Tax and Spend Liberals

No need for much text in this post, I'll let the picture do the talking.





~JSK
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So there is indeed some truth to this cartoon and I realize what it is trying to say, but I hope that people realize that this is a very simplistic explanation of the past budget deficits. I could just as easily make a simplistic analysis of who controlled congress over those periods (and the branch with the most control over the budget). The Democrats controlled the House for all of Reagan’s term and the Senate for half of it. They controlled Congress during all of Bush I’s term. The Republicans then controlled congress for 6 out of the 8 years of Clinton’s terms, including all of the years of surpluses. Lastly, even with Bush II, the years where the deficit grew from the previous year, Congress had Democrat control. The first two, the Dems had the Senate, and in the last two, where they had both houses, the deficit has ballooned from $160 billion to a projected $1.1 to $1.5 trillion deficit for this budget year. But this is too simplistic as well.

But first, just a side note. Partially because of horrible fiscal stewardship ont he part of the Republicans in recent years, the Democrats have successfully been able to turn the meaning of "fiscal responsibility" to one regarding only deficits and not rampant spending in of itself. So deficits are not even necessarily as good of a measure of being “fiscally conservative,” as total spending is. Deficits after all are not a measure of spending growth or how the money is spent, but simply the gap between inlays and outlays.

But getting back to the main point, lets briefly look at the dynamics that existed under all these administrations. First, Reagan was unable to get the budgets he wanted. Though the Southern Democrats went along with his tax cuts, they wouldn’t go along with his spending cuts, or at least not enough of them to balance the budget. Without that block in the House, he could not get anything through it. Also, in order to cut many programs, 60 votes in the Senate would have been required, which he usually did not have. Furthermore, many Republicans didn’t want to cut certain programs either because any given spending program has its entrenched interests. Had Reagan actually gotten the budgets he sent to Congress, there would have been a cumulative budget surplus by the end of his term. Now proposed budgets always get altered and it is likely Reagan didn't expect those to actually pass, but it does show that he was trying to reduce spending much more then he was able to do. Now some also say, “well wait, Reagan drastically increased military spending.” Well this is true, but his increase really only brought defence spending back in line as a percent of GDP with what had been the Cold War average. Defense spending had been falling through the Ford and Carter years being replaced by domestic spending.

Next was Bush I. He had a very hostile Congress that would not go along with any substantial spending cuts at all. But regarding the deficit, he got hit with a recession. Because of the social safety net and the progressive income tax system, a recession naturally reduces tax revenues while at the same time increasing outlays. These were all programs already in place and not the direct hand of Bush. In the end, he compromised with the Democrats and raised taxes, because he could not get cuts, and the rescinding of his famous “read my lips, no new taxes” pledge ultimately contributed to him losing his reelection (furthermore, Bush I was not nearly into the small government thing as Reagan was... remember “Voodoo Economics”, and therefore was much more willing to go along with the Congressional Democrats in the first place.)

Clinton, started out as a big tax and spend liberal as the title in the cartoon states. He raised taxes and then tried to get through his massive universal healthcare program. However, a combination of the program's high cost, the complexity of it and the political infighting within the Democrat party, he didn’t get this through. The Republicans then took the Congress and at this point they actually believed in restricting spending. They also had the partisan incentive to go against Clinton backed spending. But also at this point, Clinton then began to rule as a moderate, likely out of political necessity, and encouraged by his Treasury Secretary Rubin, who is obsessed with budget deficits, stopped pushing for more spending. The Republicans essentially made policy for most of the decade. Even think of the major achievements of the Clinton administration, NAFTA, welfare reform, capital gains tax cuts, balanced budgets... these were all the Republican Party platform issues in 94 and 96. Furthermore, he spent most of his second term using his political capital to blunt the various sex allegations. Clinton also had the short term benefit of the stock bubble, an unsustainable period of economic growth that yielded a temporary benefit, but led to the recession to follow in 2001. And just as a recession naturally reduces revenues and increases outlays, the opposite is true during a boom time. The late 90's saw the largest percent of GDP collected as tax revenue since WWII. This was why Bush II was so attement about putting in place a tax cut durring his 2000 campaign and why even Gore was advocating a smaller tax cut.

Bush II is where this cartoon has the most truth, because the administration has actively pushed for massive increases in spending over its tenure, whether it be Medicare D, No child left behind, farm subsidies, Homeland Security, etc. However, even this is not the full story. He got hit with the 2001 recession and 9-11, both of which reduced tax revenues and increased outlays. Now we have a massive deficit with all the bailouts, but these have been quite bipartisan, or at least Bush and the Congressional Democrats.

So this is still a very brief overview of the various administrations that doesn't do any of them justice; however, in general, this begins to look at the more complex dynamic.

-EJB

How Capitalism Gave Us Thanksgiving

So the rather unique American holiday of Thanksgiving comes upon us tomorrow and I wish all our readers a happy and tasty one. Though the official holiday itself began during the Civil War period as Lincoln declared a day of thanksgiving in 1863, we are all familiar with the origins being traced back to the Pilgrims in the Plymouth Colony. As every school child knows, a great feast of celebration was had after the abundance of a large harvest, which followed the previous long period of suffering in the new wilderness.

The story that few school children will ever know however, is why it took until 1623 to have this abundant harvest, three years after the colonists first landed in 1620 (there was a celebration in 1621, celebrated by the original survivors after making it the first year, but the first feast of abundance that we associate the turkey and the other mythological imagery with was in 1623). By the short simple answer, the Pilgrims for the first two years suffered under socialism and in 1623 were saved by capitalism. The original colony was set up as a communal farming community. Every man worked on common fields and all produce was shared collectively. The result was the tragedy of the commons. Because all of the benefit of an individual's work would be shared but all of the cost of one's work must be assumed alone, the incentive to work is greatly diminished. One begins to free ride off of others. However when every worker thinks this way, total output rapidly declines and harms the greater whole.

Seeing these results over the first two seasons, reforms were made. The colonial governor, William Bradford, wrote in his diary on this problem:

So as it well appeared that famine must still ensue the next year also, if not some way prevented. Therefore [the colonists] began to think how they might raise as much corn as they could, and obtain a better crop than they had done, that they might not still thus languish in misery. At length after much debate of things, [I] (with the advice of the chiefest among them) gave way that they should set corn every man for his own particular, and in that regard trust to themselves. And so assigned to every family a parcel of land.

And there for the first time, the colonists of Plymouth had private property rights. Each family was solely repsonsible for the upkeep of its land, but in return was able to keep the produce from it. The result was a massive increase in farming output that season as every man had an incentive to work hard and efficiently. Bradford further wrote:

This had very good success...for it made all hands very industrious, so as much more corn was planted than otherwise would have been. By this time harvest was come, and instead of famine, now God gave them plenty, and the face of things was changed, to the rejoicing of the hearts of many.

A very similar pattern also happened in Jamestown, where the original settlers were largely indentured servants, and their work was split communally with the colony. After the first 500 or so settlers largely perished, the new governor Thomas Dale abandon the indentured servant model and gave each family a parcel of land. The result was the thriving of the colony. Famous settler John Rolfe stated that once men were granted property they went about, "gathering and reaping the fruits of their labors with much joy and comfort.” The settlers went from bartering for food from the local natives to selling excess food.

So this Thanksgiving when you're feasting on turkey and other delights, omong other things, make sure you take a little time to be thankful for property rights, free markets and capitalism. :)

-EJB


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Leave it to EJB to bring free market theory into Thanksgiving festivities. I only have a few random thoughts to add to this one.

First, the "tragedy of the commons" is a questionable theory; and I emphasize the word "theory" because there are no great societal examples of this phenomenon. The author of the phrase (which served as the title of his article) was Garrett Hardin, professor of sociology at California. His article purports to base the "tragedy of the commons" theory on the old English "Commons," communally owned pastures where shepherds would bring their sheep to graze. These "Commons" were eventually replaced by private farms. Hardin would have you believe that the downfall of the communally owned pastures was an inevitable consequence of letting property be owned communally in the first place. New research confirms (or, at least, strongly supports the idea) that the Commons fell because of other reasons.

Besides the complete lack of empirical evidence, the "tragedy of the commons" theory, upon closer inspection, seems to be flawed rationally as well. Hardin premised his theory on the assumption that if a resource were left to communal rule, and thus not protected by individual property rights, there would be a rush by individuals within the community to use all of that resource for themselves - thus destroying the resource and the environment. This article, by Ian Angus, notes that that assumption appears slightly myopic:

"Contrary to Hardin's claims, a community that shares fields and forests has a strong incentive to protect them to the best of its ability, even if that means not maximizing current production, because those resources will be essential to the community's survival for centuries to come."

A community, just like any individual person, can foresee, comprehend and adequately prepare for future scarcity.

My last point is more social than economic. It is a sad fact of history that "tragedy of the commons" theory - or, more broadly, the Lockean theory of private property supported by "tragedy of the commons" thinking - has been used to forcibly displace and destroy indigenous populations and civilizations. There is no better time to consider this embarrassment than Thanksgiving. The brutal oppression of the Colonists over Native Americans was fueled and subsequently "justified" by theories of private property. This is made clear by a conveniently on-point quote from Chief Justice John Marshall in his opinion in the case of Johnson v. McIntosh (wherein the Court held that private citizens could not buy land from Native American tribes):

"But the tribe of Indians inhabiting this country were fierce savages, whose occupation was war, and whose subsistence was drawn chiefly from the forest. To leave them in possession of their country, was to leave the country a wilderness..."

Thus, while EJB suggests being thankful for Locke, Friedman and property rights this Thanksgiving, I suggest that those with the good fortune of being descendants of the peoples who have most benefited from the imposition of private property rights consider themselves lucky and give thanks - descendants of the conquered (the few left, of course) might not consider themselves as lucky.

~JSK

On Enemy Combatants, International Law and the War on Terror

Federal district court judge Richard Leon ruled today that President Bush must release five detainees currently held at Guantanamo Bay. One of the five prisoners is Lakhdar Boumediene, whose case prompted the Supreme Court to allow federal courts to review whether detainees captured during the "war on terror" were being properly held. Judge Leon's ruling is the first of its kind and it is a resounding critique of Bush's handling of the "war on terror." To sum up, Judge Leon ruled that the five detainees were not properly designated "enemy combatants" because the evidence the Government used to detain them was a single, unidentified source. Finding this evidence to be entirely too flimsy, Leon ordered their release. Because I agree with the outcome of the decision, but disagree with the rationale, you may consider this post my concurring opinion.

Judge Leon did the right thing by ordering the release of the prisoners. However, by ruling that the Government had not properly designated Boumediene and his friends as "enemy combatants," Judge Leon is assuming that there can be properly designated "enemy combatants" in the "war on terror." This is a fundamental misreading of the international laws of war (as governed by the Geneva Conventions - treaties which the United States is a party to). In the interest of brevity, I will limit my argument to its fundamentals, so forgive me if it seems a bit choppy and underexplained.

First, Article I, Section 8, Clause 10 grants Congress the power to "... [D]efine and punish piracies and felonies committed on the high seas, and offenses against the law of nations;" Thus, constitutionally, it is the Congress that should be defining the criteria of "enemy combatant" status - not the Executive. However, according to the Supreme Court in Hamdi v. Rumsfeld, Congress delegated this authority to the President when it passed the AUMF immediately following 9/11. So far so good. Except that there's this wonderful little line of cases espousing a principle of constitutional interpretation called the "Charming Betsy rule." This rule dictates that U.S. statutes should not be read to violate established international law of war principles. This makes sense, our very Constitution was shaped and informed in light of international law. Plus, the policy of promoting comity between nations is one of the leading justifications for obeying international law principles - even when dictating domestic law. Thus, it is vital that our Constitution and the statutes which flow from it are interpreted according to the international standards that are accepted by the global community (this is especially true when considering jus in bello rules, which have remained unchanged since the time of Thomas Aquinas!).

So we turn to the Geneva Conventions to decide what to do about detaining "enemy combatants." Articles Three and Four of the Conventions dictate the law of war rule of "distinction," that is, in "armed conflict" there are civilians and combatants. Combatants are defined as those who belong to an enemy military and/or take up arms in "direct hostilities" against another warring nation (civilians are anyone else). Does this cover terrorists? It might appear to, since terrorists do seem to act in "direct hostility" to the United States. Here's the catch that the Supreme Court missed - Articles Three and Four of Geneva also divide "armed conflict" into two types: international and non-international. International armed conflict is what you think of when you think of war: State A vs. State B, WWI and WWII. Non-international conflict is defined as a nation vs. a non-national organization or group. This would include civil wars, rebellions and international criminal organizations. Thus we have the category that al Qaeda falls into; clearly, the "war on terror" is a non-international armed conflict according to international law of war principles. Finally, the most important fact to take note of: non-international armed conflict is not covered by Articles 3 and 4. It is covered by Common Article 3 and various Additional Protocols. These documents do not recognize the existence of the class of "enemy combatant" in non-international warfare. This is key! There's no such thing as an "enemy combatant." Does this mean we cannot detain terrorists? Of course not. The law of war contemplates (and commands) that in non-international warfare, detainees are subject to the domestic law of the captors! Thus, terrorists should (indeed, must) be tried in civil courts, like any other criminal. Amazingly, the Supreme Court has recognized that the "war on terror" is indeed a non-international armed conflict (it did so in a case called Hamdan v. Rumsfeld - not to be confused with Hamdi). However, it failed to make the necessary connection that "enemy combatant" status does not exist in the "war on terror."

Think about it, what happened to Timothy McVeigh, the Atlanta Olmypic bomber and the captured 9/11 terrorist plotter? They were all tried in civil courts for the domestic crimes of conspiracy to commit murder and murder. This is the correct answer to the question of captured terrorists. Sadly, while getting the result correct, Judge Leon failed to recognize the right way to get there. He ignores or does not realize the unconstitutional nature of detaining civilians in military courts. I trust that other district court judge's will see the light and follow the principles of Charming Betsy, Hamdan and the Geneva Conventions.

~JSK

This Would Be Even Funnier If It Weren't So True

-EJB


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"America needs the money hole!"
"I love the money fires."

Brilliant, yet tragic...though the idea of people arguing over whether the free market can discover the best way to destroy money warms my heart.

~JSK

A Caricature of Bush's "Conservatism"

President Bush, in what could be the final important act of his presidency, is lobbying hard for a $25 billion dollar "bailout" (read:investment) of the Big Three American automobile makers - GM, Ford and Chrysler. Taxpayer money would essentially be used to buy an ownership stake in the companies, with the attempt of keeping them afloat and potentially reimbursing tax-payers once their stocks rise in the distant future. Essentially, this would be a partial nationalization of the automotive industry; and it comes under a GOP President - oh, the irony.

I would like to think of this act, should it pass, as a caricature of Bush conservatism. In other words, the exact opposite of what conservatism meant only 20 years ago. There is little doubt that, had you told Goldwater or Reagan that a conservative President would expend political capital to nationalize a major American industry, they would not have believed you. Small government and free market ideology were at the heart of conservatism.

But oh how things have changed. Bush, who recently publicly defended the free market system, has either changed his mind on that sentiment, or just does not understand the definitions of the terms "free" and "market." Or maybe even "the" and "system." (It's not unprecedented for a President to be unsure of even the simplest definitions, remember that Bill Clinton was perplexed by the meaning of "is.") Now, Bush advocates for bailing out companies that have failed on the market. Consumers agree (as indicated through horribly failing stock prices), GM, Ford and Chrysler cars are not worth their price. Facing competition from Honda and Toyota, Japanese imports that are - on the whole - cheaper, more efficient, get better gas mileage and last longer, American car companies have struggled in the last decade. Some chalk this up to the incredibly poor business decision made by many of these companies to pursue an increased development and production of gas-guzzling SUV's. That is certainly part of the picture. What seems to be going unsaid, however, is that the products these companies make are just horrible. Have you driven a Chrysler lately? It is not worth its weight in salt. My family owned a Chrysler mini-van for a few years. I can remember the transmission falling out of that van on at least three separate occasions. The front axle was always misaligned. And it handled incredibly poorly in snow and ice. These factors -and doubtless many more - played substantial roles in pushing customers towards buying foreign cars. Now, suddenly, we're talking about bailing out businesses that create and market inferior products. They have failed on their own merits - it is time to let them find their own way to succeed. I would suggest (should the CEO's of these companies be reading this page, which I'm sure they are) that they retool their operation entirely. Trucks and SUV's are floundering thanks to a surge in consumer gas conservationism. Hybrids and low gas-mileage cars are clearly the future. Work on that.

Now, I am not blind to the other side of the story. Two competent reasons are put forward for saving these industries. First, they employ a great deal of workers. Allowing them to go under would drastically increase unemployment and the poverty rate - especially in Detroit, a city which could itself use a bailout. Second, if these companies were to collapse, we would miss their manufacturing plants if we ever become involved in an old-fashioned international state-to-state war. The likelihood that this will happen is remote; it seems like the "war on terror" is the foreseeable altercation our country has decided to engage in. But should a war with Russia or China or some other mechanized state erupt, the loss of car manufacturing plants would cripple our ability to domestically manufacture military trucks, tanks and other necessary equipment.

Thus, I am not advocating that we should not bailout the auto industry. There are valid arguments on both sides. What I am merely pointing out is that our current President, a purported conservative, is fighting the hardest for this attempt at nationalizing the automotive industry. I find that ironic and indicative of the current state of the GOP.

~JSK

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First, I'm not so sure the Bush administration is the one really pushing for the nationalization of the auto industry. They have been luke warm thus far. This one has been more driven out of Congressional Democrats. But obviously it was the administration that initiated the push for the financial bailout.

But I agree with this point. One of the most frustrating things from the viewpoint of a Conservative is that Bush is seen as the example of what conservatism is. Goldwater and even Reagan are rolling over in their graves right now. We have had a huge government Republican claim the mantle of conservatism. Under his rule, government power, and in particular executive power has only increased in any way you measure it and government spending has exploded. This is no conservative. He is more synonymous with the old socially conservative Southern Democrats - he's a Dixiecrat. With the exception of some of the social issues, his presidency has more in common with LBJ's then any other modern president.

Though this was written before the financial mess in September and October, Charles Wheelan has a similar discussion on Bush in that he doesn't know what he is. He calls him a "neo-neoconservative", all the liberal spending without the perks. Read here.

-EJB

News Media Priorities

Just a quick post to highlight why EJB and I even started this blog (and why we continue to despise the news media). If you haven't yet heard, the BBC (and seemingly every other international news network) is reporting that German doctors have used a bone-marrow transplant to cure a man of AIDS. Yes, you read that right...this is a possible cure for AIDS.

'Could this be true,' I thought to myself. 'What wonderful news!' I remarked in my own head. Certainly I can read more about this on CNN or Foxnews. Certainly this type of news calls for front page status. Shockingly - nothing. Well, not nothing. In fact, both cnn.com and foxnews.com did actually pick up the story, but hid the link in the bottom corner of the page (accessed by scrolling down, sifting through other "today's news" stories and following the links).

So what is it that CNN and Foxnews found to be more important than a possible cure for freakin AIDS??

CNN headline: "Breaking News: Palin: I Wish I Had Done More Interviews!"
Foxnews headline: "MSNBC Duped Into Palin Hoax!"

First of all, Sarah Palin is no longer a news story. Nothing she does is news anymore, and I doubt it was ever legitimate news to begin with. Second, I don't know which site should be more ashamed of themselves. CNN listed their "story" as "breaking news," which it is clearly not. The subject matter is the opinion of a former vice-presidential candidate who "wishes she had done more interviews." I wish I had played more tennis this year. Not breaking news. Fox is an interesting one. Its "story" is actually just a shot at its rival, MSNBC. Is this more like news than CNN's "story?" I can't even tell, really. The major point here is that both sites ought to be ashamed of themselves. They are lowering the standard of intelligent discourse in this country. Seriously, readers, get your news from the BBC or some international source - they typically contain actual news.

~JSK

On Executive Orders and Barack Obama

I've been defending you, Barack Obama. It seems like everyone around here (and elsewhere) wants to fear your policies and philosophy. They claim you're going to nationalize some private industries. They swear that you'll further centralize and concentrate power in the Executive branch. And I've been on your side, giving you the benefit of the doubt. I've argued to the point of exhaustion and crippling carpal tunnel. But really...you're making it much harder to do. This, from Yahoo news. Obama plans on using "executive orders" from day one. We just suffered through eight years of a President who unconstitutionally power-grabbed by abusing and exploiting the executive order. Now you're considering doing the same thing? And from day one? Really?

Well...the article does say that Obama plans on using the executive orders to "undo policies enacted by Bush." If that is honestly the limit of these executive orders, then I guess I'd be somewhat placated. But only because I'm a loose consequentialist. If I were more of an instrumentalist, I'd probably be wondering if it is just to undo bad policies by implementing the exact same means that caused all the problems in the first place. Thankfully, I need not concern myself with such an inquiry because, in this limited case, I'm willing to let the ends justify the means (it's not always a bad policy!).

But wow, you're already thinking about issuing executive orders? No honeymoon period? No easing into this gently? I bet Barack is that guy who, when you and your friends sit down to start a poker game, raises on the very first hand. And then check-raises after the flop. Relax. You have at least four years to undo the horribles unleashed by Bush's executive orders. All this noise about "acting without waiting for congressional action" is a little unnerving. I'm not the biggest fan of Congress, but I do believe that they were granted the power to create laws. So...it's probably a good thing to go ahead and discuss your ideas with them. And just a final warning: the economy is going to get worse. We have not hit rock bottom. So, the more you do, the more closely your work will be tied to the recession - even if the legislation has absolutely no correlation with the state of the economy. It's just how it works, ask Herbert Hoover. Thus, you might want to go easy, early on. Let the recession take hold and work itself out, all the while blaming President Bush and Republicans. That's a sure road to glory, ask FDR.


~JSK

More on the Fed and the Housing Bubble

I ran into this article today. It's a bit more technical then what I've previously linked to in the past, but if your willing to read through it, its worth it. I had previously posted about how loose monetary policy had been a large contributor to our housing mess. This argues along the same notion. From the article, here are a couple of relevant charts.

Fed Funds Rate














Growth of Subprime Loans















Notice the correlation with subprime growing starting in 2001 and accelerating through 2005, the periods when the Fed held very low interest rates stoking a bubble in housing investment. Whats just as important is realizing that this mess want just subprime, but an explosion of housing lending in general, which is discussed more in t e article. The growth began to slow as the Fed raised rates and then started to fall as the housing bubble popped.

-EJB

History Repeats Itself: A Look at This Election in a Certain Cyclical Perspective

I hope you are willing to bear with me on this long post.

So with last night’s election results, the nation moves forward with a new President and Congress. Part of me is overjoyed that this long process is finally over and part of me is intellectually curious to see how a Democrat controlled government will rule after years of Republican dominance. I see certain benefits to this change in the hopeful end of our cowboy diplomacy of late (though I’m no fan of the Democrat’s propensity to surrender national sovereignty to international organization either) and hopefully the end of a Republican party clinging to power via cultural battles. They have to begin some soul searching again and develop new ideas to actually govern, while at the same time I am willing to bet that for political reasons, the Democrats will largely avoid their own social issues agenda in the near future.

But the overarching shift that I see occurring right now in our balance of political coalitions is disturbing. JSK and many others continue to dismiss the notion of this as being a great leap in favor of government power and the social state, chalking this up to me worrying and over reacting. It is true, that we are not going to suddenly see a socialist workers paradise, or a sudden rise of the next Soviet Union, but I have never been saying that. The Republicans, if they survive recounts seem to have held 43 to 44 Senate seats, maintaining their power to filibuster, but even if they hadn’t we still wouldn’t have seen these extreme developments. What I do believe, however, is that we are about to likely take the next large step in the direction of a socialist democracy, and all the pains that accompany it. Six time early 20th century American Socialist Party Presidential candidate Noram Thomas said:

The American people will never knowingly adopt socialism, but under the name of
liberalism, they will adopt every fragment of the socialist program until one
day America will be a socialist nation without ever knowing how it happened.

If one looks back now at that party’s platform in the early 1900’s virtually all of its policies are now in place and his words have a prophetic feel to them. Take a look at Marx’s ten planks of how to transition a nation into Socialism. We have most of them at least partially implemented currently.

Along this theoretical framework, American history of the past century has been marked by a period of movement towards social democracy, followed by a period of backlash after years of poor economic conditions created or at least exacerbated by those very policies. In this latter period, most of the programs earlier created are not removed, but the growth of new ones is hampered. Then when the cycle repeats itself, it picks up from where it left off.

The first period was the Progressive era, and more in particular the Wilson years, where the Federal Reserve and income tax came into full fruition. In addition, America’s isolationist tradition came to an end with an expansion of government power abroad via the involvement of the country in WWI. Partially due to the war, partially due to high income tax rates to finance the war, and partially due to a Federal Reserve that had no idea what it was doing, the latter half of the period was marked by heavy levels of inflation and general economic pain in addition to the struggles of war. Between the burdens of the war itself, and the inflationary period, this episode came to an end with the overwhelming election victory of Harding with his pledge to “return to normalcy.” He and his congressional allies cut taxes, reduced the size of the military and largely governed in a hands-off approach, in direct contrast to their Progressive predecessors. He and Coolidge thereafter presided over a period of general peace and prosperity.

This changed however, when Hoover, a big government president, who redirected his previously laissez-faire party into one of trade protectionism, much higher tax rates, wage controls in industry, centralized industrial and agriculture planning, government regulation and so on. Scrambling to react to the Stock Market crash, these large government responses only exacerbated the situation, turning a recession into the beginnings of the Great Depression. Despite Hoover being the most interventionist President to that date, this didn’t stop FDR from blaming the current situation on the free market and Hoover not doing enough. FDR rose to power as a savior figure, promising to do so by greatly increasing the power of the government. His policies elongated the Depression by taxing investment heavily, creating uncertainty in markets, and driving up unemployment particularly in the 1937 “Depression within the Depression.” This latter phase was partially driven by the implementation of the Wagner Act, which had the effect of forcing increased union wages without any increase in productivity while labor demand was already weak and by raising taxes for Social Security. They combined to drastically raise unemployment. These policies were the same things Hoover did in 1930 just rehashed and taken further. Rexford Tuggwell, one of FDR's advisers later commented that although no one would admit it at the time,

...practically the whole New Deal was extrapolated from programs that
Hoover started.

The backlash occurred starting in 1938 and 1940. Despite FRD winning a third term on the grounds of the developing WWII, his liberal congressional allies were defeated in these two elections. The Republicans gained many seats in the Congress and allied with the Southern conservative Democrats, this “conservative coalition” was formed. First led by Senator Taft and later Senator Goldwater, this coalition marginally controlled Congress from 1938 until 1964 with the exception of two of Truman’s years. Though not powerful enough to repeal most of the New Deal programs (as many members now wished to preserve those programs already created), it largely prevented the creation and expansion of new ones. Government policy in this era focused around infrastructure development and scientific research, and not increasing wealth redistribution and social engineering as it had in the New Deal. Further aided by Kennedy’s large tax cut, this period was one of general prosperity.

The cycle reset itself beginning in 1964 with LBJ’s crushing victory over Goldwater, where he gained a large number of Congressional seats. Government went back to the business of increasing wealth redistribution and social engineering. Furthermore, the Federal Reserve started expanding its role again, trying to not only provide price stability but by actively trying to increase employment operating under the notion of the Phillips Curve. This Congressional coalition ruled until 1980, and its Presidents following LBJ were all big government proponents (accept maybe Ford, but he had little policy influence in his two years). As Nixon famously exclaimed, “We’re all Keynesians now.” He continued LBJ’s intervention with price controls, more market intervention, high taxes and via getting off the gold standard completely, now gave even more control to the Federal Reserve. These years from LBJ through Carter saw ever increasing inflation and rising unemployment, a deteriorating fiscal situation and under performing financial markets.

After years of pain, the message that Goldwater failed to win by, Reagan used to sweep to victory in 1980 and with him a new Congressional coalition. The Republicans took the Senate, and gained enough seats in the House that along with the Southern “boll weevil” Democrats, gained an effective majority. In a period of reducing social programs, deregulation, lower taxes, and tighter monetary policy, prosperity began to reemerge. With the exception of the first two years of the Clinton administration, this new Congressional coalition held control from 1980 until 2006 (though they stopped governing this way in the 2000s). Unemployment rates steadily decreased, inflation lessened and the stock market saw its greatest 20 year period in history. This too changed however. Much like Hoover, our outgoing president has been a big government ruler. He took a previously small government party and turned his years of governance into the largest spending increase over a 6 year period (2000 to 2006) since LBJ. The government increased regulations heavily in the wake of September 11th and via Sarbanes Oxley, diminishing the US competitive position, energy markets were manipulated through ethanol and trade protectionism, the fiscal condition worsened, and government continued to gets its hands more involved in housing markets via Fannie and Freddie and the FHA. Foreign intervention became the dominating political issue via Iraq and Afghanistan. And just as FDR blamed a big government Republican for being laissez-faire, so has our next President blamed Bush and the free market, when in reality as I have talked about before, our real mess was largely due to poor government involvement (here and here).

So now there returns a liberal pro-government majority in the Congress, with a President promising larger government yet again. The question now is that is this simply a two year period, as with Truman and Clinton where it is only a pause in the smaller government portion of the cycle, or is this the beginning of the next phase? I hope it is the prior. It may be so, considering this election was more about the electorate being against Republicans then for Democrats. However, I feel it is likely the later. The Republican Party is a damaged brand and is blamed for the mess that we are currently in. The Party furthermore was no longer governing on the small government principals that got them elected in the first place. Also and very importantly, the narrative that was supported by both presidential candidates this year, that “greed” and the lack of government regulation is the root of our mess, is commonly held amongst the electorate. The message of small government is therefore greatly harmed at present. McCain’s concession on this argument has probably done more for the cause of large government than anything else, because it now admits politically and solidifies that the popularly held lessen from our recent problems is not the overreach of government trying to manipulate housing markets but that it was a failure of the free market. That is now mainstream, accepted by both parties with only fringe political forces arguing otherwise. Unless the Democrats now overeach and attach to themselves a lable of being too extreme, then it will be quite some time before the electorate is both in favor of small government again and at the same time trusting in the Republican party to deliver that.


So we are now going to likely have to feel a period of pain again, just as was required in past cycles, before the electorate is once again willing to accept the notion that as Reagan said, “Government isn’t the solution to the problem. Government is the problem.” It took about 7 or 8 years in the Wilson era to come to this conclusion, 10 to 12 years in FDR’s, and about 16 in LBJ’s. It may then be another decade before we wake up in this phase. Enlightening in Obama’s victory speech last night was the following disclaimer about his Presidency that was very slyly snuck into his speech when referring to our problems, economic and other:

The road ahead will be long. Our climb will be steep. We may not get there in
one year or even one term...

He is setting the narrative already for his 2012 reelection. If he gets many of his advocated polices through, raised taxes on capital, greater union power, protectionism through double taxation of foreign profits, and market intervention, which are all strikingly similar to the policies implemented during the past rises of government power that exacerbated our situation, he too will only postpone our recovery now. He is showing us already that his message in the face of a still troubled economy will be the same as FDR’s; that being blame your predecessor for the problems to deflect critisism away from your own failures. FDR and his coalition were able to successfully do that for eight to ten years. I hope this President will not have as much success at that. So maybe Obama will rule in a manner different then what he has said on the campaign trail, and maybe I will be very wrong in my predictions, but if history is a guide, I think we are in for a period of malaise and rough times.

-EJB


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I'm not sure why I'd even attempt to temper EJB's concerns. Frankly, I'd be happy to accept them as perfectly valid and believe that the GOP is in the midst of being relegated to a prolonged minority status. I say this for two reasons: first, much like the penitent man must suffer to attain atonement, the GOP should be punished for the last eight years of incompetent leadership; and second, because I hope that such punishment will help purify the party - and by this I mean, return it to the party of small-government proponents.

I agree with EJB when he posits that much of what we witnessed on Election Night was a public backlash against the GOP for President Bush. The message was loud and clear. Similarly, I also agree with EJB in that I believe the Dems will not push their social agenda anytime soon - Democratic strategists should recognize that the election was not a liberal mandate, but instead an "anyone but them" decree.

EJB lays out the Arthur Schlesinger model of the cyclical nature of American politics quite nicely. Although I have some minor quibbles with his assertions (Wilson as the catalyst of the Progressive Era? TR might have something to say about that), we're not here to debate about the historical accuracy of the Schlesinger model. I would argue, though (as commenter Kim points out (Hi Kim!)) that there is reason to believe that there is a strong undercurrent of fiscally-conservative thought amongst the younger generation. The unprecedented internet popularity of Ron Paul and burgeoning young conservatives like Bobby Jindal testify to this latent potential. If conservatives of that mold step up within the next four years, the 2012 election will be quite interesting - and dare I say it, EJB's concerns might be overstated. So buck up, young Reaganite, your future is not so bleak.

One other reason to question the legitimacy of the fear of Obama ushering in a socialist paradise is the Bill Clinton/George Bush example of unfulfilled expectations. What I mean is that, prior to Clinton taking office, the country expected him to implement all sorts of liberal policies - like universal health care, increased social welfare spending, etc. Instead, because of the deficit left to him by the previous administration, Clinton went small-government and drastically slashed the budget. He famously declared that the era of big government was over. Enter George W. Bush, who, so the country thought, would stick to his campaign promises of cutting taxes and spending. Nobody could have guessed that a conservative - a mere 15 years after Reagan - would increase the strength of the federal government in such ways as we have seen. And as I pointed out in my previous post, Obama has surrounded himself with Clinton aides (Rahm Emmanuel and Robert Rubin, to start). So perhaps we should expect the unexpected from Mr. Obama.

Finally, before I get into my major point (which, as you should all expect of me by now, involves the judicial system), I'd like to respond to the idea that our society has "partially implemented" Marx's ten planks of transitional socialism - because, honestly, I just don't see it.

1)Abolition of all property in land and application of all rents of land to public purposes.
Well...we still have privately owned property and land is not rented for solely public purposes. In fact, we have a pretty strongly supported system of private property in this country. True this Lockean system was undermined by Kelo...but let's be serious, Kelo has not been extended by any District Court. Nobody likes that decision and in fact, many States have enacted legislation directly contrary to its holding. So we're 0 for 1, thus far.

2)A heavy progressive or graduated income tax.
We could have a year-long debate about the definition of "heavy" but I'll be nice and concede this one. You got us there - Sixteenth Amendment? Totally socialist. Next.

3)Abolition of all right of inheritance.
I can tell you, after suffering through four agonizingly painful months of studying property law, that we are nowhere near the implementation of this one. Inheritance of land and chattels is still the default rule in every single State. In fact, the State can only inherit property if the decedent has absolutely no living kin survive him. And, even more interestingly, Article III, Section 3 of the Constitution expressly forbids "Corruption of Blood" and "Forfeiture" as a punishment for Treason. Looks like we're 1 for 3.

4)Confiscation of the property of all emigrants and rebels.
While it is true that there are many in Texas who would whole-heartedly support a law like this, we've yet to see one in any State (thankfully). 1 for 4.

5)Centralization of credit in the hands of the State, by means of a national bank with State capital and exclusive monopoly.
Here we do see some similarities. We have a Federal Reserve which does act as a national bank. The State does have an exclusive monopoly on the type of currency we can use, as well. But credit is not wholly centralized in the State and there is no such monopoly there. Perhaps Obama will act to fully nationalize the credit system due to the crash, but isn't that the crux of our disagreement (whether that will actually happen or not)? This one gets half a point: 1.5 out of 5 now.

6)Centralization of the means of communication and transport in the hands of the State.
Amtrak! I knew it! Socialist bastards. Private communication companies are prevalent. Private transportation companies are prevalent. We do have the DOT, but they're regulatory...they don't own the means of transport. This one fails. 1.5 for 6.

7)Extension of factories and instruments of production owned by the State...the improvement of soil in accordance with a common plan.
Again, I suppose we could argue that the Department of Agriculture does fulfill this tenet, somewhat. But there's a huge difference between regulating agriculture and "improving soil according to a common plan." Farm subsidies abide, but there are still privately owned farms and factories. In fact, it is the norm. I'll be generous and give this one a half point. 2 for 7.

8)Equal liability of all to labor. Establishment of industrial armies, especially for agriculture.
Industrial agricultural armies...now that would be a sight. And to dispel the notion that we're all equally liable for labor, I point to myself as evidence. I don't do anything. 2 for 8.

9)Combination of agriculture with manufacturing industries; gradual abolition of distinction between town and country, by a more equitable distribution of the population over the country.
Zuh? I mean...I guess we could argue that the rise of federal supremacy has acted to "gradually abolish the distinction between town and country," but that's a stretch. Our federalist system, especially since the Rehnquist Court, has never been stronger. And what's all this jazz about redistributing the population equally over the country? Evidence that this has not happened: electoral college. 2 for 9.

10)Free education for all children in public schools. Abolition of children's factory labor.
Socialist scum! How dare they want to educate all children free of expense and liberate them from factory work! Seriously, public schools aren't free in the sense that we pay for them through taxes. Plus "all children?" Not even close, sadly. Though we have abolished child labor. So this is a half a point that I think we should be proud of.

The final tally, then is 2.5 out of 10. We're 25% socialist; mainly because we ended child labor, set up the DOT and Dept of Ag and we have the Federal Reserve. I think I'm OK with this.

***

But here's the real meat of my response to EJB's post. I am most interested not with what EJB has included in his post, but what he has chosen to leave out of the discussion. He mentions the Executive and the Legislative branches and details their progressions, but nowhere is the Judiciary mentioned. This is a key issue when pondering the question of whether Obama's policies will move us even further to the left than FDR and LBJ because it will be the Supreme Court which will ultimately sign off on any Obama-created socialist policy - and it's where we can definitively distinguish Obama's future term(s) from FDR's or LBJ's.

Now, any socialist policy that would continue the work of the New Deal or Great Society would need to be passed pursuant to the Commerce Clause. Everyone pause to shudder while we think of what has become of the Commerce Clause. FDR's Supreme Courts (the Hughes Court and the Stone Court) essentially aided FDR's New Deal by drastically expanding the definition of "commerce" and altering the previously entrenched constitutional interpretation of the Clause. The Court packing scheme that FDR tried to use was not a result of the Court stonewalling him - but actually an attempt to get the Court to approve of every single proposed measure, rather than a mere majority of those measures.

The Hughes Court (1930-1941) included such "judicial activists" as Louis Brandeis, Oliver Wendel Holmes, Harlan Stone and even Hughes himself. These Justices sided with FDR's "commerce" interpretations and helped usher in the New Deal. In fact, only four Justices (McReynolds, Butler, Van Devanter and Sutherland -known collectively as the "Four Horsemen") stood up to FDR during the 1930's. The addition of Benjamin Cardozo gave FDR the edge he needed. Also important to note, FDR had nine Supreme Court appointments starting with Hugo Black in 1937 and lasting through Rutledge in 1943. The other seven were Reed, Frankfurter, Douglas, Stone (to Chief Justice), Byrnes and Jackson. By the time the Stone Court (1941-1946) rolled around, it was filled to the brim with FDR supporters. Thus, the New Deal was approved and facilitated by a very progressive, very executive-deferential, Supreme Court. (Though, if any of you Supreme Court history buffs out there want to yell at me about calling Frankfurter an FDR supporter, I'll accept your criticism...he was the only one, though, who really went conservative after appointment.)

As for LBJ, EJB himself admitted in a previous post that the mid-60's was the height of the Progressive Court. LBJ presided under the Warren Court (1953-1969), which included the most liberal/progressive Justices ever amassed on a single bench. William Brennan (my favorite Justice of all time), Thurgood Marshall, Hugo Black (the very same FDR appointment), Harry Blackmun (who authored the Roe decision), Byron White (who, despite the name, sided with Justice Black quite often), Potter Stewart (a centrist who leaned left) and Tom Clark. The Great Society stood absolutely no chance of being ruled unconstitutional by these guys. None.

Now we have Obama, who comes to the Oval Office in the midst of the Rehnquist "Federalist Revolution." The leading case is US v. Lopez, it was the first time in over seven decades that the Supreme Court limited the government's interpretation of the Commerce Clause. Lopez and its progeny (most importantly Morrison) signaled the end of the Progressive judicial movement. It also sent a message to the country that the Court would no longer defer to the President or to Congress; they would be entirely willing to strike down a democratically passed law if they felt it stretched the Constitution too far. This was a monumental swing. Here's the majority in Lopez: Rehnquist, O'Connor, Scalia, Kennedy, Thomas. Now here's the important part - George W. Bush sealed Obama's fate with unbelievably excellent (in conservatives eyes) Supreme Court appointments. Chief Justice Roberts, who clerked for Rehnquist, is his predecessors student - and an apt one at that. Justice Alito will easily fill in the void that O'Connor left. Thus a strong majority still exists (Roberts, Alito, Scalia, Thomas, Kennedy). Even more encouraging for those worried about a socialist rebirth, none of those five are going anywhere for the next eight years. Scalia is 72 but shows no signs of slowing. Kennedy is 72 as well, but has expressed no hint of retirement plans. Thomas is 60. Alito is 58. Roberts is 53 (53! A thirty-year Roberts Court is entirely possible! Blech...). Thus, any Supreme Court vacancies that Obama would get to fill would likely be liberal Justices (I'm looking at you Stevens, Ginsburg and Souter - all of whom have expressed their desire to retire if Obama is elected).

So, I too apologize for the length of this post, but I feel that it was important to note. I think it is the most important issue regarding this debate, because, again, it is the Supreme Court that must ultimately decide the fate of any proposed legislation. Fiscally-conservative conservatives (or Goldwater republicans or classically liberal republicans or small-government conservatives or whatever you guys choose to call yourselves these days) can rest easy in the knowledge that their hold on the judiciary (in the Supreme Court at least) is pretty strong. That's one thing Bush did well for his party.


~JSK

A Rose By Any Other Name

Congratulations to President-elect Obama and the Democrat party in general for their victories last night. Obama's quasi-landslide, facilitated by the fact that he pretty much swept every key swing State, surprised me slightly. And the Dem's picked up some key Senate seats (take that, Elizabeth Dole), but will not reach 60 for a super-majority...I guess we'll have to wait a little while longer for the complete nationalization of private industry, the elevation of unions to Big Brother-esque power, free unlimited abortions for every woman and the changing of our national symbol from the bald eagle to the hammer and sickle. Here's hoping for 2010, though.

Obama must obviously be excited - in the same way that any comic who is informed that he'll be performing after Carlos Mencia is excited; safe in the knowledge that he can't possibly do any worse than the last guy. Seriously, if Obama sat in the Oval Office and played Sudoku for 4 years, he'd go down in history as a better President than GWB. Not content to sit around and do nothing, however, Obama apparently has plans and goals.

So it's been less than 12 hours since the Obama victory was announced and, much to my surprise, there has been no noticeable change in life (for better or for worse). The sky did not open up, fire did not rain down upon us and I did not even hear a single trumpet (if you got that last one, I'm impressed. If not, here.) On the flip side, the blind still cannot see, the water in my sink is not wine, wars and genocides continue globally, and it is still true that white colonists enslaved Africans 300 years ago. But like I said above, Obama has plans.

I'd just like to forewarn Obama backers that they should temper their excitement a little. This article, though a few months old, gives good reasons why: he can't possibly find the money for all his change. $6billion for rebuilding bridges and dams? $15 billion for developing clean energy? $10 billion to bail out foreclosures? $18 billion for education? I guess my favorite is $50 million a year to "help make men better fathers" - I assume that means giving that money directly to the dad's so they can buy their kids an IPod...that automatically makes you a better father.

The article notes that Leon Panetta, Bill Clinton's former chief of staff, suggests that Obama is going to have to cut back his plans a bit. Fortunately, Robert Rubin, a former Clinton adviser has been working closely with the Obama campaign. This is a good sign. It may just be that Obama realizes, much like Clinton in the 90's, that he will have to forgo many of his campaign promises in order to focus on deficit-cutting. It will be difficult because Obama promised so much to so many people...but if he takes even a modest step towards balancing the budget and reducing our national deficit, he will be serving the people in a manner more praiseworthy than any government program he had planned on creating.

~JSK

Our Politicians and the Constitution

I'm just going to go ahead and declare this as unassailably true - politicians, our elected legislators and executives who create and enforce the laws of our country, should know the Constitution. And I'm not talking about knowledge of the Constitution. For instance, it is not enough for a politician to say, "Oh yes, the Constitution! I have heard of that document. They tell me it is fantastic." No. This is not what I mean. Politicians should know the text - line by line, word by word - by memory. It should be ingrained in their hearts; its words should paper their bedroom and office walls (yes I used paper as a verb...deal with it) - because it is the supreme Law of the Land.

So it both saddens and angers me when our leaders reveal a distinct ignorance of, arguably, the most important document in their lives. Let me preface the heart of my post by disclaiming that I am not picking on any one politician - especially Sarah Palin. I'm not highlighting any of these cases with the intent of mocking someone's intelligence. I am posting about this subject because it frightens me that politicians can get away with such dangerous ignorance. They create new laws! These laws are supposed to be in line with the Constitution. How could this be possible if those creating and ratifying these laws do not even understand the governing document? Anyway, let's get into it.

Some of you may have heard Ms. Palin's attack on the media. If not, here's the article, (it links to the ABC article). Ms. Palin points out that some media outlets are refusing to publish her comments about Barack Obama because those outlets deem the statements to be inflammatory and overly negative. Now, I'm not writing to discuss the merits of that claim - let's leave that to the talking heads. The important thing here, though, is that she argues that this refusal to publish violates her First Amendment freedom of speech rights, because her words are being unfairly singled out and will not be heard by the media's audience. This is nonsense. It informs us that Ms. Palin does not understand - or perhaps, may never have read - the First Amendment.

Let me dispatch with her argument quickly before I talk about the policy ramifications of her statement. First off, textually, the First Amendment prohibits only the Federal Government's passing of laws which abridge the freedom of speech ("Congress shall make no law"). This was later extended to the States by the Fourteenth Amendment. Thus, for the most part (with limited exceptions), private individuals can deprive you of your right to free speech. That's why students have a limited First Amendment right in class. That's why private businesses can control - to some extent - what their employees say. That's why I could tell you to be quiet. So, Ms. Palin's First Amendment rights are not violated by privately run media corporations because the First Amendment does not prohibit them from silencing her. But that brings us to the next point...they aren't silencing her! She can still say whatever she darn well pleases. I guess her argument is that, because enough media outlets are refusing to publish her statements, they are keeping a large audience from hearing her thoughts and expressions. There would be some bite to this argument if the media were State-run. Of course, we're not North Korea and media outlets are private. But even if that were not true, Ms. Palin would still have her work cut out for her in court. Why? Because the First Amendment - and this is important to understand - does not create a private right to an audience. We have the right to express ourselves. We do not have a right to have our expressions recognized or even heard by anyone. In fact, in some cases we have the right to be free from hearing certain types of speech (loud campaigning from "sound trucks," for instance). So, Ms. Palin is on no solid ground whatsoever when she makes her case.

So why even bother with this post? Isn't this the type of "gaffe" we promised we wouldn't discuss in our introductory post? I don't believe that it is. This is more than a mere "misinterpretation." Her comments reveal an utter lack of knowledge of Constitutional scholarship. This is dangerous because she could be the President-in-waiting. But the real issue here is that this is just the tip of the iceberg. Like I said, I'm not picking on Palin. I'm calling out every politician who holds irrational views about the Constitution. Just as EJB wrote about politicians and their lack of economic knowledge, I note the problems of electing leaders who do not understand the underlying principles of the laws they are expected to create. This problem is, unfortunately, bipartisan. I've already pointed out Joe Biden's misquoting of the Constitution. There is the famous case of Ronald Reagan's Secretary of State Alexander Haig, who failed to understand the proper Constitutionally-mandated Presidential line of succession (he yelled out "I am in control here" after Reagan was shot). Even President's are guilty of Constitutional ignorance. Nixon famously argued that "when the President does it, it is not illegal." And President Bush has taken Constitutional ignorance to its logical (and deplorable) outcome: shunning the Constitution entirely ( "a goddamn piece of paper").

This is cause for concern. Reading the Constitution ought to be a prerequisite for holding any national public office. It is the backbone of our legal system and the preserver of our freedoms. How can we hope to live in a constitutionally protected society when our leaders can't correctly quote or appropriately reference the document? I'm not arguing that every politician must be a constitutional scholar. I'm simply hoping that those entrusted with the role of creating the laws which govern our society can find it in themselves to take the time to sit down, grab a muffin and some coffee, and just read the damn thing. It's short - I promise.

~JSK

More on The Financial Mess

So I posted a while back on how despite all the political rhetoric and anti-business bashing going on, that our current economic woes were not simply due to "greed" but rather in large part due to a set of polices that changed market incentives. I talked relatively in depth about the role that monetary policy had in creating the housing asset bubble.

So, here is an article that I would not have been surprised to have found on the editorial page of the Wall Street Journal, but was completely shocked to find it in the Washington Post. Apparently even their editorial board, not normally a bastion of free market thinking, agrees with this premise and is attributing much of the blame to poor governmental market intervention.

...the problem with the U.S. economy, more than lack of regulation, has been government's failure to control systemic risks that government itself helped to create. We are not witnessing a crisis of the free market but a crisis of distorted markets.

Though I don't agree with its entirety, the article is a good brief overview. I found the comparison to Canada, which I was not familiar with, particularly interesting.

-EJB

___________________________________________________________________

Since the early days of the crash, EJB and I have discussed the matter of blame extensively - via phone, email, text message, pony express and even carrier pigeon. He has done much to convince me that the free market was not entirely to blame and that, in fact, private entities were simply taking advantage of a system which incentivized their risky behavior. Of course, it goes without saying that in events like these, it is impossible to blame any one factor entirely. There were multiple causes, with varying degrees of blameworthiness.

To that end, I point you, the reader, to the blog of one of my favorite people in the world - Richard Posner. I don't always agree with Judge Posner - especially with his attempt to analyze the tort system in purely economic terms - but he has a theory of what happened during the crash that deserves some consideration. The article is essentially Posner's attempt to explain why the warning signs of the crash were ignored or misunderstood. The crux of his argument is this:

Which brings me to the last and most important reason for the neglect of the warning signs, because it suggests the possibility of responding in timely fashion to future risks of financial disaster. That is the absence of a machinery (other than the market itself) for aggregating and analyzing information bearing on large-scale economic risk. Little bits of knowledge about the shakiness of the U.S. and global financial systems were widely dispersed among the staffs of banks and other financial institutions and of regulatory bodies, and among academic economists, financial consultants, accountants, actuaries, rating agencies, and business journalists. But there was no financial counterpart to the CIA to aggregate and analyze the information--to assemble a meaningful mosaic from the scattered pieces. Much of the relevant information was proprietary, and even regulatory agencies lacked access to it. Companies do not like to broadcast bad news, and speculators planning to sell a company's stock short do not announce their intentions, as that would drive the stock price down, prematurely from their standpoint.

Sort of like EJB being surprised to see a free market defense in the Washington Post...I'm utterly shocked to see this argument put forward by the creator of the law and economics movement. But, when one carefully examines the argument, one realizes that Posner is not advocating for government regulation - he is advocating for government oversight. This, I think, is a key difference that has been conflated by the media. Like Posner says, there is no agency that could "aggregate and analyze" scattered pieces of market information. These are important words - aggregating and analyzing information does not include the creation of rules and laws that would constitute regulation. It simply means, there ought to be an agency that gathers information already available to the public, which that agency could then analyze to discover what types of risk or how much risk any given market is prone to. Posner calls this the most important reason for the failure to detect the impending crash and I completely agree. The SEC does not fulfill this important role. A new agency must be created - one which cannot issue regulatory rules, but can only compile and analyze global market information. It should perform a risk assessment function and report its findings to the relevant authorities. Posner, I think you nailed this one.

~JSK