The Progressive Movement

“Progressivism was the reform movement that ran from the late 19th century through the first decades of the 20th century, during which leading intellectuals and social reformers in the United States sought to address the economic, political, and cultural questions that had arisen in the context of the rapid changes brought with the Industrial Revolution and the growth of modern capitalism in America.” M. Spalding, T.G. West and W.A. Schambra, ‘The Progressive Movement and the Transformation of American Politics’, www.heritage.org. July 2007

I have referred to progressives and to the progressive movement from time to time in these columns, without carefully defining the concepts. So I shall now rectify that omission. Following closely the approach of  T.G. West,  I shall identify the progressive movement in terms of its categorical rejection of the fundamental principles that underpinned the Founding of the United States.

1. The rejection of nature and reliance on history

The Founders argued that all men are created equal and that they are endowed with  inalienable rights to life and liberty and (I would argue) with an imprescriptible right to property. This natural moral order comprises rules, discovered by human reason, that promote human flourishing.

The Progressives dismissed these arguments as naive and unhistorical. In their judgment, liberty is not endowed by God but by the state. Man is a social construct. As Thomas Dewey wrote: ‘Natural rights and natural liberties exist only in the kingdom of mythological social zoology.’

2. The purpose of government

For the Founders, the gift to man by nature – the capacity to reason and the moral law discovered by reason – is more valuable than any gift from government. Yet, since men are not angels, government is necessary for the security of liberty. Government, in this sense, is always and fundamentally in the service of the individual.  Its purpose is to enforce the law of nature, to secure an individual’s negative freedom from the despotic and predatory domination by some men over others. In the Founding, the purpose of government is not to secure positive rights such as the freedom from want or poverty.

The Progressives disparaged this limited view of the role of government. In their judgment, the role of the state is to free individuals from the limits imposed by nature and necessity.  The primary role of the state shifts to the fulfillment of human capacities, that is to the provision of positive freedoms. As Dewey wrote: ‘Laws and institutions are means of creating individuals.’

3. The relevance of consent and compact as the basis for society

The Founders argued that political society is formed by a voluntary association of individuals through a social compact. This consent extended beyond the Founding to embrace its ordinary operations. Government under a universally-endorsed  rule of law was a fundamental premise of this social compact.

The Progressives poured scorn on this notion. As Charles Merriam wrote: ‘The origin of the state is regarded, not as the result of a deliberate agreement among men, but as the result of historical development, instinctive rather than conscious, and rights are considered to have their source not in nature, but in law.’

4.  The limits of government

For the Founders, government – though grounded in the divine law (that is, the laws of nature and of nature’s God) – was itself a human artifact, compromised by all the strengths and weaknesses of human nature.  As such, it must be limited, both because it was dangerous for it to become too powerful, and because its role was not to provide for the highest things in life.

The Progressives, in contrast, viewed the state as divine and the natural as low.  Private property was singled out for particular criticism, with many progressives referring to themselves as socialists. As John Burgess wrote: ‘the most fundamental and indispensable mark of statehood is the original, absolute, unlimited power over the individual subject, and all associations of subjects.’

Although there is much more to the Progressive Movement than I can outline in this short column, the distinction outlined above between the philosophy of the Founders and that of the Progressives surely serves its purpose.  Readers will perhaps  now understand  more clearly the distinction that I make between classical liberalism and progressive liberalism. They may also understand why I refer to President Obama as a progressive socialist.

Hat Tip to Sneaker

A River of Incompetence Runs Through the White House

“I don’t see how the president’s position and popularity can survive the oil spill.  This is third political disaster in his first 18 months of office.  And they were all, as they say, unforced errors, meaning that they were shaped by the president’s political judgment and instincts.” Peggy Noonan, ‘He Was Supposed to Be Competent’, The Wall  Street Journal May 29, 2010

Well. fifth actually, as I shall outline. 

President Obama is a progressive socialist who was vaulted into office as a direct consequence of a financial crisis and economic contraction.  By comparison with his predecessor, he has a good command of the English language.  He is well-educated, earning a degree in political science (without honors) from Columbia University and a law degree (with honors) from Harvard University. His education is very much in the liberal arts tradition, where good performance frequently is achieved through memorization and verbal skills, rather than through  analytical and problem-solving skills.

The absence of any scholarly publications despite a decade of teaching at the University of Chicago Law School, strongly suggests that the President lacks the spark of originality and analytical prowess that drives academic success. The fact that his autobiography was ghost-written for him by Bill Ayers after years of neglect and failure to honor contracts confirms these suspicions.

There is nothing wrong in electing a non-analytical, unoriginal person to the presidency of the United States, as long as said president recognizes this deficiency and counters it by the exceptional analytical qualities of his Vice-Presidential choice and his cabinet appointees. John Kennedy is an excellent example of such self-correction, as is Ronald Reagan.  Barack Obama, however, is no John Kennedy, and certainly is no Ronald Reagan. He is a narcissist, who genuinely believes that he is the smartest man on the planet, and who has completely swallowed his own electioneering rhetoric: ‘Yes, we can.”

So Barack Obama has chosen for his Vice-President and, with few exceptions, for his White House advisors and cabinet members, sycophants who loyally and unquestioningly support his policy pronouncements, even when his policy initiatives are going badly wrong. The two exceptions, in my judgment, are Hillary Clinton at State, whose role has been severely restrained by a short presidential leash, and Leon Panetta, who is significantly improving the performance of a dis-functional  CIA.

Bad consequences follow such self-reliance as unusual shocks hit the United States.  Ignoring a vast literature exposing the fallacies of Keynesian economics, Obama secured as economic advisors the remaining ideological remnants of that doctrine to support his penchant for a massive public expenditure program to deal with the economic contraction. The result, as we now know, is that the U.S. is mired in unsustainable debt without any benefit whatsoever in terms of lowered unemployment.

Ignoring all the accumulated experience of tit-for-tat foreign policy interventions by the Reagan administration – supported by Nobel Prize winning  strategists such as Thomas Schelling – Obama proceeded with an appeasement policy similar to that of Britain’s Neville Chamberlain in responding to aggression on the part of Iran and North Korea. The fruits of Obama’s deference are now self-evident, as Israel threatens to do to Iran what Obama could have pre-empted, and as South Korea puts in place sanctions against North Korea that Obama also could have pre-empted.

Ignoring all the warnings from leading health economists such as John Goodman, Obama drove through a reluctant Congress grossly incompetent health care legislation that threatens to lower the quality of health care nationwide, while drenching the U.S. economy in increased debt and higher taxes.

Ignoring all the advice and concern from border states inundated with illegal immigrants, with drug wars and high rates of crime, Obama proceeded with a non-policy, designed to secure Hispanic vote support, to the point where the U.S. borders are functionally and illegally open, and where individual states are effectively replacing federal with state laws, and enforcing those laws while the Feds sit helplessly by, reined in by a presidential leash.

And now, with a damaged well gushing black oil into the Gulf of Mexico, a United States President flaps his gums with useless  rhetoric, acknowledging that his own administration has no technical expertise to deal with the event.  A Harvard law degree, it seems offers little by the way of insight into the realpolitick of dealing with multi-national corporations such as BP,  whose principal concern is not shielding the U.S. coastline from ecological harm.

Fortunately, there is one major silver lining in this catelogue of incompetence. American voters are increasingly aware that government is not the solution, but rather is the problem.  “I am from the government, and I am here to help you”  more than ever before is a successful joke- line in the comedy house of politics.

The PIGS, the Eurozone and the Collapse in the Value of the Dow

The economic collapse of Greece and the impending economic collapses of Portugal, Italy, and Spain on the Mediterreanean perimeter of the Eurozone are predictable consequences for a monetary union without any centralized fiscal authority inhabited by countries that aggressively pursue social market economic philosophies.  Many American investors recognize this inevitability and identify the policies of the Obama administration with those of the PIGS. Many of them are now running for the supposed safety of Treasury notes, though as they will surely discover, U.S. Treasury notes are as vulnerable to default as any other once a structural economic crisis becomes sufficiently severe.

The Grand Vision of a United Europe following the end of World War II was predicated on the notion that Europeans would  sacrifice national sovereignty in order to avoid continuing internecine warfare that had wiped out millions of their populations and devastated their economies over centuries of conflict. The reality of unification was a cautious integration of highly nationalistic countries, each desirous of securing economic benefits from the others. This worked well for the original six members as the theory of comparative advantage of international trade worked its wonders, while wealth destructive redistribution remained severely constrained by the rule of unanimity.

When the euro zone was first established in 1999, the original members joined for significantly different reasons. Germany, Austria, Belgium, Luxembourg, and the Netherlands recognized the importance of fiscal stability as enshrined in the founding agreement. Finland, Ireland, Italy, Portugal and Spain had other ideas, namely that they would cook their books to gain entry and then make use of German-induced confidence in the currency to run large deficits financed at low rates of interest. Later entrants, Cyprus, Greece, Malta, Slovakia and Slovenia, no doubt were attracted by this perceived opportunity to exploit the euro. The current financial crisis in the euro zone inevitably followed.

As I have indicated in column after column of this weblog, bailouts are no solution for such structurally-based financial crises. Bailouts pour gasoline onto the flames. The only true solution is to allow the losers to fail, in this case, to eject from the euro zone those countries that do not restore balanced budgets within 2 years  thus signaling  to all members  that they must adjust their political economies to a survival mode or confront the break-down of the euro zone.

The survival mode implies balanced budgets, much smaller governments, and a shift towards laissez-faire  capitalism and away from socialism and state capitalism. So far only Ireland has recognized the importance of this message. The PIGS surely will not do so, given the willingness of the euro zone to bail out their bad behavior. Ultimately, of course, if the bail-out philosophy remains, the rot will widen until the euro zone collapses.

President Obama would do well to learn the true lesson from this debacle and to return U.S. economic policy towards fiscal rectitude, small governmment and  laissez-faire capitalism. Tough medicine for a progressive socialist. But President Obama swore an oath of office, to the best of his ability, preserve, protect and defend the Constitution of the United States of America.  Now is the time for him to deliver on that oath.

How to Reduce Indebtedness Without Increasing Saving

Kelly Evans (The Wall Street Journal May 28, 2010) reports on a sick trend in private consumption in the United States. Despite high levels of household indebtedness, consumer spending grew at an annualized rate of 3.5 per cent during the first quarter of 2010. The savings rate showed little improvement, averaging approximately 3.1 per cent of household income. 

Against this background, a peculiar paradox is emerging.  While household consumption continues to rise and the savings rate remains abysmally low, the ratio of household debt to disposable income  shrank from 132 per cent on average in 2007 to 122 per cent on average  in December 2009.  Over the same time period, the share of income required to make payments on debt and other obligations such as car leases  fell on average from 19 per cent to 17.5 per cent.

This paradox is resolved  in terms of debt default.  The ongoing process of house foreclosures and credit card delinquencies is the mechanism whereby households are shredding debt and bringing spending into line with income.  Kevin Lansing, a senior economist with the Federal Reserve Bank of San Francisco (where else)  welcomed the news, claiming that it is a crude form of saving, and that it is the kind of purge needed for the economy to recover. Some of us would beg to differ and would be looking for the savings rate to increase towards double digits and for consumption outlays, especially on luxury items, to decline significantly in the short term  as profligant  households learn to  take responsibility for their own actions. and to live within their means.

Today is an appropriate day to focus on debt, national as well as household. For the U.S. Treasury will announce today,  that America’s gross federal debt has reached a staggering $13 trillion. This debt now approximates 83 per cent of the U.S. economy and will increase to 107 per cent by 2020 if the Obama budget is adopted, according to an analysis prepared by the minority staff of the Joint Economic Committee.

The report also directs attention to the division of responsibility between Democrats and Republicans for this massive level of accumulated federal indebtedness. Focusing attention on the party in control of Congress, since the legislative branch ultimately controls the purse strings, the report challenges a common view that the Republicans are primarily responsible. They determine that over the period 1946 to May 2010,  18 per cent of the debt was generated when the two parties shared control, that 56 per cent of the debt occurred while the Democrats controlled Congress and that 26 per cent of the debt occurred while the Republicans controlled Congress. Only 2.1 per cent of the total debt is attributable to the  pre-1946 history of the Republic.

There is no sign on the political horizon that Congress or President plan to turn budget deficits into budget surpluses. So guess, Dear Readers, how the debt problem is going to be resolved.  Private households are showing Washington the way. Expect debt defaults both through inflation and outright refusal to meet interest payments on Treasury notes. And expect the Federal Reserve Board of San Francisco to applaud this noble resolution, even as our Chinese bankers march down Pennsylvania Avenue to seize control of the U.S. economy.

The Curious Case of Arlen Specter and Joe Sestak

Senator Arlen Specter (D.PA)  is the kind of politician who makes one’s flesh crawl, whatever one’s particular political philosophy. There are several reasons for this reaction. First, Specter is one of those old, decrepit, chronically sick, octogenarian politicians who cling onto office as best they can until the Grim Reaper  finally drags them off the stage.  Second, he is a man without any principles to guide him save the basic instinct to cling onto office, by taking any political position expedient to that goal. Third, he is a man without any loyalty to colleagues and friends, ever-ready to exploit them for political gain, to abandon them whenever the grass momentarily is greener.  In short, the man is an utter cad, who quit the Republican Party on April 28, 2009 simply because he could not stomach a tough Republican primary challenge in 2010

Joe Sespak, by comparison, is something of an American hero. Graduating second in his class at the U.S. Naval Academy in Annapolis, Sestak rose to the rank of three-star admiral.  He served as director for defense policy on the National Security Council during the presidency of Bill Clinton, and, after 9/11, he served as the first director of  ‘Deep Blue’, the Navy’s anti-terrorism unit.  Elected to the House as a Democrat  in 2006  to represent Pennyslvania’s 7th district, Sestak easily retained his seat in the 2008 elections.

Since President Obama’s election to the presidency, Sestak has been one of his most loyal supporters. He supported the February 2009 economic stimulus legislation, he supported Obama’s decision to close Guantanamo Bay prison for suspected terrorists. He voted for Obama’s health care reform legislation, and he strongly supports the Employee Free Choice Act.  What more, one might one ask, could Obama want from this virtual policy clone?

Well, plenty actually. President Obama definitely did not want Representative Sestak to pursue a bid to join the United States Senate, since such a bid might displace the re-election expectations of his beloved Arlen Specter, the turncoat who had helped to deliver the 60th vote to the Democrats  (if only for a brief moment) in the U.S. Senate.

Allegedly, in the summer of 2009, the White House attempted to interfere with the primary election – a felony if the allegation turns out to be correct – by offering Representative Sestak a high-ranking federal job, should he drop out of the race in favor of Arlen Specter.  In February 2010, Sestak, then trailing Specter in the polls, disclosed this intervention to a Philadelphia-based cable host. In the event, Sestak refused the offer and wiped Specter off the political map in the May 2010 Pennsylvania primary.

Now that Sestak is the official Democratic candidate running against a strong Republican competitor, one can imagine that both the President and Joe Sestak wish that the issue would disappear. That is unlikely to happen in the partisan atmosphere of Washington, D.C. in the middle of  an important mid-term election.

No doubt the White House will be able, with increasing memory loss on the part of Sestak, to avoid the felony charge. But the thought that remains in my mind is why ever a United States President would try to support a disloyal low-life like Arlen Specter against an American hero like Joe Sestak, who shares  his every dream and has never displayed disloyalty to any of his colleagues.

“Curiouser and curiouser”,  said Alice.

S.E.C. Allows Major Banks To Cook The Books

S.E.C. Chairman, Mary Schapiro has a past history of sleeping at the regulatory wheel. Apparently, she is dosing up again on Tylenol PM, passed out at the S.E.C. wheel, as several major  banks cook their books to window-dress their end-of-quarter reports.

According to studies by The Wall Street Journal, reported on May 26, 2010, 18 major banks – known as primary dealers because they trade directly with the Federal Reserve –  routinely reduce their short-term borrowings at quarters-end in order to provide a false published impression that they are carrying acceptable levels of risk.  They load up again once each new quarter is under way.  This manipulation is far from minor.  End- of -quarter reductions in short-term borrowings have averaged 42 per cent, by comparison with quarterly peaks, for these 18 institutions over the past five quarters.

Intentionally masking debt in order to deceive investors violates the guidelines of the Securities and Exchange Commission. Under questioning following this WSJ disclosure, Mary Schapiro merely indicated that the SEC would ‘consider introducing’ stricter disclosure rules. In reality, the rules are already on the books, but have been ignored by a sleeping chairman. The probability that stricter rules will be introduced and enforced is all but zero. The sleeping pills may well be being force-fed down Mary Schapiro’s reluctant throat by Ben Bernanke and Timothy Geithner, both perhaps trying to hide the fact that the 2009 bank stress tests were completely rigged.

The banks mask their true indebtedness by lowering their net borrowings in the ‘repurchase’ or ‘repo’ market. Once the new quarter begins, they boost their leverage once again to increase returns (and risk). This follows a pattern not far distant from that used by Lehman in 2008, when it reduced its quarter-end borrowing by classifying repo loans as sales. Oh, yes, among the major culprits in end-of-quarter window-dressing are to be found Bank of America and Citigroup,  both teetering on insolvency and both the biggest recipients of taxpayer subsidies.

Surely the banks will never learn while regulators remain asleep at the wheel. Wake up, Mary Schapiro, wake up and earn your salary. And if Ben Bernanke and Timothy Geithnner harass you on the issue, report them to Fox News.

Increasing Transparency in the Bond-Rating Market

Approximately one-third of the U.S. bond market is accounted for by structured deals – bonds backed by income streams from assets such as mortgages, auto loans and credit card payments – that are extremely complex in nature and difficult to evaluate in terms of credit-worthiness. When new bond offerings of this kind are launched, investors are especially dependent on the ratings provided by one or more of the major credit ratings agencies – Fitch, Moody’s, S&P and (increasingly) the Toronto-based DPRS – that supposedly patrol this market to provide relevant ratings information to potential investors.

As a consequence of incompetence and corruption, these ratings companies failed to perform their duties during the run-up to the financial crisis of September 2008, and thus played a significant role in luring investors into excessively high risk holdings. Of the triple-A rated mortgage bonds issued in 2004, only 3 per cent are now rated ‘junk’. Of  the triple-A rated mortgage bonds issued in 2005, 64 per cent are now rated ‘junk’, of those issued in 2006 and 2007, almost 90 per cent are now rated junk.  The numbers speak for themselves.

As always, in such circumstances, one should follow the money in seeking an answer as to why this calamitous decline in ratings quality occurred. As the complexity of mortgage, auto, and credit-based bonds increased through the early noughties, credit ratings failure was a promise awaiting fruition. In large part, the problem lay in the post-1970 nature of the market itself.

Prior to 1970, credit ratings on new bond issues were paid for by potential investors, naturally looking to the credit raters for honest evaluations. This arrangement came under criticism, because it allowed small investors to free-ride on major investors, who carried the entire cost of the ratings investment.  This rendered it uneconomic to rate some smaller bond issues. In consequence, bond issuers began t0 pay for their own ratings, thereby opening up the prospect that a bond ratings will be as high as money can buy.

The ratings companies, competing fiercely among themselves, can ill afford to secure a reputation for tough grading, just as academic faculty seeking merit pay increases find it difficult to avoid grade inflation when student evaluations influence the size of  said merit payments. Just as poor quality students shop around among faculty and enroll for classes instructed by loose graders, so junk bond issuers shop around among  ratings companies to secure triple-A grades for their issues.

One might think that reputational constraints would limit the extent to which the ratings companies can debase their assessments without losing market credibility. Unfortunately, this is not the case, largely because new entry into the ratings industry is restricted by bank capital regulations that rely on the ratings of the  recognized bond rating companies. So shopping around among the rating companies has become a major method whereby complex bond issues are protected from the sunlight of accurate assessments.

How might this failure of government and private markets be ameliorated without imposing a significant competitive handicap on the U.S. financial markets? In my judgment, the following measures are worthy of consideration.

First, require all would-be bond issuers to place in the public domain all information that they provide to any ratings company concerning their bond issues. This would allow concerned  potential investors to  patrol the bond issues for  themselves.

Second, remove all ratings requirements from banks that invest in bond issues, but require all banks fully to disclose any ratings that they have used as the basis for their investments. This will open up the ratings industry to new entry and increase competitive pressures on incompetent and corrupt raters.

Third, require any bond issuer who seeks bond ratings for his bonds to make full disclosure of any contact with a ratings company, whether or not a bond rating is secured. Further require bond issuers to disclose publicly every rating that they receive, whether one or more.  This will significantly reduce the race to the bottom,  lowest common denominator ratings shopping that still characterizes this market.

Fourth, require all ratings companies to maintain a public register of all changes in bond ratings that they make over the lifetime of a bond issue. This will inform rational investors of the trust that they can place in that company’s ratings.

Hat Tip  Aaron Lucchetti and Serena Ng, ‘Ratings Shopping Lives On As Congress Debates a Fix’, The Wall Street Journal, May 24, 2010

Political-Economic Thoughts on Aging

“Greece’s recent fiscal meltdown wasn’t caused just by care-free government spending.  It was an inevitable result of the country’s aging population, which has long been accustomed to extravagant health care and retirement benefits.  This is what happens when 19th-century policy prescriptions are applied to 21st-century realities.” Butler, R.N. and Hodin, M.W. ‘ Wither the aged’ The Washington Times, May 24, 2010

The Greek government justifiably has come under fire from Angela Merkel for allowing its citizens to retire on government pensions at the early age of 53 years.  What is left unsaid is that many public sector employees in other countries, not least in the United States, are eligible to retire on pension at similar or even earlier ages: military veterans, the police, school teachers, university professors, civil servants, and many others become vested often after only 5 years of service and in some instances can retire on full pension after 20  or 30 years of service: to live for perhaps for another 30 or 40 years.

 Individuals in the United States qualify for full social security pensions at the age of 66 years, slowly increasing to 67 years, at which time their average life expectancy is 17 years (higher for women than for men). As with social security, so with medicare, recipients typically do not cover their anticipated receipts with required outlays during their working lives. Here is the ticking time bomb for all aging populations. By 2050, Europe, Japan and Korea will have more than 40 per cent of their populations older than 60, and China will have at least 25 per cent of its huge population in that category. In the United States, the number of its citizens older than 65 years will double between 2010 and 2030.  Such demographics must impose a high and rising burden on the younger generations unless painful structural changes are imposed on government outlays to the elderly.

When confronted by irreversible trends, rational individuals should plan for incentive-compatible solutions. In private market systems, such is the expectation. However, in political markets, rational ignorance, rational irrationality, and interest group pressures combine to render such forward planning toxic. So, in this column, let me set aside the public choice problems and provide a thumb-nail sketch of an economically viable solution that does not discard a degree of public sector support programs for the elderly.

First, the pension plans of public sector employees should be placed on fiscally sound principles. Public sector employees should fully fund their retirement pensions through salary deductions. If markets require that such an adjustment must be reflected in higher pay within some parts of the public sector, at least the cost is upfront and not spread across a lengthy post-retirement time-span.

Second, the age requirements for accessing social security and medicare should be expanded to reflect increasing life-expectancy. A shift with early effect from 67 to 70 years, with subsequent extensions linked to rising longevity, will do much to  defuse the time bomb that ticks away. This change alone will encourage able-bodied individuals to remain in the labor force unless they have accumulated sufficient private savings to provide them with the leisure option. In addition, social security payments should be linked to the price index, not the earnings index, so that pensioners do not become better off over time through accessing the program.

Third, medicare provisions should be controlled to avoid waste in near-hopeless attempts to extend life in terminal situations. Heroic interventions are fine for those with the private resources to pursue them. But a situation in which one-third of average lifetime health care costs are expended in the final six months of life is unsustainable through the public purse. All individuals are mortal, and eventually will die. If medicare is to remain fiscally feasible as the proportion of the population that ages escalates, and as life-extending technology advances at rising marginal cost, common-sense decisions on allowing patients to pass on are inevitable.

Fourth, incentives should be put in place to ensure that medicare-supported individuals help themselves to minimize their medical bills. Patients whose medical bills are induced by life-style choices, lack of exercise, excessive use of alcohol, smoking, excessive eating, etc. should be required to offset such bills by co-payment requirements. Where such payments are not extractable, such patients should be placed at the back of any queue for medical services until they are seen to help themselves.

By such measures, the United States will avoid becoming Greece as its population ages and its welfare programs remain, substantially, in place.

Farm Subsidies and Efficient Redistribution: Another Chicago Fallacy

“A dead man farming?  That was the unsettling image that came to mind last November, when a Miami television station analyzed the records of federal farm subsidies paid to South Florida residents.  By cross-referencing payments against death notices, the reporters found that at least 234 people listed as deceased were still getting checks from Washington; some had been dead for as long as eight years.  All told, about $9.5 million in farm subsidies went to folks who were pushing up plants, not harvesting them.” Michael Crowley, ‘Phony farmers’, Readers Digest.com June/July 2010

Well in happier times, Chicago economists used to condemn ghost freight charged for transported steel under the Pittsburgh-plus price conspiracy.  One never expected that they would praise farm subsidies to ghosts under a corrupt Washington farm support program. Yet that is exactly what they did. 

In April 1987, the prestigious Chicago Journal of Political Economy published an article by Bruce L. Gardner entitled: ‘Causes of U.S. Farm Commodity Programs’.  The research for this paper was under-written by Chicago’s Center for the Study of the Economy and the State, directed by George J. Stigler, who also edited the JPE at that time. The paper gratefully acknowledged the advice and suggestions of Gary Becker and Sam Peltzman, also of the University of Chicago. 

The paper identified the various farm programs of the United States federal government as “attempts to redistribute (income) efficiently to the farming community, in response to pressure from interest groups. The paper essentially ignored all relevant institutions, sheltered behind some very dubious econometrics, and concluded that farm subsidy programs that minimized excess burdens, or deadweight costs, fared better than those that did not do so. For the most part, the paper is fallacious about efficient redistribution, accepting unquestioningly Stigler’s and Becker’s rational choice  nostrum that all surviving government programs are redistributionally efficient. At that time, such was the Chicago doctoral student’s intellectual burden. Gardner was on the right track about the importance of political pressure, though his paper is sadly deficient with respect to institutional details, and inexplicably ignores Mancur Olson’s much superior analysis of the logic of collective action. 

If farm commodity support programs truly were redistributive in nature, they would  take the form of lump-sum cash transfers. Mr Gardner, was surely taught that at Chicago.   Or perhaps alternatively he was  taught that complex price supports, opaque output restrictions, and non-transferable food stamps, minimize the cost of redistribution?  Pray do not tell me that he  learned that lesson at the feet of any  free market economist. Adam Smith and David Ricardo would turn in their graves.

Professor Bruce Gardner, sadly, has passed on, but not before he became aware of the fallacy of that initial paper, I am quite sure. He would have benefited greatly had he been able to avoid the deconstructionist thinking about politics advanced by  George Stigler and Gary Becker, and to have read instead Michael Crowley’s much better informed paper in Reader’s Digest.

Let me draw attention to a few statistics therein outlined. Redistribution from rich taxpayers  to poor farmers does not hold up even to a cursory review, though that is a professed goal for the program. A government audit determined that of 1.8 million so-called  farmers in receipt of federal funds between 2003 and 2006, 2,702 had adjusted gross incomes in excess of $2.5 million;  and that many of these were foreigners, not generally eligible for U.S. government handouts. This group alone syphoned off $49 million in taxpayers’ monies.  Seventy five per cent of all farm subsidies go to just 10 per cent of the nation’s wealthiest corporate farms.  Small struggling family farms are at the bottom of the heap; and, if you are a poor black farmer, please do not even  bother to apply. So much for the farmers’  poverty program!

As for the poor consumer, well that is a real joke. In 1996, Congress approved subsidies to farmers as long as they did not develop their land, even if they planted no crops at all.  Between 2000 and 2006, the government doled out $1.3 billion to farmers who do not farm.  Import quotas on sugar cane, that subsidize U.S. suger beet producers, double the retail price of sugar, a staple ingredient of a poor person’s diet. Food stamps effect income transfers to the poor at enormously high excess burdens. What such families would not do for cash instead of food transfers.

As always, follow the money when attempting to explain the inexplicable in the Washington cess-pit. The agricultural industry employs 1,200 registered lobbyists in Satan’s City, and outlays some $133 million per annum to grease the farm support program.  Lawmakers from agricultural states and districts access key congressional committees and feed out the grain that transforms itself into pork.  For example, Senator Kent Conrad (D: North Dakota) makes sure that North Dakota, almost half of whose  647,000 residents residents live in urban areas, receives an annual average of $715 million in agricultural subsidies.  Other members of Congress pump out the grain into their own pockets. For example, honest millionaire Senator  Chuck Grassley (R: Iowa) pulled in $238,000 in federal subsidies between 1995 and 2006, while  Senator Blanche Lincoln (D: Arkansas), no close relative of  Honest Abe to be sure, has shifted out more than $700,000 to her family over a ten year period.

Any serious attempt to cut the federal deficit would do well to start with eliminating the entire farm subsidy program.  Unfortunately, the probability that this will happen is lower than a snowflake’s chance in hell:

And shall the farm support program die,

Here’s 1,200 lobbyists, armed with $133 million per annum,

Will know the reason why. 

(With apologies to R.S. Hawker’s refrain, warning  King James II to restrain his executioner, when Sir Jonathan Trelawny was held in the Tower of London for resisting the Second Declaration of Indulgence):

“And shall Trelawny die,

Here’s twenty thousand Cornishmen

Will know the reason why.”

Hat Tip to Marjorie

Obamacare: Legislation Designed to Fail

The United States is not endowed with a government in the normal sense of that term. All enactments at the federal level must pass through two legislative chambers, the House and the Senate, whose members are elected on different electoral bases and for differing terms in office. They must all be signed into law by the President, elected by a nation-wide vote as calibrated through the Electoral College. The term of office of the President differs from those both of representives and senators.  Predictably, therefore, it is rare for all three chambers to agree on legislation. Legislative outcomes typically are compromises that serve no specific purpose, and that therefore cannot be evaluated in terms of success or failure.

Decidedly, this is not the case regarding Obamacare. President Obama owns the health care reform legislation signed into law in March 2010.  Obama was elected into office in November 2008 with a clear majority in the popular vote, partly because of the financial crisis, partly because of the failed governance of President George W. Bush. For similar reasons, significant Democratic-majorities were recorded in the House and the Senate.  Because President Obama was the first mixed-race President in American history, he was able to dominate the first year policy agendas of  House and Senate majorities, and to drive through his policy agenda priorities on a partisan basis.

President Obama is a progressive socialist, driven more by ideology than by thoughtful political consideration.  His two agenda priorities, namely the economic stimulus legislation, and  health care reform, were specifically targeted to socialize as much of the U.S. economy as possible.  The stimulus legislation was a walk-over, ceded without a major struggle by a collapsed Republican minority. Health care reform was a slightly tougher victory, since electoral concern about rampant socialism cost him his filibuster-proof super-majority in the Senate.

On the first round, this cost Obama his cherished public option, the wedge that would open the gates for a full nationalization of health care – and for a  federal takeover of one-sixth of the U.S. economy.  So Obama made sure that the first round victory was designed to fail, and that the public option would reappear successfully in the wake of evident failure of private provision. This is how the story unfolds:

Health care is a heterogeneous product, comprising many models of varied design and quality. It is far different from the first autos, where regular  customers could have any model that they liked, as long as they selected Ford, Model T, and black. By calibrating Obamacare with socialist precision, Barack Obama has put the U.S. health care industry on the road to a dominant public option. John C. Goodman explains the nature of the model in a recent column (The Wall Street Journal, May 21, 2010)

Once  Obamacare kicks in – predictably after he has exploited his chance for a second term – the health care industry will be composed of five principal tiers in descending order of quality:

First, will be the Cadillac private insurance schemes available unsubsidized  to extremely wealthy individuals,  and available subsidized to all federal employees and to union-dominated private  employer-insurance programs.  Individuals enrolled in these programs will have access to the finest medical facilities, physicians, specialists, hospital, after-care and the like.

Second, will be the standard employer-provided subsidized  private  insurance schemes  that currently dominate the health insurance market in the United States. These schemes fund patients at lower rates than the Cadillacs but surely at rates sufficiently attractive as to secure access to high quality health care resources. This is the built-in fault line of Obamacare, as John Goodman clearly outlines in his column.

Third will be the Medicare program, slowly stripped of  budgetary appropriations to the point where  it is profitable only to less than average quality providers offering stripped down services in basic facilities.

Fourth, will be  highly-subsidized insurance in  newly-created health-insurance exchanges, designed to play a key role in the march to nationalization of the health care industry. These schemes (if they follow the Massachusetts model) will provide basic medical coverage at Medicaid rates plus 10 per cent, rates that are lower than those provided by Medicare.  These rates will provide health care at British National Health Service levels, with long lines, poor service, infection-plagued hospitals, and  Second World medical staffs.

Fifth, will be the massively increased Medicaid program, offering the lowest rates and a minimal (Third World)  level of health care service, where such a service can be accessed at all.

Let me now return to the Obamacare fault-line designed to move Americans from employer-provided to health-insurance exchange coverage. Private companies that drop their employer-provided coverage must pay a fine of $2,000 per employee, leaving their employees with the option of buying highly-subsidized insurance through the private exchanges. AT &T has already calculated that dropping its health plan for its 283,000 employees and paying the fines will save it $1.8 billion per annum. Caterpillar, John Deere, and Verizon have all made similar calculations with similar results. It does not take an Einstein to calculate where that road leads.

Suppose that the market insists that the dis-enfranchised workers must be reimbursed by higher wages and salaries and that those wage increases are fully taxed. Most dis-enfranchised workers will still find themselves better off, because of the huge subsidies ladled out by the federal government. The CBO has calculated that the average family’s annual subsidy at the exchanges will be about $19,400, almost $17,000 more than the average subsidy for employer-provided insurance.

All will seem hunky-dory until private exchange insurance fails to provide the goods, until those so insured are competing with Medicaid insurees, below Medicare insurees, for the health care services that they desire. There is no provision under Obamacare for the training of additional doctors and support staff. to handle the approximately 30 million additional Americans who will now be able, in principle, to access the health care market.  Exclusion and queuing for inadequate services is inevitable.

 At that point, the vote motive will kick in, and nationalized health care will be demanded aggressively through the ballot box. Rest assured of one thing. President Obama and his family will not be among those lining up for Second World services through the insurance exchanges. Socialist leaders never are.  Like all socialists, they take good care of their own.