Big Government

Glasnost and Perestroika: An Agenda for the Trump Administration

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Although President Trump is confident of his ability to deal with Vladimir Putin, he should carefully avoid emulating Putin. It would be far better for the president to look to the example of Putin’s predecessor, Mikhail Gorbachev, who transformed the Soviet Union. The first steps in the transformation were glasnost and perestroika. Glasnost, introduced in 1985, roughly means openness and was a step toward open discussion of political and social issues. Perestroika, introduced the following year, roughly means restructuring. Perestroika reduced central economic planning and allowed some private business ownership. These and later reforms resulted in a sharp increase in political freedom (from nil), which peaked in 1991. Sadly, the gains were short lived. Freedom steadily and drastically declined under Yeltsin and Putin for a complex of reasons debated at a recent symposium at the Cato Institute.

The United States as it emerges from the Obama Administration, while not as bad off as the Soviet Union as it emerged from communism, is badly in need of both glasnost and perestroika. They should be the twin priorities of the dawning Trump Administration.

Glasnost

The American left has come to despise freedom of speech as much as it has traditionally despised freedom of contract. It has followed the normal progression of leftist movements toward viewing the protection of its social objectives as more important than human rights. The earliest and still worst manifestation of this trend is on college campuses. Campus speech codes began to appear in the late 1980’s and spread rapidly. Within a few years sixty percent of colleges had them. According to a report of the Foundation for Individual Rights in Education, the percentage has declined over the last nine years to forty percent.

In 1998, Congress declared that it was the sense of Congress that “an institution of higher education should facilitate the free and open exchange of ideas” and that “students should not be intimidated, harassed, discouraged from speaking out, or discriminated against.” 20 U.S.C. § 1011a(a)(2)(C), (D). While the sponsors of this provision may have thought (or wanted to give the impression) that they were doing something, they did not do very much. The provision imposes no consequences on institutions that act contrary to the sense of Congress on this subject. It needs an amendment putting federal funds at stake, as anti-discrimination sections in title 20 do. Although speech codes are less common than they were, universities still do a lot to stifle “the free and open exchange of ideas.” In particular, they fail to prevent students from being intimidated, harassed, and discouraged from speaking out by other students, using increasingly violent methods.

Intolerance of dissent, especially on a fixed dogma like climate change, is not limited to college campuses. A few years ago, a cabal of environmentalists enlisted sympathetic state attorneys general to investigate climate change dissidents. With a vague objective of finding a RICO violation, a group of twenty attorneys general (“AGs United for Clean Power”) have subpoenaed forty years of records from ExxonMobil in a retaliatory effort to find evidence that it has had information on climate change that differs from what it has said publicly. The attorney general of the Virgin Islands subpoenaed documents from academic institutions, scientists, and the Competitive Enterprise Institute, a think tank. He withdrew that subpoena after getting some pushback from a congressional committee and a lawsuit from the Competitive Enterprise Institute.

A venerable weapon is available for the Justice Department to use against oppressive state universities and attorneys general, the Enforcement Act of 1870. The second section of the act, 18 U.S.C. § 242, makes it a crime for anyone under color of state law to deprive a person of rights, privileges, or immunities secured or protected by the Constitution. The first section of the act, 18 U.S.C. § 241, provides criminal penalties for conspiracy to injure, oppress, threaten, or intimidate any person in the enjoyment of any right secured to him by the Constitution. State action is not an element of the crime under § 241. Could not the Civil Rights Division of the Justice Department, under new leadership, go after, for example, a group of students who prevent Milo Yiannopoulos from speaking? That would be fun.

These tools may or may not work, but they should be tried. Assaults on civil liberties should no longer be costless.

Perestroika

In Federalist No. 72, Hamilton said, “To reverse and undo what has been done by a predecessor, is very often considered by a successor as the best proof he can give of his own capacity and desert.” This has to be the best standard now, as everyone in the Trump Administration should understand.

Perestroika in the modern context ought to begin with reversing and undoing the Obama Administration’s impositions on the economy. Amity Shlaes, who, it should be recalled, wrote The Forgotten Man, observed that “smaller firms–the ones unready for the lawsuit, the investigation or the audit–bear the greater share of regulatory costs.” The regulatory burdens in need of repeal extend far beyond the Affordable Care Act and its progeny. Daniel Pérez of George Washington University’s Regulatory Studies Center has determined that Obama issued about 33% more “economically significant” regulations than either Bill Clinton or George W. Bush.

It will be a challenge for the political appointees in all the departments of the federal government to sift through the regulations and begin the process of liberating the economy from the worst of them. Fortunately, litigation has already left some of the Department of Labor’s output in ruins. The Persuader Rule, which I warned about in this blog before its adoption, and the Fiduciary Rule are controversial intrusions of the Labor Department into professional relationships. Both the Persuader Rule and an anti-business revision of overtime regulations have been enjoined by federal district courts in Texas. Five different lawsuits challenging the Fiduciary Rule are pending.

Withdrawing appeals of the rulings against the Persuader Rule and the overtime regulations is the simplest way to dispatch those rules. Other recently adopted regulations can by nullified by using the Congressional Review Act, 5 U.S.C. § § 801-808. A joint resolution of disapproval has to be introduced within sixty days of Congress’s receipt of a report of rulemaking. The act provides an expedited procedure for a joint resolution and limits debate in the Senate. In June, President Obama vetoed a joint resolution disapproving the Fiduciary Rule.

For that rule, and so many others, the arduous notice and comment process of the Administrative Procedure Act will be the only method of repeal. The ultimate goal should be that the Code of Federal Regulations will bear no trace that the Obama Administration ever existed and, more generally, that this time glasnost and perestroika will have a more lasting imprint.

The Right Hand Side of the Menu

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I’ve never understood people who don’t notice costs. Maybe it was because we didn’t have a lot of money when I was growing up, maybe it was bicycling around to deliver papers in the snow . . . but I don’t think so. My life wasn’t all that rough. I think it is good old Scottish common sense. It is sensible to assess price in terms of worth. Or as Franklin would see it is the value of the time I spent earning that money a good exchange for the use or pleasure it provides. From different perspectives, this was what I thought when I set prices in my business and when I wander around a store, touching and thinking about that dress or dish.

I’ve long wondered about D.C.’s ability to spend money. As a Kelly girl, I found state and federal offices squandered time in ways private businesses never did. We know the stories of lottery winners whose money is gone in half a year. I suspect someone who considers the lottery a good investment probably isn’t all that good at assessing worth, though they may be misled by winning.

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National Tantrum

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As the Deity be my witness, I have never not even since 1968 (which I am sufficiently old enough to remember, being 14 years of age in that cursed year) seen such a massive and public temper tantrum as that which we have been observing since November, 2015. Let it be said that I am observing all this with appalled and horrified fascination. It used to be that only certain very far-leftish intellectuals and college students were given to briefly melt down in such an over-the-top fashion but over the last month and a bit this appears to have become the chosen reaction to their side losing an election on the part of most Hollywood A- B- and C-Listers, all the social justice warrior front, most of the establishment media, a good chunk of our public intellectuals, a good few businesses (looking at you, Kellogg) a generous selection of our Democrat Party establishment, and a representative sample of leftish freelance political freaks. (As an aside good show; displaying your contempt toward at least half of your prospective audience/consumers/& etc is a sure winner, when it comes to the consumer market. This household will never purchase Kellogg brands again. Or go to a movie with Meryl Streep in it.)

So why the Cat-5 hurricane degree of hysteria, which shows not the slightest degree of diminishing? A number of reasons, I would venture; and for many of the most demonstrative “Never Our President” virtue signalers it may be a combination of several of these.

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There Is No Possible Reform for HUD

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“The Department of] Housing and Urban Development has done an enormous amount of harm. My god, if you think of the way in which they have destroyed parts of cities under the rubric of eliminating slums … there have been many more dwelling units torn down in the name of public housing than have been built.” ~ Milton Friedman, Interview, Hoover Institution, February 10, 1999

President-elect Trump’s appointment of Dr. Ben Carson as Secretary of Housing and Urban Development is being criticized on the grounds that he lacks the requisite administrative experience. More likely, Carson’s affront was to question why HUD exists.

Republican presidents have been ambivalent. Having bigger fish to fry, President Reagan appointed Sam Pierce HUD Secretary so that he could ignore it. George H.W. Bush repaid Jack Kemp’s political opposition by first making him HUD Secretary and then frustrating his attempts to eliminate the Department. HUD Secretary Alphonso Jackson, appointed by George W., was allegedly focused on participating in the traditional kickback schemes while his Assistant Secretary for Housing pursued homeownership policies that contributed mightily to the financial crisis of 2008.

Democratic presidents have used it as a platform to pursue other agendas. Jimmy Carter’s HUD Secretary Patricia Harris introduced Fannie Mae housing goals quotas as punishment for not appointing a woman to the Board of Directors. Between scandals, Clinton’s HUD Secretary Henry Cisneros promoted the homeownership goals that left both the financial system and the new mortgage borrowers bankrupt.

HUD’s budget is relatively small as compared to other federal departments, but it has always punched far above its budget weight in destructive power. To put HUD’s annual budget of about $50 billion in perspective, the cost of the homeowner mortgage interest tax deduction is two to three times greater, but HUD’s “mission regulation” of financial institutions has given it influence or control over trillions more.

The initial political interest in housing during the Great Depression was entirely Keynesian, i.e., related to the short-term potential to create jobs and relieve cyclical unemployment the “infrastructure investments” of that era. The Democrat’s approach to construction, management, and allocation of public housing was generally implemented to benefit builders and rife with corruption. FHA and Fannie Mae were chartered mostly as off-balance sheet financial institutions to stimulate housing production on the cheap.

The problem of urban development, as many politicians and urban analysts saw it in the 1960s, stemmed from the 1956 Eisenhower initiative to build highways financed by the National Interstate and Defense Highways Act, a byproduct of which was that more affluent people commuted from the suburbs while leaving poorer families behind. The pursuit of the American Dream of homeownership left city administrations accustomed to cross-subsidizing municipal services in fiscal distress, creating a vicious cycle: as services declined, more affluent households moved out.

The Housing and Urban Development Act in 1965 established HUD as a separate cabinet department as part of LBJ’s Great Society to give a greater priority to housing and urban issues. HUD inherited a mishmash of various New Deal federal programs, ranging from public rental housing to urban renewal, as well as financial oversight of FHA and Fannie Mae.

Faced with steep “guns and butter” budget deficits, LBJ focused on ways to further encourage off-balance-sheet financing of housing construction through “public-private partnerships.” Republicans, led by Senator Edward Brooke of Massachusetts, convinced by academic studies that the urban riots of the 1960s were the direct result of poor quality housing and the urban environment and by lobbyists for housing producers, supported the Housing and Urban Development Act of 1968. The “goal of a decent home and a suitable living environment for every American family” was first introduced in the 1949 Housing Act. Title XVI of the 1968 Act “Housing Goals and Annual Housing Report” introduced central planning without specifying the goals, a timetable for implementation, or a budget.

In the late 1960s, the Weyerhaeuser Corporation produced a forecast of single-family housing production in the coming decade to assist with tree planting. Congressional math wizards divided the total forecast by 10 to produce HUD’s annual housing production goals for the nation. For the next decade, HUD Secretaries were annually paraded before their Senate oversight Committee on Banking, Housing, and Urban Affairs to explain why they did or did not meet these production goals.

Republicans have historically supported rental housing vouchers for existing private rental units for privately built housing to minimize market distortions. Republican HUD Secretary Carla Hills in the Ford Administration pushed HUD’s Section 8 subsidies for existing housing something arguably better administered as a negative income tax as a political alternative to the Democrats’ push for a return to public housing construction. But as a further political compromise, the largely autonomous local public housing authorities would administer these vouchers, leading to the same concentration of crime and urban decay as public housing. To borrow a phrase from former House Speaker Newt Gingrich, “Republican social engineering” isn’t necessarily better than “Democratic social engineering.”

The economic goals of “affordable” housing have generally been in direct conflict with urban development. When I proposed demolishing the worst public housing projects and redeveloping the land, using the proceeds to fund subsidies for existing private market housing (something partially achieved during the Reagan Administration), Clinton Administration officials scoffed at the idea.

HUD combines socialist goals and fascist methods that seriously distort and undermine markets. There is neither market nor political discipline on the enormous scope of its activities. HUD met unfunded goals through financial coercion, undermining both Fannie Mae and Freddie Mac, and their commercial banking competitors, with the collusion of the Senate Committee responsible for both financial and housing oversight, leading to the sub-prime lending debacle of 2008.

There is no economic rationale for a federal role in housing or urban affairs in a market economy. HUD represents a continuing systemic threat for which there is no cure. May it RIP.

Kevin Villani


Kevin Villani

Kevin Villani, chief economist at Freddie Mac from 1982 to 1985, is a principal of University Financial Associates. He has held senior government positions, been affiliated with nine universities, and served as CFO and director of several companies. He recently published Occupy Pennsylvania Avenue on the political origins of the sub-prime lending bubble and aftermath.

This article was originally published on FEE.org. Read the original article.


Can Donald Trump Prevent the Economy from Falling Into a Black Hole?

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Interest rates will eventually rise without an even more devastating policy of financial repression. When they do, rising interest costs will produce a vicious cycle of ever more borrowing. We are already approaching the “event horizon” of spinning into this black hole of an inflationary spiral and economic collapse from which few countries historically have escaped. A substantially higher rate of growth is the only way to break free.

National economic growth is typically measured by the growth of GDP, and citizen well being by the growth of per-capita GDP. The long run trend of GDP growth reflects labor force participation, hours worked and productivity as well as the rate of national saving and the productivity of investments, all of which have been trending down.

The population grows at about 1% annually and actual GDP growth averaged 2% overall for 2010-2016 (using the new World Bank and IMF forecast of US GDP at 1.6% for 2016), hence per capita GDP grew at only 1%. Moreover the income from that 1% growth went primarily to the top one percent while 99% stagnated and minorities fell backwards.

Why we are approaching the Event Horizon
The Obama Administration annually predicted a more historically typical 2.6% per capita growth rate, consistent with the historical growth in non-farm labor productivity. How could their forecasts be so far off?

The Obama Administration pursued the most massive Keynesian fiscal and monetary stimulus ever undertaken. Such a policy generally at least gives the appearance of a rise in well being in the near term, as the government GDP statistic (repetitive, as the word “statistic derives from the Greek word for “state” ) reflects final expenditures, thereby imputing equal value to what governments “spend” as to the discretionary spending of private households and businesses in competitive markets. But labor productivity gains stagnated at only about 1%, most likely reflecting the cost and uncertainty of anti-business regulatory and legislative policies that dampened investment, something the Administration denied, trumping even a short term boost to GDP.

As a result the national debt approximately doubled from $10 trillion to $20 trillion, with contingent liabilities variously estimated from $100 to $200 trillion, putting the economy ever closer to the event horizon. Breaking free will require reversing the highly negative trends by reversing the policies that caused them.

Technology alone isn’t sufficient
Obama Administration apologists argued that stagnation is “the new normal” citing leading productivity experts such as Robert Gordon who dismissed the potential of new technologies. Many disagree, but Gordon’s findings imply even greater reliance on conventional reform.

Fiscal policy won’t be sufficient
Raising taxes may reduce short term deficits but slows growth. Cutting wasteful spending works better but is more difficult.

The list of needed public infrastructure investments has grown since the last one trillion dollar “stimulus” of politically allocated and mostly wasteful pork that contributed to the stagnation of the last eight years. Debt financed public infrastructure investment contributes to growth only if highly productive investments are chosen over political white elephants like California’s bullet train, always problematic.

Major cuts in defense spending are wishful thinking as most geopolitical experts view the world today as a riskier place than at any prior time of the past century, with many parallels to the inter-war period 1919-1939.

The major entitlement programs Social Security and Medicare for the elderly need reform. But for those in or near retirement the potential for savings is slight. Is Medicare really going to be withheld by death squads? Are benefits for those dependent on social security going to be cut significantly, forcing the elderly back into the labor force? Cutting Medicare or SS benefits for those with significant wealth the equivalent of a wealth tax won’t affect their consumption, hence offsetting the fall in government deficits with an equal and offsetting liquidation of private wealth. Prospective changes for those 55 years of age or younger should stimulate savings and defer retirement, improving finances only in the long run.

The remaining bureaucracies are in need of major pruning and in numerous cases elimination but they evaded even budget scold David Stockman’s ax during the Reagan Administration.

Americans will have to work more and consume less
That is the typical progressive economic legacy of excessive borrowing from the future.

The first Clinton Administration created the crony capitalist coalition of the political elite and the politically favored, e.g., public sector employees and retirees, subsidy recipients and low income home loan borrowers. The recent Clinton campaign promised to broaden this coalition, which would have accelerated the trip over the event horizon.

Reform that taxes consumption in favor of savings and a return to historical real interest rates could reverse the dramatic decline of the savings rate. Regulations redirecting savings to politically popular housing or environmental causes need to be curtailed in favor of market allocation to productive business investment.

Repeal and replace of Obama Care could reverse the trend to part time employment. Unwinding the approximate doubling of SS Disability payments and temporary unemployment benefits could reverse the decline in labor force participation.

Service sector labor productivity has been falling since 1987, the more politically favored the faster the decline. Legal services are at the bottom, partly reflecting political power of rent-seeking trial lawyers, followed by unionized health and then educational services. Union favoritism through, e.g., Davis Bacon wage requirements and “card check” increases rent seeking, particularly rampant in the unionized public sector.

Competition, of which free but reciprocal trade has historically been a major component, has traditionally provided the largest boost to well being by realizing the benefits of foreign productivity in a lower cost of goods while channeling American labor into employment where their relative productivity is highest. The transition is often painful, but paying people not to work long term is counterproductive. Immigration of both highly skilled and low cost labor (but not dependent family) generally contributes to per capita labor productivity in the same way as free trade.

None of this will be easy. The alternative is Greece without the Mediterranean climate or a sufficiently rich benefactor.

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Kevin Villani, chief economist at Freddie Mac from 1982 to 1985, is a principal of University Financial Associates. He has held senior government positions, been affiliated with nine universities, and served as CFO and director of several companies. He recently published Occupy Pennsylvania Avenue on the political origins of the sub-prime lending bubble and aftermath.