China's Rocket to Modernity
Why "socialism with Chinese characteristics" looks a lot like capitalism
Steve ChapmanSHANGHAI—You know those time-lapse videos of sunflowers sprouting, zipping straight up, and bursting into bloom in the space of a few seconds? While flipping the TV channels in my hotel room, I saw a Chinese-language ad featuring a new variation: an entire city of skyscrapers popping out of the ground and rising heavenward at a miraculous speed.
Maybe that ad was created with modern technology. Or maybe it was just a real-time video of what has happened here in Shanghai. It has transformed itself from a decaying industrial city to a gleaming, futuristic metropolis in the historical equivalent of the blink of an eye.
The gaudiest results of the metamorphosis lie in the area east of the Huangpu River. That area, known as Pudong, is the home of the Shanghai Stock Exchange, a magnetic levitation train that goes 250 mph, and, a year from now, Expo 2010—what we used to call a world's fair. Its annual economic output of $38 billion surpasses not only that of most cities but most countries. Yet fewer than 20 years ago, it was a sleepy farm region dotted with rice paddies, offering a lovely home for frogs.
Given its proximity to one of China's biggest cities, what has happened may sound natural and inevitable in retrospect. It wasn't. As long ago as the 1950s, I'm told, Shanghai's first communist mayor, Chen Yi, used to lament that such nice real estate couldn't be developed because it was on the wrong side of the river.
What kept the area backward was the economic system he served: communism. What freed its potential was removing the shackles imposed when Mao Tse-tung and his party gained power in 1949.
Since its inception, the Chinese government has carried out some gigantic economic experiments, most of them catastrophic. In the 1950s, Mao launched a crash program in industrialization that devastated the economy and caused some 15 million people to starve to death.
In the 1960s, he initiated the Cultural Revolution, which encouraged violent rampages by young ideological fanatics and banished anyone with an education, above-average skills, or managerial experience into the countryside to shovel manure. Results: more economic destruction and millions more dead.
But in 1979, the government decided to try a different approach: creating special zones where normal markets would be permitted to operate. They called it "socialism with Chinese characteristics," but it looked an awful lot like capitalism. The one in Pudong was created in 1990.
This time, disaster failed to ensue. On the contrary, the broad reversal succeeded beyond Ayn Rand's wildest dreams.
In the ensuing three decades, the Chinese economy has tripled in size—and then tripled again. The World Bank says that in 1981, 65 percent of Chinese were poor. Today the figure is 4 percent.
In less than 30 years, China's economic miracle has raised half a billion people—one out of every 10 people on the planet—out of poverty. Nothing in human history comes close to that achievement.
This year, like every other country, China is feeling the effects of the global recession. So its economy will probably expand by only 6 or 7 percent this year—which would represent eye-popping growth almost anywhere else.
Economic progress, of course, has side effects, and lately those have gotten China plenty of attention—for producing clouds of greenhouse-gas emissions, putting pressure on oil supplies, exporting like mad, and becoming the U.S. government's biggest creditor. China as an economic powerhouse gives some Westerners nightmares.
But next to mass chaos, poverty, and famine, those problems look pretty manageable, if not mythical. And it would be the height of perversity to conclude that the rest of the world suffers because 1.3 billion Chinese are now free to make constructive use of their energy and talent.
Not all of them have seen the benefits of that opportunity. But it is safe to bet that few of them would trade the economic experiment going on today for the harebrained exercises that preceded it.
Over the last few decades, China has demonstrated definitively how to generate either want or wealth. Zhang Min, a senior official of the Chinese People's Institute of Foreign Affairs, worked Pudong's rice fields as a boy and marvels at what it has become.
What accounts for the change, I ask. He recalls what was said by a Chinese leader: "Same earth. Same sky. Same people. Different policy."
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Negative Interest Rates
Why Not Negative Interest Rates?
John Makin’s April Economic Outlook observed that with the theoretically right monetary policy for present economic circumstances, the fed funds rate would be significantly negative. However, we run up against the famous “zero bound” thesis for interest rates—that it is impossible for them to be below zero.
This is frequently stated, but is it true? Why could we not have negative nominal interest rates to combat a potential deflation? This natural question arises and gets debated from time to time over the years among financial and monetary thinkers. In recent weeks, Greg Mankiw (“It May Be Time for the Fed to Go Negative”) and Willem Buiter (“Negative Interest Rates: When Are They Coming to a Central Bank Near You?”) have raised it again. Says Buiter, “I agree with Greg Mankiw that it is time for central banks to stop pretending that zero is the floor for nominal interest rates.”
In fact, there are some historical examples of negative interest rates.
“From early August to mid-November of 2003, negative interest rates occurred on certain U.S. Treasury repurchase agreements,” according to economists Michael Fleming and Kenneth Garbade. “This episode refutes the popular assumption that interest rates cannot go below zero,” they say.
Daniel Thornton reported in 1999 in a St. Louis Federal Reserve note that “several foreign-owned banks in Japan have paid negative nominal interest rates on yen deposits.”
One of the most notable features of the present crisis has been the explosion of banks simply keeping their money on deposit at the Fed. During 2008, these deposits increased by a factor of more than 40.
In 1972, the Swiss central bank imposed negative interest rates on Swiss franc deposits by foreigners. This was to reduce the flow of money into Swiss francs, which was driving up the foreign exchange value of the currency against the central bank’s desires. The charge was up to 10 percent per quarter, or 40 percent per annum—negative interest rates with a vengeance! They were again imposed, for the same reason, from 1977 to 1979.
Further back, Sidney Homer’s classic, A History of Interest Rates, reports that Treasury bill rates were sometimes negative in 1940 and 1941. “Treasury bill yields were sometimes quoted at 0.001% and occasionally sold at negative yields,” Homer wrote, “because they were exempt from the personal property taxes of some states.” In other words, the personal property tax created effective negative yields on other assets, allowing actual negative yields on Treasury bills.
It might be argued that these instances are special cases. Suppose we wish to discourage the holding of cash or Treasury bills in general, and to encourage investors to spend or invest instead—could it be done by creating negative interest rates more broadly?
The classic argument is that the possibility of simply switching to paper currency, which by definition circulates at par (a zero interest rate), is what makes a generalized negative interest rate on deposits or securities impossible. As Buiter says about creating negative interest rates, “Currency is the only problem.” We will return to the problem of currency in a moment.
But let’s begin with Treasury bills. Imagine a financial panic, when everybody wants to own Treasury bills, no matter what the yield. Now along comes the Fed, with its infinitely expandable balance sheet, and bids for 90-day bills until their price reaches 100.5, for example, or 101. Their interest rate is now about negative 2 percent or 4 percent.
A negative interest rate on excess reserves would result in a disincentive to hold Fed deposits, which would increase the banks’ incentive for the funds to be put out in the interbank market or the commercial paper market or in loans instead.
How would banks respond? There would be no point in buying Treasury bills if they could simply hold excess reserves at the Fed instead. This is the banking equivalent of putting banknotes in the mattress: “Many banks prefer to hoard cash,” is a recent analyst’s comment. Indeed, one of the most notable features of the present crisis has been the explosion of banks simply keeping their money on deposit at the Fed. During 2008, these deposits increased by a factor of more than 40: from $21 billion to $860 billion.
But it would be straightforward for the Fed to put a negative interest rate on these excess reserves, just as the Swiss did on foreign deposits. The resulting disincentive to hold Fed deposits would increase the banks’ incentive for the funds to be put out in the interbank market or the commercial paper market or in loans instead—yes, that’s the idea.
Could the banks in turn put negative interest rates on customers’ deposits with them? They might not have to if they were doing something with the money besides holding risk-free assets, but in principle they could. Something similar is done by charging fees on demand deposits.
It looks like the depository system could conceptually include negative interest rates. But how about if everybody just took out currency instead? Would this not defeat the whole idea? Such discussions always arrive at this objection.
This leads to various more or less cumbersome and impractical schemes for imposing costs on holding currency to take away its advantage in a world of negative interest rates on deposits. A classic one is to require tax stamps to be put on banknotes periodically. But are these necessary for the negative interest rate idea?
It is easy to imagine converting deposits to cash for very little cost and risk if we are thinking about relatively small amounts and personal transactions. But dealing with very large amounts of cash in commercial transactions entails very large costs and risks. Would negative interest rates induce a company with 200,000 employees, for example, to stop its automatic payroll deposit system and start passing out envelopes full of cash instead? Would the Social Security Administration start mailing its pensioners similar envelopes? Obviously not. And the Fed could put hefty charges on banks taking more than a standard level of currency from it.
Moreover, there is simply not nearly enough existing currency to replace all deposits. Even if the government did not go as far as abolishing currency (one suggestion), it could refuse to increase the supply. What then? Some hoarding of currency would result, reducing the available supply further, and then currency would presumably go to a premium against deposits. You could still make all the payments you need to, but you could either bear your negative interest rate by holding deposit cash, or have to pay a premium if you insisted on banknote cash. Or you might buy gold. Or you might spend it or make some investments in bonds or stocks or a house—again, that’s the idea.
The increasing dependence on electronic payments makes a massive move to currency less feasible and thus negative interest rates more plausible.
Would anybody rationally pay $1.02 for $1.00 in cash? They do today, if they take cash as a non-customer from an ATM. The average ATM surcharge fee is about $2. For a $100 withdrawal, that is equivalent to a price of $1.02. Alternately thought of, if a $200 withdrawal were cash for one month, the average fee would be equivalent to a negative 12% interest rate.
In general, the increasing dependence on electronic payments makes a massive move to currency less feasible and thus negative interest rates more plausible.
Still, one can imagine the unhappy customers being informed they could not withdraw currency from a human teller at par. And one can consider what the political reaction to such effects of negative interest rates might be.
In sum, could negative interest rates “come to a central bank near you”? It may seem unlikely, but it is not impossible.
Alex J. Pollock is a resident fellow at the American Enterprise Institute.
A market solution
A market solution to secure banks’ future
By William Poole
How long will the US economy live with a banking system in which some institutions are too big to fail ? Not long, we should all hope, because large banks today, under federal protection, can raise short-term funds more cheaply than their smaller competitors, which are allowed to fail.
“Too big to fail” is an unstable system. Politically inspired constraints on large banks leave them not knowing what will come next out of Washington, while there is no way of knowing whether any given bank is just small enough to be let go or will be bailed out if it gets into trouble.
But here we are, more than a year after the rescue of Bear Stearns, without a plan for the future except for vague – and, as far as I can tell, totally empty – statements coming out of Washington about tighter regulation. What exactly does Washington have in mind?
Here is a proposal, not at all original but deserving of serious public discussion. As a condition of enjoying the benefits of a bank charter, every bank must issue 10-year subordinated notes equal to 10 per cent of its total liabilities. The specification can be adjusted, but this one serves to illustrate the proposal. The subordinated debt would be unsecured; holders would stand last in line among all creditors in the event that a bank had to be shut down. The sub debt requirement would be in addition to existing requirements for equity capital.
Genuine reform requires that four minimal requirements be met, and the sub debt proposal qualifies. First, banks need more capital to protect the federal deposit insurance fund. Second, there must be more market discipline: each bank would be forced to roll over maturing sub debt equal to 1 per cent of its liabilities each year. Third, financial stability requires that a bank not be subject to runs. Sub debt cannot run, because of the 10-year maturity.
Fourth, and critically important, some creditors and not just equity owners must be at risk, which is clearly the case with sub debt. Sub debt provides much more market discipline than equity, because a bank in trouble with a weak share price is not forced to do anything. Maturing sub debt, however, does discipline the bank and if the bank cannot roll over the debt, it must shrink by 10 per cent to live within its remaining outstanding sub debt. This system is stable because any bank can contract by 10 per cent within a year by letting loans run off and/or by selling other assets. It is highly desirable that contraction be managed by the bank itself and not by regulators.
We cannot depend on regulatory agencies to prevent a recurrence of financial crisis. Ahead of the crisis, regulators, myself included, did not understand the risk of subprime mortgage paper in bank portfolios. Nor did the senior management and directors of the most sophisticated financial firms in the world. This is not the first time regulators and firms have failed to assess risk adequately. Large international banks accumulated Latin American loans in the 1970s; when Mexico defaulted in 1982 and other defaults followed, a financial crisis was narrowly averted.
Long-maturity bonds create much more market discipline than do short-term obligations. Holders of three-month certificates of deposit, for example, assume that they can always exit quickly by letting the CDs mature. It is for this reason that bond spreads over Treasuries of comparable maturity are systematically higher for longer maturities than for shorter maturities.
Banks hate the idea of a substantial sub debt requirement, because sub debt will be expensive. But bankers should think carefully about their opposition. Would they rather face market discipline from sub debt or much heavier Washington regulation, including opaque and changing rules? Given the scale of our financial crisis and taxpayer losses, intrusive regulation will be the norm for years to come. Do bankers really want to face unpredictable constraints such as they have seen on executive compensation?
I challenge leaders of our large banks to support a market-based reform such as the one I have outlined. A return to the status quo ante, with banks enjoying the benefits of “too big to fail”, does not seem likely. Regulators will not dare risk a repeat performance. Bankers who think that their political influence will control the regulatory process are in for a rude surprise.
The writer is a senior fellow at the Cato Institute and distinguished scholar in residence at the University of Delaware. He retired as president and chief executive of the Federal Reserve Bank of St Louis in March 2008
Despite Bad Economy
Despite Bad Economy No Drastic Shift in US Values
By David Paul KuhnThere has been no dramatic shift in Americans' view of Wall Street, big business or the role of government despite the worst economic collapse since the Great Depression, according to a wide-ranging Pew Research Center study of American values released Thursday.
"Whether by choice or circumstance, Barack Obama is pursuing a fundamentally different path than his predecessor in terms of economic, domestic and foreign policy. Yet there is no commensurate sea-change in public values," the Pew report concludes.
The 160-page non-partisan study, regularly conducted since 1987, is the most comprehensive look at Americans' outlook since Obama's inauguration.
The study offered new evidence that the Great Recession has not greatly altered Americans' view on the role of government or spurred a dramatic rise in populism.
Americans also remain optimistic despite the hard economic times. True to character, more Americans still believe they are "haves" than "have-nots."
The study also found that the unpopularity of the war in Iraq as well as ongoing military deployments abroad have not caused the U.S. public to turn toward isolationism.
In the political realm, one of the great unknowns in Obama's presidency is whether he will be able to enact an enduring Democratic majority. Obama's presidency has thus far failed to catalyze a large shift leftward on issues like the role of government or moved the public's identification toward the Democratic Party and liberalism.
Republicans scarcely have reason to sigh in relief. The study adds more to the tome of bad news for the Republican Party, recording lows unseen since the years following Watergate. The GOP is dejected and depressed. It sits at rock bottom, considering a range of issues from public image to morale to the GOP's anemic ranks.
However the bulk of those who left the GOP in recent years have not become Democrats, rather independents. In fact, reflecting a long-tracked trend in American politics, the portion of voters indentifying as independent has continued to rise and now matches the highpoint of the modern era.
As the middle of the electorate enlarges, the outlook of the two major parties has only become more polarized. Hyper partisanship is a more potent force today than at any other time since the advent of polling in American politics, even within the context of the rapid rise in partisanship over the past quarter century.
Below is a detailed look at four of the more salient trends in Pew's study of Americans' values.
No Populist Tide From Great Recession
The hallmark of populism is an us-versus-them worldview. That populist outlook has not taken hold over the public. Only 35 percent of Americans believe the country is divided between haves and have-nots, a 9-percentage point decline from two years ago.
More Americans still believe they are part of the haves than have-nots--48 to 36 percent respectively, with no significant change in the last few years. This finding comes in the face of the stock market collapse; 2008 marked the steepest dive in the Dow Jones Industrial Average since 1931.
Most Americans also still reject that "success in life is pretty much determined by forces outside our control."
The poll was taken with the memory of the worst days of the stock market crash still fresh in the national mind but after the market had somewhat recovered since mid March, roughly to where it was when Obama took office. The poll, which can be read in full here, was conducted March 31 to April 6 and April 14 to the 21; it included 3,013 randomly interviewed Americans and has a 2-point margin of error.
The poll did ping a populist streak in American public opinion, but populism has not surged upward since the market collapse. Fully three fourths of Americans say, "there is too much power concentrated in the hands of a few big companies." More than six in 10 of those polled believe businesses' profits are too large. But Pew finds these opinions are generally unchanged in recent years.
Large swaths of Americans do hold a negative view of Wall Street. When asked if Wall Street "often hurts the economy more than helps it," 49 percent agreed while 37 percent disagreed. (This is the first year Pew has asked the question.) Still, more than six in 10 Americans believe Wall Street makes an "important contribution" to the economy.
Americans are similarly conflicted on regulation. They believe that a free market economy generally needs government regulation but a slim majority, 54 percent, believes regulation often "does more harm than good," including 41 percent of Democrats. That marks only a slight decline since 2007. Support for the role of regulation was mildly stronger in 2002, following the WorldCom and Enron scandals, than today.
One of the more striking findings of the Pew study is the continued relevance of Calvin Coolidge's statement that "the chief business of the American people is business." Coolidge's remark captured the contrast between the roaring twenties and the downward spiral of the thirties.
Even today, 76 percent of Americans say the "strength of this country today is mostly based on the success of American business." This is exactly where the public was in 1987 and generally throughout the 1990s.
There has been a significant, though not large, change between the early Obama presidency and the Clinton era on some issues, which marks the modern contrast between boom times and bust.
Consider this statement, "corporations generally strike a fair balance between making profits and serving the public interest." Today, 58 percent of Americans disagree. That's where the public was in the Bush era, both in the 2007 and the 2003 study.
But in the bull market of 1999, 50 percent of Americans disagreed that companies strike the right balance between profits and public good. That signifies an 8-point shift in a decade, significant but not immense.
A slim majority of Americans, 53 percent, in fact say they are "pretty well satisfied with the way things are going" for them financially. That's the lowest percentage expressing this opinion since 1987, an 8-point drop compared to 2007. But again, considering the hit taken by most Americans stock portfolios, that a majority of Americans still hold this view is perhaps more striking.
Ever-More Hyper Partisan Public
The distance between the two major tribes of American politics has never been greater. Pew has consistently asked 48 questions on Americans values since 1987. The average difference of opinion over the scope of these questions has steadily risen, from 9 points as recently as 1997 to 16 points today.
The rise in hyper partisanship was visible within weeks of Obama taking office, on presidential approval in particular. The partisan gap has raised more eyebrows because of Obama's pledge throughout the 2008 campaign to bridge the very same divide.
The greatest partisan gap on policy views, 39 points, is over the issue of health care. That may prove a harbinger of coming partisan rancor. Obama pledges to push healthcare reform through Congress later this year.
When Americans were asked if they are "concerned about the government becoming too involved in health care," 68 percent of Republicans said yes while only 29 percent of Democrats agreed.
Views of government regulation echo the same trend.
The crisis has only hardened Republicans' view of regulating the free market. Three fourths of Republicans believe government regulation does more harm than good, compared to 57 percent two years ago.
The Great Recession has had the opposite effect on Democrats. Democrats held roughly the same view as Republicans on regulation in 2007. Today, only 41 percent of Democrats believe regulation does more harm than good.
This gap on regulation is even larger when considered through the polemic lens of political debates. Call it the George Will-Paul Krugman effect. Fully 81 percent of conservative Republicans believe regulation does more harm than good while only 29 percent of liberal Democrats agree. In 2007, liberal Democrats and conservative Republicans held the same view.
Views on the role of government have long served as a strong indicator of partisanship. Tellingly, Republicans are thinking like 1994, Pew data finds, the highpoint in Americans small-government ethos. One might say Democrats are thinking like 1964-- the height of the Great Society. Based on Pew's research, Democrats are as positive about the role of government as they have been since the study began.
Other issues that betray the largest partisan divide include the environment, national security and affirmative action.
Republicans Bad Shape
Democrats hold about a 20-point advantage in public approval, with 40 percent of Americans holding a favorable view of Republicans and 59 percent holding a favorable view of Democrats.
Republicans are not pleased either. In 2004, two-thirds of Republicans believed their party was doing an "excellent or good job" standing up for its traditional positions on the size of government, cutting taxes and supporting traditional social values. Today, only one-quarter of Republicans said the same. By contrast, 61 percent of Democrats give their party high marks, a rise from 43 percent in 2007.
Republicans' ranks are as thin as they have been in the last quarter century, according to Pew's tracking. Democrats have gained a 9-point edge in party identification in the past five years. That's a large shift but not historical. Between 1956 and 1961 Democrats changed the party-ID margin 13 points to their favor and between 1983 and 1985 Republicans changed the margin 17 points to their favor, according to Gallup Poll tracking.
By Pew's measure, Democrats' advantage in partisan affiliation has actually ebbed between December 2008 and April 2009, from 39 to 33 percent. Over the same period Republicans have slipped from 26 to 22 percent.
But as Pew notes, one factor distinguishing today's party-ID gap from past transitions in partisan identification is that unlike Republicans in the mid 1980s or Democratic gains by 1961, the GOP's losses have not translated into Democratic gains. Thirty-five percent of adults indentify as Democrats, similar to last year.
Most former Republicans, Pew found, indentify as independents. This trend is seen in the makeup of the middle. Half of independents view themselves as moderates, but today, conservative independents outnumber liberal independents by a 2:1 ratio.
Republican ranks have thinned but conservative ranks have remained constant, a trend also seen in exit polls last year. Pew finds no significant shift in the past decade on either partisan flank; 37 percent of Americans indentify as conservative compared to 19 percent who identify as liberal.
But as Republican numbers dwindle they have not become a far more conservative bloc. Two-thirds of Republicans describe themselves as conservative, up only 3 points since 2004.
Still, Pew's study offers yet another indicator of the GOP's regional problems. Pew finds that Democrats now outnumber Republicans by an almost 2:1 ratio in the Northeast. As recently as the early 1990s, this northeastern gap hardly existed.
Rise of Independents
In so partisan an era, is it any surprise that the ranks of independents continue to swell?
Pew finds that 36 percent of Americans describe themselves as independent, matching the 1992 peak when third-party candidate Ross Perot stormed onto the political stage.
Independents have moved rightward on economic issues in particular over the past two years, not a good sign for an ambitious president looking to reverse Ronald Reagan's small government philosophy. This trend is likely in part related to the movement of Republicans to the independent label.
Independents now hold a more conservative view on big business and some roles of government. For example, Pew notes, in the past two decades both independents and Republicans have become more skeptical of expanding the social safety net. They also agree with Republicans in their opposition to affirmative action.
But independents are left leaning on cultural issues like religion and homosexuality. They lean slightly toward Democrats on foreign policy and national security issues as well. Yet even this latter trend is not clear-cut.
For example, a slim majority of Americans believe that the best way to ensure peace is through military strength. Independents precisely mimic the overall trend on peace through strength, with 53 percent agreeing. Independents break with Republicans by 22 points and Democrats by 10 points. But Democrats fall below the 50-percent bar for public support, while independents rise above.
The steadiness of the American outlook may be the most notable trend of the study. One example is the “peace through strength” question. That outlook was 9-points stronger in 2002, following the September 11 attacks, but generally a slim majority have supported an aggressive military posture on the world stage for the past two decades.
The same pattern is found on the United States role in the world. Nine in ten Americans also agree that “it’s best for our country to be active in world affairs,” a view unchanged since 1987.
In Depth: 8 Things Americans Believe in 2009
Austrian Recipe vs. Keynesian Fantasy
Austrian Recipe vs. Keynesian Fantasy
The current crisis has revealed the Keynesian roots of mainstream economics. The only debate has been the type and size of bailouts and stimulus packages. For example, Nobel laureate Joseph Stiglitz of Columbia University thinks nationalization is preferable to the Geithner-Summers toxic-asset-relief plan. The Keynesian fantasy is really a monomania because ultimately it is a fixation on a single panacea — more government spending. Meanwhile, the Austrians have the opposite set of policy guidelines and have heroically held to their recipe of liquidation.
The high degree of unanimity among mainstream economists in support of the bailouts and stimulus packages came into sharp relief at the recent convention of the American Economic Association. In addition to this unanimity, mainstream economists have become more influential and powerful than ever before. For example, Paul Krugman, the most recent Nobel laureate in economics and columnist for the New York Times, supports the stimulus packages to combat the recession. No matter how many new plans are offered, his only complaint is that it is not enough. Krugman's former colleague at Princeton University, Ben Bernanke, who is now in charge of the Federal Reserve, believes that if he can fix the problems in the "financial economy" he can prevent problems spreading to the "real economy." Larry Summers, former economist and president of Harvard University is now President Obama's director of the National Economic Council and presumably the coordinator of plans to address the economic crisis. It is interesting to note that Summers is the son of two academic economists and is the nephew of Nobel laureates, Paul Samuelson and Kenneth Arrow. He is also considered a mentor of Secretary of the Treasury Timothy Geithner, who worked under Summers in the Treasury department during the Clinton administration.
All this suggests to me that this crisis is a "market test" for mainstream economics. Never before have so many academic economists held such primary roles in the economic policy of the federal government. If we include the two outsiders, Stiglitz and Krugman, with the two powerful insiders, Bernanke and Summers, we get a good sample of the elite mainstream economics. Given that Congress has voted on very few of the many measures to address the economic crisis, this economic team, including Secretary Geithner, is presumably responsible for designing the bulk of the responses to the crisis.
Their responses amount to Keynesian economics on steroids. In the last quarter of 2007, there were the typical interest rate cuts by the Federal Reserve. Then, in January 2008, the first of the unprecedented moves came from Bernanke when the Fed began auctioning off reserves at the discount window. This was followed by one unprecedented response after another, bailouts, stimulus, and government guarantees, such as increasing FDIC insurance coverage on bank deposits and extending it to money-market mutual funds, but it all amounts to trillions of dollars of more government spending. Obama did not really bring "change"; he only increased the magnitude and speed of the policy responses.
Bailouts, stimulus packages and guarantees should be seen as a kind of backdoor protectionism. Washington is protecting Wall Street; it's protecting the banks; it's protecting the auto companies; and it's protecting "jobs" in general. Foreigners have already raised concerns about this bailout-style protectionism and the potential of a global trade war. Of course, if you make this point to one of the elite economists in Washington, they would scoff and deny the charge. Why? Because every economist — even mainstream economists — knows that protectionism will just make the problems worse. The Smoot-Hawley Tariff made the Great Depression much worse, and such increased protectionism can lead to trade wars.
The Austrian recipe for economic crisis is very simple and requires little action on the part of government. It only seems "hard" because of the presumption that the Keynesian approach could possibly be less painful. However, if you understand that the Austrian recipe is correct — that it would produce quicker and better results, and that the Keynesian approach is a recipe for disaster — then it is the obvious course to take.
Here are the passive ingredients of the Austrian recipe:
- Allow liquidation of bankrupt firms and debt (no bailouts)
- Allow prices to fall (no monetary inflation)
- Do not prop up employment (no stimulus)
- Give no assurances against failure (no nationalizations of GSEs or expanding FDIC coverage)
- Do not subsidize unemployment (no extending of unemployment insurance)
- Do not discourage "hoarding," i.e., saving
This recipe will produce the quickest possible recovery and minimize the magnitude of economic pain. The active side of the Austrian policy response would be to reduce the size of government, budget, taxes, and regulations.
It should be pretty obvious that the Austrians and mainstream/Keynesians have polar opposite views when it comes to solving the current economic crisis. To see how it might turn out, let us take a look back in American economic history.
The Next Super Cycle?
Mainstream economics identifies turns in the business cycle with the National Bureau of Economic Research's dating of American business cycles. In the table of cycle dating, the center column is the length of contractions in months. It appears to suggest that contractions are becoming shorter in duration while expansions have become longer in duration. However, there are many significant problems with NBER's cycle dating.
One problem to note is that the NBER dating obscures what I call "super cycles," which should not be confused with Kondratiev or Elliot Wave cycles. The first of these super cycles is the Progressive Era when a host of radical changes were made to the Constitution, government, and the economy. This super cycle encompasses the five cycles from 1907 to 1921. The second super cycle was the Great Depression from 1929 through World War II and the third super cycle was the Great Stagflation of the 1970s, which lasted from 1970 to 1982.
Another problem is how best to measure the economy over the business cycle. NBER looks at many factors in its dating of peaks, troughs, and recessions, but it largely boils down to GDP. One problem with this approach is that over time government spending has increased relative to the private sector, rising from just a few percent to a large minority of all spending in the economy. Federal government spending is less susceptible to cutbacks during recessions due to government's power to run budget deficits, tax, and inflate. The large amounts of government spending automatically makes more recent cycles seem less severe than older cycles when measured in terms of GDP.
However, government spending does not have its value tested with consumers in the market, and much of the spending is actually bad for the economy. Government could pay people to dig ditches and other people to fill the same ditches, and it would increase GDP, but no one argues this is the path to prosperity. Austrians would argue that such ditch digging and filling are actually better for the economy than what government actually does with our money.
Murray Rothbard addressed the problem of measuring a big government economy with the concept of private product remaining (with producers), or PPR, which basically takes GDP and subtracts from it twice the amount of government spending. Government spending is subtracted once to obtain gross private product and it is subtracted again to account for all the resources that government has siphoned off from the private sector. For example, applying PPR to the stagflation super cycle of the 1970s, we find that PPR (adjusted for inflation) increased from $600 billion in 1969 to merely $729 billion in 1982. That means there was anemic average economic growth of less than 1.4% per year during this period.
Rothbard then accounts for the increase in population by looking at the number of producer-breadwinners in the private sector (not government employees). Using calculations provided by Robert Batemarco, Real PPR per productive worker actually fell from $9,134 in 1969 to just $8,708 in 1982. What first appears to be four short contractions in the NBER dating system turned out to be an economic nightmare for the average American. On top of lower real incomes, when adjusted for inflation, the value of stocks fell by more than 50% during this period.
The three super cycles of the 20th century therefore coincided with the rise of the Progressives, the New Dealers, and the Keynesians.
In contrast, if we look at normal recessions, where the country is not at war, is on the gold standard, and where Keynesian policy is not dominant, we find a much different story. For example, the recessions of 1953–1954, 1957–1958, and 1960–1961 were short in duration, shallow in depth, and followed by robust growth. In terms of real GDP, economic growth briefly turned negative by one percent in the first and third recessions and by 2.5% in the second recession, which was the briefest of the three. If we look at the three recessions in terms of real PPR (per producer) we find that the first recession did not produce an annual decrease, but an increase of 2.7% in 1954, and more than a 5% increase in 1955. The second recession shows an annual drop of 2% in 1958 and a 6% increase in 1959. The final recession shows an annual drop of 2% in 1960, an increase of 2% in 1961, and an increase of 4.5% in the year following the recession.
The housing bubble peaked in July 2005. Private investment, a leading indicator of the economy, peaked at the end of 2006. As worsening conditions in the home building industry spread, the economy stumbled in late 2006 and again in late 2007 before falling into clear depression in 2008. The size and scope of the Keynesian policy remedies employed since late 2007 have been unprecedented. With the renaissance of Keynesian economics we can only conclude that the preconditions for a new super cycle have been established, and that if the policies are not reversed we face many years of depressed economic conditions.
History as Fiction
History as Fiction Designed to Unite Us
Today, history is regarded, if not as one of the social sciences, then at least as an independent discipline that deals in facts, not fancies; in edification, not entertainment. But it was not always thus. Harry Elmer Barnes reports that before the 18th century, "there had been either no attempt to cite sources or else the citations had been hopelessly confused; there had been no general practice of establishing the genuineness of a text; there had been little hesitancy in altering the text of a document to improve the style."[1] And even after the 18th century itself had begun to fade into history, the new standards Barnes describes had still not really become universal. On the contrary: "Prior to the French Revolution," Hayden White writes,
historiography was conventionally regarded as a literary art. … The eighteenth century abounds in works which distinguish between the study of history on the one side and the writing of history on the other. The writing was a literary, specifically rhetorical exercise, and the product of this exercise was to be assessed as much on literary as on scientific principles."[2]
In point of fact, until late in the 19th century, most historians regarded themselves neither as social scientists (a concept that did not even exist before the 19th century) nor as humanistic scholars, but rather as literary men, men of letters. The stories they were telling were true, of course, but nonetheless they were telling stories, just as though they were novelists, and their job, as they saw it, was to tell their stories as vividly and poetically as any novelist. Peter Novick reports that
George Bancroft, William Lothrop Motley, William H. Prescott, and Francis Parkman … each, in at least one of their major works,employed the organization of the stage play, with a prologue, five acts, and an epilogue. Sir Walter Scott was, by a wide margin, the most popular and imitated author in the early-nineteenth-century United States, and the florid style of the "literary" historians gave clear evidence of his influence.[3]
And not only did the most representative 19th-century historians think of themselves as litterateurs, most of them saw themselves in particular as the providers of an important kind of inspirational literature. As Novick puts it,
[t]he "gentleman amateurs" wrote not to keep the pot boiling, or out of professional obligation to colleagues, but because they had an urgent message to deliver to the general reading public. "If ten people in the world hate despotism a little more and love civil and religious liberty a little better in consequence of what I have written, I shall be satisfied," Motley wrote.[4]
More specifically, most of the 19th-century American historians were convinced that, as Peter Charles Hoffer writes,
by celebrating our history we might heal our political differences. Look to the Founders, these historical boosters argued; praise, exalt,and honor them. Ignore their faults and failings, for the message must be an uplifting one to which everyone can subscribe. The greatest of the Founders, George Washington, became at the hands of the itinerant bookseller and preacher Mason Weems an unblemished paragon of virtue, whose "great talents, constantly guided and guarded by religion he put at the service of his country."[5]
Of course, in order to transform George Washington into "an unblemished paragon of virtue," Weems had to exercise a bit of literary license,even making up one of his most famous anecdotes — that of the young Washington and the cherry tree — out of whole cloth.
But Weems was far from alone in employing such techniques. As Hoffer puts it, "Against the vast profit perceived in this approach, what reader could object to the historians' rearrangement of their subjects' language, or to their selective use of facts?" Hoffer calls attention to "an 1835 edition of Washington's letters, edited by Reverend Jared Sparks,"in which the editor "regularly altered Washington's words" and "sometimes pasted one piece of a document into another document entirely."Yet, so far as readers and other historians were concerned, "[i]t did not seem to matter …. After all, the entire purpose of editing the letters was moral instruction, and ministers like Sparks long had the tradition of cutting and pasting Scripture in their sermons." [6]
Hoffer also suggests that we take a close look at George Bancroft's "monumental ten-volume History of the United States, the last volume of which appeared in 1874. Bancroft's History was to become the standard work on American history for generations. … When he died in 1891, he was the most honored of our historians, and his works were widely read." Bancroft "believed that his job was to write a chronicle that would make his readers proud of their country's history," Hoffer tells us,
[a]nd when it suited his didactic purposes, he fabricated. He "felt free [as Bancroft himself explained in the preface to his great work] to change tenses or moods, to transpose parts of quotations, to simplify language, and to give free renditions." If the purpose of history was to tell stories that taught lessons, such "blending" could hardly be objectionable, and for contemporary reviewers, it was not.[7]
Hoffer notes that Bancroft was also sloppy about crediting his sources. For example, he "made no real distinction between primary sources and secondary sources. When a secondary source cited a passage from a primary source, Bancroft felt perfectly free to reuse the language of the secondary source in his own account without identifying it as such. He cited the secondary-source pages, but copied or closely paraphrased rather than quoted." After all, a work of history was a work of literature, was it not? All that really mattered was whether the passage in question fit into the flow of the style, whether it fit artistically into the work — not whether it was accompanied by some sort of footnote!
It was the tail end of the 19th century before the calling of the historian had been professionalized and academicized to such an extent that a majority of practitioners in the field had come to hold the view of their discipline that we now take for granted — the historian as dispassionate seeker after truth, a scholar, much more like an anthropologist or sociologist than a novelist or playwright. Still, there were holdouts. The long tradition of historical works written by novelists and poets and offered frankly, not as scholarship but as lovely letters, died particularly hard. In the 1890s, just as the new social-scientist paradigm was at last coming to dominate the historical profession, Edgar Saltus, a then very popular and successful writer who is now utterly forgotten, was putting the finishing touches on his best known and most frequently reprinted book, Imperial Purple (1892), a specimen of what Claire Sprague calls "a genre almost non-existent today — history decked in the colorful impressionism of the magazine essay of the last [19th] century."[8] Before his death in 1921, Saltus would also do for Russia's Romanov dynasty what he had done for the Caesars of imperial Rome in Imperial Purple. The Imperial Orgy was brought out by Boni and Liveright in 1920.
A few years later, the renowned poet Carl Sandburg would begin publishing an even more ambitious work, though one quite as free of footnotes or bibliography as Saltus's works had been — a six-volume biography of Abraham Lincoln. "The two volumes of The Prairie Years were the publishing event of 1926," reports James Hurt, "and the four volumes of The War Years were an equal success in 1939." [9] As late as 1969, Richard Cobb, whom John Tosh describes as "a leading historian of the French Revolution," could write of the historian that "His principal aim is to make the dead live. And, like the American 'mortician,'he may allow himself a few artifices of the trade: a touch of rouge here, a pencil-stroke there, a little cotton wool in the cheeks, to make the operation more convincing."[10] Only five years later, in 1974, the late Shelby Foote, who made his early reputation as a novelist, published the last volume of what The New York Times called his "2,934-page, three-volume, 1.5 million-word military history, The Civil War: A Narrative," a work characterized by "punctilious, but defiantly unfootnoted research." It was immensely popular, earning "considerably more in royalties than any of his novels had earned," and winning him an invitation to serve as a consultant and onscreen expert for the "smash hit" Ken Burns documentary on the war, a job that made Foote into "a prime-time star."[11]
It is difficult indeed to ignore the many similarities between the historian's task and that of the novelist. As Hayden White writes, "[v] iewed simply as verbal artifacts histories and novels are indistinguishable from one another." Moreover,
the aim of the writer of a novel must be the same as that of the writer of a history. Both wish to provide a verbal image of "reality." The novelist may present his notion of this reality indirectly, that is to say, by figurative techniques, rather than directly, which is to say, by registering a series of propositions which are supposed to correspond point by point to some extra-textual domain of occurrence or happening, as the historian claims to do. But the image of reality which the novelist thus constructs is meant to correspond in its general outline to some domain of human experience which is no less "real" than that referred to by the historian.[12]
To achieve this common end of "providing a verbal image of 'reality,'" both historians and novelists tell stories. "The late R. G. Collingwood insisted," White reminds us,
that the historian was above all a story teller and suggested that historical sensibility was manifested in the capacity to make a plausible story out of a congeries of "facts" which, in their unprocessed form, made no sense at all. In their efforts to make sense of the historical record, which is fragmentary and always incomplete, historians have to make use of what Collingwood called "the constructive imagination," which told the historian — as it tells the competent detective — what "must have been the case" given the available evidence ….
"Collingwood suggested," according to White, "that historians come to their evidence endowed with a sense of the possible forms that different kinds of recognizably human situations can take. He called this sense the nose for the 'story' contained in the evidence or for the 'true' story that was buried in or hidden behind the 'apparent' story."[13] Journalists, those historians in a hurry who provide what legendary Washington Post publisher Phillip Graham famously called the "first rough draft of … history" (and whose rough draft not infrequently becomes the final draft), make a very similar distinction. You either have a "nose for news," they say — good "news sense," good "news judgment" — or you don't. If you do, you can see the story contained in the evidence, the true story buried or hidden behind the apparent (or, sometimes, the official) story.
The important point here is that describing any historical event,whether one that took place yesterday or one that took place a century ago, by telling a story is inescapably an act of imagination. As White sketches the problem,
traditional historiography has featured predominantly the belief that history itself consists of a congeries of lived stories, individual and collective, and that the principal task of historians is to uncover these stories and to retell them in a narrative, the truth of which would reside in the correspondence of the story told to the story lived by real people in the past.[14]
Yet, "real events do not offer themselves as stories …."[15] In fact,
the notion that sequences of real events possess the formal attributes of the stories we tell about imaginary events could only have its origin in wishes, daydreams, reveries. Does the world really represent itself to perception in the form of well-made stories, with central subjects, proper beginnings, middles, and ends, and a coherence that permits us to see "the end" in every beginning? Or does it present itself … either as mere sequence without beginning or end or as sequences of beginnings that only terminate and never conclude?[16]
In short, "stories are not lived; there is no such thing as a real story. Stories are told or written, not found. And as for the notion of a true story,this is virtually a contradiction in terms. All stories are fictions. Which means, of course, that they can be true only in a metaphorical sense and in the sense in which a figure of speech can be true."[17]
A metaphor is a lie that conveys truth — or, at any rate, what the maker of the metaphor regards as truth. "Men are pigs." "The world is a ghetto." "The years are gusts of wind, and we are the leaves they carry away."[18] Taken literally, all these statements are untrue. They are falsehoods, lies. Taken figuratively, however, each of them conveys an arguable truth about its subject. A novel — a long, elaborate lie, involving the events in the lives of wholly imaginary human beings — is a metaphor for human life in the world as we know it. In this sense,every work of fiction is philosophical, because every work of fiction conveys an at least implicit statement about or judgment upon the human condition.
This does not mean that every fiction writer is also a philosopher or even philosophical by temperament. Consider, in regard to this issue, the testimony of three fiction writers who are also, in some sense, philosophers: Jean Paul Sartre, William H. Gass, and Ayn Rand.[19] According to Gass, "fiction, in the manner of its making, is pure philosophy," and "the novelist and the philosopher are companions in a common enterprise, though they go about it in different ways."[20] "The esthetic aim of any fiction," he writes, "is the creation of a verbal world …, often as intricate and rigorous as any mathematic, often as simple and undemanding as a baby's toy, from whose nature, as from our own world, a philosophical system may be inferred …."[21] Moreover, "the world the novelist makes is always a metaphorical model of our own."[22] Nevertheless, "[t]he philosophy that most writers embody in their work… is usually taken unconsciously from the tradition with which the writer is allied." Alternatively, "[h]e may have represented, in just the confused way it existed, the world his generation saw and believed they lived in …."[23]
Rand agrees. "The art of any given period or culture," she writes, "is a faithful mirror of that culture's philosophy." This is so because "[s]ome sort of philosophical meaning …, some implicit view of life, is a necessary element of a work of art." Art is "the voice of philosophy."[24] Indeed, in a sense, art is the language we employ to express philosophical ideas.
Just as language converts abstractions into the psycho-epistemological equivalent of concretes, into a manageable number of specific units — so art converts man's metaphysical abstractions into the equivalent of concretes, into specific entities open to man's direct perception. The claim that "art is a universal language" is not an empty metaphor, it is literally true ….
The philosophical ideas that are "in the air," taken for granted, during the lifetime of a fiction writer need not, cannot, be the only source of the philosophical ideas that find their way into that fiction writer's fiction, however. Another source, one drawn upon by many novelists, is religion, which Rand calls "the primitive form of philosophy."[25] Still another, drawn upon inescapably by every fiction writer, is the individual writer's "sense of life."
"A sense of life," Rand wrote in 1966, "is a pre-conceptual equivalent of metaphysics, an emotional, subconsciously integrated appraisal of man and of existence."
Long before he is old enough to grasp such a concept as metaphysics,man makes choices, forms value-judgments, experiences emotions and acquires a certain implicit view of life. Every choice and value-judgment implies some estimate of himself and of the world around him — most particularly, of his capacity to deal with the world. He may draw conscious conclusions, which may be true or false; or he may remain mentally passive and merely react to events (i.e., merely feel). Whatever the case may be, his subconscious mechanism sums up his psychological activities, integrating his conclusions, reactions or evasions into an emotional sum that establishes a habitual pattern and becomes his automatic response to the world around him. What began as a series of single, discrete conclusions (or evasions) about his own particular problems, becomes a generalized feeling about existence, an implicit metaphysics with the compelling motivational power of a constant, basic emotion — an emotion which is part of all his other emotions and underlies all his experiences. This is a sense of life.[26]
According to Rand, "[t]he key concept, in the formation of a sense of life, is the term 'important,'" and it is crucial that we understand, she says, that
"[i]mportant" — in its essential meaning, as distinguished from its more limited and superficial uses — is a metaphysical term. It pertains to that aspect of metaphysics which serves as a bridge between metaphysics and ethics: to a fundamental view of man's nature. That view involves the answers to such questions as whether the universe is knowable or not, whether man has the power of choice or not,whether he can achieve his goals in life or not. The answers to such questions are "metaphysical value-judgments," since they form the basis of ethics.
In the end, "[i]t is only those values which he regards or grows to regard as 'important,' those which represent his implicit view of reality, that remain in a man's subconscious and form his sense of life."[27]
And what has all this to do with fiction writing? Everything, for, as Rand puts it, "[e]sthetic abstractions are formed by the criterion of: what is important?" Another way of saying this is that "[a]n artist … selects those aspects of existence which he regards as metaphysically significant — and by isolating and stressing them, by omitting the insignificant and accidental, he presents his view of existence."[28] Thus, particularly among those fiction writers who are unphilosophical, but to some extent among all fiction writers, "[i]t is the artist's sense of life that controls and integrates his work, directing the innumerable choices he has to make, from the choice of subject to the subtlest details of style."[29] Accordingly, Rand defines art as "a selective re-creation of reality according to an artist's metaphysical value-judgments."[30]
Needless to say, then, by publishing a novel, a novelist displays his metaphysical value-judgments, his sense of life, for all to see. As Rand puts it, "nothing is as potent as art in exposing the essence of a man's character. An artist reveals his naked soul in his work …."[31] Sartre saw the same phenomenon. Literary artists, he wrote, are noted for "the involuntary expression of their souls. I say involuntary because the dead, from Montaigne to Rimbaud, have painted themselves completely, but without having meant to — it is something they have simply thrown into the bargain."[32] They could hardly have done otherwise, however, Sartre notes, for
[i]f I fix on canvas or in writing a certain aspect of the fields or the sea or a look on someone's face which I have disclosed, I am conscious of having produced them by condensing relationships, by introducing order where there was none, by imposing the unity of mind on the diversity of things. That is, I feel myself essential in relation to my creation.[33]
For when it comes to "the unique point of view from which the author can present the world," it is always and everywhere true that "if our creative drive comes from the very depths of our heart, then we never find anything but ourselves in our work."[34]
But of course, all this is true of historians as well. Most historians are no more philosophically minded than most fiction writers. On the contrary, they are notoriously "sceptical of abstraction," as John Gray put it not long ago in the New Statesman.[35] Yet every work they produce has philosophical implications, provides support for various general ideas — ideas about the nature of government, for example, and the utility of war, and the way national economies work. Where do these ideas come from, in the works of unphilosophical historians wary of "loose generalization" (as Gray puts it)? Some of them are inherited, so to speak, from earlier practitioners of the historian's particular area of specialization. Some are absorbed unthinkingly from the culture in which the historian grows up and matures. Still others are provided by a sense of life. For every historian has a sense of life, just as every fiction writer does — a set of "metaphysical value-judgments" built up subconsciously over years of living until they provide a sort of "automatic response to the world" and an automatic answer to such questions as "whether the universe is knowable or not, whether man has the power of choice or not, whether he can achieve his goals in life or not." How any given historian has inwardly answered such questions will exercise considerable influence over what that historian regards as a realistic view of government, war, and economics — and, thus, how that historian treats these subjects in his or her work.
It is little wonder, then, that Roy A. Childs, Jr., ever an assiduous student of Ayn Rand, offered the following definition of history in his influential essay, "Big Business and the Rise of American Statism": "History is a selective recreation of the events of the past, according to a historian's premises regarding what is important and his judgment concerning the nature of causality in human action."[36] Childs saw clearly that the historian proceeds much as the fiction writer proceeds, and obtains similar results. Nor was he alone in doing so. John Tosh writes that "[i]n many instances the sources do not directly address the central issues of historical explanation at all. … Questions of historical explanation cannot, therefore, be resolved solely by reference to the evidence. Historians are also guided … by their reading of human nature ….[37] The legendary economist and social theorist Ludwig von Mises notes that any historical writing "is necessarily conditioned by the historian's world view" and stresses the importance of what he calls "the understanding" in making sense of historical evidence.
The historian's genuine problem is always to interpret things as they happened. But he cannot solve this problem on the ground of the theorems provided by all other sciences alone. There always remains at the bottom of each of his problems something which resists analysis at the hand of these teachings of other sciences. It is these individual and unique characteristics of each event which … the historian can understand … because he is himself a human being.[38]
More recently, the historian John Lewis Gaddis has proposed that every historian approaches his subject with certain assumptions, based on personal experience, about "how things happen" in the world — assumptions about "the way the world is," [39] the way the world works. "Sorting out the difference between how things happen and how things happened,"Gaddis writes, "involves more than just changing a verb tense. It's an important part of what's involved in achieving [a] closer fit between representation and reality."[40]
But if the historical enterprise can be difficult to distinguish from the fictional enterprise (particularly in light of the concept, introduced some four decades ago by Truman Capote, of the "non-fiction novel"),what does this imply about so-called "historical fiction"? Is there any reason a reader should place any more confidence in the work of an historian than in the work of an historical novelist? The answer is that everything depends on what historian we're talking about, what novelist we're talking about, and what kind of historical fiction we're talking about.
The ungovernable state
California
The ungovernable state
As California ceases to function like a sensible state, a new constitution looks both necessary and likely
ON MAY 19th Californians will go to the polls to vote on six ballot measures that are as important as they are confusing. If these measures fail, America’s biggest state will enter a full-blown financial crisis that will require excruciating cuts in public services. If the measures succeed, the crisis will be only a little less acute. Recent polls suggest that voters are planning to vote most of them down.
The occasion has thus become an ugly summary of all that is wrong with California’s governance, and that list is long. This special election, the sixth in 36 years, came about because the state’s elected politicians once again—for the system virtually assures as much—could not agree on a budget in time and had to cobble together a compromise in February to fill a $42 billion gap between revenue and spending. But that compromise required extending some temporary taxes, shifting spending around and borrowing against future lottery profits. These are among the steps that voters must now approve, thanks to California’s brand of direct democracy, which is unique in extent, complexity and misuse.
A good outcome is no longer possible. California now has the worst bond rating among the 50 states. Income-tax receipts are coming in far below expectations. On May 11th Arnold Schwarzenegger, the governor, sent a letter to the legislature warning it that, by his latest estimates, the state will face a budget gap of $15.4 billion if the ballot measures pass, $21.3 billion if they fail. Prisoners will have to be released, firefighters fired, and other services cut or eliminated. One way or the other, on May 20th Californians will have to begin discussing how to fix their broken state.
California has a unique combination of features which, individually, are shared by other states but collectively cause dysfunction. These begin with the requirement that any budget pass both houses of the legislature with a two-thirds majority. Two other states, Rhode Island and Arkansas, have such a law. But California, where taxation and budgets are determined separately, also requires two-thirds majorities for any tax increase. Twelve other states demand this. Only California, however, has both requirements.
If its representative democracy functioned well, that might not be so debilitating. But it does not. Only a minority of Californians bother to vote, and those voters tend to be older, whiter and richer than the state’s younger, browner and poorer population, says Steven Hill at the New America Foundation, a think-tank that is analysing the options for reform.
Those voters, moreover, have over time “self-sorted” themselves into highly partisan districts: loony left in Berkeley or Santa Monica, for instance; rabid right in Orange County or parts of the Central Valley. Politicians have done the rest by gerrymandering bizarre boundaries around their supporters. The result is that elections are won during the Republican or Democratic primaries, rather than in run-offs between the two parties. This makes for a state legislature full of mad-eyed extremists in a state that otherwise has surprising numbers of reasonable citizens.
And that is why sensible and timely budgets have become almost impossible, says Jim Wunderman, president of the Bay Area Council, an association of corporate bosses. Because the Republicans are in a minority in the legislature, they have no sway until budget time, when they suddenly hold veto power thanks to the two-thirds requirement. Because in the primaries they have run on extremist platforms against other Republicans, they have no incentive to be pragmatic or moderate, and tend simply to balk.
What was unusual about this year’s deadlock was only its “record lateness”, says Mr Wunderman, which amounted to an “anti-stimulus” that negated much of the economic-recovery plan coming from Washington, DC. “No real conversation is possible on anything that matters,” he says, whether it be California’s fraught water supply, its barbaric prison conditions or its teetering public education.
Representative democracy is only one half of California’s peculiar governance system. The other half, direct democracy, fails just as badly. California is one of 24 states that allow referendums, recalls and voter initiatives. But it is the only state that does not allow its legislature to override successful initiatives (called “propositions”) and has no sunset clauses that let them expire. It also uses initiatives far more, and more irresponsibly, than any other state.
Direct democracy in America originated, largely in the Western states, during the Populist and then Progressive eras of the late 19th and early 20th century. It came to California in 1911, when Governor Hiram Johnson introduced it. At first, it made sense. The Southern Pacific Railroad dominated politics, society and the courts in the young frontier state, and direct democracy would be a welcome check and balance. The state in 1910 had only 2.4m residents, and 95% of them were white. (Today it has about 37m residents, and less than half are white.) A small, homogenous and informed electorate was to make sparing and disciplined use of the ballot to keep the legislature honest, rather as in Switzerland.
Citizen-power gone mad
Sparing and disciplined it stayed until the 1970s. But then came a decade of polarisation and voter mistrust. In 1978 Californians sparked a nationwide “tax revolt” by passing Proposition 13, which drastically limited property taxes and placed a permanent straitjacket on state revenues. That launched an entire industry of signature-gatherers and marketing strategists that now puts an average of ten initiatives a year on the ballot, as Mark Baldassare, the boss of the non-partisan Public Policy Institute of California, has calculated. In 2003 direct democracy reached a new zenith—or nadir, some might say—when Californians “recalled” their elected and sitting governor, Gray Davis, and replaced him with Mr Schwarzenegger.
The minority of eligible Californians who vote not only send extremists to Sacramento, but also circumscribe what those representatives can do by deciding many policies directly. It is the voters who decide, for instance, to limit legislators’ terms in office, to mandate prison terms for criminals, to withdraw benefits from undocumented immigrants, to spend money on trains or sewers, or to let Indian tribes run casinos.
Through such “ballot-box budgeting”, a large share of the state’s revenues is spoken for before budget negotiations even begin. “The voters get mad when they vote to spend a ton of money and the legislature can’t then find the money,” says Jean Ross of the California Budget Project, a research outfit in Sacramento. Indeed, voters being mad is the one constant; the only proposition that appears certain to pass on May 19th would punish legislators with pay freezes in budget-deficit years.
More than half of the initiatives don’t pass, and some that do are sensible. But much of the system has been perverted into the opposite of what Hiram Johnson intended. It is not ordinary citizens but rich tycoons from Hollywood or Silicon Valley, or special interests such as unions for prison guards, teachers or nurses, that bankroll most initiatives onto the ballots.
Then comes a barrage of television commercials, junk mail and robo-calls that leave no Californian home unmolested and the great majority confused. Propositions tend to be badly worded, with double negatives that leave some voters thinking they voted for something when they really voted against. One eloquent English teacher in Los Angeles recently called a radio show complaining that, after extensive study, she could not understand the ballot measures on grounds of syntax.
The broken budget mechanism and the twin failures in California’s representative and direct democracy are enough to guarantee dysfunction. The sheer complexity of the state exacerbates it. Peter Schrag, the author of “California: America’s High-Stakes Experiment”, has counted about 7,000 overlapping jurisdictions, from counties and cities to school and water districts, fire and park commissions, utility and mosquito-abatement boards, many with their own elected officials. The surprise is that anything works at all.
As a result, there is now a consensus among the political elite that California’s governance is “fundamentally broken” and that the state is “ungovernable, unless we make tough choices”, as Antonio Villaraigosa, the mayor of Los Angeles and a likely candidate for governor next year, puts it. What are those choices?
Incremental reform, says one set of analysts. Darrell Steinberg, a thoughtful Democrat who is the current leader of the state Senate, says that the dysfunction is often overstated, since the system was deliberately designed “to ensure that change occurs slowly”. He believes that several piecemeal reforms already slated will fix most of the problem.
So does California Forward, a bipartisan think-tank supported by several of the state’s éminences grises. A change to districting rules should end gerrymandering, starting next year. And there is talk of open primaries in which people vote irrespective of their party affiliation, and then elect a candidate in a run-off between the top two vote-getters, whether from the same party or not. Together, these two steps would make the state’s representative politics more moderate, says James Mayer, California Forward’s director. Representatives should also have longer terms in office, he thinks, to reduce the permanent turnover that pits greenhorn legislators against savvy and entrenched lobbyists.
Founding fathers wanted
Many others, however, now believe that California needs to start from scratch, with a fully-fledged constitutional convention. California’s current constitution rivals India’s and Alabama’s for being the longest and most convoluted in the world, and is several times longer than America’s. It has been amended or revised more than 500 times and now, with the cumulative dross of past voter initiatives incorporated, is a document that assures chaos.
Calls for a new constitution have resurfaced throughout the past century, but never went far. That changed last August, as the budget negotiations were once again going off the rails, when Mr Wunderman of the Bay Area Council renewed the call for a convention and received an astonishing outpouring of support. Mr Schwarzenegger has called a constitutional convention “a brilliant idea” and thinks it is “the right way to go”. (The new constitution would take effect well after he leaves office.) Most encouragingly, says Mr Wunderman, nobody, not even the so-called special interests, has yet come out against a convention.
To the extent that there is scepticism at all, it is not about the idea of a new and cleaner constitution but about the process that might lead to it. If a convention set out to rewrite the entire constitution, it would end in the usual war over hot-button social issues such as gay marriage or the perennial Californian fight over water. And there is concern that “the nutwings are the ones who will show up, not the soccer moms,” as Ms Ross of the California Budget Project puts it. The same partisan extremists bickering about the same controversies would lead nowhere.
To address these concerns, the Bay Area Council, which has become the driving force behind the scheme, has put forth two ideas. First, delegates to the convention should be chosen through the general jury pool to ensure that the whole population, as opposed to partisans or voters, is represented. Second, the scope of the constitutional convention would be explicitly limited to governance issues and the budget mechanism and would exclude all others.
This should enable reform in the most vital and interconnected areas. These are: reducing the two-thirds requirement for budgets and taxes; mandating two-year as opposed to annual budgets; giving local governments more access to local revenues; creating less partisan districts and primary elections; disciplining the process of direct democracy with new rules about signature collection; and introducing a “sunset” commission, as Texas has, that would gradually retire overlapping jurisdictions and offices to achieve something more manageable.
The plan is to introduce voter initiatives in next year’s ballot calling for a constitutional convention, to have the convention the following year, and to put the new constitution on a ballot in 2012, when it would take effect. In the meantime both the incrementalists, such as California Forward, and the wholesale reformers, such as the Bay Area Council, are backing the propositions on next week’s ballot. Even if they succeed, this would only temporarily reduce the urgency for radical reform; failure would cause intolerable pain.
Handouts and loopholes
Handouts and loopholes
America's climate-change bill is weaker and worse than expected
AL GORE calls it “one of the most important pieces of legislation ever introduced in Congress”. Joe Barton, a Republican congressman and global-warming sceptic, says it will put the American economy in a straitjacket. For something that practically no one has read, the American Clean Energy and Security Act provokes heated debate. It would establish a cap-and-trade system for curbing carbon-dioxide emissions, thus transforming the way Americans use energy.
President Barack Obama has long argued that America should join Europe in regulating planet-cooking carbon. But he has left the details to Congress. And the negotiations to craft a bill that might actually pass have not been pretty. The most straightforward and efficient approach to reducing carbon emissions—a carbon tax—was never seriously considered. Voters do not like to hear the word “tax” unless it is followed by the word “cut”.
So Mr Obama proposed something very similar to a carbon tax, albeit slightly more cumbersome. Industries that emit carbon dioxide would have to buy permits to do so. A fixed number of permits would be auctioned each year. The permits would be tradable, so firms that found ways to emit less than they were entitled to could sell some of their permits to others. The system would motivate everyone to reduce emissions in the most cost-effective way. It would raise energy prices, which is the point, but it would also raise hundreds of billions of dollars, most of which Mr Obama planned to give back to voters. Alas, that plan looks doomed.
On May 15th Henry Waxman and Edward Markey, the Democratic point-men on climate change in the House of Representatives, unveiled a bill that would give away 85% of carbon permits for nothing, with only 15% being auctioned. The bill’s supporters say this colossal compromise was necessary to win the support of firms that generate dirty energy or use a lot of it, and to satisfy congressmen from states that mine coal or roll steel.
Giving away permits creates several problems. First, it generates no money, thereby royally messing up Mr Obama’s budget. Second, it means that the permits go not to those who value them most (as in an auction) but to those whom the government favours. Under Waxman-Markey, electricity-distributors would get the largest share, with the rest divided between energy-intensive manufacturers, carmakers, natural-gas distributors, states with renewable-energy programmes and so on. Oil firms, with only 2% of the permits, feel hard done by. But most polluters, having just been promised hundreds of billions of dollars’ worth of permits for nothing, are elated. So it is not just the owners of ski resorts and businesses with negligible carbon footprints that are queuing up to praise the bill. Duke Energy, a power generator with lots of coal-fired plants, is also enthusiastic.
The grand handout to shareholders is meant to last until around 2030, by which time all permits will be auctioned. In the meantime, the bill’s supporters say that consumers will be protected from higher energy prices because the largest chunk of the free permits will go to tightly regulated electricity distributors. Regulators can simply order these firms to keep prices low. Problem solved.
Not so, says Alan Viard, an analyst at the American Enterprise Institute, a conservative think-tank. If electricity is cheap, Americans will buy more of it, generating more emissions than would otherwise have been the case. Other industries will accordingly have to cut their emissions more, since there are a fixed number of permits. The cost of this will be passed on to consumers. Overall, ordinary Americans will endure price hikes just as severe as they would have under Mr Obama’s plan, while receiving far less compensation. Mr Viard likens giving permits to polluters to handing the proceeds of a tobacco tax to the shareholders of Philip Morris.
Another problem with Waxman-Markey is its complexity. At 932 pages, it is half as long again as an already-bloated previous draught. It includes a dizzying array of handouts, mandates and technical standards for everything from hot-food-holding cabinets to portable spas. It allows for a huge increase in “offsets”—where a polluter pays someone else to stop polluting instead of curbing his own emissions. These are open to abuse, as Europe’s experience shows. There is little to stop foreign factories from starting to pollute just so that someone will pay them to stop.
Among environmentalists, support for the bill varies. Some denounce it for doing less to curb greenhouse gases than was once promised. It aims to cut emissions by 17% below the level in 2005 by 2020, instead of 20%. Greenpeace’s American arm says it cannot support the bill in its current state. Other greens reckon that if this is the strongest bill that can pass, the best idea is to pass it now and tighten it later.
That is the most likely outcome, though far from certain. Mr Waxman wants his bill to pass through the House energy committee this week. Republicans such as Mr Barton could slow it down by offering hundreds of amendments or forcing it to be read aloud. (Mr Waxman has hired a speed-reader, just in case.) But they probably do not have enough votes to stop it, either in committee or when it eventually comes before the full House.
The next step will be the Senate, where the minority has more power. It is hard to predict what will happen there. Republicans plan to berate the bill as both a job-destroyer and a handout to big business. Some will also argue that it will make little difference to the climate if China and India do not also curb their emissions.
The bill’s supporters retort that both countries will come on board only if America sets a good example. Time is running out before the big global climate conference in Copenhagen in December. If the United States does not have a cap-and-trade law in place by then, the chance of a global agreement will plummet. The bill may be imperfect, says Steve Tripoli of Ceres, a green business group, but having no bill at all would be unthinkable.
Meanwhile, Mr Obama continues to attack climate change from other angles. On May 19th he announced that he would impose tougher fuel-efficiency standards. Carmakers will have to produce vehicles that go eight miles farther on a gallon of petrol by 2016. Cars must eke out 39 miles (63km) per gallon, on average; light trucks must manage 30 miles. Carmakers, some of whom would be bankrupt if Mr Obama was not pumping them full of taxpayers’ money, meekly applauded. In the past an agreement such as this would have been thought impossible, the president crowed.
Mr Obama admitted that more fuel-efficient cars might cost more. But he promised that motorists would save thousands of dollars by cutting their fuel bills. In fact, they can already cut their fuel bills by buying smaller cars, but most choose not to. Mr Obama could discourage petrol use more directly and efficiently by taxing the stuff, but that would be unpopular. Ideally, politicians who want to save the planet would be honest with voters about how much this will cost. But America’s leaders do not seem to think Americans are ready for straight talk about energy.
Real Men at Work
The Hubble: Real Men at Work
Amid our obsession with what's wrong comes a magnificent success.
The news inundates us now with daily battle reports from the low-grade war that is America's politics. One cost is a national preoccupation with failure.
Politics always and forever is about the failure of others. President Obama appears before us daily, and that ensures we will hear again about "the failed policies of the past." The laws of political physics then require that his opponents crack back at his manifest failures. To spend all one's time with politics is to marinate in failure.
It becomes easy to forget that most people go to work each day to succeed, not fail. Still, it was startling last week to catch sight on TV of men floating in space. This was Servicing Mission 4, NASA's long-scheduled flight to fix the space-based Hubble telescope.
It was pure success. Anyone able to avert their eyes the past week from Speaker of the House Pelosi swimming in her own marinade of failure could have watched a team of Americans doing miracles in space for days.
![[Wonder Land]](http://s.wsj.net/public/resources/images/OB-DS289_oj_wl0_DV_20090520193738.jpg)
Associated Press The Hubble telescope has become the Washington Monument of U.S. science -- beautiful, beloved and important. One of the astronauts who went up to fix it, astronomer John Grunsfeld, this week called it "arguably the most important scientific instrument ever created."
It was put up there, 350 miles above the Earth, because the sight line into the stars of ground-based telescopes is impaired by the Earth's atmosphere. For 19 years the Hubble has wowed scientists with its data and the rest of us with its eerie, awesome images of other galaxies. It put "black hole" into everyone's vocabulary.
Unfortunately, as SM4's astronauts discovered when they arrived, the Hubble's bolts were stuck -- just like when we can't get the lug nuts off a flat tire in the middle of nowhere. Except that you're not floating alongside your car at 17,000 miles an hour in a space suit with thick gloves that barely bend and while breathing bottled oxygen.
"I don't think it's coming out, Drew," astronaut Mike Massimino said to Drew Feustel on spacewalk four as he fought a bolt on a handrail attached to the Hubble's spectrograph, which transforms light into colors that reveal celestial chemistry.
Mike Massimino did what you'd do; he sucked in his breath and muscled it. It gave. But you wouldn't have had to then remove 111 little screws from the cover plate, and make sure none of them floated into space.
On the first long spacewalk last Thursday -- and just about the time federal employee Nancy Pelosi was wrestling with the press over the meaning of "briefing" -- Astronauts Grunsfeld and Feustel installed a new camera and data-handling unit to beam images back here. On Friday, Massimino and Mike Good replaced six gyroscopes. That took eight hours. The next day Grunsfeld and Feustel fixed a camera not designed for repairs in space. After Massimino's Sunday battle with the bolt, Monday was kind of a Home-Depot day, installing new insulation.
Hubble's good now for at least another five years. Then, once and for all, it will fall apart.
On departing the telescope, astronaut Grunsfeld called the week a "tour de force of tools and human ingenuity." And as well of training and raw smarts in the service of, hard to believe just now, nothing but human progress.
Lessons abound in what one witnessed during the 11-day mission to restore the legendary Hubble, which ends tomorrow when the astronauts land in Florida. Here's one: Like the Hubble team, try to be lucky enough once in life to be part of a great project worked by great people -- the early Microsoft or Genentech, the Manhattan Project, the 1927 New York Yankees, many now-gone Wall Street financial "shops" at the top of their game, or the Iraq surge. It's an ethos of team-driven possibility caught in the famous title of a book, "The Soul of a New Machine."
The mortal enemy of all this is bureaucracy. The Hubble project's struggle not to be strangled by bureaucracy was conveyed last year in a stirring history, and cautionary tale, by Robert Zimmerman -- "The Universe in a Mirror: The Saga of the Hubble Space Telescope and the Visionaries Who Built It." Worth a read.
Across 20 years, several thousand very smart people worked on the Hubble project which, easy to forget, was always a line-item in the federal budget. As one of Mr. Zimmerman's reviewers noted, if the Hubble itself hadn't been so compelling, the political system would have killed it. Men broke themselves, their friends and families to get that thing into space.
The magnificence of Servicing Mission 4 is ended, and it's back to earth, where we read that the Obama administration may create a new regulator for consumer financial products.
I imagine the Obama inner circle thinks of itself as a smart, once-in-a-lifetime team of visionaries who will build and leave behind great things. It is ironic, or at least unusual, that their creations will be several large new bureaucracies. They call them "investments in the future."
The intense interest in our politics today is over whether that is true. Whether the soul of a new bureaucracy really can lead men to dream about, and work to create, the next Hubble.
About Those 'Speculators' . . .
About Those 'Speculators' . . .
Pension funds also got whacked by Uncle Sam.
Remember how President Obama blamed Chrysler's bankruptcy filing last month on "a small group of speculators" who turned down Treasury's $2 billion final offer for their $6.9 billion in debt? Well, it turns out that hedge funds and other short sellers weren't the only secured creditors who got a raw deal from Uncle Sam.
Indiana Treasurer Richard Mourdock revealed this week that his state's police and teacher pension funds have lost millions of dollars in the Chrysler "restructuring." Indiana's State Police Fund and Major Moves Construction Fund, which finances roads and bridges, together lost more than $1 million. And the Teacher's Retirement Fund "suffered, at a minimum, a loss of $4.6 million due to the action of the Federal government," reports Mr. Mourdock.
Far from being speculators, these funds represent retired public employees, including cops and teachers. The funds paid a premium to buy "secured" status, only to discover that they were politically outranked by the United Auto Workers in the White House hierarchy.
"In the past, to be 'secured' meant an investor was 'first in line' in the event of a bankruptcy and 'non-secured' creditors would receive value after secured-creditors were paid," Mr. Mourdock says. "In the Chrysler bankruptcy, however, secured creditors received $.29 on the dollar even as non-secured creditors received higher values and ended up with a 55% ownership of the new company, which is fundamentally wrong and a dangerous precedent to the capital markets."
We've worried that the Chrysler sandbagging would discourage bond investment. And, sure enough, Mr. Mourdock says that from now on no funds under his control will invest in the secured debt of "General Motors, other manufacturing companies, or those insurance companies who have or will be receiving bailout funds." Given the recent actions by the feds, he adds, "the risk is too great for any prudent investor to accept."
This isn't political grandstanding. Public investment officials like Mr. Mourdock have a fiduciary duty to seek maximum returns for retirees. The question for all public officials responsible for investing pension money is whether they too should conclude that investing in U.S.-aided companies now carries so much political risk that it violates their legal obligations. Such are the wages of White House disdain for legal contracts.
Downgrade Fears Rattle Stocks
Downgrade Fears Rattle Stocks
Stocks slumped Thursday as investors weighed a possible downgrade of the British government's credit rating and a retreat in oil prices, which weighed on the energy sector.
At 10:40 a.m., the Dow Jones Industrial Average was down by 137.9 points.
The Nasdaq Composite fell 1.6%. The S&P 500 declined 1.6%. The weakest sector was energy, down 3.8%. Basic materials and industrials were also big decliners, with each group off nearly 3%. Financials were off only slightly after Goldman Sachs analysts upgraded their ratings on large banks and credit-card issuers.
![[Markets Data]](http://s.wsj.net/public/resources/images/MDGpromo_D01222009151210.jpg)
Standard & Poor's shocked investors world-wide with a formal warning that the United Kingdom must get its finances in order or lose its coveted triple-A credit rating, underscoring the monumental challenges the country faces as it seeks to dig its economy out from under the wreckage of the financial crisis.
Big declines in London and other trading hubs around the world set a glum tone that carried into U.S. trading after the opening bell in New York. The FTSE 100 was down 2.7%. The benchmark indexes in Gernmany, France, and India were off almost as much.
The pound slid against the dollar following S&P's warning, which means that a downgrade, while not imminent, may come within the next few years. The pound tumbled from a six-month peak of $1.5808 to $1.5647 in recent action.
Investors also digested new data that cast a murky outlook for the U.S. economy. The Labor Department reported that initial claims for jobless benefits fell 12,000 to a seasonally adjusted 631,000 in the week ended May 16. But the number of continuing claims climbed 75,000 to a record 6,662,000 as the unemployed continue to face a challenging job market.
On a more welcome note for U.S. consumers, crude futures took a break from their recent sprint higher, trading down $1.51 at $60.53 a barrel recently in New York.
Heading into the peak demand period this summer, rude prices are trading at less than half their records hit last year. However, constraints in refinery output could yet shock U.S. consumers at the pump in the months ahead. Many plants are still constrained in their ability to churn out more gasoline because they can't get credit to buy additional crude, said Matthew Simmons, chairman of Simmons & Co., a boutique investment bank in Dallas focused on the energy industry.
"A lot of people are focusing on the big inventories we have right now and saying crude is due for a reversal," said Mr. Simmons. "But they're overlooking the reasons why the inventories are so high, which are pretty worrisome."
The U.S. Dollar Index and gold were holding steadyThursday, bolstered by safe-haven buying.
Such activity also lifted Treasury prices. The benchmark 10-year note recently gained 5/32 to yield 3.171%.
Wednesday, May 20, 2009
The Climate-Industrial Complex
The Climate-Industrial Complex
Some businesses see nothing but profits in the green movement.
BJORN LOMBORG
Some business leaders are cozying up with politicians and scientists to demand swift, drastic action on global warming. This is a new twist on a very old practice: companies using public policy to line their own pockets.
The tight relationship between the groups echoes the relationship among weapons makers, researchers and the U.S. military during the Cold War. President Dwight Eisenhower famously warned about the might of the "military-industrial complex," cautioning that "the potential for the disastrous rise of misplaced power exists and will persist." He worried that "there is a recurring temptation to feel that some spectacular and costly action could become the miraculous solution to all current difficulties."
This is certainly true of climate change. We are told that very expensive carbon regulations are the only way to respond to global warming, despite ample evidence that this approach does not pass a basic cost-benefit test. We must ask whether a "climate-industrial complex" is emerging, pressing taxpayers to fork over money to please those who stand to gain.
This phenomenon will be on display at the World Business Summit on Climate Change in Copenhagen this weekend. The organizers -- the Copenhagen Climate Council -- hope to push political leaders into more drastic promises when they negotiate the Kyoto Protocol's replacement in December.
The opening keynote address is to be delivered by Al Gore, who actually represents all three groups: He is a politician, a campaigner and the chair of a green private-equity firm invested in products that a climate-scared world would buy.
Naturally, many CEOs are genuinely concerned about global warming. But many of the most vocal stand to profit from carbon regulations. The term used by economists for their behavior is "rent-seeking."
The world's largest wind-turbine manufacturer, Copenhagen Climate Council member Vestas, urges governments to invest heavily in the wind market. It sponsors CNN's "Climate in Peril" segment, increasing support for policies that would increase Vestas's earnings. A fellow council member, Mr. Gore's green investment firm Generation Investment Management, warns of a significant risk to the U.S. economy unless a price is quickly placed on carbon.
Even companies that are not heavily engaged in green business stand to gain. European energy companies made tens of billions of euros in the first years of the European Trading System when they received free carbon emission allocations.
American electricity utility Duke Energy, a member of the Copenhagen Climate Council, has long promoted a U.S. cap-and-trade scheme. Yet the company bitterly opposed the Warner-Lieberman bill in the U.S. Senate that would have created such a scheme because it did not include European-style handouts to coal companies. The Waxman-Markey bill in the House of Representatives promises to bring back the free lunch.
U.S. companies and interest groups involved with climate change hired 2,430 lobbyists just last year, up 300% from five years ago. Fifty of the biggest U.S. electric utilities -- including Duke -- spent $51 million on lobbyists in just six months.
The massive transfer of wealth that many businesses seek is not necessarily good for the rest of the economy. Spain has been proclaimed a global example in providing financial aid to renewable energy companies to create green jobs. But research shows that each new job cost Spain 571,138 euros, with subsidies of more than one million euros required to create each new job in the uncompetitive wind industry. Moreover, the programs resulted in the destruction of nearly 110,000 jobs elsewhere in the economy, or 2.2 jobs for every job created.
The cozy corporate-climate relationship was pioneered by Enron, which bought up renewable energy companies and credit-trading outfits while boasting of its relationship with green interest groups. When the Kyoto Protocol was signed, an internal memo was sent within Enron that stated, "If implemented, [the Kyoto Protocol] will do more to promote Enron's business than almost any other regulatory business."
The World Business Summit will hear from "science and public policy leaders" seemingly selected for their scary views of global warming. They include James Lovelock, who believes that much of Europe will be Saharan and London will be underwater within 30 years; Sir Crispin Tickell, who believes that the United Kingdom's population needs to be cut by two-thirds so the country can cope with global warming; and Timothy Flannery, who warns of sea level rises as high as "an eight-story building."
Free speech is important. But these visions of catastrophe are a long way outside of mainstream scientific opinion, and they go much further than the careful findings of the United Nations panel of climate change scientists. When it comes to sea-level rise, for example, the United Nations expects a rise of between seven and 23 inches by 2100 -- considerably less than a one-story building.
There would be an outcry -- and rightfully so -- if big oil organized a climate change conference and invited only climate-change deniers.
The partnership among self-interested businesses, grandstanding politicians and alarmist campaigners truly is an unholy alliance. The climate-industrial complex does not promote discussion on how to overcome this challenge in a way that will be best for everybody. We should not be surprised or impressed that those who stand to make a profit are among the loudest calling for politicians to act. Spending a fortune on global carbon regulations will benefit a few, but dearly cost everybody else.
Mr. Lomborg is director of the Copenhagen Consensus, a think tank, and author of "Cool It: The Skeptical Environmentalist's Guide to Global Warming" (Knopf, 2007).
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