Confederate Flag Hysteria

So the Stars and Bars is coming down from the South Carolina statehouse to the accompaniment of whooping and hollering by breast-beating politicians. If you have the stomach, you can watch some of it here. Now, sure as clockwork, politicians are tripping all over each other to get on the bandwagon. Flags are coming down all throughout the South. You can no longer buy them on Amazon or at Walmart, although at this writing they’re still seen on eBay. Statues of Confederate heroes are in danger of being ground up for use as concrete aggregate.

What’s the meaning of the Confederate flag, anyway? It depends whom you ask. It means nothing to me. To some white Southerners, it’s a reminder of their brave forbears’ fight for their honor. To many blacks, perhaps most, it’s a symbol of hate. Who’s right? All of the above; none of the above—it’s whatever you want to make of it. What’s disturbing is the widespread ignorance of what the Civil War was about. It was about secession, first and foremost, and only secondarily about slavery. Lincoln freed the slaves as a tactical matter, and only in the re-conquered Southern states, and not until two years into the war. Before the war he made it quite clear that his goal was to preserve the union, and if freeing the slaves would further that goal, he would free them, and if not, not.

It is the height of oversimplification to cast the rebels as bad guys and the yankees as good guys. There were many acts of kindness between whites and blacks on both sides of the line and of course, many atrocities on both sides. This doesn’t justify slavery the least little bit. But the war was the wrong way to end it. If the South had been allowed to go its way, 600,000 lives plus uncounted misery and destruction would have been averted. Slavery would not have lasted much longer in the South for economic and moral reasons. One economic reason is that the best slaves would have escaped to the North where they would no longer fear being deported. The gradual mechanization of farms is another. On the moral front, although ideas moved more slowly in those days, thoughtful Southerners would gradually come to see slavery as abominable and indefensible. (Highly recommended: Jeff Hummel’s groundbreaking revisionist treatment of the war, “Freeing the Slaves, Enslaving Free Men.”)

I take their word for it that blacks see the flag as a symbol of oppression. Given that, I would have to agree with the action in South Carolina notwithstanding the insult to Southern pride. But I’m not so naïve as to believe race relations will improve as a result. In fact, I fear they’ll get worse. If the flag wasn’t a symbol of racial animosity before, it is now. Positions will be hardened. White Southern conservatives, having recently taken a beating on gay marriage, will be further marginalized and polarized. The “progressives,” having smelled blood, will be on the warpath (oops—is that word racially insensitive?). They’ll be out on search-and-destroy missions, hunting down vestiges of Southernism.

My humble suggestion: let’s not get so worked up about symbols, whether they’re flags, crosses, Mohammed cartoons, or even the dollar sign on the last page of Atlas Shrugged.

Warren Harding’s Fiscal Cliff

The economy is in rough shape right now but suppose it were even worse: unemployment at 12% rather than 8%; GDP falling at a 17% annual rate rather than rising slowly.  A close advisor to the President counsels an array of interventions to stimulate the economy but is ignored.  Instead, the President cuts Federal spending in half and engineers drastic reductions in income  tax rates for all groups.  Meanwhile the Federal Reserve, rather than cranking up the printing presses for a round of monetary stimulus, snoozes through the whole year.

Now there’s a fiscal cliff for you.  If today’s thinking about the fiscal cliff of Jan. 1, 2013 held true, surely such policies would tank the economy big-time.

The foregoing scenario actually happened.  The year was 1920, the President was Warren G. Harding and his close advisor was none other than Herbert Hoover, who as President from 1929 to 1933 would have his way – raising taxes, jawboning wages, and slapping a killer tariff on the economy, thereby doing a great deal to turn the rather mild downturn of 1929-30 into the Great Depression which, with lots of help from Franklin Roosevelt, would plague the nation for another decade.

So what happened in Harding’s time?  Things were pretty rough for a while but by the summer of 1921, signs of recovery were already visible.  The following year, unemployment was back down to 6.7% and hit 2.4% by 1923 (source: Thomas Woods, “The Forgotten Depression of 1920″).  A budget surplus arose resulting in a noticeable decline in the national debt.  Business confidence soared and the 1920’s boom was off and running.

President Harding has gotten a bad rap from history because of the scandals that erupted during his administration as well as his chronic womanizing and his passion for the bottle.  But in the countdown of 20th century Presidents that I might do for this blog should I ever get ambitious, I will start with Harding as the least bad President of that sad century and work my way down from there.  I’ll let you  guess who I will honor as the Worst President of the Century.

How does the looming fiscal cliff compare with the policies of 1920?  In case you’ve been hiding under a rock lately (not a bad way to ride out the election campaign!), the fiscal cliff is the set of automatic tax increases and spending cuts that were agreed to when the debt ceiling was raised in 2011.  Congress decided to force its future self to act by lighting a time bomb that it would surely – surely! – defuse before it could go off.  The fuse has now burned to within 1/8 inch of the bomb.

The bomb’s tax increases and spending cuts would reduce the deficit by an estimated $600 billion in one year.  That may be the most accurate estimate but it’s only an estimate.  Congress can set tax rates but tax revenues depend on the size of the tax base.  If highly productive people, those who would take the biggest hit, decide to Go Galt, the tax base could shrink.  And as Jeff Hummel likes to point out, tax rates, particularly the top marginal rates, have varied drastically over the years and yet tax receipts have not varied much from 20% of GDP, excepting the World War II years.

Not only might tax receipts fall short, but expenditures could rise if additional welfare payments such as unemployment benefits or food stamps were to rise.

But let’s assume the fiscal cliff happens and the deficit is indeed reduced by $600 billion. Using figures for the fiscal year just ended, we would still have a $400 billion deficit which would have to be financed by borrowing.  As always, this would be new borrowing, on top of the borrowing needed to roll over the daily stream of maturing debt.  And we mustn’t forget the Social Security Trust Fund which until last year has mitigated the deficit by “investing” its surpluses (FICA tax revenues minus benefit payments) in Treasury securities.  Those FICA surpluses have now turned to deficits which for the present are offset by interest payments on Trust Fund holdings but will eventually require the Trust Fund to stop rolling over maturing securities and, should the trend continue, to deplete its holdings entirely.  All of these developments exacerbate the main federal deficit.  The same applies to the much smaller Medicare Trust Fund.

So I say, with a glance over my shoulder at 1920, bring on the fiscal cliff!  Let the cuts happen, thereby ending a lot of wasteful and harmful spending – particularly “defense” spending.  Let tax rates rise; people will work around them.

But it won’t happen because too many special interests will rise up to prevent it:

  • There are enough military personnel, military contractors, their suppliers, relatives and hangers-on to prevent significant cuts in defense spending.
  • The 27% cut in Medicare physician fees will lead doctors to brush away their Medicare patients like flies, sending those patients hobbling off to howl at their their Congressmen.
  • Millions of middle class people will gasp when their tax preparer tells them they’ve been caught in the dreaded Alternative Minimum Tax trap.  Others will escape the trap only to find that their ordinary income tax rates have risen substantially.
  • Still more millions will see their FICA (Social Security) tax rate revert to the 2010 rate of 6.2% from the current 4.2% “stimulus” figure.

The fiscal cliff won’t happen, at least not all of it, except perhaps for a brief period in January which will be fixed retroactively.  And so, though I hate to say it, I think the longer-term odds of pulling out of our fiscal death spiral are pretty slim.  Many think the government will resort to the time-honored remedy of the printing press, but Jeff Hummel has made a solid argument as to why this option won’t work and why there will be a default on Treasury securities instead.

Hummel also urges economists to do whatever they can to warn people not to count on government largess.  Most young people have written off Social Security for their future and that’s a good thing.  (Not so good for Social Security recipients like me who are increasingly unemployable yet hope to live another 25 years.)  We must take responsibility for our own health care, first by watching our health habits and second by cultivating a personal relationship with a physician, perhaps offering him or her cash payments.  We should be leery of Treasury Securities or of banks, mutual funds, etc. that rely heavily on these securities.  Sock away a few gold and silver coins.

We’re in for a rough ride, I fear, over the next few years.  But the sun will still rise and tangible assets will remain.  Provided enough of us have taken precautions, social unrest will be manageable and maybe, just maybe, the cancer that is called Social Democracy will be shaken off once and for all.

Obama: Any Silver Lining?

So it’s four more years of Obama.  What can we expect?

Obama makes me, a libertarian these last 40 years, nostalgic for the sort of “liberals” who until recently dominated the Democratic Party.  At least those folks have some respect for facts and tolerance for other points of view.  Obama is different.  I know longer think it an exaggeration to say that Obama hates America, as Rev. Wright preached to him for twenty years.  I have a new understanding of Obama thanks to Dinesh d’Souza’s book “Obama’s America.” Barack Obama had an epiphany at the grave of his father, a man who was a leader among the anti-colonialists of Kenya.  The man was a no-good drunkard who deserted and abused more than one wife and child, yet Barack was able to put aside these faults and hitch his star to his father’s cause. His first term in office gave us numerous actions that exemplify his quest to bring America down.  He likes to stir up class hatred.  His tax proposals are all about fairness, as defined by him, of course, and never mind the ensuing economic damage.  That they punish the most productive among us is all to the good; that they damage all of us in the long run doesn’t matter. He has seized control of health care.  He has acquiesced in a brutal war on medical marijuana patients, waged by his Northern California District Attorney and others.  He has ordered assassination of U.S. citizens and condoned domestic spying.  The CIA continues its massacre of civilians in Pakistan, a supposed ally.  All of this would make a high-class liberal like Adlai Stevenson gasp with horror.

Thank God we still have a Republican House and a Senate where they can filibuster.  Gridlock will probably prevent any new atrocities of the scale of Obamacare.  But the door remains open for a great deal of evil-doing.

First off, there will be at least three Supreme Court appointments in the next four years.  It’s a sure bet that Obama will appoint “social justice” types, the sort who have no concept of the Constitution as a document intended to limit the powers of government.  These are life appointments so the new appointees could be wreaking havoc long after Obama is gone.

Second, the President has a great deal of latitude in foreign affairs. Just look at the damage George Bush inflicted on the world with his senseless wars in terms of casualties, hatred of America, and insolvency.  But there is a ray of hope here.  The warmongering neo-cons are on the sidelines and Obama’s ineptness in foreign affairs may spare us some future dustup that Romney might have provoked.

This isn’t the silver lining I had in mind, however.  I present here, with misgivings, a viewpoint suggested by my colleague Jeff Hummel. He likes Obama’s victory because he thinks it will hasten our Götterdämmerung – the collapse of Social Security and Medicare and default on Federal debt.  Out of the ashes will come a new order in which Social Democracy has been rooted out of the polity, as the paroxysm that was the Civil War put an end to slavery.  This is a viewpoint with which I have a great deal of sympathy while continuing to hope for some sort of “soft landing” instead.

Social Democracy is the idea that individual choices of all sorts must be decided by voting and enforced by the government, the agency of compulsion and coercion as Mises called it.  I wouldn’t contest the proposition that Social Democracy is a cancer on our society that ranks with slavery in its banefulness. I dearly hope that a future upheaval might root it out but I’m not so sure.

I hasten to emphasize that I say “ashes” metaphorically.  We will survive the demise of the Federal government.  The sun will still rise and physical assets will remain in place.  The damage done to the social fabric will be lessened if people see the collapse coming.  That private individuals can and do step in when government collapses was illustrated on a small scale by a recent incident involving the California park system.  A list of parks scheduled for closure was published and it looked like private groups had raised enough money to keep at least some of them open. (Then some bureaucrat found $50 million lying around in the Parks Dept. and the private groups gave up in disgust.)

I confess to being a bit more conservative than Jeff Hummel.  I’m slightly older and may have more to lose as things get worse.  I continue to hope that libertarian ideas will continue to infiltrate the public discourse and that the respect for productive people that is still held by a substantial though declining segment of the population will rein in Obama and his hangers-on.

Glass-Steagall and Deregulation: What Went Wrong?

Nothing, really. Consortium members Warren Gibson and Jeffrey Rogers Hummel write in the Freeman on Glass-Steagall and what its repeal in the 1990’s meant for the economic crisis that began in 2008:

The timing of the repeal of Glass-Steagall makes this deregulatory move a convenient scapegoat for the financial crisis. But the crisis began with the housing collapse, a result of government encouragement of unsound lending practices. Financial firms took too much risk with mortgage-backed securities, in part because of moral hazard engendered by government guarantees and partly because bond rating firms were not as independent as was once thought. The limited liability that the investment banks gained when they became corporations may also have amplified moral hazard. There is no good reason to believe that Glass-Steagall, had it remained in effect, would have prevented any of these problems.

I highly recommend this piece. Lots of good history behind the law as well as a very clear explanation of the different types of banking services, what they do, and how they are created.

Around the Web: Consortium Edition

Co-editor Fred Foldvary points out that slavery is alive and well today.

Historian Michael Adamson compares the debacle in Iraq to South Vietnam rather than Germany or Japan.

Mark Brady gives us a well-written, brief biography of a little-known (and hence important) individual in the liberty movement.

Ninos Malek explains how property rights are the key to environmental conservation efforts.

Jeffrey Rogers Hummel takes on anthropologist David Graeber.

Links From Around the Consortium

Jacques Delacroix continues his vendetta against Ron Paul.

Dr. Ninos Malek points out the obvious in regards to guns and public schools

Fred Foldvary has a wonderful piece in the Progress Report on Turkey joining NAFTA

Brian Gothberg (with Gregory Christainsen) writes on property rights and whaling technology

Professor Jeffrey Rogers Hummel on Ben Bernanke versus Milton Friedman (pdf) in the Independent Review

Have a great weekend!

Links From Around the Consortium

Over at the Progress Report, Dr. Fred Foldvary writes on how we can extirpate poverty from the world.

Jacques Delacroix calls out Ron Paul’s statement about Iran being surrounded by the U.S. government.

Professor Jeffrey Rogers Hummel tackles the issue of slavery head-on in a Freeman article.

Brian Gothberg writes about the potential technology has to start protecting the ocean’s resources through property rights.

And our newest blogger, Dr. Ninos Malek, defends stereotyping (defending the undefendable is why I love being a libertarian!).

Links From Around the Consortium

Brian Gothberg’s piece on whaling and property rights deserves another look, as he channels Nobel laureate Ronald Coase:

According to a simple version of the Coase (1960) theorem, if the costs of transacting were very low, it would not much matter for the allocation of resources how stock rights were initially assigned. Trading ensures that rights would be put to their highest-valued uses, whatever they might be. If particular whales have more value as a source of pizza toppings than as the subject of a tourist?s photo session, whale-watching companies would be encouraged to sell any rights that they might have to whalers. If, on the other hand, particular whales have great value simply as magnificent creatures whose existence is to be nurtured and cherished, conservation groups would tend to end up with the rights to those whales.

Reality is not always simple, however. Transaction costs are sometimes high. In particular, there is a free-rider problem […]

Co-editor Fred Foldvary opines on how deregulation hurts the economy.  This is perhaps the best piece I have found on regulation and its effects on the economy at large.

I found this piece by Jeffrey Rogers Hummel on President Martin van Buren, whom he calls the ‘American Gladstone’.  If you’re itching for some historical information on one of the American republic’s little known presidents, I recommend you grab a cup of coffee and enjoy.

And, not to be outdone, Jacques Delacroix asks if the French have it better.  He is specifically referring to the debt-to-GDP ratios of France and the U.S.  The whole thing is good throughout, more so because Delacroix professes to hate the French.

Some Possible Consequences of a U.S. Government Default

My Econ Journal Watch article on Treasury default is now available online. It appears in a special issue that is devoted to various articles with differing perspectives on the probability and consequences of a U.S. government default.

Rainy Day

Here is a quick list of links around the web from our bloggers at the consortium:

Fred Foldvary weighs in on the 2011 Nobel Prize winners in Economics

Some Possible Consequences of a U.S. Government Default by Jeffrey Rogers Hummel

One of Jacques Delacroix’s famous short stories (and this co-editor’s personal favorite)

Brian Gothberg introduced me to Colossus: The Forbin Project at a summer seminar in 2009

I hope everybody stays dry out there!

Laundry Day!

Links from around the web by the consortium.

Brian Gothberg wants to save the whales.

In an oldie but goodie, Jeffrey Rogers Hummel writes about Federal Reserve accounting and insolvency.

Jacques Delacroix feels remorse for singing the praises of Newt Gingrich.

And Fred Foldvary gives his take on the Israel-Palestine mess.

Happy Friday, and enjoy your weekends!