Bears Shouldn't Do Math
Alan ReynoldsPrice-to-earnings ratios don't always tell the whole story.
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A May 11 Wall Street Journal headline claims, "By Most Measures, Stocks No Longer Look Cheap." In this article, Tim Lauricella alludes to three measures of valuation: a trailing ratio of S&P 500 stock prices to operating earnings over the past 12 months; a forward ratio of stock prices relative to estimated earnings over the next 12 months; and a nostalgic ratio of stock prices to a 10-year history of inflation-adjusted earnings. The latter is thought to be "the most widely followed of these barometers ... created by Yale Professor Robert Shiller."
The trouble is that such valuation measures were also cited in a March 9 Wall Street Journal front page feature--"Dow 5,000? There's a Case for It" by Annelena Lobb. "Looking solely at valuations," she wrote, "the S&P at 500 isn't necessarily a wild stretch."
Relying on Professor Shiller's valuations, Barrons' March 7 cover story claimed, "the Dow could fall a further 25%, to 5,000, and the S&P could drop to about 500." In a March 12 commentary on Forbes.com, Nouriel Roubini used forward P/E ratios to predict that "even in the best scenario" the S&P was unlikely to exceed 500-600 this year. The following Sunday, TheNew York Times posted Shiller's chart emphasizing that the ratio of stock prices to earnings "hasn't fallen as far as the market bottoms of 1932 and 1982."
By March 23, after the DOW had risen 14% from the bottom, Mark Gongloff's "Ahead of the Tape" column in The Wall Street Journal suggested "such rallies are fairly typical of the worst markets." He compared it to other "dead cat bounces" between 1929-32. Relying on Shiller's figures, Gongloff said "the S&P is priced about 13 times earnings. ... But that ratio has fallen below 10 in the grimmest bear markets. ... A 30% plunge in the S&P to 530 would take its P/E ratio to 10 in a hurry."
All of these gloomy projections of falling stock prices have been based on falling valuations, not falling earnings. We're told the ratio of stock prices to earnings could supposedly fall below 10 simply because that happened before, in years like 1982.
But stock valuations are not just a matter of opinion, gyrating unpredictably between waves of optimism and pessimism. On the contrary, the graph shows that P/E ratios mainly depend on interest rates. It makes that point by simply turning the P/E ratio upside down, resulting in an earnings-price ratio or "earnings yield."
The previously mentioned New York Times graph highlighted the fact that the P/E ratio briefly fell to seven in early 1982, which is equivalent to an E/P ratio of 14.3 (one divided by seven). My graph, however, reveals that such a low multiple (high E/P ratio) made sense in January 1982 only because the yield on 10-year Treasuries was 14.6%.
This graph bases the earnings-price ratios on trailing earnings over the past four quarters rather than relying on analysts' estimates of the future or on Shiller's decade of ancient history. I used annual figures from the Economic Report of the President for 1980-88 because quarterly data from the Standard and Poor's Web site don't go back that far. After 1988, bond yields in the graph are for the last month of each quarter because that captures changing rates better than a three-month average.
Since 1960, the yield on 10-year Treasury bonds averaged 6.68%, while the earnings yield averaged 6.43. The earnings yield on stocks rarely deviates much from the coupon on bonds partly because stocks and bonds compete with each other, and because stock prices gauge the discounted present value of expected earnings. Expectations of future earnings differ from recent reported earnings, of course, yet nonetheless involve estimating changes from that starting point.
Note that the E/P ratio was lower than bond yields toward the end of the recessions of 1991, 2001 and 2008. That is because trailing earnings are an increasingly bad indicator of future earnings as recessions near an end. Year-to-year comparisons of earnings become easy to beat during the early stages of recovery.
The relatively low E/P ratio in 1999, despite a rising bond yield, does suggest some unduly euphoric momentum, though scarcely a "bubble." Conversely, the E/P ratio was higher than the bond yield in 2005-2006, suggesting prescient pessimism about future earnings but also accurate optimism about rising bond prices (falling yields).
It is not hard to envision future earnings disappointments as a result of higher tax rates on companies or shareholders, health care price controls or cap and trade schemes. But these are threats to earnings, not to multiples. They are to some extent reflected in the weakness in stock prices ever since the election.
Any big drop in P/E multiplies, by contrast, requires a big increase in bond yields. It is certainly possible to envision massive federal borrowing and aggressive Fed easing culminating in a sizable increase in long-term interest rates. Yet such a future of "reflation" and "crowding out" presupposes faster growth of overall demand, gross domestic final sales. In that case, earnings would be rising so the net effect on stock prices might well be positive. Bearish economists, by contrast, typically assume depressed demand and deflation--forecasts impossible to reconcile with the double-digit interest rates required to push the E/P ratio to 10 or more.
I first met Bob Shiller in the early 1980s, when I invited him to speak at Lew Lehrman's Institute in Manhattan. He thought stocks were grossly overpriced then too. Indeed, Shiller always seems to see the current P/E ratio as too high relative to some historical average. But the stock multiple is not a mean-reverting series. On the contrary, the height of today's P/E ratio relative to the past tells us nothing except that (1) interest rates are far below average and (2) future earnings are very likely to rise from today's depressed base.
Unless those who have spent the past two months predicting P/E ratios of 8-10 are also predicting a tripling of long-term rates, their forecasts of stock prices are inconsistent and unworthy of the slightest attention.
Alan Reynolds is a senior fellow with the Cato Institute and the author of Income and Wealth.
The GOP has plenty of room for honest debate
Arlen Specter's defection to the Democratic Party provoked a firestorm of debate about the future of the Republican Party and its ability to become a majority party once again in America. Many on the left have framed this question as a choice between purity and popularity. This is a false dichotomy designed to be a lose-lose proposition for the GOP. The better questions are: What guiding principles define the modern Republican Party? Where should the party be flexible and where must it be resolute?
Since the "tent" seems to be the preferred metaphor for addressing this issue, I will use it to make my case.
I see the tent's poles as the many ideas that animate the Republican Party. We can and should have a vibrant, ongoing debate about how many poles the tent should have and where they should be positioned.
Surely one of the poles supporting the Republican tent is a strong national defense. But whether and when to go to war, where to station troops overseas, and how much to spend and on what kinds of weapons are all subjects on which good Republicans can disagree.
Respect for the values that Western civilization has developed over many generations is another important pole. I believe that one aspect of this idea is to defend and protect innocent human lives, including those of unborn children. But I would certainly not suggest that those who disagree with the pro-life position be banished from the Republican tent.
Another pole almost all Republicans feel strongly about is fiscal discipline. Less government spending and lower taxes are important Republican precepts but exactly what level of spending and how much to tax are surely topics for endless debate among good Republicans. No one has a monopoly on the right answers to these inherently subjective fiscal questions.
A strong, diverse and healthy Republican Party should welcome an open and lively debate about these and other poles in our tent. But a tent consists of more than just poles. In fact, the purpose of the poles is to hold up the fabric that unifies the poles and provides the cooling shade that brings people to the tent in the first place. It is this unifying fabric, this common Republican cloth that is the essential defining characteristic of what it means to be a Republican.
This unifying idea is that personal freedom is the highest political goal of our great nation. It is not the only goal, but the most important. To achieve it necessarily means the power of government must be limited so it cannot excessively infringe on our freedom. All who embrace this transcendent theme should be welcome in the Republican tent.
Limited government and individual freedom were the primary principles of our nation's founding, and of our party's founding amid the anti-slavery movement. They must be the central theme of the Republican Party because they are so fundamental to our national identity, because they offer better solutions for the problems Americans face today and because they are under attack today as never before.
The modern Democratic Party is based on the opposite premise. Its highest goal is to attempt to achieve a society of more equal outcomes. Since they are not satisfied with the inequality of outcomes in a free society, like all quasi-utopians, they must rely on the coercive power of government to force the outcomes they seek.
Thus, the Democrats support exorbitant taxes on the productive; the redistribution of wealth; employment and academic quotas; increasing control over business; government-controlled health care, day care and education. The list goes on. And if the current Congress has its way, it will go on, and on, and on.
All of which is why today, perhaps more than ever before, the Republican Party has to stand in defense of individual freedom and must try to limit the power of the growing leviathan.
Arlen Specter never believed in limiting the power of government and defending the freedom of the individual. As long as he is wielding the levers of power, he wants that power to grow. His active cooperation with the current regime's massive expansion of government power was the straw that broke the camel's back for Pennsylvania Republicans. Or perhaps the last tearing of the fabric of freedom of the Republican tent.
That's the reason Mr. Specter fit so uncomfortably in the Republican tent. But for all of those out there who share the desire for more personal freedom and a less intrusive and growing government in Washington, the Republican Party's tent has the welcome mat out for you.
Big Labor's Investment
Big Labor's Investment in Obama Pays Off
By Michelle Malkin"We spent a fortune to elect Barack Obama -- $60.7 million to be exact -- and we're proud of it," boasted Andy Stern, president of the Service Employees International Union, to the Las Vegas Sun this week. The behemoth labor organization's leadership is getting its money's worth. Whether rank-and-file workers and ordinary taxpayers are profiting from this ultimate campaign pay-for-play scheme is another matter entirely.
The two-million-member union, which represents both government and private service employees, proudly claimed that its workers "knocked on 1.87 million doors, made 4.4 million phone calls and sent more than 2.5 million pieces of mail in support of Obama." It dispatched SEIU leaders to seven states in the final weekend before the election to get out the vote for Obama and other Democrats.
Through a series of local chapter takeovers and bully campaigns to destroy the reputation of executives who refuse to submit to their will, Stern and his scandal-plagued lieutenants have consolidated low-skill service workers to create a 21st century labor empire. The ubiquitous Stern now enjoys a prominent seat at the table of every major policy discussion at the White House, including economic recovery and health care radicalization.
Obama champions the SEIU's top legislative priorities: expansive government health care (paid for with regressive sin taxes) and the "Employee Free Choice Act" to do away with private-ballot union elections in the workplace. He has SEIU-blessed bureaucrats installed in every corner of his administration to carry out the agenda.
The SEIU scored not one but two Cabinet appointees: Health and Human Services Secretary Kathleen Sebelius and Labor Secretary Hilda Solis. The SEIU pitched in with maximum donations to Solis' first congressional campaign and lent her nearly 300 canvassers and ground troops. "I wouldn't be here, were it not for my friends in the labor movement," she gushed. Indeed, over four terms in Congress, Solis has pocketed more than $900,000 in union campaign contributions.
Former SEIU chief lobbyist Patrick Gaspard served as the Obama campaign's national political director and transition deputy director of personnel. During the 2004 election cycle, he led the George Soros-funded group America Coming Together (ACT) as national field director. SEIU poured $23 million of workers' dues money into ACT in its failed attempt to put Democratic Sen. John Kerry in the White House. Under Gaspard's tenure at ACT, the get-out-the-vote group employed convicted felons as canvassers and committed campaign finance violations that led to a $775,000 fine by the Federal Election Commission. Gaspard was appointed White House political director shortly after Election Day 2008.
SEIU Secretary-Treasurer Anna Burger was appointed to the president's Economic Recovery Advisory Board to provide advice on "boosting the sagging U.S. economy" (translation: imposing new employment regulations on companies and expanding union membership rolls).
Within two weeks of moving into the White House, Obama signed a series of executive orders championed by union bosses. The new rules authorized sweeping powers for the labor secretary that essentially blackball nonunion contractors targeted by labor organizers and blacklist nonunion employees in the private sector from working on taxpayer-funded projects. Such regulatory favoritism limits freedom in the workplace and raises the cost of doing business.
Another measure immediately adopted by Obama requires that when a government service contract runs out and there's a new contract to perform the same services at the same location, the new contractor must retain the old workers. Mickey Kaus of the left-leaning Slate magazine dubbed the move the "Labor Payoff of the Day."
The payoffs keep coming. Last week Obama slashed the Labor Department's funding to investigate union corruption -- a welcome move for Stern, who has seen three of his handpicked deputies resign in 2008-2009 over financial scandals involving cronyism, nepotism and embezzlement.
California officials also reported last week that the Obama White House gave the SEIU an unprecedented role in negotiations over federal stimulus funds. According to the Los Angeles Times, the union lobbied the feds to withhold nearly $7 billion in stimulus money from California unless it revoked a wage cut for unionized health care workers -- which had already been approved by Democratic lawmakers as part of a budget deal forged in February. Top SEIU officials participated in a conference call last month on the issue; the Obama White House backs the union demands.
SEIU's enforcers have set aside $10 million to un-elect any of its political beneficiaries who abandon their pledges to do the union's legislative bidding. The campaign money was raised by slapping an extra $6-per-member fee on top of regular dues payments -- and funneled straight to the union's political action committee. Meanwhile, after spending a fortune to put Obama in office, the union laid off a third of its D.C. field staff (in violation of its own employment protections, according to the
workers) due to . budget troubles.
The laid-off workers are collateral damage in Big Labor's pursuit of power. The only jobs guaranteed by SEIU's merger with Hope and Change, Inc. belong to the brass.
Tax Increases
Tax Increases Could Kill the Recovery
The cap-and trade levy would hit low-income earners especially hard.
MARTIN FELDSTEIN
The barrage of tax increases proposed in President Barack Obama's budget could, if enacted by Congress, kill any chance of an early and sustained recovery.
![[Commentary]](http://s.wsj.net/public/resources/images/OB-DQ927_oj_fel_DV_20090512221044.jpg)
Martin Kozlowski Historians and economists who've studied the 1930s conclude that the tax increases passed during that decade derailed the recovery and slowed the decline in unemployment. That was true of the 1935 tax on corporate earnings and of the 1937 introduction of the payroll tax. Japan did the same destructive thing by raising its value-added tax rate in 1997.
The current outlook for an economic recovery remains precarious. Although the stimulus package will give a temporary boost to growth in the current quarter, it will not be enough to offset the combined effect of lower consumer spending, the decline in residential construction, the weakness of exports, the limited availability of bank credit and the downward spiral of house prices. A sustained economic upturn is far from a sure thing. This is no time for tax increases that will reduce spending by households and businesses.
Even if the proposed tax increases are not scheduled to take effect until 2011, households will recognize the permanent reduction in their future incomes and will reduce current spending accordingly. Higher future tax rates on capital gains and dividends will depress share prices immediately and the resulting fall in wealth will cut consumer spending further. Lower share prices will also raise the cost of equity capital, depressing business investment in plant and equipment.
The Obama budget calls for tax increases of more than $1.1 trillion over the next decade. Official budget calculations disguise the resulting fiscal drag by treating Mr. Obama's proposal to cancel the 2011 income tax increases for taxpayers with incomes below $250,000 as if they are real tax cuts. The plan to modify the Alternative Minimum Tax to avoid increases for some taxpayers is also treated as a tax cut.
But those are false tax cuts in which no one's tax bill actually declines. In contrast, the proposed tax increases are very real. And despite the proposed tax increases, the government's new spending and transfer programs would cause the annual budget deficit in 2019 to exceed $1 trillion, or 5.7% of GDP.
Mr. Obama's biggest proposed tax increase is the cap-and-trade system of requiring businesses to buy carbon dioxide emission permits. The nonpartisan Congressional Budget Office (CBO) estimates that the proposed permit auctions would raise about $80 billion a year and that these extra taxes would be passed along in higher prices to consumers. Anyone who drives a car, uses public transportation, consumes electricity or buys any product that involves creating CO2 in its production would face higher prices.
CBO Director Douglas Elmendorf testified before the Senate Finance Committee on May 7 that the cap-and-trade price increases resulting from a 15% cut in CO2 emissions would cost the average household roughly $1,600 a year, ranging from $700 in the lowest-income quintile to $2,200 in the highest-income quintile. Since the amount of cap-and-trade tax rises with income, the cap-and-trade tax has the same kind of adverse work incentives as the income tax. And since the purpose of the cap-and-trade plan is to discourage the consumption of CO2-intensive products, energy or means of transportation by raising their cost to consumers, the consumer-price increases would be the same for a 15% reduction in C02 even if the government decides to give away some of the CO2 emissions permits.
But while the cap-and-trade tax rises with income, the relative burden is greatest for low-income households. According to the CBO, households in the lowest-income quintile spend more than 20% of their income on energy intensive items (primarily fuels and electricity), while those in the highest-income quintile spend less than 5% on those products.
The CBO warns that the estimate of an $80 billion-a-year tax increase could be significantly higher or lower, depending on how the program is designed. The Waxman-Markey bill currently before Congress calls for reducing greenhouse gasses 20% by 2020 and by an incredible 83% by 2050. As the government reduces the amount of CO2 that is allowed, the price of the CO2 permits would rise and the pass-through to consumer prices would also increase.
The next-largest tax increase -- with a projected rise in revenue of more than $300 billion between 2011 and 2019 -- comes from increasing the tax rates on the very small number of taxpayers with incomes over $250,000. Because this revenue estimate doesn't take into account the extent to which the higher marginal tax rates would cause those taxpayers to reduce their taxable incomes -- by changing the way they are compensated, increasing deductible expenditures, or simply earning less -- it overstates the resulting increase in revenue.
Since the projected revenue from this source is already designated to be used for Mr. Obama's health plan, some other tax increases will be needed. Moreover, Mr. Obama's budget characterizes the projected $634 billion outlay for health-care reform as just a down payment on the program. The budget notes that there would be "additional resources and new benefits to be determined with Congress." Those additional resources would no doubt be even higher taxes.
The third major tax increase is the plan to raise $220 billion over the next nine years by changing the taxation of foreign-source income. While some extra revenue could no doubt come from ending the tax avoidance gimmicks that use dummy corporations in the Caribbean, most of the projected revenue comes from disallowing corporations to pay lower tax rates on their earnings in countries like Germany, Britain and Ireland. The purpose of the tax change is not just to raise revenue but also to shift overseas production by American firms back to the U.S. by reducing the tax advantage of earning profits abroad.
The administration is likely to be disappointed about its ability to achieve both goals. Bringing production back to be taxed at the higher U.S. tax rate would raise the cost of capital and make the products less competitive in global markets. American corporations would therefore have an incentive to sell their overseas subsidiaries to foreign firms. That would leave future profits overseas, denying the Treasury Department any claim on the resulting tax revenue. And new foreign owners would be more likely to use overseas suppliers than to rely on inputs from the U.S. The net result would be less revenue to the Treasury and fewer jobs in America.
It's not too late for Mr. Obama to put these tax increases on hold. If he doesn't, Congress should protect the recovery and the longer-term health of the U.S. economy by voting down this enormous round of higher taxes.
Mr. Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard and a member of The Wall Street Journal's board of contributors.
The creeps of wrath
Michael Savage excluded
The creeps of wrath
If your name is down, you’re not coming in
Mr Savage mulls his suitAS IF Jacqui Smith didn’t have troubles enough at home, she has now put up the back of one of America’s most splenetic radio talk-show hosts. Michael Savage says he will sue the “lunatic” home secretary for including his name on a list, published by her department, of some of those banned from entering Britain between the end of October last year and the end of March 2009. Others who feature include assorted Muslim preachers, a Jewish extremist, a Hamas activist, a homophobic Baptist pastor, a pair of Russian skinheads, a neo-Nazi and a former grand wizard of America’s white-supremacist Ku Klux Klan.
Mr Savage (né Michael Alan Weiner) protests that he does not promote violence, and objects to being bracketed with those who do. His “shock jock” views are not always edifying: he has described the Koran as a “book of hate”, for example, and said horrid things about autistic children. But on Ms Smith’s edict, he has a point.
Free speech is meant to be one of those core values that Britons would fight to the death to defend. But the rules on just how much of it is allowed in and into the sceptred isle have been tightening.
After the London bombings in 2005—amid worries that London had become “Londonistan”, a semi-inadvertent sanctuary for foreign Islamist radicals—the home secretary was given the power to refuse entry to those who promote or foment hatred, terrorist violence or serious criminal activity. In October 2008 a presumption in favour of exclusion was introduced, which means that it is up to the dubious individual to prove that he would not “stir up hatred” in Britain if he visited, and that he has publicly repudiated his “previous extremist views”.
A total of 101 people were kept out between August 2005 and March 2009. (Geert Wilders, a Dutch MP with harsh views on Islam, was refused entry earlier this year under a related European rule.) The exclusions are currently running at five a month. They raise a serious objection and a theoretical question.
The objection is whether the power of exclusion is being applied equally, and indeed whether it could ever be. Some maintain, for example, that undue sensitivity has been accorded to the feelings of Muslims in deciding whom to rebuff. The rational rule would surely be that only advertised views that clearly constitute a crime in Britain should be sufficient grounds for turning away foreigners.
The question is how the history of Britain, and indeed the world, might have differed had the power to exclude been applied in the past using the current criteria. Karl Marx might not have made the cut; nor would the assorted Bolsheviks who plotted in the East End of London before their revolution. Ditto Gandhi and various members of the ANC.
Punishing Intel
Intel and the EU
Punishing Intel
The European Commission levies a €1.06 billion fine on Intel for anti-competitive behaviour
THE European Commission wielded its heaviest antitrust hammer against Intel, the world’s biggest chipmaker on Wednesday May 13th. The €1.06 billion ($1.45 billion) fine levied on Intel for antitrust abuses is the Commission’s biggest ever punishment and represents just under 4% of Intel's revenues in 2008. The chipmaker was charged with using a system of discounts and rebates to encourage computer-makers and retailers to sell only a limited number of machines powered by chips made by AMD, Intel’s only remaining serious rival in microprocessors for personal computers. The Commission says that “millions of European consumers” suffered as a result of the anitcompetitive behaviour. Intel has said that it will appeal.
The case against Intel was tricky. Offering discounts and rebates is common in many industries, so the case hinged on whether Intel attached conditions to such rebates that constituted an abuse of its market position. The Commission determined that the rebates were indeed illegal though Intel can continue to offer legal rebates. It is unclear whether any harm has been done: prices for chips continue to fall, innovation has not slowed and AMD has increased its market share slightly in recent months. And certain remedies could actually limit competition. Limiting discounts, for instance, might in effect create a price floor for AMD, given that it is Intel’s only competitor.
Intel’s case is far from isolated. In early June Microsoft will defend itself in a hearing in Brussels against accusations that it illegally bundled its web browser with its Windows operating system—the very practice that got the software company into trouble in the late 1990s. IBM, the target of trustbusters since the 1950s, faces a new antitrust complaint. And Google, the industry’s newest giant, is also coming under closer scrutiny. In April it emerged that America’s Justice Department is examining whether Google’s settlement with authors and publishers over its book-search service violates antitrust laws; and on May 5th the Federal Trade Commission (FTC) launched a probe to see whether Google’s sharing of two board members with Apple reduces competition between the two firms.
The computer industry makes more antitrust headlines than others for three reasons. First, technology heavyweights are often dominant in their respective markets. The firms say that it is a result of billions spent on research and development. But they also operate in markets that allow a winner to take all (or most). Mainframes and operating systems benefit from strong network effects: the more applications run on them, for instance, the more users they attract, which encourages programmers to write more applications for them. With microprocessors, ever-increasing capital requirements mean only the biggest firms can afford to build their own factories. The markets for search and online advertising exhibit similar effects: the bigger a firm’s market share, the greater its ability to attract advertisers, thus bringing in the money to build ever bigger data centres. In each case it is difficult for an upstart to break in.
But it is not impossible. A second characteristic of the industry is that dominant positions can be undermined by technological progress. Because they cannot afford to rest on their laurels, high-tech heavyweights often foster aggressive corporate cultures that draw the attention of antitrust regulators. Fear of being supplanted was also behind Microsoft’s decision in the late 1990s to bundle its web browser, Internet Explorer, into Windows.
Problems with antitrust will continue to dog the industry for the simple reason that companies are increasingly using it as a competitive weapon, alongside other instruments such as patent lawsuits and battles over standards. As it lost market share to Intel, for example, AMD launched a global campaign to get regulators to examine its rival’s behaviour. Similarly, antitrust lobbying is part of a broader “platform war” for IBM, which hopes thereby to keep Microsoft at bay. Not to be outdone, Microsoft has entered the antitrust game, too.
That is not to say that the antitrust cases that are now under way are without merit but regulators must make decisions about whether consumers not just competitors are hurt. It seems unlikely that the antitrust thing will blow over any time soon.
Oil price
Oil price
A turning tide?
The oil price rises amid hints of economic recovery
THE price of oil reached over $60 a barrel during intraday trading on Wednesday May 13th, its highest point since November. Glimmers of economic recovery, such as an increase in imports from China, together with a weak dollar and tight supply forecasts have pushed up the prices of many commodities. Coffee, sugar and wheat have all hit modest peaks this week. Exporters of commodities would welcome an upturn in prices for food and other raw materials and those worried by deflation might also cheer rising prices. But consumers already battered by the economic slump, especially in poor countries, will not be pleased by rising costs.
Is Sully Too Old to Fly?
Is Sully Too Old to Fly?
The thrilling crash landing last January of US Airways Flight 1549 into the frigid waters of the Hudson River in New York captivated the mind. Truly, if Hollywood depicted this event, we would require our willing suspension of disbelief, knowing that such an outcome of a doomed plane could never happen that way in real life.
Yet it did. Finding his Airbus A320's ascent thwarted by a flock of birds cramming the plane's fuselage, pilot Chesley B. "Sully" Sullenberger glided his falling plane away first from buildings, then from the crowded George Washington Bridge, and then into the Hudson, where it should have broken up, or possibly flipped. That this maneuver even succeeded is miraculous. Airlines computer simulate this very event in training, and no pilot has ever landed without loss of virtual life.
Sully is someone I'd want flying my plane, and for all I know, he and others like him have. Unfortunately for me and for you, he has been spending his time lately in courtrooms instead of cockpits, defending his right to work to those who, if they had their way, would be cheering his pending retirement.
Pending? Well, yes. Sully is 58 years old, and before a law passed by Congress in December 2007, he would have been forced to retire at age 60. (The mandatory retirement age is now 65.) To understand why this law was ever in place requires an understanding of economic and regulatory history.
Flashback to 1959. The airline industry is on the cusp of its fifth decade, but there is a problem facing younger pilots who want to enter it. The old-timers just won't retire, and this frustrates potential entrants with much flying experience and training, thanks to military service in World War II, Korea, and elsewhere. The result is a sort of malinvestment in human capital, with many men trained to be pilots without private-sector jobs to justify the training.
What is a young, aspiring pilot to do? Well, he and his peers could make their presence and skills known to the airlines, signaling that the labor market had changed and that it would be possible to hire new pilots at lower wages. Not only would some airlines opt for the lower-priced laborers, thus lowering the airlines' reservation price required to provide flights to consumers, some owners of capital might invest in new airlines, thus increasing consumer choice, industry output, and create a downward pressure on prices.
Such would be the market solution, coordinated by changes in relative prices, and it would be peaceful, characterized by voluntary interaction and compromise by the parties involved. Unfortunately, there was another option, requiring the pilot to join a pilots union to lobby the federal government to enact rules forcing existing pilots to retire at age 60. All the union needed was a lobbying presence and some sympathetic regulators at the FAA.
Guess which option was chosen? It seems that in 1959, the aspiring pilots found a sympathetic ear in C.R. Smith, the then-president of American Airlines who also wanted to ground his older pilots. The industry was switching to jet engines, and Smith wanted to freeload off of the tax-supported training with those engines many of the younger pilots received in the military. So Smith instructed his lobbyists in Washington to rewrite FAA rules to force retirement at 60, and in December of 1959, an FAA administrator named Elwood R. Quesada simply authorized them. In January of 1961, Quesada retired from the FAA and immediately joined the board of directors of American Airlines. The retirement age rule has been in effect for almost 50 years.
It is another case of unions doing what unions do, which, like the medieval guilds before them, involves some form of extramarket force to restrict entry into their professions, reduce competition for their labor services, and allow those who can obtain union membership to receive higher wages than they otherwise would.
It is also a case of modern mercantilism at work, with corporations teaming with the state to effect outcomes different from what would have resulted if market forces had dominated, thus reflecting the chummy relationship that develops between regulators and the regulated, in which the former can become captured by the latter. By supplying firms the regulation they want — whether to increase costs on possible competitors or to usurp market surplus that would otherwise go to consumers — regulators can use "public service" as a stepping-stone to significant income in the private sector. Membership on corporate boards is only one way that firms repay former public officials — senators, congressmen, and higher-level bureaucrats — for services rendered during their time in government.
Consumers are hardly better off because of it. Many Sully Sullenbergers have been forced to retire before Congress extended the retirement age, based on the belief that US airlines, if allowed to make rules on their own, would allow unhealthy or incompetent pilots to man their expensive aircraft, regardless of age. That such decisions are better made by government officials, separated from the industry and bearing no direct cost if they decide incorrectly, is a scandal. Why no outrage from foes of age discrimination when the perpetrator is the state itself? Government control of hiring in the private sector is a characteristic of fascism, not capitalism.
Those who advocate an expansive federal government must not bemoan the lobbying and rent-seeking of modern life, because it is part-and-parcel with expansive federal government. Genuine market economies — meaning those that maximize the long-term benefits to consumers and producers — thrive when state power is minimized. With this in mind, abolishing the FAA and firing its bureaucrats who hinder the market order would constitute a step in the right direction. Such an event would surely cause an expensive and wasteful airline cartel to lose its greatest ally.
If this happens before Sully Sullenberger reaches 65, who knows? Like many of his fellow noncommercial pilots, he may opt to fly into his seventies, if US Airways will have him. It might make escaping New York a more pleasant experience.
Never-Ending Government Lies
Never-Ending Government Lies About Markets
The purpose of government is for those who run it to plunder those who do not. Throughout history, governments have used violence, intimidation, coercion, and mass murder to enforce this system. But governments' first line of "defense" is always a blizzard of lies — about its own alleged benevolence, altruism, heroism, and greatness, along with equally big lies about the "evils" of the civil society, especially the free market.
The current economic crisis, which was instigated by the government's central bank and its boom-and-bust monetary policies, among other interventions, has once again been blamed on "too little regulation" and too much freedom.
Will Americans ever catch on to this biggest of all of government's Big Lies?
When the Pilgrims came to America, they nearly starved to death because they adopted communal agriculture. When William Bradford, leader of the Mayflower expedition, figured this out he reorganized the Massachusetts pilgrims in a regime of private property in land. The incentives created by private property promptly created a dramatic economic turnaround and the rest is history. Most history books ignore this reality, however, and blame the starvation crisis of the Pilgrims on corporate greed on the part of the Mayflower company.
After the American Revolution, it was imperative to build roads and canals so that commerce could expand and the economy thrive. George Washington's Treasury secretary, Alexander Hamilton, declared in his famous Report on Manufactures that private road and canal building would never succeed without government subsidies. President Thomas Jefferson's Treasury secretary, Albert Gallatin, concurred. Meanwhile, private capital markets and the private "turnpike" industry were busy financing thousands of miles of private roads without any governmental assistance. When government did intervene in early-American road building, it was a financial catastrophe almost everywhere, so much so that by 1860 only Missouri and Massachusetts had not amended their state constitutions to prohibit the use of tax dollars for "internal improvements."
Americans have been taught by their government-run schools that the post-1865 Industrial Revolution was bad for the working class, which made government regulation of work and wages, and the creation and prospering of labor unions necessary. In reality, people left the farms for factories because the latter offered far better wages and working conditions. Between 1860 and 1890, real wages increased by 50 percent in America, as myriad new products were invented, and made available to the common working person thanks to low-cost, mass production. It was capital investment that dramatically increased the productivity of labor, allowing hours worked to decline from an average of 61 hours per week in 1870 to 48 hours by 1929.
Higher worker productivity, fueled mostly by capital investment by entrepreneurs and private investors, also made it less necessary for families to force their children to work. Child labor was on the wane for decades before government got around to regulating or outlawing it. And when it did so it was to protect unionized labor from competition, not to protect children from harsh working conditions.
The "robber barons" of the late 19th century robbed no one. Most of them made their money by providing valuable — if not revolutionary — goods and services to the masses at lower and lower prices for decades at a time. John D. Rockefeller, for example, caused the price of refined petroleum to drop from 30 cents per gallon in 1869 to 8 cents in 1885, and continued to drop his prices for many years thereafter. James J. Hill built the most efficient and profitable transcontinental railroad without a dime's worth of government subsidy. In return for their remarkable free-market success the government prosecuted both of these men, kangaroo court style, under the protectionist "antitrust" laws. The real "robbers" were politically connected businessmen like Leland Stanford, a former California governor and senator, who succeeded in getting laws passed that granted his company a monopoly in the California railroad business.
The federal antitrust laws were passed beginning with the Sherman Antitrust Act of 1890 because the government informed Americans that industry was becoming "rampantly cartelized" or monopolized. In reality, prices everywhere were plummeting as new products and services were being invented everywhere. The entire period from 1865 to 1900 was a period of price deflation. As I show in How Capitalism Saved America, all of the industries accused of being monopolies by Congress in 1889–1890 had been dropping their prices for at least a decade thanks to vigorous competition. And it was not a result of the idiotic theory of "predatory pricing." No sane businessperson would intentionally lose money for decades by pricing below cost with the hope that he would somehow frighten away all competition forevermore.
Everyone "knows" that President Herbert Hoover was a staunch advocate of laissez-faire economics, and it was his lack of interventionism that caused the Great Depression. This is the biggest governmental lie in the history of America. Hoover was a "progressive" (as today's socialists, also known as "Democrats," have taken to calling themselves).
Hoover strong-armed corporate executives into raising wages at a time when wages needed to adjust downward in the free market in order to minimize unemployment. He devoted 13% of the federal budget to a failed "stimulus" program of pork-barrel spending and imposed some of the biggest tax increases in history to fund it all. He was a protectionist who signed the notorious Smoot-Hawley Tariff Act, which increased the average tariff rate to nearly 60 percent and spawned a worldwide trade war that shrunk world trade by two-thirds in three years. He cartelized the agricultural industry with "farm boards" that began the insane practice of paying farmers for not growing crops or raising livestock. He pioneered the politicization of capital markets by crating the Reconstruction Finance Corporation. And he ranted and raved against "greedy capitalists" while launching numerous government "investigations" of investors and the stock market. FDR's top domestic advisor, Rexford Tugwell, said that his fellow New Dealers "owed much to Hoover," who began many of the policies that they simply extended.
Every time the price of gasoline goes up significantly, Congress convenes a Nuremburg Trial–style inquisition of oil-company executives. This practice began in the 1970s when the government's own foolish price controls on petroleum products caused massive shortages, and it needed someone to blame. Oil company executives are never praised when gasoline prices fall, as they have in the past year from over $4/gallon to under $2/gallon in many parts of the United States.
Most recently, the current economic crisis is said to be caused by the "excesses" of economic freedom and "too little regulation" of the economy, especially financial markets. This is said by the president and numerous other politicians, with straight faces, despite the facts that there are a dozen executive-branch cabinet departments, over 100 federal agencies, more than 85,000 pages in the Federal Register, and dozens of state and local government agencies that regulate, regiment, tax, and control every aspect of every business in America, and have been doing so for decades.
Laissez-faire run amok in financial markets is said to be a cause of the current crisis. But the Fed alone — a secret government organization that is accountable to no one and which has never been audited — performs hundreds of regulatory functions, in addition to recklessly manipulating the money supply. And it is just one of numerous financial regulatory agencies (the SEC, Comptroller of the Currency, Office of Thrift Supervision, FDIC, and numerous state regulators also exist). In a Fed publication entitled "The Federal Reserve System: Purposes and Functions," it is explained that "The Federal Reserve has supervisory and regulatory authority over a wide range of financial institutions and activities." That's the understatement of the century. Among the Fed's functions are the regulation of
- Bank holding companies
- State-chartered banks
- Foreign branches of member banks
- Edge and agreement corporations
- US state-licensed branches, agencies, and representative offices of foreign banks
- Nonbanking activities of foreign banks
- National banks (with the Comptroller of the Currency)
- Savings banks (with the Office of Thrift Supervision)
- Nonbank subsidiaries of bank holding companies
- Thrift holding companies
- Financial reporting
- Accounting policies of banks
- Business "continuity" in case of an economic emergency
- Consumer-protection laws
- Securities dealings of banks
- Information technology used by banks
- Foreign investments of banks
- Foreign lending by banks
- Branch banking
- Bank mergers and acquisitions
- Who may own a bank
- Capital "adequacy standards"
- Extensions of credit for the purchase of securities
- Equal-opportunity lending
- Mortgage disclosure information
- Reserve requirements
- Electronic-funds transfers
- Interbank liabilities
- Community Reinvestment Act subprime lending requirements
- All international banking operations
- Consumer leasing
- Privacy of consumer financial information
- Payments on demand deposits
- "Fair credit" reporting
- Transactions between member banks and their affiliates
- Truth in lending
- Truth in savings
That's a pretty comprehensive list, the result of 96 years of bureaucratic empire building by Fed bureaucrats. It gives the lie to the notion that there has been "too little regulation" of financial markets. Anyone who makes such an argument is either ignorant of the truth or is lying.
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