What is the Real Crisis–J. P. Morgan or Government Spending?

by Burt on May 16, 2012

Is the loss of $2 billion in a business deal by J. P. Morgan a crisis? According to Law Professor Jonathan Macey, “The truth is that nobody should care about J.P. Morgan’s loss–nobody except J.P. Morgan stockholders and a few top executives. . . .” Macey is right. No laws were broken. Companies take risks, and sometimes they lose. Their stock goes down, and shareholders sometimes vote in new management. J.P. Morgan has over $127 billion in equity, and they may even score a profit at the end of the quarter. End of story.

But some politicians want to use the Morgan investment “crisis” to pass more laws and regulations–just as they did when they passed the Dodd-Frank law that has hamstrung banks recently.

In the book Crisis and Leviathan, economist Robert Higgs noted that politicians often use crises to expand the power of government. For example, World War I became the opportunity for progressives to pass prohibition right after the war. All grain, the argument went, should be used to feed troops, not turned into liquor. Then the Great Depression spawned a batch of bad laws: Minimum Wage laws, for example, have increased unemployment among black youths by making their labor unaffordable to many employers. Economist Milton Friedman noted that black unemployment often goes up after a hike in the minimum wage. After the Great Depression, the crisis of World War II was the excuse FDR needed to institute a high income tax and the monthly withholding of income–both as a crisis war measure, but they persisted long after the war ended. The crisis was an excuse for FDR to enlarge government–and secure a steady source of revenue to spend.

In the case of the J.P. Morgan investment, we don’t even have a real crisis, just Barney Frank and others pleading for us to tighten laws, or pass new ones. But then again, maybe we do have a real crisis. J.P. Morgan lost $2 billion, but during each day of the last four years the federal government has lost an average of $3 billion dollars–tacking $5,000,000,000,000 onto the national debt. Now that is a real calamity that actually does require new laws and changes in our habits! Even if our free-spending politicians promised to only lose each day the $2 billion J.P. Morgan lost, our national debt curve would improve.

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President Obama’s Personal Weakness

by Burt on May 14, 2012

What is President Obama’s biggest personal weakness? Is it his drug use in high school, as some commentators seemed to say last week? Or his lack of experience in politics, which others deplore?

Not at all. George Washington, Abraham Lincoln, and Dwight Eisenhower only had a combined two years political experience in Congress before becoming president. Less than Obama. And Obama’s misspent youth is part of a larger narrative of success and overcoming the obstacles of a broken family and a weak early education. He rose above this to achieve academic honor at Harvard Law School–a marvelous American success story. For that he should be praised.

No, the president’s biggest personal weakness is his lack of experience in business. He understands law and has even taught law courses, but he doesn’t like business and doesn’t have many businessmen around him. He therefore has trouble grasping incentives and what incentives can do to motivate behavior. When the president proposes high taxes for rich entrepreneurs, he doesn’t really believe that will stop them from trying to sell stuff. Because the president never had to meet a payroll in his formative years, he doesn’t seem to grasp the central place of business in American life.

Entrepreneurs, for example, sell a product at a profit that people want to buy, and that series of transactions is a job-creator. The great entrepreneurs, from Henry Ford to Bill Gates, became true “public servants” in that they gave people what they wanted (before they even knew they wanted it) at cheap prices. One hundred years ago. Henry Ford put Americans in cheap but sturdy Model Ts, and they made him a billionaire–and then made the auto industry the biggest growth industry in the world. Millions of Americans had jobs because people wanted to drive cars. And Ford raised the wages of his workers to almost twice the wages of other industrial workers in the U.S. A good work force, Ford argued, would add value to his company, so he added extra pay to their wages. Bill Gates followed in Ford’s footsteps at Microsoft, and Steve Jobs did it again at Apple. These men played a huge role in making the U.S. a prosperous nation.

FDR, like President Obama, had no real experience or sympathy with business, and thus was a disaster in the White House during the Great Depression. He started with increases in the income tax (ultimately to 94% at the top level). Then came increases in the death tax, corporate taxes, and in taxes on cars and gasoline. Car sales went from almost five million in 1929 to only a little over one million in 1933–and FDR would not give businessmen the incentives to start or expand companies to get people back to work. When the secretary of treasury urged FDR to please let entrepreneurs keep more profits from the capital they were investing, the president emphatically said “No,” and the Great Depression persisted.

Empathy is trying to understand how others feel. All Americans should empathize with President Obama in overcoming the obstacles of his challenging childhood to achieve success as a lawyer, a politician, and as a husband and father. That’s great. But it would also be nice if President Obama empathized with those Americans who want to create jobs by starting new businesses, but don’t dare take the risk because of the many uncertainties and hindrances he has introduced to them during the last four years.

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Let’s Have a Real Debate

by Burt on May 11, 2012

During the last week, we have seen the president support three political positions: gay marriage, a raise in the minimum wage, and a cut in the interest rate on loans to college students. These issues have one thing in common: The president’s supporters claim that those who oppose gay marriage, oppose a high minimum wage, and oppose the lowering of interest rates on college student loans must really hate gays, hate the poor, and oppose education. If you don’t favor President Obama’s programs, you hate the groups targeted by the programs. Thus, we have no serious debate on the merits of either side of these issues, and that is unhealthy.

Those conservatives who oppose gay marriage, for example, often favor other legal protections for gays. These conservatives point out, however, that polygamists and the man-boy advocates are anxious to promote their causes if the gays succeed in redefining marriage. Thus, redefining marriage could pose many problems that need a public debate, not a blanket condemnation.

Likewise, those who oppose a high minimum wage are often thinking of the interests of the poor. If employers lay off workers–because their wages are raised beyond the point where the workers add value–then society loses because it has a higher unemployment rate. In fact, that seems to have happened with the first national minimum wage in 1938–unemployment spiked in 1939. But hey, let’s have a helpful public debate, and discuss all the historical evidence.

Finally, those who want college students to pay less in loans are, in effect, asking non-college students to pick up some of the tab instead. And making college loans more attractive is enticing many students to pile on more debt during college that will be a millstone around their necks after graduation. Is that the right thing to do? Let’s debate it rather than issuing sound bites denouncing those who oppose it as “anti-education.” They are not.

Politicians always try to demonize opponents, but until recently it has usually failed because our free press asks presidential candidates the tough questions that force a real debate to take place. With FDR, for example, he charmed the press, but reporters still asked him tough questions in 1937 when he proposed packing the Supreme Court with six extra justices. The bill failed, and the country was the winner when that happened. With President Obama, however, the mainstream press so far has not asked the president–or his supporters–the tough questions that force a public debate on complicated issues. The November election is very important–let’s hope reporters begin asking both sides the tough questions that yield facts that voters can use to make informed choices. Maybe those who oppose this are the ones who are “anti-education.”

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Learning from History What Made the U.S. Prosperous

by Burt on May 9, 2012

One of the big problems in studying history is having to unlearn so much of what you are taught in school today. Let’s look at the way history is taught when studying FDR’s New Deal during the 1930s and 1940s, and when studying the Gilded Age, the generation after the Civil War, dating roughly from 1865 to 1900.

The New Deal is almost always presented in history books as a great reform era–lots of new programs. But what the texts omit is that most of these programs were disasters–they increased unemployment, and FDR used them mainly to win votes of special interest groups. The national debt doubled during FDR’s first two terms and then increased nearly another sixfold before he died. The national suicide rate rose during the 1930s, divorces increased, and murders were higher in the 1930s than in the decades before or after. What’s more, FDR’s first two terms were the only period of the 20th century where life expectancy did not increase in the U.S. Yes, we tried to experiment with big government, but increasing government increased taxes and class warfare, not our national standard of living.

The Gilded Age, by contrast, is often distorted in the textbooks as a period of robber barons and greed. Sure, there were unsavory characters, then as now, but many of those men did their mischief with cash from Uncle Sam. The Union Pacific corrupted the railroad business with its federal aid; and Samuel Langley drove two federally subsidized airplanes into the water before the Wright Brothers finally flew airplanes successfully (with no federal aid). During the Gilded Age, as Milton Friedman famously said, there was “no FCC, no SEC, and you pick out any other three letters of the alphabet and it wasn’t there either.” Annual spending by the federal government was only about 3% of GDP, and Americans used their freedom to invent many products like barbed wire and to discover 300 products to be made from the lowly peanut. We had medical breakthroughs with the germ theory of disease, and entrepreneurs funded the science that led to cures for hookworm. Entrepreneurs also started libraries all over the nation and funded missionaries to preach Christianity in China, Africa, and other places around the world. The U.S. became a great industrial power during the Gilded Age; millions of immigrants flocked to New York City. American oil and steel dominated the world. A free people showed the world how freedom could improve lives across the globe.

What we can learn from history is that the Gilded Age gave the U.S. a recipe for greatness, and the New Deal almost poisoned that legacy of achievement 50 years later. Today, will we seek again the freedom of the late 1800s, or the false security of the federal programs of the 1930s?

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Why Would Anyone Foment Class Warfare?

by Burt on May 3, 2012

It is very puzzling. The rich, in order to get rich, had to sell us stuff we all wanted. Bill Gates, the wealthiest man in the U.S., is estimated to have created 10,000 millionaires from those who worked with him or invested heavily in Microsoft. Steve Jobs at Apple may have rivaled that figure. Their rising tide lifted a lot of boats and also gave us affordable computers and iPhones, which have transformed the way we live and do business.

But what about taxes? Shouldn’t these millionaires pay more to the government? Not unless you have a warped sense of fairness. The top 1% of earners currently pays almost 40% of all revenue to the the U.S. government from income taxes; the bottom 50% of earners pays about 2% of all revenue received by the government. The current U.S. corporate tax is now the highest in the world and the income tax, at a 35% rate on top earners, may already be so high that we are chasing future Bill Gates and Steve Jobs out of the country to tinker on their inventions elsewhere.

During prosperous times, some people complain, the rich seem to get way too rich. During the Reagan prosperity of the 1980s, for example, the top 20% of wealth earners grew their wealth by 20% (adjusted for inflation), but the poorest 20% of wealth earners only increased their wages by 5%. Two points here. First, the rich people were the ones who usually took the risks; they deserved the greater gains. Second, even the poorest 20% in the 1980s, with their paltry 5% increase, did better than any group of earners during the 1970s. According to Arthur Laffer and Stephen Moore, from 1973 to 1981, the bottom 20% of wage earners lost 5% of their income (adjusted for inflation). In other words, poor people lost income during the 1970s, and gained 5% in the 1980s. During the 1980s, the rising tide of computers, fax machines, cell phones, microwaves, and walkman radios made jobs better for the poor, and gave all of us new products to make our lives easier.

Perhaps Franklin Roosevelt, the greatest class warrior in U.S. history, can give us insight into why someone would pit one group of Americans against another. In 1937, to attack the rich, he goaded Congress into establishing the Joint Committee on Tax Evasion and Avoidance. He wanted to nail rich people who were sheltering income from the government. When Senator Pat Harrison (D-Miss.) and Congressman Robert Doughton (D-N.C.) asked him why he was doing this, FDR responded that this new committee would bring the Democrats “at least 10,000,000 [votes].” FDR’s explanation is illuminating. Class warfare doesn’t bring prosperity, but may bring 10,000,000 votes. And in the minds of some, that makes class warfare worth doing.

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Why Would Anyone Imitate FDR?

by Burt May 1, 2012

To many observers, the presidency of FDR was a disaster. He had double-digit unemployment throughout the 1930s, and he doubled the size of the national debt in his first two terms. The League of Nations rated the U.S. recovery as one of the worst in the world. Economic stagnation was a cloud over the entire [...]

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Do the Rich Really Get Richer and the Poor Get Poorer?

by Burt April 26, 2012

We are hearing more rhetoric of “class warfare” this year than in any presidential campaign in recent memory. But “soak the rich” proposals have been part of U.S. history ever since President Woodrow Wilson fought to raise the top marginal rate on rich people to 77% in 1918. Yes, these progressive politicians sometimes succeed for [...]

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Two Presidents with Character

by Burt April 23, 2012

Politics often has its scandals–and as the federal government has grown since the 1930s, the scandals have increased. As Willie Sutton might have said, some exploit corruption in Washington because that is where the money is. If we returned many federal functions to the states, or to private enterprise, that would drain money out of [...]

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Eleven Words to Think About

by Burt April 19, 2012

“Are you better off today than you were four years ago?” That was the campaign mantra of Ronald Reagan when he ran for president against Jimmy Carter in 1980; and then again when Reagan ran for re-election in 1984. President Reagan believed that comparison was important in deciding whether his presidency had succeeded or failed. [...]

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The Senate Buffets the Buffett Rule

by Burt April 17, 2012

Hooray! On Monday night the Senate defeated the Buffett Rule by a vote of 51-45. No special tax on millionaires this time around, and that’s good news to help bolster the anemic economic recovery in the U.S. What has happened in the past when the U.S. launched special taxes against rich people? Answer: It didn’t [...]

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