James Landrith is...Taking The Gloves Off: syndicated

left-libertarian blogger, publisher, USMC veteran and civil liberties activist

 

How the U.S. Empire Contributed to the Economic Crisis 
May 11, 2009
Ivan Eland

A few—and only a few—prescient commentators have questioned whether the U.S. can sustain its informal global empire in the wake of the most severe economic crisis since World War II. And the simultaneous quagmires in Iraq and Afghanistan are leading more and more opinion leaders and taxpayers to this question. But the U.S. Empire helped cause the meltdown in the first place.

War has a history of causing financial and economic calamities. It does so directly by almost always causing inflation—that is, too much money chasing too few goods. During wartime, governments usually commandeer resources from the private sector into the government realm to fund the fighting. This action leaves shortages of resources to make consumer goods and their components, therefore pushing prices up. Making things worse, governments often times print money to fund the war, thus adding to the amount of money chasing the smaller number of consumer goods. Such “make-believe” wealth has funded many U.S. wars.

For example, the War of 1812 had two negative effects on the U.S. financial system. First, in 1814, the federal government allowed state-chartered banks to suspend payment in gold and silver to their depositors. In other words, according Tom J. DiLorenzo in Hamilton’s Curse, the banks did not have to hold sufficient gold and silver reserves to cover their loans. This policy allowed the banks to loan the federal government more money to fight the war. The result was an annual inflation rate of 55 percent in some U.S. cities.

The government took this route of expanding credit during wartime because no U.S. central bank existed at the time. Congress, correctly questioning The Bank of the United States’ constitutionality, had not renewed its charter upon expiration in 1811. But the financial turmoil caused by the war led to a second pernicious effect on the financial system—the resurrection of the bank in 1817 in the form of the Second Bank of the United States. Like the first bank and all other government central banks in the future, the second bank flooded the market with new credit. In 1818, this led to excessive real estate speculation and a consequent bubble. The bubble burst during the Panic of 1819, which was the first recession in the nation’s history. Sound familiar?

Although President Andrew Jackson got rid of the second bank in the 1830s and the U.S. economy generally flourished with a freer banking system until 1913, at that time yet another central bank—this time the Federal Reserve System—rose from the ashes.

We have seen that war ultimately causes the creation of both economic problems and nefarious government financial institutions that cause those difficulties. And of course, the modern day U.S. Empire also creates such economic maladies and wars that allow those institutions to wreak havoc on the economy.

The Fed caused the current collapse in the real estate credit market, which has led to a more general global financial and economic meltdown, by earlier flooding the market with excess credit. That money went into real estate, thus creating an artificial bubble that eventually came crashing down in 2008. But what caused the Fed to vastly expand credit?

To prevent a potential economic calamity after 9/11 and soothe jitters surrounding the risky and unneeded U.S. invasion of Iraq, Fed Chairman Alan Greenspan began a series of interest rate cuts that vastly increased the money supply. According to Thomas E. Woods, Jr. in Meltdown, the interest rate cuts culminated in the extraordinary policy of lowering the federal funds rate (the rate at which banks lend to one another overnight, which usually determines other interest rates) to only one percent for an entire year (from June 2003 to June 2004). Woods notes that more money was created between 2000 and 2007 than in the rest of U.S. history. Much of this excess money ended up creating the real estate bubble that eventually caused the meltdown. Ben Bernanke, then a Fed governor, was an ardent advocate of this easy money policy, which as Fed Chairman he has continued as his solution to an economic crisis he helped create using the same measures.

Of course, according to Osama bin Laden, the primary reasons for the 9/11 attacks were U.S. occupation of Muslim lands and U.S. propping up of corrupt dictators there. And the invasion of Iraq was totally unnecessary because there was never any connection between al Qaeda or the 9/11 attacks and Saddam Hussein, and even if Saddam had had biological, chemical, or even nuclear weapons, the massive U.S. nuclear arsenal would have likely deterred him from using them on the United States.

So the causal arrow goes from these imperial behaviors—and blowback there from—to increases in the money supply to prevent related economic slowdown, which in turn caused even worse eventual financial and economic calamities. These may be indirect effects of empire, but they cannot be ignored. Get rid of the overseas empire because we can no longer afford it, especially when it is partly responsible for the economic distress that is making us poorer.

New from Ivan Eland! THE EMPIRE HAS NO CLOTHES: U.S. Foreign Policy Exposed (Updated Edition) Most Americans don’t think of their government as an empire, but in fact the United States has been steadily expanding its control of overseas territories since the turn of the twentieth century. In The Empire Has No Clothes, Ivan Eland, a leading expert on U.S. defense policy and national security, examines American military interventions around the world from the Spanish-American War to the invasion and occupation of Iraq. Learn More »»

Why and How to Lift the U.S. Embargo on Cuba 
May 7, 2009
William Ratliff

We Don't Need Marx to Face This Global Economic Crisis 
May 7, 2009
Art Carden
ForeignPolicy.com

During this time of global economic crisis, the venerable Karl Marx is enjoying newfound popularity. He is undoubtedly the most influential social thinker of the last three hundred years if not the last thousand, but while his influence permeates the Great Conversation, his system has been crushed under the weight of contradictory theory and evidence. In light of global economic conditions, should we come to praise Marx, or to bury him? He is an important figure in the history of ideas, but we won’t gain much insight into current economic conditions by reading Marx.

It is important not to mistake Marx’s significance in the history of ideas for the veracity of Marx’s economics. Paul Samuelson described Marx-the-economist as “a minor post-Ricardian,” and the current global economy does nothing to suggest that we should revise Samuelson’s assessment. Marx’s theoretical system was destroyed by nineteenth century marginalism (as discovered and explained by noted economists William Stanley Jevons, Carl Menger, and Leon Walras), and the broader Marxian system has been thoroughly demolished in detailed critiques by the likes of Eugen von Bohm-Bawerk, Joseph Schumpeter, Ludwig von Mises, and Thomas Sowell.

Even when setting his critics aside, history gives us plenty of reason to doubt Marx. He predicted growing misery for the working class and the creation of a large and growing reserve army of unemployed. Neither predication came to pass; indeed, precisely the opposite happened. Industrialization did not result in the increasing misery of the poor. Industrialization poured out blessings on unskilled laborers in the form of higher wages. Indeed, as Gregory Clark shows in A Farewell to Alms, real wages increased, interest rates stayed nearly constant, and rents on land also stayed almost unchanged. Contra Marx, the poor got richer in countries that adopted capitalist institutions.

Marx also claimed that capitalism alienates us from our essential nature and saps us of our creative juices. Deirdre McCloskey notes in The Bourgeois Virtues: Ethics for an Age of Commerce that the alleged social ills wrought by advancing capitalism were in fact mitigated rather than exacerbated by the spread of bourgeois society and bourgeois values. And, ironically, the intellectual and cultural freedom that Marx foresaw in his socialist paradise has flourished under capitalism. Commerce and culture are not substitutes. Commercial success is an input into flourishing culture.

In his monumental History of Economic Analysis, Joseph Schumpeter argues that one cannot fully understand and comprehend Marx if one has not read all three volumes of Capital and all of his Theories of Surplus Value. Further, he argues that one cannot have a full appreciation of Marx without an intimate familiarity with the continental intellectual tradition in which he wrote. Given the ways in which his qualifications trump mine, I defer to Schumpeter for an assessment. While acknowledging the importance and originality of some of Marx’s analytical contributions, Schumpeter offers a threefold criticism of the Marxian system. Schumpeter points to Marx’s important contribution about the relationship between ideology and ideas, but he points out that while Marx was keen to highlight the ideological underpinnings of capitalism he did not notice or discuss the ideological underpinnings of his own system. Second, writes Schumpeter, Marx “reduces [ideological systems of thought] to emulsions of class interests which are defined in exclusively economic terms.” Finally, to borrow from Ludwig von Mises, Marx and his followers felt that identifying the interests behind an ideology was enough to dismiss it.

Marx’s system is undermined by the bankruptcy of his theories of value and exploitation. Where classical and neoclassical economic analysis sees profit as an indispensable element of the market economy and as a return to capitalists and entrepreneurs for risk-taking, Marxian economics sees this line of thinking as mere apologetics for capitalist interests. According to Marx, any product of labor above and beyond what is needed to call labor into production that does not go into the pockets of the laborers is extracted and appropriated surplus value. In classical and neoclassical economics, this “exploiter” plays a crucial role by identifying prospective opportunities for moving factors of production from lower-yield to higher-yield employment. In his thorough critique and refutation of the Marxian system, Thomas Sowell (himself a former Marxist) points out that the entire Marxian system collapses on itself when one admits that factors other than labor have value.

The current crisis is not a crisis of capitalism. It is a crisis of interventionism spawned by the hubris of political leaders who, to borrow from F.A. Hayek, were arrogant enough to think that they could design what they could not possibly understand. Governments regulate, which means two things. First, the regulators are insulated from competition. Removing the determination of standards from the cash nexus of the market process means that they are circumventing the information-generating process that would tell providers of rules and regulations whether they are choosing wisely or choosing poorly. Second, turning market decisions into political decisions means creating political incentives. We should not be surprised that financial market regulations are being bent to the benefit of those who are in the best position to influence policy and to the detriment of everyone else.

Marx’s status as an important figure in the history of ideas is unassailable, but the decisive and multi-faceted refutations of his system suggests that we won’t learn much by perusing his work for insight into the roots of the global economic crisis. For real insight we have to look elsewhere. I’m starting with Ludwig von Mises and Friedrich Hayek. Like Marx, both offered complete social systems, internally consistent monetary theories, and explanations of economic crises. The difference is that Mises and Hayek got the economics right.

Bleak Future for Chrysler and GM 
May 6, 2009
William F. Shughart II

Early on in the New Deal, President Franklin Roosevelt repudiated private contract clauses that required payments to be made in gold. Abruptly, debtors were permitted to settle up with newfangled “Federal Reserve Notes” secured only by commercial paper and other assets on the Fed’s balance sheet. Furthering parallels with FDR, President Barack Obama recently wrapped up his first 100 days in office by abrogating the contracts between Chrysler and its bondholders. In doing so, he confiscated their senior claims to the company’s remaining market value in favor of a new troika of owners: the United Autoworkers’ healthcare trust, the Italian car maker Fiat, and the U.S. and Canadian governments, all sweetened by a new $6 billion federal loan.

The administration’s plan for restructuring General Motors, whose bankruptcy looms on the horizon, currently calls for the federal government to take a much larger stake, perhaps more than half of its equity, than the 8 percent of Chrysler America’s taxpayers now own. Forcing Chrysler’s lenders to cede the priority for compensation over shareholders they thought they had—and would have had in an ordinary bankruptcy proceeding—is a dreadful enough policy. If and when it emerges from Chapter 11, the company will be at a serious disadvantage in the credit market. Lenders, having just seen their contractual rights evaporate, will be unwilling to advance money to Chrysler except at a substantial premium.

But there is an even more fundamental reason for expecting Chrysler’s emergence from financial insolvency to take much longer than the two months the Obama administration has forecast. After all, the ownership structure of a business enterprise determines its performance.

Three broad categories of ownership arrangements can be found around the globe. Private companies, which are owned wholly by their shareholders, are the most familiar to Americans. At the opposite end of the spectrum are state-owned enterprises (SOEs) that operate fully under the control of the public sector. Venezuela’s oil and banking industries, national commercial airlines, the Tennessee Valley Authority, the local public school system, and the office where you register your car or renew your driver’s license are a few examples.

The third type of organization comprises so-called mixed enterprises, which are owned partly by private stockholders and partly by the public sector or other “stakeholders,” such as customers or employees.

Economists have studied the performances of these three types of enterprises extensively, evaluating them on a variety of outcomes, including profitability and cost-efficiency. The results of those studies consistently show that privately owned companies rank first, SOEs in second place, and “mixed” enterprises dead last.

A logical explanation for that ranking is not hard to come by. Owners have objectives. Stockholders want the private firm in which they have invested to maximize its profits, for that maximizes their wealth. The “owners” of an SOE rarely have the same aim in mind, but they want to advance some public purpose, such as ensuring that everyone has equal access to the enterprise’s goods or services. As long as there is only one set of owners, those distinct goals can be pursed single-mindedly.

But the objectives of the owners of mixed enterprises are incompatible. Profit-maximization is inconsistent with universal access or other public purposes, which predictably are subject to political pressure; the organization’s performance predictably suffers, causing it to be inferior to that of one that is wholly either privately owned or publicly owned.

The reconfigured Chrysler stands to have three sets of owners: Fiat (35 percent), UAW retirees (55 percent), and the U.S and Canadian governments (10 percent collectively). Reconciling their separate and divergent objectives may well be impossible. Fiat will want profitability, the union will want to protect pensions and healthcare benefits, and governments will want to protect jobs and pursue who knows what other political ends—tellingly, the administration’s first priority is to preserve UAW jobs.