people whom we elect to Congress are either ignorant of, have contempt for or
are just plain stupid about the United States Constitution. You say:
“Whoa, Williams, you’re really out of line! You’d better
explain.” Let’s look at it.
Phil Hare, D-Ill., responding to a question during a town hall meeting, said
he’s “not worried about the Constitution.” That was in
response to a question about the constitutionality of Obamacare. He told his
constituents that the Constitution guaranteed each of us “life, liberty
and the pursuit of happiness.” Of course, our Constitution guarantees
no such thing. The expression “life, liberty and the pursuit of
happiness” is found in our Declaration of Independence.
a debate, Rep. Jim McGovern, D-Mass., gave his opinion about the U.S. Supreme
Court’s ruling in Citizens United v. Federal Election Commission,
concluding that “the Constitution is wrong.” Not to be outdone,
at his town hall meeting, Rep. Pete Stark, D-Calif., responded to a
constituent’s question about Obamacare by saying, “There are very
few constitutional limits that would prevent the federal government from
(making) rules that can affect your private life.” Adding, “Yes,
the federal government can do most anything in this country.” The
questioner responded, “People like you, sir, are destroying this nation.”
Her comment won shouts of approval from the audience.
year, a CNS reporter asked, “Madam Speaker, where specifically does the
Constitution grant Congress the authority to enact an individual health
insurance mandate?” Speaker Pelosi responded: “Are you serious?
Are you serious?” She shares the vision of her fellow Californian Stark
that Washington can do most anything.
ignorance and contempt for our Constitution isn’t only on the Democrat
side of the aisle. During a town hall meeting, Rep. Frank LoBiondo, R-N.J.,
was asked by one of his constituents whether he knew what Article I, Section
I of the Constitution mandated. He replied that, “Article I, Section I
is the right to free speech.”
Article I, Section I reads, “All legislative Powers herein granted
shall be vested in a Congress of the United States, which shall consist of a
Senate and House of Representatives.” LoBiondo was later asked whether
he knew the five rights guaranteed by the First Amendment. Fearing further
revelation of his ignorance, he replied, “I can’t articulate
the way, those five guarantees are: free exercise of religion, freedom of
speech, freedom of the press, the right to peaceable assembly and the right
to petition the government for redress of grievances.
in part, is the oath of office that each congressman takes: “I do
solemnly swear (or affirm) that I will support and defend the Constitution of
the United States against all enemies, foreign and domestic; that I will bear
true faith and allegiance to the same ... .” Here’s my question
to you: If one takes an oath to uphold and defend, and bear true faith and
allegiance to the Constitution, at the minimum, shouldn’t he know what
he’s supposed to uphold, defend and be faithful to?
congressmen, judges, the president and other government officials were merely
ignorant of our Constitution, there’d be hope -- ignorance is curable
through education. These people in Washington see themselves as our betters
and rulers. They have contempt for the limits our Constitution places on the
federal government envisioned by James Madison, the father of our
Constitution, who explained in the 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. ... The powers reserved to the
several States will extend to all the objects which in the ordinary course of
affairs, concern the lives and liberties, and properties of the people, and
the internal order, improvement and prosperity of the State.”
“Your New Health Care
shows how Obamacare’s hundreds of moving parts fit together — or
The Congressional Joint Economic Committee’s (JEC)
personnel could not fit all of this new law’s boards, commissions,
mandates, and other elements onto this chart. So, by way of shorthand, they
created “bundles of bureaucracy.” Beyond those functions
delineated in the chart, these seven collective symbols respectively
represent clusters of four loan repayment and forgiveness programs, four
other new regulatory programs, 17 insurance mandates, 19 special-interest
provisions, 22 other new bureaucracies, 26 other new demonstration and pilot
programs, and 59 other new grant programs. These 151 additional items within
Obamacare do not appear individually on this diagram. As Representative Brady
explains, “If we included all of these units, this chart would be three
times larger.” …
Between December 2007, when the Great Recession began,
and last July, the private sector lost 7,837,000 jobs (down 6.8 percent).
Local-government employment dropped 128,000 positions (minus 0.9 percent),
while state governments shed 6,000 positions (less 0.1 percent). Meanwhile,
Washington, D.C., boomed. Federal employment zoomed by 198,100 slots as Uncle
Sam’s workforce expanded by 10 percent.
This graph’s whiff of Marie Antoinette should boil
every patriot’s blood. While the American people live increasingly
ascetic lives, and even city halls and statehouses have displayed some
restraint, Washington, D.C., increasingly resembles Versailles — an out-of-touch,
extravagant, and callous place that fuels little beyond the nation’s
disgust, fury, and organized rebellion. As the party rages within the
Beltway, federal revelers scream, “Let them pay taxes!”
USA Today on August 10 published this front-page
chart based on Bureau of Economic Analysis data. It shows that in 2009, the
average private-sector employee saw compensation of $61,051 ($50,462 in wages
and $10,589 in benefits). Among state- and local-government workers, the
relevant figure was $69,913 ($53,056 in wages and $16,857 in benefits). For
federal-civilian employees, the picture was far prettier: Compensation stood
at $123,049 ($81,258 in wages and $41,791 in benefits).
These nauseating numbers show federal employees earning
201 percent of the average private worker’s compensation. Federal
benefits equal 395 percent of private-sector benefits.
This bloat is bipartisan. While President Obama’s spending
spree has exacerbated the inequality of federal vs. private compensation,
this problem reaches into the irresponsible Bush-Rove years. Between 2000 and
2009, private salaries and benefits grew by 8.8 percent after inflation.
Among federal civilians, however, salaries and benefits exploded by 36.9
Proving the other party is
unfit to rule is simple; governing is more difficult.
“I NEVER VOTE,” SAID A MAN whose name
is legion, “It only encourages them.” He and all of us should
remember that it doesn’t matter if you encourage them or not. Every
election has the same result—a government.
We stand with another anonymous humorist who said,
“Politicians are like diapers—they need changing regularly and
for the same reason.” It’s no surprise to us that the American
people are in the mood for a change of parties. Usually the mystery is why it
takes the people so long to get in the mood. This time it took only four
The unrepaired economy, the continuing foreign
wars, the people’s mistrust of one-party government and the unfulfilled
promises of health-care reform have shaken the people’s confidence in
Democrats and congressional Democrats’ confidence in themselves and
their leaders. More than 50 Democratic members of Congress are giving off a
putrescent odor of fear. All of them soon will be looking to blame their
president, their friends and their former allies.
When campaigning Republicans place blame on the
other party, they are telling us to assume that they could have done better.
That’s a rebuttable presumption, at best:
• The Congress and the president had little
success saving the economy, but it’s doubtful that another
policy—or no policy—could have done much better. The so-called
Great Recession was carelessly constructed from at least 16 years of
bipartisan mistakes that neither party wishes to undo.
• Saying that the wars in Iraq and
Afghanistan were bad ideas, or good ideas badly executed, does not bring the
soldiers home or solve the puzzle of terrorism.
• The disadvantages of one party controlling
the House, the Senate and the White House have been obvious for a long time,
but divided government is unlikely to satisfy the aspirations of a divided
• Health-care reform was merely authorized
by Congress; the real details of the law with all their devils will be
drafted by the bureaucracy, and then amended in the courts. This election
will not affect that process.
The current election campaign has been especially
devoted to the effort to get the other guys to stay home. As H.L. Mencken
said in an earlier campaign, “each party tries to prove that the other
party is unfit to rule.” He added, “Both commonly succeed, and
The devoted reporters at the FactCheck.org Website
provide appalling and bipartisan examples of lies, damn lies and statistics
pressed into political service. We would say read it before you vote, but
then you might not vote.
Voting is worthwhile, even if one only follows the
rule promulgated by W. C. Fields: “I always vote against,” he
Vote for, if you see something worth voting for.
Vote against, if that’s all you can see. If you can’t see
anything, follow the advice we offer every year: Vote regardless of party to
vote out the incumbent, especially the incumbents with long service and weak
challengers. No matter who’s in, no matter how securely, the way to
encourage them is to make their election as doubtful as possible.
A Profit Without Honor
Treasury plays a shell game
with borrowed money.
YOU BORROWED $100,000 from your rich uncle two years ago to go to business school.
Your two-year course is over, but the economy still is in such bad shape that
you can’t get a job. You move back into your father’s house. But
your uncle wants to be repaid. Your father is retiring soon, but he takes out
a second mortgage on the house in order to pay back your uncle. Using your
business-school acumen, you ask your uncle for a letter of recommendation,
attesting to the fact that you paid back his loan. Your uncle does better
than that—he also co-signs the car loan for your new BMW.
have one crazy hypothetical uncle. But it’s not entirely a fantasy.
It’s real life, as imagined in press releases from Uncle Sam. The U.S.
Treasury declared on Oct. 3: “Three-fourths of the TARP funds provided
to banks have already been returned, and taxpayers will ultimately receive a
credulous news service embellished the story: “The U.S.
government’s bailout of financial firms through the Troubled Asset
Relief Program provided taxpayers with higher returns than they could have
made buying 30-year Treasury bonds. The government has earned $25.2 billion
on its investment of $309 billion in banks and insurance companies, an 8.2%
return over two years. That beat U.S. Treasuries, high-yield savings
accounts, money-market funds and certificates of deposit.”
is, of course, a 4% annual return, but that isn’t so impressive. And it
doesn’t consider any adjustment for the risk. And it would be just as
accurate to claim that the government earned an infinite rate of return,
since all the $309 billion was borrowed.
is just part of a bailout-and-stimulus program that is a huge loser. The
government has borrowed money and shoveled it out the window for more than
two years. A little of it has leaked back in under the door. Trillions of dollars
of American wealth will not be seen again until Americans put their economy
and their government finances on a sounder footing.
Mae and Freddie Mac have financed the so-called profit through purchase and
guarantees of banks’ dubious mortgages and mortgage-backed securities.
In its turn the Fed has supported Fannie and Freddie through purchases of
their debt and bad assets worth about $1.25 trillion.
more interesting question is what the Treasury’s investment in zombie
banks will look like if the banks are forced to take back the shady mortgages
and squirrely mortgage-backed securities they peddled to naïve
investors. The government will be throwing our good money after our bad
money, though we can be certain that there will be official declarations of a
“Civil asset forfeiture is an unjust
practice under any circumstances. It is an invitation to corruption, offering
a way for the government to get its hands on someone’s property under a
lower standard of proof than it must meet to convict someone.” —
Radley Balko, “The Government’s License to Steal“
“Fascism will come
at the hands of perfectly authentic Americans who have been working to commit
this country to the rule of the bureaucratic state; interfering in the
affairs of the states and cities; taking part in the management of industry
and finance and agriculture; assuming the role of great national banker and
investor, borrowing billions every year and spending them on all sorts of
projects through which such a government can paralyze opposition and command
public support; marshaling great armies and navies at crushing costs to
support the industry of war and preparation for war which will become our
nation’s greatest industry; and adding to all this the most romantic
adventures in global planning, regeneration, and domination, all to be done
under the authority of a powerfully centralized government in which the
executive will hold in effect all the powers, with Congress reduced to the
role of a debating society.” — John T. Flynn, As We Go Marching
“When goods do not cross borders,
soldiers will.” — Frédéric Bastiat
10/30/2010: from the Daily
Joel Bowman, reporting from Buenos Aires...
The world waits...
Stocks barely budged this week. Gold bobbed around
like an anchorless sailboat, adrift in a vast ocean of guesses, speculation
and rumor. All eyes, meanwhile, are on US Fed Chairman Ben Bernanke, who is
widely expected to announce his next round of systematic dollar debasement a
few days from now – a strategy otherwise known as “quantitative
easing,” or “QE” for short. Trepid investors, unsure of
what the value of the world’s reserve currency will be a week from now,
sit on the sidelines, awaiting their cue from the man with the magic chopper.
Fellow Reckoners will recall Bernanke’s
statement that, should it become “necessary,” he could cure what
ails the financial world by dropping money from helicopters. He’s not
quite there yet. Readers are invited to have a little patience...
Of course, the battle between central bank-created
fiat money and its arch nemesis, gold, is not a new tale. Money meddlers have
been tussling with the precious metal since the coin clipping days of the
Romans. You’d think the bozos would have learned their lesson by now.
But, as Bill likes to say, what one generation learns, the next is quick to
“Gold vs. the Fed: the Record is
Clear,” reads a headline from The Wall Street Journal this week. The
article goes on to highlight a few of the dollar’s lowlights during its
ongoing battle with the Midas Metal.
“From 1947 through 1967, the year before the
US began to weasel out of its commitment to dollar-gold
convertibility,” the story begins, “unemployment averaged only
4.7% and never rose above 7%. Real growth averaged 4% a year. Low
unemployment and high growth coincided with low inflation. During the 21
years ending in 1967, consumer-price inflation averaged just 1.9% a year.
Interest rates, too, were low and stable – the yield on triple-A
corporate bonds averaged less than 4% and never rose above 6%.
“What’s happened since 1971,”
the article wonders aloud, “when President Nixon formally broke the
link between the dollar and gold? Higher average unemployment, slower growth,
greater instability and a decline in the economy’s resilience.”
And that’s not all.
“For the period 1971 through 2009,
unemployment averaged 6.2%, a full 1.5 percentage points above the 1947-67
average, and real growth rates averaged less than 3%. We have since experienced
the three worst recessions since the end of World War II, with the
unemployment rate averaging 8.5% in 1975, 9.7% in 1982, and above 9.5% for
the past 14 months. During these 39 years in which the Fed was free to
manipulate the value of the dollar, the consumer-price index rose, on
average, 4.4% a year. That means that a dollar today buys only about
one-sixth of the consumer goods it purchased in 1971.”
And to think the Journal is referring only to official
statistics! The real story, when adjusting for the number torture going on in
the government’s chamber of statistics – what Orwell might call
the Ministry for Truth – is far, far worse. But readers get the point.
The evidence is in. The facts have been observed. The arguments made. The
case against a fiat money system would seem as open and shut as they come.
So why continue down the path leading to the very
same cliff every other fiat money leapt from? Ahh... As every liar worth his
salt well knows, a mistruth must beget a fraud, which, in turn, must give
rise to another lie.
The world is brimming with stories of people who
blindly cling to crackpot ideas in the face of any and all rational argument
to the contrary. In fact, research shows that, far from inspiring a
level-headed change of opinion, a well constructed argument dismantling this
or that hocus pocus theory often has the opposite effect, emboldening the
purveyors of such falsehoods. Leon Festinger introduced the theory, known as
“cognitive dissonance” in his well-known book When Prophecy
Fails, co-written with Henry Riecken, and Stanley Schachter.
In it, Festinger and his colleagues infiltrate a
cult whose leader, Dorothy Martin, convinces a bunch of fellow village idiots
that an apocalyptic flood is going to ravage the earth and that their only
hope rests with a group of strangely benevolent aliens who would swoop down
at the hour of reckoning to save the believing souls from certain death. One
might reasonably expect that, when the fated day came and went without a drop
of rain (or alien appearance), the group, no doubt embarrassed but otherwise
none the worse for wear, would simply disband and go home. Not so.
Ed Yong, an award-winning British science writer
who addressed the subject in a recent article for Discover magazine,
describes what happened next. “In a reversal of their earlier distaste
for publicity, [the group] started to actively proselytize for their beliefs.
Far from shattering their faith, the absent UFOs had turned them into zealous
What corners we humans allow our theories to paint
Perhaps it is the same psychological disposition,
a cerebral partitioning of sorts, giving rise to the popular belief that a
man can grow prosperous by spending more than he earns. Or that problems
caused by too much debt can be cured...with more debt. Or that leaving a
central banker in charge of the value of money can end in anything other than
currency destruction and eventual financial ruin.
So, what does a central banker do when one round
of money printing doesn’t bring about the desired effect? Does he
revisit first principles and reexamine the evidence? Or does he double down
on his bets, defending his actions with increasingly zealous evangelism?
Bernanke gives the world his answer on Wednesday.
Gold Never Has Been (and Never Will Be) in a Bubble
By Nathan Lewis, Binghamton, New York
Most serious gold investors follow a basic
principle: that gold is stable in value. Changes in the “gold
price” represent changes in the currency being compared to gold, while
gold itself is essentially inert.
This is why gold was used as a monetary foundation
for literally thousands of years. You want money to be stable in value. The
simplest way to accomplish this was to link it to gold. Today, we summarize
this quality by saying that “gold is money.”
From this we can see immediately, that if gold
doesn’t change in value – at least not very much – then it
can never be in a “bubble.” There may be a time when many people
are desperate to trade their paper money for gold, but that is because their
paper money is collapsing in value. It has nothing to do with gold.
Let’s take a look at some of the great gold
bull markets of the last hundred years:
- From 1920 to 1923, the price of gold in German
marks rose from 160/oz. to 48 trillion/oz.
- From 1945 to 1950, the price of gold in Japanese
yen rose from 140/oz. to 12,600/oz.
- From 1948 to 1967, the price of gold in
Brazilian cruzeiros went from 648/oz. to 94,500/oz.
- From 1970 to 1980, the price of gold in US
dollars went from 35/oz. to 850/oz.
- From 1982 to 1990, the price of gold in Mexican
pesos went from 8,000/oz. to 1,025,000/oz.
- From 1989 to 2000, the price of gold in Russian
rubles went from 1,600/oz. to 8,120,000/oz.
Each of these situations was an episode of paper
currency depreciation. Today is no different. The rising dollar/euro/yen gold
price is simply a reflection of the Keynesian “easy money”
policies popular around the world today.
We can also see that, if gold remains stable in
value, then the supply/demand considerations that affect industrial
commodities do not affect gold, which is a monetary commodity. This is why
gold is used as money. If its value was affected by industrial supply/demand
factors, we would not be able to use it as money.
Thus, “jewelry demand” or “peak
gold,” or any other such factor, has little meaningful effect on
gold’s value. Day-to-day money flows will affect the price at which
currencies trade vs. gold, but this ultimately affects the currency in
question, not gold.
None of these historical “gold bull
markets” resulted from jewelry demand or mining supply.
Any attempt to attach a valuation to gold is
mostly a waste of time. Concepts like the “inflation-adjusted gold
price” or the “gold/oil ratio,” or a ratio of outstanding
debt or currency to a quantity of gold bullion, are a distraction. An item
that doesn’t change value is never cheap or dear. That’s what
“gold is money” means.
The “price of gold” may reach five
thousand, ten thousand, a hundred thousand, a million, or a billion dollars
per ounce. The gold bubble-callers will be frothing at the mouth, until they
finally have the realization that there was never a bubble in gold, but only
a crash in paper money.
Gold is money. Always has been. Probably always
will be. This time it’s different? I don’t think so.
the life of me, I can’t figure out why Wall Street bankers, traders and
executives get paid so much money year after year for doing jobs that rarely
require them to innovate, enlighten or put their own capital at risk, and
have the nasty habit of periodically sinking our economy.
a two-year stint as a reporter on a daily paper in the early 1980s, I worked
on Wall Street for nearly two decades, and quickly discovered that I could
make more money in one year as a banker than I could in a lifetime as a
journalist. And that was when I was a relatively junior banker. By the time I
was a managing director, the pay — and the pay spread — was
though, the amount of time and energy I devoted to the two professions on a
daily basis wasn’t all that different; both were totally demanding.
While it was true that as a banker I generated revenue, or helped to generate
revenue, and as a journalist, the publisher likely figured I was part of a
cost problem, the discrepancy in pay never made much sense to me since I
always had trouble imagining a newspaper without writers.
after six years of writing about Wall Street — including two lengthy
books — I remain at a total loss to explain the pay phenomenon.
What’s worse, even the most modest sleights when it comes to pay on
Wall Street — “The guy next to me got a $2 million bonus, why did
I only get $1.9 million?!” — is enough to reduce someone to
tears. Indeed, I have yet to encounter a person on Wall Street who can, with a
straight face, justify his compensation on other than the most painfully
tone-deaf grounds, usually along the lines of how they “add
value” for their clients.
Wall Street Journal recently estimated that Wall Street bonuses in 2010 will
total $144 billion, in a year that has been less than stellar for most banks.
Goldman Sachs has set aside $13.1 billion in bonuses for its approximately
35,000 employees, an average of $370,000 per person, which completely ignores
the fact that people at the top of Goldman’s golden pyramid get paid
millions of dollars annually while those at the bottom do not. (In 2007, the
three top executives at Goldman split around $200 million.) Goldman’s
accrued bonuses for the first nine months of the year equaled 43 percent of
its revenue and were down from the $16.7 billion that the firm accrued in
2009, or 47 percent of its revenue. (In a nod to the political gales blowing
in its direction, Goldman accrued nothing for bonuses in the final quarter of
Morgan Stanley, half of the $24 billion in revenue the firm has generated in
the first nine months of the year has been earmarked for compensation. At
Lazard — a somewhat different Wall Street animal, in that it largely
limits its actions to asset trading and advising on mergers, as opposed to
trading on its own account — 61 percent of the revenue generated so far
this year has been set aside for bonuses. And, incredibly, according to the
Financial Times, UBS, the giant Swiss bank, has asked Swiss authorities to
waive a $1 million bonus cap for its bankers “amid complaints”
the cap “has strained some executives’ personal finances.”
Wall Street firms exist for the benefit of their shareholders, like other
public companies, or do they exist primarily for the benefit of the people
who happen to work there? The answer to this rhetorical question is
painfully, and sadly, obvious. No other large public companies pay out
anywhere near as high a percentage of revenue to their employees. But where
is it written that this madness has to continue? Why does a financial
engineer have to get paid exponentially more than a real engineer?
his usual narrative flair, the New Yorker writer Malcolm Gladwell recently
tried to figure out, why Americans pay their “stars” so much
money. “There was a time, not so long ago, when people at the very top
of their profession — the talent — did not make a lot of
money,” he wrote. That’s true of Wall Street as well: in 1949,
when Felix Rohatyn started at Lazard Freres & Co., in New York, he was
paid $37.50 a week. This was a 15 percent better weekly salary than Ace
Greenberg received that year when he started at Bear Stearns, where he would
eventually rise to chief executive and chairman.
Gladwell explains — thanks to such visionaries as Marvin Miller, the
former head of the Major Baseball Players Association, and Mort Janklow, the
literary agent — the talent began taking a larger percentage of the
pie. The logic evolved, soundly, that those who took the greatest risks or
had achieved greatness on a daily basis deserved the bulk of the financial
reward, as opposed to those who happened to own the team or the printing
press. We may not always like Alex Rodriguez, but most Americans can
understand why he got a $275 million, 10-year contract to play baseball;
he’s one of the great players of all time, and his talents bring in the
crowds (and TV money) to the Yankees.
finance, the rough equivalent of A-Rod are top private-equity titans, like
Steve Schwarzman and Henry Kravis, or hedge-fund managers, like John Paulson
and James Simons. These men risk large chunks of their own money (as well as
their investors’) and make calculated gambles they hope will pay off.
If they bet right, they get fabulously wealthy; if they don’t, they
disappear into oblivion. Teddy Forstmann, a onetime star of the
private-equity firmament, explained to Gladwell why he chose that business:
“I wanted to be a principal and not an agent.” He wanted to be
the talent and to be paid like the talent, assuming he performed.
unlike hedge-fund guys, investment bankers are not principals. They are
agents. And they are at their best when they provide important services to
their clients — such as advice on mergers and acquisitions or the
capital their clients need to grow — and at their worst when they
pretend to be principals, using other people’s money to make bets for
their firms that they hope will be eventually reflected in their bonuses.
yet, somewhere along the line, bankers decided that they deserved to get paid
like those quantifiable talents who put themselves or their capital at risk
day after day. This is what mystifies me, since, as a group, investment
bankers are the most personally and professionally risk-averse people
I’ve ever met. After all, in what other business could they make so
much money without putting any of their own money on the line? Outsized
financial rewards should be reserved for those who take outsized financial
risks with their own money or have outsized, demonstrable talent. Investment
bankers, by and large, just do not make that cut.
the end of his essay, Gladwell tells the story of how the baseball Hall of
Famer Stan Musial, after turning in a batting performance that was 76 points
below his career average in 1959, asked the St. Louis Cardinals for a 20
percent pay cut off his $100,000 annual salary. This was a decade before
Marvin Miller came and changed the calculus for players. Gladwell concedes
that Miller would have been appalled by Musial’s decision. “There
wasn’t anything noble about it,” Musial said in explaining why he
did it. “I had a lousy year. I didn’t deserve the money.”
brings to mind what happened to Felix Rohatyn, at Lazard, when he took the
advice of Samuel Bronfman, the Seagram’s magnate, and switched from
foreign-exchange trading to Lazard’s mergers-and-acquisition group,
where he would go on to become a legend. The moment he made the switch,
however, Andre Meyer, Lazard’s senior partner, cut Rohatyn’s
annual pay to $10,000, from $15,000. And Rohatyn had not even had a bad year.
songs from years past are sometimes referred to as “golden
oldies.” There are political fallacies that have been around for a long
time as well. These might be called brass oldies. It certainly takes a lot of
brass to keep repeating fallacies that were refuted long ago.
of these brass oldies is a phrase that has been a perennial favorite of the
left, “tax cuts for the rich.” How long ago was this refuted?
More than 80 years ago, the “tax cuts for the rich” argument was
refuted, both in theory and in practice, by Andrew Mellon, who was Secretary
of the Treasury in the 1920s.
Mellon took office, there was a large national debt, the economy was
stagnating, and tax rates were high, though the tax revenues were still not
enough to cover government expenditures. What was Mellon’s prescription
for getting out of this mess? A series of major cuts in the tax rates!
as now, there were people who failed to make the distinction between tax
rates and tax revenues. Mellon said, “It seems difficult for some to
understand that high rates of taxation do not necessarily mean large revenue
for the Government, and that more revenue may often be obtained by lower
can that be? Because taxpayers change their behavior according to what the
tax rates are. When one of the Rockefellers died, Mellon discovered that his
estate included $44 million in tax-exempt bonds, compared to $7 million in
Standard Oil securities, even though Standard Oil was the source of the
the country as a whole, the amount of money tied up in tax-exempt securities
was estimated to be three times as large as the federal government’s
expenditures and more than half as large as the national debt.
short, huge amounts of money were not being invested in productive capacity,
such as factories or power plants, but was instead being made available for
local political boondoggles, because this money was put into tax-exempt state
and local bonds.
tax rates are reduced, investors have incentives to take their money out of
tax shelters and put it into the private economy, creating higher returns for
themselves and more production in the economy. Andrew Mellon understood this
then, even though many in politics and the media seem not to understand it
was able to persuade Congress to lower the tax rates by large amounts. The
percentage by which tax rates were lowered was greater at the lower income
levels, but the total amount of money saved by taxpayers was of course
greater on the part of people with higher incomes, who were paying much
higher tax rates on those incomes.
1921 and 1929, tax rates in the top brackets were cut from 73 percent to 24
percent. In other words, these were what the left likes to call “tax
cuts for the rich.”
happened to federal revenues from income taxes over this same span of time?
Income tax revenues rose by more than 30 percent. What happened to the
economy? Jobs increased, output rose, the unemployment rate fell and incomes
rose. Because economic activity increased, the government received more
income tax revenues. In short, these were tax cuts for the economy, even if
the left likes to call them “tax cuts for the rich.”
was not the only time that things like this happened, nor was Andrew Mellon
the only one who advocated tax rate cuts in order to increase tax revenues.
John Maynard Keynes pointed out in 1933 that lowering the tax rates can
increase tax revenues, if the tax rates are so high as to discourage economic
John F. Kennedy made the same argument in the 1960s -- and tax revenues
increased after the tax rates were cut during his administration. The same
thing happened under Ronald Reagan during the 1980s. And it happened again
under George W. Bush, whose tax rate cuts are scheduled to expire next
rich actually paid more total taxes, and a higher percentage of all taxes,
after the Bush tax rate cuts, because their incomes were rising with the
the people who keep repeating the catch phrase, “tax cuts for the
rich” not know this? Or are they depending on your not knowing it?
that are “golden oldies” have much less pleasant counterparts in
politics-- namely, ideas and policies that have failed disastrously in the
past but still keep coming back to be advocated and imposed by government.
Some people may think these ideas are as good as gold, but brass has often
been mistaken for gold by people who don’t look closely enough.
of these brass oldies is the idea that the government can and must reduce
unemployment by “creating jobs.” Some people point to the history
of the Great Depression of the 1930s, when unemployment peaked at 25 percent,
as proof that the government cannot simply stand by and do nothing when so
many millions of people are out of work.
we are going to look back at history, we need to make sure the history we
look at is accurate. First of all, unemployment never hit 25 percent until
after-- repeat, AFTER-- the federal government intervened in the economy.
was unemployment like when the federal government first intervened in the
economy after the stock market crash of 1929? It was 6.3 percent when that
first intervention took place in June 1930-- down from a peak of 9 percent in
December 1929, two months after the stock market crash.
never hit double digits in any of the 12 months following the stock market
crash of 1929. But it hit double digits within 6 months after government
intervention-- and unemployment stayed in double digits for the entire
remainder of the decade, as the government went in for one intervention after
first federal intervention in June 1930 was the passage of the Smoot-Hawley
tariffs by a Democratic Congress, a bill signed into law by Republican
President Herbert Hoover. It was “bipartisan”-- but bipartisan
nonsense is still nonsense and a bipartisan disaster is still a disaster.
idea behind these higher tariffs was that reducing our imports of foreign goods
would create more jobs for American workers. It sounds plausible, but more
than a thousand economists took out newspaper ads, warning that these tariffs
would be counterproductive.
was because other countries would retaliate with their own import restrictions,
reducing American exports, thereby destroying American jobs. That is exactly
what happened. But there are still people today who repeat the brass oldie
that restricting imports will save American jobs.
can always save particular jobs in a particular industry with import
restrictions. But you lose other jobs in other industries, not only because
other countries retaliate, but also because of the economic repercussions at
can save jobs in the American sugar industry by restricting imports of
foreign sugar. But that results in higher sugar prices within the United
States, leading to higher costs for American candy producers, as well as
American producers of other products containing sugar. That leads to higher
prices for those products, which in turn means lower sales at home and
abroad-- and therefore fewer jobs in those industries.
study concluded that there were three times as many jobs lost in the
confection industry as were saved in the sugar industry. Restrictions on
steel imports likewise led to an estimated 5,000 jobs being saved in the
steel industry-- and 26,000 jobs being lost in industries producing products
made of steel.
the whole idea of the government itself “creating jobs” is based
on regarding the particular jobs created by government as being a net
increase in the total number of jobs in the economy. But, since the
government does not create wealth to pay for these jobs, but only transfers
wealth from the private sector, that leaves less wealth for private employers
to create jobs.
that are golden oldies bring enjoyment when they return. But brass oldies in
politics just repeat the original disasters.
statistical analysis by economists, published in 2004, concluded that federal
interventions had prolonged the Great Depression of the 1930s by several
years. How long will future research show that current government
interventions prolonged the economic crisis we are living through now?
is not the only place where some pretty brassy statements have been made and
repeated so often that some people have accepted these brassy statements as
being as good as gold.
of the brassiest of the brass oldies in the law is the notion that the
Constitution creates a “wall of separation” between church and
state. This false notion has been so widely accepted that people who tell the
truth get laughed at and mocked.
recent New York Times piece said that it was “a flub of the first
order” when Christine O’Donnell, Republican candidate for senator
in Delaware, asked a law school audience “Where in the Constitution is
the separation of church and state?” According to the New York Times,
?The question draw gasps and laughter” from this audience of professors
and law students who are elites-in-waiting.
New York Times writer joined in the mocking response to Ms.
O’Donnell’s question, though admitting in passing that “in
the strictest sense” the “actual words ‘separation of
church and state’ do not appear in the text of the Constitution.”
Either the separation of church and state is there or it is not there. It is
not a question of some “strictest” technicality.
First Amendment to the Constitution of the United States begins,
“Congress shall make no law respecting an establishment of
religion.” There is absolutely nothing in the Constitution about a
“wall of separation” between church and state, either directly or
phrase was used by Thomas Jefferson, who was not even in the country when the
Constitution was written. It was a phrase seized upon many years later, by
people who wanted to restrict religious symbols and has been cited by judges who
share that wish.
was no mystery about what “an establishment of religion” meant
when that phrase was put into the Constitution. It was not an open ended
invitation to judges to decide what role religion should play in American
society or in American government.
Church of England was an “established church.” That is, it was
not only financed by the government, its members had privileges denied to
members of other religions.
people who wrote the Constitution of the United States had been British
subjects most of their lives, and knew exactly what an “established
church.” meant. They wanted no such thing in the United States of
America. End of story-- or so it should have been.
more than a century, no one thought that the First Amendment meant that
religious symbols were forbidden on government property. Prayers were offered
in Congress and in the Supreme Court. Chaplains served in the military and
presidents took their oath of office on the Bible.
in our own times, judges have latched onto Jefferson’s phrase and run
with it. It has been repeated so often in their decisions that it has become
one of the brassiest of the brass oldies that get confused with golden
fundamentally important as the First Amendment is, what is even more
important is the question whether judges are to take it upon themselves to
“interpret” the law to mean whatever they want it to mean, rather
than what it plainly says.
is part of a larger question, as to whether this country is to be a
self-governing nation, controlled by “we the people,” as the
Constitution put it, or whether arrogant elites shall take it upon themselves
to find ways to impose what they want on the rest of us, by circumventing the
is already doing that by passing laws before anyone has time to read them and
the White House is likewise circumventing the Constitution by appointing
“czars” who have as much power as Cabinet members, without having
to go through the confirmation process prescribed for Cabinet members by the
circumvent the Constitution by reading their own meaning into its words,
regardless of how plain and unequivocal the words there are.
Constitution cannot protect us and our freedoms as a self-governing people
unless we protect the Constitution. That means zero tolerance at election
time for people who circumvent the letter and the spirit of the Constitution.
Freedom is too precious to give it up in exchange for brassy words from
To find out more about Thomas Sowell
and read features by other Creators Syndicate columnists and cartoonists,
visit the Creators Syndicate web page at www.creators.com. Thomas Sowell is a
senior fellow at the Hoover Institution, Stanford University, Stanford, CA
94305. His Web site is www.tsowell.com.
American states have promised their
employees benefits they can’t afford
From The Economist print
COLUMBO, the finest fictional detective in the history of the Los Angeles
Police Department, had a knack for instantly identifying the culprit. Were he
investigating the threat to American state finances, he would be looking at
members of his own force. One California mayor estimates that the effective
cost of employing each police officer and fireman is $180,000 a year.
sum is not their take-home pay. For police and firefighters, the big costs
occur when they stop working—retirement at 50, combined with
inflation-linking, health benefits and lump sums for unused sick leave. Some
might not begrudge perks given to those who put their lives on the line for
fellow citizens. But California is also shelling out fortunes to retired
state and municipal managers; more than 9,000 have retirement incomes of over
$100,000 a year. Across America, states have been handing out such goodies
for years (see article). Most public-sector workers are still being promised
retirement incomes based on their final salaries, at a time when private
companies have been retreating from such commitments.
is not alone in having a pensions problem, as this week’s strikes in
France demonstrate. But because America’s public-sector pensions funds
are so enormous, the potential consequences of their problems are too.
Meredith Whitney, a financial analyst who foretold the banking crisis, thinks
America’s states could be the next source of systemic financial risk.
the potential exposure of taxpayers to pension promises is complicated. Much
of the cost lies in the future, when existing employees retire. So a discount
rate has to be applied to those future promises to calculate their present
value. Following rules set down (rather shamefully) by the Government
Accounting Standards Board, the individual states discount
their pension liability by the assumed rate of return on the assets, in most
cases around 8%. [emphasis added]
is “Alice-in-Wonderland accounting”, as David Crane, an economic
adviser to California’s governor, Arnold Schwarzenegger, has remarked.
For a start, pension schemes have not achieved such returns over the past
decade of dismal stock markets, and are unlikely to do so in future. Nor do
the liabilities disappear if the pension scheme fails to achieve its targeted
returns. In many states, pension rights are legally protected. So a pension
promise is a debt owed by the state; retirees may have even greater rights
than a conventional creditor.
those conditions, the states’ pension promises should be discounted by
the risk-free rate, or the yield on Treasury bonds. On
that basis, total liabilities are $5.3 trillion, compared with $1.9 trillion
of assets. [emphasis added] The total shortfall of $3.4 trillion is the
equivalent of a quarter of all federal debt. [It is estimated that State of
California’s pension funding shortfall is about $500 billion, not the
$60-100 billion shortfall reported by CalPERS]
Just one more question
on the basis of the dodgy accounting they currently use, the states have not
funded their pension promises properly. Their finances are already coming
under pressure from weak tax revenues; September’s employment data
showed they are laying off staff. Balanced-budget requirements mean that
filling the hole in pension schemes will absorb cash that would otherwise be
used to provide services to citizens. It adds up to a dreadful mess. Some
states may run out of the money to fund their pension schemes by the end of
the very least, the accounting rules should be changed so that taxpayers are
made aware of the promises they have underwritten. Perhaps they will be happy
to keep funding them. But it is more likely that they will demand reform.
Changing scheme rules for new employees is a start but will do nothing to
reduce the size of the hole that has already been dug. The benefits of
existing employees will have to be cut by, for example, increasing the
retirement age. A move to career-average rather than final-salary benefits
would cut the overall bill while protecting the lowest-paid.
of this will be easy. Unions are at their most powerful in the public sector
and its workers are an important voting block. Changes to their rights will
be challenged in the courts. But it is high time to stop ignoring and
obscuring the problem. The longer the system remains unchanged, the bigger
the hole will get.
the first rule of regulation be “First, do no harm”]
Fed huffs, stock market puffs. If only the story
Since Federal Reserve Chairman Ben Bernanke hinted
at a whatever-it-takes approach to keeping the U.S. economy afloat in late
August, the market has behaved almost exactly according to plan. The S&P
500 is up about 11%. The yield on the benchmark 10-year Treasury note, which
sets borrowing rates for things like mortgages, has sunk to 2.382%.
That is precisely how the Fed is hoping to reflate
the U.S. economy. Make mortgages cheaper, and demand will help keep home
prices from dropping. Get a rally going in stocks, and the accompanying
“wealth effect” will lift consumer spending. Push down interest
rates on cash, and people and companies will be less inclined to save and
more likely to spend or invest.
It sounds almost too good to be true. Sadly, it
probably is. Policy makers can unleash a flood of liquidity into the U.S.
economy, but they have little control over where it washes up. And lately
there are some troubling signs that the Fed’s pursuit of inflation
risks leaving the U.S. with something like stagflation instead.
Consider some of the standout performers since
late August. Investors may be warming to U.S. stocks, but commodities are on
fire. Gold is up about 10%. Oil and copper are up some 16% each. Silver is up
nearly 30%. Soft commodities like corn, wheat, soybeans, butter and sugar
have added to their rallies, too.
But U.S. consumers are hardly positioned right now
to absorb higher prices. Rather than sparking “good” inflation,
caused by strong demand and reduced slack in the economy, “bad”
inflation that behaves more like a tax could result. A 15% rise in gasoline
prices above August levels would, in theory, require households to spend an
extra $48 billion annually, or $430 each, for the same amount of fuel,
according to Capital Economics. A 5% increase in food prices, meanwhile,
would slice another $40 billion, or $360 per household, leaving less room for
The burden also tends to fall disproportionately
on lower-income households. Ken Matheny of Macroeconomic Advisers calculates
that the 6% jump in gas prices so far since the end of August could shave
nearly half a percentage point off fourth-quarter consumer-spending growth.
The “wealth effect” from the stock market’s rebound could
offset it in aggregate. But who benefits? Middle- and upper-income
Fed policy makers may be striving to kick-start
growth and reduce chronic unemployment levels. But because assets like
commodities are responding to cheap money much faster than, say, houses, the
Fed risks drowning struggling U.S. consumers instead.
Trillions Owed by Thomas G. Donlan
Underfunded state and local pensions
add to the national debt binge
ANNUAL STATE BUDGET crises have trained officials
from California to New York in the wily ways of accelerated revenues and
deferred expenses. But the most widespread way in which state and local
governments become indebted without a vote is in their cavalier treatment of
About 84% of state and local government employees
are covered by defined-benefit pension plans—the traditional pensions
in which all the promised benefits are supposed to be funded in advance in a
Private industry and even the federal government
realized decades ago that they were unwilling and unable to assume such
open-ended responsibility. A series of private pension-plan
disasters—in mining, metals and manufacturing--underscored the danger.
Now about 17% of private-sector workers are in defined-benefit plans, down
from 41% in 1980.
State and local governments have tried to evade
their responsibilities without ending their dangerous defined-benefit plans.
At the latest count, 47 states were saving less than they should for their
Although California has the largest reported
pension shortfall, at $60 billion, Illinois is a close second at $54 billion.
It has only 46% of the assets needed to secure its pension funds.
This year, the Illinois gubernatorial election
pits a Democrat who leans toward raising taxes to keep benefits flowing
against a Republican who seems to be willing to borrow $50 billion for a
Illinois has to do something, because an earlier
generation of lawmakers put a clause in the state constitution that forbids
changing an employee’s pension promises, all the way to retirement. The
constitutional guarantee covers benefits already earned and those benefits
the employee will earn in the future. No benefits anticipated under
today’s plan can be reduced for any current employee; the only
allowable changes are those affecting people who haven’t yet been
Fiscal insanity of this sort is all too common.
Many states allow pension benefits to be earned on overtime, as well as on
base pay. Double-dipping is a common abuse, in which an employee retires from
one agency and takes a similar job elsewhere in the same jurisdiction to
collect a salary and a pension at the same time. Some states do not even
require their pension-fund overseers to be the employees’ fiduciaries,
which means these people are prone to using funds for “social
investing” and other political purposes.
The Hole Is Deep
The U.S. Census Bureau estimates from a sample of
plans that $3.1 trillion of assets were held in 2008 by 2,550 public plans,
with 14.7 million active members and 7.7 million retirees. The bureau
doesn’t estimate liabilities or underfunding. Academic and think-tank
researchers start with the $500 billion in shortfalls acknowledged by the
states to go up from there.
The Pew Center for the States came up with assets
of $2.3 trillion and liabilities of $3.35 trillion—a $1.1 trillion gap
for the states, not counting local plans.
Chad Aldeman and Andrew J. Rotherham, analyzing
government pensions for a Washington, D.C., nonprofit called Education
Sector, were not quite so alarming in a report they published this summer,
but no cause for complacency was to be found in it:
“While the current funding ratios are less
than ideal, they are not catastrophic. The most recent figures from the
Public Fund Survey, a compilation of 101 state and municipal retirement
plans, show that the aggregate funding ratio for these plans reached a high
of 102% in 2001 at the end of the Internet-led bull market. Through a
combination of poor investment returns and benefit enhancements, the ratio
had fallen to 85% by July 2008, about where it was in 1994. The stock-market
boom of the late 1990s allowed pension funds to avoid making hard choices.
But it would be unwise to assume that will happen again.”
Robert Novy-Marx of the University of Chicago and
Joshua Rauh of Northwestern University dissent from common practice and sound
a loud alarm. Correcting for the fact that many states have enshrined their
pension liabilities as sacred, sitting ahead of other obligations, even in
some cases ahead of state general-obligation debt, the two use a low discount
rate and calculate a present value for state liabilities of $4.43 trillion,
compared with state assets of about $2.6 trillion.
They add dryly: “Liabilities are even larger
under broader concepts that account for projected salary growth and future
service.” In other words, states generally fund benefits as they
accrue, with no cushion to cover what they will actually have to pay when
They calculate that states’ estimates of
what they will be paying 30 years from now are about two-thirds short of
Thus each year that goes by increases the
sponsors’ liabilities, but it takes years for their funding standards
to force them to adapt. They will never catch up until the rules change.
Unlike private pension funds, which are forced by
federal law to respond quickly to shortfalls in funding, public pension funds
smooth their results, using averages calculated over several years. This
disguises underfunding problems, even from the responsible officials, who
have often granted excessive benefit increases at the end of bull markets and
found themselves deeply underfunded when asset values fall in bear markets.
Even more effectively disguising true financial
positions, public plans, on average, estimate that their assets can generate
8% per year indefinitely. (The lowest earnings assumption among the 15
largest plans is Virginia’s at 7%.) Sponsors and their complacent
consultants point to the past results that suit them—9.3% average
earnings over the past 25 years as opposed to 3.9% average earnings over the
most recent 10 years.
High earnings estimates reduce the need to make
funding payments in cash, and that’s the way state politicians like it.
They think taxpayers don’t want to provide pension security to public
workers if the price is higher taxation—and they may be right. To prove
the pension-chiselling politicians wrong, responsible citizens must make
their voices heard.
An early investor in
Facebook and the founder of Clarium Capital on the subprime crisis and why
American ingenuity has hit a dead end.
The housing bubble blew up so catastrophically
because science and technology let us down. It blew up because our
technocratic elite told us to expect an ever-wealthier future, and science
hasn’t delivered. Except for computers and the Internet, the idea that
we’re experiencing rapid technological progress is a myth.
Such is the claim of Peter Thiel, who has either
blundered into enough money that his crackpot ideas are taken seriously, or
who is actually on to something. A cofounder of PayPal and an early investor
in Facebook (his stake was recently reported to be around 3%), Mr. Thiel is
the unofficial leader of a group known as the “PayPal mafia,”
perhaps the most fecund informal network of entrepreneurs in the world,
behind companies as diverse as Tesla (electric cars) and YouTube.
Mr. Thiel, whose family moved from Germany when he
was a toddler, studied at Stanford and became a securities lawyer. After
PayPal, he imparted a second twist to his career by launching a global macro
hedge fund, Clarium Capital. He now matches wits with some of the great macro
investors, such as George Soros and Stanley Druckenmiller, by betting on the
direction of world markets.
Those two realms of investing—narrow
technology and broad macro—are behind his singular diagnosis of our
economic crisis. “All sorts of things are possible in a world where you
have massive progress in technology and related gains in productivity,”
he says. “In a world where wealth is growing, you can get away with
printing money. Doubling the debt over the next 20 years is not a
“This is where [today is] very different
from the 1930s. In the ‘30s, the Keynesian stuff worked at least in the
sense that you could print money without inflation because there was all this
productivity growth happening. That’s not going to work today.
“The people who bought subprime houses in
Miami were betting on technological progress. They were betting on energy
prices coming down and living standards going up.” They were betting,
in short, on the productivity gains to make our debts affordable.
We’ll get back to what all this means. Mr.
Thiel wants to meet me at a noisy coffee shop near Union Square in Manhattan.
Because a Fortune writer invited to his condo wrote about his butler?
“No,” Mr. Thiel tells me. “And I don’t have a
His mundane thoughts these days include whether
Facebook should go public. Answer: Not anytime soon.
As a general principle, he says, “It’s
somewhat dangerous to be a public company that’s succeeding in a
context where other things aren’t.”
On the specific question of a Facebook initial
public offering, he harks back to the Google IPO in 2004. Many at the time
said Google’s debut had reopened the IPO window that had closed with
the bursting of the tech bubble, and a flood of new tech companies would come
to market. It didn’t happen.
What Google showed, Mr. Thiel says, is that the
“threshold” for going public had ratcheted up in a Sarbanes-Oxley
world. Even for a well-established, profitable company—which Google was
at the time—the “cost-benefit trade-off” was firmly on the
side of staying private for as long as possible.
Mr. Thiel was early enough in the Facebook story
to see himself portrayed in the fictionalized movie about its birth,
“The Social Network.” (He’s the stocky venture capitalist
who implicitly—very implicitly—sets the ball rolling toward
cutting out Facebook’s allegedly victimized cofounder, Eduardo
Today, Mr. Thiel (the real one) has no remit to
discuss the company’s many controversies. Suffice it to say, though, he
believes the right company “won” the social media wars—the
company that was “about meeting real people at Harvard.”
Its great rival, MySpace, founded in Los Angeles,
“is about being someone fake on the Internet; everyone could be a movie
star,” he says. He considers it “very healthy,” he adds,
“that the real people have won out over the fake people.”
Only one thing troubles him: “I think
it’s a problem that we don’t have more companies like Facebook.
It shouldn’t be the only company that’s doing this well.”
Maybe this explains why he recently launched a $2 million fund to support
college kids who drop out to pursue entrepreneurial ventures.
Mr. Thiel is phlegmatic about his own hedge fund,
which took a nasty hit last year after being blindsided by the market’s
partial recovery from the panic of 2008. Listening between the lines, one
senses he faces an uphill battle to convince others of his long-term view,
which he insists is “not hopelessly pessimistic.”
“People don’t want to believe that
technology is broken. . . . Pharmaceuticals, robotics, artificial
intelligence, nanotechnology—all these areas where the progress has
been a lot more limited than people think. And the question is why.”
In true macro sense, he sees that failure as
central to our current fiscal fix. Credit is about the future, he says, and a
credit crisis is when the future turns out not as expected. Our policy
leaders, though, have yet to see this bigger picture. “Bernanke,
Geithner, Summers—you may not agree with the them ideologically, but
they’re quite good as macroeconomists go,” Mr. Thiel says.
“But the big variable that they’re betting on is that
there’s all this technological progress happening in the background.
And if that’s wrong, it’s just not going to work. You will not
get this incredible, self-sustaining recovery.
And President Obama? “I’m not sure
I’d describe him as a socialist. I might even say he has a naive and
touching faith in capitalism. He believes you can impose all sorts of burdens
on the system and it will still work.”
The system is telling him otherwise. Mankind, says
Mr. Thiel, has no inalienable right to the progress that has characterized
the last 200 years. Today’s heightened political acrimony is but a
foretaste of the “grim Malthusian” politics ahead, with
politicians increasingly trying to redistribute the fruits of a stagnant
economy, loosing even more forces of stagnation.
Question: How can anyone know science and
technology are under-performing compared to potential? It’s hard, he
admits. Those who know—”university professors, the entrepreneurs,
the venture capitalists”—are “biased” in favor of the
idea that rapid progress is happening, he says, because they’re raising
money. “The other 98%”—he means you and me, who in this age
of specialization treat science and technology as akin to
magic—”don’t know anything.”
But look, he says, at the future we once portrayed
for ourselves in “The Jetsons.” We don’t have flying cars.
Space exploration is stalled. There are no undersea cities. Household robots
do not cater to our needs. Nuclear power “we should be building like
crazy,” he says, but we’re sitting on our hands. Or look at
today’s science fiction compared to the optimistic vision of the
original “Star Trek”: Contemporary science fiction has become
uniformly “dystopian,” he says. “It’s about
technology that doesn’t work or that is bad.”
The great exception is information technology,
whose rapid advance is no fluke: “So far computers and the Internet
have been the one sector immune from excessive regulation.”
Mr. Thiel delivers his views with an
extraordinary, almost physical effort to put his thoughts in order and phrase
them pithily. Somewhere in his 42 years, he obviously discovered the
improbability of getting a bold, unusual argument translated successfully
into popular journalism.
Mr. Thiel sees truth in three different analyses
of our dilemma. Liberals, he says, blame our education system, but liberals
are the last ones to fix it, just wanting to throw money at what he calls a
“higher education bubble.”
“University administrators are the
equivalent of subprime mortgage brokers,” he says, “selling you a
story that you should go into debt massively, that it’s not a
consumption decision, it’s an investment decision. Actually, no,
it’s a bad consumption decision. Most colleges are four-year
Libertarians blame too much regulation, a view he
also shares (“Get rid of the FDA,” he says), but “libertarians
seem incapable of winning elections. . . . There are a lot of people you
can’t sell libertarian politics to.”
A conservative diagnosis would emphasize an
unwillingness to sacrifice, necessary for great progress, and once motivated
by war. “Technology has made war so catastrophic,” he says,
“that it has unraveled the whole desirability of it [as a spur to
Mr. Thiel has dabbled in activism to the minor
extent of co-hosting in Manhattan last month a fund raiser for gay
Republicans, but he has little taste for politics. Still, he considers it a
duty to put on the table the idea that technological progress has stalled and
why. (To this end, he’s working on a book with Russian chess champion
and democracy activist Garry Kasparov.)
You don’t have to agree with every jot to
recognize that his view is essentially undisputable: With faster innovation,
it would be easier to dig out of our hole. With enough robots, even Social
Security and Medicare become affordable.
Mr. Thiel has not found any straight line,
however, between his macro insight and macro-investing success.
“It’s hard to know how to play the macro trend,” he
acknowledges. “I don’t think it necessarily means you should be
short everything. But it does mean we’re stuck in a period of long-term
Some companies and countries will do better than
others. “In China and India,” he says, “there’s no
need for any innovation. Their business model for the next 20 years is copy
the West.” The West, he says, needs to do “new things.” Innovation,
he says, comes from a “frontier” culture, a culture of
“exceptionalism,” where “people expect to do exceptional
things”—in our world, still an almost uniquely American
characteristic, and one we’re losing.
“If the universities are dominated by politicians
instead of scientists, if there are ways the government is too inefficient to
work, and we’re just throwing good money after bad, you end up with a
nearly revolutionary situation. That’s why the idea that technology is
broken is taboo. Really taboo. You probably have to get rid of the welfare
state. You have to throw out Keynesian economics. All these things would not
work in a world where technology is broken,” he says.
Perhaps it really does fall to some dystopian
science fiction writer to tell us what such a world will be like—when
nations are unraveling even as a cyber-nation called “Facebook”
is becoming the most populous on the planet.
Real Jobs Machine by Robert J. Samuelson
Without startups, we’re sunk.
you’re interested in job creation—and who isn’t these
days?—you should talk to someone like Morris Panner. In 1999, Panner
and some others started a Boston software company called OpenAir. By 2008
they sold it for $31 million. The firm had then grown to about 50 workers. It
turns out that entrepreneurship (essentially, the founding of new companies)
is crucial to job creation. But as Panner’s experience suggests,
success is often a slog.
frustrating and perplexing about the present job dearth is that the U.S.
economy has long been a phenomenal employment machine. Here’s the
record: 83 million jobs added from 1960 to 2007, with only six years of
declines (1961, 1975, 1982, 1991, 2002, 2003). Conventional analysis blames
today’s poor performance (jobs are 7.6 million below their
pre-recession peak) on weak demand. Because people aren’t buying,
businesses aren’t hiring. Though true, this omits the vital role of
In any given
year, employment may reflect the ups and downs of the business cycle. But
over longer periods, almost all job growth comes from new businesses. The
reason: high death rates among existing firms. Even successful firms succumb
to threats: new competition or technologies; mature markets; the death of
founders; shifting consumer tastes; poor management and unprofitability. A
company founded today has an 80 percent chance of disappearing over the next
quarter century, reports a study by Dane Stangler and Paul Kedrosky of the
blue-chip firms—the Exxons and Procter & Gambles—endure. Four
fifths of the Fortune 500 were founded before 1970. But they are exceptions,
and many blue chips have died: Pan Am (once the premier international
airline), Digital Equipment (once the second-largest computer maker), and
Circuit City (once a leading consumer-electronics chain).
over whether small or big firms create more jobs is misleading. The real
distinction is between new and old. American workers are roughly split
between firms with fewer or more than 500 employees. In healthy times, older
companies of all sizes do create lots of jobs. But they also lose jobs, as
some businesses shrink or vanish. On balance, job creation and destruction
cancel. All the net job increases occur among startups, finds a study of the
1992–2005 period by economists John Haltiwanger of the University of
Maryland and Ron Jarmin and Javier Miranda of the Census Bureau.
To be sure,
entrepreneurship has a downside: booms and busts. Remember the dotcom
“bubble.” But more damaging, says Panner, are widespread popular
misconceptions about what it is and isn’t.
the Blockbuster Myth: successful entrepreneurship creates huge enterprises
à la Google that transform how we live. In reality, “most
ventures don’t change the world,” says Panner. They’re
unknown companies providing highly specialized goods and services, plus
restaurants, auto-repair shops, and many other unromantic businesses. There
are more than 500,000 startups annually. The number must be large to make an
impact on the 155 million–person labor force.
the Inspiration Myth: most startups spring from some epiphany suggesting a
new product or technology. Wrong. Gee-whiz moments are few. Companies
constantly change plans. OpenAir ditched its original idea, which didn’t
draw customers. “You can’t do anything until you meet
someone’s needs,” says Panner. Failure rates are high; half of
new firms die within five years.
the Incentive Myth: it’s necessary to keep tax rates low, so entrepreneurs
can reap huge rewards for their time, sweat, and money. Well, this may be
true, but it misses a parallel truth: government disincentives to
entrepreneurship. Panner, a registered Democrat, criticizes complex
accounting, employment and health-care regulations imposed by federal and
state agencies that consume scarce investment funds and time. There’s a
bureaucratic bias, unintended perhaps, against startups.
all about risk taking. The good news is that the entrepreneurial instinct
seems powerful. Americans like to create; they’re ambitious; many want
to be their “own bosses”; many crave fame and fortune. (Panner is
already involved with a new startup; it has five employees.) The bad news is
that venture capital for startups is scarce and that political leaders seem
largely oblivious to burdensome government policies. This needs to be
addressed. Entrepreneurship won’t instantly cure America’s job
deficit, but without it, there will be no strong recovery.
exactly what the Global Warming fraudsters have been advocating?
Rights, the Declaration, and the Constitution, Part 1
(from Freedom Daily for October
2010; a publication of
The Future of Freedom Foundation
We live in
a country whose economic system is a welfare state and a government-managed
economy and whose foreign policy is now based on an extensive overseas
military empire and perpetual war, along with ever-increasing infringements
on the civil liberties of the people.
economic consequences of the welfare-warfare state have been enormous.
Federal spending and debt are soaring out of control, with no end in sight.
People are struggling just to make ends meet. The possibility of
hyperinflation looms on the horizon.
in a country in which the federal government’s tax-collecting agency,
the IRS, strikes fear into the hearts of the citizenry. It’s a country
where regulatory bureaucrats do the same to people in the business and
in a country in which the president can send the entire nation into war
without the constitutionally required congressional declaration of war.
It’s a country whose government engages in invasions, occupations, wars
of aggression, kidnapping, torture, abuse, sanctions, embargoes, and
assassinations, all with impunity.
this possibly be the America that the Founding Fathers envisioned when they
separated from England in a violent revolution? Is this the type of
government for which they were willing to pledge their lives, fortunes, and
sacred honor to establish?
most Americans would say, “No way!” This nation is as far away
from what the Founding Fathers envisioned as they could ever have imagined.
In fact, I think that most people would agree that as powerful as the British
government was, the power it claimed and exercised over the British colonists
paled in comparison with the type of powers claimed and exercised today by
the U.S. government over the American people.
this happen, and is there a way out of this morass? Is there a way to get
America back on the right track, the track toward freedom, free markets, and
a constitutional limited-government republic?
The Declaration of Independence
those questions, we need to return to fundamental principles. We need to
examine the nature of rights and the role of government in a free society.
begin with the Declaration of Independence and the U.S. Constitution.
remarkable thing about the Declaration of Independence is not the list of
reasons it gave for the British colonists living in the New World to take up
arms against their own government.
what was remarkable was the part of the Declaration that enunciated the
rights of man and the proper role of government in a free society. The
message set forth was one of the most radical that people had ever heard, one
that struck concern and fear in the hearts of government officials all over
Declaration declared that all men have been endowed by nature and God with
certain unalienable rights. In other words, rights did not inhere only in the
British citizenry, including those living in America. They inhered in all
men, everywhere. Equally important, they didn’t come from government.
They derived from nature and God.
implications of such a declaration were earth-shattering. For centuries
people had come to believe that their rights were really just privileges
bestowed on them by the king — that is, by their government. As such, they
considered it entirely proper for the king or the government to regulate,
control, manage, conscript, and rule over the citizenry.
was the Declaration telling the people of the world something totally
different: Your rights don’t come from government. They come from
nature and from God.
notice the question this claim raises: If rights pre-exist government —
if they are inherent in the individual — under what legitimate
authority does government regulate, control, or manage people, much less
conscript them into serving it?
the nature of these inherent, natural, God-given rights that pre-exist
government? The Declaration refers to “life, liberty, and the pursuit
of happiness.” But it makes clear those three rights are not exclusive,
for it states that such rights are among others that are not enumerated.
The rights of man
life, liberty, and the pursuit of happiness? What do they mean? What do they
people might think that liberty simply means not being in jail. But to a
libertarian, such rights mean much more than that. Freedom of speech, freedom
of the press, freedom of religion, and freedom of assembly come to mind. If
the government can put you in jail simply for saying the wrong things, then
you’re not free, even if you’re not in jail. Or if the government
can shut down newspapers, radio and television, or the Internet, then people
in that society cannot truly be considered free. Or if government can order
you and your family to go to church every Sunday, then you’re not
living in a free society. If government can prevent you from meeting with
others, it’s violating your freedom.
all that is not sufficient for a free society. What about the right to keep
and bear arms? Isn’t it necessary to ensure that people retain the
right to resist their government if it becomes destructive of their rights?
about economic liberty — the right to sustain your life through labor,
the right to engage in mutually beneficial contracts and exchanges with
others, the right to accumulate wealth, and the right to do whatever you want
with your own money?
one of the fault lines between libertarians and statists. Libertarians hold
that economic liberty is as critical as all those other aspects of freedom.
Statists hold the contrary, maintaining that economic liberty isn’t a
right but simply a privilege bestowed by government, one that government can
rightfully control, manage, regulate, or even take away.
would agree that each of us is born without governmental permission or
involvement. It is evident our very lives come from nature or God. The
government does not breathe life into anyone.
same time, each of us is born different from everyone else. Every person is
unique. Everything about a person is different from everyone else. Skin
color. Voice. Shape. Eyes. Fingerprints. Even the shape of your kidney is
different from that of everyone else who has ever lived. Nature and God made
each person one of a kind.
same time, it is evident that no one is born equal to anyone else. Sure, all
are equal in the eyes of God, but they are unequal in every other respect.
Every person is born with different characteristics, talents, and abilities,
along with different handicaps and disadvantages.
people are born with great beauty, or with a beautiful voice, or with
tremendous athletic skills, which enable them to become actors, opera
singers, or football players. Others are born with other attributes and
skills, enabling them to become farmers, mechanics, writers, lawyers,
doctors, or homemakers. Some people are born with tremendous handicaps that
they must overcome or learn to cope with.
to life is to discover what one’s particular talent or ability or
passion is. While man has not yet been able to figure out the mystery of life
and death, it’s tempting to suspect that it has something to do with
developing as a human being. That process involves an inner journey of
discovery, exploration, and development, a process that enables a person to
mature, to develop, to grow into what he was naturally born to be.
process necessarily entails figuring out where one’s talents,
abilities, and interests are, and then pursuing them. Some people figure all
that out at an early age, and then spend their lives happily developing them.
Others reach their deathbed never having made that discovery, having lived
what Thoreau called lives of quiet desperation.
permit me to digress here to discuss another aspect of liberty that separates
libertarians from statists: educational liberty.
statists, libertarians are firmly opposed to all governmental involvement in
education. We consider the right to pursue an education to be as fundamental
and inherent as all the other natural, God-given rights. Such a right entails
each person’s choosing to pursue the education that best fits him,
given his particular interests and passion. Most of the time this is done in
consultation with one’s family, but how many times have we seen
children break out of the plans their parents had for them to instead pursue
their own dreams in life?
is a natural process. It’s not so much a cramming process, but rather a
seeking process. A genuine education involves a person’s seeking out
what he himself is interested in exploring, not in the determination by
someone else of what needs to be crammed into his mind. In fact, the word
“educate” is derived from the Latin word “educere,”
which means “to draw out.”
about children from birth to six years of age. All children are filled with
an awe of the universe. You can see it in their faces. When they’re
awake they’re scanning everything within their sight, amazed by
everything and absorbing everything. When they begin to speak, the most
popular word they come to employ is that giant three-letter word that comes
to bedevil parents: “Why?” They want to know how the universe
works, and no matter what answer you give them, it’s never enough to
dissuade them from hitting you with the next “Why?”
child grows older, the ideal is that he comes to discover what he was born to
do — what his talents and abilities are, what his particular role in
the universe shall be. That’s where the education comes in.
That’s where the seeking happens. The awestruck kid who discovers what
he likes and what he’s good at begins educating himself on how to get
better. He’s not so much educating himself as fulfilling his passion.
That’s what makes education exciting.
ahead 12 years, when children are graduating from the public (i.e.,
government) schools that the law required their parents to send them to. How
many such graduates have the same sense of wonder and awe for the universe
they had when they were six years old?
say very few of them. By that time, they hate everything they’ve come
to believe is education: conformity, regimentation, cramming, memorizing,
tests, term papers, and the like. They can’t wait for the whole thing
to end. The 12 years of enforced regimentation and conformity that come with
state schooling have smashed all sense of curiosity and love of learning out
of most of them.
children who fight mightily to retain their sense of individuality,
creativity, and imagination are made to feel like outcasts or weirdos. If
they persist, they’re put on such drugs as Ritalin until they come
around and become one of the group. All too often, the 12 years of coercion
have diverted many of them away from discovering and nurturing their own
unique interests, talents, and abilities. Some discover their passion later in
life. Some never discover it at all before they die.
event, it is evident that this part of life — seeking, developing,
growing, maturing — is a gift that comes from nature and God, not from
one engage in this process? Well, that’s where freedom comes into play.
Where people have the widest possible freedom, there will be the widest
opportunity for personal development and growth.
the process is the making of choices — between bad and good, healthy
and unhealthy, responsible and irresponsible, moral and immoral, ethical and
unethical. Making choices saddles people with the responsibility of the
consequences, a process that nudges but doesn’t force them to make
better decisions in the future.
This is where
the principles of economic liberty come into play. One person discovers that
he’s good at basketball. Another person senses a deep passion for
English literature. As they both grow up, they revel in studying and
developing their respective loves and passions.
end of the process, they enter the job market. The basketball player is
offered $1 million a year. The literature major is offered $40,000 a year.
fair? Sure it is, because it simply reflects the valuations of other people
— that is, how they wish to spend their money. The difference in
valuations doesn’t mean that the basketball player is a better person
or that he worked harder than the literature teacher. It simply means that
there is a greater demand among consumers for basketball than for English
process of figuring out his future, a person might well choose a life of
self-imposed poverty. Lots of priests and nuns do that. Most other people
choose to enter the workforce, engage in economic exchanges with others and
accumulate wealth. That of course is part of freedom as well.
person accumulates wealth, he’s faced with a growing array of choices.
Should he save his money or spend it? Should he donate to the poor or not?
Should he help his ailing parents or turn his back on them? Should he invest
the money or place it in a savings account?
choices are often not easy, but often that is the way that people grow and
develop. Sometimes the people who must overcome tremendous disabilities and
handicaps in life become some of the most fully developed and fascinating
critically important aspect to all this is that it’s all a natural part
of being a person. The government did not create anyone. It does not endow
anyone with any talents or abilities. Thus, no one has to be grateful to
government for his life, his liberty, his wealth, his growth, or his pursuit
of happiness. Those are all natural, God-given rights that inhere in all men,
independent of government, not privileges that come from government.
do we need government for, anyway? The Declaration pointed out the reason: to
secure the exercise of man’s fundamental natural and God-given rights.
In other words, to protect people from murderers, rapists, robbers, burglars,
and thieves, while at the same time leaving everyone else alone.
our ancestors bring the federal government into existence? Let’s now
talk about the Constitution.
Hornberger is founder and president of The Future of Freedom Foundation.