by Pat Heyman | Dec 15, 2009 | Uncategorized
How Barack Obama and Ben Bernanke are destroying the dollar — and perhaps ushering in the amero
By Robert P. Murphy
First under the Bush Administration and even more so under President Obama, the federal government has been seizing power and spending money as it hasn’t done since World War II. But as bold as the Executive Branch has been during this financial crisis, the innovations of Fed chairman Ben Bernanke have been literally unprecedented. Indeed, it is entirely plausible that before Obama leaves office, Americans will be using a new currency.
Bush and Obama have engaged in record peacetime deficit spending; so too did Herbert Hoover and then Franklin Roosevelt (even though in the 1932 election campaign, FDR promised Americans a balanced budget). Bush and Obama approved massive federal interventions into the financial sector, at the behest of their respective Treasury secretaries. Believe it or not, in 1932 the allegedly “do-nothing” Herbert Hoover signed off on the creation of the Reconstruction Finance Corporation (RFC), which was given billions of dollars to prop up unsound financial institutions and make loans to state and local governments. And as with so many other elements of the New Deal, FDR took over and expanded the RFC that had been started under Hoover.
In the past year, the government has seized control of more than half of the nation’s mortgages, it has taken over one of the world’s biggest insurers, it literally controls major car companies, and it is now telling financial institutions how much they can pay their top executives. On top of this, the feds are seeking vast new powers over the nation’s energy markets (through the House Waxman-Markey “Clean Energy and Security Act” and pending Kerry-Boxer companion bill in the Senate) and, of course, are trying to “reform” health care by creating expansive new government programs.
For anyone who thinks free markets are generally more effective at coordinating resources and workers, these incredible assaults on the private sector from the central government surely must translate into a sputtering economy for years. Any one of the above initiatives would have placed a drag on a healthy economy. But to impose the entire package on an economy that is mired in the worst postwar recession, is a recipe for disaster.
Debt and Inflation
Conventional economic forecasts for government tax receipts are far too optimistic. The U.S. Treasury will need to issue far more debt in the coming years than most analysts now realize. Yet even the optimistic forecasts are sobering. For example, in March the Congressional Budget Office projected that the Obama administration’s budgetary plans would lead to a doubling of the federal debt as a share of the economy, from 41 percent of GDP in 2008 to 82 percent of GDP by 2019. The deficit for fiscal year 2009 (which ended Sept. 30) alone was $1.4 trillion. For reference, the entire federal budgetwas less than $1.4 trillion in the early years of the Clinton administration.
Clearly the U.S. government will be incurring massive new debts in the years to come. The situation looks so grim that economist Jeffrey Hummel has predicted that the Treasury will default on its obligations, just as Russia defaulted on its bonds in 1998. But another scenario involves the Federal Reserve wiping out the real burden of the debt by writing checks out of thin air to buy up whatever notes the Treasury wants to issue.
Many analysts are worried about Fed chairman Ben Bernanke’s actions during the financial crisis; Marc Faber is openly warning of “hyperinflation.” To understand what the fuss is about, consider some facts about our monetary and banking system.
The United States has a fractional reserve banking system. When someone deposits $100 in a checking account, most of that money is lent out again to other bank customers. Only a fraction—typically around 10 percent—needs to be held “on reserve” to back up the $100 balance of the original depositor. A bank’s reserves can consist of either cash in the vault or deposits with the Federal Reserve itself. For example, suppose a given bank has customer checking accounts with a combined balance of $1 billion. Assuming a 10 percent reserve requirement, the bank needs $100 million in reserves. It can satisfy this legal requirement by keeping, say, $30 million in actual cash on hand in its vaults and putting $70 million on deposit in the bank’s account with the Fed.
Normally, the Fed expands the money supply by engaging in “open market operations.” For example, the Fed might buy $1 billion worth of government bonds from a dealer in the private sector. The Fed adds the $1 billion in bonds to the asset side of its balance sheet, while its liabilities also increase by $1 billion. But Bernanke faces no real constraints on his purchasing decisions. When the Fed buys $1 billion in new bonds, it simply writes a $1 billion check on itself. There is no stockpile of money that gets drained because of the check; the recipient simply deposits the check in his own bank, and the bank in turn sees its reserves on deposit with the Fed go up by $1 billion. In principle, the Fed could write checks to buy every asset in America.
Monetary Catastrophe
Since the start of the present financial crisis, the Federal Reserve has implemented extraordinary programs to rescue large institutions from the horrible investments they made during the bubble years. Because of these programs, the Fed’s balance sheet more than doubled from September 2008 to the end of the year, as Bernanke acquired more than a trillion dollars in new holdings in just a few months.
If Bernanke has been so aggressive in creating new money, why haven’t prices skyrocketed at the grocery store? The answer is that banks have chosen to let their reserves with the Fed grow well above the legal minimum. In other words, banks have the legal ability to make new loans to customers, but for various reasons they are choosing not to do so. This chart from the Federal Reserve shows these “excess reserves” in their historical context.
U.S. depository institutions have typically lent out their excess reserves in order to earn interest from their customers. Yet currently the banks are sitting on some $850 billion in excess reserves, because (a) the Fed began paying interest on reserves in October 2008, and (b) the economic outlook is so uncertain that financial institutions wish to remain extremely liquid.
The chart explains why Faber and others are warning about massive price inflation. If and when the banks begin lending out their excess reserves, they will have the legal ability to create up to $8.5 trillion in new money. To understand how significant that number is, consider that right now the monetary aggregate M1—which includes physical currency, traveler’s checks, checking accounts, and other very liquid assets—is a mere $1.7 trillion.
What does all this mean? Quite simply, it means that if Bernanke sits back and does nothing more, he has already injected enough reserves into the financial system to quintuple the money supply held by the public. Even if Bernanke does the politically difficult thing, jacking up interest rates and sucking out half of the excess reserves, there would still be enough slack in the system to triple the money supply.
The End of the Dollar?
Aware of the above considerations, central banks around the world have been quietly distancing themselves from the U.S. dollar. Over the summer, officials in India, China, and Russia opined publicly on the desirability of a new global financial system, anchored on a basket of currencies or even gold.
We thus have in motion two huge trains of supply and demand, and the result will be an inevitable crash in the value of the dollar. Just as the Federal Reserve is embarking on a massive printing spree, the rest of the world is looking to dump its dollar holdings. It’s impossible to predict the exact timing, but sooner or later the dollar will fall very sharply against commodities and other currencies.
A crashing dollar will translate immediately into huge spikes in the price of gasoline and other basic items tied to the world market. After a lag, prices at Wal-Mart and other stores will also skyrocket, as their reliance on “cheap imports from Asia” will no longer be possible when the price of the dollar against the Chinese yuan falls by half.
The consequences will be so dramatic that what now may sound like a “conspiracy theory” could become possible. Fed officials might use such an opportunity to wean Americans from the U.S. dollar. Influential groups such as the Council on Foreign Relations have discussed the desirability of coordination among the North American governments. For example, CFR president Richard N. Haas wrote in the foreword to a 2005 Task Force report titled, “Building a North American Community”:
The Task Force offers a detailed and ambitious set of proposals that build on the recommendations adopted by the three governments [Canada, the U.S., and Mexico] at the Texas summit of March 2005. The Task Force’s central recommendation is establishment by 2010 of a North American economic and security community, the boundaries of which would be defined by a common external tariff and an outer security perimeter.
The “Texas summit of March 2005” refers to the “Security and Prosperity Partnership (SPP) of North America,” which came out of a meeting in Waco, Texas between President George W. Bush, Canadian Prime Minister Paul Martin, and Mexican President Vicente Fox. For the record, the federal government’s website has a special section devoted to refuting the (alleged) myths of the SPP, including the claim that the SPP is a prelude to a North American Union, comparable to the European Union. Yet despite the official protestations to the contrary, the global trend toward ever larger political and monetary institutions is undeniable. And there is a definite logic behind the process: with governments in control of standing armies, the only real check on their power is the ability of their subjects to change jurisdictions. By “harmonizing” tax and regulatory regimes, various countries can extract more from their most productive businesses. And by foisting a fiat currency into the pockets of more and more people, a government obtains steadily greater control over national—or international—wealth.
But if indeed key players had wanted to create a North American Union with a common currency, up till now they would have faced an insurmountable barrier: the American public would never have agreed to turn in their dollars in exchange for a new currency issued by a supranational organization. The situation will be different when the U.S. public endures double-digit price inflation, even as the economy still suffers from the worst unemployment since the Great Depression. Especially if Obama officials frame the problem as an attack on the dollar by foreign speculators, and point to the strength of the euro, many Americans will be led to believe that only a change in currency can save the economy.
For those who consider such a possibility farfetched, remember that one of FDR’s first acts as president was to confiscate monetary gold held by U.S. citizens, under threat of imprisonment and a huge fine. Yet nowadays, that massive crime is described as “taking us off the gold standard” which “untied the Fed’s hands and allowed it to fight the Depression.” The same will be said in future history books, when they explain matter-of-factly the economic crisis that gave birth to the amero.
What Can One Man Do?
If events play out as described, what should average investors do right now to protect themselves? First and most obvious, they should rid themselves of dollar-denominated assets. For example, government and corporate bonds promising to make a fixed stream of dollar payments will all become virtually worthless if huge price inflation occurs. (In contrast, holding U.S. stocks is not a bad idea from the point of view of inflation; a stock entitles the owner to a portion of the revenue stream from a company’s sales, which themselves will rise along with prices in general.)
Second, investors should acquire an emergency stockpile of gold and silver. If and when dollar-prices begin shooting through the roof, there will be a lag for most workers: They will see the prices of milk, eggs, and gasoline increasing by the week, yet their paychecks will remain the same for months or longer. If the dollar crashes in the foreign exchange markets, gold and silver would see their prices (quoted in U.S. dollars) increase in the opposite direction.
We can’t know the timing of the impending monetary catastrophe, but it is coming. Smart investors will minimize their dependence on the dollar before it crashes. At this late date, no one should trust the government and media “experts” who assure us that the worst is over.
Robert P. Murphy has a Ph.D. in economics from New York University. He is an economist with the Institute for Energy Research and author of The Politically Incorrect Guide to the Great Depression and the New Deal.
by Pat Heyman | Dec 13, 2009 | Uncategorized
by Pat Heyman | Dec 13, 2009 | Uncategorized
The Curse of Good Government
Wednesday, December 09, 2009 by William L. Anderson
As one who has made a career out of criticizing government and exposing the various predations of government, one would think I would be intelligent and wise enough not to expect that entity we know as “good government.” In fact, given that I am quite familiar with the entire socialist calculation debate and have assigned numerous papers covering that subject to my MBA students, it should have dawned upon me by now that “good government” is an oxymoron at best and a delusional term at worst.
Yet I must admit that whenever I see government doing something that is outrageous or even wasteful or seemingly stupid, my “good government” ideals seem to kick in and I find myself thinking that the powers that be could learn how to do things correctly. At that point, it never occurs to me that maybe, just maybe, the mechanism of action we know as government cannot be operated in a “proper” way at all, because no intellectual device exists that permits us to properly determine just what is “good” or “bad” government.
Not that there is a dearth of true believers. Last year, Paul Krugman waxed eloquent about the goodness of the state (as long as it is run by “good” people), writing,
Before Mr. Obama can make government cool, however, he has to make it good. Indeed, he has to be a goo-goo.
Goo-goo, in case you’re wondering, is a century-old term for “good government” types, reformers opposed to corruption and patronage. Franklin Roosevelt was a goo-goo extraordinaire. He simultaneously made government much bigger and much cleaner. Mr. Obama needs to do the same thing.
However, before one can be a true goo-goo, one must believe in the state. Witness Krugman’s description of the failures of the Bush administration:
Needless to say, the Bush administration offers a spectacular example of non-goo-gooism. But the Bushies didn’t have to worry about governing well and honestly. Even when they failed on the job (as they so often did), they could claim that very failure as vindication of their anti-government ideology, a demonstration that the public sector can’t do anything right.
This is a curious way to describe the failures of government, blaming those malfunctions on the notion that those carrying out their powers really did not believe that their powers were legitimate, and so they failed. I recall many things that Bush and his minions did while they were in office, but I cannot recall any time that anyone in that administration was reluctant to use their powers. Indeed, the Bush administration was extremely abusive during its eight years in power, and I don’t believe that the administration engaged in such behavior because its principals were laissez-faire libertarians, and I do not recall Bush blaming the failures of the government’s pathetic and ill-advised response to disasters like Hurricane Katrina on the illegitimacy of government.
(Granted, I am using logic here, something that generally is missing from Krugman’s column. Instead, we see partisanship and personal invective, combined with the religion of statism, something that really should be beneath a man who has received the academic honors he has garnered in his career. While Krugman has viciously attacked the Austrians in his writings, I cannot recall reading anything by an Austrian, dead or living, that makes the same kind of politically partisan comments that regularly appear in Krugman’s articles and columns.)
Unfortunately, Krugman goes on to claim that FDR created a governing apparatus via the New Deal that wisely and honestly dealt with the economic calamity in a positive way:
F.D.R. managed to navigate treacherous political waters safely, greatly improving government’s reputation even as he vastly expanded it. As a study recently published by the National Bureau of Economic Research puts it, “Before 1932, the administration of public relief was widely regarded as politically corrupt,” and the New Deal’s huge relief programs “offered an opportunity for corruption unique in the nation’s history.” Yet “by 1940, charges of corruption and political manipulation had diminished considerably.”
The historical record says something else. James F. Couch and William Shughart in their book, The Political Economy of the New Deal, lay out example after example of the political calculus that was used in determining where New Deal relief money would be spent. They concluded, after examining the spending patterns, that political considerations determined what projects would be funded and how much money would go into them.
In reviewing the book 10 years ago, I noted how the authors pointed out the Works Progress Administration (WPA) pay differentials in different states:
One example [Couch and Shughart] give is the dispersal of Works Progress Administration (WPA) projects. Given the supposed “compassionate” nature of the Roosevelt administration, one would think that those in the most dire need would receive the most help. Under the leadership of Roosevelt deputy Harry Hopkins, however, the WPA discriminated among states according to the political needs of the Democratic party, as government dollars were distributed according to their marginal political benefit.
Compensation was tied to area incomes. For example, an “intermediate” WPA worker in Tennessee would earn 23 cents per hour, while his counterpart in New York received $1.57. Skilled laborers working on WPA projects made 31 cents an hour in Tennessee and Alabama and $2.25 in New York. Professional pay was 34 cents per hour in Alabama and $3.03 in Pennsylvania.
Compare the Couch-Shughart study to Krugman’s praise of the WPA:
The Works Progress Administration, in particular, had a powerful, independent “division of progress investigation” devoted to investigating complaints of fraud. This division was so diligent that in 1940, when a Congressional subcommittee investigated the W.P.A., it couldn’t find a single serious irregularity that the division had missed.
F.D.R. also made sure that Congress didn’t stuff stimulus legislation with pork: there were no earmarks in the legislation that provided funding for the W.P.A. and other emergency measures.
According to the very partisan Krugman, government under FDR acted with compassion and worked to meet needs as they existed. According to Couch and Shughart, government acted, well, like government. New Deal money was used to buy votes and to spread political influence.
Krugman also fails to point out that in many cases, WPA workers were forced to register as Democrats and some projects required workers to make financial contributions to the Democratic Party. But since he is a partisan Democrat, I suspect he believes that such a requirement was part of enforcing “good government.”
In other words, any accurate reading of the historical record demonstrates that the New Deal was not the epitome of “goo-gooism,” or whatever Krugman wants to call it. Instead, we find that people in government operated according to the political calculus that both Austrians and public-choice economists have been pointing out for years.
What can be done? To be honest, nothing. There is no way that we can create a government that taxes and spends according to some imaginary formula that “maximizes” the “public good.” These are merely terms created to hide the fact that the only calculus politicians can call upon is based upon political costs and benefits.
Obviously, pointing out that politicians make politically based choices is a no-brainer; even people like Krugman are not oblivious to political corruption. However, so-called progressives believe they have a way to create and maintain “good government”: place more power in the hands of the executive branch of the US government. The executive branch, which would be dominated by “selfless” bureaucrats and “experts,” would allow resources to be directed “properly” by taking the decision-making power from the hands of elected politicians who are prone to corruption and let the people with the best intentions make the important decisions.
However, if there is one thing we have learned from this country’s century-old experiment in giving “independent” bureaucrats more power, it is that the bureaucracies created their own political fiefdoms and the problems and economic dislocations they have forced upon our society are worse than anything even the most corrupt politicians have done.
We are dealing with human nature, and putting on the robes of a selfless bureaucrat does not increase one’s qualifications to run the affairs of others. Furthermore, the notion that experts placed in government are going to run things properly is delusional at best and dangerous at worst.
Take the Federal Reserve, for example. The Fed is a Progressive Era creation, with its vaunted “independence” from whims of politicians. Its chairman, Ben Bernanke, is a really intelligent person who has operated in the highest academic circles. He was valedictorian of his high-school class, went to Harvard, and received his doctorate from MIT. Bernanke is the epitome of Progressivism and “good government,” and if there is a “goo-goo” in Washington, it is Bernanke.
However, this really intelligent person almost has single-handedly run the US economy into the ground. Granted, it takes a very special person to have this kind of influence, but Bernanke has been up to the task. Now, it would seem to me that Bernanke is exactly the kind of expert we would want working in the temples of government. I don’t detect his taking money on the sly or engaging in the bottom-dwelling quid pro quo actions of many people in government.
In other words, I believe that Bernanke truly believes that he has been doing the right thing. However, the man has been a disaster. He has had the power to act on his belief that the Great Depression came about because Herbert Hoover’s government did not print enough money. The notion that inflation is a positive economic force should be verboten to anyone with a doctorate in economics, but here we see Bernanke as the apostle of inflation, being cheered by other “good government” elites who are either stupid or craven enough to demand the destruction of the US dollar.
The response of the elites has been predictable. The Atlantic magazine, in a recent issue praising Bernanke and other “Brave Thinkers,” sniffed that Bernanke “somehow found time to bear the made-for-TV harangues of financially illiterate members of Congress.” Bernanke’s quote for the article tells the story of the “expert” who is just plain wrong.
There were many people who said, “Let them fail. It’s not a problem. The markets will take care of it.” And I think I knew better than that.
However, it is utterly clear that Bernanke did not know better than the markets. And what were the brilliant things that he did in order to confound those ignorant markets that wanted to liquidate the failing firms? According to the Atlantic,
He dropped target interest rates to near-zero for the first time in history; made trillions of dollars in government cash available to financial institutions; expanded the Fed’s lending and relaxed its collateral requirements; bought up billions of dollars in securities backed by consumer debt and mortgages; prevented the collapse of AIG, Fannie Mae, and Freddie Mac…
This is not brilliance; this is cranking up the printing presses, something that governments have done in Argentina, Zimbabwe, and Bolivia, not to mention Weimar Germany, with predictable results. The problem was that none of the things that Bernanke did addressed any of the real damage done to the structure of production in our economy. He just showered the markets with paper money, and his adoring chorus in the media and academe sang his praises.
I suspect that Bernanke has set an example of “good government” for these elites. First, he “saved” the economy; second, he has had to put up with “non-goo-goos” like Ron Paul, who clearly do not worship the state nor the characters that statism produces.
Those of us who understand that the mechanism of economic calculation is not something that “goo-gooism” can successfully reproduce via simple brilliance certainly won’t be declared heroes by the apostles of statism. Indeed, we are placed in the category of the “financially illiterate” because we understand that sound money is not a hindrance to economic growth or even to economic fairness.
Unfortunately, the “good government” advocates don’t see it that way. Instead, “good government” seems to involve reckless spending by Washington, endless printing at the Fed, and bailout after bailout. After all, the “goo-goos” know best.
William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University. Send him mail. See William L. Anderson’s article archives.
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by Pat Heyman | Dec 13, 2009 | Uncategorized
People such as George Soros and Michael Moore certainly talk a good game, but the next Mother Teresa they are not. Mother Teresa never criticized the free-market system; wealth just wasn’t for her. Soros and Moore are quite the opposite. They will never take a vow of poverty and dedicate themselves to helping the poor. They just want our civilization to take a vow of poverty and become poor.
This has caused many to wonder: How can someone preach socialism while being the most rapacious "capitalist" imaginable? Well, I have a theory about this.
It has often been observed that those who preach liberalism the most practice charity the least, and research bears this out. For example, in a piece titled "Bleeding Heart Tightwads," self-proclaimed liberal Nicholas Kristof wrote,
Arthur Brooks, the author of a book on donors to charity, ‘Who Really Cares,’ cites data that households headed by conservatives give 30 percent more to charity than households headed by liberals. A study by Google found an even greater disproportion: average annual contributions reported by conservatives were almost double those of liberals.
Then there is a fascinating article by Peter Schweizer, titled "Don’t listen to the liberals — Right-wingers really are nicer people, latest research shows." In defense of this thesis, the author presents some scientific findings and then a bit of anecdotal evidence, writing, "Most surprising of all is reputable research showing those on the Left are more interested in money than Right-wingers."
Both the World Values Survey and the General Social Survey reveal that Left-wingers are more likely to rate ‘high income’ as an important factor in choosing a job, more likely to say "after good health, money is the most important thing," and more likely agree with the statement "there are no right or wrong ways to make money."
You don’t need to explain that to Doug Urbanski, the former business manager for Left-wing firebrand and documentary-maker Michael Moore. "He [Moore] is more money-obsessed than anyone I have known — and that’s saying a lot," claims Urbanski.
The article also cites one Linda Hirshman, who "tells women not to have more than one baby so they can concentrate on a career. ‘Find the money,’ she advises."
Additionally, Schweizer reports on studies showing that Leftists are the embodiment of envy. This finding should come as no surprise, despite liberals’ propensity to rail against the rich and preach redistribution of wealth. Because, you see, it’s not that they care about the downtrodden so much — it’s just that they’re just insanely jealous of those who have more than they do.
But what about advocating socialism? Why would these greedy leftists try to kill the goose that lays the golden eggs they crave? To understand this, we have to delve into the psychology of vice.
There is a chasm between the heart and head. It is one thing to know something is wrong; it’s quite another to feel it on an emotional level. This is probably why Confucius once said (I’m paraphrasing), "It is not that I do not know what to do; it is that I do not do what I know." The heart is both a terrible master and a terribly alluring one, as its fires so often trump the head’s cool logic. It is the demagogue of the mind’s elections, whose rhetoric is hard to resist because it just feels so right.
Now, let’s talk about that seemingly greedy man, George Soros. As a 14-year-old Jewish boy in Nazi-occupied Budapest, Hungary in 1944, he posed as the godson of a government official who had been bribed to protect him. Soros then accompanied his protector while the man would make his rounds confiscating property from Jews who were being shipped off to death camps. During a 60 Minutes interview with Steve Kroft, Soros said he felt no guilt over this and explained why, stating, "Well, of course I c — I could be on the other side or I could be the one from whom the thing is being taken away. But there was no sense that I shouldn’t be there, because that was — well, actually, in a funny way, it’s just like in markets — that if I weren’t there — of course, I wasn’t doing it, but somebody else would."
It’s just like in markets…that’s an interesting comment. But what is this similarity of which Soros speaks? Is it just that by his lights, in both situations he had to choose between being the predator and the prey? Well, read two more statements Soros made in the interview. When asked about his mercenary currency trading, he said, "I don’t feel guilty. Because I’m engaged in an amoral activity which is not meant to have anything to do with guilt."
An amoral activity or an amoral man?
And when asked whether he deserved the blame for various nations’ financial collapses, he replied, "I am basically there to — to make money. I cannot and do not look at the social consequences of — of what I do."
No, but he sure looked at the social consequences of what George Bush (whom he called a Nazi in his book) did. But I digress.
It’s clear that Soros sees our free-market system as an evil, much like the Nazi system whose death camps he eluded. And I wouldn’t be surprised if, just as when he was 14, Soros sees himself as a victim caught in its web (the difference is that in 1944, he actually was a victim, whereas now he is the spider). If he doesn’t rape the system, someone else will. Yet he is a victim only of his own greed.
Taking this a bit deeper, it’s much like someone in the grip of any vice. It’s like a man who just cannot resist the bottle and gets falling-down drunk. He may sometimes have moments of clarity during which he actually hates his vice — and he may start to hate alcohol itself. At these times he may wish it didn’t exist, for then the temptation wouldn’t be there. But as long as it does exist, he can’t help but partake.
George Soros is a greedy man. Because of this, he cannot be "free" of his vice until the opportunity to make money is gone. He cannot retire, cannot rest, as long as there is another dollar to be made in the evil system. He wishes his "bottle" didn’t exist, but as long as it does, he can’t help but partake. Thus does he want Profit Prohibition.
This should surprise no one. I once heard of a woman who was told by her Leftist college professor not to give money to charity because it was the government’s job. But you see, to liberals, everything is little g’s job — and also its responsibility. In just the way a criminal isn’t responsible for his actions because "society made him the way he is," Leftists want the government to fight their temptations for them, and they see a free-market society as being one big occasion of sin. The message is simple: It’s not my fault if the government places us in a situation in which we can be immoral. Just as liberals outsource their charitable responsibilities, they outsource their moral ones.
The problem is that it doesn’t work. There will always be "the other side" and those "from whom the thing is being taken away." There will always be an "evil system." In communist governments, those in power — who are more equal than others — get the new Mercedes, the plush apartment, the fine food, and all the other luxuries any commissar could want. And the George Soroses of the world would always try to be among them, for greed still lay in their hearts. And it wouldn’t be hard for them to rationalize, either. They would simply reason, "If I’m not more equal than others, someone else will be. If I don’t do it, someone else will."
Contact Selwyn Duke
by Pat Heyman | Dec 13, 2009 | Uncategorized
The Washington Toy Story
by by Timothy P. Carney
The following is an excerpt from Tim Carney’s new book, Obamanomics: How Barack Obama Is Bankrupting You and Enriching His Wall Street Friends, Corporate Lobbyists, and Union Bosses, published November 30 by Regnery Publishing.
A staple of Obamanomics is the regulations, pitched as consumer protection, that functions as Big Business protection. We have seen this at work in the toy industry.
“The year of the recall,” as some people called it, saw recalls of Dora the Explorer and Barbie dolls due to excessive lead in the toys’ paint. Mattel, the largest toymaker in the world, recalled more than two million toys. All the recalled toys were made in China.
Obama, after backing away from a pledge to ban all Chinese-made toys, put his support behind a bill called the Consumer Product Safety Improvement Act (CPSIA). This bill passed Congress in July when Obama was on the campaign trail, so he missed the vote. But he issued a joint press release with another Democratic senator reading, in part, “‘Keeping America’s children safe from dangerous products must be a top priority’ said Senator Obama. . . . ‘I urge the President to sign this bill into law as quickly as possible.’” [1]
When Obama entered the White House, he made enforcing this law a priority. His nominee to head the Consumer Products Safety Commission, Inez Tenenbaum, testified during her confirmation hearings that “one of the things that is urgent is the full implementation of the Consumer Product Safety Improvement Act which you passed last year.” [2]
Although standing up for child safety is a pretty safe bet politically, this bill isn’t all puppies, rainbows, and smiling babies. Like most Washington regulation, it has a sordid backstory. And, as with most instances of Obamanomics, Big Government has been a boon for Big Business and a bane to smaller competitors.
Mattel wins the game
Pulling more than two million toys off the shelf in 2007 was a blow to Mattel’s reputation – it’s hard to generate worse PR than you get for selling over-leaded toys to kids. Mattel responded to its critics by immediately instituting a new testing regimen for its toys and by working to standardize and streamline the process. [3]
While Mattel was investing in its factories, it was also investing in Washington. The company had spent a steady $120,000 per year on lobbying from 2002 through 2006, [4] but the number ballooned to $540,000 in 2007, the year of the recall. In 2008, its lobbying expenditures hit $730,000 – more than six times what the company had spent two years before. [5]
In August 2007, during the recall scandal, Mattel retained the lobbying firm Johnson, Madigan, Peck, Boland & Stewart. [6] The company’s lobbyists included Sean Richardson and Sheila Murphy, who had recently been the chief of staff and legislative director, respectively, for Democratic senator Amy Klobuchar. A month later, Klobuchar became a co-sponsor of CPSIA.
The bill imposed new but bearable costs on Mattel. Perhaps more important, it promised to provide a government stamp of approval on Mattel’s toys which had – justly – earned the distrust of consumers. CPSIA established a principle that any children’s product was guilty until proven innocent – or in this case, unsafe until proven safe. The bill required every manufacturer of children’s products to submit its products to third-party testing for lead and other toxins before selling them. It also promised to crack down on second-hand sales of products violating the new lead standards.
The law sent shivers through the world of thrift stores. Products that were perfectly legal to make and sell in 2008 might be outlawed in 2009. “This has gotten so serious and it is so frightening because we serve consumers that sometimes have no other way to clothe their children,” said Adele Meyer, executive director of the National Association of Resale and Thrift Shops. She added, “You could wipe out a whole industry.” [7]
Thrift stores didn’t have a powerful lobby in Washington, but they had plenty of public sentiment behind them. In its final days, Bush’s CPSC tried to allay the fears:
The new safety law does not require resellers to test children’s products in inventory for compliance with the lead limit before they are sold. However, resellers cannot sell children’s products that exceed the lead limit and therefore should avoid products that are likely to have lead content, unless they have testing or other information to indicate the products being sold have less than the new limit. Those resellers that do sell products in violation of the new limits could face civil and/or criminal penalties. [8]
You got that, Salvation Army? The bill doesn’t require you to test your products for lead. But if you sell a product with 301 parts-per-million of lead – even if nobody gets sick – you could get sued or go to jail.
And small craftsmen were threatened by the testing requirement. Every manufacturer, including grandpa in his woodshed, would need to submit its products to an accredited outside testing facility. This would be costly and burdensome. But written into the law was a provision that, while common sense, seriously favored mass-producers. Look at this guidance from the CPSIA:
If your products need to be tested, and they are materially identical and made in the same fashion with no change in assembly, equipment used, etc., then a single sample may be all that is necessary for testing purposes. A change in materials or design can be enough to alter testing results. [9]
So if you’re rolling 10,000 petroleum-based Barbies off an assembly line in Shanghai, you need test only one. If you’re making ten sets of children’s rosary beads to donate to the kids in your parish receiving their first communion, you also need to test one – unless these rosaries are unique, or if you made some at home, some at your office, and some while visiting your grandchildren. In those cases you need to get each one tested – not just each rosary, but each component: the little beads, the big beads, the crucifix, and the string.
Mattel was deploying the “Overhead Smash”: crowding out smaller competitors and potential start-ups by lobbying for stricter regulation.
Obama’s CPSC, to its credit, moved fairly quickly to exclude certain safe materials from testing requirements. [10] And come late August – six months after the law took effect – the government lifted the testing burden on Grandpa’s all-wood, unpainted chair – depending on what sort of screws, nails, or joinery he used.
But the CPSC issued another, crucial exemption: the commission voted unanimously to allow Mattel – and only Mattel – to test its own products on-site rather than submit samples to an outside tester. [11] Now, this exemption was not given out lightly. Mattel spent considerable resources developing its own testing facilities, which the company “firewalled” to protect it from corporate influence. Mattel, through extraordinary effort and expenditure, had earned the right to test its own products. The company made its case to the CPSC, and the CPSC agreed.
There’s no evidence of cronyism or any sort of wrong-doing here, and the law explicitly provided for such exemptions. But this episode gets at the heart of the problems with Obamanomics.
First, Mattel had already begun developing its own in-house testing regimen before the CPSIA even passed. We also can tell – thanks to their lobbying filings – that Mattel had significant input into the bill’s drafting. The relationship was probably a two-way street: Mattel lobbyists guided the bill’s testing requirements to match the company’s testing plans, and lawmakers’ demands on testing helped shape Mattel’s testing process.
And after the law went into effect, the world’s largest toymaker had decent access to Obama’s CPSC. One day in late August, according to CPSC notes, Mattel executives met with CPSC Chair Inez Tenenbaum and other CPSC commissioners, at the request of Mattel executive Jim Walter. [12]
Do you think grandpa in the back shed would get meetings with three CPSC commissioners? No, Mattel was exploiting the First Law of Obamanomics: “During a legislative debate, whichever business has the best lobbyists is most likely to win the most favorable small print.” Playing the “Inside Game,” Mattel found it easier to follow all the rules because it was there as the rules were being drafted.
Also, consider that no small manufacturer could afford to build its own in-house testing facility. This was all typical of Big Government, one-size-fits-all regulation: the smaller businesses, many serving the poorer communities, don’t have their own K Street lobbyists (and certainly not a former chief of staff and a former legislative director for a U.S. Senator). And they get steamrolled.
Notes
[1] Press Release, “Obama-Cardin Amendment Set to Become Law as Senate Passes CPSC Modernization,” July 31, 2008.
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