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Monthly Archives: December 2008

Uncivil War

Detroit Blames the South

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“Some of the old guard still hold on to pipe dreams of an all-conquering Union.”

The Union is squaring off against the South again. This time it’s Detroit’s union — the UAW — partnering with the auto manufacturers, politicians, and media supporters of the domestic auto industry to wage warfare against the entire South.

The problem here centers on certain southern states — Mississippi, Louisiana, Georgia and, in particular, Alabama — where certain bone-headed senators seem to have forgotten that the Civil War ended, with the appropriate outcome, almost 150 years ago.

What’s more, these Alabama representatives argued that they and other southern states had plenty of automotive manufacturing capacity to take up the slack and keep the country’s economy going if Detroit was to go belly up. Specifically, Alabama’s Republican senator Richard Shelby called Detroit a ‘dinosaur’ and said bankruptcy was a better solution to the problems facing U.S. carmakers. The state’s other senator, Jeff Sessions, also a Republican, said Detroit’s collapse would “not be the end of the world. We have a very large and vibrant automobile sector in Alabama.”[1]

That’s Detroit News columnist John McCormick, who labeled Southern politicians opposing the bailout “good old southern boys.”

Detroiters continue to embarrass themselves by placing the auto industry collapse into an us-versus-them framework. In the midst of all the whining and begging for a bailout, the South has been declared the new enemy, along with the foreign-car manufacturers who are producing cars — in Southern plants — that consumers want to buy. The army of politicians and opinion columnists in Michigan who lay the groundwork for resuscitating this fading industry don’t bother to acknowledge that it is in the best interests of any public company to maximize quality for its customers and efficiency of production and profits for its shareholders.

Instead, Toyota and Honda are pegged as evil because they are thriving. They are especially evil for building plants that aren’t located near Detroit. However, it is important to remember that foreign auto manufacturers are able to build plants where they want to build them, according to what fits best into their strategic plans and potential for profit. The US automakers have UAW officials making those decisions for them for the sole purpose of enriching the union’s overpaid officers and dues-paying members.

Moreover, the whole South is considered evil for luring foreign plants into the region. Sure, the massive subsidies granted to foreign automakers to lure them to the South are the quintessence of corporate welfare. But no country, no state, no region, is immune to such politics. Michigan does the same to lure high-tech companies to the state, and most recently, it offered huge incentives to Volkswagen to build a new plant in the state. The game is played the same everywhere.

The free-market method would be to allow for a business environment that would be ideal for businesses to thrive (no taxes or stifling regulations); thereby encouraging companies to relocate to low-cost states on a mutually cooperative basis. This would engender competition among states that would drive down all costs everywhere. But that would mean that the people in power — the politicians and government planners — would become less influential and less wealthy; it is for that reason the free market has not prevailed.

Additionally, Southern members of Congress are seen as evil because they refuse to vote “yea” on a bailouts for debt-laden, deadbeat companies in the North. Immediately following the failed bailout vote, Michigan Congressman John Dingell accused Southern senators of “unpatriotically blocking a bill that was supported by the White House, that passed the House with a bipartisan majority, and that had the support of 52 Senators.” Michigan Governor Jennifer Granholm referred to the lack of support for the bailout as “un-American.”

Along the way, the Detroit, pro-bailout contingent is frantically seeking outside parties to come to its aid — assorted journalists, neocons, politicians, and ideologically compatible sympathizers who all wish to preserve and fortify the Yankee mercantile system.

Perhaps the most preposterous line of attack I’ve seen from one of the non-Detroit proponents is the tripe produced by Michael Lind in Salon, who is still fighting the War Between the States. He stated, “The South will have risen by bringing down the North. Jefferson Davis will have had his revenge.” Lind refers to a “Southern economic strategy” as he charges the South with “poaching” key industries from New England and the Midwest in the early 20th century because it played dirty with less regulation and public spending.

“It is in the best interests of any public company to maximize quality for its customers and efficiency of production and profits for its shareholders.”

He goes on to declare that “the neo-confederates” are aligning with the economic axis — Germany and Japan — to defeat a common enemy, the Northern union (as in UAW). Lind is distraught because Reconstruction of the South was never completed and thus he calls for a Third Reconstruction (the New Deal-Civil Rights era being the Second Reconstruction) that could be carried out by engaging the majority Northern congressional contingent, along with the executive branch, to use “the power of the federal government to put a stop to the Southern conservative race-to-the-bottom strategy once and for all.”

Then the Feds could foist Yankee traditions onto those poor, backwards Southerners who just don’t know any better. The new Reconstruction would be consummated by turning out national minimum-wage laws ($12 per hour), more safety regulations, more environmental regulations, and higher taxes. So the brilliant plan goes like this: if the Detroit model doesn’t work in Detroit, extend it everywhere else by the force of majority power and government fiat. Doing so, he says, will finally fix the broken South, making it a more suitable place. Poor Michael Lind believes he is still trying to free slaves from the ghosts of Southern plantation masters.

The failure of Congress to bail out Detroit’s failed automakers has been identified as the cause for Detroit’s flop. In fact, hyperbole-laden journalists keep saying, “Detroit is collapsing.” But Detroit is not collapsing. Three auto manufacturers born of Detroit are no longer financially able to continue operations. They are financially failed because they long ago sold their souls to union brutes who have run their businesses in the best interests of the UAW’s overpaid executives and managers, and their spoiled autoworker constituency. They have become insolvent because of the parasite effect: too many years of a top-heavy, management scheme sucking the blood from each company’s long-term potential. They have ceased to sell cars because they have, for decades, been turning out scores of dreadful cars — with serious design flaws and quality concerns — that don’t last as long as the car payments. And finally, American automakers have never saved for the rainy days ahead. All of their balance sheets reflect an attitude of “live for the day,” and indeed they did.

Ford, Chrysler, and GM all went hog wild during the boom years — they reaped gorgeous profits from consumers loaded with the credit bubble’s cheap cash and too much debt. The Big Three’s financing arms became inordinately profitable while their profits from operations dropped and dropped — and then stopped altogether. Still, not once did executive management look forward, beyond the peculiarity of the boom, and prepare for the business environment and consumer demands of tomorrow. Instead, all three companies continued to put all of their resources into the short-term channel to secure today’s profits at the expense of tomorrow’s stability and survival.

Boom times and credit bubbles (and recent bailouts) have masked dead business models, considerable quality issues, and insolvency. Now that the veneer of phony prosperity has been stripped off the economy, the naked auto companies are a frightening sight to behold. And since Detroit came to rely so heavily on one industry, and put all of its eggs in that one basket, the region’s economy is starting to crumble.

In response, Detroit automakers and unions seek to use aggressive tactics against others to remain intact. The automakers sought, and received, the theft and redistribution of other peoples’ money in order to sustain their failed businesses. The UAW seeks to use legislative fiat to direct the terms of the bailout and extend their power by planting their gangs in the South. Some of the old guard still hold on to pipe dreams of an all-conquering Union. As one union president said (apparently, a guy who never got past the intro to macro and micro in high school),

What the economy needs now is rising wages so the country can get on the path of wage-driven consumption growth. That means stronger unions. Indeed, I believe eventually it will mean the unionization of the entire U.S. auto industry.

However, in the South the market has spoken in at least one respect — the unions are not welcome by the workers.

Getting back to John McCormick’s limp line of reasoning, he ends his column by implying that Michiganders should boycott Alabama — especially the retirees and warm-weather family vacationers. As always, the little guys are told to give up their way of life to preserve the high-paying jobs of corporate and union executives — along with the jobs of people who make cars no one wants to buy. But what’s in it for them? National pride?

Perhaps Detroit should just send a battalion down to Atlanta to rough things up a little. A new Civil War anyone?

 

Teaching Economics

 

Townhall.com Columnist

Walter E. Williams
Wednesday, December 31, 2008

Many professors, mostly on the liberal side of the political spectrum, use their classrooms to proselytize students. I have taught economics for the past 40 years and challenge anyone to find even one student, among the thousands who went through my classes, who can say, “Professor Williams used his class to proselytize students.” While acceptable at most universities, it is nothing less than academic dishonesty to do so. Like others I have my own values and opinions, such as those expressed in some of my nationally syndicated columns, but they never become a part of classroom discussion.

Learning how to think straight, as opposed to what values and opinions to hold, is the crucial part of education. Part of that learning is to be able to understand the distinction between subjective statements, for which there are no commonly accepted standards of proof, and positive statements for which there are. For example, the statement “Scientists cannot spit the atom” is a positive statement because if there’s any disagreement, there are facts to which we can appeal to settle the disagreement. Just visit Stanford’s linear accelerator and watch them do it. By contrast, the statement “Scientists should not spit the atom” is a subjective statement. There are no facts to which we can appeal to settle any disagreement. Disagreement can go on forever. A fairly good proxy for whether a statement is subjective is the presence of words such as should and ought. This lesson is closed by telling students that it is not being suggested that they purge their vocabulary of subjective terms such as should and ought because they are excellent tools to trick others into doing what you want them to do. However, in the process of tricking others, one need not trick himself.

 

 

A related lesson is dealing with terms such as better and best and worse. This lesson might be approached by my asking students which is the best system for resource allocation: capitalist, socialist or communist? After several fall for my bait, I tell them that the correct response is to tell me it’s a nonsense question. It is akin to asking their physics professor: Which is the best state: a liquid, gaseous, solid or plasma state? However, if the physics professor were asked: Which is the cheapest state to nail a nail into a board? He could answer the question and probably say that it is the solid state. Going back to the question about capitalism versus socialism and communism, asking which system maximizes personal liberty and societal wealth, the answer would be capitalism, at least here on Earth.

Another pitfall to straight thinking is sometimes called the cause and effect fallacy. That fallacy is made when a person sees event B coming on the heels of event A and then says A caused B. There may no causal relationship at all. Such is the case when the rooster crows and shortly thereafter the sun rises. That is easy to see but many historians assert that the 1929 stock market crash caused the 1930s Great Depression. Little is further from the truth. Instead, it was caused by inept fiscal, monetary and regulatory policies of the Hoover and Roosevelt administrations.

There are a number of other pitfalls to straight thinking that I lecture on as introductory material before we begin to explore economic theory. I tell students that if they hear me say something subjective, without my having prefaced it with “in my opinion,” they are to raise their hand and tell me that they took my class to learn economics and not to be indoctrinated with my values. Personally, I want students to share my values that personal liberty, along with free markets, is morally superior to other forms of human organization. The most effective means to accomplish that goal is to give them the tools to be tough, rigorous, hard-minded thinkers and they will probably reach the same conclusions as I have.

Copyright © 2008 Salem Web Network. All Rights Reserved.

 

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The Right Economic Forecast

by Dr. Gary North

THE FORECASTER’S EDGE: AUSTRIAN ECONOMIC THEORY
Date 12/30/2008 • Issue 40

On December 19, 2006, I warned my readers that a recession would begin in 2007. It did, according to the National Bureau of Economic Research. It began in December 2007.

On December 6, 2007, UCLA’s widely quoted Anderson Forecast unit announced that there would be no recession in 2008.

LOS ANGELES — In its fourth quarterly report of 2007,  the UCLA Anderson Forecast holds steadfast to the basic tenet of a forecast they have been making throughout the year, that the national economy is not technically in a recession, nor is there a national recession on the economic horizon. Though the economy is experiencing difficulty rooted in the problematic real estate sector, as well as the result of such things as higher oil prices and a troublesome rate of consumer debt, the UCLA Anderson Forecast does not see the possibility of enough job loss to trigger an actual recession.

http://www.garynorth.com/snip/750.htm

I did a Google search for “Anderson,” “no recession,” and “2008.” I discovered that these UCLA forecasters reasserted their prediction of “no recession” in March, June, and September of 2008.

http://www.garynorth.com/snip/751.htm

On December 11, 2008, Anderson issued a press release.

Anderson Forecast: ‘Nasty recession’ to include 4 quarters of declining GDP. In its fourth quarterly report of 2008, the UCLA Anderson Forecast predicts that the current national economic recession will include four quarters of negative growth, followed by very tepid growth rates, and rising unemployment that lasts through 2010. California will share the national recession, with negative growth through the middle of next year and high unemployment until 2010 as well.

The National Forecast

“The news from the economy is bad,” writes Anderson Forecast senior economist David Shulman in his essay “The Balance Sheet Recession.” “The recession we had previously hoped to avoid is now with us in full gale force.”

The Forecast now expects that real gross domestic product (GDP) will decline 4.1 percent in the current quarter, followed by declines of 3.4 percent and 0.8 percent in the first two quarters of 2009.

In addition, the unemployment rate is expected to rise from its October 2008 level of 6.5 percent to 8.5 percent by late 2009/early 2010. Associated with the rising unemployment will be the loss of 2 million jobs over the next 12 months.

The Forecast lays the blame for what it is calling a “nasty recession” on the financial crisis of 2007-08, noting that the economic circumstances underlying current conditions differ significantly from past recessions.

http://www.garynorth.com/snip/752.htm

Such precision!

These guys, all experts, did not sense that the economy was in a recession as late as September 24. But now they have the future charted to the decimal point.

Why am I not impressed?

One reason has to do with semantics. The press release speaks of “negative growth.” I have this view of growth, that it is not negative. Contraction is negative. Collapse is negative. Growth is positive.

My more substantive reason is that when someone cannot see that a truck has been running over him for a year, he probably is not in a good prediction to predict future movements of the truck.
How did I know in December 2007 what expert forecasters at UCLA did not see as late as September 2008? Simple. I quit the graduate program in economics at UCLA in the fall of 1964 and transferred to UC Riverside in 1965, where I majored in history. I could see what UCLA’s program was: a schizophrenic hybrid of Keynesianism and Chicago School economists, united in their ignorance of, or outright rejection of, Austrian School economics. I regard my 1964 decision as one of the better decisions on my career.

“BAD MONEY DRIVES OUT GOOD FORECASTS”

This is my variant of Gresham’s law.

In the final pages of his 1912 book, “The Theory of Money and Credit,” Ludwig von Mises presented a new theory of the business cycle of economic booms and busts. He argued that central bank policy of monetary expansion creates the boom. When central bank policy shifts to tighter money, in order to avoid accelerating price inflation, this produces the bust. I have summarized Mises’ theory here:

http://www.lewrockwell.com/north/north87.html

This theory is despised by all rival schools of economic theory, for these reasons:

1. It is hostile to central banking.
2. It blames recessions and depressions on a government-licensed monopoly over money.
3. It teaches that a committee of economists cannot successfully guide the economy.

In modern economics textbooks, no criticism of the idea of central banking is allowed, except the 1963 criticism of the Federal Reserve System by Milton Friedman, namely, that the FED did not inflate enough, 1930-33.

Forecasters are therefore self-blinded. They cannot easily see when a recession is coming because they reject the cause of the recession: central bank policy. They cannot see this because they refuse to use Mises’ theory of central banking to analyze the effects of central bank policy.

Some very smart, very misguided experts have been lured into making bad forecasts. I suppose the classic example of a bad forecast in this business cycle is this one, made by Charles Prince, the CEO of Citigroup in July 2007.

When the music stops, in terms of liquidity, things  will be complicated. But as long as the music is  playing, you’ve got to get up and dance. We’re still dancing.

That retroactively juicy statement appeared in an interview in London’s “Financial Times” on July 9, 2007. It was immediately picked up and posted all over the Web. There were many skeptics, but mostly in the hard-money crowd. Then came August’s collapse of the secondary market for subprime mortgages. In that market, the music ended abruptly.

On November 4, 2007, Mr. Prince resigned. He departed with stock holdings worth $94 million to add to his $50 million in pay for the previous four years.

The next day, I told my Website’s subscribers to get out of stocks and short the S&P 500.
For Prince’s sake — and his lawyers’ sake — I hope he sold all of his shares in 2007. Citigroup’s value collapsed over the next 12 months. You can buy Citi at $6.50 a share. In July 2007, when Mr. Prince made his famous statement, City was at $55. In November, when he departed, it was in the mid-$30s. It took a Federal bailout to keep Citi, America’s largest bank, from going bust in November, 2008. The U.S. government and the Federal Reserve System took over $260 billion of Citi’s $300 billion of toxic liabilities. This wiped out $120 billion in shareholder value.

The latest news is that Prince and former Treasury Secretary Robert Rubin, who was on Citi’s board, are defendants in a lawsuit, which accuses them of covering up the nature of these toxic securities. One thing is sure: their defense lawyers will do very well.

http://GaryNorth.com/snip/748.htm

It was such easy money in the boom phase of the economy, which was funded by low interest rates created by the Federal Reserve under Alan Greenspan after 2000. Everyone cheered. The people at the top of the financial side of economy were getting fabulously wealthy.

Then Bernanke replaced Greenspan in February 2006, who immediately reduced the growth of the monetary base. That was the signal that the music was going to stop. And so it did.

Prince should have seen this coming. It was obvious to me in late 2006 what was going to happen. Anyone who paid attention to U.S. Treasury debt interest rates should have seen this coming. It was Prince’s job to see it coming. But in the heat of the boom, experts refuse to face the music. The Maestro, Alan Greenspan, had orchestrated the music. He was no longer conducting the orchestra.

MY FORECASTS

On August 22, 2006, six months after Greenspan retired, I wrote a “Reality Check” newsletter, “Greenspan’s Time Bomb.” I wrote this.

There is a time bomb ticking. A major indicator has  just appeared: the inverted yield curve. If it lasts for 20 consecutive business days, the U.S. economy is  likely to head into recession in 2007. To understand  why, click here:

http://snipurl.com/invertedyc

To make things even more dicey, the yield curve is so inverted today that the federal funds rate, the overnight commercial bank rate that the Federal Reserve seeks to control, is now higher than the rate for 90-day T-bills. I will explain why this is a negative anomaly later in this report.

A basic feature of all action hero movie time bombs is a built-in count-down timer. I’m not sure why bomb-designers put these into their bombs. I don’t think there is a Radio Shack bomb count-down timer, but you never know.

Alan Greenspan did not include one in his economic time bomb. He handed it over to Ben Bernanke last February, and quietly departed from the scene. He gives an occasional speech, but his retirement program is fully funded — unique in Washington — and his wife remains gainfully employed by NBC TV.

Greenspan’s time bomb was assembled in stages, beginning in October, 1987, when the Federal Reserve created massive liquidity on the day after the meltdown of the world’s stock markets by over 20%. He continued tinkering with it throughout his time as chairman, culminating in the creation of sufficient fiat money that drove the federal funds rate from 6.5% in mid-2000 to 1% in mid-2003, and then adopted a new monetary policy that allowed the rate to rise to 4.5% in late January, 2006, when he retired. It has now risen to 5.25%.

http://snipurl.com/fedfundsrate

Why is this a time bomb? Because of the effects of low interest rates in stimulating economic activity. In housing, in long-term corporate borrowing, and in household borrowing, there is only one thing better than low interest rates to get people to spend money: access to the newly created fiat money that forces down interest rates.

The problem comes, in the words of the longest FED chairman of all time, William McChesney Martin, when the FED turns off the money spigot. This takes away the party’s punch bowl.

Bernanke is now the administrator of the time bomb. He doesn’t want it to detonate. He has now been in office long enough to get the blame for any explosion. Greenspan can safely say nothing in the aftermath of the explosion. He need point no finger. He can be polite. The central fact is, it did not detonate on his watch.

Bernanke did not see what was about to hit the American economy. As I pointed out in my report, he denied the significance of the inverted yield curve. “No problem!”

Bernanke said in March that investors should not pay much attention to the yield curve, which was flattening.

What is the relevance of this scenario for today? Although macroeconomic forecasting is fraught with hazards, I would not interpret the currently very flat yield curve as indicating a significant economic slowdown to come, for several reasons. First, in previous episodes when an inverted yield curve was followed by recession, the level of interest rates was quite high, consistent with considerable financial restraint. This time, both short- and long-term interest rates–in nominal and real terms–are relatively low by historical standards.

He ignored the obvious: The short-term federal funds rate had risen from 1% to 4.5%, June, 2003-March 20, 2006. Today, it’s 5.25%. The T-bill rate has risen from a bit over 1% to 5%. There is no comparable percentage increase in so short a period in all of American history.

Don’t worry, he told the attendees, “market participants do not harbor significant reservations about the economic outlook.”

They didn’t harbor significant reservations in the late fall of 1929, either.

A week later, I followed with a report on “Bernanke’s International Time Bomb.”

A week ago, I described Alan Greenspan’s time bomb, which he passed off to Ben Bernanke last February. This time bomb is the huge build-up of fiat money that enabled Greenspan to escape the 2001 recession without a scratch.

There are three things that Bernanke can do about: (1) continue the FED’s policy of stable money, which will detonate it within months; (2) reverse course and expand the money supply, which will roll the clock forward but will add to the explosive material; (3) resign.

Bernanke is paying no public attention to this time bomb. He is also ignoring another: the time bomb of international credit.

http://www.lewrockwell.com/north/north473.html

On December 9, 2006, I wrote this report: “Recessions are Great Opportunities.” I began with these words:

I’ve got bad news and good news. The bad news: A recession is coming in 2007. The good news: A recession is coming in 2007.

There is nothing like a recession to create depression in most people’s minds — good, old-fashioned emotional depression. But for a self-selected minority, a recession is the opportunity of a decade — maybe a lifetime.

Most people watch, helpless, as housing prices fall, the stock market falls, business income falls, and job opportunity falls.

A few people take the initiative, redouble their efforts, and position themselves for the recovery phase, which lasts far longer than the recession.

For the unlucky few, they get fired. In the midst of a tight job market, they are sent on their way. But the debt meter keeps ticking: mortgage, phone, electricity, insurance, etc.

We don’t get recessions often. In my job market career, there have been only six: 1970, 1974, 1980, 1981, 1991, 2001. Some analysts would say 1980 and 1981 were really only one. I would agree. They both had the same cause: tight-money policy by the Federal Reserve System, begun in 1979, after dozen years of monetary inflation.

Because the most recent one was so mild, housing prices continued to rise. What fell was the personal savings rate. In the past, people have saved more during recessions. In 2001, not only did they not save more, they saved less. Fear did not overtake them.

Unemployment rates close to 10% are a dim memory for most Americans. Unemployment always hits the manufacturing sector harder than it hits services. The percentage of the American population involved in manufacturing has been falling for a generation.

Unemployment for white, married males is always lower — no more than half — what it is for single non-white males. So, when we read of rising unemployment, we who are white, married, and male rarely face the threat of getting fired. What we face is falling prices of our equity investments. We see our stock mutual funds fall. Because only the top 20% of wealth owners own stocks, except in pension funds, this loss affects a minority of the population. As for pension funds, Americans still think that somehow, they will be able to retire at someone else’s expense. They believe, because they have been told, that the stock market always comes back.

It hasn’t come back from the fall it took 2000 — not the Standard & Poor’s 500, which reached 1550. But pension fund owners still have faith. Somehow, something miraculous will happen, and their retirement dreams will come true.

They won’t, of course. The next recession will remind a growing number of Americans: They will not be able to retire.

http://www.lewrockwell.com/north/north495.html

The recession began a year later, in December 2007, according to the National Bureau of Economic Research, which for some unknown reason is the official arbiter of such matters. It is now accelerating.

CONCLUSION

We are now being told that this recession will be the longest, deepest, and most destructive in the post-World War II era. I think this forecast is correct.

Austrian economic theory teaches that monetary inflation will disrupt the economy far more than recession will. We look at the statistics from the FED, and we see monetary inflation looming on a scale not seen in peacetime America. You can monitor this for yourself in my Website’s department, “Federal Reserve Charts.”

http://www.garynorth.com/public/department29.cfm

The expert forecasters are telling us that price deflation is the #1 threat facing the U.S. economy and the world.

The experts have it wrong again, and for the same reason: they reject Austrian economic theory.

 

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Teaching Kid’s Responsibility

Big Middle-Class Sister
We shouldn’t apologize for teaching poor kids how to move up in America.

Alan Luks, the recently retired executive director of Big Brothers Big Sisters of New York, told me recently that program volunteers should behave like “middle-class surrogate relatives” toward the children they mentor. He quickly apologized for using the term “middle-class”: “That’s wrong.” But it isn’t. Middle-class values are exactly what disadvantaged kids need in order to succeed. It’s too bad that the people who run mentor programs are often so steeped in bad social theory, nonjudgmentalism, and “cultural sensitivity” that they discourage volunteers from teaching their mentees how to move up in America.

When I signed up to be a mentor with BBBS seven years ago, the initial conversations I had with my mentee, Veronica, didn’t bode well. The transcripts would probably read like police interrogation sessions. I would ask her questions about school, family, friends, anything I could think of; she would answer in as few words as possible. And our meetings, which included outings to the beach, the movies, and museums, as well as bicycle riding and even a couple of trips around the park on horseback, were not without their logistical frustrations. Veronica was always late, for instance, often by almost an hour. At first, I chalked it up to her youth. When we were first matched, she was only 11. I would show up at her house at noon on a Saturday and find she was still in her pajamas and had forgotten about our plans.

It quickly became clear, though, that she was only behaving like the adults around her, who had no middle-class values to speak of. The one-bedroom apartment where she lived was chaotic. Her mother, her aunt, her sister, and her two younger cousins were the fixtures, with a parade of her aunt’s boyfriends and occasionally her own father added to the mix. Veronica spent money as though she were in the middle class, but she never earned or saved any, so far as I know. That didn’t stop her from buying Coach sneakers or a new cell phone every few months.

The biggest obstacle standing between Veronica and a middle-class life was education. My great coup was getting her parents to put her in Catholic school in ninth grade. We filled out the applications together, and despite Veronica’s objections—“There are no boys there!”—her mother sent her anyway.

As it happened, the school partnered with another mentoring program, called iMentor, so I became her mentor through that program, too. We e-mailed every week and saw each other every few months. Volunteers in iMentor must be college-educated professionals. But executive director Mike O’Brien says he “would stop short of making a judgment” that there’s anything wrong with the mentees’ original environment. “I love New York City in all of its complexity,” he tells me, noting that, just as many of the mentees hadn’t seen the professional world, most of the mentors “had never been to East New York.”

The mentors I know never told their charges that there was anything wrong with growing up in East New York—they didn’t have to. Mentees saw what these adults had and wanted it for themselves. For a few years, Veronica and I lived on opposite sides of Brooklyn’s Prospect Park. “I want to live in your neighborhood,” she told me on a visit to Park Slope when she was a high school freshman. It was a good opportunity for me to teach her something: “Well, if you go to college and get a good job, you can.” I’m sure that I’m not alone in my judgmentalism. The reason young men and women are able to become mentors in the first place is that they made the right “middle-class” choices in their own lives. Of course they’re judgmental. Judgment is what got them educations, good jobs, and decent apartments.

When Veronica was about 13, I got a flyer for a BBBS seminar, led by a representative of Planned Parenthood, on how to talk to mentees about sex. It started as you might expect: Give them all the information they want about birth control, emphasize the importance of safe sex, tell them where they can get tested for STDs, and so on. When the discussion turned to what the appropriate age is to begin having sex, the woman explained: “You should tell your Ωlittle≈ that they shouldn’t have sex until they are in love.” I nearly fell out of my chair. Veronica had been in love seven times during the last school year alone.

Veronica and I have never discussed birth control or STDs, but about five years ago, she told me she wanted a baby. I told her that I didn’t think that was a good idea yet, and that she should finish high school, go to college, start a career, find the right guy, get married, and then have a baby (what my parents refer to as “the right order”). She nodded and said that seemed like a long way off. I assured her that she wouldn’t regret waiting.

When Veronica still hadn’t filled out her college applications and hadn’t even decided where to apply by January of her senior year, I complained to the people in charge of iMentor. I wanted the program coordinator to make some demands from the school. I wanted the school to make demands from Veronica. I wanted her mother to put her foot down. It was time for ultimatums. Instead, I got more nonjudgmentalism. “I’m sure she’ll make some decisions soon,” the iMentor folks told me. “And maybe community college is right for her.”

This past June, I attended Veronica’s high school graduation. Her record wasn’t stellar, but she’s attending Kingsborough Community College this fall. She has learned something about discipline and hard work. She has had some good teachers. Her classmates have been a good influence overall.

And there’s no baby.

Naomi Schaefer Riley is the deputy editor of the Taste page in the Wall Street Journal.

 
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Posted by on December 29, 2008 in Education

 

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The Perfect Christmas Myth

Written by Anthony Bradley

Our current economic recession is probably the best Christmas present Americans could have received this year. Since we are all cutting back on spending maybe, just maybe, we can divorce ourselves from the stress and frivolous spending associated with having the “perfect” Christmas.

Who knows what movie or fairy-tale inaugurated the idea that a perfect Christmas is one where the whole family sits around a table of food for an evening—hiding the reality that our family is extremely dysfunctional and has been affected by the Fall—and then passes out gifts we cannot afford to buy? Parents can intentionally create anxiety, especially many mothers, having bought into the idea that Christmas means that the entire family must return to the nest. It’s a great tradition and there’s nothing inherently wrong with it, but is it worth the strain of trying to turn the house into a movie set?

For many families, however, Christmas can be dreadfully stressful. Couples fight over which side of the family they are going to spend four hours with on Christmas Day because on Thanksgiving the husband’s parent’s saw the kids for five hours and now the maternal grandmother wants her equal time. And many of us will be guilt-manipulated with this theme: “You’re not going to be here for Christmas dinner? It’s just not Christmas if you’re not here.” Or you find yourself sitting around the dinner table and the same passive-aggressive comment your dad makes every year about you getting “a real job” helps you suddenly remember that it is your turn to give the kids a bath. By the way, your dad is so proud of your brother’s job. Have you seen his new house?

And, of course, there is the sister with the perfect husband and family. Your folks love them. While your kids are running around the house knocking things over, your sister’s kids are reciting Bible verses for the family. Later on, the perfect sister signals that she wants to talk you because your kids seem undisciplined.

The perfect Christmas is thankfully strained this year. Maybe you cannot afford to travel to the big perfect family dinner. Your kids are learning a valuable lesson about saving and spending because they are not receiving the mountain of new and soon to be discarded toys because “Mommy and Daddy just don’t have much money this year.” This is fantastic.

It seems like Christmas, the day set aside to remember the birth of Jesus Christ into a broken and fallen world, could also be a day where families get together to celebrate their need for a Savior, Christ the Lord, born into a dysfunctional family (Matthew 1:1-17) and to a mommy and daddy who did not have much to give other than love and affection (Luke 2:1-21).

Perhaps the perfect Christmas is one where family bonds are strengthened, not because we walk into a Norman Rockwell painting, but are deepened because our families have another opportunity for authenticity, repentance, and celebration. We celebrate the promised Savior’s birth because Christ alone came to give us hope about our sin, imperfect families, difficult finances, challenging marriages, pot-smoking kids, bad memories, health problems, passive-aggressive parents, loneliness, shame, and freedom from the power of the evil one (Luke 4:18-22; Galatians 5:1).

Joy to the world.

 

The Burden of Responsibility

The Therapeutic State

By Thomas Szasz

Thomas Szasz is professor of psychiatry emeritus at SUNY Upstate Medical University in Syracuse. His latest books, both from Syracuse University Press, are The Medicalization of Everyday Life: Selected Essays and Psychiatry: The Science of Lies.

Life is an unending series of choices and, therefore, “problems in living.” Ordinary choices—what to have for breakfast—we ignore as trivial. Extraordinary choices—whether to kill ourselves (or worse)—we dismiss as the symptoms of mental illness. The profession of psychiatry rests on, and caters to, the ubiquitous human desire to avoid, evade, and deny the very possibility of morally “unthinkable” choices. We use the rhetoric of psychiatry to transform such choices into medical-technical problems and “solve” them by appropriate “medical treatments.” This is why deception and prevarication are intrinsic to the principles of psychiatry, and fraud and force are intrinsic to its practices.

We humans are choice-making animals. The freedom to make choices is both a blessing and a curse. Depending on age, temperament, information, and alternatives, some people experience the opportunity for choice as exhilarating, others as tormenting. Traditionally, it was one of the functions of religion to relieve people of choices. Today, psychiatry and the therapeutic state perform the same job.

Karl Jaspers (1883–1969)—the great twentieth-century German psychiatrist-turned-philosopher—understood this. But he identified only one part of this drama, the patient’s: “Generally formulated, we may say that these people [“neurotics”] are determined that events for which they are accountable and in which they are understandably concerned shall be taken as mere happenings, for which they are entirely irresponsible.” Psychiatrists were, and are, happy to play the other part, authenticating the person’s false self-definition as mental patient—medical object, not moral actor.

Lord Acton

There is important religious precedent for the authoritative declaration of falsehood as truth. In 1870, under the leadership of the legendary Pope Pius IX—Pio Nono, the longest-reigning and one of the most colorful popes in history—the Vatican declared the dogma of papal infallibility. This was anathema to Lord Acton (1834–1902), the most respected Catholic layman in Europe in his time. Alienated from the Church, Acton did not leave it; and, probably because he had not been ordained, he was not excommunicated. It was in the context of this moral conflict that, in 1887, in a letter to Bishop Mandell Creighton, Acton made his famous pronouncement:

“I cannot accept your canon that we are to judge Pope and King unlike other men, with a favorable presumption that they did no wrong. If there is any presumption it is the other way against the holders of power, increasing as the power increases. Historic responsibility has to make up for want of legal responsibility. Power tends to corrupt and absolute power corrupts absolutely.”

Most people who quote Lord Acton’s famous dictum today are unaware it refers to papal power and was made by a devout Catholic. In 1882 Acton, now alienated from his great teacher and lifelong friend, Father Johann Ignaz von Döllinger, who was excommunicated for opposing the infallibility doctrine, writes him:

“I came, very slowly and reluctantly indeed to the conclusion that they [the great Catholic notabilities] were dishonest. And I found out a special reason for their dishonesty in the desire to keep up the credit of authority in the Church. . . . When I got to understand history from the sources, especially from unpublished sources, the reason of all this became obvious. There was a conspiracy to deceive. . . . That men might believe the Pope it was resolved to make them believe that vice is virtue and falsehood truth.”

Acton regarded the claim of papal infallibility as evidence of intolerable religious arrogance and power. I regard psychiatric infallibility—the unfalsifiability and irrefutability of psychiatric diagnoses backed by mental-health laws—as evidence of intolerable psychiatric arrogance and power.

Acton thought “he witnessed the triumph of error in history.” Indeed, he had. Today, we witness a similar—but more ominous—triumph of error in medicine-psychiatry. In addition to persuading the public and the government that human problems are medical diseases, psychiatrists have succeeded in abolishing the concepts of responsibility, guilt, and innocence, and in replacing punishment with the irrefutable and ineradicable stigmata of psychiatric “diagnoses” and “treatments.” “Modern psychiatry,” I wrote in 1970, “dehumanize[s] man by denying . . . the existence, or even the possibility, of personal responsibility, central to the concept of man as moral agent.” It accomplishes that evil by treating responsibility, following Ambrose Bierce, as “a detachable burden easily shifted to the shoulders of God, Fate, Fortune, Luck or one’s neighbor.” In our day, it is not merely customary but, in matters that really count, mandatory to unload responsibility on Mental Illness (“he snapped,” “had a breakdown,” “battled his demons,” “was on drugs,” “went off prescribed medication,” and so forth).

In Acton’s day the separation of church and state was an established political practice in many countries. Hence, the Church’s moral failures and self-arrogated powers affected only persons who chose to be its adherents. Our predicament is more serious. We live at a time when the alliance of medicine-psychiatry and the state is taken for granted—viewed as an unalterable social fact and undoubted moral and social good. Everyone, regardless of personal choice, is affected, directly or indirectly, by the powers of the therapeutic state.

Psychiatry and the State

Given its limited legal-political powers, the Vatican could not have tried to purge the world of its critics, much less intimidate them into becoming its crypto-supporters. In contrast, in our day the alliance of psychiatry and the state has enabled pharmacracy to do just that. Its so-called critics—who call themselves “antipsychiatrists,” “critical psychiatrists,” “ethical psychiatrists,” and so on—oppose one or another psychiatric “diagnosis” or “treatment,” rarely even psychiatric coercion. But they all support the view that the misbehavior of individuals afflicted with/suffering from so-called mental illnesses ought not be regulated by the same rules as are the misbehaviors of individuals not so denominated: They recoil from defending an ethic based on personal responsibility for public actions (as distinct from private actions, called “thoughts”) and of every individual’s inalienable right to his or her life and death, lest they appear uncompassionate and, perish the thought, unscientific and illiberal (in the modern, statist sense of “liberal”). Thus they endorse—explicitly or by the assent of silence—psychiatry’s war on responsibility, epitomized by the wars on drugs, mental illness, and suicide and by the insanity defense.

“Truth,” said Thomas Jefferson, “will do well enough if left to shift for herself. She seldom has received much aid from the power of great men to whom she is rarely known and seldom welcome. She has no need of force to procure entrance into the minds of men. . . . It is error alone which needs the support of government.” Jefferson was right in applying this principle to religion: modern states should not (and for the most part do not) lend their coercive powers to the support of the clerical lies of priests. Nor should they lend their coercive powers to the support of the clinical lies of psychiatrists. As long as they do, serious persons ought not to take psychiatry seriously—except as a threat to reason, responsibility, and liberty.

 

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Get Out of Jail Free


     Bailout mania has hit the United States.

In other words, our so-called leaders in Washington have become all-too-willing to dole out YOUR hard-earned taxpayer dollars on a wing and a prayer.

     Can it be stopped?

The American people were told that without an immediate injection of $700 billion of your hard-earned tax dollars, the economy would tank!

And Congress, over the initial objections of the American people, passed a massive $700 billion wealth re-distribution BAILOUT program.

     The legendary figure Robin Hood stole from the rich and gave to the poor.

     Ironically, Uncle Sam seems to be doing the reverse.

And now – after giving away $350 billion of the $700 billion – the economy is still hurting, the so-called credit crunch has not been reversed as banks are still not lending, and the American people are left to suffer.

     But that’s not all.

     Now everyone and their grandmother wants a piece of the action.

Most recently, the big three automakers came to Washington, hat-in-hand, and Congress, specifically conservatives in the Senate, finally said “No.”

But now, the Administration is trying to find ways to accommodate the request anyway – using your $700 billion.

When is the madness going to stop? Who’s next to pick the pockets of hard-working American taxpayers?

     Is it possibly time to admit that the $700 billion was a bad idea?

     Is it time to give up the ghost and go back to the drawing board?

Is it possibly time, finally, to try some free market solutions to our problems and give Capitalism a shot?

Use the hyperlink below to send your personalized and urgent Blast Faxes to President Bush and each and every Member of the Leadership of the United States Senate and the United States House of Representatives.

Tell them that giving $700 billion of our hard-earned tax dollars was a bad idea… a mistake. Tell them that it is time to give up the ghost. Tell them that now is the time to try some free market solutions to stimulate the economy. Most importantly, tell them not to spend the $350 billion that remains from the $700 billion economic relief package that Congress passed last month.

- Send My Blast Faxes -

What Happens To The Remaining $350 Billion?

For starters, it SHOULD NOT get spent until we come up with a better solution to our problems and admittedly, some creative thinking is in order.

     As an example, Congressman Louie Gohmert of Texas, has come up with an idea.

     Gohmert is calling for a two-month federal tax holiday.

It works something like this: Since the federal government collects approximately $167 billion per month in taxes and entitlements, the remaining $350 billion can be used instead to cover two months of tax revenues and taxpayers could reap the benefits of a two-month tax holiday.

     Imagine that!

The American people would pay ZERO in federal income and FICA taxes for a full two months.

Of course, Gohmert’s proposal is essentially another form of income redistribution, but at least the money would be going back to those from whom it was taken – the American taxpayers.

Gohmert’s proposal may or may not be an answer, but at least it is an example of the kind of creative thinking that needs to be applied to the problem.

     And who knows?

One can only wonder what would happen if people actually saw the money the federal government withholds from their paychecks for two months and then the government started taking it back again?

     Taxpayer Revolt?

Use the hyperlink below to send your personalized and urgent Blast Faxes to President Bush and each and every Member of the Leadership of the United States Senate and the United States House of Representatives.

Tell them that giving $700 billion of our hard-earned tax dollars was a bad idea… a mistake. Tell them that it is time to give up the ghost. Tell them that now is the time to try some free market solutions to stimulate the economy. Most importantly, tell them not to spend the $350 billion that remains from the $700 billion economic relief package that Congress passed last month.

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An Example of Creative Free Market Thinking

Congressman Gohmert is not the only one thinking creatively these days.

Conservative Leader Grover Norquist of Americans for Tax Reform (ATR) recently sent an open letter to the Treasury Department with some of his own ideas for the $700 billion.

     To make the obvious yet comical point, Norquist’s letter began:

“I write today to formally request $700 billion from the TARP Capital Purchase Program. Since unionized auto companies, state and local governments, and certain credit card companies are applying, I thought I should, as well.”

And, with the $700 billion, Norquist laid out the free market plan on how ATR would use the money. “Since the money came from the taxpayers in the first place,” Norquist wrote, “I propose giving it back to them.”

     Specifically, Norquist would:

Cut the corporate income tax rate from 35% to 15%. America currently has the second-highest corporate income tax in the world. By lowering it to 15%, our nation’s corporate income tax would become the third-lowest in the world.  Norquist wrote: “Companies would be dying to set up shop in the United States.” And with that, new jobs would be created!

Eliminate the capital gains and dividends tax. As the old saying goes, “Tax something less and you get more of it.” In this case, it would be more investment in American companies, creating more jobs and more wealth across the board.

Cut the top personal income tax rate from 35% to a flat 15%. In other words, let the people keep more of their money instead of forcing them to hand it over to the federal government.

Kill the death tax.  Norquist again: “Almost nothing is more capital-killing for small businesses and family farms than the estate, gift, and generation-skipping transfer taxes.”

Allow companies to fully-expense capital assets purchased the first year. Currently small businesses and individuals can only deduct such expenses in small amounts over several years according to a depreciation schedule. Letting them deduct 100% of the cost of capital assets all at once would encourage new spending and investment by small businesses.

     Of course, none of these ideas are new.

But, when it comes to spending your hard-earned taxpayer money, Congress and the Administration would rather dole it out and manipulate the markets rather then give it back to taxpayers and allow free markets to work.

It is time for our elected leaders in Washington to abandon this bailout mentality.

 

Use the hyperlink below to send your personalized and urgent Blast Faxes to President Bush and each and every Member of the Leadership of the United States Senate and the United States House of Representatives.

Tell them that giving $700 billion of our hard-earned tax dollars was a bad idea… a mistake. Tell them that it is time to give up the ghost. Tell them that now is the time to try some free market solutions to stimulate the economy. Most importantly, tell them not to spend the $350 billion that remains from the $700 billion economic relief package that Congress passed last month.

- Send My Blast Faxes -

Who Is To Blame?

The answer is Congress.

     More specifically, liberal ideologues on both sides of the political aisle.

Ironically, it is this same Big-Government Gang that is calling today for yet more government intrusions into our already battered free-market.

     Instituting more of the problem is NOT the solution!

     Here’s how it went down the first time.

In 1977 – with liberal Democrats in control of Congress and Jimmy Carter in the White House – the federal government instituted the Community Reinvestment Act (CRA) to encourage low-income folks to buy houses.

     With this well-intentioned legislation, the stage was set for catastrophe.

Then, in 1995, President Bill Clinton – with the help of liberals in Congress – gave CRA some real teeth and added massive new provisions that forced banks to issue $1 trillion dollars in bad loans!

     Didn’t anyone see the looming economic disaster?

Sure. Among them was Howard Husock of Harvard’s Kennedy School of Government. Many years ago, he predicted the current crisis in an article: entitled “The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities.”

And yet, even though the consequences of such policies are known, Big Government ideologues want to mess with the Free Market again.

If we let them do it to us again, we could end up a nation of bicycle riders on the fast track to Scandinavian socialism.

Use the hyperlink below to send your personalized and urgent Blast Faxes to President Bush and each and every Member of the Leadership of the United States Senate and the United States House of Representatives.

Tell them that giving $700 billion of our hard-earned tax dollars was a bad idea… a mistake. Tell them that it is time to give up the ghost. Tell them that now is the time to try some free market solutions to stimulate the economy. Most importantly, tell them not to spend the $350 billion that remains from the $700 billion economic relief package that Congress passed last month.

- Send My Blast Faxes -

Are We Simply Funding A Radical Agenda?

But it wasn’t just Big Government that Husock warned against. He also predicted that the radical Left would drive the lending industry to the brink of bankruptcy.

     Among other things, he deplored the empowerment of radical ideologues.

Case in point, ACORN (you remember them), literally extorted lenders into making billions in questionable loans.

     Here’s what Husock wrote about that:

“Crucially, the new CRA regulations also instructed bank examiners to take into account how well banks responded to complaints… [F]or advocacy groups that were in the complaint business, the Clinton administration regulations offered a formal invitation. The National Community Reinvestment Coalition, a foundation-funded umbrella group for community activist groups that profit from the CRA, issued a clarion call to its members in a leaflet entitled ‘The New CRA Regulations: How Community Groups Can Get Involved.’ ‘Timely comments,’ the NCRC observed with a certain understatement, ‘can have a strong influence on a bank’s CRA rating.’”

     In other words, here’s how it works:

The government offers a new source of funding for banks. But in order to tap this source, they have to please far-left organizations like ACORN, whose job it is to promote revolution. These organizations push the banks to fund every loan applicant who walks through the door. If the banks don’t capitulate, the organizations tattle to the examiners. And Presto! No more CRA funds!

     Husock again:

“‘To avoid the possibility of a denied or delayed application,’ advises the NCRC in its deadpan tone, ‘lending institutions have an incentive to make formal agreements with community organizations.’ By intervening, even just threatening to intervene, in the CRA review process, left-wing nonprofit groups have been able to gain control over eye-popping pools of bank capital, which they in turn parcel out to individual low-income mortgage seekers. A radical group called ACORN Housing has a $760 million commitment from the Bank of New York; the Boston-based Neighborhood Assistance Corporation of America has a $3-billion agreement with the Bank of America; a coalition of groups headed by New Jersey Citizen Action has a five-year, $13-billion agreement with First Union Corporation. Similar deals operate in almost every major U.S. city. Observes Tom Callahan, executive director of the Massachusetts Affordable Housing Alliance, which has $220 million in bank mortgage money to parcel out, “CRA is the backbone of everything we do.”

     So, who is at fault?

Use the hyperlink below to send your personalized and urgent Blast Faxes to President Bush and each and every Member of the Leadership of the United States Senate and the United States House of Representatives.

Tell them that giving $700 billion of our hard-earned tax dollars was a bad idea… a mistake. Tell them that it is time to give up the ghost. Tell them that now is the time to try some free market solutions to stimulate the economy. Most importantly, tell them not to spend the $350 billion that remains from the $700 billion economic relief package that Congress passed last month.

- Send My Blast Faxes -

Who Sold Out America?

Congress sold out America to the radical Left.

Liberals in Congress forced financial institutions to make bad loans and fund radical organizations like ACORN, groups dedicated to the destruction of our free enterprise system.

A liberal Congress also empowered Fannie Mae and Freddie Mac to buy those bad loans. In fact, for a while, the more loans Fannie and Freddie bought, the more money they made.

So Fannie and Freddie leaned on financial institutions to make even more bad loans.

Lenders in turn – with the free market hopelessly compromised – engaged in risky speculation. And liberals in Congress – pockets stuffed with contributions from nervous lending institutions – turned a blind eye.

     It was a sweet gravy train while it lasted.

Then, when the bubble burst, critics of this subversive deal said “I told you so!”

     Former House Majority Leader Dick Armey:

“It was not the free market, but a government-distorted market that caused this. It was politicians, fat cat corrupt CEOs and special interest lobbyists for Fannie Mae, Freddie Mac and other firms that created the perfect storm that led to the housing market collapse.”

     Economist Thomas Sowell agreed:

“Among the Congressional ‘leaders’ invited to the White House to devise a… ‘solution’ are the very people who have for years created the risks that have now come home to roost.”

     Former Congressman Bob Barr puts it even more plainly:

“Congress needs to get out of the way.”

     But they won’t, will they?

     Look at it this way:

If a surgeon removed one of your kidneys by mistake, would you let him operate on your other kidney?

Our economy is now functioning on one kidney – and here comes Congress with a rusty scalpel.

     Only the American people can prevent this continued suicide.

Use the hyperlink below to send your personalized and urgent Blast Faxes to President Bush and each and every Member of the Leadership of the United States Senate and the United States House of Representatives.

Tell them that giving $700 billion of our hard-earned tax dollars was a bad idea… a mistake. Tell them that it is time to give up the ghost. Tell them that now is the time to try some free market solutions to stimulate the economy. Most importantly, tell them not to spend the $350 billion that remains from the $700 billion economic relief package that Congress passed last month.

- Send My Blast Faxes -

 

Yours In Freedom,

Jeff Mazzella
President
www.cfif.org

P.S.  Please help us reach as many concerned Americans as possible by forwarding this e-mail to at least 10 of your friends and family members.

 


Center for Individual Freedom
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The Back Door to Socialism

Daily Article by | Posted on 12/12/2008

Barack Obama plans to initiate public-private partnerships (PPPs) on a grand scale. While the media focuses on Obama’s First Dog or his left-handed jump shot, behind the scenes he is planning how to become president of the world. Therefore, it is worth enumerating many of his proposed partnerships so as to expose his actual policies, and then offer an Austro-libertarian analysis of these partnerships. As we will see, a mix of public and private ownership is a socialist arrangement, and a sly tactic employed by those looking for increased power, albeit under a different name: the public-private partnership.

PPPs are essentially contracts between a public agency and a private company where assets, risks, and rewards are shared in providing a good or service to the public. The rationale is typically that private enterprise provides greater efficiency and quality of service, while the government agency furnishes additional capital. They are claimed to (potentially) lead to “happy employees,” better educational opportunities, and better public safety. Government agencies reportedly realize cost savings of 20 to 50 percent by using PPPs.

Of course, PPPs, dating back to at least 1652 when the Water Works Company of Boston began providing drinking water to Massachusetts colonists, are nothing new in the United States (or any country), and most government agencies and offices are engaged in using them. From the National Council for Public-Private Partnerships website we read the following:

Public-Private Partnerships [are] used for water/wastewater, transportation, urban development, and delivery of social services, to name only a few areas of application. Today, the average American city works with private partners to perform 23 out of 65 basic municipal services. The use of partnerships is increasing because it provides an effective tool in meeting public needs, improving the quality of services, and [is] more cost effective.

The treatment of so-called “public goods” in neoclassical economics is partly responsible for offering a justification for government intervention in providing for these goods and services. A large part of Obama’s economic agenda is to encourage more PPPs —well beyond what neoclassical economists mean by “public goods” (e.g., defense services, streetlights).

Obama claims these partnerships will promote innovation at a local level through federal funding. Before we can engage in an analysis of PPPs, we must provide an overview (lengthy, but I believe worth exposing) of the various partnerships Obama proposes. PPPs will be used in the following ways under an Obama administration:

  1. Deliver real broadband to communities that currently lack it. Encourage PPPs to “get low-income communities and residents connected [through] best practices among those that have deployed citywide free wireless broadband networks and how those lessons learned can be applied in other communities.”
  2. Modernize public safety networks and establish a PPP to “facilitate the development of a next generation network for use by public safety agencies on a priority basis.”
  3. Award public contracts to companies committed to American workers and end tax breaks for companies that send jobs overseas.
  4. Create a national network of public-private business incubators by “investing $250 million per year to increase the number and size of incubators in disadvantaged communities throughout the country.”
  5. Expand PPPs to advance “leading edge technologies” in space and aeronautics research to spur economic growth and innovation.
  6. Provide funding for “Early Learning Challenge Grants” where states will have to, among other requirements, develop strong public-private partnerships.
  7. Establish a Presidential Early Learning Council to expand public/private investments in the “youngest children.”
  8. Issue competitive grants to PPPs for evidence-based models to help students graduate.
  9. Mandate public service and require American middle and high school students to perform 50 hours of service a year, and for all college students to perform 100 hours of service a year. At the community level, PPPs will be used so “students can serve more outside the classroom.”
  10. Develop and deploy clean coal technology by using the Department of Energy to enter into PPPs to develop five new commercial scale “coal-fired plants with clean carbon capture and sequestration technology.”
  11. Expand PPPs between schools and arts organizations by increasing resources for the US Department of Education’s Arts Education Model Development and Dissemination Grants.
  12. Improve and expand PPPs to increase cultural and arts exchanges throughout the world and promote “cultural diplomacy.”
  13. Interact with the private sector from “electronic health records to the general supply chain.”

PPPs: An Economic Analysis

Obama uses PPPs to justify government involvement and intervention, and he typically associates PPPs with innovation, which seems like an oxymoron. Fortunately, the Austrian economist can point out the many likely effects and unintended consequences of government intervention in the form of PPPs, including the (tragic) effects on entrepreneurship. We will discuss a few of these, using as our guide Mises’s excellent and insightful book, Bureaucracy. Two topics often associated with entrepreneurship, innovation and risk, are perhaps the most pertinent in our discussion.

Innovation

One of the reasons Obama gives as a justification for these partnerships is to “spur innovation.” There are many reasons why this will prove difficult, if not impossible. Private businesses that have a government-granted monopoly from a PPP will have less (or no) competition, decreasing any incentive to increase efficiency and provide better quality services and products at lower prices. With a government guarantee of revenue, either through the company (or government) charging a fee to customers for its services, or through government subsidy, there is less incentive to cut costs.

Innovation is also less likely if the partnership specifies revenue will be obtained in a “cost plus percentage” arrangement where companies will be guaranteed a specified amount of gross profit, regardless of revenue or cost. When the PPP contract guarantees a period of time (typically years), companies may no longer be interested in increasing profits as there is little danger of going out of business during that timeframe. Thus, PPPs have no stringent requirement of meeting the market profit-and-loss test, since they cannot “lose.”

Mises pointed out the flaw in trying to use PPPs as a catalyst to innovation:

To say to the entrepreneur of an enterprise with limited profit chances, “Behave as the conscientious bureaucrats do,” is tantamount to telling him to shun any reform. Nobody can be at the same time a correct bureaucrat and an innovator. Progress is precisely that which the rules and regulations did not foresee; it is necessarily outside the field of bureaucratic activities.

In addition, progress and innovation may also be trapped by old government regulations, codes, and established ideas. “If it ain’t broke, don’t fix it,” is the motto of the government bureaucrat—and as Mises points out, these are typically old men with established ideas of what works (and what doesn’t). In contrast, innovation is more than just making sure a product “ain’t broke”—it is about improving an already functional and highly demanded product (think iPhone in the wireless industry, or Google Chrome in web browsers).

In contrast to private businesses, companies in a government partnership that wish to introduce innovations require going through red tape and levels of bureaucracy for approval. If it were not for a government guarantee of monopoly privilege, such a time gap for bureaucratic approval would likely eliminate any first-mover advantage in the market.

Furthermore, investment capital will not necessarily be generated from savings or business operations, but possibly from a shared government budget. Finally, instead of an incentive to earn as much profit as possible, governments often set a limit on the amount of total profit, and tax or remove any profit above the arbitrarily specified amount, thereby discouraging innovation.

Risk

Risk is another aspect that needs to be analyzed in relation to PPPs. Companies that are guaranteed a government contract in some situations may be less likely to take on risk, as risk only disrupts the existing circumstances, and increases the possibility of failure. This is because the company is “safe” (i.e., its revenue is virtually guaranteed) if it does not take any risks. Any risk the company takes may lead to its loss, not the government’s.

Companies in a partnership with government will also lose (ultimate) control of their decision-making abilities. For instance, government would be less likely to allow a company to take risks that could affect any government “revenue” originating from the company. Maintaining the status quo is the name of the game. Companies must, in the end, follow the government’s wishes and whims, not their own—nor their customers’. The company sees risk not in terms of whether the consumer will buy its product or service, but in terms of whether it is in line with the designs of the bureaucrat. Any risk then becomes focused on pleasing the bureaucrat, at the expense of pleasing the consumer.

On the other hand, risk of failure is essentially reduced to nil for the length of the contract due to government’s ability to subsidize losses through taxation or other coercive measures. Obtaining government contracts for smaller companies becomes virtually impossible; and it eliminates any future or start-up companies and investment in that market. Thus, competition and the threat of competition are close to none. We now see that government is truly the enemy—not the oft-viewed, and mistakenly confused, supporter—of the start-up entrepreneur, i.e., the “little guy.”

In a PPP, while revenues are guaranteed for the length of the partnership agreement, stability is only limited to the length of the current administration, i.e., to the trust placed in government to keep its agreements and promises. Ironically, by the very act of creating a public-private partnership in an industry, and eliminating or decreasing competition, government reduces that credibility, and other industries are at risk of similar partnership arrangements.

What is left of capitalism in the United States will be uprooted and supplanted with corporatism; any remnants of a free market will have to yield to the coercive measures of government, resulting in monopolies and cartels.

PPPs as a Justification for Bigger Government

When government is able to partner with a private company and grant access to land, labor, or capital that would not have occurred absent government intervention, everyone’s property is exposed to the risk of government takeover. A private company may not be able to construct a highway through the private property of others. Government, through powers of eminent domain, is able to seize private property from individuals and construct nearly anything it desires. In other words, government is able to not only extract money from private individuals (taxes) but also to take away their (more tangible) private property.

In addition, public-private partnerships, because of the word “private,” are often viewed as more legitimate, and with less hostility, than solely the term “public.” Thus PPPs may expand and multiply without real justification, and with little hostility. The (already flawed and misunderstood) meaning of “public goods” then expands beyond the initial neoclassical interpretation to mean anything that could be deemed good for the public.

Murray Rothbard explains how government’s violent intervention in one part of the economy results in “calculational chaos,” which inevitably spreads to other parts:

[E]ach governmental firm introduces its own island of chaos into the economy; there is no need to wait for socialism for chaos to begin its work. No government enterprise can ever determine prices or costs or allocate factors or funds in a rational, welfare-maximizing manner.

Rothbard states that government cannot be run on a “business basis”:

[A]ny government operation injects a point of chaos into the economy; and since all markets are interconnected in the economy, every governmental activity disrupts and distorts pricing, the allocation of factors, consumption/investment ratios, etc. Every government enterprise not only lowers the social utilities of the consumers by forcing the allocation of funds to ends other than those desired by the public; it also lowers the utility of everyone (including, perhaps, the utilities of government officials) by distorting the market and spreading calculational chaos. The greater the extent of government ownership, of course, the more pronounced will this impact become.

Thus, the greater the extent of government ownership, the larger the amount of calculational chaos, and the closer we move toward socialism.

Conclusion: The Power of Ideas

In 1942, Joseph Schumpeter wrote that capitalism would be threatened and condemned by intellectuals, not for its failures, but its successes—and that socialism was inevitable. It seems the public desires the move toward socialism. There are more and more clamors for government intervention in nearly every aspect of an individual’s diurnal activities—and as H.L. Mencken said, “Democracy is the theory that the common people know what they want and deserve to get it good and hard.” Government propaganda is required to promote such a foolish message. Mises phrased it accurately: “Truth does not need any propaganda; it holds its own.”

The danger in public-private partnerships and their promotion by both government bureaucrats and private businesspersons was perhaps best expressed by Rothbard:

What’s needed is a corporate spokesman [and government bureaucrat] who embraces the government-business partnership with enthusiasm and joy. … When such a champion emerges, Mr. and Ms. America, keep a sharp eye on your wallets—you are about to be fleeced.

Nevertheless, there is hope. We live in a world of ideas, where the QWERTY keyboard is truly mightier than the latest military contraption. The rapidity and magnitude of government failure, and the more it is exposed and can be replaced with the idea of free markets—and with greater communications technology than at any other time in history, ideas can spread faster than ever—the faster will be the shift toward free markets, and most likely toward a level of prosperity never before experienced. Obama’s public-private partnerships would become extinct and despised, being recognized for what they are: back-door socialism, making a mockery of true partnerships and freedom. Entrepreneurship and innovation would be free to flourish in such an environment.
 
 

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Going the way of France (1790)

Daily Article by | Posted on 12/11/2008

French assignat, 1795First printed in 1896 and as unfortunately pertinent today as it was then, Dr. Andrew Dickson White’s Fiat Money Inflation in France chronicles the national suicide of an imposing empire that choked to death on one of mankind’s more foolish delusions — the stubborn belief that money does grow on trees. Dr. White’s style makes the book an easy read, even during the frightening parts that sound as if lifted directly from today’s newspapers.

Weighing in at a light sixty-eight pages, the book nonetheless packs a wallop. It is well-researched and — most surprising for a history book — full of laugh-out-loud moments. One-hundred-plus years have done nothing to diminish the effect of Dr. White’s prose.[1] Only in the author’s method of referring to the numbers involved — numbers that then seemed so fantastic yet are commonplace today — does the book show any signs of dating. This leads you to read, for example, “twenty eight hundred millions” instead of $2.8 billion — billions likely being beyond the thought process of the people of his time.

Not beyond ours, though; we’re up to a trillion.

File Under “Idea, Not a Good One”

The issue of paper will show that gold is not necessary.

–Mirabeau, French politician (1790)

Wisdom comes and goes; lessons are learned hard then hardly remembered. Mankind’s endless stupidity on the subject of paper money surely ranks up there in the realm of the sublime. We are forever like Charlie Brown, trying and trying to kick Lucy’s football. Generation follows generation, each refusing to learn one of life’s more important lessons — nobody must be allowed license to counterfeit. Fiat Money Inflation in France uses as its lesson plan the tragedy of France in the 1790s and Dr. White moves the tale along at a steady clip.

His prose is pointed but polite, and makes no bones about giving credit where credit is due. On the plus side of the ledger, he notes that France was not plunged into a decade-long economic pit by wild-eyed fools, but rather by calm, well-educated ones. The smartest guys in the room whose ideas brought about the tragedy “were universally recognized as among the most skillful and honest financiers in Europe” (p. 47).

Because France in 1789 was in an economic downturn, the idea that the difficulties were due to a lack of money — and that more of it would be nice — caught the imagination of many people. France boasted its own Bernankes, Paulsons, and Greenspans, and when not misthinking, they were off making the rounds of Parisian salons, talking peoples’ ears off about how fiat money, despite its disastrous history, could work if only done better — and better is what they intended.

Fiat money, declared the experts, was a means of “securing resources without paying interest” (p. 2). The idea promised that from nothing there would be something — or, as Keynes would later put it, from stone there shall be bread. Nobody was thinking this one through.

Soon the doctrine wormed into the ears of the French politicians who, upon having it explained to them that the plan called for them to print money whenever they wanted, were quickly convinced the whole thing was a splendid idea.

France in 1790 was on a gold standard, with the livre being the unit of measure, but the government would now issue paper money, too. It was to be backed not by gold but by church land stolen specifically for the purpose, and under the authority of The Will of the People. While France had just experienced a harsh lesson in paper money not too long before the coming madness — with John Law’s 1720 paper-money schemes — members of the French central government insisted that John Law’s paper notes did in fact bring prosperity, “and the ruin they caused resulted from their over-issue, and that such an over-issue is possible only under a despotism” (p. 4).

We don’t live under a despotism!” everyone agreed, and promptly voted to issue $400 million livres’ worth of paper money, backed by the stolen church land and paying interest to the holder at three percent annually. Not five months later, $800 million more were printed, the notes not bearing any interest at all. With the currency now nice and elastic (before it all collapsed in 1796), the French politicians were madly printing money in secret, running the printing-press workers at a very un-French-like fourteen hours per day.[2] In less than six years, the French politicians printed over $45 billion in irredeemable paper — and that was when $45 billion was a lot of money.

It is where Dr. White outlines the effects of all this inflation on France that the book reads like today’s paper. Prices rose as the value of the currency endlessly fell; savings dwindled while debt loads rose; a spirit of gambling took hold, and bribery flourished. I just Googled those terms plus “America,” and we’re four for four.

Dr. White created the book from a series of lectures given during his time at Cornell University and the University of Michigan. Judging by how the book reads, he must have been quite the speaker. Describing Mirabeau’s impassioned 1790 speech in support of paper, he writes of its oratorical beauty, of how it was frequently interrupted by applause, yet how listening to the opinion of a man who never studied the subject he’s yammering about (Mirabeau knew nothing of economics) “was like summoning a prize fighter to mend a watch” (p. 18).

And that went for the rest of the French Assembly, too, bursting with plans to “fix” the economy but full of “men who had never shown any ability to make or increase fortunes for themselves (yet) abounded in brilliant plans for creating and increasing wealth for the country at large” (p. 17). They soon would fall back to the politician’s more natural road to wealth, as their newly found power to dispense endlessly available money made them obvious candidates to bribe for legislative favors. Dr. White tries to see the bright side by writing “it is some comfort to know that nearly all concerned were guillotined for it” (p. 30).

What is best about the book is that it is, at its base, a plea for the poor — an appeal to grant them the protection afforded by gold. Dr. White shows a progressive mind in his concern for the less fortunate, always the ultimate victim of inflation, which “creates on the ruins of the prosperity of all men of meager means a class of debauched speculators, the most injurious class that a nation can harbor” (p. 5).

Don’t we know it.

No, Virginia, Money Does Not Grow On Trees

On whom did this vast depreciation mainly fall at last? Men of small means.

–Andrew Dickson White (1896)

Using the French monetary collapse of 1796 as a lesson to teach a greater point — to warn against fiat currency — the book is unabashedly supportive of a gold standard. At the time of its publication in 1896 this position was not only respected; it was mainstream — proponents of paper money were the kooks. Now the shoe is firmly on the other foot: polite people do not talk about a gold standard. Maybe they should start.

The purpose of a gold standard — what makes it so indispensable to a system of economic justice — is that it takes the power to create money and credit at will out of the politicians’ hands — in fact, out of anyone’s hands. No man, no matter how virtuous and saintly, can long resist the call of the money machine; and the political world, where virtue and saints are always in meager supply, is a particularly dangerous place for it to reside.

The removal of the gold standard from our lives, Robert Samuelson recently noted, has “created an entirely new situation…inflation would no longer control itself.” With Nixon’s repudiation of the US dollar’s remaining link to gold in 1971, we’ve all taken a time machine back to 1790s France, and so far it’s been a less-than-excellent adventure.[3]

We have substituted for the steady, disinterested hand of gold the arbitrary, rapacious vagaries of the politician; yet we wonder why prices do nothing but float upward, year after year, until grandma is eating cat food. Whenever and wherever paper money has been introduced, from France in the 1790s to America in 2008, a steadily debased currency and a steadily debased economy have followed, as “there is a natural law of rapidly increasing emissions and depreciation” (p. 21).

Inflation as a deliberate policy is fit for nobody but street junkies; it is a method of short-term, artificial pleasure at the certain cost of long-term pain. But “long term” is a misleading, soothing term meant to calm nerves. The “long term” always inevitably morphs into “right now,” and towards the foolish he’s a vicious bastard. A glance at America’s money-supply growth since 1971 — and since the Federal Reserve’s creation in 1913, for that matter — gives notice that many have been fools.

The French of the late 1790s, like so many people in so many times, believed in “the doctrine that all currency…derives its efficiency from the stamp it bears” (p. 22), and therefore we can print as much of that currency as we please. Dr. White identifies that flawed doctrine as the root cause of the disaster.

In France during 1790 to 1796 the economic dislocations gained steam as the currency dove towards zero, leading politicians to pass a desperate intervention, followed in time by another even more desperate; and soon Marat, one of the most powerful men in French politics, was openly calling for the people to murder the shopkeepers and plunder their inventory. (That was his economic stimulus package.) The price inflation rent the fabric of French civilization; just the attempt alone to enforce price controls had the guillotines chopping steadily.

As much as the French of the 1790s, we too wished to be “delivered by this grand means from all uncertainty and from all ruinous results of the credit system” (p. 8), and now, also like the 1790s French, we have discovered that where “commerce was dead; betting took its place” (p. 27). We too sat at dinner parties and prattled on about how our hedge fund — the one we told you all to invest in — is up 46% year to date; and now we find ourselves staring at an empty 401(k) with the same dumbfounded “what happened?” look on our face.

What is amazing about America circa 2008 is not the citizens’ money illusion — history has seen that aplenty — but the utter lack of resistance to it. From near to far, from MTV to CNBC to cocktail parties, the doctrine of fiat money is so pervasive that the thought of life without it is beyond our comprehension. Maybe it shouldn’t be.

Niall Ferguson recently asked why the West was so “blinded by money illusion.” He asks the question as if we’re over the illusion, as if we now see paper money for what it is. We don’t. We, like the French of 1795, still blame “every cause except the right one” for our troubles.

On a Paris morning in February 1796, with great melancholy all the apparatus for printing paper money was “solemnly broken and burned” in that city’s Place Vendome (p. 53). It took the French six years to figure it out; it’s taken us 37 and counting.

Dr. White’s excellent book can move us a step closer to “solemnly” breaking and burning the root of our problem. Even if it doesn’t, Fiat Money Inflation in France is still a great read.

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Notes

[1] Case in point: “All that saved thousands of laborers in France from starvation was that they were drafted off into the army and sent to be killed on foreign battlefields.”

[2] Being French, they of course went on strike.

[3] My mother-in-law now lives with me. Her savings have been depleted by the dollar’s steady debasement. Thank you, Mr. Greenspan. You’re the best.

 

De-gifting

Written by Tony Woodlief

We were commiserating with friends about the exigencies of Christmas gift buying, and one, the most logical thinker in the bunch, got right to the crux of the problem: “What is our motivation for buying gifts?”

Some of us are trapped in a gift-giving cycle with relatives or friends, and if we would stop now it would be tantamount to a slap in the face. In some cases, certain relatives have an entitlement mentality; they have no spouses or children to buy for them, and so tentative proposals for ending the gift exchanges are met with complaints about how bare the spaces under their trees will be.

The irony, I observed, is that often the people with whom we are close enough to know what to get them are the people we aren’t buying for. The relatives we are obligated to buy for, meanwhile, don’t have much at all in common with us, and hence are much harder to intuit how to please. Too often, I lamented, we buy out of obligation—a complaint probably shared by more than a few people buying gifts for us.

And yet the suggestion of a truce is often met with reluctance, irritation, even anger. So we spend too much of our Christmas worrying over what to get whom, and fretting over our card list, and forking over cash, and slowly developing the feeling that life will be more peaceful once Christmas has passed.

I’d like to move to a custom under which we buy a few gifts for our children and spouses, as well as close friends, and nothing beyond that, except—most importantly—a generous increase in charity. How do we get there? I suspect the only feasible route is to simply do it unilaterally, regardless of the ill feelings it generates. But maybe if enough of us make the leap all at once, it will be a cultural shift, and not just another example—and trust me, there are plenty—of me insulting family members and acquaintances.

So who’s with me?

 
 
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