Something Wicked This Way Comes

via American Thinker

By J.C. Smith

The darkest times in human history have all begun when someone decided "not to let a serious crisis go to waste". In fact, it is in times of economic crisis that folks are most susceptible to the ideas of tyrants. We look for an answer, any port in a storm that will shield us from the unknown. And in our desire to be safe, we open ourselves up to things that we would never have dreamed of allowing in normal times.


Consider, my friends that Germany in the 1930's was suffering from massive unemployment and high inflation, mostly due to the effects of the Great Depression. Hitler appointed Hjalmar Schacht as Minister of Economics to combat this and bring Germany into fresh prosperity. Schacht leaned on Keynesian Economics to this end, specifically in the areas of large public works programs supported by deficit spending. For those that don't know, deficit spending is when the Government purposefully spends more money than they receive through tax revenues. The theory is that by spending into deficit, the government creates jobs which increases consumer spending. This in turn, creates more business by supplying for the new spending being done.


The natural reaction that rational people have to deficit spending is to talk about the "burden of the national debt". The idea of course is that if we create debt now, future generations will have to pay that debt off and we therefore are saddling them with a burden that is unfair. Interestingly, this reaction has been in place since the 1930's when Keynes first introduced his theory. Now, is it any wonder that the current administration has been untouched by the Right's cries regarding the burden of the national debt? To them it is the expected and naïve cry of the bourgeoisie used to scare the ignorant proletariat.. To the Keynesians, the debt-income ratio would disappear over time anyway, provided the economy grew fast enough.


Forgive my descent into macroeconomic theory, friends, I do have a point here. However, I want you folks to understand what is happening all around you right as we speak. Obama's administration has embraced Keynesian economic theory. That is the reason for the massive spending bill, the Omnibus bill and the bailouts. They believe that by combating the current recession with massive governmental public works and deficit spending, they can end the economic crisis. Hjalmar Schacht and Adolf Hitler believed the exact same thing and Schacht applied the theory to Germany's Depression economy. After jolting the economy with massive deficit spending, the next step was to implement the Reinhardt Program, combining tax reductions with public investment in roads, railways and waterways. Now while it cannot be argued that both practices worked in getting Germany well on the road to recovery, it also is evident that it was the death of the free market in Germany and the perfect springboard for Hitler's rise to dictatorship.


In the Germany of the 1930's, the economic troubles served as a serious crisis in which the National Socialist Party could push through major reforms. When your job, your home, your livelihood seems to be in peril, people look for a voice, any voice, that seems to have the answer for their day-to-day problems. The more charismatic that leader is, the quicker his ascent to power during a crisis. Not only that, the more charismatic the leader is, the further people will allow themselves to be led down a path that they would normally rebel against.


Hence, the Keynesian theories that Hitler introduced to a desperate population not only served to jolt Germany's economy into recovery, it also served to make the Germans dependent on the government for their welfare and by extension then, on Hitler himself. He became their savior when in fact, he was their greatest doom.


There is no better time to introduce seismic shifts in a nation's identity than during an economic crisis, if you are the right kind of despot. In the years before the French Revolution, Necker borrowed and Calonne spent to combat the crisis caused by France's financing of the American Revolution. This led to a deepening of the crisis and eventual overthrow of the government. In 1917 in Tsarist Russia, the Bolsheviks used the economic crisis to overthrow the government and Lenin rose to power amidst the flames. Over and over throughout history we see the same pattern playing itself out; in the midst of crisis, the crazies take over the nuthouse.


We stand on a treacherous precipice here in America today. Had you been able to ask a German prior to Hitler's rise to power if Germany was capable of the Final Solution, do you think that they would have laughed you to scorn? Do we see that it was not a monstrous sub-class of people who carried out the orders of the Reich but rather normal people who were living their normal lives and were carried away into madness in degrees by a man who understood that times of crisis were perfect opportunities for major reform? The story of the Russian Revolution carries with it the exact same lessons that we fail to see. It was economic crisis that lent itself to the ascent of the Communist party and to the deaths of multiplied millions of Russians at the hands of that regime.


When good people relinquish the power of the free market, the power that rests in the hands of the individual, and look to a charismatic figure for help, disaster is right around the corner. It is nothing new that is happening in the world today, my friends. It is the same thing that has been happening since the dawn of time; it takes a crisis to enthrone a monster and I fear that something wicked this way comes.

CONGRESS VS. THE CONSTITUTION

Congress may not be overflowing with constitutional scholars these days - but you'd think at least some of its members could read.

The Senate this week voted to grant the District of Columbia full voting membership in the House of Representatives - a measure expected to win quick approval both from the House and President Obama.

It was probably to be expected, of course, that the Democrats would try to grow their margin in Congress as much as possible: DC is heavily Democratic - and the extra seat given to Republican Utah in the same bill would potentially be reapportioned after the 2010 Census.

Their only problem is the plain language of the US Constitution:

"The House of Representatives shall be composed of members chosen every second year by the people of the several states," reads Article I, Section 2.

And Article 1, Section 8, clearly defines DC as "the seat of the government of the United States" - that is, not a state. Plus, the 23rd Amendment grants DC the presidential electors "to which the District would be entitled if it were a state."

Case closed.

Whether DC should have representation, of course, is another matter; that's why the Constitution also contains an amendment process.

What it certainly doesn't allow is the gutting of its clear meaning whenever transient majorities in Congress think it's time for a change.

Adding to the outrage, experts are uncertain whether anyone has standing to sue to overturn this abomination.

Let's just hope this isn't how Obama and his allies plan on treating the rest of the document.

Original Article

Adam Smith gets the last laugh

By P.J. O’Rourke


The free market is dead. It was killed by the Bolshevik Revolution, fascist dirigisme, Keynesianism, the Great Depression, the second world war economic controls, the Labour party victory of 1945, Keynesianism again, the Arab oil embargo, Anthony Giddens’s “third way” and the current financial crisis. The free market has died at least 10 times in the past century. And whenever the market expires people want to know what Adam Smith would say. It is a moment of, “Hello, God, how’s my atheism going?”

Adam Smith would be laughing too hard to say anything. Smith spotted the precise cause of our economic calamity not just before it happened but 232 years before – probably a record for going short.

“A dwelling-house, as such, contributes nothing to the revenue of its inhabitant,” Smith said in The Wealth of Nations. “If it is lett [sic] to a tenant for rent, as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue.” Therefore Smith concluded that, although a house can make money for its owner if it is rented, “the revenue of the whole body of the people can never be in the smallest degree increased by it”. [281]*

Smith was familiar with rampant speculation, or “overtrading” as he politely called it.

The Mississippi Scheme and the South Sea Bubble had both collapsed in 1720, three years before his birth. In 1772, while Smith was writing The Wealth of Nations, a bank run occurred in Scotland. Only three of Edinburgh’s 30 private banks survived. The reaction to the ensuing credit freeze from the Scottish overtraders sounds familiar, “The banks, they seem to have thought,” Smith said, “were in honour bound to supply the deficiency, and to provide them with all the capital which they wanted to trade with.” [308]

The phenomenon of speculative excess has less to do with free markets than with high profits. “When the profits of trade happen to be greater than ordinary,” Smith said, “overtrading becomes a general error.” [438] And rate of profit, Smith claimed, “is always highest in the countries that are going fastest to ruin”. [266]

The South Sea Bubble was the result of ruinous machinations by Britain’s lord treasurer, Robert Harley, Earl of Oxford, who was looking to fund the national debt. The Mississippi Scheme was started by the French regent Philippe duc d’Orléans when he gave control of the royal bank to the Scottish financier John Law, the Bernard Madoff of his day.

Law’s fellow Scots – who were more inclined to market freedoms than the English, let alone the French – had already heard Law’s plan for “establishing a bank ... which he seems to have imagined might issue paper to the amount of the whole value of all the lands in the country”. The parliament of Scotland, Smith noted, “did not think proper to adopt it”. [317]

One simple idea allows an over-trading folly to turn into a speculative disaster – whether it involves ocean commerce, land in Louisiana, stocks, bonds, tulip bulbs or home mortgages. The idea is that unlimited prosperity can be created by the unlimited expansion of credit.

Such wild flights of borrowing can be effected only with what Smith called “the Daedalian wings of paper money”. [321] To produce enough of this paper requires either a government or something the size of a government, which modern merchant banks have become. As Smith pointed out: “The government of an exclusive company of merchants, is, perhaps, the worst of all governments.” [570]

The idea that The Wealth of Nations puts forth for creating prosperity is more complex. It involves all the baffling intricacies of human liberty. Smith proposed that everyone be free – free of bondage and of political, economic and regulatory oppression (Smith’s principle of “self-interest”), free in choice of employment (Smith’s principle of “division of labour”), and free to own and exchange the products of that labour (Smith’s principle of “free trade”). “Little else is requisite to carry a state to the highest degree of opulence,” Smith told a learned society in Edinburgh (with what degree of sarcasm we can imagine), “but peace, easy taxes and a tolerable administration of justice.”

How then would Adam Smith fix the present mess? Sorry, but it is fixed already. The answer to a decline in the value of speculative assets is to pay less for them. Job done.

We could pump the banks full of our national treasure. But Smith said: “To attempt to increase the wealth of any country, either by introducing or by detaining in it an unnecessary quantity of gold and silver, is as absurd as it would be to attempt to increase the good cheer of private families, by obliging them to keep an unnecessary number of kitchen utensils.” [440]

We could send in the experts to manage our bail-out. But Smith said: “I have never known much good done by those who affect to trade for the public good.” [456]

And we could nationalise our economies. But Smith said: “The state cannot be very great of which the sovereign has leisure to carry on the trade of a wine merchant or apothecary”. [818] Or chairman of General Motors.

* Bracketed numbers in the text refer to pages in ‘The Wealth of Nations’, Glasgow Edition of the Works of Adam Smith, Oxford University Press, 1976

The writer is a contributing editor at The Weekly Standard and is the author, most recently, of On The Wealth of Nations, Books That Changed the World, published by Atlantic Books, 2007

The Hell with Our Constitution

Dr. Robert Higgs, senior fellow at the Oakland-based Independent Institute, penned an article in The Christian Science Monitor (2/9/2009) that suggests the most intelligent recommendation that I've read to fix our current economic mess. The title of his article gives his recommendation away: "Instead of stimulus, do nothing — seriously."

Stimulus package debate is over how much money should be spent, whether some should given to the National Endowment for the Arts, research sexually transmitted diseases or bail out Amtrak, our failing railroad system. Dr. Higgs says, "Hardly anyone, however, is asking the most important question: Should the federal government be doing any of this?" He adds, "Until the 1930s, the Constitution served as a major constraint on federal economic interventionism. The government's powers were understood to be just as the framers intended: few and explicitly enumerated in our founding document and its amendments. Search the Constitution as long as you like, and you will find no specific authority conveyed for the government to spend money on global-warming research, urban mass transit, food stamps, unemployment insurance, Medicaid, or countless other items in the stimulus package and, even without it, in the regular federal budget."

By bringing up the idea of constitutional restraints on Washington, I'd say Dr. Higgs is whistling Dixie. Americans have long ago abandoned respect for the constitutional limitations placed on the federal government. Our elected representatives represent that disrespect. After all I'd ask Higgs: Isn't it unreasonable to expect a politician to do what he considers to be political suicide, namely conduct himself according to the letter and spirit of the Constitution?

While Americans, through ignorance or purpose, show contempt for our Constitution, I doubt whether they are indifferent between a growing or stagnating economy. Dr. Higgs tells us some of the economic history of the U.S. In 1893, there was a depression; we got out of it without a stimulus package. There was a major recession of 1920-21; though sharp, it quickly reversed itself into what has been call the "Roaring Twenties." In 1929, there was an economic downturn, most notably featured by the stock market collapse, after which came massive government intervention — you might call it the nation's first stimulus package President Hoover and Congress responded to what might have been a two- or three-year sharp downturn with many of the policies President Obama and Congress are urging today. They raised tariffs, propped up wage rates, bailed out farmers, banks and other businesses, and financed state relief efforts. When Roosevelt came to office, he became even more interventionist than Hoover and presided over protracted depression where the economy didn't fully recover until 1946.

Roosevelt didn't have an easy time with his agenda; he had to first emasculate the U.S. Supreme Court. Higgs points out that federal courts had respect for the Constitution as late as the 1930s. They issued some 1,600 injunctions to restrain officials from carrying out acts of Congress. The U.S. Supreme Court overturned as unconstitutional the New Deal's centerpieces such as the National Industrial Recovery Act and the Agricultural Adjustment Act and other parts of Roosevelt's "stimulus package." An outraged Roosevelt threatened to pack the Court, and the Court capitulated to where it is today giving Congress virtually unlimited powers to tax, spend and regulate. My question to my fellow Americans is: Do we want a repeat of measures that failed dismally during the 1930s?

A more fundamental question is: Should Washington be guided by the Constitution? In explaining the Constitution, James Madison, the acknowledged father of the Constitution, wrote in Federalist Paper 45: "The powers delegated by the proposed Constitution to the federal government are few and defined. Those which are to remain in the State governments are numerous and indefinite. The former will be exercised principally on external objects, as war, peace, negotiation, and foreign commerce." Has the Constitution been amended to permit Congress to tax, spend and regulate as it pleases or have Americans said, "To hell with the Constitution"?

Walter E. Williams is a professor of economics at George Mason University.

Keynes Can't Help Us Now

Governments cling to the delusion that a crisis of excess debt can be solved by creating more debt.

It began as a subprime surprise, became a credit crunch and then a global financial crisis. At last week's World Economic Forum in Davos, Switzerland, Russia and China blamed America, everyone blamed the bankers, and the bankers blamed you and me. From where I sat, the majority of the attendees were stuck in the Great Repression: deeply anxious but fundamentally in denial about the nature and magnitude of the problem.

Some foretold the bottom of the recession by the middle of this year. Others claimed that India and China would be the engines of recovery. But mostly the wise and powerful had decided to trust that John Maynard Keynes would save us all.

I heard almost no criticism of the $819-billion stimulus package making its way through Congress. The general assumption seemed to be that practically any kind of government expenditure would be beneficial -- and the bigger the resulting deficit the better.

There is something desperate about the way economists are clinging to their dogeared copies of Keynes' "General Theory." Uneasily aware that their discipline almost entirely failed to anticipate the current crisis, they seem to be regressing to macroeconomic childhood, clutching the Keynesian "multiplier effect" -- which holds that a dollar spent by the government begets more than a dollar's worth of additional economic output -- like an old teddy bear.


They need to grow up and face the harsh reality: The Western world is suffering a crisis of excessive indebtedness. Governments, corporations and households are groaning under unprecedented debt burdens. Average household debt has reached 141% of disposable income in the United States and 177% in Britain. Worst of all are the banks. Some of the best-known names in American and European finance have liabilities 40, 60 or even 100 times the amount of their capital.

The delusion that a crisis of excess debt can be solved by creating more debt is at the heart of the Great Repression. Yet that is precisely what most governments propose to do.

The United States could end up running a deficit of more than 10% of GDP this year (adding the cost of the stimulus package to the Congressional Budget Office's optimistic 8.3% forecast). Nor is that all. Last year, the Bush administration committed $7.8 trillion to bailout schemes, in the form of loans, investments and guarantees.

Now the talk is of a new "bad bank" to buy the toxic assets that the Troubled Asset Relief Program couldn't cure. No one seems to have noticed that there already is a "bad bank." It is called the Federal Reserve System, and its balance sheet has grown from just over $900 billion to more than $2 trillion since this crisis began, partly as a result of purchases of undisclosed assets from banks.

Just how much more toxic waste is out there? New York University economistNouriel Roubini puts U.S. banks' projected losses from bad loans and securities at $1.8 trillion. Even if that estimate is 40% too high, the banks' capital will still be wiped out. And all this is before any account is taken of the unfunded liabilities of the Medicare and Social Security systems. With the economy contracting at a fast clip, we are on the eve of a public-debt explosion. And similar measures are being taken around the world.

The born-again Keynesians seem to have forgotten that their prescription stood the best chance of working in a more or less closed economy. But this is a globalized world, where uncoordinated profligacy by national governments is more likely to generate bond-market and currency-market volatility than a return to growth.

There is a better way to go: in the opposite direction. The aim must be not to increase debt but to reduce it.

This used to happen in one of two ways. If, say, Argentina had an excessively large domestic debt, denominated in Argentine currency, it could be inflated away -- Argentina just printed more money. If it were an external debt, the government defaulted and forced the creditors to accept less.

Today, America is Argentina. Europe is Argentina. Former investment banks and ordinary households are Argentina. But it will not be so easy for us to inflate away our debts. The deflationary pressures unleashed by the financial crisis are too strong -- consumer prices in the U.S. have been falling for three consecutive months. Nor is default quite the same for banks and households as it is for governments. Understandably, monetary authorities are anxious to avoid mass bankruptcies of banks and households, not least because of the downward spiral caused by distress sales.

So what can we do? First, banks that are de facto insolvent need to be restructured, not nationalized.(The last thing the U.S. needs is to have all of its banks run like Amtrak or, worse, the IRS.) Bank shareholders will have to face that they have lost their money. Too bad; they should have kept a more vigilant eye on the people running their banks. Government will take control in return for a substantial recapitalization, but only after losses have been meaningfully written down. Those who hold the banks' debt, the bondholders, may have to accept a debt-for-equity swap or a 20% "haircut" -- a disappointment, but nothing compared with the losses suffered when Lehman Bros. went under.

State life-support for dinosaur banks should not and must not impede the formation of new banks by the private sector. It is vital that state control does not give the old, moribund banks an unfair advantage. So recapitalization must be a once-only event, with no enduring government guarantees or subsidies. And there should be a clear timetable for "re-privatization" -- within, say, 10 years.

The second step we must take is a generalized conversion of American mortgages to lower interest rates and longer maturities. About 2.3 million U.S. households face foreclosure. That number is certain to rise as more adjustable-rate mortgages reset, driving perhaps 8 million more households into foreclosure and causing home prices to drop further. Few of those affected have any realistic prospect of refinancing at more affordable rates. So, once again, what is needed is state intervention.

Purists say this would violate the sanctity of the contract. But there are times when the public interest requires us to honor the rule of law in the breach. Repeatedly in the course of the 19th century, governments changed the terms of bonds that they issued through a process known as "conversion." A bond with a 5% return was simply exchanged for one with a 3% return, to take account of falling market rates and prices. Such procedures were seldom stigmatized as default.

Another objection to such a procedure is that it would reward the imprudent. But moral hazard only really matters if bad behavior is likely to be repeated, and risky adjustable-rate mortgages aren't coming back soon.

The issue, then, becomes one of fairness: Why help the imprudent when the prudent are struggling too?

One solution would be for the government-controlled mortgage lenders and guarantors, Fannie Mae and Freddie Mac, to offer all borrowers -- including those with fixed rates -- the same deal. Permanently lower monthly payments for a majority of U.S. households almost certainly would do more to stimulate consumer confidence than all the provisions of the stimulus package, including tax cuts.

No doubt those who lost by such measures would not suffer in silence. But the benefits would surely outweigh the costs to bank shareholders, bank bondholders and the owners of mortgage-backed securities.

Americans, Winston Churchill once remarked, will always do the right thing -- after they have exhausted all other alternatives. If we are still waiting for Keynes to save us when Davos comes around next year, it may well be too late. Only a Great Restructuring can end the Great Repression. It needs to happen soon.

Niall Ferguson is a professor at Harvard University and Harvard Business School, a Fellow of Jesus College, Oxford, and a senior fellow of the Hoover Institution. His latest book is "The Ascent of Money: A Financial History of the World

At World Economic Forum: "New Model" Sought

by Robert Bradley
January 26, 2009

The Wall Street Journal reports today that the world’s elite, gathering in Davos this week, are amazed at how little they know about the economy. There is even talk about how capitalism itself is a failing business model. One participant, who is giving a business leadership seminar there, is quoted as saying:

The capitalist myth is lovely and youthful. It kicked off the industrial revolution, but maybe we need a new one.

Instead of looking for new government quick-fixes, business and government leaders need to discover (I wish I could say, rediscover) what is real capitalism–free-market capitalism–in theory and practice.

Today’s problems can be traced to the government side of the mixed economy, as well as a perverted capitalist ethic in the boardroom. (The two are related to each other.) Business prudence has been weakened by politically set and artificially low interest rates, by regulations, and by government jawboning for "common-good" lending.

Real capitalism is about government neutrality and noninterference in the economy. From the business side, it is about principled entrepreneurship ™, defined as "maximizing long-term profitability for the business by creating real value in society while always acting lawfully and with integrity" (see p. 79 here). Such value creation can only be measured in a free market where consumers have choices, and where profits and losses are meaningful measures of business performance. And such wealth creation eschews political profiteering, which redistributes and destroys value rather than creates it. Thus political capitalism is discouraged in favor of free-market capitalism by the company practicing principled entrepreneurship.

The World Economic Forum has always been a haven for the political capitalists. In 2001, Ken Lay gave five talks at Davos on his views of Enron and corporate social responsibility (see the Epilogue in Capitalism at Work about Enron’s anti-capitalistic business model).

Indeed, a new business model is needed, and one quite different from what the participants are likely to hear.

Original Post

The Recidivist Congress

By George Will

WASHINGTON -- "Recidivism" is Rep. Jim Cooper's laconic explanation of why he, although only 54, has spent portions of five decades on Congress' payroll. Responding with aphorisms (e.g., "Bad government starts at the grass roots") to the tedium of Congress' culture of avoidance, he grows more laconic as the welfare state's implosion approaches.

The son of a Tennessee governor, Cooper, a Democrat who represents Nashville, was a congressional page starting in 1969 and then a Rhodes Scholar before being elected to Congress in 1982. Having run unsuccessfully for the Senate in 1994, he returned to the House in 2002. A mordant Cassandra ("If members of Congress were paid on commission to cut spending we'd see fabulous results"), he is no longer astonished by Congress' bipartisan avoidance of the predictable crisis coming to the big three entitlement programs -- Social Security, Medicare and Medicaid.

"Astonishing," says Cooper of the new president's avowed determination to confront the crisis. Leadership, says Cooper, who has seen precious little of it concerning entitlements, enlarges the number of "things that can be talked about." Such as the Social Security payroll tax, which Cooper would cut for several stimulative years from 12.4 percent to 8 percent. It suppresses job-creation, is raising more revenue than Social Security is dispensing and will continue to do so until 2017. The surplus is invested in Treasury bonds. That amounts to lending it to the government "which in turn," Cooper says, "spends it on everything except Social Security."

President Lyndon Johnson, to make the deficit numbers during the Vietnam War less scary, adopted the "unified budget," under which Social Security's surplus was mingled with general revenues, thereby reducing -- disguising, really -- the deficit's size. That, Cooper says, was the "original sin" in the budgeting sleight-of-hand that prevents the public from knowing, and Congress from being compelled to act on, facts about the entitlement programs' unfunded liabilities -- promises to future beneficiaries that future taxpayers may not be willing to pay.

Cooper, who has an unshakable appetite for unappetizing numbers, wishes more Americans were similarly eccentric and would read the 188-page 2008 Financial Report of the United States Government -- the only government document that calculates what deficit and debt numbers would be if the government practiced, as businesses must, accrual accounting.

Under such accounting, future outlays to which beneficiaries are entitled by existing law are acknowledged as expenditures before they are paid. Were the Social Security surplus sequestered for accounting purposes, reflecting the truth that it is already obligated, and were there similar treatment of the other entitlement programs' liabilities, the deficit for the fiscal year that ended Sept. 30 would have been $3 trillion rather than $454.8 billion. The report's numbers show that the true national debt is $56 trillion, not the widely reported $10 trillion.

The report says that in 25 years the portion of the population 65 and older will increase from 12 percent to 20 percent, while the share of the population that is working and paying taxes will decrease from 60 percent to 55 percent. If Medicare spending continues to grow, as it has for four decades, more than one and a half times as fast as the economy, the big three entitlements, which currently are 44 percent of all federal expenditures (excluding interest costs of the national debt), will be 65 percent by 2030. Under current law, 30 years from now government revenues will cover only half of anticipated expenditures.

For years, many conservatives advocated a "starve the beast" approach to limiting government. They supported any tax cut, of any size, at any time, for any purpose, assuming that, deprived of revenue, government spending would stop growing. But spending continued, and government borrowing encouraged government's growth by making big government cheap: People were given $1 worth of government but were charged less than that, the balance being shifted, through debt, to future generations. In 2003, Republicans fattened the beast with the Medicare prescription drug benefit (Cooper opposed it), which added almost $8 trillion in the present value of benefits scheduled, but unfunded, over the next 75 years.

Liberalism's signature achievement -- the welfare state's entitlement buffet -- will, unless radically reduced, starve government of resources needed for everything on liberalism's agenda for people not elderly. Conservatives want government limited, but not this way.

Although President Obama promises entitlement reforms, what can be expected from a Congress with a long bipartisan record of reckless enrichments of the entitlement buffet? Recidivism.

This is no time to panic

Politicians are in agreement: Government must spend, spend, spend to solve the economic "crisis." The words "economic crisis" are accepted as fact. Why? Why is America in "crisis"?

Treasury secretary Hank Paulson wrote in the New York Times, "We are going through a financial crisis more severe and unpredictable than any in our lifetimes." Is he right? Okay, the Dow Jones Industrial Average fell more than 5,700 points, but bubbles have to pop. In the summer of '82, the Dow was at 776. At 8,228, as of this writing, stocks have risen 1,047 percent in 25 years. America is still way ahead of the game.

But people are losing their jobs! President Obama frets that "the unemployment rate could reach double digits." Yes, that would be bad, but in the recession of '82, it reached 10.8 percent. Yet no one even remembers the "crisis" of '82. Today's 7.2 percent unemployment rate is higher than we've grown used to, but we've experienced that rate 16 times over the past 35 years. And it pales in comparison to the 25 percent rate of the Depression era.

"The bad news is that our economy is broken and there is nothing the government can do to fix it," economist Peter Schiff told the Wall Street Journal. "The free market does have a cure: It's called a recession."

Have we become so fragile that we can't handle any recession? The 11 recessions since World War II are part of the "creative destruction" that ultimately drives our economy, yet today politicians
act as if they can insulate us from pain with bailouts and "stimulus packages."

Even smart people like Paul Volcker say, "This crisis is different." Politicians say things like this because they're too close to the problem. They've panicked. I saw this again and again doing consumer reporting: People closest to problems often panic beyond reason. After 9/11, people overreacted because of fear of terrorism. We federalized airport security and spent tax money on nonsense like bulletproof vests for dogs. In 1999, it was the Y2K computer technicians themselves who were most convinced that computers would freeze and planes crash. It was the bird flu specialists who were convinced that millions would die from the bird flu. Today, it's the scientists creating global warming computer models who are most insistent that we take economically destructive steps to stop climate change.

Fortunately, the bird flu doctors and global warming fanatics didn't hold the reins of government. Unfortunately, today's most frightened people do. Hank Paulson is surrounded by panic; I assume many of his Wall Street banker buddies called to shout: "It's a catastrophe! I've lost everything!" In the echo-chamber of Washington and Manhattan, one starts to believe that this deleveraging is different. This one requires more government. But it doesn't. More government will just delay recovery.

Vice President Biden informed ABC News that "Everyone .  .  . says the scope of this package has to be bold. It has to be big." Everyone? Hardly. More than 100 prominent economists signed a petition against the stimulus package, and more than 200 signed a petition against the financial bailout.

I liked the headline that the Wall Street Journal gave to an op-ed by George Mason University economist Russ Roberts: "Don't Just Do Something, Stand There." Roberts pointed out that politicians can't wisely spend the trillions they commit, "even if they want to. The information about who needs to be bailed out and who needs to fail is too complicated. .  .  . It is time to let the imprudent fail and the prudent pick up the bargains."

What if the government had cut loose GM, Citigroup, and the others, forcing them to do what businesses do in hard times: renegotiate with creditors and revalue assets? Wouldn't prices have found a more solid floor? We'll never know. But today the CEOs of those companies would be suckers to drastically revalue assets or sell off a cherished part of the company. If they did that, and then Congress showered their industry with money, they would have cheated their shareholders. Better wait to see what the politicians will do. And so government programs frighten private investors away from making the tough decisions that would start them on the path to real recovery.

Of course some of those companies would fail, and suddenly letting that happen is a political no-no. When the automakers came to Washington to beg, Nancy Pelosi said, "We reject those advocating bankruptcy." Why? Bankruptcy can be a good thing. Kmart declared bankruptcy in 2002, but it didn't disappear. Filing for bankruptcy allowed the company to reorganize itself and reemerge stronger.

George W. Bush told CNN, "I've abandoned free-market principles to save the free-market system." Why did Bush and Pelosi think they knew how to run the economy? F.A. Hayek famously termed this the "fatal conceit"--governments can't possibly know everything that's going on in an economy, and so while government intervention may delay some economic pain, it cannot stop it.

"The arrogance of officialdom should be tempered and controlled," said Cicero in 55 B.C. He was right.

John Stossel is coanchor of ABC News's 20/20 and the author of Myths, Lies, and Downright Stupidity.



Complete Original Article from American Standard

Of Judges, By Judges, For Judges

By George Will

WASHINGTON -- Last November, 13,402,566 California voters expressed themselves for or against Proposition 8, which said that their state's Constitution should be amended to define marriage as a relationship between a man and a woman. The voters, confident that they had a right to decide this question by referendum, endorsed Proposition 8 by a margin of 52.3 to 47.7.

Now comes California's attorney general, Jerry Brown -- always a fountain of novel arguments -- with a 111-page brief asking the state Supreme Court to declare the constitutional amendment unconstitutional. He favors same-sex marriages and says the amendment violates Article 1, Section 1 of California's Constitution which enumerates "inalienable rights" to, among other things, liberty, happiness and privacy.

Brown's audacious argument is a viscous soup of natural-law and natural- rights philosophizing, utterly untethered from case law. It is designed to effect a constitutional revolution by establishing an unchallengeable judicial hegemony. He argues that:

The not-really-sovereign people cannot use the constitutionally provided amendment process to define the scope of rights enumerated in the Constitution; California's judiciary, although established by the state's Constitution, has the extra-constitutional right to supplement that enumeration by brooding about natural law, natural justice and natural rights, all arising from some authority somewhere outside the Constitution; the judiciary has the unchallengeable right to say what social policies are entailed by or proscribed by the state Constitution's declaration of rights and other rights discovered by judges.

What is natural justice? Learned and honorable people disagree. Which is why such consensus as can be reached is codified in a constitution. But Brown's reasoning would make California's Constitution subordinate to judges' flights of fancy regarding natural justice. Judges could declare unconstitutional any act of Constitution-revising by the people.

In a brief responding to Brown's, Kenneth Starr -- former federal judge, former U.S. solicitor general, current dean of Pepperdine University Law School -- notes the absurd consequences of the proposition that "the people can never amend the Constitution to overrule judicial interpretations of inalienable rights." Long ago, a California court struck down a Sunday closing law because "it infringes upon the liberty of the citizen, by restraining his right to acquire property." And a court struck down a law against scalping theater tickets because it violated rights "inherent in every natural person." By Brown's reasoning, judges could declare unconstitutional any constitutional amendment revising these judicial judgments.

Passing laws by referenda is an imprudent departure from the core principle of republican government -- representation: The people do not decide issues, they decide who shall decide. But the right of Californians to make laws through the direct democracy of referenda is as firmly established as it is promiscuously exercised.

In 2000, voters passed Proposition 22, enacting a law stipulating that marriage is a heterosexual relationship. Last May, California's Supreme Court struck down the law on the ground that there is no "compelling state interest" in not recognizing same-sex marriages under the constitutional clause guaranteeing "equal protection" of the laws. Opponents of same-sex marriage quickly gathered sufficient signatures to place on the November ballot the amendment to the constitution.

The breadth and depth of California's toleration regarding sexual lifestyles refute the worry that gays are a vulnerable minority menaced by majoritarian tyranny. Proposition 8 merely restored to California law the ancient and nearly universal definition of marriage, a definition resoundingly endorsed by the U.S. Congress (85-14 in the Senate, 342-67 in the House) and written into the laws of 47 other states. California advocates of erasing the right to same-sex domestic partnerships could not even get sufficient signatures to put their measure on the November ballot.

Just eight years ago, Proposition 22 was passed 61.4 to 38.6. The much narrower victory of Proposition 8 suggests that minds are moving toward toleration of same-sex marriage. If advocates of that have the patience required by democratic persuasion, California's ongoing conversation may end as they hope. If, however, the conversation is truncated, as Brown urges, by judicial fiat, the argument will become as embittered as the argument about abortion has been by judicial highhandedness.

Brown's reasoning would establish an unassailable tyranny of a minority -- judges -- over any California majority. Brown, 70, California's former and perhaps future governor, once was a Jesuit seminarian. One American Heritage dictionary definition of "jesuitical" is "given to subtle casuistry"; one of that dictionary's definitions of "casuistry" is "specious or excessively subtle reasoning to rationalize or mislead." These definitions, although unfair to Jesuits, are descriptive of Brown's argument.

Banks Don't Need to Be Forced to Lend The last thing we need is Congress setting business models.

By BERT ELY

Tomorrow, the House Financial Services Committee will hold a hearing to "discuss priorities" for the Obama administration's use of Troubled Asset Relief Program (TARP) funds. Those priorities could include lending and other directives to financial institutions receiving TARP investments. These directives could be disastrous for taxpayers and the economy if they force banks to engage in unwise lending, or keep weak, troubled banks from being absorbed by stronger banks.

TARP has two major shortcomings. The first is a lack of political support. Congress did not explicitly authorize capital investments in financial institutions when it created the $700 billion program three months ago. The Treasury originally was supposed to buy troubled assets of banks and other financial institutions. It quickly realized that this was unworkable due to challenges in determining asset prices. It then decided to invest TARP funds in the institutions, to increase their capital. But the lack of congressional consent for these investments has understandably stoked controversy about their purpose.

Second, there is widespread confusion about the role capital plays in bank balance sheets, which has exacerbated this controversy. That confusion is evident in comments such as "banks should be forced to lend the TARP monies the government has given them."

Treasury invests TARP funds by purchasing preferred stock in a bank, which adds to the bank's capital. Bank capital, which also includes common stock and retained earnings, serves as a cushion to absorb losses from loans and other bank activities; it is not loaned out directly. Most bank lending is funded by customer deposits and borrowings from third parties (such as the Federal Home Loan Banks).

Potentially, a bank could use its increased capital from TARP to absorb losses from loans and investments already on its books, to acquire banks too weak to remain independent, or to increase its lending. The higher capital boosts a bank's lending capacity because it enables the bank to safely increase its deposits -- and thus its loans -- without increasing its risk of insolvency.

Unfortunately, Treasury has poorly explained the legitimacy of those uses. Congressional debate about TARP may further muddy the waters. A review of these uses show why none should be mandated or barred.

First, even well-managed banks are suffering loan losses as collateral values shrink and the recession deepens. In normal times, a bank would raise new capital to offset those losses. However, the capital markets are not functioning normally, with many sound banks now unable to raise fresh capital.

TARP investments, which increase a bank's capital, therefore serve as a bridge to when normality returns to the capital markets. Because of restrictions accompanying TARP investments, and a jump in the TARP dividend rate after five years to 9% from 5%, banks will have an incentive to raise private capital to finance a buyback of their TARP preferred stock. Taxpayers will profit from these TARP investments because of the dividends paid by the banks on the preferred shares the Treasury purchased.

Second, weak banks need to be acquired by well-managed banks rather than being propped up by TARP investments, for weak banks are not good lenders. The continued existence of weak banks will impede the economic recovery.

However, an acquirer needs to realistically account for losses buried in the other bank's balance sheet even though this accounting will reduce its own capital. The TARP investment should therefore ensure that the merged bank is well capitalized. Eventually, that bank would raise capital to retire its TARP stock.

Third, while a TARP investment increases a bank's lending capacity, lending mandates -- such as that a bank must increase its outstanding loans by some multiple of its TARP investment -- could force banks to make new bad loans.

Unfortunately, banks accepting TARP investments must, under the contract governing Treasury's investment in the bank, agree that Treasury can "unilaterally amend" the agreement "to comply with any changes . . . in applicable federal statutes." Through this provision the new Congress can impose on banks with TARP investments lending mandates or other obligations and restrictions, such as barring the use of TARP funds to acquire weak banks. Even worse, Congress may legislate credit allocation, such as directing that a certain percentage of a mandated lending increase must go to a favored class of borrowers.

Banks are in the lending business: They do not need to be forced to lend. And contrary to popular and political opinion, banks have not stopped lending. Despite the recent financial market turmoil, a declining GDP, and an increase in loan-loss reserves, commercial bank lending actually grew $336 billion, or 4.9%, from August to Dec. 24, according to Federal Reserve data. While lending dictates or other restrictions may be tempting, the Obama administration must discourage Congress from imposing them on recipients of TARP investments.

Mr. Ely, the principal in Ely & Co., Inc., is a financial institutions and monetary policy consultant.

Pigs At The Trough

by Cal Thomas

Like pigs waiting in line to get their snouts in the feeding trough, come many of the nation's governors -- on the heels of the mayors -- asking Washington for bailout money.

Democratic governors from overspending states like New York, Wisconsin, New Jersey, Massachusetts and Ohio are among those seeking financial deliverance. The governors want Washington to pony up $1 trillion for their absolutely-essential-non-negotiable-if-we-don't-get-the-money-people-will-starve programs.

New York Governor David Paterson claims that, because tax revenues have plunged, 43 states now have budget deficits totaling around $100 billion. No, those states have deficits because when times were good and the money was rolling in they thought they could get away with endless new programs, while putting little or no money aside for the inevitable rainy day. Neither did they consider which programs were necessary and which ones were just politically beneficial. Or, maybe they did and they opted for politically beneficial, thus creating their problem, and ours.

Notice the sleight of hand about to be perpetrated on hardworking taxpayers. In the end, it is we who pay for the plans of politicians who are unable,
or unwilling, to control themselves when it comes to other peoples' money. When Republicans cut taxes, Democrats scream about growing deficits. But Democrats never worry about the deficit when they spend more than what the government takes in. So it really isn't about the deficit at all. It is about how much of our hard-earned money the Democrats, mostly, will allow us to keep. When you understand this, you understand everything about politics and politicians.

Every program created and sustained by Democrats (and increasingly some Republicans) must be kept. Once created, they must continue, no matter how unnecessary, outdated, or corrupt they become. The proof of eternal life is to be found in government programs, which are harder to kill than a vampire, another blood-sucking beast.

The incoming Obama administration wants to spend gobs of money on "infrastructure," creating government jobs that will end when the work is completed. Isn't infrastructure primarily supposed to be the work of state and local governments? Isn't the gasoline tax supposed to go to build and repair local roads and bridges? The federal responsibility should begin and end with the interstate highway system.

The governors' request for more money from Washington is also about unfunded mandates, the rising cost of Medicare and Medicaid and a lot of other "entitlement" programs that could have been made solvent during the Bush administration, which tried, but was unable to succeed due to opposition from Democrats who preferred to have an issue rather than a solution.

It isn't that options, other than overspending and misspending, don't exist. The Heritage Foundation's Brian Riedel, Stuart Butler and others (heritage.org), the National Taxpayers Union (ntu.org) and Citizens Against Government Waste (cagw.org) have all written thoughtful and nonpartisan papers on the subject of government pork. The problem is that Democratic politicians (and too many
Republican politicians, which is why the GOP is again in the minority) have refused to adopt them. Again, Democrats would rather foster a dependency on government so that people would be less self-reliant and more dependent on politicians for their current and future welfare.

This is a formula for socialism and for whatever political system follows to enforce it, though socialism advances even in our supposed constitutional republic. Anyone who relies less on themselves and more on government will see their freedoms erode. It has always been this way.

If this growing dependence on ever more costly and overreaching government continues, we may have to change the familiar letter abbreviation for this country from USA to ATM.

Counterfeiting Versus Monetary Policy

by Walter E. Williams

Congress is on a spending binge. With all the calls for bailouts, economic stimulus and other assorted handouts, there is a real risk of inflation in our future. If we do have a rapid inflation, it's likely that Congress, as they did in the financial meltdown, will blame it on everybody except themselves. Before Congress begins to shirk their responsibility, let's understand what an inflation is and is not.

Several prices rising are not inflation. Only when prices across the board rise is there inflation. But just as in the case of diseases, describing a symptom does not necessarily tell us the cause. That is the same with inflation; it is a symptom of something else. Nobel Laureate and noted monetary theorist Milton Friedman explained, "(I)nflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output." Put another way, inflation results from an increase in the supply of money relative to the demand for money.

That being the case, who is responsible for inflation? It's not you or I because if we privately increased the supply of money to finance profligate spending, we would be charged with counterfeiting and go to prison. The Federal Reserve Bank, our central bank, is the only entity legally permitted to increase the supply of money, to finance Congress' profligate spending. The Federal Reserve Bank is supposed to be independent but it typically accommodates the wishes of Congress and the White House.

Central banks are villains in most countries; ours is just not as bad as others. In 1946, Hungary's central bank gave it the world's highest inflation rate. Prices doubled every 16 hours creating an annual inflation rate of 13 quadrillion percent. Last October, Zimbabwe's central bank produced history's second highest rate of inflation. Prices doubled every 25 hours, giving it an annual inflation rate of 80 billion percent.By comparison, Germany's inflation rate, which brought about the social disruption responsible for Hitler's rise to power, was a mere 30,000 percent that saw prices doubling every four days. You say, "Williams, that couldn't happen here." Except during the Revolutionary War and the War of 1861, our inflation has never exceeded 20 percent, but keep in mind that any hyperinflation was once 20 percent.

Knowing the dangers posed by central banks, we might ask whether our country needs the Federal Reserve Bank. Whenever I'm told that we need this or that government program, I always ask what we did before. It turns out that we did without a central bank from 1836, when President Andrew Jackson closed the Second Bank of the United States, to 1913 when Federal Reserve Act was written. During that interval, we prospered and became one of the world's major economic powers.

The justifications for Federal Reserve Act of 1913 was to prevent bank failure and maintain price stability. Simple before and after analysis demonstrates that the Federal Reserve Bank has been a failure. In the century before the Federal Reserve Act, wholesale prices fell by 6 percent; in the century after they rose by 1,300 percent. Maximum bank failures in one year before 1913 were 496 and afterward, 4,400. During the 1930s, inept money supply management by the Federal Reserve Bank was partially responsible for both the depth and duration of the Great Depression.

It is not wise for us to permit a few people on the Federal Reserve Board to have life and death power over our economy. My recommendation for reducing some of that power is to repeal legal tender laws and eliminate all taxes on gold, silver and platinum transactions. That way there would be money substitutes and the government money monopoly would be reduced and hence the ability to tax — some people would say steal from — us through inflation.

Walter E. Williams is a professor of economics at George Mason University. To find out more about Walter E. Williams and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate Web page at www.creators.com.

COPYRIGHT 2008 CREATORS SYNDICATE, INC.

I, Pencil: My Family Tree as told to Leonard E. Read

I, Pencil

By Leonard E. Read

I am a lead pencil—the ordinary wooden pencil familiar to all boys and girls and adults who can read and write.

Writing is both my vocation and my avocation; that’s all I do.

You may wonder why I should write a genealogy. Well, to begin with, my story is interesting. And, next, I am a mystery —more so than a tree or a sunset or even a flash of lightning. But, sadly, I am taken for granted by those who use me, as if I were a mere incident and without background. This supercilious attitude relegates me to the level of the commonplace. This is a species of the grievous error in which mankind cannot too long persist without peril. For, the wise G. K. Chesterton observed, “We are perishing for want of wonder, not for want of wonders.”

I, Pencil, simple though I appear to be, merit your wonder and awe, a claim I shall attempt to prove. In fact, if you can understand me—no, that’s too much to ask of anyone—if you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing. I have a profound lesson to teach. And I can teach this lesson better than can an automobile or an airplane or a mechanical dishwasher because—well, because I am seemingly so simple.

Simple? Yet, not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn’t it? Especially when it is realized that there are about one and one-half billion of my kind produced in the U.S.A. each year.

Pick me up and look me over. What do you see? Not much meets the eye—there’s some wood, lacquer, the printed labeling, graphite lead, a bit of metal, and an eraser.

Innumerable Antecedents

Just as you cannot trace your family tree back very far, so is it impossible for me to name and explain all my antecedents. But I would like to suggest enough of them to impress upon you the richness and complexity of my background.

My family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon. Now contemplate all the saws and trucks and rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding. Think of all the persons and the numberless skills that went into their fabrication: the mining of ore, the making of steel and its refinement into saws, axes, motors; the growing of hemp and bringing it through all the stages to heavy and strong rope; the logging camps with their beds and mess halls, the cookery and the raising of all the foods. Why, untold thousands of persons had a hand in every cup of coffee the loggers drink!

The logs are shipped to a mill in San Leandro, California. Can you imagine the individuals who make flat cars and rails and railroad engines and who construct and install the communication systems incidental thereto? These legions are among my antecedents.

Consider the millwork in San Leandro. The cedar logs are cut into small, pencil-length slats less than one-fourth of an inch in thickness. These are kiln dried and then tinted for the same reason women put rouge on their faces. People prefer that I look pretty, not a pallid white. The slats are waxed and kiln dried again. How many skills went into the making of the tint and the kilns, into supplying the heat, the light and power, the belts, motors, and all the other things a mill requires? Sweepers in the mill among my ancestors? Yes, and included are the men who poured the concrete for the dam of a Pacific Gas & Electric Company hydroplant which supplies the mill’s power!

Don’t overlook the ancestors present and distant who have a hand in transporting sixty carloads of slats across the nation.

Once in the pencil factory—$4,000,000 in machinery and building, all capital accumulated by thrifty and saving parents of mine—each slat is given eight grooves by a complex machine, after which another machine lays leads in every other slat, applies glue, and places another slat atop—a lead sandwich, so to speak. Seven brothers and I are mechanically carved from this “wood-clinched” sandwich.

My “lead” itself—it contains no lead at all—is complex. The graphite is mined in Ceylon [Sri Lanka]. Consider these miners and those who make their many tools and the makers of the paper sacks in which the graphite is shipped and those who make the string that ties the sacks and those who put them aboard ships and those who make the ships. Even the lighthouse keepers along the way assisted in my birth—and the harbor pilots.

The graphite is mixed with clay from Mississippi in which ammonium hydroxide is used in the refining process. Then wetting agents are added such as sulfonated tallow—animal fats chemically reacted with sulfuric acid. After passing through numerous machines, the mixture finally appears as endless extrusions—as from a sausage grinder—cut to size, dried, and baked for several hours at 1,850 degrees Fahrenheit. To increase their strength and smoothness the leads are then treated with a hot mixture which includes candelilla wax from Mexico, paraffin wax, and hydrogenated natural fats.

My cedar receives six coats of lacquer. Do you know all the ingredients of lacquer? Who would think that the growers of castor beans and the refiners of castor oil are a part of it? They are. Why, even the processes by which the lacquer is made a beautiful yellow involve the skills of more persons than one can enumerate!

Observe the labeling. That’s a film formed by applying heat to carbon black mixed with resins. How do you make resins and what, pray, is carbon black?

My bit of metal—the ferrule—is brass. Think of all the persons who mine zinc and copper and those who have the skills to make shiny sheet brass from these products of nature. Those black rings on my ferrule are black nickel. What is black nickel and how is it applied? The complete story of why the center of my ferrule has no black nickel on it would take pages to explain.

Then there’s my crowning glory, inelegantly referred to in the trade as “the plug,” the part man uses to erase the errors he makes with me. An ingredient called “factice” is what does the erasing. It is a rubber-like product made by reacting rapeseed oil from the Dutch East Indies [Indonesia] with sulfur chloride. Rubber, contrary to the common notion, is only for binding purposes. Then, too, there are numerous vulcanizing and accelerating agents. The pumice comes from Italy; and the pigment which gives “the plug” its color is cadmium sulfide.

No One Knows

Does anyone wish to challenge my earlier assertion that no single person on the face of this earth knows how to make me?

Actually, millions of human beings have had a hand in my creation, no one of whom even knows more than a very few of the others. Now, you may say that I go too far in relating the picker of a coffee berry in far-off Brazil and food growers elsewhere to my creation; that this is an extreme position. I shall stand by my claim. There isn’t a single person in all these millions, including the president of the pencil company, who contributes more than a tiny, infinitesimal bit of know-how. From the standpoint of know-how the only difference between the miner of graphite in Ceylon and the logger in Oregon is in the type of know-how. Neither the miner nor the logger can be dispensed with, any more than can the chemist at the factory or the worker in the oil field—paraffin being a by-product of petroleum.

Here is an astounding fact: Neither the worker in the oil field nor the chemist nor the digger of graphite or clay nor any who mans or makes the ships or trains or trucks nor the one who runs the machine that does the knurling on my bit of metal nor the president of the company performs his singular task because he wants me. Each one wants me less, perhaps, than does a child in the first grade. Indeed, there are some among this vast multitude who never saw a pencil nor would they know how to use one. Their motivation is other than me. Perhaps it is something like this: Each of these millions sees that he can thus exchange his tiny know-how for the goods and services he needs or wants. I may or may not be among these items.

No Master Mind

There is a fact still more astounding: The absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work. This is the mystery to which I earlier referred.

It has been said that “only God can make a tree.” Why do we agree with this? Isn’t it because we realize that we ourselves could not make one? Indeed, can we even describe a tree? We cannot, except in superficial terms. We can say, for instance, that a certain molecular configuration manifests itself as a tree. But what mind is there among men that could even record, let alone direct, the constant changes in molecules that transpire in the life span of a tree? Such a feat is utterly unthinkable!

I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles which manifest themselves in Nature an even more extraordinary miracle has been added: the configuration of creative human energies—millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human masterminding! Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree.

The above is what I meant when writing, “If you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing.” For, if one is aware that these know-hows will naturally, yes, automatically, arrange themselves into creative and productive patterns in response to human necessity and demand— that is, in the absence of governmental or any other coercive master-minding—then one will possess an absolutely essential ingredient for freedom: a faith in free people. Freedom is impossible without this faith.

Once government has had a monopoly of a creative activity such, for instance, as the delivery of the mails, most individuals will believe that the mails could not be efficiently delivered by men acting freely. And here is the reason: Each one acknowledges that he himself doesn’t know how to do all the things incident to mail delivery. He also recognizes that no other individual could do it. These assumptions are correct. No individual possesses enough know-how to perform a nation’s mail delivery any more than any individual possesses enough know-how to make a pencil. Now, in the absence of faith in free people—in the unawareness that millions of tiny know-hows would naturally and miraculously form and cooperate to satisfy this necessity—the individual cannot help but reach the erroneous conclusion that mail can be delivered only by governmental “masterminding.”

Testimony Galore

If I, Pencil, were the only item that could offer testimony on what men and women can accomplish when free to try, then those with little faith would have a fair case. However, there is testimony galore; it’s all about us and on every hand. Mail delivery is exceedingly simple when compared, for instance, to the making of an automobile or a calculating machine or a grain combine or a milling machine or to tens of thousands of other things. Delivery? Why, in this area where men have been left free to try, they deliver the human voice around the world in less than one second; they deliver an event visually and in motion to any person’s home when it is happening; they deliver 150 passengers from Seattle to Baltimore in less than four hours; they deliver gas from Texas to one’s range or furnace in New York at unbelievably low rates and without subsidy; they deliver each four pounds of oil from the Persian Gulf to our Eastern Seaboard—halfway around the world—for less money than the government charges for delivering a one-ounce letter across the street!

The lesson I have to teach is this: Leave all creative energies uninhibited. Merely organize society to act in harmony with this lesson. Let society’s legal apparatus remove all obstacles the best it can. Permit these creative know-hows freely to flow. Have faith that free men and women will respond to the Invisible Hand. This faith will be confirmed. I, Pencil, seemingly simple though I am, offer the miracle of my creation as testimony that this is a practical faith, as practical as the sun, the rain, a cedar tree, the good earth.

America Must Take the Cure

By Froma Harrop
Dec 16, 2008

Al goes to the doctor. Al: "I'm still short of breath. I know you told me to quit smoking, and honestly, I've tried. But kicking the habit is really stressful. Doc, can you help me?" Doctor: "I understand. Let me find a way to help you continue smoking." No serious medical professional would ever offer that response. Smoking caused Al's breathing problems. However difficult quitting cigarettes may be, it is the only way Al will get better.

Likewise for the sick consumer economy. The cure will require discomfort. While Washington should take the panic out of shoppers, it should not impede their pained efforts to change unhealthy behavior.

An example of the conflicts involved comes in the report that American families started paying down their debt in October. (This is the first time household debt has contracted since records were first kept in 1952.) Sounds like a fine piece of news, but here is The Wall Street Journal's take: "That is a punishing turn for an economy in which consumer spending accounts for 70 percent of gross domestic product."

We appreciate the concern, but too much borrowing is how we got into trouble. There is no way to reduce debt other than to reduce debt. If the consumer economy hurts for that reason, well, isn't this a side effect of the needed pill? Eventually, consumers won't owe so much, and so they'll feel confident enough to shop again.

There are things the federal government can fix and things it shouldn't. Washington must help unfreeze the credit markets so that people can borrow for such big purchases as cars. But it will have to passively watch a lot of stores and entire malls go broke. The "overstoring" of America was fueled in part on consumer borrowing. Many retail chains are themselves debt laden and will not survive this downturn.

But a consumer switch from borrowing to saving should leave a smaller but healthier retailing infrastructure. As financial advisers like to say, saving is nothing but delayed spending.

Some may remember the old Christmas clubs. All year round, workers would put, say, $40 a month into special holiday savings accounts. Come November, they take out money to blow on presents.

As with falling debt loads, swooning house prices are not an entirely bad thing. Some of the business interests that benefited from inflated home prices now demand intervention to prop up the flattened values of these assets. To hear them speak, you'd think that soaring prices were the natural order of things and tumbling prices abnormal. Of course, the market price of something is whatever someone is willing to pay for it.

Lower house values mean that consumers can buy homes for less money and with smaller mortgages. That will leave them more to spend on other things.

The new economic reality is curtailing the practice of borrowing off one's home equity to free cash for other spending. Consumers will regard their home as their shelter, not their piggy bank. Once that mental change happens, they won't care so much what the house was worth in 2006, but that there be a stable market when they need to sell.

Like Al's smoking, Americans' love of debt and taste for real-estate speculation made the problem now needing treatment. The cure in both cases is to stop the bad habits that caused it.

The big question: If the good times were caused by consumer borrowing, and consumers shouldn't go back to their old ways, how can we bring back the hot times? Answer: The times won't be as hot, but they'll be fine.

Oil Companies Voting With Their Feet

By INVESTOR'S BUSINESS DAILY | Posted Friday, December 12, 2008 4:20 PM PT

Energy: Another day, another oil company fleeing the country. No, this isn't Ecuador, the banana republic that just defaulted on its debt after chasing out investors. It's the United States, and what we're seeing is self-defense.

Much political hay has been made in Congress about "unpatriotic" corporations that move operations abroad. Weatherford International is the latest, taking its headquarters from Houston to Switzerland. The oil services company said that it wants to be closer to its markets. But what it really meant was that it no longer saw the future in the U.S.

In a political atmosphere of blaming corporations, it's no wonder. Halliburton fled to Dubai in 2007. Tyco International, Foster Wheeler and Transocean International all went to Switzerland. As a pattern emerges, America's global standing diminishes, in part because it's based on the willingness of companies to invest. It's an especially bad sign when domestic companies flee.

"The U.S. is an important market," Weatherford CEO Bernard J. Duroc-Danner told the Houston Chronicle Thursday. But, "it's just a market. It's not the primary market."

How does that sound for a loss of global leadership? If that's not clear enough, try this: "In the hierarchical pecking order, (Houston's) not going to be Rome anymore."

What accounts for this vote of no confidence in the U.S.?

Start with the demonization of oil companies. Executives have been hauled before Congressional star chambers, held up to abuse and ridicule, and then blamed for high oil prices as if they wanted to kill their markets. Rising global demand, nationalizations and Congress' failure to open the country to drilling go ignored.

Huge companies such as Exxon Mobil, whose market cap exceeds the GDP of most countries, create $100 billion in earnings in quarters when oil prices soar. It looks high, but over the years, the industry's average returns, at 9%, are less than other industries.

Nevertheless, Exxon's profits are evidence of its success at extracting oil from miles below the earth's surface, even underwater, and from unbelievably hostile environments, such as the Arctic. Instead of being objects of national pride for their productivity and efficiency, and subjects of heroic Hollywood movies, their success is considered to be dishonest.

Congressional hostility affects oil companies' operations abroad, too: Exxon, remember, noted that Congress' animus toward oil profits directly encouraged Hugo Chavez's uncompensated expropriations of $1 billion of Exxon's assets in Venezuela, which drove oil prices higher.

With an expanded Democratic Congress and an incoming Democratic president determined to create "patriot corporations," it's no surprise to see companies try to get out while they can. Make no mistake — it's investment fleeing the country. As this goes, foreign capital could flee next.

Congress' abuse sets the political tone for the worst to come.

First, oil companies, like all corporations, endure the second-highest taxation in the developed world (39.25% of their income), which dampens their competitiveness. The 2007 OECD average is 27.6% and falling. Worse still, U.S. firms are taxed on operations around the world, unlike the global standard, making a move of headquarters a defensive move.

Meanwhile, politicians openly say they want to hike taxes on oil firms. President-elect Obama seems to have backed off, but questions remain as to whether he can stand up to a rapacious and economically ignorant Congress that hasn't.

Second, Big Labor is feeling its oats, swaggering confidently with newfound political power. United Steelworkers approved a "national oil bargaining policy" for higher wages and beefed up its "strike defense fund," both of which point to plans to squeeze oil companies, if not launch strikes.

"You have to prepare your membership for 2009," according to USW International Vice President Gary Beevers on a union Web site. "The oil companies are ready for us; we have to be ready for them." With Congress at their back, oil companies are unlikely to lose.

None of this portends well for the U.S. business environment. That's why top-performing firms, such as Weatherford, are exiting. Until Congress learns to appreciate and value oil firms, this will continue, leading to less U.S. investment and influence as more competitive climes beckon.

The New Political Economy

by Charles Krauthammer

WASHINGTON -- In the old days -- from the Venetian Republic to, oh, the Bear Stearns rescue -- if you wanted to get rich, you did it the Warren Buffett way: You learned to read balance sheets. Today you learn to read political tea leaves. You don't anticipate Intel's third-quarter earnings; instead, you guess what side of the bed Henry Paulson will wake up on tomorrow.

Today's extreme stock market volatility is not just a symptom of fear -- fear cannot account for days of wild market swings upward -- but a reaction to meta-economic events: political decisions that have vast economic effects.

As economist Irwin Stelzer argues, we have gone from a market economy to a political economy. Consider seven days in November. On Tuesday, Nov. 18, Paulson broadly implies he's only using half the $700 billion bailout money. Having already spent most of his $350 billion, he's going to leave the rest to his successor. The message received on Wall Street -- I'm done, I'm gone.

Facing the prospect of two months of political limbo, the market craters. Led by the banks (whose balance sheets did not change between Tuesday and Wednesday), the market sees the largest two-day drop in the S&P since 1933, not a very good year.

The next day (Friday) at 3 p.m., word leaks of Timothy Geithner's impending nomination as Treasury secretary. The mere suggestion of continuity -- and continued authoritative intervention during the interregnum by the guy who'd been working hand in glove with Paulson all along -- sends the Dow up 500 points in one hour.

Monday sees another 400-point increase, the biggest two-day (percentage) rise since 1987. Why? Three political events: Paulson's weekend Citigroup bailout; the official rollout of Obama's economic team, Geithner and Larry Summers; and Paulson quietly walking back from his earlier de facto resignation by indicating he would be ready to use the remaining $350 billion (with Team Obama input) over the next two months.

That undid the market swoon -- and dramatically demonstrated how politically driven the economy has become.

We may one day go back to a market economy. Meanwhile, we need to face the two most important implications of our newly politicized economy: the vastly increased importance of lobbying and the massive market inefficiencies that political directives will introduce.

Lobbying used to be about advantages at the margin -- a regulatory break here, a subsidy there. Now lobbying is about life and death. Your lending institution or industry gets a bailout -- or it dies.

You used to go to New York for capital. Now Wall Street, broke, is coming to Washington. With unimaginably large sums of money being given out by Washington, the Obama administration, through no fault of its own, will be subject to the most intense, most frenzied lobbying in American history.

That will introduce one kind of economic distortion. The other kind will come from the political directives issued by newly empowered politicians.

First, bank presidents are gravely warned by one senator after another about "hoarding" their bailout money. But hoarding is another word for recapitalizing to shore up your balance sheet to ensure solvency. Is that not the fiduciary responsibility of bank directors? And isn't pushing money out the window with too little capital precisely the lending laxity that produced this crisis in the first place? Never mind. The banks will knuckle under to the commissars of Capitol Hill. They control the purse. Prudence will yield to politics.

Even more egregious will be the directives to a nationalized Detroit. Sen. Charles Schumer, the noted automotive engineer, declared "unacceptable" last week "a business model based on gas." Instead, "We need a business model based on cars of the future, and we already know what that future is: the plug-in hybrid electric car."

The Chevy Volt, for example? It has huge remaining technological hurdles, gets 40 miles on a charge and will sell for about $40,000, necessitating a $7,500 outright government subsidy. Who but the rich and politically correct will choose that over a $12,000 gas-powered Hyundai? The new Detroit churning out Schumer-mobiles will make the steel mills of the Soviet Union look the model of efficiency.

The ruling Democrats have a choice: Rescue this economy to return it to market control. Or use this crisis to seize the commanding heights of the economy for the greater social good. Note: The latter has already been tried. The results are filed under "History, ash heap of."

Charles Krauthammer is a 1987 Pulitzer Prize winner, 1984 National Magazine Award winner, and a columnist for The Washington Post since 1985.

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