Guilty as Charged
by George A. Selgin
David Henderson and Jeff Hummel have managed to ruffle quite a few Austrian feathers with their recent Cato briefing paper, and no wonder: that paper claims not only that Alan Greenspan's Fed was innocent of any role in encouraging the housing boom but that Greenspan had actually managed to do something Austrian monetary economists have long claimed to be impossible, namely, solve the monetary-central-planning problem. Greenspan, by their assessment, managed to mimic the kind of money-demand accommodating money supply growth that would occur under free banking, thereby achieving (according to their paper's executive summary) "a striking dampening of the business cycle."
To be sure, Henderson and Hummel do not see Greenspan's supposed achievement as justifying central banking. On the contrary, they make clear their "preference" (the word, again, comes from the executive summary) for free banking. Nevertheless, their argument supplies ammunition to apologists for central banking. After all, if the choice between free banking and central banking is merely a matter of "preference," rather than a choice between arrangements with inherently distinct capacities for either limiting or exacerbating business cycles, then there are strong prima facie grounds for dismissing radical and (recently) unproven alternatives in favor of the status quo.
But are Henderson and Hummel's claims valid? Contributors to the Mises blog, including Robert Murphy ("Greenspan not to blame?"), have attempted to counter Henderson and Hummel's arguments largely by pointing to various alternative measures of money that appear to suggest faster money growth earlier this decade than the measures Henderson and Hummel themselves emphasize. In my opinion, such efforts miss the real problem with Henderson and Hummel's analysis, which is precisely that one cannot accurately gauge the easiness of monetary policy by looking at money-stock measures alone. Instead, one must look at measures that indicate the relationship between the stock of money on one hand and the real demand for it or, if one prefers, its velocity. What matters isn't how rapidly the money stock grows, regardless of how one chooses to measure it, but whether its grows faster than the public's demand for real (that is, price-level-adjusted) money holdings. Even a low, a zero, or a negative absolute growth rate for some money-stock measure can prove excessive if demand for the monetary assets in question is declining. Regarded in light of this consideration, Greenspan's monetary policy was in fact "easy," as I will endeavor to show.
The Housing Boom and Fed Policy
Those who hold the Greenspan Fed partly to blame for the housing bubble typically offer as evidence its having held the federal funds rate at the extremely low level of 1% for an extensive period of time after having reduced it to that level in stages following the collapse of the dot-com bubble. As I put it in an August 31, 2007 article in the Christian Science Monitor,
Why did mortgage lenders earlier this decade start showering credit as if it were spewing from a public fountain? The answer is that credit was spewing from a public fountain—and that fountain was the Fed. In December 2000, the Fed began an unprecedented year-long series of rate cuts, reducing the federal funds rate from over 6 percent to just 1-3/4 percent—a level last seen in the 1950s. By mid-2003, two further cuts had reduced the rate to just 1 percent.
The correlation between the Fed's moves and the volume of subprime lending is in fact striking, as can be seen by comparing relevant charts, from the St. Louis Fed's FRED database and Inside Mortgage Finance, respectively:
Although it's true that subprime lending peaks in 2005–6, or some two years after the federal funds rate target reached its trough, this fact is perfectly consistent with the well-known tendency of monetary policy changes to influence other aspects of economic activity only following "long and variable lags." In this particular case, the Fed's low-target-rate policy had its more immediate effect on general real-estate lending. The share of subprime loans exploded only after 2003, thanks in part to regulatory causes independent of Fed policy, such as have been very well described by Stan Liebowitz.
Monetarism Misunderstood
Although evidence such as that reviewed above has been taken by many, including no less a monetarist than the great Anna Schwartz, as compelling grounds for holding Greenspan at least partly to blame for the housing bubble, Henderson and Hummel dismiss it on the supposedly monetarist grounds that what really matters is the behavior of various money-stock measures, including the monetary base. According to them, all such measures suggest "that monetary policy was not all that expansionary during 2002 and 2003 under Greenspan, despite the low interest rates."
It's true that, once upon a time, Milton Friedman argued that sound monetary policy was just a matter of having M2, or some such money measure, grow at a modest and constant rate approximating the anticipated long-run growth rate of real output. It's also true that Friedman later argued for a more extreme money-growth rule, consisting of a rule to freeze the monetary base. But Friedman abandoned his original growth-rate rule in response to the evident passing, following the inflation of the 1970s and consequent financial innovations, of the stability of velocity upon which its success was predicated. As for the frozen-base proposal, Friedman was careful to accompany it, as free bankers (myself included) have accompanied their similar proposals, with a call for more complete financial deregulation: Friedman never suggested that a frozen or relatively constant monetary base, however measured, could be taken as evidence of the sound conduct of monetary policy in a heavily regulated monetary system such as prevails today, where banks cannot issue currency and are subject to legal reserve requirements. These and other legal restrictions on commercial banks tend to undermine their capacity to automatically accommodate changes in the demand for money with appropriate changes in the supply of (private) money. Consequently, the prevailing regime is one in which the avoidance of monetary excess or shortages calls for frequent changes to the monetary base, that is, for adherence to some more elaborate monetary rule, if not for monetary discretion.
Yet Henderson and Hummel believe just the opposite. According to them, Greenspan, by championing reforms that supposedly served to "deregulate the broader monetary aggregates" during the 1980s and early 1990s, succeeded in establishing a system in which changes in money's velocity were automatically offset by changes in its amount—just as Larry White and I (and, at least implicitly, Milton Friedman) predict would happen under free banking. But which of these reforms abolished reserve requirements, or allowed banks to issue their own paper currency? Putting that question aside for the sake of argument, it remains an easy matter to test Henderson and Hummel's claim. As the equation of exchange, MV=Py, informs us, if changes in V tend to be offset by changes in M, that fact should translate into a relatively stable value of corresponding measures of nominal spending, Py.
So how did Py actually behave during the period in question? Here is a plot for one popular measure, final sales of domestic goods (other measures show very similar patterns):
Evidently, whatever M was up to during the housing boom, it was not simply adjusting so as to offset opposite changes in V. If it had been, final sales and other similar measures would have been constant. In fact, final sales, which had been growing at modest annual rates between 2.5 and 3.5 percent during the year or so following the end of the dot-com recession, accelerated rapidly thereafter. In 2004 the growth rate exceeded 6 percent, and by 2006 it was just shy of 7 percent. How fast is that? Well, a monetarist would have nominal spending grow no faster than the expected growth rate of real output, which, based in recent experience (for either final or gross domestic product) is between 2 and 3 percent, so as to keep the expected rate of inflation close to zero. By this reckoning, the annual rate of money growth during 2003–2006 was too rapid by a long chalk.
Indeed, it was too rapid even relative to a less strict goal of keeping the inflation rate at around 2 percent, such as has been popular among relatively responsible central bankers in recent years, including those who rely on the so-called Taylor rule for adjusting interest-rate targets in response to deviations of inflation and employment from their desired values. John Taylor himself has made this point, in a paper in which he argues that the Fed should have begun raising the federal funds target, not in mid 2004, but towards the end of 2001, when it was still well above 1 percent.[1] Doing so, Taylor claims, "would have avoided much of the housing boom"—about a third of it, to judge by Taylor's own simulations.
But that, in my opinion, is being far too charitable. As I've argued in my pamphlet Less Than Zero and (more briefly) elsewhere, and as many other economists have argued before me, even zero inflation is too much when an economy is experiencing overall improvements in productivity. Sound policy in that case calls for deflation at minus the rate of productivity growth. (The opposite is also true: if productivity declines, prices should be allowed to rise to reflect the new reality of increased unit production costs.) Taking such a "productivity-norm" ideal into account, and referring to total factor productivity growth as shown in Chart 5, one arrives at the conclusion that the Fed ought to have begun raising the federal-funds-target-rate somewhat earlier than Taylor suggests, and far more aggressively. It follows that, in light of a productivity-norm perspective on sound monetary policy, Greenspan's Fed may deserve, not only a large share of blame for the housing bubble but the lion's share.[2]
Conclusion
David Henderson and Jeff Hummel deserve to be congratulated for their eloquent defense of Alan Greenspan. It is, I think, as compelling a defense as could be raised on his behalf. Why two anti-central-bank libertarians would bother to undertake such a defense—and a pro bono defense at that—is an interesting question that several bloggers have raised. Personally I have no doubt that they have done it because they sincerely believe Greenspan to be innocent, and that claims to the contrary are based on bad monetary analysis.
But whatever their purpose they've performed a valuable service not just to Greenspan himself but to monetary economics, for in putting Greenspan's actions in the most favorable possible light, they have posed a challenge to those of us who insist that a persistently sound central-banking policy is not only unlikely but beyond the ken of mere mortals, and that even the best of possible central bankers must eventually steer the economy he is piloting into disaster. Whether that challenge has been met here is for others to decide.
Thursday, November 6, 2008
Swing Voters Don't Want Big Government
Survey results Barack Obama and the GOP would be wise to heed.
PAT TOOMEY
Barack Obama and congressional Democrats won big on Tuesday night, but they should not mistake their victory for a big-government mandate. The evidence tells a very different story.
A poll commissioned by the Club for Growth in 12 swing congressional districts over the past weekend shows that the voters who made the difference in this election still prefer less government -- lower taxes, less spending and less regulation -- to Sen. Obama's economic liberalism. Turns out, Americans didn't vote for Mr. Obama and Democratic congressional candidates because they support their redistributionist agenda, but because they are fed up with the Republican politicians in office. This was a classic "throw the bums out" election, rather than an embrace of the policy views of those who will replace them.
Although currently held by Republican congressmen, all but one of these 12 districts we surveyed flipped to Democratic control Tuesday night. Collectively, President Bush carried these districts in 2004 with 53%. They are nearly evenly split in party affiliation: 40% Democratic, 37% Republican and 19% Independent. The poll surveyed 800 voters with a margin of error of +/- 3.46 percentage points.
Nancy Pelosi's San Francisco district will always support universal health care, and Jeff Flake's Arizona district will always support less government. But the 12 districts we surveyed represent the political middle of the country, and in this cycle their partisan allegiances changed. The question is, have their opinions on the issues changed as well? The answer is emphatically no.
Consider the most salient aspects of Mr. Obama's economic agenda: the redistribution of wealth through higher taxes on America's top earners; the revival of the death tax; raising the tax on capital gains and dividend income; increased government spending; increased government involvement in the housing crisis; a restriction on offshore drilling and oil exploration in Alaska's Arctic National Wildlife Refuge (ANWR); and "card check" legislation stripping workers of their right to a secret ballot in union elections.
On each of these issues, swing voters stand starkly against Mr. Obama. According to the Club's poll, 73% of voters prefer the federal government to focus on "creating economic conditions that give all people opportunities to create wealth through their own efforts" over "spreading wealth from higher income people to middle and lower income people." Two-thirds of respondents prefer to see the permanent elimination of the death tax, and 65% prefer to keep capital gains and dividend tax rates at their current lows.
When it comes to government spending, voters in these swing districts are fed up with the explosion of government under Republicans, and are no more inclined to swallow further spending increases from the Democrats. Over half of respondents think more than a quarter of federal spending in Washington is "wasteful," and 66% prefer candidates "who want to reduce overall federal spending, even if that includes cutting some money that would come" to their own districts.
A large plurality of voters is dissatisfied with the government's bailout of the banking industry; even more are opposed to further action. Fifty-four percent think the "federal government is trying to do too many things that are better left to individuals, families and businesses," compared with 39% who think the government should do more.
Mr. Obama's opposition to domestic drilling is clearly out of step with mainstream America as well. Sixty-two percent of voters in swing districts would like to allow oil exploration in ANWR, and a dramatic 75% want to allow drilling for oil and natural gas off America's coastlines.
Of all Mr. Obama's plans, the most unpopular may be one of his first acts as president -- the signing of "card check" legislation. Perhaps he should know that a whopping 85% of voters in the districts that made him president oppose taking away the right of workers to have secret union ballots.
Despite the celebrating in Chicago's Grant Park Tuesday night, the Democrats' victory comes with a very large caveat. Any attempt to jam higher taxes and spending and increased regulation down the throats of American voters will be met with opposition -- not just from the right, but also from the center of the electorate.
Mr. Obama is not the only person who should take notice of this poll. These numbers carry a powerful message for Republicans too. In the coming days you will hear many a pundit read the conservative movement's obituary. But voters have not rejected conservative ideals; they are disgusted with Republican politicians who govern like liberals.
This is pretty clear when you look at the Club's poll. Voters blame the GOP over the Democrats for "taxpayer bailouts for big corporations" by a ratio of nearly 3 to 1. Forty-eight percent singled out the GOP as "the Party that gave us the Bridge to Nowhere," compared to 14% who blamed Democrats. More voters chose the Democratic Party as better for "promoting economic growth" than the GOP, and eight out of 10 voters agreed that "in recent years, too many Republicans in Washington have become just like the big spenders that they used to oppose."
Much like the years following the 1974 midterm elections, Republican leaders will be tasked with rebuilding the GOP from the ground up. As dire as the future looks, economic conservatives should keep one thing in mind. When it comes to ideas, the American people are still on their side.
Mr. Toomey is the president of the Club for Growth.
Obama's Triumph Is America's Too
Like the senator, we are stronger for our diversity.
ELIZABETH WURTZEL
I must admit, I cried. I'm not perfectly sure why, but of course I was overjoyed. It is still astonishing that a country with our history of slavery and racism could elect a biracial man who identifies as African-American. This is a proud moment for all of us. I even photographed my ballot in the voting booth, my fingers pushing the X into the Obama-Biden slot.
But then again, I also cried when Bill Clinton won in 1992. I wept because after 12 years of Reagan and Bush, we were free at last. It was as if air had been released into an oxygen-deprived room. To be young in a nation under Ronald Reagan was to hate life.
So I guess I take politics personally.
When the winner was declared last night, I was deeply moved by the images of the Luo tribesmen in Kogelo, Kenya, dancing in the streets because one of their descendants is to become leader of the Free World. It would have been similarly appropriate for the CNN cameras to show the thrilled faces at the offices of the Harvard Law Review or in the dormitory lounges at Columbia University, or to look into living rooms in Honolulu or dens in Wichita as folks watched their hometown boy head to triumph.
I am mystified by what happened instead. All the news networks showed scenes in the streets of Harlem and Compton, on the campus of Spelman College, and in the pews of Ebenezer Baptist Church -- all of which have nothing to do with Barack Obama. It seems that his win was mistaken for a black triumph, when actually it was a Democratic and human victory.
Of course, Mr. Obama's election to the highest office in the nation is a particular party for the African-American community -- only a moron would miss that point -- but why leave the rest of us out? Anyone still thinking straight after this heady occasion knows that Mr. Obama is to be our next president in spite of race, not because of it. The winner of this contest may finally be Martin Luther King Jr., whose dream is at last realized: We judged Mr. Obama not by the color of his skin, but by the content of his character. Why minimize the wonder of that by making this into a black thing?
Another point that's been continually overlooked is Mr. Obama's biracial identity. Insofar as ethnicity is part of his success, it's in that he is equally black and white -- in fact he was reared in a Caucasian family -- and as such he is an avatar of inclusion. He represents what is great about America not because we have finally elected a black man as president, but because we've recognized the greatness of our mixed-breed heritage.
Mr. Obama's appeal comes down to some form of hybrid vigor. Most of the multiracial people I know seem more beautiful and talented than those of us boring folks who are just one dull thing. America itself, which is a menagerie of mutts, has been a mightier nation for its diversity.
Mr. Obama has consistently separated himself from the ugliness of the past, and we love him for representing America's future, which is spectacularly multicultural. It's nothing new for white Americans to honor individual African-Americans to the point where they are our most awed icons. We have long adored Bill Cosby and Oprah Winfrey; we have of course admired Colin Powell and Condoleezza Rice. There is good reason to relish the symbolism of our first African-American president, and of a black family living in the White House -- wow! -- but this is about Barack Obama, the individual. Only he could have done this.
Miss Wurtzel, an attorney at Boies, Schiller & Flexner, is the author of "Prozac Nation" (Houghton Mifflin, 1994).
The Obama Realignment
This could be the start of a lasting Democratic majority like that created by FDR.
LANNY J. DAVIS
Tuesday's substantial victory by Barack Obama, together with Democratic gains in the Senate and House, appear to have accomplished a fundamental political realignment. The election is likely to create a new governing majority coalition that could dominate American politics for a generation or more.
![[Commentary]](http://s.wsj.net/public/resources/images/ED-AI502_davis_D_20081105165305.jpg)
Chad CroweBut this realignment is unlike any of the previous ones in our history.
The previous five presidential realigning elections -- 1800, 1828, 1860, 1932 and 1980 -- typically resulted in a fairly decisive shift in demography and/or ideology. In 1800, there was the "Jeffersonian Revolution," a swing towards states' rights and away from the more centralized government policies represented by Hamiltonian federalism. In 1828, the "Jacksonian Democracy" resulting from the presidency of Andrew Jackson ushered in a ruling coalition based largely in the Western, rural poor and urban working class -- replacing the Founding Fathers' generation of gentleman elites.
In 1860, the election of Abraham Lincoln on a platform opposed to the expansion of slavery led to the Civil War and decades of pro-business Republican Party power. In 1932, FDR's New Deal brought centralized liberal government in Washington for 20 years and majorities in the House for two generations. And then, in 1980, Ronald Reagan solidified the emerging conservative majority of Southern and Western fiscal conservatives by adding the fervent grass-roots of the religious right.
But the Obama landslide victory Tuesday cannot be accurately depicted as another cycle, this time right-to-left. The new majority coalition seen in his victory is far more complicated than that -- just as he is.
Mr. Obama won in traditionally conservative "red states" such as Virginia, Nevada, New Mexico, Colorado, Indiana and Florida (and possibly North Carolina and Missouri) not because of a clearly defined liberalism. Quite the contrary.
This is a man who defended the right to gun ownership under the Second Amendment; who arguably ran to the right of McCain on broader-based tax cuts for the middle class; who defied his left-purist base by supporting (with more controls) the president's terrorist surveillance program; who talked of pay-as-you-go fiscal policies aimed at restoring balanced budgets; who insisted to black audiences that black men take more responsibility for their families; and who talked boldly of aggressive military action in Pakistan to take out al Qaeda and bin Laden.
One of Mr. Obama's early speeches, the "Call to Renewal" in June 2006, was about the need for Democrats to speak openly about their own faith and to speak to people of faith. This speech moved my oldest son, Seth, to decide to support Mr. Obama for president well before he decided to run.
How do you ideologically pigeonhole this Obama ideological mix? You don't, at least not easily.
One apt characterization, in the absence of anything better for now, is the Obama New Majority Center. Whatever its name, it has the potential to become a genuinely new governing coalition.
In fact, President-elect Obama presents an ideological mix of social liberalism, fiscal conservatism and cultural moderation that attracted a 20-point margin Tuesday among self-described "moderates" -- including crucial crossover moderate Republicans from suburban and exurban areas previously considered safely part of the Republican/Reagan conservative base -- as well as a majority of self-described independent voters.
The early seeds of this majority realignment were apparent during the two terms of Bill Clinton. He proved that a Southern moderate with progressive Democratic values and positions on social issues could win (albeit with less than a majority popular vote) by standing up to his liberal base on the three critical issues of balanced budgets/fiscal responsibility, welfare reform and free trade.
Beyond defining a new ideological center resembling Mr. Clinton's, Mr. Obama has also successfully created a New Politics that seeks to rise above the partisan "gotcha" game that has stained our political culture over the last 20 years or so, for which both parties are responsible.
He appears to mean what he says and he says what he means: It is time to take a "time out" from the hyperpartisanship of the last generation, and to begin a new experiment in bipartisan government, getting government back into the solutions business. His is a fact-driven approach to politics that isolates the strident, purist voices of the left and right who demonize those they differ with rather than disagree and debate them.
For these reasons, it would be a mistake to assume that the Obama landslide victory and the appearance of this new majority coalition in Tuesday's election results was a fluke -- a result of a "perfect storm" of the Iraq war, the economic crisis, and George Bush's unpopularity that made John McCain's task of winning in 2008 almost impossible.
Rather, years from now we will probably look back at Nov. 4, 2008, the way we look back at the five previous realigning elections. Something fundamental has changed. In this case, not only has a unique majority coalition of liberals, conservatives, moderates and independents come to power, but a unique style of governance as well, as exemplified by Barack Obama's speech Tuesday night.
If the future President Obama makes progress on solving the huge economic and social problems facing this country, and on securing the country from future terrorist attacks, he may well be viewed as the Democrat who created a long-term new political majority not seen since FDR.
Mr. Davis, an attorney and former special counsel to President Bill Clinton from 1996-1998, is the author of "Scandal: How 'Gotcha' Politics Is Destroying America"Hope To Change
Governing: Barack Obama's victory Tuesday came on a broad platform of hope. While that stands in stark contrast to the far-left agenda his party promoted, the real hope is that Obama the president may be different.
Obama's graceful victory speech thanking supporters and promising to listen to opponents could do much to make governing smoother and his presidency a success.
"As Lincoln said to a nation far more divided than ours, 'We are not enemies, but friends . . . though passion may have strained, it must not break our bonds of affection.' And to those Americans whose support I have yet to earn — I may not have won your vote, but I hear your voices, I need your help, and I will be your president too," he told the nation Tuesday.
It's a good start. But amid language of hope and change, it all will come down to whether Obama wants to impose a radical vision to change society, or instead be a good president in tune with the desires of the essentially centrist public, which would bring hope.
He presents a mixed bag of signals, but there are encouraging signs of a move toward the latter.
For one, Obama reads history and used the tax-cutting language of Ronald Reagan to sell his economic plan, perhaps the strongest reason he was elected. It signals a recognition of the reality of what the public will buy into, and may account for voters' belief that Obama is the better man to fix the economy.
His plan is to raise taxes on the rich, of course, but since tax hikes cause problems in a recession, it was sold as a tax cut, which leaves the door open to modifying the plan into a better deal when reality hits. Moderate economic advisers such as Larry Summers and Robert Rubin give more reason to think this could happen.
Second, he did come around on energy development, saying that if he could not support drilling for its own sake, he could support it as part of an energy deal in Congress. That signals a certain realism about the urgency to develop energy from domestic sources, even if the centerpiece of his campaign is a $150 billion alternative and green energy program. The cash on that may be wasted, but the drilling, disguised as a political chit, has real potential to forge energy independence.
Third, for all of Obama's naive ideas on foreign affairs, it's an advantage that he commands so much respect abroad, from Europe to Latin America to Asia. It translates into a capacity to enhance U.S. influence and could keep gamy players such as Iran and Russia from openly crossing him. It's notable that Obama's wave of international popularity has started to bring detested dictators, including Fidel Castro and Hugo Chavez, out to flatter him to increase their own prestige. The servile show gives Obama leverage that will affect their behavior.
Obama's position changes tend to occur after he is subject to criticism, signaling that not only does he mean it when he says he will listen, but that Republicans should remain a principled opposition. Obama modifies extreme positions to more palatable and realistic ones, inevitably improving them by moving toward the center.
Obama flip-flopped on his statement that he would destroy the North American Free Trade Agreement, modifying his stance in response to GOP critics. He also flopped on the success of the Iraq surge, not exactly admitting he'd been wrong, but acknowledging the strategy's success. That again signals common sense over prevailing leftist lines, and that willingness to listen could also open the door to more moderate positions on the United Nations, judicial appointments and defense.
The broad pattern Obama shows is one of positions that start out hard, then moderate. If he governs that way, he not only will bring tolerable change, but reason for hope.
While the Democrats and Barack Obama have won the presidential election and come close to a filibuster-proof majority in the Senate, they will be handicapped by the financial condition of the nation they will inherit. Think of a trustee or conservator of a bankrupt company. Obama will find his options substantially constrained by reality, if not by the partisan animosity of the Republicans.
Those who fear a radical Obama miss the point of the lack of maneuverability of the next president of the United States. Behind the mortgage crisis looms the credit card crisis and the student loan crisis and the car loan crisis. Sweating the credit out of the system will take two years of zero growth or contraction. We won't have a Great Depression because the government will irrigate our economy with money. But we will have stagnation, followed by inflation.
Obama, as the next president, will take office with unlimited political power but with highly circumscribed practical power. He will be able to pass whatever legislation he wants in Congress, but won't be able to indulge his ideology. He will be faced with constraints at every turn.
The irony will be bitter for the Democrats. Finally able to rise above the political limitations they have faced, they will now encounter limits having nothing to do with politics, but having to do with the fundamental problems of the economy they will inherit.
The role of the Republican Party is to rebuild in the shadow of the frustrations of the Obama presidency. Just as MoveOn.org built a massive grass-roots base that yesterday impelled the Democrats to victory, so the Republicans must go down to their grass-roots, get in touch with their base and rebuild an opportunity to win national elections. Government has been bad for the party. It has sapped the party's soul and eroded its purity. But opposition, especially as a socialist like Obama wrestles with the practical problems of capitalism, will be a heady experience for the Republicans. The conservative movement can be reborn in opposition in a way they never could have been as the governing party.
For political historians, it is worth noting that Obama has not scored the knockout that many predicted. He will win by a few points in the popular vote, but not by the double digits so confidently predicted in the media polls. The fact is that most of the undecided voters went to the Republicans.
In the face of a mandate limited by reality and undermined by his inability to sweep the nation as had been predicted, Obama faces a difficult situation as he becomes president. As the economy falls apart around him, he will find himself unable to raise taxes as he wants and will find that his plans for government takeover are stymied as well. He will profit from a political reality that will accommodate his agenda but an economic reality that frustrates it.
A very tough future awaits President Barack Obama.
Congratulations must go to the MPC
By Martin Wolf
Sometimes boldness is caution. The Bank of England’s monetary policy committee has, in extreme circumstances, adopted the “risk management” approach followed by Alan Greenspan and Ben Bernanke at the Federal Reserve. It was right to do so.
In my column of last Friday (“What the British authorities should try now”) I recommended a cut of two full percentage points. The MPC has not gone quite that far. But it is to be congratulated for coming as far as it has, with its one and a half percentage point cut bringing rates down to 3 per cent, their lowest since 1955.
In making this decision, the MPC recognises that an already disturbing economic story changed dramatically for the worse with the financial shocks of September and October. As the MPC stated on Thursday: “Since mid-September, the global banking system has experienced its most serious disruption for almost a century.”
Meanwhile, it added: “In the UK, output fell sharply in the third quarter. Business surveys and reports by the Bank’s regional agents point to continued severe contraction in the near term. Consumer spending has faltered in the face of a squeeze on household budgets and tighter credit. Residential investment has fallen sharply and the prospects for business investment have weakened. Economic conditions have also deteriorated in the UK’s main export markets.”
Thus the risk has shifted from inflation to deflation. While a short period of falling prices would be no disaster, entrenched expectations of deflation would be, particularly for a country as over-indebted as the UK. Debt-deflation is a plague to be avoided at all costs. This is why the inflation target is symmetrical.
‘In present circumstances, the risks of doing too little are far greater than those of doing too much’
Yet will this cut work? The answer is that it is unlikely, on its own, to lead to a sudden resurgence in lending. But, in conjunction with the other measures taken – recapitalisation, guarantees on new lending and liquidity provision – it should help the slow healing of the banking system.
Part of that healing consists of rising margins on lending, partly because profitability must be restored and partly because spreads were far too low prior to this crisis. Banks will not cut lending rates by the same amount and should not do so. But lending rates should now fall and the availability of credit start to improve.
Is the cut too risky? The answer is that in present circumstances, the risks of doing too little are far greater than those of doing too much. Nonetheless, risks do exist. In particular, sterling may come under severe pressure. If so, inflation might turn out to be much more persistent than now seems likely.
Yet, on balance, it was right to ignore this danger. It is even possible that the combination of strong policy action with the hope of a smaller recession than otherwise will strengthen confidence in the UK economy and in its management. If so, sterling may even strengthen.
It remains vital, however, for the long-term credibility of the policy regime to be sustained. This must be seen as a move against the risk of deflation, not as a step towards inflation. With the Bank willing to take such powerful moves, the case against large discretionary fiscal stimulus also becomes weaker.
Finally, will this cut be enough? This is almost certainly not the end of the cuts. Some downturn was necessary and inevitable at the end of such a vast credit boom. But a huge recession must be avoided. So I would guess that further cuts will come. Even the UK might end up testing the zero bound on interest rates. Let us hope not. For, if so, economic conditions would be dire indeed.
Barriers Broken?
by Llewellyn H. Rockwell, Jr.Among those who are bemoaning the election results, one must ask supporters of liberty: given the choices, what would have been a good outcome? We've lived through eight years of what might possibly be the worst executive-driven meltdown of human liberty outside civil or world war in American history, and this is true regarding domestic policy and foreign policy.
A McCain victory would have been perceived at home and abroad as a ratification of the past eight years, and it is hard to imagine a worse course of events than that. The Obama victory symbolizes a well-deserved repudiation of this ghastly experience.
Of course, the Obama victory elicits its own spin, which is also highly dangerous. The main message concerns race. All the headlines blared that a racial barrier had been broken. The subtext here is impossible to miss: heretofore America has been a hopelessly racist country that put up barriers to the advance of people of color.
But why should politics be the standard for what constitutes a barrier or a barrier broken? The ability of individuals in a group to navigate the murky and treacherous waters of electoral politics has no necessary connection to the status of the group as a whole.
A much better indicator concerning the status of any group – racial, religious, sexual, or otherwise – is commerce, which is the real engine that makes society work. And here we see that there are no such barriers in existence. We need only look at the status of black-owned businesses to see that there are more than one million in the United States, generating revenue of some $89 billion per year, which is more than the GDP of 140 countries around the world, and growing (according to most recent data) at a faster pace than all businesses.
Tragically, Obama does not seem to see that expanding this trend is a pathway forward. For him, the answer is the failed politics of redistribution, a pathway that can only exacerbate racial tension. Far from being a healing force in American life, his success at taking from one group to give to another will only increase conflict.
Conflict is the critical word here, for the conflict view of society is what is really behind the hysterical claims that Obama's real contribution is to have broken through barriers. To understand this view, we must examine the implicit social philosophy held by those who write the headlines and put the political spin on all important events.
Lacking any kind of serious training in economics or liberal political philosophy, these people assume a soft-Marxist approach to social observation, believing that all important steps forward grow out of great clashes between intrinsically antagonistic groups.
Step back in history and try to understand how the Marxists came to understand the Industrial Revolution and all subsequent steps forward in economic development. There were ever more people benefiting from economic exchange and investment, and the standards of living of the working class were rising year after year, while the population was living longer and better. But the Marxists refused to see this or understand its meaning. All they could see came from their fixed frame of mind that posited a conflict between capital and labor. All the gains of one came at the expense of the other. If there were rich capitalists living luxuriously it could only be due to their having robbed surplus value from labor. The only way forward was to turn the tables: to expropriate the expropriators.
Now, this old-fashioned mindset is not much on display today, but other versions of the conflict view of society are all around us. There is the view that the relationship between men and women is inherently antagonistic, and the only way to overturn this and push history forward is to unseat the economically dominant group and exalt via state intervention the economically weaker group. (In case you are wondering which is which, the convention asserts that women are the exploited group.)
So it is with religion. The conflict view asserts that only one strain of doctrine can assume the commanding heights, and so all the progress of groups lower on the faith chain depends on unseating others from power. Secular groups can hold this view, believing that religion must be vanquished from the earth, and so too with religious groups that believe secularism must be destroyed.
You can go through the list here: age, ability, education level, class, region – really there is an infinite number of directions you can take this conflict view of society. One of them is race, and this one has been around a very long time and has its roots in America in genuine exploitation as represented by actual physical slavery. And yet under the conflict view, a form of slavery persists in all relations between black and white. They see only exploitation and antagonism while ignoring all contrary evidence. The path to advancement for blacks, in this view, comes only through taking power and wealth from whites, and the surest way to do that is to empower the state.
These are the underlying assumptions behind much of the media celebration of the Obama victory. It stems from the belief that the "tables must turn" – the strong must be made weak and the weak made strong – in order for history to move forward on its path toward some imagined social ideal. Again, evidence of progress that conflicts with this agenda is routinely ignored, which is why you don't often hear about peaceful, productive, commercial associations among blacks and whites at all levels of society.
This is why we hear about "breaking barriers" rather than encouraging opportunity, about policies rather than freedom, about power rather than entrepreneurship. For the media writing about all this, it is the only intellectual model they have in mind. The conflict view of society was taught to them in college and is reinforced daily in the press. Also, unless you have some clear filter in mind, it seems like the conflict view is supported by plenty of evidence, given that the rise of the state has actually generated social antagonism where none should exist.
The workplace is a good example. The legal minefield that has replaced free contract has increased tension. So too with a discriminatory welfare state. It creates the impression that some people are looting others and benefiting from it.
What is the alternative to the conflict view? It is the old liberal view of how the social order works. There is a harmony of interests in society in which people cooperate and exchange without the aid of an outside, all-controlling, leviathan state. Society contains within itself the capacity for self-management. Another way to put this view is that the free society works. Sadly, this view is not held by either the right or the left in our political culture.
To the extent that there is truth in the conflict view of society, it concerns the real issue: that the state always and everywhere exists in an antagonistic relationship to the rest of society. For this reason, the true liberal could find himself loathing the Obama administration as much as he did the Bush administration. As I've said many times, the real problem is not the person; it is the institution.
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