The View From 1776

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The spectacle of concerted strikes by teachers, other public employee unions, and by Democrat/Socialist Party legislators in Wisconsin is a throwback to the syndicalist origin of mass industrial unions in the United States.  Such actions aim at forcing the state into financial ruin, if necessary, to keep and to increase the hugely disproportionate and unmerited flow of public funds channelled to public employees’ unions. 

Wisconsin historically is dead center in the American syndicalist history of industrial unon violence and extortion.  Milwaukee’s Victor Berger was a founder of the American Socialist Party and the first Socialist Party candidate to be elected to Congress.  Berger’s co-founder, Eugene V. Debs, also was a founder of the IWW (see below).

Vocal and financial support for illegal action by Wisconsin unionists and legislators by President Obama, Nancy Pelosi, and other Democrat/Socialist Party leaders is fully consonant with Obama’s full-speed-ahead, no-current-cuts, welfare-state budget.  Their conduct in the Wisconsin affair makes the conservative Tea Party, in comparison, a tranquil afternoon of tea and crumpets at a ladies’ garden party.

Syndicalism originated in late 19th century socialist France under the leadership of Georges Sorel, a legislator of national prominence.  Advocating general strikes, violence, and threats of violence, syndicalists intended to bring organized government to its knees and to replace it with workers councils that would assume control of all production.  Syndicats, French for labor unions, would then redistribute wealth to the unionized workers. 

In the United States the syndicalist movement found a home in the violent ranks of the Industrial Workers of the World (IWW), which gradually melted into the American Socialist and Communist Parties after World War I.  The avowed aim of the IWW to take over the government and reshape it into a Soviet people

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Why Investors Can’t Get More Cash Out of U.S. Companies
By Jason Zweig

Earlier this month, Microsoft borrowed $2.25 billion in unsecured debt. What in the world possesses a company with $40 billion in cash and short-term securities to go out and borrow money?

Rock-bottom interest rates are one reason. But the bizarre, byzantine U.S. tax code seems to be another.

Microsoft declined to comment on whether its recent borrowing was partly driven by tax considerations. But, like many purportedly cash-rich companies, Microsoft can’t bring home much of its cash without writing a fat check to the Internal Revenue Service.

Politicians have been carping about the more than $2 trillion in cash sitting idle in corporate coffers even as unemployment remains high. But much of that cash isn’t in the U.S.; it is abroad. And it isn’t likely to come back home unless U.S. tax laws change.

David Zion, a tax and accounting analyst at Credit Suisse, estimates that the companies in the Standard & Poor’s 500-stock index have “north of $1 trillion” in undistributed foreign earnings, or profits that have been parked overseas to avoid U.S. tax. Not all of that is cash; some is in the form of inventories or other assets.

U.S. companies are taxed at up to 35% when they bring home the earnings generated through the operations of their overseas subsidiaries. They get a credit for any taxes paid to foreign governments

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Green energy technology and green jobs cannot survive on their own, because the overwhelming majority of people don’t want them at all or won’t pay the higher prices they entail.  The benefit / cost ratio is far too low.  When economic reality finally overtakes the Federal and state governments, all of the green subsidies will wither, and the whole industry will collapse, as it has in other green venues, such as Spain.  Investors will lose it all.

Green energy and green jobs are phantasmic emanations of liberal-progressive state-planning and the concomitant worship of the secular political state as the sole fountain of earthly wisdom.  Failure of liberal-progressives to consider secondary and tertiary costs of their folly reveals the worship of “green” as religious mythology, the opposite of true science and a travesty of economics.

As with all government intervention in the business world, Federal and state mandates and subsidies to promote green jobs diminish productivity, raise costs, and reduce standards of living.

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Inflation (creating excessive amounts of fiat money) is a dangerous way to ease a government’s debt burden.  The idea is to pay future interest and principal on the Federal debt with dollars worth increasingly less.  In the most recent six months, the dollar has, measured against a basket of foreign currencies, declined 12.8%. 

Such methods amount to cheating creditors, ranging from U.S. citizens and banks, to foreign governments, who now hold trillions of dollars in Treasury debt that, measured in foreign currencies, is worth less in purchasing power every day.

The Treasury justifies the short-term impact of inflation as a way to promote U.S. exports.  As the dollar declines, foreign buyers will require smaller amounts of their currency to pay for our exports. 

Unfortunately that game works both ways.  Foreign nations will retaliate by debasing their currencies, pushing the world toward currency and tariff warfare.

Economist Allan H. Meltzer tells us what the Fed ought to be doing, if it were truly serious about maintaining a stable dollar and combatting inflation.

Ben Bernanke’s ‘70s Show
Inflation is on the horizon, and now is the time for the Fed to head it off.

By ALLAN H. MELTZER

In the 1970s, despite rising inflation, members of the Federal Reserve’s policy committee repeatedly chose to lower interest rates to reduce unemployment. Their Phillips Curve models, which charted an inverse relationship between unemployment and inflation, told them that inflation could wait and be addressed at a more opportune time. They were flummoxed when inflation and unemployment rose together throughout the decade.

In 1979, shortly after becoming Fed chairman, Paul Volcker told a Sunday talk-show audience that reducing inflation was the best way to reduce unemployment. He abandoned the faulty Phillips Curve thinking that unemployment was the enemy of inflation. And he told the Fed’s staff that while he thought highly of their work, he did not find their inflation forecasts useful. Instead of focusing on near-term output and employment, he changed the Fed’s policy to put more emphasis on the longer-term reduction of inflation. That required a persistent policy that President Reagan supported even in the severe 1982 recession.

We know the result: Inflation came down and stayed down. The Volcker disinflation ushered in two decades of low inflation and relatively steady growth, punctuated by a few short, mild recessions. And as Mr. Volcker predicted, the unemployment rate fell after the inflation rate fell. The dollar strengthened.

That was not unprecedented. The Phillips Curve often fails to forecast correctly. Spanish inflation has increased in the last year while the unemployment rate rose above 20%. Britain also has rising inflation and rising unemployment. Brazil lowered inflation and unemployment together. There are many other examples if only the Fed would look at them.

Throughout its modern history, the Fed has made several of the same policy mistakes repeatedly. Two are prominent now. It concentrates on near-term events over which it has little influence, and neglects the longer-term consequences of its operations. And it interprets its dual mandate as requiring it to direct all of its efforts to reducing unemployment when the unemployment rate rises. It does not have a credible long-term plan to reduce both current unemployment and future inflation, so it works on one at a time. This is an inefficient way to achieve a dual mandate. It failed totally during the Great Inflation of the 1970s. I believe it will fail again this time.

Commodity and some materials prices have increased dramatically in the past year. Countries everywhere face higher inflation. Despite the many problems in the euro area, the dollar has depreciated against the euro, a weak currency with many problems, suggesting that holders expect additional dollar weakness. Imports will cost more.

I believe it is foolhardy to expect businesses to absorb all the cost increases by holding prices unchanged. And loan demand has started to pick up, increasing the amount of money in circulation. It is a big mistake to expect that the U.S. will escape the inflation that is now rising throughout the world.

Because the Fed focuses on the near term, it tends to ignore changes in money-supply growth. This, too, is a mistake. Sustained inflation always follows increases in money-supply growth. Sustaining negative real interest rates (i.e., adjusted for inflation), as we have now, will cause this.

The Fed should make three changes. First, it should increase the short-term interest rate it controls to 1%, which would show that it is aware of the inflation risk and will act promptly to counteract it. Current low interest rates are an opportunity for the Fed to start reducing excess reserves.

Second, it should announce a specific, detailed plan that explains how it proposes to reduce about $900 billion of the more than $1 trillion banks continue to hold in excess of their legally required reserves.

Third, it should end QE2, its latest round of Treasury bond purchases. If, last November, the Fed had waited two more months before starting QE2, it would have known that a double-dip recession was not about to happen. Instead of waiting, the Fed responded to the cries coming from Wall Street.

Current slow growth and high unemployment is not mainly a monetary problem. The financial system has more than ample liquidity. Uncertainty about government policy is a much bigger problem. Businesses have had many reasons to be uncertain, to wait for a clearer outlook that would permit them to more accurately estimate future costs and returns to new investment. Better to hold cash and wait.

Until the 2010 election changed their view of the future, there was no way to know how much tax rates would increase, what new, costly regulations would stem from the president’s health-care reforms, the Dodd-Frank financial reforms, and elsewhere. The election reduced these concerns by giving control of the House to a majority that does not share President Obama’s vision that a good society should be directed and regulated from Washington. Last December, when Mr. Obama agreed to extend the Bush tax cuts, he showed that some improvement in outlook was justified. The economy responded.

What we need out of Washington now is spending reduction, lower corporate tax rates, and a three-year moratorium on new regulation. But perhaps most importantly, we need a new Fed policy to prevent 1970s-style inflation. Inflation is coming. Now is the time to head it off.

Mr. Meltzer is a professor of economics at Carnegie Mellon University’s Tepper School of Business, a visiting scholar at the American Enterprise Institute, and the author of “A History of the Federal Reserve” (University of Chicago Press, 2003 and 2010).

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Keynesian macroeconomics is, at heart, a rationalization for collectivized state planning .  Its progenitor was the 18th century quest to discover social science laws of behavior paralleling Newton’s mathematics and laws of motion that explained movements of the planets and of the earth around the sun.  By the early 1800s French socialist intellectuals were confident that they had identified sociological laws that would enable them to create a secular paradise here on earth.  A hundred years later, economist John Maynard Keynes propounded his ideas in the same tradition.

Along with Darwinism and socialism, Keynesianism sees humans as subject to manipulation by material factors such as government regulation.  All three discount free will and what Austrian economists view as the basic fact in economic activity: purposeful, individual human action.

In the Darwinian world-view, humans are the same as all other living creatures.  We just happened, by random chance, to have evolved into existence, with no greater claim on earthly resources than any other living organism.  Economic determinism, not free will, governs human conduct.  Changing material conditions in nature and the process of natural selection will, over the eons, channel our evolution into unforeseeable future life forms.

The human soul and its universal aspiration to comprehend and to obey the Will of God is viewed as a vestigial instinct acquired by humans in the evolutionary process of natural selection.  Spiritual religion in the Brave New World is therefore ignorant superstition to be banished from society by teaching Darwinian evolutionary doctrine.

Socialism and Darwinism agree in denying God’s existence, in rejecting spiritual religion, and in believing that material conditions and forces are the only factors at work in the universe.  But they contradict each other in a fundamental way.

Socialism is quintessentially a secular religion of state planning in a command economy led by intellectuals and implemented by bureaucratic apparatchiks.  Darwinians, in contrast, acknowledge no higher purpose to the existence of human beings and no higher purpose to human action.  Perfection of human nature and of human society is not on Darwinian radar screens.  Appearances of order, apart from Darwin’s law of natural selection, are deceptive.  All is unplanned and essentially purposeless.  Professor Richard Dawkins, the loudest present-day exponent of Darwinism, describes it thus:

“Natural selection, the blind, unconscious, automatic process which Darwin discovered, and which we now know is the explanation for the existence and apparently purposeful form of all life, has no purpose in mind.  It has no mind and no mind

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New York Times columnist Paul Krugman is one of the most prominent voices championing new government stimulus spending, bigger than Obama’s 2009 stimulus, the greatest in world history.  Only thus, he writes, can the economy regain traction and recover full employment.

Parenthetically, it is to be noted that liberal-progressives now are hypocritically claiming credit for the present slow rate of GDP recovery, while unemployment, the thrust of Keynesianism, remains near 10% (more than 17% if one counts people who have given up searching for jobs and dropped out of the work force).  Today’s GDP growth is at about half the rate of recovery experienced after President George Bush cut taxes in 2001.  Moreover, unemployment declined much more rapidly after the Bush tax cuts.

Measured by its primary goal, full employment, Keynesian economics has failed under President Obama.  The Federal Reserve expects unemployment to remain north of 8% for several more years, given the tiny rates of improvement currently experienced.

The eight-year failure of Franklin Roosevelt’s New Deal to end the Great Depression of the 1930s is the historical parallel that explains the failure of Obamanomics.  In the 1930s, Roosevelt was continually creating new regulatory bureaus, adding new layers of regulation, and raising personal and corporate taxes to confiscatory levels (some marginal rates around 90%).  Roosevelt repeatedly blamed his failures on private enterprise, describing businessmen as greedy and outmoded in the new socialist economy.

President Obama and his Democrat/Socialist Party leaders Pelosi and Reid went to great lengths consciously to replicate government policies of the 1930s, even styling themselves the New New Deal.  The plan was to seize the confusion and fear created by the Federal-Reserve-created financial meltdown as an opportunity to impose socialized medicine and regulatory control of our energy industry while voters were too distracted to resist.  Democrat/Socialists continually threatened or imposed higher taxes, higher energy costs, Obamacare, and millions of new regulations under hundreds of new apparatchik bureaus. 

Unemployment disappeared during World War II.  Twelve million men and women were in the armed forces and the remainder not already employed were working in defense industries.  Economist Robert Higgs explains why that period is not proof that government spending can end recessions and guarantee prosperity.

Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s

Abstract:

Relying on standard measures of macroeconomic performance, historians and economists believe that

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