The View From 1776

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’s republic has to a dangerous extent been realized by today’s non-industrial unions, the teachers’ and government workers’ unions.  (See Labor Unions: Socialism’s Shock Troops and The Real Engine of Blue America.)

Liberal-progressives have long sentimentalized the IWW as a rollicking, happy-go-lucky bunch who merely bargained for justice in the form of better wages and working conditions.  In fact, however, the IWW was nothing more than labor gangsterism, aimed at bankrupting our Constitutional government. 

That, of course, is exactly what the present-day Wisconsin strikes are all about.

For details, see Larry Kudlow’s essay and the Investor’s Business Daily editorial.

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—but, since the corporate-tax rate in the U.S. is one of the world’s highest, most companies are in no rush to bring the money back onshore. By keeping those earnings abroad, U.S. companies can indefinitely defer their day of reckoning with the IRS.

That can put firms in the peculiar position of having tons of cash offshore that they might need but can’t use at home without taking a tax hit.

The U.S. is the only major country that taxes foreign earnings of its own companies this way. American investors may not come out ahead either. In a 2007 survey of executives at more than 400 companies, Massachusetts Institute of Technology economist Michelle Hanlon found that the desire to avoid the repatriation tax led to a variety of distortions, most of which end up making companies less efficient.

For example, among the companies that had brought some profits home to the U.S., 30% had invested in lower-returning foreign assets rather than pay additional taxes to bring overseas profits back onshore. Another 56% had borrowed money in the U.S. rather than bring cash home. And 6% said they had declined to invest in a profitable project in the U.S. when funding it with foreign earnings would have triggered a tax hit.

These perverse effects can extend even to smaller companies. Consider Waters Corp., a laboratory-instrument manufacturer based in Milford, Mass. At last count, Waters had approximately $1.4 billion in earnings locked up at foreign subsidiaries. Of the company’s $830 million in cash and short-term securities, around 80% sits abroad.

Waters borrowed $200 million last year to pay down higher-cost debt and “for general corporate purposes.” Like many U.S. companies, Waters is “building up cash outside the U.S. while borrowing in the U.S.,” says Eugene Cassis, its investor-relations director.

“We’d certainly like to be able to bring some of that money back,” he says. “We would have a greater ability to invest here if we didn’t have to pay a ‘tollgate tax’ to bring the cash home. Current tax policy creates a slight bias towards acquiring technology or assets outside the United States.”

As the great financial analyst Benjamin Graham long argued, shareholders are usually better off when companies hold less cash, rather than more. Too much cash can lead to reckless acquisitions and a fat-and-happy culture of waste.

But, in this case, it isn’t just management that is making companies sit on too much cash. It is tax policy, too. Congress and the White House are discussing whether the U.S. should follow the rest of the world and stop taxing repatriated offshore earnings from companies that already have paid taxes to foreign governments. Some gnarly technical details will have to be worked out if the repatriation tax is to be reduced or eliminated.

Meanwhile, investors should remember that a big chunk of cash on the balance sheet may look tempting but isn’t necessarily there for the taking.

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.

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).

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’s eye.  It does no plan for the future.  It has no vision, no foresight, no sight at all.  If it can be said to play the role of watchmaker in nature, it is the blind watchmaker.” (The Blind Watchmaker, Chapter 1)

Absence of free will is a particularly prominent feature of both Darwinism and secular socialism.  As Karl Marx and Freidrich Engels opined, human nature is manipulable, being a product of the ways and conditions in which humans earn their livings.  Human nature, in a much shorter time span than envisioned by Darwinian evolution, thus can be changed by government policies that control economic activity.  Hence Lenin’s New Soviet Man, who would take only what he needed and selflessly give his maximum work effort to the general welfare.

This vision permeated Obama’s 2008 campaign rhetoric about “change,” as well as the New Deal’s promotion of socialism.  President Franklin Roosevelt in his 1933 inaugural address embraced the economic regimentation implicit in philosophical materialism:

Quote:

“…if we are to go forward we must move as a trained and loyal army willing to sacrifice for the good of the common discipline, because, without such discipline, no progress is made…We are, I know, ready and willing to submit our lives and property to such discipline because it makes possible a leadership which aims at a larger good.…With this pledge taken, I assume unhesitatingly the leadership of this great army of our people, dedicated to a disciplined attack upon our common problems.…"

Keynesian macroeconomics beclouds the economic perceptions of Big Brother’s administrators.  Keynesians view humans and human action as abstract statistical aggregates that are predictable, and therefore controllable, by their computer programs.  They speak of fine tuning the economy as if it were a single mechanism fully comprehensible by economic planners.  Fed chairman Bernanke, for example, aims to increase inflation from two percent annually to a rate closer to four percent, confident that the Fed’s QE2 monetary policy will raise employment, revive the economy, and simultaneously maintain the dollar as the world’s unblemished reserve currency.

When the Constitution was crafted, inhabitants of this country were thought of as citizens who had surrendered a limited amount of authority to the Federal government, retaining a large swath of inalienable natural rights to individual liberty.  Under liberal-progressive Keynesianism, inhabitants of the United States have become subjects of an omniscient Big Brother, who is free to arrogate any still remaining individual rights (cf. Obamacare’s individual mandates).

Individuals’ Fifth Amendment property rights and other political liberties are ignored in Keynesian doctrine.  State planners believe that only they know what is best for the masses.  Individual desires for larger automobiles, incandescent light bulbs, larger homes, and other things opposed by environmentalists must be forbidden by the apparatchiks.

The government’s subjects are expected to react en masse in planned ways to selectively administered government policies.  When the government engages in Keynesian deficit spending, its subjects are expected to exhibit the appropriate Pavlovian response: they are to go forth immediately and spend their new fiat money to revive the economy.  No provision is made for the unreality of Keynesian doctrine, for the likelihood that many people will not immediately spend their stimulus handouts, that they will instead save the money or pay down their debts.  In the real world, most people recognize that government stimulus spending will be short lived.

Because the utility of purposeful economic action by individuals in a free market is not a consideration in Keynesian macroeconomic theory, any economic activity is as good as the next.  Government spending can be for any purpose, however silly or wasteful.  In the Obama-Pelosi-Reid stimulus package, much of the spending increased or maintained labor union salaries and benefit programs, with no increase in employment or production of goods and services.  An example used by Lord Keynes in the 1930s was having the government employ men to bury bottles one day and crews to unearth them the next day.  Such is the logic of an abstract, statist theory like Keynesianism.

Darwinians and socialists alike see no moral dimension to individual free will.  Liberal-progressive-socialists in Soviet Russia and National Socialist Germany had no compunctions about liquidating tens of millions of individuals who stood in the way of a higher good perceptible only by the intellectuals.  Present-day liberal-progressives in the United States and Western Europe reject the moral standards of Judeo-Christianity, opting for no limits upon sexual promiscuity, marital infidelity, and drug abuse.  Murder by abortion is justified, among other things, as a sort of Darwinian natural selection.

Individuals who exercise prudence, conserving their resources and saving for future needs, are damned as social malefactors.  Their prudence, Keynesians say, creates a theoretical “liquidity trap” that selfishly drains the economy’s lifeblood and causes economic recessions. 

If destruction of the coal and petroleum industries and subsidization of green energy and green automobiles are thought necessary for the salvation of society, people in the aggregate are expected to enlist in Franklin Roosevelt’s proletarian army, prepared to submit their lives and property to the greater good defined by Keynesian intellectuals, labor unions, and Democrat/Socialist Party leaders.

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 “war prosperity” prevailed in the United States during World War II. This belief is ill-founded, because it does not recognize that the United States had a command economy during the war. From 1942 to 1946 some macroeconomic performance measures are statistically inaccurate; others are conceptually inappropriate. A better grounded interpretation is that during the war the economy was a huge arsenal in which the well-being of consumers deteriorated. After the war genuine prosperity returned for the first time since 1929.