Wednesday Links
- New research suggests that there has been more monetary and macroeconomic instability since the Federal Reserve’s inception than in the decades preceding it.
- New thinking about the usefulness of government programs will help us from restore fiscal balance and economic well-being in America.
- New geopolitical circumstances should make us wonder: why are we still a part of NATO?
- New Deal-era jurisprudence may soon be overturned as challenges to the Affordable Care Act reach the U.S. Supreme Court.
- New means of funding public roads will increase efficiency by confronting drivers with the costs of using them, and reducing congestion:
- Reminder: If you’re in the DC area, please join us this Friday at 4:00 p.m. Eastern for a special sneak preview of Free or Equal and Q&A with Cato senior fellow Johan Norberg.
Homeownership Before the New Deal
The latest canard offered for keeping taxpayers on the hook for mortgage risk is that, without such, homeownership would limited to the wealthy. Sarah Rosen Wartell of the Center for American Progress stated before the House Subcommittee on Capital Markets, “The high cost, limited availability, and high volatility of pre-New Deal mortgage finance meant that homeownership was effectively limited to the wealthy.” Congressman Al Green repeated the point. As I’ve generally found Sarah to be one of the more reasonable CAP employees, and that this is fundamentally an empirical question, I would have expected her to offer some evidence to support such a claim. Alas, she did not. So I will.
According to the US Census Bureau, at the turn of the century in 1900, the US homeownership rate was 46.5%. I’m pretty sure that even Sarah wouldn’t claim that close to half of US households in 1900 were “wealthy.” Interestingly enough, homeownership after the first 10 years of the New Deal was lower than before the New Deal.
While 46.5% is about 20 percentage points below the current rate, the population in 1900 was considerably younger, and one thing we do know is that homeownership is positively correlated with age. In 1900, 54% of the US population was under the age of 25, a reasonable cut-off for homeownership. Today, that number is 35%. I don’t think it would be a stretch to say the greatest driver behind the homeownership rate over the last 100 years has been the aging of the US population, probably followed by the increase in household incomes (homeownership and income are also closely correlated).
Hopefully this will put to rest the myth that FDR and the New Deal gave homeownership to the masses. The fact is that homeownership was fairly widespread long before the New Deal. I await the next myth from the Fannie Mae apologists. If they are wise, they will try one that isn’t so easily falsified.
Misunderstanding Inflation through the Years
NPR reports on rising food prices across the world. They may have played some role in the revolts in Tunisia and Egypt, and if so, those wouldn’t be the first revolutions sparked by inflation. NPR reporter Marilyn Geewax mentioned several reasons that food prices are rising — droughts, floods, oil prices, financial speculation – but not the obvious one: the continuing creation of unbacked money by central banks around the world. As Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon.” And as Jerry O’Driscoll wrote just two weeks ago, about rising food prices, “Inflation is here.” But that point isn’t yet universally understood, at least not at our government radio network.
Anyway, I turned off the radio and turned on the television, where TCM was just broadcasting the 1942 MGM propaganda film “Inflation” (made at the request of the Office of War Information but then never released because it was too anti-capitalist even for wartime propaganda). Edward Arnold plays the Devil, in league with Hitler and posing as a businessman who who encourages people to buy more, evade price controls, stockpile goods, and use the black market. (The film was made by Cy Endfield, who had been a member of the Young Communist League at Yale and went on to make such films as Zulu and Universal Soldier.) The film features what appears to be President Franklin D. Roosevelt’s April 28, 1942, radio speech, “Total War and Total Effort.” As the young couple in the film go to buy a new radio, the shopkeeper turns on the radio and they hear FDR say:
You do not have to be a professor of mathematics or economics to see that if people with plenty of cash start bidding against each other for scarce goods, the price of those goods (them) goes up.
Yesterday I submitted to the Congress of the United states a seven-point program, a program of general principles which taken together could be called the national economic policy for attaining the great objective of keeping the cost of living down. I repeat them now to you in substance:
First. we must, through heavier taxes, keep personal and corporate profits at a low reasonable rate.
Second. We must fix ceilings on prices and rents.
Third. We must stabilize wages.
Fourth. We must stabilize farm prices.
Fifth. We must put more billions into War Bonds.
Sixth. We must ration all essential commodities which are scarce.
Seventh. We must discourage installment buying, and encourage paying off debts and mortgages.
As it happens, I have a 1942 OWI poster with that same message hanging in my kitchen:
In fact, of course, price inflation was the natural result of a substantial increase in the money supply before and during the war. All of FDR’s policies — cartels, destruction of crops, wage and price controls, rationing — were misguided attempts to deal with the consequences of monetary manipulation and other bad policies.
By the way, FDR famously said, “The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation. It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something.” Which might explain another propaganda film produced by MGM, this one in 1933, that extolled the virtues of FDR’s policy of inflation, utilizing the argument that is variously called “stimulus” or “the broken window fallacy.” The film cited the successful results of Civil War inflation. “What inflation has done before it will do again! . . . What a man! And what a leader! Yowzer! Happy days are here again!” Yeah, that went well. And by 1942 MGM was back on board, making a government propaganda film opposing inflation.
For background on inflation, read Cato adjunct scholar Lawrence H. White at the Concise Encylopedia of Economics.
Toward Restoring Constitutional Government
Today POLITICO Arena asks:
In light of today’s reading of the Constitution in the new House, what misinterpretations of the Constitution do you regularly see in American politics? And are House Republicans implying that the previous Democratic majority did not have a firm grasp of the government’s founding document?
My response:
Thanks to the Tea Party, as I wrote in Tuesday’s Wall Street Journal, Congress seems to be rediscovering the Constitution — or at least many House Republicans seem to be. When members read the document aloud today, apparently for the first time in the nation’s history, they’ll be throwing down a marker: “We take the Constitution seriously, and intend to abide by its principles.” If true, how refreshing.
This is not a partisan matter. As many Republicans have said — albeit, some only after November’s elections — both parties for years have ignored the Constitution’s limits on political power. To confirm that, we need look no further than to James Madison, the principal author of the document, who assured skeptical ratifiers in Federalist 45 that the powers authorized by the Constitution were “few and defined.” That hardly describes today’s federal behemoth.
Thus, the main “misinterpretation” has been over the very idea of constitutional limits — particularly as inherent in the doctrine of enumerated powers, the principle that “We the People” gave Congress only 18 enumerated powers. The Commerce Clause, for example, was written mainly to ensure interstate commerce unfettered by state interference, not to enable Congress to regulate every aspect of life. And the General Welfare Clause was meant to limit Congress’s taxing power pursuant to its enumerated ends to objects of national, not particular, concern: it wasn’t meant to enable Congress to redistribute private wealth at will.
The great change came during the New Deal, of course, after FDR’s infamous Court packing threat, when a cowed Court began turning the Constitution on its head. But don’t take my word for that constitutional legerdemain. Here’s Roosevelt, writing to the chairman of the House Ways and Means Committee in 1935: “I hope your committee will not permit doubts as to constitutionality, however reasonable, to block the suggested legislation.” And here’s Rexford Tugwell, one of the principal architects of the New Deal, reflecting on his handiwork some 30 years later: “To the extent that these new social virtues [i.e., New Deal policies] developed, they were tortured interpretations of a document [i.e., the Constitution] intended to prevent them.” They knew exactly what they were doing.
So when today’s liberals tell us the Constitution authorizes the vast federal programs that now reduce so many Americans to government dependents, they reveal their historical ignorance — or their political ambition. And they’re reduced to the silliness we saw in Tuesday’s New York Times, where the Times editorialists ranted against today’s constitutional reading as “a theatrical production of unusual pomposity.” Illustrating their own penchant for pomposity, they then dug into their bag of adjectives and let loose: “a self-important flourish,” “their Beltway insider ritual of self-glorification,” “a presumptuous and self-righteous act,” “an air of vacuous fundamentalism,” ”all of this simply eyewash,” “a ghastly waste of time.” They must have been emotionally drained when they finished their screed.
The Constitution is not a blank slate, details to follow, as decided by transient majorities. Were it that, it never would have been ratified. After all, we fought a revolution to rid ourselves of overweening government, and fought a Civil War to institute at last the grand principles of the Declaration of Independence. Nor will those principles be restored in a day. But today’s reading will start a debate that is sorely needed, at the end of which one can hope for restoration.
Obama’s Attack on the Chamber of Commerce: Perfectly Consistent
Today POLITICO Arena asks:
Will President Obama’s campaign finance attacks on the U.S. Chamber of Commerce and others resonate with voters over the next three weeks?
My response:
With so many senior advisors leaving the White House so early in the term, you have to wonder who’s left to advise the president except, well — the president. And judging from his attacks on corporate campaign spending generally and the U.S. Chamber of Commerce in particular, you’re inclined to believe that that’s the case. After all, the attacks are perfectly consistent with the president’s larger agenda.
As others here at the Arena have noted, not since the New Deal have we seen so sustained an anti-business political agenda as has come from this president. Under such an assault, is it any wonder that businesses have created so few jobs, or that they’re fighting back? Yet for that, the president is criticizing them — with campaign finance claims that not even the New York Times finds credible.
This campaign finance angle has an especially unseemly air about it, however – see the Wall Street Journal’s editorial this morning about Democrats unleashing the IRS and Justice on donors to their political opponents. The effort to restrict the speech that campaign finance represents — promoted by the political establishment, especially Democrats — has always been at bottom about incumbency protection, not “good government.” We didn’t hear complaints when Obama abandoned the public financing system in 2008, for example, as “unconscionable” amounts of private money poured into his campaign. Obama may be barking now that the shoe’s on the other foot, but his bark rings as hollow as his agenda, which is why it’s not resonating with the voters, and is not likely to in the three weeks ahead.
‘Make Wall Street traders and CEOs fear for their lives, or at least for their freedom to travel.’
Recall the unionists’ siege of the Maryland banker’s home the other day? Perhaps it was inspired in part by this screed on the world financial crisis that appeared a little while back on the blog New Deal 2.0, published by the left-leaning Franklin and Eleanor Roosevelt Institute. Other advice in the same piece on how to handle execs from Goldman Sachs and similar investment banks: “Build some Guantanamo-like facility to hold these enemy financial combatants until they can be tried, convicted, and properly punished.” And: “Post the names of all managers and traders on Interpol. Arrest anyone who tries to board a plane, train, or boat; confiscate their passports; revoke their visas and work permits; and put a hold on their bank accounts until culpability can be assessed.”
Tongue in cheek-ism, evidence of a genuine impulse to dispense with the rule of law, or some of both? Well, judge for yourself, bearing in mind what sorts of rhetoric serve in accusing, say, the Tea Party movement of extremism and worse. The “braintrusters” roster of the Roosevelt Institute, incidentally, boasts such respectables as Jonathan Alter, Hendrik Hertzberg, appeals court nominee Goodwin Liu, Joseph Stiglitz and Sean Wilentz.
As part of a symposium the other day, the recently launched blog Think Tanked asked me to help define what a think tank is and what it should do. My advice on the latter was to “let ‘em rip” — the scholars and thinkers, that is — but maybe in the case of the Roosevelt Institute I’d advise making an exception.
Was There a Libertarian Golden Age?
Recently I wrote an article arguing that there never was a golden age of liberty and that in particular libertarians should not hail 19th-century America as a small-government paradise, at least not without grappling with the massive problem of slavery. Jacob Hornberger, author of an article that I criticized, responded in Reason, and I then responded here. Meanwhile, an interesting discussion took place on a email list of libertarian scholars, and I’m pleased to have gotten the permission of several participants to include some of that discussion here:
The Constitutionality of the Individual Mandate
Ezra Klein defends an individual healthcare mandate against charges that it’s unconstitutional, and what’s striking to me is that the argument seems awfully wobbly even if you’re on board with a lot of the post–New Deal jurisprudence about the scope of federal power. Sez Ez:
The summary is that you can look at the individual mandate as a tax, which is constitutional, or as a regulation forcing private actors to engage in a certain transaction, much like the minimum wage, which is also constitutional. I’ve also heard scholars mention auto insurance, which is an obvious analogue, and the Americans With Disabilities Act, which proved that the government can order businesses to install ramps, despite the fact that the constitution doesn’t explicitly give the federal government jurisdiction over entryways.
This doesn’t seem like the right level of analysis. Some taxes and regulations are within the ambit of federal powers; that doesn’t mean anything capable of being so described is. Some things not explicitly and specifically mentioned in Article I are nevertheless necessarily implicit in the enumerated powers; that doesn’t mean anything is. Auto insurance seems like a poor analogue because it’s a condition of access to government-maintained roadways. Ezra also mentions Massachusetts’ individual mandate, which seems rather beside the point in a discussion of the scope of Congress’ Article I powers. But bracket that. Even if you think the federal commerce power legitimately extends to legislation like the ADA, there’s intuitively a world of difference between saying that a commercial enterprise providing services to the public must provide them in such-and-such a fashion and insisting that private persons have to engage in a specified type of transaction just by dint of being alive. I don’t think the best reading of the Commerce Clause encompasses either, but it’s not that hard to conceive a reading that extends to the former but not the latter. I stress this just because I don’t think you have to be a libertarian or have a very restrictive view of the legitimate scope of federal power to believe there’s a genuine question here. The real form of the argument here looks an awful lot like: “Look, we’ve stretched commerce…between the several states so absurdly already, why are we even pretending it might be found to exclude anything?”
How Government Really Works
In a profile of Virginia Democratic gubernatorial hopeful Creigh Deeds, the Washington Post tells us about the grandfather from whom he got his unusual first name — and his interest in political power:
Creigh Tyree mattered. While serving as chairman of the Bath County Democrats, during the Depression, Tyree’s house was the first private home in the county to receive electricity from the federal Rural Electrification Act, proof of the power of government, he told his grandson.
Or at least proof of the practice of government. And that is in fact the lesson that young Creigh learned:
Watching the elderly man work the circuit of county shops and farms, the boy saw the power of political maneuvering, the influence it brought a man, the way it enabled the well-connected to pick up a phone and get something previously ungettable. Young Deeds started telling elementary school teachers that he wanted to be, would be, governor someday, and then president.
Using political connections to get things other people can’t get — that’s the lesson young Creigh Deeds learned from his granddad’s experience with the New Deal.
In a story earlier this week, the Post made it clear that that’s still the way politics works:
Sen. Thad Cochran’s most recent reelection campaign collected more than $10,000 from University of Southern Mississippi professors and staff members, including three who work at the school’s center for research on polymers. To a defense spending bill slated to be on the Senate floor Tuesday, the Mississippi Republican has added $10.8 million in military grants earmarked for the school’s polymer research.
Cochran, the ranking Republican on the Appropriations subcommittee on defense, also added $12 million in earmarked spending for Raytheon Corp., whose officials have contributed $10,000 to his campaign since 2007. He earmarked nearly $6 million in military funding for Circadence Corp., whose officers — including a former Cochran campaign aide — contributed $10,000 in the same period.
In total, the spending bill for 2010 includes $132 million for Cochran’s campaign donors, helping to make him the sponsor of more earmarked military spending than any other senator this year, according to an analysis by the nonprofit group Taxpayers for Common Sense.
Cochran says his proposals are based only on “national security interests,” not campaign cash. But in providing money for projects that the Defense Department says it did not request and does not want, he has joined a host of other senators on both sides of the aisle. The proposed $636 billion Senate bill includes $2.65 billion in earmarks….
The bill, however, would add $1.7 billion for an extra destroyer the Defense Department did not request and $2.5 billion for 10 C-17 cargo planes it did not want, at the behest of lawmakers representing the states where those items would be built. Although the White House said the administration “strongly objects” to the extra C-17s and to the Senate’s proposed shift of more than $3 billion from operations and maintenance accounts to projects the Pentagon did not request, no veto was threatened over those provisions….
Sen. Daniel K. Inouye (D-Hawaii), chairman of the Senate Appropriations Committee, ran a close second to Cochran’s $212 million in earmarks this year, having added 37 earmarks of his own worth $208 million, according to the tally by Taxpayers for Common Sense.
Almost all of Inouye’s earmarks are for programs in his home state, and 18 of the provisions — totaling $68 million — are for entities that have donated $340,000 to his campaign since 2007. His earmarks included $24 million for a Hawaiian health-care network, $20 million for Boeing’s operation of the Maui Space Surveillance System and $20 million for a civic education center named after the late senator Edward M. Kennedy….
In Cochran’s case, the proposed earmarks would benefit at least two entities that hired his former aides.
Folks, this is the way government works. If you think the programs of the New Deal or the stimulus bill or federal highway programs are necessary, fine — and certainly a defense bill is necessary — but understand that all such government programs involve taking money by force from people who didn’t offer it up voluntarily and then distributing it to others, in many cases to people with more political clout. People in the reality-based community should recognize this reality.
For more on this, see chapter 9 of Libertarianism: A Primer, “What Big Government Is All About.”
Stimulus and Boondoggles
The New York Times has a story on some of the more controversial ways in which state and local government are using so-called federal “stimulus” dollars. If anything, it provides some interesting background on the history of the word boondoggle (not surprisingly, it entered the American lexicon during the New Deal). The gist of the piece is that one person’s boondoggle is another person’s…turtle crossing…skateboard park…or airport for an island in Alaska with 170 people on it. One New Dealer found this out decades ago:
Robert D. Leighninger Jr., a sociologist who wrote “Long-Range Public Investment: The Forgotten Legacy of the New Deal” (South Carolina University Press, 2007), recounted the story of a Works Progress Administration official in Arizona who went off in search of boondoggles, and discovered that the towns he visited seemed to like their own projects but questioned those of their neighbors. “I’ve been hunting all over the state for one, but everywhere I go I’m told it’s in the next county,” the official was quoted as saying in a 1936 newspaper article. “So far I haven’t been able to catch up with a real, live one.”
Naturally, that attitude is alive and well today. I know more than a few folks in central Pennsylvania who thought Alaska’s “Bridge to Nowhere” was a waste of their federal taxpayer dollars but the “Road to Nowhere” in their own backyard was other people’s money well spent. Of course the folks in central Pennsylvania don’t like being taxed by the federal government to pay for a bridge in Alaska — they don’t benefit, but bear a portion of the cost. And that’s a fundamental problem with federal subsidization of activities that are — at most — the proper domain of state and local government.
Set aside the fact that the Constitution never intended for the federal government to make such expenditures. While any of these controversial parochial projects will technically have benefits, sound economic decision-making would seek to optimize those benefits versus the costs. In the politicized world of the congressional sausage factory, costs scarcely factor into the equation given that the burden is borne by million of taxpayers spread out across the country. Therefore, I think the few in Congress who crusade against these perceived boondoggles should spend more time trying to educate their colleagues (don’t laugh) and the public on the need to limit the federal government’s ability to spend the money in the first place.
For more on the problems with the federal subsidization of state and local government, please see this Cato Policy Analysis from my colleague Chris Edwards.
What Did the New Deal Do?
There has been much recent debate about whether or not President Franklin Roosevelt’s New Deal policies increased the nation’s economic pain during the Great Depression or led to its end. In today’s Cato Daily Podcast, Regulation Magazine managing editor Thomas A. Firey reveals why erroneous stories about the effects of the New Deal survive despite decades of economic research that tell a different, more nuanced story:
Listening to the fight today among commentators on the left and the right talking about the New Deal and making various claims about it, as far as a stimulus—they’re almost all wrong, and what’s most disturbing to me as an economic historian is this is actually pretty well-plowed ground, so I don’t know how they can be wrong and how no one’s calling them out on it….
…The two stylized stories, the one that nothing got better and the other that the New Deal miraculously fixed everything—both are very clearly wrong when you look at the numbers. But no one wants to tell the real story, because, first of all, it doesn’t fall nicely in an ideological story on either side, and, second of all, it requires work. You have to read stuff and do research and care about the facts, and, let’s be honest, in this political environment, very few people do those things or care about the facts.
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