From A Libertarian Republic to Majoritarian-Totalitarian Democracy: a Summary
The 2016 American Presidential Election
Trust in government fell by almost 80% from the end of the Eisenhower Administration to the end of the Obama Administration. Then Americans endured one of the most divisive and longest two year election campaigns leading up to the 2016 election. Former Democrat turned Republican Donald Trump defeated a field of 17 traditional center-right Republicans to run against traditionally centerleft Democratic candidate Hillary Clinton who turned left to defeat her socialist competitor Bernie Sanders in the primary. Sanders correctly argued that the U.S. political system is rigged more than he knew at the time but responded by promising his generally young supporters socialism without totalitarianism. The public has endured another two years of divisiveness as the losing party tries to undermine and some would impeach the winner.
Republican nominee and arguably crony capitalist businessman Donald Trump, the son of a crony capitalist housing developer, ran on the paradoxical promise to “drain the swamp.” The faux democratic election of crony capitalist supremo Vladimir Putin in 2011 drew the public reprobation of then U.S. Secretary of State Hillary Clinton, the subsequent Democratic Party nominee. Putin responded with a campaign of not so fake news not to elect Trump they had the same polls as everybody else but to expose Clinton as a crony capitalist who also engaged in election-rigging. He hit pay dirt. The faux Russian collusion scandal has since been used to undermine the legitimacy of the Trump Administration.
On the issue of trade there was no difference between the three main candidates all opposed the new TTP trade agreement. The U.S. trade deficit has been about $500 billion a year during this century, consumption financed mostly with additional debt. Candidate Clinton, who supported China’s entry into the WTO during the Clinton Administration agreed she would if elected renegotiate NAFTA, the trade bill passed at her husband’s initiative. On the related issue of immigration, candidate Clinton voted for the bipartisan Secure Fence Act of 2006, as did then Senators Obama and Schumer.
The Obama Administration had doubled the federal debt outstanding to over $20 trillion – and the unfunded liability is approximately ten times that. President Obama’s Chairman of the Joint Chiefs of Staff publically warned as early as 2010 that the debt was a threat to national security. Candidate Clinton promised she wouldn’t add a penny to the national debt, but her platform had an imbedded $10 trillion increase, less than Sanders to be sure. Candidate Trump promised to eliminate the debt in eight years by increasing economic growth. Clinton’s was a political lie, Trump’s an outlandish campaign promise since going unfulfilled: his appropriations bill contained a $200 billion increase in spending, a Democratic victory for domestic spending in return for Republican defense spending.
Candidate Trump ran against the “deep state” wars and military interventions that candidate Clinton had voted for. But as President, Trump embraced it with overwhelming Democratic support to punish Russia.
Progressivism’s Administrative State
The Democrats’ agenda has arguably fared much better under Trump than Republicans did under Obama. Given these similarities in proposed and actual policies, the subsequent animosity might appear puzzling. But the biggest difference among the candidates relates to the relative roles of the public and private sectors. The U.S. is now governed by an unaccountable patria administrative state: judicial and legislative subsumed in the executive branch and sometimes independent even of that judge, jury and executioner. The new religion is “science” requiring a faux consensus and leadership by the “experts” as proposed by John Kenneth Galbraith in the New Industrial State (1967) over a half century ago.
Washington, D.C. is a place where self interested deals are made in hotel lobbies and K street offices, but the entire federal bureaucracy sits on a former swamp. Most federal politicians are political swamp people having worked their way up in local and state politics by making political deals for budget and/or tax subsidies and/or regulatory discretion – legal extortion. Candidate Clinton is a self described progressive and candidate Sanders a socialist, the former supports state control of business, the later favors more direct state ownership.
The Berlin Wall fell in 1989, followed by the Soviet Union two years later. In 1995 U.S. President Bill Clinton declared “The era of big government is over.” Britain’s Prime Minister Tony Blair, publishing in a Fabian pamphlet in 1998 argued: “Liberals (classical, i.e., American conservatives) asserted the primacy of individual liberty in the market economy; social democrats promoted social justice with the state as its main agent. There is no necessary conflict between the two, accepting as we now do that state power is one means to achieve our goals, but not the only one and emphatically not an end in itself.” But “the values which have guided progressive politics for more than a century – democracy, liberty, justice, mutual obligation and internationalism” have lead in practice to “state control, high taxation and producer interests (crony capitalism).” By the end of the century a few years after Blair spoke, the market had reached The Commanding Heights of the economy. But a decade later the Obama Administration had put the state back on top, seeking to control not just health care but finance and energy.
Progressivism like fascism and communism started with the best of intentions, in opposition to crony capitalism. Social welfare programs were implemented to spread the wealth and provide a safety net, but during the progressive Obama Administration economic growth per capita stagnated. Candidate Trump believed that rolling back the administrative state regulations and the tax on savings and investment as suggested by Blair would restore real private economic growth, the key to managing the public deficit. His Democratic opponents both favored a vast expansion of the administrative state and increases in the tax on capital.
Progressive Internationalism and the New World Order
Progressives supported freer trade even if not reciprocal in the post WW II era because America could still enjoy a balance of trade surplus that could be used to fund investments abroad and a “new world order” of American dominance in a bi-polar world with the Soviet Union and its satellites. The European Union evolved as a mechanism to end European – especially German “nationalism” in favor of this plan. Two events undercut this agenda of international control through capital flows: the 1960s wars on poverty and Vietnam turned American surpluses into deficits, and the common European currency created a German economic hegemony over Europe. The U.S. today is to China what Greece, Italy, Spain, Portugal and Ireland are to Germany, and that’s not a compliment. Both China and Germany – whose exports equal China’s with only 6% of the population – are mercantilist countries pursuing low wages and consumption domestically so that future generations can live off the debt that finances their over-consuming customers.
Germany understands perhaps better than any country the problem of using foreign debt to finance current consumption as it did to feed a starving population during the interwar years. The excessive debt undermined the fledgling Weimar Republic, giving rise to Hitler. Trumps trade policy appears incoherent, as is much of the criticism. Progressives still argue for globalism and internationalism while conservatives and libertarians are hung up on Ricardian theory of comparative advantage in international trade and the accounting identity of the trade and capital balance.
The problem isn’t global trade per se, but progressive policies that repress national saving and domestic labor and capital productivity while growing the administrative state. National boundaries still matter. In the EU the single currency zone has destabilized previously relatively stable prosperous countries, threatening political and economic collapse. The relationship between the U.S. and China reflects a similar dynamic: the willingness to accept American debt has kept the dollar from falling and trade adjusting. China holds over trillion dollars of debt backed by taxpayers, and was the biggest foreign funder of Fannie Mae and Freddie Mac during the sub-prime lending bubble. Progressives argued that we would grow out of this debt, but simultaneously and inconsistently deny that the failure to grow during the Obama Administration reflected economic repression but “secular stagnation” that capitalist innovation has run its course. If so, we are doomed when countries attempt to collect.
Thus far the main part of the Trump agenda, the tax reform and regulatory roll back – against universal Democratic opposition and condemnation – appears to be working. Economic growth per capita has picked up, unemployment is the lowest since the turn of the century, and business investment net of depreciation is rising from historic lows. But it is way too early to declare success. China entered the WTO without meeting the minimum requirements for intellectual property protection or reciprocity, a Clinton Administration oversight. Fixing the former should be uncontroversial. Reciprocity insures that the most competitive – not the most subsidized win. Subsidies may benefit American consumers temporarily, but the dislocations are costly and overconsumption dangerous, the debt leading to contemporary “gunboat diplomacy” to settle debts. A reciprocal tariff is a consumption tax, not irrational to consider under those circumstances.
Progressive efforts to Impeach President Trump: the Totalitarian Administrative State Strikes Back
Yet since the election, some progressive Democrats have been pushing for impeachment on grounds of Russian collusion and obstruction of justice, although no evidence has yet been produced of that after two years of investigation.
One thoughtful progressive commentator dismisses these grounds, arguing that the real grounds for impeachment are the “threats Trumpism poses to democracy and rule of law.” If true, those would indeed be grounds for impeachment but he doesn’t define Trumpism or provide evidence. The many articles in the progressive media can be summarized thus: Trump is tweeting against the administrative state agents that are out to get him.
Libertarians and Republican conservatives have argued that progressives have been undermining liberty and the rule of law for over a century to create the administrative state, obfuscating their agenda by manipulating words to mean the opposite of their historical meaning. Trump’s Court appointments are intended to reverse that trend. Statism is usually associated with one-party faux democracy to prevent state power from turning against the entrenched interests with a change of government. Trump ran against the progressive new world order, arguing to “put America first.” The Democrats didn’t think Trump had any chance to win. This seems the more compelling reason for their impeachment efforts. The anti-Trump organized hysteria bears a marked resemblance to the largely Soros funded Republican and Democratic efforts to ignite the democratic color revolutions in the former Soviet states described by F.William Engdahl in Full Spectrum Dominance: Totalitarian Democracy in the New World Order (2009).
This isn’t about Trump tweets. It’s a battle for the commanding heights.
Capitalist Individual Liberty and its Discontents
Capitalism remains under attack by the political elite, even though virtually all human progress, however unequal, has been made under competitive market capitalism during the last few hours of the year of humanity, where the consumer is sovereign. 18th century Classical economic liberalism is based on private property and the rule of law, a market economy, freedom of religion and press, sound money and free and peaceful trade among individuals (and firms) within and across political boundaries. The results of competitive market capitalism tend toward survival of the fittest rather than equality, but provide greater opportunity for all those not born into wealth or political power.
Economic liberalism is unnatural, requiring a great degree of confidence and trust in fellow man and the government to instill it by protecting the right to contract and providing public services while protecting individual liberty. Class conflict preceded capitalism by millennia. Capitalism destroyed traditional class barriers to economic mobility based on merit and access to capital, creating a new class structure with capitalists at the top. American culture developed without the legacy of class conflict in the “old world” between the “political elite” a term reflecting the political constituencies of the political party in power who repressed the opportunity of others, and has historically embraced these differences when based on individual merit; athletes, entertainers, entrepreneurs and others that enrich our lives.
Liberty versus Progressivism’s Totalitarian Democracy
Capitalism’s process of creative destruction the key to economic progress – is inherently unstable and disruptive of entrenched interests. Two historic responses to the perceived “unfairness” of market capitalism – inherent inadequacies that are often just reflections of economic reality – have been to control it toward state ends fascism or replace it with state ownership communism. Both are collectivist and totalitarian. Mercantilism and imperialism share the key elements of the former as alternative forms of state capitalism. The modifier “classical” was added a century ago to distinguish it from the new “liberal” American progressivism and subsequent European post WW II “social democracy” that borrows socialist redistribution from communism to share the fruits of market capitalism – somewhat less totalitarian but still “majoritarian,” i.e., based on the collective majority without sufficient respect for individual liberty necessary for capitalism to flourish.
The growth of the state to the commanding heights neither reflects “the will of the people” nor the ability of the federal government to solve social problems better and cheaper that lower levels of government or the private sector, for reasons described by Hayek in Fatal Conceit (1988). Even if it had the purest of motives and incentives, it lacks the access to the decentralized information that drives capitalist progress, described by George Gilder in Knowledge and Power ((2013).
As the size of government has grown, often in the name of social justice, economic progress has slowed and shifted the distribution of wealth toward a new American political elite, introducing class conflict. Progressive ideology implemented with majoritarian democracy, eventually but inevitably regresses into the antithesis of economic liberalism, illiberal identity politics, tribal infighting and crony capitalism. Blair’s assertion that there was no necessary conflict was wishful thinking: the state has become the end, replacing liberty with tyranny. It’s been progressing slowly for a long time, but the current anti-Trump hysteria shows how far it has come.
From a Limited Government Republic to a Progressive-Totalitarian Democratic State
Recently, four progressive Supreme Court Justices ruled that when the founding fathers met to amend the Articles of Confederation in 1787, the intent of the Commerce Clause they inserted into the new Constitution to promote interstate trade made constitutional legislation that required residents to buy a product but forbid them from buying it out of state? How did this happen?
When Winston Churchill opined in his oft quoted speech before the House of Commons in 1947 that “Indeed it has been said that democracy is the worst form of Government except all those other forms that have been tried from time to time” he was not referring to his frustration with getting Democratic President FDR to support Britain during its darkest hour. Nor was he referring to the recent war against fascism or the new cold war against communism. He was speaking out against the proposed constitutional amendment to give the progressive Labor government of Clement Attlee (an admitted socialist) additional power to address Britain’s post war needs.
Churchill’s sentiment was neither original nor new. It motivated America’s greatest political theorist James Madison’s call for a constitutional convention in 1787. Ben Franklin’s reply to the question regarding the form of government the convention had just produced, “A republic, if you can keep it,” referred to the agreed upon limits to popular sovereignty protecting the rights of individuals and the tenuous protections thereof. Citing Franklin’s response in an otherwise excellent commencement address at the University of Michigan in 2010 (where it was replayed in 2017 because apparently the 100 strong diversity administrators rejected that year’s speaker), President Obama immediately followed with: “Well, for more than 200 years, we have kept it. Through revolution and civil war, our democracy has survived.”
Every country has a unique history of why state power grew, but the question for the U.S. is how did the unique “limited federal government” Republic of the Constitution which granted greater individual rights than any prior political system but not the right to vote – morph into deTocqueville’s democratic “tyranny of the majority” with massive income re-distribution schemes and state directed crony capitalism?
The Founding Fathers weren’t against representative government, but they were well aware of the problem of majoritarian or “mob” rule over such a big polity as the U.S. dating back to Aristotle. The term laissez faire is French for “leave it alone,” the advice given to a 17th century French mercantilist minister by businessmen regarding state “help.” The Constitution’s limited powers implemented this advice at the federal level but left America a surfeit of democratic government at the somewhat more accountable state and local levels where representative democracy works best, i.e., cities, towns and increasingly private associations such as those for condominiums. States were free to pursue their own progressive policies subject to the discipline of the ballot box, intrastate migration, federal constitutional limits – often ignored, and capital markets., leaving it to states to experiment, innovate and compete for the right balance of economic and political power.
The U.S. has retained a two party system not envisioned by the Founders. Political parties change their names and their views. Jefferson and Madison, the founders of the first political party- the Republican Party, the name later changed to the rather awkward and misleading Democratic-Republican Party originated the concepts of a constitutionally limited government. The Democratic Party of Andrew Jackson opposed the abolition of slavery in the Civil War and opposed black rights well into the mid-twentieth century. Abraham Lincoln and Theodore Roosevelt, the original big government progressives, were both Republicans. But for over a century since WW I and the Great Depression the progressive banner has been carried by the Democratic Party and the limited government Republic banner most consistently by the politically irrelevant Libertarian Party and less reliably by the Republican Party, often by outsiders of the D.C. establishment like the Tea Party.
Individual liberty often conflicted with the progressive view of majoritarian democracy and “mutual obligation”, i.e., socialism. While the original Constitutional boundaries between state and market remain with minor adjustments in subsequent amendments, the short non-legal explanation for today’s administrative state is creative opinion writing sequentially subverting the original intent. If the Supreme Court Justices were all apolitical geniuses, the votes on constitutionality wouldn’t so often be split along party lines. Supreme Court appointees today put party allegiance and personal convictions above their oath of office. While Republican candidates for the Supreme Court generally must pass the litmus test promising to uphold the written constitution and amendments as originally intended – often honored in the breach – Democratic candidates are subjected to a litmus test of Progressive Era Court precedents stare decisis supporting majoritarian rule, a Democratic virtual or “living” constitution the antithesis of the written one. To avoid rollback when not in power progressives argue for “judicial restraint” or “conservatism” not with respect to the written but the virtual constitution. There is no constitutional basis for this deference, which grows the administrative state with each progressive Court victory.
Early Republican progressives focused their efforts on the federal government initially due to the legacy of slavery. The overdue extension of voting rights to former slaves and over a half century later to women vastly expanded the potential political factions. The 14th Amendment to restrict the ability of Southern states from inhibiting their voting rights has since been interpreted to give the federal government virtual total supremacy, undermining states rights which consequently avoided state competition and political accountability. The direct election of Senators in the 17th Amendment of 1912 and subsequent Supreme Court decisions reassigned sovereignty from the people to the collective “majority.” As voting rights were appropriately expanded in the U.S. individual rights were increasingly repressed by the majority as progressive legislation enabled by a politically progressive Supreme Court – shifted most of the money and power to the federal government that increasingly encroached on economic life.
The first big progressive initiative under Democratic President Wilson was the 18th Amendment banning alcohol in response to alcoholism among German and particularly Irish immigrants. This didn’t decrease consumption, but instead fueled massive corruption. The 21st Amendment repealing the 18th accomplished with an amendment process not used before or since to circumvent populist opposition – became the basis on which much of the Depression era progressive legislation sharply curtailing economic liberty would be based, from which subsequent precedents would follow.
The domestic economic system embedded in the Constitution most closely resembles that of contemporary libertarians, but the authors recognized that the U.S. was unique and they weren’t internationalists. This diverges from today’s libertarianism without borders in that they were founding a nation in an illiberal world of nation-states set against European imperialism, the reason for the Monroe Doctrine was for the U.S. to stay out of European affairs and have Europeans stay out of the Americas.
The Rise and Decline of Nations: “good intentions”- the Road to Hell
How nations rise and avoid decline is the essential question of political economy. In recent times the question was first addressed by Mancur Olsen The Rise and Decline of Nations (1984), later by David S. Landes The Wealth and Poverty of Nations in 1998, by Daron Acemoglu and James A. Robinson in Why Nations Fail in 2012 and most recently by Peter Frankopan in Silk Roads: a New History of the World in 2017. What generalized conclusions can be inferred?
America had lots of advantages, not unlike Latin and South America. Its comparative wealth and greater rise is in no small measure due to its political system that rewarded innovation and the creative destruction of capitalism. In summarizing “Why Nations Fail Today” (chapter 7), Acemoglu and Robinson (pg 401) conclude “the more critical lessons are in the big picture, which reveals that in each of these cases, extractive political institutions have created extractive economic institutions, transferring wealth and power toward the elite.” In other words: crony capitalism.
The second main observation is that they fail before they reform as the political elite have more to lose. It took a Civil War to break the hold of Southern Plantation owners, and a new civil war is brewing as the economic liberalism of the South has become the engine of American growth while the more progressive North stagnates. It took a global coalition of capitalists and communists to stop European fascism. Then it took a half century “cold war” to stop the communists. Whereas European fascism ended (at least temporarily) with a bang, Soviet communism ended with a whimper it just went broke.
What made America great wasn’t collectivist “majoritarian” democracy but American exceptionalism, the constitutional codification of the precepts of classical economic liberalism.
The Reagan Revolution barely slowed the growth of the administrative state, accelerating defense spending to drive the Soviets into bankruptcy. But the U.S. didn’t return to its classical roots, instead becoming a global hegemon. It has undertaken military action around the globe implementing a mercantilist strategy to control trade routes particularly oil pipelines – and access to resources. It didn’t accumulate wealth as do mercantilist powers, instead consuming its capital stock to fund domestic social welfare. It didn’t collect the taxes or economic rents as former imperial powers, but still has become unpopular with many allies. If history is any guide, continued conflict with China and Russia over trade routes and currency is inevitable, particularly in the Middle East and increasingly in Africa.
As is often the case in mercantilist conflicts the public costs may far exceed benefits. The Military-Industrial-Congressional Complex is bipartisan, and Congress has failed in its responsibility for approving such conflict. The public has unarguably sacrificed its liberty in the name of security. Whether that has made its citizens more or less secure remains an open question.
Libertarianism versus Progressivism and One Party Rule
The founding fathers drew a unique line between the public and private sectors. In what follows I try to put what they did in historical perspective, and discuss the economic issues facing the country today critiquing progressive policies from their generally libertarian perspective: fiscal and monetary policy; trade, immigration and labor policy; credit allocation; infrastructure investment; and income redistribution.
It starts with author Peter Frankopan’s compelling Silk Roads, a New History of the World (2017), a brief 600 page history how political economy evolved. Why new? As Frankopan notes in his prologue “there were alternative ways of looking at history ones that did not involve looking at the past from the perspectives of the winners of recent history.” The winner is always the state.
I know from experience that progressive lawyers, historians and economists will howl in rebuttal: while we retain the two party system the party of the state has captured the intellectual elite and main stream media. David McCullough, the dean of American historians, concludes American history textbooks are “so politically correct as to be comic.” And as 97 out of 100 history professors are self-identified liberals/progressives, their perspective on the success of progressive policies is highly biased. The same is true of progressive journalists, lawyers and economists, all members of the political elite, so visceral push-back is to be expected.
Commenting on Alexander Solzhenitsyn’s first public comments, at Harvard four decades ago only four years after he arrived in America, Mark Judge writes:
“Even without any state censorship in the West, Solzhenitsyn observed, “fashionable trends of thought and ideas are fastidiously separated from those that are not fashionable, and the latter, without ever being forbidden have little chance of finding their way into periodicals or books or being heard in colleges. Your scholars are free in the legal sense, but they are hemmed in by the idols of the prevailing fad.” And these fads form “a sort of petrified armor around people’s minds, to such a degree that human voices from 17 countries of Eastern Europe and Eastern Asia cannot pierce it. It will only be broken by the inexorable crowbar of events.” In one observation, he’s taken account of the general failure in the West to perceive that communism would collapse in the late 1980s, and also of the character of Americans coming of age in the new millennium, so in thrall to the idols of political correctness today that they cannot bear to hear opposing views on campus and cannot grasp the nature of the freedoms that have been enshrined in their country’s founding charter.”
I have mostly cited references generally, i.e., links to books rather than footnotes with page numbers, that admittedly doesn’t do proper justice to the authors and puts a burden on interested readers for further reading. It’s only intended as a guide to more definitive treatments.
The Silk Roads to Trade, Markets and Slavery
Mercantilist Trading Empires and Slavery
To synthesize Frankopan in four sentences: In the beginning of civilization peoples freely traded in the marketplace(based mostly on absolute advantage due to available natural resources, skills, etc.) creating great economic value. Money (and later finance) evolved replacing barter to enhance trade opportunities. Marauders first robbed the caravans (or extorted them in return for protection), and then some morphed into religions (e.g., Islam), governments or both, calling their booty tithes, duties or taxes. All wars since have been fought over access to the booty (e.g., by controlling trade routes and/or money) and the re-distribution thereof.
One of the most commonly traded “goods” from the beginning were slaves – an “economic surplus” created by coercive labor exploitation was shared by the other participants in the trade. For example: The Middle Eastern prophet Mohamed merged all political and economic life under a new dogmatic Muslim religion, enslaving non-believers; More than a century later the Viking tribe of “Rus,” invaded what later became Russia trading “Slavs” (slaves). The legacy of slavery as a labor policy has an impact on the political economy of many countries today, particularly the U.S. Free trade and “market capitalism” has often been unfairly linked to coercive labor exploitation.
New trading empires and currencies rose with the advent of new trading routes, as the old fell away. Britain took control of the sea routes after the defeat of the Spanish Armada in 1588, which the Royal Navy fought many wars to maintain over the next four centuries. Britain abolished the slave trade in the Empire in 1807, and slavery in 1833. It won the Crimean War (1854-56 to keep Russia out of Europe (in Churchillian terms) and World War’s I & II (to keep Germany down). While victorious, it lost the Empire after which it ceded control of the seas to the U.S. Navy. In addition, Britain’s gold reserves had largely moved to America to pay war debts and as a result of the Bretton Woods agreement the dollar replaced the British Pound Sterling as the world’s reserve currency on which international trade would subsequently be based.
Agricultural Trade and Serfdom
Agriculture extends back over ten millennia, but trading in agricultural commodities like wheat has records going back less than a millennium. Early political economy is mostly about the land, those who owned or controlled it and the peasants and serfs that worked it. In the Great Wave (1996) David Hackett Fischer ties the political revolutions of the last millennia to price movements in agricultural trade. He finds that four great long waves of agricultural price instability typically rising prices – are the source of social and political crises of the thirteenth, sixteenth, eighteenth and twentieth century creating social disorder, economic collapse and political revolution during the following century. Rising prices reflected shortages that could result in famine over time. Societies often responded to rising prices by debasing money, exacerbating the inflation. Families then responded with plummeting fertility, generating subsequent labor shortages.
Rising prices in the late 18th century caused starvation and ultimately the end of feudalism in France and ultimately the rest of Europe. But prices fell throughout the 19th century in the U.S. and Britain, creating pressure by the agricultural lobby for more money silver coinage to inflate their prices. Prices started rising again, ending Russian serfdom early in the 20th century. This long wave of rising prices resulted in gradually improved agricultural productivity, freeing labor from the land, resulting in great waves of excess urban labor and falling non-farm wages.
The Socialist Road Back to Serfdom
Nineteenth century German political economists writing in Britain Marx and colleague Engels developed their own theories of urban industrial labor exploitation and predictions of political revolution. While it didn’t happen the way they predicted, the old ideas of utopian socialism were tried in Marx’s name as a replacement for feudalism, serfdom and monarchy primarily in Eastern Europe, Russia (to become the Soviet Union) and later China. Germany later opted for National Socialism in the troubled aftermath of WW I while Italy followed former communist party head Mussolini into its close cousin fascism.
These dogmatic twentieth century political ideologies that put politics, religion and economics under the control of the state murdered one hundred million people in the process. International communism fostered rather than prevented war and all three produced massive corruption. Friedrich Hayek an Austrian political economist also writing in Britain (at the invitation of John Maynard Keynes) a century later predicted these ideologies were a totalitarian Road to Serfdom (1944) rather than to a workers’ paradise. He predicted that was true for European social democracy as well.
Clear eyed socialist George Orwell conceded at the time that Hayek was probably right about socialist totalitarianism, as he published Animal Farm the following year depicting Stalin’s predictable betrayal of the Soviet revolution. But he forecast incorrectly – that capitalism would be even worse for workers, underestimating the way capitalism builds on individual self interest for the greater good, while socialism ignores it to the public detriment.
Yet almost three quarters of a century after publication of Hayek’s book and a quarter century after the collapse of socialist regimes world-wide, French historian and lapsed socialist Jean-Francois Revel describes in Last Exit to Utopia (English translation 2009) the intellectual death of socialist thought as the official files were opened to reveal the organized mass murder, and the shocking rebirth. This was most glaringly evident in the campaign of socialist candidate for the 2016 Democratic nomination Bernie Sanders.
The American Revolution: A New Road to a Classical-Liberal Republic
The American Founding Fathers were in a unique position in the late 1700s to create a new untested liberal form of government. The British Empire was distant and distracted, more concerned with maintaining their highly profitable eastern (Indian) and other trading routes within the Empire than fighting expensive Indian Wars in the Americas. Britain itself was a liberal representative government from which many ideas from the new political economy of classical liberalism would be borrowed. And as young colonies, there were few legacy issues to deal with.
As men of affairs, their motives were not always entirely pure. The Boston Tea Party “Indians” destroyed the tea of the East India Trading Company that was undercutting the price of tea smuggled by John Hancock. Numerous Founding Fathers, most notably surveyor George Washington, held major interests in land that the British unlike the Spanish in Mexico – were preventing them from seizing from the indigenous Indians. Benjamin Franklin became the first Postmaster General so he could distribute his newspaper. The most glaringly illiberal exception was slavery, as many of the Founding Fathers owned slaves.
American Exceptionalism: Limited Government with Checks and Balances
The Founding Fathers wanted to create a virtuous republic where they could pursue their own interests so long as they didn’t violate the rights of others to do likewise, a system of laws not dependent on the infallibility of men. The Declaration of Independence and the subsequent implementing document the U.S. Constitution created a Republic with highly specified and sharply curtailed powers, reserving the rest for “we, the people” as individuals. While they were generally religious, the “affairs of state” were separated from religion – inherently dogmatic – and to the extent possible the economic life of citizens. While the states remained free to pursue more progressive policies, most amended their constitutions to strengthen individual rights as well.
Among the most important limits, the federal monopoly over legal tender was limited to currency money backed by gold or silver. Reflecting concerns with the concentration of economic power and crony protectionism that they associated with the British, the failure to explicitly charter a central bank was debated for the next century and the subsequent debates over the constitutionality of the Federal Reserve Bank’s authority to issue fiat (paper) money continued over the century after that.
In addition to individual rights, elaborate separation of powers and numerous checks and balances to limit federal power was the most exceptional feature of the new Republic, but one weakness was soon apparent. While the Supreme Court Justices were given (or took in Marbury versus Madison, 1803) the power to prevent or overturn unconstitutional legislation, was it a duty, and if so what would happen if it is ignored or exercised fraudulently, i.e., by reflecting their personal political views or those of their sponsors rather than the constitution, a “high crime or misdemeanor”? They soon learned the answer, i.e., not much if they were granting the politicians who appointed them more power.
The Constitutional Protections of Economic Activity
The uneven results from the strengths of competitive capitalism, providing equal opportunity to all but rewarding labor and capital based on individual merit and productivity rather than e.g., social status were embraced. The constitution addressed the question of “naturalization,” the process of becoming a citizen. But other than slavery, labor migration and immigration were not addressed, as the Founders were all immigrants or their descendents. While the country was already a melting pot of ethnicities at the founding, all those who came to “the land of opportunity” shared the same motivation to work and get ahead.
Economic intervention was mostly limited to the Commerce Clause which prohibited restraint on trade among the states to promote intrastate trade and national markets, but the Constitution didn’t so limit the federal government in international trade, paradoxically relying mostly on protectionist import duties.
The federal government was supreme in international affairs, but the nation’s first President George Washington admonished against foreign entanglements. Thomas Jefferson, his successor after John Adams, shared those sentiments but ironically found it necessary to take defensive military action in the far off Mediterranean Sea to protect American trade routes against the Barberry “pirates” Muslim state-sanctioned marauders.
The Mexican Revolution: the Road to Faux Progressive Democracy and Crony Capitalism
The political struggles in Mexico after the arrival of the Europeans contain elements of all the struggles of not just Latin and South America but North America as well as all the countries that later groped towards representative government, including the WW I era campaigns of U.S. President Wilson to “make the world safe for democracy” and later the democracy campaign in transitioning countries of Eastern Europe and the former Soviet Union following the 1989 opening of the Berlin Wall. They all forgot or ignored de Tocqueville’s earlier warnings. Mexico is a case study how democracy without sufficient binding limits morphs into one party totalitarian rule.
The Rocky Road to Representative Democracy
In Mexico, Biography of Power (1997) Enrique Krauze’s history focuses on the last two centuries but actually goes back a half millennium to the arrival of the Spanish. European settlement in New Spain (later Mexico) had a century head start on North America. It had extreme ethnic diversity; both highly developed Indian cultures, hundreds of less developed tribes, the mestizos (part Indian), the Spanish (from Spain) the creoles (Spanish born in Mexico) the Negroes (immigrants from the slave colonies) and the mulatos (mixed white/black). It inherited political systems from the Aztecs and Viceregal rule from Spain (later France) which shared political power with the Catholic Church. The Jesuits, whose New Spain universities date to the 17th century, were expelled in 1767 in a three way political power struggle among the religious orders, the secular clergy who sought religious sovereignty who sought religious sovereignty and the Spanish Crown who sought political sovereignty. Battles for political power between and among these various groups changed but didn’t end when Spanish rule was ended in 1821 as subsequent Jesuit teaching generally less dogmatic – fortified a new Mexican identity and quest for independence.
The first federalist constitution in 1824, three years after independence, was modeled after the U.S. Constitution. But viceregal influence remained and the various groups vying for power continuously fought pitched battles. The new constitution of 1857 purportedly made Mexico a “representative, democratic and federal republic.” But while Mexico had no legacy of slavery or indigenous Indian extermination like the U.S., it had a legacy of unfair land expropriation and indigenous labor exploitation. Many land reforms were undertaken in the face of strong political opposition. To counter this, a powerful presidency – “patria” (father) of the people developed, ultimately merging the state with the party and a more cooperative relationship with the Catholic Church.
Porfirio Diaz, elected on a campaign promise of “no re-election” in 1874, remained in power until forced into exile in 1910 during his eighth term. Massive infrastructure investments were undertaken during his long reign as “Liberal Dictator.” But the executive branch seized virtually all political power through a campaign of “bread and bludgeon” either receive state funded benefits and protection in return for political support or be harassed (sometimes killed) by the state/party. Revolutionary leader Francisco Maduro, elected president in 1910 on a promise to restore the liberal constitution of 1857, was assassinated in a coup by the Diaz faction reportedly assisted by U.S. ambassador Lane Wilson, unbeknownst to either President Taft or President elect Wilson. The revolution of 1910-1911 resulted in a new “democratic” constitution in 1917.
The PRI: the Road to Fascism
In 1929 the National Revolutionary Party (PNR) was formed, later to become the Party of the Mexican Revolution (PRM) and finally in 1946 the Institutional Party of the Revolution (PRI). Mexico became a full-fledged crony capitalist economy with the “election” of pro-business Manuel Aleman Valdes in 1946, “institutionalizing” the state, economy and even the church within the party.
In 1938 Mexico nationalized the oil industry and turned protectionist. Sensitive to opposition to the Communist Party in the U.S., Mexico maintained a faux democracy, honoring the “no re-election” promise by “anointing” successors and imposing virtual one party rule through all levels of government and holding phony elections. It expanded the “bread and bludgeon” tactics of Diaz, bringing all the different factions either onto the budget or into a protected political elite and any resistance was met with state coercion. The PRI factions included the press, the intellegencia, the arts, government workers, labor unions, students (bludgeoned in the late 1960s) and protected business, but armed struggle continues among the Indian tribes in the south. As in the Soviet Union, they ruled in the name of “social justice” enriching themselves and others at the expense of the poor as fascist crony capitalists rather than comrades.
The PRI totalitarian grip on power outlasted that of the Soviets, who were basically bankrupt by 1989-91. Mexico’s debt crisis came in 1994, followed by a U.S. bailout that allowed the PRI to hang on to the presidency until 2000 (and make a comeback in 2012). Not surprisingly, most of the new “social democracies” to emerge from the former socialist countries bear a greater resemblance to Mexico’s totalitarian PRI as Hayek had predicted for “social democracies” than to the limited government republic of the U.S. Founding Fathers.
The 1910 revolution ended centuries of armed conflict over political power and on paper implemented a liberal democracy. Mexico had a powerful neighbor to the north, but the threat was always from within. It lacked sufficient institutional checks and balances on executive power, particularly an independent powerful and incorruptible judiciary with enforcement powers to curb the excess of progressive democracy and crony capitalism, stalling its rise to upper-middle income status.
Civil War and the Aftermath: The U.S. Road to Crony Capitalism
After the constitution of 1857 and election of Juarez as President, political affairs in Mexico remained so volatile that it entered into an agreement to become a protectorate of the United States. Before it could be implemented the U.S. Civil War intervened.
Slavery: the Illiberal Legacy leads to a Second American Revolution
While Silk Roads author Frankopan didn’t specifically address the U.S. Civil War, he gives great credence to the recent similar conclusions of libertarian economists such as Thomas Di Lorenzo in The Real Lincoln (2013).The new Republican Party was formed as a coalition of those against extending slavery to new states and the former Whig Party of which Lincoln was a long term member that promoted higher tariffs and more government infrastructure spending. Whether or not they realized it at the time the agenda of these two factions were diametrically opposed.
Arguments over how to end slavery continued from the Constitutional Convention of 1787 to the election of 1860 with little progress. The slave trade with Africa had been abolished in 1807 by the U.S. Congress, to be enforced by the British (who controlled the seas), making existing slaves and their offspring that much more valuable. Whereas in Brazil, which accounted for 40% of the slave trade because slaves were expendable life expectancy was only 7 years, America counted for only 3.5% of the slave trade because owners encouraged families and children at least to some extent to get a continued return on investment.
Lincoln never threatened to immediately abolish slavery. Republicans didn’t believe they had any constitutional authority to do so in the slave states. Moreover, even with the Democratic vote split between a northern and Southern candidate, he lacked political support in the North where only about 5% of the populace supported it, same as in the South, even though many northern states had already abolished in the North by this time. Lincoln had no concrete post-slavery plan other than reference to external colonization. Southerners feared mass violence as had generally happened elsewhere, and Northerners feared northern migration. But Northern abolitionists punched well above their weight politically, as Northern army captain – later Supreme Court Associate Justice – Oliver Wendell Holmes whose mother was an abolitionist put it: “Communists show in the most extreme form what I came to loathe in the abolitionists the conviction that anyone who did not agree with them was either a knave or a fool.” Lincoln’s subsequent wartime Emancipation Proclamation applicable only in the South didn’t free any slaves. That required Constitutional Amendments.
If the war was fought to abolish slavery then it should be viewed as a costly failure. The U.S. lost about 10% of its total population during the War and the Southern economy took about a century to stop looking backwards and eventually recover. It resulted in the legal emancipation of slaves, but the political and economic reality wasn’t obviously accelerated and arguably slowed. Prior to the Civil War about 25% of slaves had been semi-skilled tradesmen paid a meager salary, a system somewhat akin to indentured servitude. After the Civil War black labor continued to be exploited economically and politically at least until World War II, with productivity gains and economic and political progress arguably slowed in comparison to all the other jurisdictions where slavery was abolished without war, often by buying out the slave owners. The Thirteenth, Fourteenth and Fifteenth Amendments were passed to re-enforce the individual rights in the Constitution with ironclad protections to extend these rights to the emancipated slave population over Southern state resistance. But political progress was stifled until the 1960s when President Johnson broke ranks with southern democrats to push through the Civil Rights and Voting Rights Acts of 1964 and 1965 over his party’s opposition.
The Civil War legacy: Crony Capitalism and the Perversion of Federalism
Slaves were valuable because their labor was still exploited to make the trade in cotton profitable, allowing tariffs to be imposed on the return trade in mostly manufactured goods from Britain. The tariff revenue collected almost exclusively at southern custom houses (e.g., Fort Sumter) accounted for most of the revenue of the Federal government. As a lifelong and ardent Whig protectionist, Lincoln supported the passage of the Morrill Tariff in 1861 (after his election but before his inauguration) resulting in a huge increase in duties on Southern imports.
While there was no shortage of private capital for infrastructure such as roads and railways, Lincoln, a former railroad lawyer, ran successfully for the Illinois Congress in 1832 on a platform of corporate infrastructure subsidies. Victorious, he subsequently pushed a spending package that had virtually nothing to show for it but a financial crisis so stressful that in 1848 the Illinois legislature passed a constitutional amendment prohibiting such expenditures, as did several other states. Nevertheless, Lincoln ran for president on a platform to finance “internal improvements” in the North, including the railroads, heretofore considered unconstitutional. Taxing the fruits of Southern slavery to fund Northern business cronies incited the South to secede (and Britain, which also continued to benefit indirectly from slavery, considered supporting the Southern cause). The South’s Constitution essentially mirrored the original but in addition liberalized international trade by making it duty free.
American limited government economic liberalism was undermined by the War and aftermath. To fund the War, Lincoln introduced national banking and a “temporary” income tax, harbingers of the future. The North became a hotbed of crony capitalism as petitioners filled the lobby of the Willard Hotel in the District of Columbia, hence the term lobbyist. The Jefferson/Hamilton deal of 1790 made the South that had mostly repaid their debts responsible for the Revolutionary War debts of the North that is to say, the slaves financed the Revolution – in return for a capital city in the South on the Potomac. Surveyor George Washington chose the site of the nations’ capital because it was available swamp land. Parenthetically, the Jesuits who had serendipitously received a land grant for a university on the Georgetown heights above the swamp just before this selection would centuries later be the first to receive earmarks direct payments hidden from public view.
Trade, Slavery and Immigration
The U.S. as a new largely unsettled country had a surplus of land and the inverse, a labor shortage. Hence the Constitution didn’t address the issue of restricting immigrants who were initially welcomed, especially after the prohibition of the slave trade. This relieved pressure on countries with a vast excess of cheap unskilled or semi-skilled labor. By the time of the Civil War Irish immigrants not yet naturalized as citizens made up a large and equal share of the armies of the North and South. After the war, it was mostly Irish labor that built the railroad from the east, and Chinese labor from the west.
As immigration was a substitute for slavery and the slave trade, immigrant jobs and domestic output indirectly substituted for imported goods, the authority to regulate immigration was inferred by the Supreme Court to the federal government under the Commerce Clause. Immigrants were considered “people” with due process rights but not the full rights of citizens. This happened before legal restrictions on immigration had been considered. After restrictions were imposed, the Court inferred the same rights to those here illegally as those who came legally. The rights of citizenship were then extended as a reading of the 14th Amendment to apply to the offspring of illegal immigrants, unique among nations.
By the twentieth century as the frontier closed not only in America but worldwide, particularly Russia, and with it the chronic labor shortages the debates over trade protectionism and immigration quotas became inextricably linked, with internationally competitive (generally big) business supporting free trade exports – and cheap labor – immigration – while big labor favored the opposite to protect jobs. After that immigrants came mostly legally- of their own accord, most often taking the worst jobs America had to offer but presumably better than their domestic alternatives. The competition was not with “organized” union labor but the other new arrivals and descendents of slavery that unions were organized to exclude,
Progressivism’s Big Idea: State Directed Investment and Financial Repression
Banking and finance is an extension of money that produces great value through productivity enhancements and hence opportunities for rent-seeking. Nowhere is the difference between laissez faire capitalism and progressivism starker than the allocation of capital. The biggest progressive myth is that politicians and bureaucrats can direct investment better than private business in pursuit of human economic progress. The cost of this one delusion dwarfs all of progressivism’s purported benefits combined by orders of magnitude.
The strength of state control is the ability to repress wages and consumption, producing a rate of saving and investment in the former Soviet Union roughly ten times that of the West. Soviet Premier Nikita Khrushchev’s 1956 promise to the West that “we will bury you” was a reference to the greater economic investment of Soviet planning. The first Keynesian, Joan Robinson, had been an advisor to Stalin and American progressive Paul Samuelson agreed with Khrushchev, maintaining his support of the Soviet development model in his textbook right up through its collapse. The weakness of this model is massive mal-investment of this surplus, the main reason central planning in the Soviet Union and its satellites failed.
Developed financial systems promise savers both the high returns of capitalism and safety, a problematic transformation for inherently risky investment. Progressive economic planners focus on safety and stability for savers while mis-allocating investment to political factions, leading to systemic failure.
The U.S. Banking System: Crony by Design
Charles W. Calomiris and Stephen H. Haber Fragile by Design: The Political Origins of Banking Crises and Scarce Credit (2014) describe the crony capitalist origins of U.S. (and Mexican) banking.
The Constitution purposely made no provision for federally chartered banks to prevent an excessively powerful central government with concentrations of banking power, leaving the door open to the states who during the nineteenth century quickly realized that the economic rents from requiring banking charters were potentially huge. Taking full advantage, states maximized the number of charters by preventing entry by banks from other states and more often than not branching within states as well. Direct fees, taxes and dividends became a major source of state revenue averaging a third or more of the total during the 19th century. But an even bigger source of economic rents for politicians in the US was the ability to direct credit to political constituencies, generally by imposing regulations on eligible investments, a form of “financial repression.” Political cronies financing “internal improvements” most often went bankrupt, as did the state chartered banks lending to them. But in return politicians would offer insider loans and protection to boost potential returns to attract capital to banking.
From a public policy perspective, this banking system was fragile and unstable, a brake on economic growth. It was subject to continual liquidity and solvency crises due to the political and regulatory limits on banks’ ability to diversify risk. But after each banking system failure, the same political coalition doubled down to protect the original bargain. Numerous states eventually introduced taxpayer-backed deposit insurance: not only did the banks still fail, but all the public deposit insurance schemes failed as well, creating a crisis in state financing.
The most complete failure of this system occurred during the Great Depression, which the big city now federally chartered universal banks, diversified not only geographically but also across business lines with investment banking sales and trading activities, survived relatively unscathed. But even the Great Depression couldn’t kill the old political alliance, as perverse policy was instead expanded under the “reform” umbrella. Political cover was provided by the Pecora Commission, described by Michael Perino in The Hellhound of Wall Street (2010) as a political sham to pass the Glass-Steagall Act of 1933 which separated investment from commercial banking while introducing federal deposit insurance to save the unitary banks.
The Mexican Banking System: Bread and Bludgeon Credit Allocation
Prior to Porfirio Diaz Mexico was too politically volatile to attract much capital to banking. Most “loans” often made involuntarily – went to back one or another warring general. Diaz brought sufficient political stability and worked to attract capital to banking by offering protection from political risk and competition, sharing the political rents liberally with the bankers who in turn channeled cheap loans to the government. Unlike in the U.S. the resulting system was concentrated in only a few banks.
For the first half century after the PRI came to power, banking shrunk to pre-Porfirio levels due to the extreme political risk of either expropriation or repression. This was not for lack of trying, as the PRI needed to direct credit to those industries and unionized workers it supported as part of the Party base. So the PRI established a system of second tier lenders a sort of “secondary market” made by wholesale “development” banks that directed credit to PRI priorities by purchasing the loans from the banks. Thus the bank risk was shifted opaquely to taxpayers who implicitly backed these institutions.
These banks initially focused on agriculture but by the early mid-twentieth century focused on industrial loans and a half century latter mortgages as Mexico industrialized and urbanized. They tended to focus on larger enterprises that were more likely to be unionized, a key PRI constituency. As state banks, they were bailed out when needed, exacerbating the moral hazard and politicization of lending.
The World Bank: A Progressive Failure
The first proposal for a multinational infrastructure bank – the International Bank for Reconstruction and Development at the Bretton Woods meetings in 1944 by the senior American Treasury official Harry Dexter White whose main interest was in lending to governments to expand the public sector was further developed by his British counterpart John Maynard Keynes. But Keynes argued that the proposed “World Bank” as it came to be called was really a fund whereas the proposed International Monetary Fund was really a (central) bank. There is more than nomenclature at issue here. Banks have a fiduciary responsibility to get repaid with interest whereas “funds” may invest or give grants.
Its charter was limited to lending to governments to finance infrastructure projects that were supposed to produce economic benefits that would be indirectly reflected in the ability of government borrowers to repay. Following Bagehot a century earlier, Keynes’s gave assurances that it would only lend at a penalty rate of interest to avoid competing with private lenders and only on sound collateral. Skeptical American critics nevertheless saw the World Bank as a form of “economic imperialism.”
What White a communist and top Russian spy during WWII had in mind for the World Bank was primarily funding postwar European and particularly Soviet reconstruction. He was slotted to be the first World Bank President but died unexpectedly (and some think suspiciously) before taking office when the FBI accused him of spying for the Soviets during the war. The Soviet Union subsequently dropped out of the U.S. controlled enterprise.
The World Bank in practice has followed White rather than Keynes: there is typically little or no link between a project’s forecasted economic benefits and loan repayment, and the loans have become increasingly politically correct rather than economically viable. Unlike private lenders, the World Bank often doesn’t write off loans to borrowers who can’t pay: it just lends them more “fungible” money for new projects, which in practice can be used to pay off old loans. That often indirectly props up bad, corrupt and/or fiscally irresponsible governments.
The World Bank has the greatest assemblage of excellent economists and other experts ever. In spite of this expertise and virtually free money, almost without exception during its three quarters of a century the countries that developed economically were those that did not take or stopped taking World Bank loans. As Catherine Caufield put it, the experts became Masters of Illusion (1996). When a country or entire continent becomes insolvent, as Africa did several decades ago, it is considered an exogenous event warranting debt forgiveness so the cycle can repeat. The World Bank backed by almost 200 nations hence overseen by none – may be the most politically perfect, i.e., the least accountable least transparent progressive government institution ever created.
In its defense, other development banks are no better.
The Sub-Prime Mortgage Meltdown of 2008: A Massive Progressive Failure
The federal government set up several credit allocation mechanisms, including what was later called Fannie Mae a so called “secondary market” facility to stimulate housing construction and prop up the fragmented banking system in the wake of the Great Depression. The original rural farm housing lobby went urban with political support for homeownership for veterans after WW II resulting in other new federal programs. By the 1970s a rent-seeking homeownership political coalition grew to include mortgage, commercial and investment bankers, realtors, homebuilders, and eventually a huge coalition of “affordable housing” advocates empowered by the Community Reinvestment Act (CRA) of 1977.
The housing lobby enjoyed a mixed victory in the wake of the systemic failure of the mortgage lending savings and loan industry with the ironically named Financial Institutions Reform, Recovery and Enforcement Act of 1989 that limited diversification out of housing and while it eliminated the special Federal Savings and Loan Insurance Fund, it maintained a separate sympathetic regulator, albeit moved under Treasury where the regulator for federally chartered banks had always been.
Deregulation during the 1990s consisted of removing restrictions on branching and merger activities (the Reid-Nagel Act in 1994) and investment banking activities (the GrammLeachBliley Act in 1999). This should have simultaneously strengthened the historically fragile banking system but the opposite occurred for several reasons. First, the ironically named Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (the GSE Act) combined with HUD’s 1995 National Homeownership Strategy to dramatically increase the credit directed to much riskier mortgage borrowers by the government sponsored enterprises (GSE)s. Second, community action groups such as ACORN were given virtual veto power over these new branching, merger and acquisition powers by the Clinton Administration, which mad the ratings public. These groups used the reports to extract $4 trillion in additional directed credit commitments towards primarily urban borrowers who were generally a higher risk.
During the 1990s these quasi-private GSEs Fannie Mae and Freddie Mac and federally insured banks had each been able to generate economic rents of about $20 billion annually liberally distributed to politicians – they were both in the top five – as well as their constituents, about half to borrowers. The only way to generate these economic rents was to substitute cheap debt made cheap by implicit Treasury backing and government deposit insurance – for expensive equity made doubly expensive by the corporate tax on earnings before dividends. But these new political quotas applied to well over half of the entire mortgage market, increasing the need for economic rents five-fold even if one assumed the same borrower ability to pay. Meeting these quotas also required printing a lot of new money in lieu of savings. Deposit insurance – rather than being eliminated as no longer necessary with deregulation – was made virtually universal, allowing banks to exploit capital rules to achieve almost infinite leverage. Fannie Mae and Freddie Mac employed similar leverage as the global distribution of their securities especially to central banks – made taxpayer backing a sure thing. Politically directed mortgage credit more than doubled the mortgage stock with only a small increase in housing supply, fueling a housing price bubble that caused a systemic financial system failure, made systemic by government backing. When it burst the global economic downturn is estimated to have cost tens of trillions of dollars.
The Economist magazine reported that bank fines related to the financial crisis of $100 billion (eventually $200 billion) with no evidence of illegality during the sub-prime mortgage lending bubble: “Lost in the flurry of payouts is any clear adjudication of what banks have done wrong, and therefore any guidance for setting things right.” Add to that the almost $200 billion that Fannie Mae and Freddie Mac together have paid to the Treasury as “dividends” and this pot of money was going to attract politicians like bees to honey. On the other hand, banks took in about $50 billion in graft per year during the Obama Administration by using excessive leverage (thereby avoiding taxes) facilitated by federal deposit insurance and paying little or nothing on deposits (due to the Federal Reserve’s zero interest rate policy (ZIRP). See Occupy Wall Street (2013).
And the Consumer Financial Protection Bureau created by Dodd Frank in 2010 funded by the Federal Reserve, the brainchild of progressive now Senator Elizabeth Warren, is also accountable to no one.
A National Infrastructure Bank: Crony Credit Allocation
President Clinton and later President Obama proposed a National Infrastructure Bank (NIB) and the proposal remains on the Democratic Party platform. The proposed NIB is genetically a national economic development bank to finance infrastructure and to implement a state industrial policy. The usual idea is to make loans at the government borrowing rate, financed with off-balance sheet federal debt. Not surprisingly, former President Bill Clinton recommended that these bank fines referred to above be used to fund the NIB.
Infrastructure was historically primarily a state and local government responsibility and arguably should be their primary one. What specific funding problem of insufficient infrastructure investment would a new off-budget federal GSE address? Not the ability of state and local governments to borrow! State and local public debt has almost doubled since 1980 from 12% of GDP to 22% currently. Not the ability of the federal government to borrow! Federal public debt outstanding as a percent of GDP has more than doubled since 1970 to over 60%, much of which financed a five-fold increase in federal grants to state and local governments from 1977 to 2007. Not a shrinkage of government generally! Government spending at all three levels combined has grown from a sixth to a third of GDP since 1950, with taxes generally keeping pace in the 1950s and 60s. Debt then doubled in real terms in spite of prohibitions in most states of borrowing to cover current account deficits.
The failure of governments to meet their most basic responsibility to provide public infrastructure doesn’t reflect their lack of funding or access to finance, but rather a shift in priorities directed primarily to public sector employees. In California, about 85% of state revenues not passed through to local governments go toward compensation, and over 50% at the local level. Hence the NIB would finance the “bread” of major government constituencies with off-budget federal debt or worse. Davis Bacon hiring requirements and project labor agreement (PLAs) would be imposed on all projects, maintaining the artificially high union wage rates for private sector employees to spend the “most bucks for the job.” And of course much of the money would go directly to protect existing public sector employment and wage levels.
Progressive Macro-Economic Mis-Management: the Road to Bankruptcy
There is no such thing as a macro-economy, only aggregate statistics. Hayek published Prices and Production in 1931 as the Depression was under way, building on the Austrian conception of stages of production. Keynes published his General Theory of Employment, Interest and Money five years later focusing on the aggregates. Hayek argued that the Structure of Production (Mark Skousen (1990) was complex, with many stages and the total mostly composed of intermediate goods. Hayek reasoning led to a laissez faire government response to economic cycles, whereas Keynes provided a theoretical basis for the progressive policies of Hoover and FDR over the previous seven years.
Libertarian Murray Rothbard makes the Austrian case in America’s Great Depression (1963) for laissez faire. Milton Friedman of the Chicago school of economic thought blamed the Federal Reserve. But neither analysis nor experience has ended the debate. Virtually all Keynesians conclude that capitalists cause recessions and depressions and progressives fix them, whereas Austrians and generally Chicagoans (initiated by Hayek) believe the opposite. The debate isn’t over whether government spending can smooth out the trend in the GNP statistic it obviously can – but whether that does more harm than good.
Paul Samuelson, the leader of Keynesian economists during the post-WW II period predicted that postwar cuts in government in the U.S. would mean “the greatest period of unemployment and industrial dislocation which any economy has ever faced,” But the post War economy boomed. Keynesians pay insufficient attention to the productivity of labor and capital in their development models, focusing instead on employment government created “jobs” – and government spending. Most micro-economists ignore the role of the entrepreneurial risk-taking in their development models and most macro-economists ignore the complexities of the production chain: belief in the “invisible hand” of prices and production and laissez faire macro policy is hazardous to their employment and tenure prospects.
Progressive Wage Policy and Trade Protectionism
America came out of WW I much stronger than all the European participants. American labor experienced high employment and increasing real wages as immigration was restricted, war time unionization plummeted to 3% – one sixth of its war time level – with lack of political support, and the Federal Reserve goosed the economy with cheap money. In a globally competitive marketplace worker productivity is reflected in wages, but as Keynes later noted, wages are “sticky” downward due to union political power and influence as well as money illusion.
In the US the Davis Bacon “prevailing” wage has since the Wagner Act of 1935 generally been interpreted as the union wage, which often is as much as twice the local wage, particularly in rural areas. It was Hoover (a Wilsonian Republican who considered switching parties), and later FDR, who supported keeping wages at union levels after the stock market crash. Their success was estimated by the NBER in the early 2000s: wages were 40% above the market clearing level during the Great Depression. That alone explains the massive unemployment.
Perhaps the most enduring progressive myth is that the Depression was caused by the massive Republican sponsored Smoot Hawley Tariff. The U.S. has never been a truly “free trade” nation, engaging in a minutely managed trade. The tariff change for goods actually traded was small by historical benchmarks and there was virtually no tariff response by foreign nations for American products, just public sound and fury. The move was politically stupid but economically inconsequential, hurting some sectors while helping others but overall expansionary. Trade plummeted as a consequence of the Depression as America was uncompetitive and couldn’t afford imports.
More recently, while most economists would conclude from the fact that e.g., auto jobs have moved from Northern to Southern states over the last half century that unionized workers were over-paid in the former, the progressive political narrative is exploitation by Southern states and need for protection. As many of the less developed countries industrialize a similar wage disparity occurs as between states, with a similar political narrative of exploitation.
The current progressive argument that “wages haven’t been rising with productivity” since the mid-1970s is inconsistent with the position that “rising unemployment is due to “unfair” foreign competition.”One or the other is wrong. Foreign labor is sometimes “exploited,” one possible explanation. But the U.S. government statistics don’t measure worker productivity; rather it imputes a constant share of overall income to both labor and capital. The evidence suggests a failure of labor productivity to rise.
The progressive response to domestic and foreign labor competition and technological innovation is to raise wages by fiat independent of productivity. Protectionism can save some jobs, but is a regressive tax on consumers. Numerous other laws and regulations from minimum wage to trade licensing inhibit labor market adjustment and declining real wages. Sometimes they call for system wide progressive legislation, e.g., a $16 federal minimum wage to be extended internationally. Similarly progressives argue that females who make up almost half of the U.S. work force face systemic and massive discrimination, warranting federal legislation guaranteeing equal pay, but pay differentials virtually disappear when the many factors affecting employment in the workplace are taken into account.
The Progressive response is to “create jobs.” Keynes really did suggest the government paying people to dig holes and fill them up again as a way to stimulate employment comparable to e.g., going to war. But he followed up by stating this was “better than nothing” only in the short run, all he cared about – arguing it would be much better were they to do something “productive.” Labor churning, the process of labor matching to the most productive highest paying – jobs in response to changing conditions, amounts to about twenty percent of the private labor force annually. There are three progressive policies to “create” jobs after they destroy them, all counterproductive.
First, they can limit imports. Trade sanctions are the primary example. Protectionism isn’t the answer to America’s structurally un-or-under employed, especially at the currently low unemployment rate. The jobs “saved” is a small fraction of the new jobs being created by the economy and the tax on consumers may offset even this potential jobs benefit.
Second, they can subsidize business directly or through more favorable regulation, favoring crony capitalist firms over more productive market competitors.
Third, they can create public sector jobs, where productivity is hard to measure and on the margin results in rent-seeking (or worse, opposition to productive enterprise). State and local employees are mostly unionized so political pressure rather than relative productivity improvements have approximately doubled public sector per worker wage and benefit costs since 1950 relative to the private sector while simultaneously and unsurprisingly approximately doubling the percentage of the labor force in public sector employment. Nevertheless, much of the work is subcontracted and often includes project labor agreements (PLAs) in public contracts issued to private vendors that require union wages even for non-unionized employees. The leading candidates for the Democratic nomination for the 2020 election have proposed a guaranteed taxpayer-financed job.
Keynesian Countercyclical Policy
In the Schumpeterian view, business cycles occur naturally as part of a market adjustment process. The period 1869 -1929 was one of rapid if somewhat rocky economic growth of the US economy. During this period the gold standard was pro-cyclical, relying on disruptive unemployment to bring about the required adjustments, more frequent but short. Schumpeter’s process of “creative destruction” that generally occurs in the downturn was temporarily painful but served a useful purpose as businesses and households took the opportunity to reassess business practices, down-sizing or even going out of business, increasing productivity during the recovery and beyond as it did in this period of tremendous productivity growth.
Whether you believe in the Schumpeter (business) or the Austrian (public) origins of business cycles, historically governments didn’t and arguably couldn’t – do much about them. Since the Depression Keynesians have argued for increasing final consumption demand with deficit-financed government spending. The central bank as the handmaiden of fiscal policy is generally expected to finance such expenditures. This boosts and “stabilizes” quarterly GDP, a government statistic (redundant, as the word statistic is derived from the Greek word for state) reflecting total spending and potentially employment. But that isn’t directly related to economic well being.
Even Keynes believed in balanced budgets – over an economic cycle rather than a budget calendar year – although the “Keynesian” economics profession has generally casually supported ongoing deficits and increasing indebtedness, or as my father used to say “I gave you an inch and you took a mile.”FDR’s response was that you don’t get something for nothing. The associated debt and/or taxes have offsetting effects on production and prices throughout the supply chain. The Austrians argue that the immediate economic benefits are more than offset by the resulting long run costs.
That such spending is motivated more by politics than economics is reflected in political addiction to chronic deficit spending. How did the U.S. become technically insolvent bankrupt? To paraphrase Hemmingway, it happened “slowly at first, then all at once.” President Obama was on to something when he rejected American exceptionalism by equating it to Greek exceptionalism just before the Greek debt crisis: both now have excessive deficits and debt owed largely to foreigners that they cannot default on through domestic inflation.
The old excuse that the national debt isn’t a problem because “we owe it to ourselves” simply implied that domestic creditors were less of a political threat than foreign nations. Currently the older generation owes it to future American generations, as the debt represents an intergenerational war against disenfranchised (and indoctrinated) underage and unborn taxpayers. There is some evidence that millenials understand this looming burden, but still overwhelmingly vote Democratic. In part, the debt is so large as to defy their comprehension. In addition, they are turned off by Republican social conservatism, even though the Republican Party remains closer to the libertarians and the Constitution on these freedoms. The universities and media are also almost exclusively progressive, a dominant influence. And most students haven’t yet faced the tax bill.
FDR’s construction of the Jefferson Monument in 1934 to identify his party with the leading proponent of limited government was a shrewd political move. Jefferson, a strict Constitutional constructionist, didn’t believe that debts should be passed on from one generation to the next. He died bankrupt. The U.S. avoided this fate after WW II because it won, and President Eisenhower used America’s relative strength to pay down the debt. Had he not done so, the U.S. would have then face the fate of every deeply indebted country over the last eight centuries. Why believe This Time is Different?
The Federal Reserve: a Century of Monetary Manipulation
The role of Central banks is to serve as the fiscal agent of governments and print now electronically) money mostly to fund wars. When the charter for the first bank of the U.S. expired in 1811, another was chartered to fund the War of 1812. When its Charter lapsed as a result of the efforts of President Jackson, President Lincoln introduced federal charters for banks to fund the civil War. The Federal Reserve System was created during the Wilson Administration with great secrecy purportedly due to the recurring liquidity crises of the previous century. The Fed went on to help fund WW I, WW II, the Great Society, etc., all the way through the Great Bailout following the 2008 financial crisis, all in secrecy without accountability due to its faux independence from political influence.
With respect to the liquidity function, the Fed’s stated policy was to follow Walter Bagehot’s dictum in 1863 for the Bank of England to lend freely and without limit in times of crisis to avert panic, but at a penalty rate with excess collateral to avoid the moral hazard of lending to insolvent firms, thereby preventing the necessary economic restructuring. Not surprisingly, insolvent firms are most willing to accept those terms, and it has since the founding only lent to them.
With regard to The Fed’s role in maintaining price stability, from Selgin, Lastrapes and White “Has the Fed Been a Failure? Cato, (2011) p. 3: “The Fed has failed conspicuously in one respect: far from achieving long-run price stability, it has allowed the purchasing power of the U.S. dollar, which was hardly different on the eve of the Fed’s creation from what it had been at the time of the dollar’s establishment as the official U.S. monetary unit, to fall dramatically. A consumer basket selling for $100 in 1790 cost only slightly more, at $108, than its (admittedly very rough) equivalent in 1913. But thereafter the price soared, reaching $2422 in 2008 (Officer and Williamson 2009). ….most of the decline in the dollar’s purchasing power has taken place since 1970, when the gold standard no longer placed any limits on the Fed’s powers of monetary control.”
With regard to the Fed’s ability to smooth out economic cycles, consider the policies in the aftermath of the 2008 financial crisis. The Fed was actively involved in creating the bubble as it had done in past bubbles. Its solution near zero interest rate policy (ZIRP) for a decade with security purchases building a $4 trillion portfolio was a complete failure at achieving its purported mission, to stimulate consumer consumption and the economy. The history of recovery with no progressive response is much better. But the real mission was to bail out the commercial banks that Fed policy was partly to blame for insolvency. The previously noted opaque subsidies totally about $50 billion annually did that, all at the expense of taxpayers and savers. The redistribution from depositors to bond and stockholders explains why income distribution worsened during the period.
How Progressivism Discourages National Savings
If all public and private pension funds were accounted for at the Fed’s ZIRP interest rate of the last decade, they would all be actuarially insolvent could not meet their obligations, as would most households facing retirement due to the lack of anticipated earnings. This monetary intervention was unprecedented and is unending. But it didn’t start there.
Progressive policies discourage all the reasons for saving. They have largely mitigated the need for contingency savings by providing an extensive safety net. They have largely replaced retirement savings with government debt and contingent liabilities (see above). And they have encouraged virtually complete leverage little or no down payment – for consumer durables and, most importantly, for owner-occupied homes. Net of loan write offs, consumer saving net of debt charge-offs hovered around zero for several of the post recession years. Tax policies have also encouraged spending over saving.
China and Russia: the New Silk Road to Neo-Mercantilism
Geopolitical strategists President Richard Nixon had his National Security Advisor Henry Kissinger visit China in 1972 to drive a wedge between China and the Soviet Union during its cold war with the U.S. Now Kissinger believes conflict between the U.S. and China is inevitable and a new cold war with Russia.
From Mao to Chou
Mao, whose initial instincts were democratic, was enticed with modest funding to follow Stalin’s lead. The resulting upheaval of the rural peasant society eventually transformed the Chinese economy into an urbanizing industrializing communist centrally planned economy emulating the Soviet transformation including the cost of tens of millions of lives. A historically entrepreneurial culture, China introduced many market-oriented reforms in the post-Mao late 1980s under Chou En-Lai, often called “state-capitalism.” But a totalitarian communist government remains in control with an all encompassing neo-mercantilist plan.
Unlike the former closed Soviet economy, China seeks a large trade surplus in mostly manufactured goods to generate what former Federal Reserve Chairman Ben Bernanke called a “Chinese savings glut” to which he attributed the 2008 housing bubble as it was heavily invested in the federally sponsored agency debt. Today China’s gross national savings rate exceeds 50%, more than four times the U.S. China did better than the Soviets, bringing 250 million people from rural agricultural peasant population to urban middle class working in an industrial economy. While mal-investment in state owned companies remains rampant in China, much of the savings is being used to develop a New Silk Road to bypass existing trade routes, and an army and navy to protect it.
To support this effort, China has launched a new Asian Development Bank. This is just an extension of its direct lending, but unlike the World Bank, China forecloses when these soft loans inevitably fail, following the path of British imperialism by taking control of the infrastructure.
From Boris to Vladimir a contemporary Stalinist
Russian President from 1991 to 1999 Boris Yeltsin presided over the decline of the Soviet economy without sowing sufficient seeds for economic liberalism to flourish. He inherited an economy that, while fully employed, the value of final output was less than the value of non-labor inputs for about 60% of the labor force their productivity was negative through no fault of their own.
American efforts to introduce a competitive market economy and real democracy, to the extent they were sincere, were a complete failure. An economically, politically and militarily weak Russia rich in oil and other natural resources would be easy prey for either the capital rich west or resource poor China. NATO’s continued expansion fed Russia’s traditional paranoia regarding western intentions.
Yeltsin transferred power to his groomed successor KGB operative Vladimir Putin who a few years later declared the collapse of the Soviet Union “the greatest geopolitical disaster (tragedy or catastrophe) of the century” and set out to restore Russia’s geopolitical position. A rise of Russian nationalism and militarism at the expense of markets and democracy was inevitable.
Russia’s oligarchic economy now depends on high oil prices as Russia is the world’s largest producer of natural gas. So Russia’s interest in the geography from the Crimea and rest of Ukraine through the Middle East is to protect its monopoly pipe lines to Europe while fomenting instability and high oil prices.
The New World Order Looks Like the Old One
Putting past disputes behind, China is cooperating with Russia to construct this new trade route. Russia and its former satellites are the new silk roads between Asia and Europe, alternatives to the American controlled seas and the routes through Afghanistan, Iraq, and Syria. Europe particularly Germany after the Green Party eliminated their nuclear power – is more dependent on Russia’s fossil fuels today than the U.S. was on Middle East Oil in the 1970s. But China is the second biggest importer of oil after the U.S. and may well soon become the first, challenging the U.S. in Africa and the Americas to control supply.
Both countries are also big gold produces and plan a new hard money international currency as more of the capital surplus than China (or Russia) will admit adds to their mercantilist gold stock. This is a very long term play with a huge potential economic payoff.
America could afford its domestic profligacy as the only global hegemon, but having incurred deficits and debt fighting the War in Vietnam and on domestic poverty, squandered its gold stock inheritance by 1971, imposing upon the globe an experiment in a fiat currency for international trade. As a result the dollar’s status as the world’s reserve currency is irrevocably eroding. America’s trading partners are concerned about U.S. gold holdings and some have asked for a physical return of gold supposedly held for safe-keeping. Several competing countries including Russia and China are preparing for their Eisenhower moment. The EU is conducting trade with Iran in Euros to skirt U.S. Government sanctions.
Progressive Politics in America: the Road to Fascism
President Obama’s assertion that American democracy has survived was correct in a global context of authoritarian democracy. As with all political ideologies, early progressives were reacting to what they perceived as capitalism’s shortcomings with what seemed to be reasonable policies, but Jonathan Goldberg in Liberal Fascism (2008) describes American liberalism/progressivism as rooted in twentieth century European fascism. While most Americans educated to view Hitler and Mussolini as “madmen” reject this fascist label the description is apt. Both came to power through democratic means as patriotic progressives and in Hitler’s case initially funded by the west (British bankers with U.S. money) to serve as a bulwark against Soviet communism. Fascism, like communism, went too far down the totalitarian road.
In The Great Deformation, (2017) David Stockman describes The Corruption of Capitalism in America as a bipartisan effort. Hayek saw this coming. The Republican Bush Presidencies, H.W and particularly W. “compassionate conservatism” and war contributed to the domestic deficit while pursuing a new world order that some see as a Bush/Clinton joint family effort. The two party system remains, but fascist sign posts: militarism, mercantilism, tribalism, centralization, socialism and autocracy are flashing red as progressivism picks up speed.
Militarism: Eisenhower and the Military/Industrial/Congressional Complex
That’s Eisenhower’s original formulation, cleansed by his speechwriters before he presented it to Congress. The two brothers, John Foster Dulles as Secretary of State and his brother Allen Dulles as head of the CIA, formed an alliance to prevent the spread of communism and avoid overt military conflict. The Brothers (Stephen Kinzer, 2013) extended the overt and covert American presence globally as the Cold War became the Devil’s Chessboard (David Talbot, 2015) for America’s CIA. Wars generally, whether civil, hot, cold, proxy, cyber or otherwise conjure external threats – real and imagined to justify an increase in the size, scope and power of the federal government, as graphically portrayed in Orwell’s 1984 vision of Soviet totalitarianism (1948).
Social democracy came to Britain and the rest of Western Europe in the wake of WW II devastation – with the CIA help wherever communism was a potential “democratic” alternative. The final death knell to the heavily indebted British Empire – saddled with war debts and post war social democracy – came when President Eisenhower defeated the British in Suez by selling gilts (British government bonds), creating a run on the currency that British (unlike French) gold reserves couldn’t stem. America avoided armed conflict, but later would replace the British Empire repeating its expensive losing mercantilist hot wars in Afghanistan and the Middle East, while the Crimea remains a proxy war with Russia.
President Wilson’s effort to “make the world safe for democracy” by sacrificing Germany at Versailles to get approval for the League of Nations sowed the seeds for WW II. While many U.S. Presidents have since given lip service to the effort, democracy and human rights promotion is largely a cover for mercantilist control over resources. President George W. Bush’s war on terror and President Obama’s support for democracy during the Arab Spring destabilized the secular dictatorships across the Middle East, giving rise to Islamic totalitarianism. A century after WW I it is still about oil and Silk Road trade routes. To maintain Full Spectrum Dominance the U.S. currently maintains almost 1000 foreign military bases in 80 countries without the revenues of the former British Imperial Empire to support them.
The federal government like the totalitarian governments in opposition – pursues their new world order agenda largely in secret, hidden behind various slogans such as the War on Terror. There has never been a serious public discussion or vote on the alternatives. The U.S. pays a high price and high taxes – for lower consumer prices and crony capitalist profits.
The British ultimately survived and prospered after their Imperial Empire collapsed and with it control of the Seas and global currency rescued by Margaret Thatcher from an excess of progressivism – although it must have come as a cultural shock when Irish incomes surpassed British in the 1990s (and today with 75% more people than California it has a lower GDP). This requires a stiff upper lip.
Mercantilism:
NAFTA negotiated with Mexico during the prior Administration – was President Clinton’s crowning achievement, and like LBJ’s Civil Rights legislation, passed by Republicans with little Democratic Support. Labor unions in the U.S. opposed it, even though better jobs in Mexico meant fewer immigrants coming north. The terms of trade may have been unfavorable to the U.S. as part of an effort to strengthen our politically stable ally to the north and to help stabilize the neighbor to the south. The U.S. doesn’t need a balanced trade account with either country, but greater reciprocity may now be called for.
President Obama’s Secretary of State Hillary Clinton supported the Trans-Pacific Partnership (TPP) but her opponent in the Democratic primary socialist Bernie Sanders apparently preferring the Soviet over the Chinese model opposed it. Presidential candidate Clinton then switched positions, opposing it as well. The bipartisan support collapsed as Republican candidate Trump competed for the same protectionist votes. The 5600 page TTP agreement is hardly free trade, but should have been considered on its merits.
Tribalism: Identity Politics – The End of Immigrant Assimilation?
America has always been an ethnic and cultural melting pot while respecting differences. What’s changed? The current Progressive view of cultural diversity is seriously distorted toward political ends. It has two incompatible goals: to bail out the bankrupt welfare state and add a new faction to their grip on political power without offending their traditional labor faction.
By the 1960s the major immigration occurred in California to support the seasonal agricultural harvests. It was a win for the workers, who typically returned to Mexico (or points south) after the harvests and a win for the growers. It was often illegal as labor interests in the U.S. had limited visas and the welfare state could potentially attract immigrants to stay, even though they weren’t eligible for benefits. So “open but illegal” as advocated by libertarian economist Milton Friedman was semi-official policy. Many did ultimately stay and spread across the country.
By the 21st century the Bush Administration attempted “comprehensive immigration reform.” The Democratic Party seeing a potential burgeoning constituency for their big government agenda promoted citizenship and hence access to the welfare state by providing visas to non-working age dependents. But in deference to its long term labor constituency Senator Reid and Congressman Obama, supported by Senator Clinton, inserted a last minute labor “poison pill” into the Bill. Unable to reconcile their internal conflict, the Democratic Party has simply milked the ensuing stalemate for political advantage.
Latin immigrates have always come to work and culturally assimilated: most of the Southwest was part of Mexico not all that long ago. California already is and the U.S. will be a “white minority” country by 2045. No one seriously questions the work effort or eventual cultural assimilation of Asian and Latin immigrants.
Immigration to raise total GDP an oft stated goal – is meaningless unless needed for war production. Nations, the U.S. included, can reasonably consider whether immigration and trade – raises long run per capita consumption of its existing citizens to whom the democratic government is responsible. Given the much higher Latin birth rate, they may well represent a net contribution to federal coffers if all political barriers to work are eliminated, but not a $200 trillion bailout of the welfare state.
The current wave of refugees from the Middle East following Muslim immigration presents a different challenge. As Mark Steyn in America Alone (2006) chronicles, the European welfare state is more bankrupt than the U.S supporting an aging population as native birthrates plummeted to a fraction of that necessary for a stable population. Many of these countries sought Muslim immigrants, young and reproducing at 4 to 5 times the rate, as the solution. The current civil wars, particularly in Syria, have unleashed millions of refugees, mostly to Europe. That has been problematic, as many countries don’t find the EU responsive to citizen concerns.
The U.S. has been less welcoming to these refugees than in the past. The issue isn’t ethnic discrimination. Arabs account for only about 20% of the world’s Muslim population, and the early Arab migrations to the U.S. were Christians who readily assimilated. The issue isn’t religious freedom: only about 4 in 10 Asian immigrants were Christian. The Democratic Party supports Muslim immigration while including the Christian evangelicals among the “deplorable.” The issue is both political and cultural.
Islam’s politics and sharia law is irreconcilable with the U.S. Constitution’s separation of church and state. The secular Turkish republic founded by “the father” of modern Turkey Ataturk almost a century ago, the prime example of a secular Muslim state, is now turning into an Islamic dictatorship.
Ethnic diversity and multiculturalism enhances the culture with shared values, but can and some say will destroy a society without it. Some of the Founding Fathers (most infamously Benjamin Franklin) weren’t overtly engaged in organized religion, but they all believed that the success of the Republic depended on shared moral values of a meritorious society. As Charles Murray notes in Coming Apart (2013) it isn’t just race or religion that is dividing America but economic and social values, many of which have been undermined by progressivism.
Centralization: The Perversion of Federalism to the Mexican Bread or Soviet Oblast System
Armed with the now permanent federal income tax in the 16th Amendment and the shift to direct elections of Senators in the 17th Amendment introduced in 1913 during President Wilson’s Administration, federalism state responsibility for funding public goods, e.g., infrastructure was perverted into a Mexican patria or soviet oblast system of federal taxes reallocated to states politically reminiscent of the Whig/Republican agenda leading to the Civil War. Federal infrastructure spending is a synonym for crony capitalism. But beyond that these two amendments support the political consolidation of power required by fascism.
Recently, the Obama Administration’s one trillion dollar infrastructure “stimulus” virtually all went to political cronies. More recently, the Trump Administration’s proposed new infrastructure plan to be funded 80% by the states to provide a measure of accountability is opposed by Democrats who prefer the old way of political dependency.
Perhaps most importantly, my primary education was funded and administered locally by the town. This has largely shifted to the states and the U.S. Department of Education.
Socialism: the Patria Social Welfare State
The U.S. social welfare system had a more overt political objective than European social democracy- to keep the people dependent on the state/party. As a retirement benefit and health insurance system, Social Security and Medicare are the biggest financial frauds in history. They collect mandatory taxes with nothing more than a political promise of future “entitlements” public statements to the contrary notwithstanding, which demand continued loyalty to the party that promises to protect them. State and local pensions are similarly largely unfunded political promises, albeit with sympathetic court rulings regarding the priority of these payments.
The “food stamp” program originally established to distribute “surplus food” bought by the new Agriculture Department to boost farm prices and subsequently left to rot in warehouses while the population starved during the Great Depression, has morphed into a $70 billion Supplemental Nutrition Assistance Program covering 15% of the population. While the stamps now a plastic card cover the most basic of necessities the black market value averages only fifty cents of face value which doesn’t even include the administrative costs.
Progressives argue that their programs reflect the “will of the people” the majority. In the U.S., as 2012 Republican presidential candidate Mitt Romney noted the voters in the bread line equals those not in it. But it’s not just “welfare queens” the majority includes corporate crony capitalists like Elon Musk and the Koch Brothers who receive less than ten percent of Musk’s subsidies. The rational voter response to progressivism is to join the breadline, supporting personal graft while opposing personal extortion.
But if a black market currency system was created for every such government program like that for food assistance and those trading at less than full cost were eliminated, the Progressive era bureaucracies would all be gone and the Washington Mall would be a ghost town. The Republican establishment hasn’t put up staunch resistance: to quote former speaker of the House Republican Newt Gingrich: “I don’t think right-wing social engineering is any more desirable than left-wing social engineering.”
Some conservatives, most notably Charles Murray, promote a guaranteed minimum income. The current benefits could no doubt be delivered at a fraction of the current cost by eliminating hundreds of overlapping bureaucracies, but the moral hazard and political risks are unmanageable at the Federal level which is too distant from the beneficiaries to monitor behavior relative to e.g., charities.
Autocracy: the Bread and the Bludgeon and the Tyranny of the Party
“Power tends to corrupt and absolute power corrupts absolutely” if true for the Pope, to whom this barb was directed, is certainly true of progressive politicians who claim infallibility with moral certitude. American presidents particularly progressives Wilson and FDR – chafed at constitutional limits to their power, just as Diaz and his successors in Mexico, Clement Attlee in Britain, or even Hitler in Germany, all claiming the support of the people. The Pope may be infallible, but progressive politicians and the administrative state is anything but.
The Democratic Party retains majoritarian control by emulating the PRI “patria” and “bread and bludgeon” strategies: The factions are the same – the press, the intellectual elite, government employees, unions, big heavily regulated businesses, immigrants, etc.: The platform is similar income and wealth redistribution by the budget (bread) and regulation (bludgeon).
The bread includes all the budgeted subsidies, tax subsidies and credit allocation previously discussed. The bludgeon includes the miss-use of legal and regulatory power. For example, the Obama Administration promulgated regulations exerting extensive control over most of the U.S. economy, following progressive housing policies that caused the global financial collapse of 2008, then it doubled down with repressive financial regulation.
The bludgeon includes repression of free political speech and armed opposition, the best explanation of the Progressives’ obsession with repressing First and Second Amendment rights. The liberal democratic activist who served in the Clinton Administration Kirsten Powers describes the virtually complete elimination of diversity of thought in America’s higher education system and main stream media (MSM) in The Silencing: How the Left is Killing Free Speech (2015) in chilling detail.
She cites to fellow Irishman Joseph McCarthy as a reference point, but the much more accurate point of reference is Joseph Goebbels, Hitler’s Minister of Propaganda. Progressives have thus far not required Goebbels’s more repressive tactics, having the advantage also enjoyed by the North Koreans of starting indoctrination much earlier with primary school education. The results are also racist, a reaction to America’s legacy of slavery.
While faculty are the first bulwark of progressive thought, the ratio of Administrators to students has also doubled to police any regression from the progressive indoctrination of primary and secondary education. The University system and many of the “private” think tanks are dependent on public money. The “UnKoch my campus” movement reveals the Democrat’s agenda. The Democratic Party is funded mostly by crony capitalists such as George Soros and big labor. The Koch Brothers are distinguished not just by being comparatively small time crony capitalists, but libertarians opposed to crony capitalism who fund libertarian research. No diversity of opinion is to be tolerated.
American newspaper editors generally supported Obama Administration progressive totalitarianism on their own. Those in opposition, represented by the Tea Party, were quickly bludgeoned by the MSM. But when one lone cable news channel Fox sought a diversity of opinion “fair and balanced” as Fox put it the Administration was more than willing to use their political power to silence any opposition. Kirsten Powers showed great bravery in making her revelations about this campaign.
The 5-4 Supreme Court decision on the Citizens United case relating to the election bureaucracy’s attempt to suppress a film about candidate Hillary Clinton’s fitness for office before the election reveals the inherent inconsistencies of the progressive agenda. When big government is for sale, a bidding war will ensue. The decision allowing business and unions but not the Russians to spend money on political propaganda outraged liberals, although the effect seems small. The dissenting opinion relied on the negative consequences and stare desisis ignoring the Constitution to deal with previously unconstitutionally facilitated crony capitalism.
The progressive attack on Second Amendment rights seems inexplicable on the merits. Guns kill, but the correlation between gun control and homicide is slightly positive, suggesting other policies. The fervor may be better explained in the context of its opposition to First Amendment rights, as the Second Amendment assigns the ultimate responsibility to defend the Constitution to the people through state militias before the Civil War and 17th Amendment eliminating state appointment of U.S. Senators – when the three branches of government collude to do otherwise.
Democrats concern over voter registration as in virtually all democracies, justified as a necessary protection of black voters is also best understood in the context of their opposition to the First and Second Amendments. All the voting rights Amendments and legislation were passed by Republicans over democratic opposition, so the current concern that Republicans will use registration to suppress black votes is ironic and unsubstantiated. Voter fraud studies are opposed more on political than statistical grounds as such fraud hasn’t yet been systematically measured and the effort to do so was recently stymied – but the potential is there and to the extent it exists favors Democrats.
The Democratic Party currently stands accused of using bureaucratic administrative powers of the IRS, FBI, Justice Department and national security apparatus in pursuit of Party interests, then “anointing” its successor candidate. Democrats deny any guilt, but the bureaucratic stonewalling of Congressional oversight unprecedented in its breath and longevity seems designed to outlast Republican control of the House.
How did all this happen? Ironically, the previously quoted Oliver Wendell Holmes who after being appointed to the Supreme Court by the Founder of the Progressive Party Theodore Roosevelt steered the Court down the path of “conservative deference” to progressive legislation, paving the way for the New Deal with the moral certitude of the abolitionists and communists that he previously loathed. Progressives believe their ends justify their means. The subsequent collusion of the executive, legislative and judiciary branches -often with the acquiescence if not collusion of Republicans – conspired against the “people” and the powers reserved to them. When in power Democrats rely on “majoritarian rule” and when out on Supreme Court “deference” to resist roll-back.
Hitler came to power in 1933 through democratic means ultimately resorting to totalitarianism in the effort to restore Germany to its pre-war size, wealth and power viewed necessary in part to defend against the internal and external communist threat. He also adopted the U.S. progressive’s science of eugenics to justify mass extermination. Just prior to the end of WW II, America sent a team of hundreds of its writers, actors and other members of its entertainment culture including Earnest Hemmingway and Marlene Dietrich to convince every surviving German citizen more than the ten years old unborn when Hitler came to power – of their personal guilt for allowing it. America gave up the effort when it recognized the need for a strong Germany to defend against Soviet communist aggression.
Imagine if today’s American talk show hosts and main stream media analysts were held accountable for allowing and facilitating American Fascism!
America: the Road Back to the Future
Britain’s Tony Blair offered progressives a new non-statist third way several decades ago. There were no takers. Scientists have discovered that male mammals have a spatial x/y coordinate sense of direction but when disoriented may charge off in the wrong direction indefinitely, whereas females will look for sign posts and seek direction from others to get back on course. Progressives have the socialist nurturing empathy of females but the stubborn sense of direction of disoriented males. They never let a good crisis often caused by their own policy failures go to waste, speeding up in the wrong direction.
The inevitable Keynes’ “long run” when capital markets shun U.S. debt is getting closer. The potential for America to push the currency lower has already caused a flight out of U.S. bonds into hard assets. Based on an overwhelming demographic disadvantage the U.S. cannot “beat” Chinese-Russian mercantilist state crony capitalism with domestic progressive crony capitalism. But neither Chinese-Russian neo-mercantilism nor the erosion of the reserve currency represents an existential threat to the United States.
Sovereign default is historically a casus belli. The Soviet Union went out with an international whimper because its debts and misery – were internal. This is depressing. The dystopian novel The Mandibles, (2016) by Lionel Shriver is that, but entertainingly so.
A century after the Civil War the South the main target of early progressivism – has become the engine of American growth while the North stagnates. Restoring America’s exceptionalism denied by progressives and market capitalism not mercantilism – is the best hope for a change in course short of catastrophe.
Democracy: Too Much of a Good Thing
This is not intended as a diatribe against democracy or the Democratic Party, but the totalitarianism of excessive central government democracy and progressivism. As Sanders is now in his late 70s, the progressive mantel is shifting to progressive candidate Elizabeth Warren and it appears a virtual certainty that the 2020 Democratic candidate will be progressive. It is worth reviewing the diagnoses and prescriptions for excessive progressive democracy, if for no other reason than to assess the difficulty of implementing them.
There are those who would resurrect socialism, arguing that the ideology is sound but never implemented correctly. That is the fast lane to national suicide. Democracy has been sold as the only alternative, but without sufficient limits has proven to be the slow lane to national suicide.
Some authors such as Jonathan Rauch in Demosclerosis (1994) blame democracy itself as inevitably captured by special interests, certainly true when it controls economic life. Others like James Bovard in Attention Deficit Democracy (2006) provide all the reasons why liberty should be restored, but no sure method for doing so, blaming the citizenry for civic ignorance and sloth for not holding politicians accountable. While capitalists are accused of being short sighted, Hans-Hermann Hoppe in Democracy, The God that Failed (2007) sees democracy itself as inevitably focused on the near term, and in many ways inferior to alternatives, including monarchy. Optimists such as Bennett and Lotus in America 3.0 (2013) believe that the legacy of liberty, technology and policy reform will lead to a bright future. Micklethwait and Wooldridge in The Fourth Revolution (2014) site examples of politicians reinventing the state in response to a crisis. There is a wealth of good ideas but not a lot of cause for optimism as it would seem to take a crisis much bigger and more threatening than the global financial collapse of 2008, the very response to which increased the systemic risk it was supposed to mitigate.
A Republic: Reviving Constitutional Limits
We don’t need a new, untried political system or a failed old one. The future of America’s standard of living relies more on rejuvenating its historic comparative advantage of entrepreneurial capitalism derived from American exceptionalism its limited government economic liberalism. The founding fathers were against fighting mercantilist/imperialist wars and history hasn’t proven them wrong.
That the executive and legislative branches would seize power at every opportunity was expected. It was the duty and responsibility of the Supreme Court to prevent this. They haven’t: that is why Supreme Court appointments have become so contentious.
Randy E., Barnett in Our Republican Constitution (2016) describes the judicial road Back to the Future of economic liberalism by honoring the original checks and balances. His two insights (pg 258): “first come the rights of the people as individuals, and only then comes government as their servant” and “the will of the majority is not the solution to the problem of constitutional legitimacy but is the problem a republican form of government is needed to solve” motivates his proposed Constitutional Convention. The major amendments include: term limits; repeal of the income tax in favor of a consumption tax; the power of a majority of state legislatures to repeal federal legislation. This would require a much less public political recognition of the failure of progressivism.
The Military/Industrial/Congressional complex presents an even more difficult challenge. Congress has the power and responsibility, but not the inclination.
Lacking willing Justices, Barnett’s extremely ambitious Amendment agenda is clearly worth trying. In the meantime, the oft proposed balanced budget amendment may have the most economic bang for the political buck. It’s not a solution but a start that may buy time.
Kevin Villani
This needs to be about 10 blog posts, not one. There’s too much to try to digest here.
I’ll just say it seems to miss what to me was the final death of the Republic–the “one person one vote” atrocity, in which the Supreme Court decided a 100 year old amendment banned 200 years of precedent, and completely stripped all political power from non-urban interests. All modern political problems stem from that.
Crony Capitalism isn’t a bad thing. …check that… C.C. isn’t the worst thing. …yeah, that’s it.
“Agriculture extends back over ten millennia, but trading in agricultural commodities like wheat has records going back less than a millennium.”
That seems misleading. It might be literally true depending on how narrowly you intend to define “[having] records” but I don’t expect any readers will naturally use such an artificially narrow definition when they try to understand what the passage means. Even as a nonhistorian off the top of my head I know of recorded primary evidence of what seems to be trade in agricultural commodities long before 1000AD, like Aristotle’s story of Thales https://leightonvw.com/2013/04/01/how-an-ancient-greek-philosopher-bet-on-the-future-and-won/ and the Old Testament directive (Deuteronomy 2:6) “ye shall buy meat of them for money, that ye may eat” and the New Testament story (John 12:5, Matthew 26:9, Mark 14:5) about the dispute over selling expensive ointment and using the proceeds to meet the needs of the poor. (What needs if not food and clothing?) And I don’t know personally how reliable the chain of evidence is, but there’s lots of secondary evidence that I expect is reasonably reliable: e.g., learned people are very willing to write confidently and without too much controversy about the price of bread in classical Rome (I have read books touching on it, and Googling for “classical rome price of bread” gives a lot of hits with a similar flavor, and historians’ reconstruction of the classical Greek economy generally seem to come up with a significant amount of waterborne trade of olives and wine for (among other things) more general foodstuffs in part of the period.
It does seem to be true that free exchange in foodstuffs wasn’t nearly as routine and common as moderns tend to assume. High spoilage rates and very high transport costs tended to shut down a lot of the choices that we have come to take for granted, and nonmarket arrangements seem to have been very common, like tribute and forced labor and payment in kind at artificial fixed rates, and norms and taboos of various sorts (e.g., in the spirit of modern norms against usury and hoarding) could impose a lot of constraints. That’s an interesting truth, and worth pointing out. But the natural reading of the statement in the original post is so much stronger than that truth that it seems outlandish to me.
You list me at crony capitalist Trump.
Kevin, thanks for the essay.. or doctorate thesis? Ha. Long, but I’m about a 1/3rd through it and will have to read more later. Appreciate the effort and though some of your language is triggering, so far your context is not. So thanks. I really appreciate the Mexico info and our Civil War.. fits well with what I already have read, and some new info too.
Let’s see: Was Texas recently a part of Mexico, and is this an important fact.
Texas was recently part of the Confederacy (1865).
Texas was recently independent (1845)
Texas was recently part of Mexico (1835)
Texas was recently part of Spain (1810).
Was Texas recently part of Mexico? Yes.
Spain claimed Texas for hundreds of years. Mexico for 25. Independence for 10. Confederacy for 4. United States for 170. Spain wins. The US places second. The others are too trivial to consider, except as people wish to believe them. We’ll see which sentiment wins.
I haven’t seen a post this good at Chicago Boys in years.
Regarding “The Mandibles:” Shriver’s contentious relationship with the literary establishment has been twice recently noted at Instapundit. Coincidence?
ErisGuy
Spain claimed Texas for hundreds of years. Mexico for 25. Independence for 10. Confederacy for 4. United States for 170. Spain wins.
While Spain may have CLAIMED Texas for hundreds of years, the first Spanish attempt at living in Texas didn’t occur until 1690. The first attempt at creating a Spanish presence in Texas was quickly abandoned. The first permanent Spanish settlements in Texas didn’t occur until 1716.Wiki: Spanish Texas.
As the first permanent Spanish settlements lasted less than 100 years before Mexico won independence, the US wins.
A neighbor of mine can trace his ancestry to Spaniards who were in Texas in the 18th century. Further ancestor tracing led him to the conclusion that his Spanish ancestors were Conversos, based on an ancestor from Monterrey in northern Mexico. His brother, when stationed in Italy with the US Navy, had an interesting experience. An Italian of the Jewish faith told him that it was common knowledge that his Spanish surname was Jewish.
Highly opinionated, and riddled with factual errors.
“Slav” is not cognate with “slave”, but with “slovo” (“word”).
The PRI regime in Mexico was corrupt and authoritarian, but hardly totalitarian, by any known definition of that term. Totalitarian states do not have openly operating opposition parties or any independent media.
The American Civil War did not kill over 3M people (10% of the US population).
The Emancipation Proclamation freed millions of slaves de jure; they were under Confederate control at that time, but became free de facto when Union troops arrived, with no further legal actions required.
The bulk of US tariff revenue in 1860 was collected in the major ports of Boston, New York, and Philadelphia, not in the South.
The Morrill Tariff did not incite secession, as it was passed only after seven Southern states declared secession and withdrew their Representatives and Senators from Congress. Southerners were in any case deeply divided on the tariff question. In 1844, Lincoln’s Whig mentor, Henry Clay, ran for President on a high-tariff platform. Clay carried two of the nine future “Confederate” states then in the union, and got over 40% in five others. But the South was unanimous on slavery. In 1860, Lincoln got zero votes in nine of the now eleven states, and 1% in one. (South Carolina had no popular vote.)
Hitler’s political campaigning was not funded by US money channelled through British bankers; that’s vulgar conspiracy stuff.
Anonymous above is me.