3) Yet Plato’s solution to the problem of democracy is to have a Big Brother!
In your comments, you do not quite stray this far and you were quite clear that you still favour popularly elected government. The problem with communism, however, is not that it had no moral compass and that, “from each according to his ability, to each according to his need…” was lip service. The problem with communism is that, even if practiced in its purest form, it is unworkable. It, by its very definition, subjects the free will of every individual to the will of the state, or collective. In the most ideal form of communism, no worker is entitled to the fruits of his labour (the very definition of slavery – forced labor for the benefit of someone else), only to a “fair share,” of the fruits of everyone’s labour in aggregate. With no penalty for working less, clearly such a system will encourage some to live off the work of others – and that will happen if communism abides by its stated moral compass!(4)
A free society requires that each individual be allowed to set his own moral compass. There is no moral difference between the spiritual legislation of morality passed by 18th century British parliaments (everyone must belong to the Church of England) and advocated by modern social, so-called, “conservatives,” or the secular legislation of morality that bans drug use, redistributes wealth, or combats climate change. In each case, individuals are having choices made for them and forced upon them. Each is an example of coercion. A recognition that it is a role of government to review data, decide what is right or good for society, and then enforce that end on each individual in society is an implicit approval of coercion as a tool of public policy. If five guys who haven’t eaten in a week attack me in downtown Baltimore, steal my money and buy food they have committed a crime – even though they are many (an overwhelming majority in that hypothetical group of six) and I am only one and their need is clearly greater than mine. I ask you, how is that morally different from a majority of Americans (or a majority of their representatives in Congress) from voting to take money from wealthier Americans and distributing it to poorer Americans? It’s not. In both cases the property owned by one individual is forcibly or coercively taken, by the will of a majority and given to someone else. How can a free society operate like this? If I am not entitled to the fruits of my own labour, am I not a slave? How would we react if the majority voted to silence the free speech of the minority, or to exclude the minority from voting, or to condemn the minority’s sexual orientation, instead of taking the minority’s property? Why does it matter if the minority is a small group or just an individual; a minority of the poor, or of the wealthy; to have equal protection of personal rights and liberties (including private ownership) under the law?
It is this individual liberty that libertarianism seeks to preserve. It is important to do so, because coercing individuals to do what seems obviously, “right,” in one setting sets a precedent for government coercion that can be applied to any of those other basic freedoms we enjoy that I mentioned above. There is an important role for government in the libertarian view. The view does not advocate near anarchy. Government is necessary to protect the rights of individuals. Without it, the rich would trample of the rights and freedoms of the poor and the strong would coercively take from the weak. It is the fundamental role of government to prevent that from happening. As Mr. Jefferson said, a free society requires, “a wise and frugal government, which shall restrain men from injuring one another, which shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labour the bread it has earned. This is the sum of good government…”(5) If we are to maximize liberty (and prosperity), we need to be left free to do most things, but we can’t be left free to do anything. I have been arguing that government doesn’t have the right to tell me what foods to eat, what substances I can and can’t take recreationally, who I can or can’t have sex with, or to take my money or property arbitrarily. Well, neither do I have the right to do that to any other citizen and it is the role of government to prevent me from doing so and to punish me if my actions coerce others or take from others. But, just as there needs to be a rule book to limit coercive behaviour by individuals, their needs to be a rule book limiting the power and scope of government as well to prevent this government in which we, of necessity, invest so much power from misusing this power and do to us exactly what we are charging it to prevent us from doing to each other. Most people are quite annoyed when their parents or in-laws tell them how they should raise their own children. And although they might tolerate that, they would find it completely unacceptable if their neighbours told them how they should raise their children. Why on earth, then, should we give government (the voice of our neighbours in aggregate) any role in this arena (beyond protecting children from abuse, of course) or any other decision of personal, political, or economic behaviour? In our country, the rule book that limits power of government is the U.S. Constitution. More than democracy (we have seen how tyranny can occur just as easily when a majority imposes it’s will on a minority or individual as when an individual tyrant imposes his will on the majority), this is the guarantor of our liberty. It is our Constitution that prevents government from wielding the power we have invested in it arbitrarily. It is for this reason that I tend to oppose any government program or role for government for which authority is not specifically granted by the Constitution. I understand that a 220-year-old document may not always be relevant to the 21st century, but I think it is in the long run threatening to our liberty to lessen our restraints on governmental power by ignoring the Constitution, a court decision, or a simple majority; rather than by using the constitutionally proscribed remedy of amendment.
The economic system of a free society is capitalism. In a truly capitalist society, the consumer is king. When markets are open and competitive, profits are maximized by providing a good or service that the masses desire, at an acceptable level of quality for the masses, and at a price that the market will bear. The individual consumer benefits from having multiple companies competing for his business, the individual labourer benefits from having multiple businesses competing for his work, and the businesses benefit from having a competitive labour force to choose workers from. Most importantly, for a free society, in an open market, all of these transactions are engaged in voluntarily. Markets achieve goals through voluntary cooperation – a business chooses whether to hire person A or person B, a worker decides whether to take a job offer from employer A or employer B, a borrow decides between lender A and his terms or lender B and his, A lender decides whether nor not borrower A or borrower B is a better investment or risk, a consumer decides whether or not to buy widget A or widget B, or whether or not he needs a widget at all. Some grow impatient that markets are too slow to effect change, others complain that they distribute wealth inequitably. However, markets accomplish a distribution of wealth and resources based on persuasion and voluntary cooperation that preserves and protects liberty, rather than coercion and force. Furthermore, in truly competitive markets, wealth is distributed to those who have worked for and earned it. This brings me to another crucial role for government. It is imperative, both for freedom and individual empowerment, as well as for prosperity and economic growth, that government pursue policies that keep markets open and competitive. This means removing trade barriers and pursuing free and open trade with all countries, breaking up trusts and monopolies that would limit consumer choice and competition, providing a framework for the protection of private ownership and property rights (on which a market economy is based), and the mediation of contract disputes. Some regulation of business practice is also important. Competitive markets are based on the notion that the prices of goods and services, costs of investments or borrowing, value of stock prices and so on convey accurate information to consumers about the relative safety and profit potentials of a given benefit or the supply and demand of a particular good or service. If companies cook their books, like Enron, the consumer doesn’t have accurate information on which to base economic decisions. Monopolies are coercive and must be avoided. It is particularly egregious for governments to decide winners and losers in the marketplace by subsidies; bailouts; tax breaks; or regulatory favours for one particular industry, business, or economic sector over another.
The late, great, libertarian guru (and Nobel laureate in economics), Milton Friedman, also argued a role for government when there is, “market failure.”(6) This includes situations in which an intervention is desirable to a society as a whole but not cost effective for private industry, such as infrastructure. I would argue government funding of, particularly basic science, research falls into this category as well as it increases the understanding and knowledge base of society at large and would not be otherwise funded if the application, and therefore profit potential, of such knowledge is decades away. The classic example of market failure is pollution. The Chesapeake Bay gets polluted from the water tables of West Virginia, Pennsylvania, New Jersey, Delaware, Maryland and Virginia; but only Maryland and Virginia have a direct interest in preserving the bay. Therefore market forces would never, in and of themselves, provide an incentive for other states in the Chesapeake water table to assist with conservation of the Chesapeake Bay. Clearly, there is an important role for government in protecting the environment – not dictating how we live our lives as a way of tilting at the windmill of climate change - but regulations to limit actual pollutants, maintain a supply of clean air and clean water, and conserve important but scarce natural resources. I would argue that your “conservative,” position that government should be as small as reasonably possible is the libertarian position. Government is important and has the above roles to play – and must be effective at those roles to benefit society. But, to protect individual liberty, government must be limited to those defined roles. Government that is as small as possible (as you asserted the libertarian view advocates) is often ineffective and cannot accomplish its important role in the maintenance of a free society. Our government under the Articles of Confederation is a good example of that.
I am concerned about your trust in government over business and industry. You argued that business, “cares the least for the people.” And yet, business generates its profits solely from the people, the consumers. A business that provides a good or service that people don’t want, or at inferior quality, or at an exorbitant price will go out of business! Businesses compete for our business and need to persuade us to by their products. Although certainly some unscrupulous business owner will cut corners or cook books to generate short-term profits at the expense of his consumers, a business model for long term success is one of providing goods or services that are in demand and of competitive quality and price. It seems to me that business owes for more to the goodwill of consumers than does government (particularly with the growth of independent regulatory agencies that are outside of elective politics). Do you really think politicians seek office and wield political power because they care about you and me? Do you believe that just because we vote for a government means it will be more farsighted in pursuing what is in the nation’s best interests, or even more foresighted than a company that would like to ensure our business for years and decades to come? Do you believe the popularly elected governments don’t respond to organized special interests rather than the diffuse national interest? And regardless of what product a particular business is selling, what sneaky advertising campaign they have used to market it and make you think you need it, the bottom line is they must still persuade you to buy it. It is still your choice. I’ll put aside your mention of the cigarette industry. That is, perhaps, a special case since the product they sell is addictive. But your example of the restaurant industry is illustrative. Yes it is unhealthy to eat out. It is particularly unhealthy to eat fast food. Yes we can decry the morality of serving unhealthy food in portions sizes that are too large and not giving healthy choices to consumers. But, McDonald’s can’t force me into the store. Once I enter, McDonald’s can’t force me to super-size my fries. If I stop in for a Big Mac value meal it is a choice I have made. Government on the other hand does have the ability to force behaviour by rule of law, at the point of a gun. You are afraid of corporate power and aggressive business practices, but there is not a company in this country that can make you or I do anything we don’t want to do or don’t choose to do. Private sector monopolies are coercive (which is why government needs to prevent them), but even a private sector monopoly leaves the consumer with the choice of trying to do without that particular good or service. When laws are passed, individuals have no choice but to obey or be punished. You may recall there was a push by fast food restaurants a few years ago to add “healthier” choices to their menus. They all abandoned it when the Hardee's franchise rebounded by offering people the Monster Thick-Burger. Now it’s all about bigger burgers and super-sized fries. But why did that happen? People wanted it. People chose it. The fast food restaurants were responding to consumer demand. There was a market for unhealthy fast food and people weren’t going to fast food places in the first place because they wanted salad. These people are making individual choices (and need to be responsible for the consequences of those choices). It may not be a choice that is good for them and it may not be the choice you would want them to make, but in a free society it is their right to make it and if there is enough of them, then of course businesses will actively seek that market. As an aside, as far as mandatory labeling for restaurant food, I personally don’t have much of a problem with the concept – anything that allows consumers to make more informed choices is probably a good thing. The only caveat is, it must be applied equally, across the board, so that it doesn’t put any one particularly restaurant at a competitive advantage or disadvantage. Most people will probably still choose the food they like, rather than the food that is healthier – and many will still choose that super-sized Big Mac value meal…
This then, is the essence of libertarianism. It begins with recognizing that the most important thing about a society are the individuals that comprise it. Each individual is a unique moral agent with an intrinsic right to make choices for himself about personal, political and economic behaviour; an intrinsic right to express those choices and thought freely; an intrinsic right to worship freely; and an intrinsic right to the fruits of his own labour. Free choices are best expressed through an open and competitive market of ideas, goods, and services, in which associations are based on the voluntary cooperation of the participants and not coercion. In this context, there is an important role for government to protect our liberty from foreign threat; protect our liberty from others who may wish to coerce us; maintain a free, open, and competitive marketplace; protect property rights and mediate contract disputes; and undertake projects the market may fail to handle such as infrastructure, scientific research and environmental protection. To be effective at this essential role a government must be powerful. To prevent this power from being used arbitrarily and coercively against the citizenry and therefore undermining the liberty and freedom to choose that the government is ostensibly there to protect; the role of government must be precisely defined and limited. Those limits, in our country, are spelled out in the U.S. Constitution and therefore it is imperative that we seek to avoid empowering government with roles not enumerated in the Constitution if we are to protect our liberty in the long term. If it seems as though our Constitution is outdated on a particular subject and we want to lift the limits it imposes on our government for political expediency in dealing with an issue of the modern world, we should do so only after serious and sober reflection and prolonged debate to insure that doing so does not set a precedent for government intrusion that will threaten the liberty of future generations. This is why such limits on governmental power should be lifted only by constitutional amendment, not by fiat from the judicial bench, executive order, or the simple majority of a legislature.
I’ll end with this thought, similar to the sentiment with which I began:
Experience should teach us to be most on our guard
to protect liberty when the government's purposes are
beneficial. Men born to freedom are naturally alert to
repel invasion of their liberty by evil-minded rulers.
The greater dangers to liberty lurk in insidious encroach-
ment by men of zeal, well-meaning but without
understanding.(7)
1 Jefferson, T. The Declaration of Independence. In the Continental Congress, July 4, 1776.
2 Plato. The Republic. Book VIII.
3 Orwell, G. 1984.
4 Excellent literary examples of how such a system is doomed to fail, resulting in oppression, can be found in the example of the horse in Orwell’s Animal Farm (“I must work harder…”) and in the disintegration of the Twentieth Century Motor Company in Ayn Rand’s Atlas Shrugged
5 Jefferson, T. First Inaugural Address. March 4, 1801.
6 Friedman M and Friedman R. Free to Choose: A Personal Statement. Harcourt, Brace, and Jovanovich. 1979.
7 Justice Louis Brandeis, Olmstead v. United States. 1928
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