The Liberal Syllabus of Errors

Whether or not President Obama has done a number on Republicans (by increasing spending in the tax-cut compromise) or betrayed his Democratic base (by abandoning his promise to raise taxes on the rich) the fact is that the Bush tax rates continue. And the battle for the mind of America continues.

Absolutely critical is what the professionals call "messaging." We conservatives need to hammer away at the fundamental things that liberals have got wrong and persuade the American people, the moderates in the middle, that the liberals have got it wrong. As in:

• Corporations are evil. Corporations are big institutions that make products and deliver services to people. Since the limited liability corporation emerged in the mid 19th century the prosperity of the ordinary person that works for or buys from big corporations has sky-rocketed at a rate unprecedented in human history. Ordinary people that have been protected from big corporations in socialist countries and in the Third World have not done so well. This is evil?
• The rich should pay their fair share. The rich already pay more in tax as a percent of reported income than the middle class. How much more do you want? The record is that as you lower tax rates on the rich they mysteriously report more income. So, it seems from a practical point of view that if you want to tax the rich you should find a sweet spot that encourages them to fire the lawyers and tax accountants and just pay up.
• Inequality is the problem. Hey, it's morally tricky that some people make more money than others. Some people make obscenely more. But all we know is that, in the last two hundred years, the societies that didn't worry too much about inequality experienced the most increase in general prosperity while the societies that worried most about inequality experienced the least increase in prosperity. Anyway, once you let the government start messing with equality it merely starts to shovel money at the government supporters, irrespective of need. Government supporters just come to get defined as deserving and government opponents defined as undeserving. How unequal is that?
• The rich are getting richer and the poor are getting poorer. The majority of the poor in the United States cool their houses with air conditioning and own automobiles, and live in houses that, on average, are the same size as the the average house in Europe. And, of course, the poor benefit from the startling increase in life expectancy of the last two centuries. The poor are immeasurably richer than they were two hundred years ago. But then so are the rich.
• Americans are racists. Let us put it this way. In the last two hundred years there has been a sea change in the way that humans think about people who look different from them. Call it the influence of the Enlightenment or global commerce. In this move liberals were often a couple of inches in front of the rest of us. But often liberals have exploited race for political power, as in Affirmative Action, diversity, and racial quotas. In general, ordinary Americans have shut up and kept their heads down in the race wars while liberals have pontificated and shamed and blamed. Except for one shining moment in the 1960s liberals have plenty to be ashamed about when it comes to race.

Well, that will do for today. But it is an important subject. If we are to curb liberal political power we have to persuade the American people of the utter folly and utter delusion of liberal ideas and liberal talking points. And the next two years, as liberals try to squirm out of the mess they have got into, will be crucial.

Olby's Indictment, Clause by Clause

MSNBC host Keith Olbermann has done us all a favor. In his rant last Tuesday, after President Obama's own presser rant, he has delivered a bill of indictment against President Obama. He--or his writing team--has detailed the specific ways in which the liberal base feels betrayed. For that, we owe him a huge debt of gratitude. It takes a true believer to locate the emotional pulse of the liberal base and report on its flutterings.

So here is Olbermann's bill of particulars:

• Rendition and domestic spying. Olby hits the "refusal of even the most perfunctory of investigations of rendition or domestic spying or the other crimes of the Bush Administration". Nothing has been achieved: any future administration can do the same.
• Afghanistan. Liberals don't understand why we are there.
• Continuation of Gitmo. Liberals don't get that either.
• Single payer and public option. Olby faults the president's "preemptive abandonment."
• Don't Ask Don't Tell. Olby faults "foot-dragging."
• Getting less than he could have. Olby feels that the president expects liberals to be happy that the president isn't John McCain and that he saved us from another Great Depression. Given those amazing achievements, the president expects liberals to forgive him for settling for less than he could have on health reform and taxes.

In Olbermann's rage we see the elected Democrats starting to pay the price of riding the Angry Left bronco through the mid 2000s. By fanning the left's rage about President Bush and his forward strategy against radical Islam the Democrats set themselves up for an expectations crisis once they got back to power. The beltway Democrats knew that Bush wasn't a rogue president. Almost certainly they were consulted as Bush developed the nuts and bolts of his response to 9/11, including Gitmo and rendition. But they acted as if they were "shocked, shocked" that these decisions had been taken, and showed up in force at Michael Moore's agit-prop Fahrenheit 911 mockumentary.

Now they are paying the price. You'd have to search pretty hard to find any of Bush's strategy that hasn't been reluctantly confirmed by the Obamis. And the clearly different directions they took, most obviously the "reset" strategy of open arms to thug dictators, has been a disaster.

For chaps like me that voted for Obama precisely because we wanted the Democrats to be confronted with reality on the War on Terror, all this is good news. The reluctant embrace of the Bush strategy was always likely. But the rage in the Democratic base is a bonus.

The idea that Obama could have got a better deal from the Republicans on taxes does have merit. Sean Trende of RealClearPolitics thinks that Obama could have got a better deal. He could have dared Republicans to walk into the coffin corner of voting for a cold Xmas for the unemployed while sticking up for millionaires and billionaires.

Either way, the Democratic base is livid. And that can only for good for a center-right nation that wants to curb the excesses of big government.

It Ain't WikiLeaks' Fault

It's great fun to run around accusing Julian Assange of espionage or, better still, of failing to use condoms. After all, that's what politicians do when they are not actually running for election. They run around accusing other people of the most frightful crimes and misdemeanors even as the government totally screws up everything it does.

Now, admittedly, failing to use a condom is one of the worst crimes in the liberal calendar.

But hey fellas, if you chaps in the State Department don't want everyone reading your cables for breakfast then you need to apply proper security precautions.

State Department cables are exchanged on SIPRNet, apparently. And about 3 million people have access. No problem, chaps. But clearly, it should be impossible for anyone to get their hands on 150,000 cables as WikiLeaks has done. How hard is this?

Now, admittedly, it was great fun to leak everything in sight when the media were busy embarrassing the hated Bush administration back in the 2000s. And it was only right to hit Vice-President Cheney in the keister. The liberal renegades in the State Department and their bribed apologists in the media were delighted to see the Bushies embarrassed. But didn't they think about the moment when some chap like Julian Assange would take advantage of the opportunity to embarrass a Democratic administration. For chaps like that, noble Democrats aren't much different from eevil Republicans. It's not unprecedented. Back in the 1940s we had Commie physicists getting their hands on US nuclear secrets and handing them over to Uncle Joe Stalin. Hello? Was anyone home back then?

What we don't want to do is make Julian Assange into a martyr like the sainted Rosenbergs. Prosecuting the Rosenbergs turned into a political bonanza for liberals and lefties, and they postured and pretended for years that the Rosenbergs were as innocent as fresh-laid snow and victims of eevil McCarthyism.

No. What we need is for a few heads to roll at the State Department and a few dozen inter-agency committees devising new methods of limiting access to State Department cables. Also, I dare say it wouldn't hurt to trigger an alarm when anyone starts trying to assemble a whole bunch of cables all at once. After all, who needs to set up their own private vault of State Department cables?

Market Says Ho Hum on Tax Package

The "framework" for a tax deal struck between President Obama and Republican leaders yesterday seems to satisfy neither the Democratic base nor the Republican base. So it probably represents the best deal that either side can hope for on December 6, 2010 in a lame-duck Congress.

The most telling reaction, of course, is from the stock market. On the buy-on-rumor, sell-on-news theory, we can assume that the market, that rose strongly last week and today is flat, thinks the package is so-so.

That is not good news for President Obama, who needs a pretty strong economy starting early in 2011 to get a decent economy in 2012 for reelection.

Of course, the tax package, which more or less extends the Bush tax cuts, doesn't do anything about the real big drag on the economy, which is ObamaCare.

The stage is now set for the political argument of the next two years. Should the economy be based on the privilege-and-subsidy state of the liberals, on the belief that ordinary people cannot get a fair shake without a heavy government leaning on the exchange relationships of employer and employee, producer and consumer? Or should it be based on a level playing field of low tax rates and low spending, on the assumption that capitalism is basically a win-win proposition where service and trustworthiness is repaid in a decent return on labor, on capital, on the consumer dollar, and on the investment of trust in the system?

This is the Great War that has raged since 1848, when the educated youth upped and declared that the whole thing stank. They declared that the bourgeois were exploiters and that students and workers were victims. Special interventions were needed to save the workers from a fate worse than death, and the educated youth were the only chaps with the moral standing to do it.

Now, more than ever, it is time to really evaluate what the century and a half of economic interventions has really delivered and what it can hope to deliver in the future. Or is big government just big government whether it is run by absolute monarchs or absolute politicians?

Now more than ever, it is time for the lovers of liberty to strain every brain cell and every sinew to persuade the American people first, that the liberal world view is wrong and second, that its politicization of everything is cruel, corrupt, unjust, wasteful, and deluded.

End the Fed?

Why do we have a central bank, asks Gerald O'Driscoll of the Cato Institute? It's not actually necessary for a modern financial system. The US didn't have a true central bank until 1913. Canada didn't have one at the beginning of the Great Depression, and its banks sailed through the crisis without failure (But the Canadians legislated one in 1935).

The simple answer is that a central bank is really convenient for the government. It helps to get the government out of a jam and it helps the government to market its debt.

In wartime, a central bank is invaluable, because it helps the government commandeer the nation's resources for the struggle. And in a financial crisis it can act as lender of last resort to help financial institutions facing liquidity problems, i.e., a run on the bank.

After the Bank of England got started in the 1690s, it became evident that there was another benefit of a central bank, provided it was combined with sensible government fiscal policies. Government debt became highly regarded collateral, and rock-solid debt is the foundation of a well-functioning financial system. That was the basis of Alexander Hamilton's successful launch of the US National Debt in the first Washington administration.

The problem is that the government abuses the advantages of a central bank. The ease of floating debt creates a temptation to float more of it. Then the day comes when market actors wonder just how solid the government's debt is. Then they start to demand higher interest rates. Then the government gets into a sovereign debt crisis. Then the government defaults on its debt. Given this vicious cycle, maybe it is best to get rid of the central bank and get rid of the temptation for bad behavior.

The thing about debt comes down to the old saw about banks. The bank will only lend money if you don't need it. When you are in trouble, the bank will demand outrageous guarantees and collateral.

Well, of course. Credit works when everyone knows you are good for it. That means that you keep your debt levels low enough that you can always meet your obligations, even in the middle of a financial crisis. Financial crises, large and small, occur when debtors get in a jam. The solution to financial crises is for every actor to keep debt and equity properly balanced and keep risk capital and working capital clearly separate.

(That's easy to say, of course. In real life, consumers and businesses make mistakes and they put off doing something about it. Then, all of a sudden, it's too late, you are underwater, and you are facing bankruptcy.)

OK, so what should we do about the Fed? In my view we need to limit the Fed to the one job that central banks do well, and that is acting as the government's banker.

But it is time to move away from the temptations. Lender of last resort? Maybe, but the financial system should not rely on that. Printing money? Maybe, but we have seen that central banks can't be trusted to maintain the value of money. There has to be a better way, and I suspect we will see another way develop with the new ETFs for gold and other commodities.

The one thing we must stop is the failed policy of goosing the economy with the central bank and easy money. That is pure inflation, and that is wrong. Economies that need goosing are economies that have been distorted by bad government programs. Getting the central bank to paper over the government's failed subsidies and privileges doesn't solve anything.

Trust in the Slum

Suppose we accept that in the rarified air of high commerce that the economy runs on trust.

But what about life at the bottom? What is it like in the mean streets of the western inner city What about commerce in the slums of the third-world city? There, surely, you will find naked capitalism, where the rich get richer, the strong survive, and the poor go to the wall.

The poor don't write, but researchers do, and we have recent research on life on the mean streets of the underclass city. According to Hernando De Soto, commerce in the informal economy of Lima, Peru, is all about gaining the trust of the consumer. According to Sudhir Alladi Venkatesh, life on the South Side of Chicago, where President Obama used to community-organize, people struggle along with a remarkably entrepreneurial will. And in the third-world slums of Hyderabad and Africa, enterprising education entrepreneurs run schools that outperform the government schools. When there are any.

Hernando De Soto described the informal economy of Lima, Peru, in The Other Path twenty years ago. He tells the story of the Andean peasants moving to Lima in the teeth of bumbling opposition from the political system and the formal business sector.

The peasants needed property rights, to build houses, to earn a living, and the political system, oriented towards the exchange of favors, did not understand. The politicians and the bureaucrats made it almost impossible, mainly by suffocating bureaucracy, for migrants to live and work in the city legally. What could the migrants do?

One way that peasants could earn a living was by selling goods as a street vendor.

Street vending is illegal, but the peasants did it anyway. In 1986 when De Soto conducted a census of street vending in Lima, he found over 91,000 vendors. Street vendors start as "itinerant" vendors, with no fixed location. Vendors soon establish a fixed route every day so they can establish a reputation for reliability and earn the trust of their customers and credit from suppliers. But, of course, itinerant vending with a limited supply of goods cannot earn as much as vending from a fixed location on the street, so successful vendor soon finds a place to set up a barrow or a stall illegally on the sidewalk. If it's a good pitch, he is soon joined by other vendors. This competition is beneficial, because it helps create a critical mass: "vendors realize that the safety, cleanliness, quality, and variety of goods available" affect the volume of customers and the power of numbers helps to defend them against the government and competing interests. Eventually the successful street vendors combine to build a "minimarket" and then move off the street into permanent markets that they have combined to build and operate. Denied access to the institutions that are supposed to reward trust and reliability, the newcomers to the city must create their own culture of trust without the assistance of the formal legal system. The process is clear. These rural peasants combine to win formal property rights out of a society that hardly knows they exist, and resists their attempts to earn a living from the burgeoning city.

Informal trading is not the only off-the-books activity in Lima. New housing is typically built by "invasions" of state-owned land on the periphery of the city. Mass transit is furnished by informal bus companies that operate in a curious no-mans-land between legality and illegality. And there is a vast economy of small-scale manufacturing that operates outside the law in order to hide from expensive labor laws and business regulations.

The story in The Other Path is clear. The immigrants to the city want to establish property rights for themselves. But they find that they must deal with a political system for which power and the exchange of favors is the only true reality. So they must fight for the right to acquire property rights in their housing and their employment.

That's a sober thought for Tea Party Americans as we struggle with the favor factory of the modern administrative state. How do we convert this corrupt culture of compulsion and its divisive political warfare into a culture of social cooperation, a world where people can abandon the trenches of political attrition and work together to serve each other and benefit society with their wealth-creating skills? How do you reform a political system so that there is less politics?

Warren, Tell 'em It Ain't So!

So now we know why Warren Buffet is such a goo-goo about the estate tax, and why he thinks it's such a good idea to keep it.

Any guesses?

It turns out, according to Jonathan Strong, that the life insurance industry, one of the strongest lobbies in Washington, DC, is against the repeal of the estate tax.

Now, why in the world would the life insurance industry care about the estate tax? Their job is life insurance, not railing about inequality and family dynasties, right?

Wrong. It appears that ten percent of the life insurance industry's revenues come from from people using life insurance to reduce their estate tax exposure. Life insurance proceeds don't count as part of an estate; thus the heirs get the money without paying a cut to Uncle Sam.

And wouldn't you know: Warren Buffet, presumably through Berkshire Hathaway, owns six life-insurance companies.

Really, the stench is getting unbearable. Another famous proponent of the estate tax is Bill Gates, Sr. He is a lawyer, and apparently notable as an estate-planning expert.

Estate planning is a phrase that means: rearranging your assets with an expensive lawyer so you can reduce your estate-tax exposure.

The joke about all this is that these days, unlike in the old days of the landed aristocracy, you don't need to worry about wealthy dynasties. The money accumulated by a successful billionaire entrepreneur usually gets dissipated in the next generation. Sometimes it gets dissipated early by his widow.

The estate tax does have the effect of making it very difficult to pass down a family business to the next generation, or worse, forcing the heirs to sell the business to Warren Buffet at fire-sale prices.

Oh, you didn't know that? Yes, it appears that one of Warren Buffet's specialties is buying family businesses on the cheap. It's a cosy little niche that exists because of the estate tax. Almost any family business worth a few million will have to be sold quickly in order to pay Uncle Sam's estate tax. And when you have to sell the family business quickly, chances are that you are not going to get a good price on it.

It's a universal law. Anything the government gets into ends up as a cesspool of corruption and crony capitalism. Because government is force, and politics is power.

Personally, I'm all in favor of the estate tax. But not at 55 percent. I'd say that an estate tax at a rate of five to ten percent would collect a nice little chunk of change but still keep family businesses going in the family. Alternatively, it would help heirs of a creative turn of mind become famous scientists and artists, as happened so often in the 19th century.

But an estate tax that low would put the noses of Warren Buffet and Bill Gates, Sr. out of joint. Not to mention the life-insurance industry.