Anyone needing proof that at least one U.S. Senator exists who truly “gets it” with regard to the government’s role in creating our recent financial debacle should devote 10 minutes to watching this video.     This was South Carolina Senator Jim DeMint’s allocated time in questioning Federal Reserve chairman Ben Bernanke during the latter’s December 3rd renomination hearings in the Senate Finance Committee.  It’s great theater, Bernanke’s I’d-rather-be-having-a-root-canal demeanor notwithstanding.

It’s hard provide better verbiage on what DeMint describes, both in the setup of the importance of the issue and the implications of not getting our hands around the true causes of our recent crisis.   Any informed voter needs to be aware of this perspective, and of the presence of elected officials who are willing to buck the populism that keeps it from getting the attention it warrants.   So with that disclaimer, I’m quoting large portions of DeMint’s comments:

Sen. Jim DeMint

“When Congress created the Federal Reserve, they created arguably the most powerful institution in the whole world.  Our whole economy, all our prosperity, wealth, rests on the soundness of the dollar, as does much of the economic systems all around the world.  So as we consider your renomination it’s important that we ask some difficult questions, not just of you, but to ourselves, because no one can say that there haven’t been major failures and I think a lot of us have to admit that the Federal Government, the Federal Reserve let down the American people and a lot, a lot of people have been hurt.

I will take exception to one of the arguments that I’ve heard today and I’ve heard often about what we heard last October and what actually happened.    We were told that if we did not appropriate nearly a trillion dollars to buy toxic assets that the whole worldwide economy or economic system was likely to collapse.  We appropriated nearly a trillion dollars and we never bought one toxic asset and the world economic system did not collapse.   Now we can make a case and debate about all we want about whether or not twisting banks’ arms and forcing more money into the banking system actually helped us.  We could talk about that all day.   But the premise that we used, to create this TARP program, was never followed through on, and it’s difficult for me to find credibility in the arguments that we saved our economy.”

The bait-and-switch performed last fall under the financial doomsday scenario scare tactics described above is nothing short of criminal.   Recent reports of TARP’s supposed effectiveness miss DeMint’s crucial point:   The unprecedented program was passed using scare tactics for an implementation plan that was quickly  abandoned following its passage. Yet in “fool-’em-once-fool-’em-again” fashion, President Obama has the audacity to now want to take $200 billion of these TARP funds and throw it at other sectors and politically expedient portions of our economy.   But we won’t call it a “stimulus”…

DeMint continued:

“For me perhaps the biggest failure, in the Federal Reserve, in the political side here in Washington, is that, amid all these failures, the politicians, the folks in the Administration and Federal Reserve, have claimed credit for saving the system, while blaming capitalism and unrestrained free markets for our problems.   That has justified the positions that are now being taken here in the Congress in many ways, to come back and even extend the control, the intrusion of the Federal Government further into the private sector.  I think you’ve been a big part of orchestrating that, and shifting the blame onto the private sector.

Fed Chairman Ben Bernanke

No one’s arguing that there’s not blame to go around everywhere.   But the biggest failure I’ve seen, is the failure for us to recognize the role that we played and the lack of our oversight of Fannie Mae, who created a lot of these toxic assets and sold them around the world, the loose monetary policy that created chronically low unemployment rates and high leverage across the economy.   By not taking some of the blame, and making the public is aware of that, we’ve undermined the system that made this country prosperous, and I think that is an egregious error.”

Although I’ve written about this before, it warrants repeating that the attempts by many to move our economy away from free markets, to any extent, truly risk killing the golden goose.  And with the government’s nearly perfect track record of never repealing any major program or initiative, the stakes for preventing such major legislative endeavors that might permanently weaken our preeminently free-market orientation have never been higher.

More from the Senator:

“To a large degree the oversight that we’re responsible for here in this Congress we did not accomplish because of assurances that we’ve  gotten over the years, from your predecessor and from yourself and by doing that I think we have egregiously failed the American system.

…

I would again, as you and I have talked personally, ask you to consider the need to make the Federal Reserve more transparent.   There’s no need that independence needs to mean secrecy.  The confidence in the Federal Reserve, the mistrust around this country, has reached new heights, and we need to do something to restore faith that the American people have in their monetary system, their financial system, and that responsibility is at the Federal Reserve as well as in the Congress.   I would encourage you again to consider what type of openness, or “audit” as you and I have talked about, would be appropriate in order to reassure the American people that we’re not looking at another Fannie Mae situation, that over years we were told “not to worry, not to worry”, that everything is OK, and now we saw what it did.   We can’t allow that to happen with the Federal Reserve.”

DeMint here is referring to S604, the Senate counterpart the Ron Paul/Alan Grayson Amendment (HR 1207), which recently passed 43-26 in the House Financial Services Committee, much to the fear of Federal Reserve itself.   DeMint’s intentions here call the bluff of many who would call upon even more regulation and oversight of all aspects of our economy:   Evidently there are still plenty of elected officials who are not comfortable with this oversight extending to certain government agencies.

Lastly, it is well worth noting that voters who agree with DeMint’s worldview can thank The Club For Growth for helping him and other liked-minded individuals get to Washington.    The Club’s legal ability to advertise itself is outrageously limited (perhaps this is Washington’s notion of limiting government).   Anyone wanting to see DeMint’s perspective advanced in Washington should encourage and support similar candidates,  and the Club’s track record in getting that done is impressive.   In the never-more-important war of ideas, having candidates who will reliably legislate from the limited-government side is correspondingly crucial.

In June of 2008, Stephanie Simon wrote a great article entitled “The Greenest Show On Earth:  Democrats Gear Up for Denver”.  She described the trials and tribulations of the planners trying to implement Denver Mayor John Hickenlooper’s charge of making “the greenest convention in the history of the planet”.   Here’s a short excerpt:

Consider the fanny packs.

The host committee for the Democratic National Convention wanted 15,000 fanny packs for volunteers.  But they had to be made of organic cotton.  By unionized labor.   In the USA.

Official merchandiser Bob DeMasse scoured the country.   His weary conclusion:  “That just doesn’t exist.”

Seventeen months and one victorious Presidential election later, as the Democrats run all three rings of our government’s circus, it is clear that the folly and/or paralysis described in Simon’s article was merely a foreshadowing of things to come.

The fundamental problem facing the Democrats right now is that their understanding of how an economy works is flat-out wrong.    It’s not like their policies will not work.   They simply can not work, any more than Newton could will the apple to fall from the top of his head back onto the branch.   Consider the following plans of action:

Economic “Stimulus”: Proclaim to know how to direct the resources of the economy in synergistic fashion, like some kind of nuclear fusion reactor creating more output than the inputs used.   Continue to pursue a strategy that is based on class-warfare, envy and redistribution.   Refuse to acknowledge that taking resources from one part of the economy via a political process, and handing them over to some other part of the economy, will not and can not produce a net positive.   Recoil from the possibility that their very attempts to manage the economy are in fact the cause of the economic woes they now try to combat.

Cap & Trade:   Propose a $200 billion dollar/year boondoggle to extract additional resources from the economy to be re-allocated to some supposedly wiser-purpose, all for a negligible change in the supposed villain, average global temperature.  Maintain the overarching vision the that humans can control the climate of a planet.   Support the silencing of dissenting points of view, and blame any dissenters that slip past the gates on Rush Limbaugh.

Card Check: Hammer home the belief that the economy can be made better off by eliminating workers’ rights to a private ballot as to whether or not they should form a union.   (Whatever one thinks of unions, this simple fact about this proposal should make it DOA, but it remains a top legislative goal).

Health Care: Take an already over-regulated one sixth of our economy, call it a “market”, proclaim that markets don’t work, and seek to take it over instead.   Hold up the structurally bankrupt programs of Social Security, Medicare and Medicaid as models to emulate.   Vilify the insurance industry and proclaim the desire for competition, but do not allow the insurance companies to compete with each other across state lines.    Make no mention of medical-malpractice and tort reform.    Lastly and most importantly, do everything possible to hide the successes of Health Saving Accounts and similar freedom-based, patient-empowering programs.

Taxation:  Stay on track to allow the Bush “tax cuts for the rich” to expire.  Maintain the class-warfare required to support such policies.   Ignore the fact that “the share of the tax burden borne by the top 1 percent now exceeds the share paid by the bottom 95 percent of taxpayers combined.”    Continue the path towards having 50% of wage earners pay no income taxes at all (standing at roughly 43% right now).    Make no connection between high corporate tax rates and companies sending jobs overseas.

If you were an entrepreneur, or a business owner or manager with the ability to start large new initiatives, perhaps ones requiring large numbers of new employees, in the face of the above legislative uncertainty, would you dare proceed?

Hopefully as the Democrats keep themselves tied up in logical knots, they will succeed in passing nothing in the way of major additional economic legislation.  Eventually, perhaps requiring several election cycles, the pursuit of such hamstringing policies will be dropped (or those enacted, repealed) and the true engines of growth will be unleashed.  In the meantime, as the party of Biggest Government (yes, the Republicans have their sad recent history of being the party of Bigger Government), the Democrats can not do the right thing because doing so would require them to repudiate their very worldview.   Solutions to our economic problems based on a worldview that an ever-expanding government can create a utopia-on-Earth are every bit like Bob DeMasse’s sought-after fanny packs.   They just don’t exist.

From the never-to-be-covered-by-The-New-York-Times department….

It has always stuck me as highly plausible that scientific researchers writing grant requests needed to convey some sense of urgency in order to motivate their potential funding sources into action.   Big need, big problem, big money.   Likewise, at the local newsstand, which cover story would more likely catch your attention:  “Earth’s Changing Climate: Same As It Ever Was…”  or, “Warming Climate To Radically Alter Life On Earth!!!”?

Hysteria sells.

Amidst perhaps the grandest, most globally-coordinated legislative campaign ever devised, that to impose “climate change” legislation, we have what should be considered an equally massive bombshell:  apparent proof that the research of dissenting scientists was systematically withheld from public consumption, lest it ruin the funding party for everyone else.    Do yourself a favor and listen to this exchange between author and radio host Laura Ingraham and climatologist Patrick Michaels from November 23rd, and then do the right thing and urge your friends to do the same.   Note that in the leaked e-mail exchanges, Michaels is singled out for some of the harshest criticism (in his role as party-crasher) by his fellow researchers.

On a far more serious note, all of this would would border on the comical if the consequences of blindly following such biased research were not so damaging to the most vulnerable people in the world.   Because at the end of the day, if the man-made global warming proponents have any concern for their fellow man, they will realize that man’s ability to adapt to an ever-changing climate is first and foremost an economic problem. It is really one of poverty, as it is the poorest people who are most unable to adapt.    Therefore, the solution is to create more of the opposite of poverty, which is wealth.   So instead of pouring our passion and funding into global warming, we should instead be fighting for global liberty.

Liberty and globalization, defined in this context as freedom in all forms, free trade, property rights and the rule of law, have done more to lift people out of poverty and better positioned them to deal with an ever changing world than any headline-grabbing, heartstring-tugging, Polar Bear-hugging, income-redistributing, Save The Planet campaign ever has, or ever will.

In this regard, Copenhagen Consensus Director Bjorn Lomborg has recently published two highly poignant commentaries in the Wall Street Journal, “Global Warming as Seen From Bangladesh” and “The View from Vanuatu on Climate Change“.   They should be required reading for anyone who feels “global warming” is the number one issue of modern times, or even amongst the top ten.

JP Morgan CEO Jamie Dimon’s recent commentary in the Washington Post proclaims that financial institutions need to be able to fail. He also describes the need for regulatory changes that would enable this to happen while minimizing the effects should a firm do so.   What he does not describe is why firms need to be able to fail.  Judging from the comments out there, it’s clear there’s a need to understand the why.  It is central to understanding what regulatory changes, if any, are even required.

Mr. Dimon is correct for one simple reason: When there is the perception of risk with a trading counterparty, risk management will arise to deal with that risk.   Due diligence with regards to understanding the counterparty will increase in proportion to the perceived risk.   In the extreme case, risk management may dictate that the trading (however simple or complex) may not take place at all. Note that “trading” in this case is not simply what everyone envisions on some Wall Street trading floor, but the very essence of any transaction between two individuals.

The absence of “too big to fail”, and the extra due diligence that would have instead been present, would likely have prevented the entire housing-related financial debacle we’re all living through, including the current hand-wringing about what to do about it.

When a firm is deemed “to big to fail”, anyone trading with that firm is afforded the luxury (or trap) of letting their risk management guard down.   “Hey, my counterparty’s existence is a sure thing — why should I care what they’re doing behind my back? — It can’t affect me.”   The story of the Norwegian town of Narvik illustrates this perfectly.

With truly free trade, two potential trading partners, X and Y, will only trade if they make each other better off.   To do that, they must know each other’s needs.  Say X and Y are contemplating a transaction, but X is deemed “too big to fail” by some trusted third party — ie, 100% trustworthy in their ability to fulfill their obligation to Y, and/or of their ongoing existence.   Trading partner Y now has far less need to understand trading partner X.   In some ways, rather than Y needing to exhibit reciprocity in its care for its trading partner, it can act more selfishly, focusing more so on its own gains.   Knowing that X’s continuation is a sure thing, Y might not even feel entirely obligated to honor their obligation to X — “If I don’t, what difference will it make to them?”   This, combined with lax bankruptcy penalties, might have been all that was needed to prompt some people to stop paying their mortgages as their houses went “upside down”.

Amongst the chain of players in the housing market, note the prominent role of Fannie Mae and Freddie Mac, two institutions that were generally thought of as “too big to fail”.   Any mortgage originator who could raise product in a way that could conform to Fannie or Freddie’s securitization requirements could lay off whatever risk they initially had to  these organizations.   They were therefore incentivized to raise as much product as they could, earning commissions and short term compensation along the way, knowing that anything Fannie or Freddie did downstream was irrelevant.    Loans to borrowers with sketchy credit profiles?  No problem!  Sell ’em off to Fannie or Freddie!   This is exactly what occurred with firms such as Countrywide Financial.

Suppose that Fannie and Freddie did not have their implicit government guarantee, or political pressure to assist in expanding home ownership.  They would then have been far more concerned with the quality of the collateral they were purchasing.    This would have rippled all the way back to the origination of the loans, because the resulting loans would have been less marketable, and in many cases, perhaps not marketable at all.

However, there would have still been a role for risk-takers to provide a valuable service to the market, in the form of making higher interest loans (to compensate for the risk) to higher-risk borrowers, and NOT selling the loans to a third party.   But there would have been an important difference.  It would be the free market and private decision making, as opposed to a political process, determining where on the risk-reward curve the business activity would be.

Mr. Dimon also does not mention the massive instructional benefit of failure.   While failure in and of itself is generally not pleasant to watch (perhaps with this exception), it is invaluable as a teaching tool.   It allows all non-participants to learn in a way that is every bit as valid as those who did participate:  Watching someone burn himself on a hot stove doesn’t require me to touch the stove as well to learn not to touch it.   Simply knowing that people can burn themselves on hot stoves is enough to make me cautious and treat the stove with respect.     This country needed to witness failure of lending to unqualified people to ensure that such poor business practices did not expand in scope.   Failure of unqualified borrowers to obtain credit is not evidence of a broken free-market.  It’s direct evidence of the market working!

If failure were permitted to happen in an unhampered fashion, private defense against possible failure of trading counterparties would necessarily increase.   There would be no need for a regulatory agency to try to outthink the market as a whole (an impossibility, yet one that many people sadly think is possible), because out of their own self-interest in self-preservation, companies would do it themselves.    Even still, there may be opportunities for private firms to arise that would add additional risk-management services in the form of wider information visibility and/or better analysis.   There is simply no need to politicize the function.  Claims that companies self-policing themselves have failed ring hollow because the necessary punishment of true corporate failure was not present.

A politicized version of the crucial risk-management function produces things like forcing a bunch of firms to take TARP money, even those who don’t need it, to shelter the identity of those who do.    Discovering these weakened firms faster and more unambiguously is exactly the kind of information that market participants (companies AND individuals) need to correctly perform their risk assessment.   Simply the threat of being put on such a list would be enough to keep an honest company concerned with the best interests of its customers off the list.

And this is exactly where we’d wind up.  Financial stability, security and trustworthiness would rapidly become the aspects that financial service companies would compete over.   Large financial institutions would have to prove to their customers that they are conducting themselves in ways that make their customers comfortable in trading with them, lest they watch these customers go elsewhere.    Not with some phony “too big to fail” claim, backed up with a politicized redistribution of private wealth, but with honest and verifiable proof using their own resources.    It’s already started, with small and regional banks running ad campaigns highlighting the fact that they didn’t take TARP money.  It’s a trend we need to encourage.

Imagine one morning you wake up and learn that The United States is under attack from multiple fronts, our defenses overwhelmed by a previously inconceivable force.  It’s not unlike 9/11, except on a much wider scale.  Your plans for the day have just been changed.

Different scenario:  You are woken out of bed by the carbon monoxide alarm in your house.  You can’t see or smell anything wrong, but it’s not a false alarm and without it, you’d meet a sad fate.

In the first scenario, the threat is so obvious that the need for taking some kind of defensive action, perhaps even an offensive one, is equally obvious.  Failure to do so could prove fatal.  In the second scenario, the consequences of inaction are every bit the same, but the threat can not be easily seen.  It has to be detected by other means.

The United States is currently engaged in a “hot” war with multiple fronts, thankfully not on our soil. Less thankfully, many of the citizens of Iraq and Afghanistan have woken up to the first scenario, and have been forced to act accordingly.  And although no one wants the war to continue any longer than required, losing the war is not an option.

Yet on American soil, like the carbon monoxide threat that can not be readily seen, another war is now underway.  It has many fronts, and the enemy force is organized, highly determined and well funded.  It is also a war that we can not lose.  This is the war on capitalism and free-markets.

In many respects, it is the more important war.

Consider first off that the terrorist forces that attacked U.S. soil in 1993 and 2001 recruit from regions of the world where poverty reigns.   To a David with a highly questionable economic future, a chance at greatness via a terrorist act against Goliath begins to look more appealing.  But the irony in what they are attacking is staggering.    The economic system which defines America — “the land of opportunity” — is exactly the system that could be bringing these economically hopeless people out of their despair. The opposite is also true, as Steven Malanga has written, “free markets are rare in starving nations“.

To whatever extent America weakens its most differentiating characteristics, we reduce our opportunity to be an example in how to best lift the world’s inhabitants out of poverty and into peace.

With wealth and poverty being opposites, if we lament the latter, we must look to promote policies and practices that have demonstrated track records of creating the former.   Likewise, free-markets and their resulting capitalism are inimical to war.   They are the best peace-plan ever devised. It bears repeating:  A truly free market between two trading partners makes both parties better off.  Once this virtuous circle is in place, there is a greatly reduced incentive to go to war, as both parties are made worse off.   Note that this precisely explains Russia’s reluctance to join in the chorus against Iran — they are huge trading partners.

Under a rising tide of concern over Obama’s push of our economy into a more socialist-leaning direction, we have George Soros greasing the skids, with the goal of de-emphasizing free-markets in matters of public policy.  This will be no small effort either, with a hoped-for endowment of $200 million.   This is more than the combined endowments of many of the more notable free-market organizations.

And the proverbial “carbon monoxide detectors” are going off with regard to the United States.   Exhibit A is the value of the US dollar, which has been meandering downhill like a nice “blue” intermediate ski trail with black diamond sections becoming more frequently interspersed.    Exhibit B is our exploding debt, which is finally catching more attention for what it is:  blatant inter-generational theft.

What’s truly mind-boggling about the efforts of Soros and his wealthy followers is that they decry the very system in which they became wealthy, the system in which they expand their wealth, in classic “I’ve got mine, close the gate” fashion.   Witness Michael Moore’s “Capitalism, A Love Story” — in some countries, attacking the native economic system with such a movie would get him killed.

This crowd simply doesn’t understand what free-markets and capitalism are.  They think our economy, with its ever increasing regulations, corporate cronyism and government-as-backstop is a free market.    Others have done a fantastic job at illustrating the ridiculous nature of such claims, very recently, Charlie Gasparino’s piece in the Wall Street Journal (expanded in his new book, “The Sellout“).   Two other recent and noteworthy books, Thomas Woods’ “Meltdown” and Thomas Sowell’s “The Housing Boom And Bust” also make the methodical, crystal-clear case that big, interventionist government itself was the primary cause for our recent financial crisis.

None of this would matter if the anti-capitalists didn’t have the full mind and ear of the legislative and regulatory arms of the federal government right now.   The damage that could be done in just one 2-year congressional term is incalculable.   Ronald Reagan’s “shining city on a hill” runs the serious risk of tarnish.

In the opening example of a sudden “hot” war in our backyard, we would all literally leap to our feet and do anything and everything required to defeat the enemy.   Yet surely and silently an enemy operates in our midst whose worldview can more easily lead to the “hot” war.   When will we leap to our feet to defeat it once and for all?

Sometimes the truth hurts.

The economic understandings or misunderstandings of our members of government get reflected in our laws and regulations.   And at the end of the day, it is the economic understandings or misunderstandings of our electorate that determine which individuals serve there.    In this past election, in siren-song fashion, Barack Obama convinced a majority of voters to act on misunderstandings of how the economy works and became President.

The repercussions of such economic illiteracy are now being played out.    First there was last February’s massive “stimulus” bill.    Most recently there has been the take-no-prisoners battle to re-make the healthcare portion of our economy.    “Cap and Trade” looms in the not too distant future.   Obama remains determined to re-pay unions via passage of “Card Check”.  Calls for a second stimulus are rising even as majority of the first one’s dollars have not been spent.  The list goes on and on.   Elections do indeed have consequences.

One of the most fundamental fallacies being followed by Washington these days is the belief that in the face of a slumping economy, government must “stimulate demand”.  In the most basic of economic courses, the student is taught that “economic equilibrium” is achieved when demand equals supply, and that markets are always trying to move towards that state.   Many in Congress, and the many voters that put and keep them there, seem to think that demand equaling supply falls under the “Which came first, the chicken or the egg?” category.   They are sadly mistaken.

Who will defend the practice of “demanding” without first “supplying”?   We supply so that we can demand — supply must come first.  This truism renders any attempt to “stimulate demand” not just backwards, but practically immoral.

For example, who “demands” that they have gasoline for their car without first supplying their labor in some fashion in order to have money to pay for the gasoline?      And is it truly the government’s function to provide that job that will then pay for the gasoline?    If so, who supplies the government with that job that can then be dispensed?   Should the government command someone to provide the job by force?    We’re now only a couple steps away from slavery.     Note also that any consumable, such as food, clothing, shelter, or even healthcare, substitutes nicely in this line of reasoning.

“Creating jobs” is not described in the Constitution as a function of government.   Only a tortured interpretation of things like the “General Welfare” or “Commerce” clauses would begin to assign that role to government.    The moment we look to government to create a job, we fall onto a slippery slope:  Who decides what jobs to create?  How are they funded?  How do we evaluate job performance?    As a nation we are now collectively bruised and battered from falling down this slope for several generations.  It’s also worth noting that it is exactly when voters “demand” that the government “create jobs” using its redistributive techniques that we wind up with stimulus programs where the effective cost of those “created jobs” runs into the hundreds of thousands of dollars per job.    Indeed, if the $787 million February stimulus, according to The White House, “creates or saves” 3.5 million jobs (ignoring for now how we’d actually measure that), that works out to nearly $225,000 per job.

What is fundamentally not understood amongst an apparent majority of voters is that entrepreneurs and their financiers, (often being one in the same), create jobs.   They perform the vital discovery mechanism of demand assessment and supply a potential solution, risking their own resources to do so.   It is a truly virtuous circle, in which the entrepreneurs who best understand the needs and desires of their customers — their demands — are rewarded most handsomely.   Likewise, through the vital role of failure, bad assessors of demand are punished, and collectively we can all watch and learn what works and what doesn’t.

A critical point to realize about the above process is that no central orchestrator directs the entrepreneur as to what action to take.    They might do exactly the wrong thing.   They might also supply a solution for which there was no prior demand.   Yet this is precisely how things like the personal computer or iPhone came about.   There was no government program to initiate the demand of having a computer in one’s house, let alone in one’s pocket.

Unfortunately due to a general lack of understanding of this process, we’ve tolerated an increasingly hostile environment towards fostering supply, such as ever-escalating taxes, oppressive regulations and minimum wage laws that prevent employers from putting that first rung on the economic ladder closer to a reaching hand.

Getting back to the election, in the case of Barack Obama, another dynamic was also present:  Many voters became further enamored with the historic possibility of electing the first black President.  Yet with painful irony, these voters ignored Dr. Martin Luther ‘s historic plea to judge instead by the content of one’s character.    Had the philosophies behind Obama’s economic agenda (a major part of his “character” in this case) been more widely understood, a majority of voters would have realized that much of what he wanted to do (and indeed is now trying to do) has been tried before and has failed.   They simply would never have elected him because doing so would cause themselves great economic harm.    And sadly, as prominent economists like Thomas Sowell have noted, it is exactly these failed economic policies that have disproportionately harmed blacks ever since FDR’s New Deal,  accelerating through Johnson’s Great Society to today.   Voters should have rejected these policies in the same way that they reject being told that 2+2=5.  Fortunately our collective mathematical literacy has not yet caused us to re-write that fact (although Congress often makes valiant attempts).

Ironically, economic illiteracy also kept Obama’s opponent, John McCain, from being able to convincingly articulate an alternative to Obama’s vision of a bigger, more activist government.   So perhaps it is fair to say that more economically literate voters had no horse in that race.   But it’s also fair to say that an economically illiterate mainstream media fanned the flames in Obama’s favor, recklessly avoiding any kind of challenge to his audaciously hopeful plans.  As the saying goes, “hope is not a strategy.”

So will 2010 be the year that voters snap out of it and send the likes of Nancy Pelosi, Barney Frank, Maxine Waters, Christopher Dodd and the rest of them packing?   With incumbent reelection rates in the mid-90% range, it would be fair for Congress to think the voters have approved of their actions so far.    To the voters we say,  “we have met the enemy, and it is us.”

What happens to healthcare reform if the people invited to pay for the party don’t show up?   Honest historians already know:  It won’t be pretty.

Even voters of the most liberal persuasion have a hard time arguing against the economic truism, “tax something and you’ll get less of it”.   So check out this bag of goods:  Among the key funding mechanisms for the healthcare bills being promoted are a 40% excise tax on so-called “gold-plated” or “Cadillac” plans, and a windfall profit tax on insurance companies themselves.    When even the unions are raising an eyebrow to taxing high-cost plans, you know something’s up.

Senator Max Baucus and others have run their numbers and see a moneypot in these high-cost plans.   Their spreadsheets look really simple and have formulas in them like “Tax Revenue = MoneyPot * 40%”.      What is being attempted here is something akin to studying physics without calculus, calculus being the “language” of dynamic processes.  The planners and masterminds in control insist on using static analysis, a simplification that results in financial recklessness.

History shows conclusively that people don’t sit back and accept 40% tax rates with glee.   In an instinctive pain-avoidance maneuver, they change their behavior in an attempt to minimize the tax.    Some percentage, likely bigger than Sen. Baucus will ever admit, will reduce their high-cost plans one way or another.    The unions certainly realize this — they’re likely to see the value of their plans cut closer to, or under, the tax-trigger threshold, all via reduced benefits.   In any case, the total taxable dollars to drive the Senator’s moneypot is going to go down.     Witness, the birthplace of government program cost overruns.   Calls for further tax increases and/or limitation of services (also called rationing) will be soon to follow.

In another form, this dynamic is happening today in the form of shrinking state tax revenues.   In New York, thanks to the  ongoing economic illiteracy of the state legislature, the Working Families Party was able to convince them that their budgetary woes could be solved by raising the taxes on the “rich”.     Things haven’t gone according to plan, and they’re about $500 million short (note that a sad side-effect of the staggering numbers being bandied around the health care, stimulus, cap & trade and other policy debates is that $500 million now seems like chump change).    Steve Malanga’s excellent article goes on to describe similar stories in New Jersey, Maryland and elsewhere as high-wage earners pack up and leave.

But for striking parallel to the tax on luxury insurance plans, we can visit the boatyards up and down the Eastern Seaboard in the early 1990’s.   In an attempt to get the “rich” to pay their “fair share” of taxes, liberal Democrats in Congress enacted a family of taxes on “luxury” goods, as defined by them, including boats costing more than $100,000.    Ironically, Ben Bernanke, along with Robert Frank, wrote about the backfiring of this legislative mess in their 2003 book “Principles of Microeconomics“, quoted here:

pg 96:

“Before these taxes were imposed, the Joint Committee of Taxation estimated that they would yield more than $31 million in revenue in 1991.   But in fact their yield was little more than half that amount, $16.6 million.   Several years later, the Joint Economic Committee estimated that the tax on yachts had led to a loss of 7,600 jobs in the U.S. boating industry.  Taking account of lost income taxes and increased unemployment benefits, the U.S. government actually came out $7.6 million behind in fiscal 1991 as a result of its luxury taxes — almost $39 million worse than the initial projection.    What went wrong?

The 1990 law imposed no luxury taxes on yachts built and purchased outside the United States.   What Congress failed to consider was that such yachts are almost perfect substitutes for yachts built and purchased in the United States.   And, no surprise, when prices on domestic yachts went up because of the tax, yacht buyers switched in droves to foreign models.   A tax imposed on a good with high elasticity of demand stimulates large rearrangements of consumption build yields little revenue.   Had Congress done the economic analysis properly, it would have predicted that this particular tax would be a big loser.   Facing angry protests from unemployed New England shipbuilders, Congress repealed the luxury tax on yachts in 1993.”

Other accounts of the yacht tax put the job losses at upwards of 25,000, or as high as 45,000, with sales revenues plunging as much as 71%.    But if you think the lesson here is that Congress should have only taxed imported yachts, or all yachts, you’ve sadly missed the point.

Finally, there is the self-defeating notion of taxing “windfall profits”.   Simply put, if one of the stated goals of the left is to reduce the profits of the insurance companies, is funding health care legislation with a “windfall profits tax” nothing more than a parasite killing its host?

Just like the yacht buyers who changed their behavior, or the people voting with their feet and moving out of high-tax states, the “dynamic” will with certainty trump the “static” when it comes to trying to raise big dollars to pay for big health care.    When it does, and the budget hole is measured in 12 or 13 digit numbers, to what peg will Congress turn?   Once again, it won’t be pretty.

So does the President support Read The Bill, or not?

This past Wednesday morning, Representatives John Dingell (D, Michigan) and Kevin Brady (R, Texas)  sat down for an interview with CNBC’s Becky Quick, Carl Quintanilla and John Harwood.   Discussing healthcare legislation, bipartisanship and the law-making process in general, some unintentional revelations of our completely dysfunctional Congress were laid bare and proved stunning.

A few minutes into the discussion, Becky Quick questioned whether or not a “public plan” was needed to achieve the goal of “lowering the cost curve”.   Here is Dingell’s response:

“Well, I think a public plan is an absolute necessity, and the reason is, that we have found, that the current pattern of state regulation does not work.  There’s no way, whatever, that we can control the costs and the behavior of the insurance companies.  And so we’ve got to substitute for that, competition.   And the only way we can get that competition that will work is by seeing to it that we do have a public plan.“

Nevermind that many Republicans believe that it is exactly all the state and federal regulation prohibiting competition that is a big contributor to our dramatic health care cost inflation.   What was truly remarkable was that even with the admission of a non-working public policy, there has been no call from these same people to repeal it.   Rather, a massive new program must be put in place which will correct for the failings of the first one, which will be left in place.

Dingell was also proud of the Congressional Budget Office’s estimate that through the inclusion of a public option there would be “an increase the number of persons receiving employer based health insurance by about 2 million people”.   Using his number of 46 million uninsured, that’s a little over 4%.   Enough said.

But it got better.   Minutes later, following a discussion of whether or not there was bipartisan cooperation, Rep. Dingell, elected to the House in 1955, initiated the following exchange:

Rep. Dingell: “One of the problems that exists, and this is a very real one, is that we are engaged now in the public [his emphasis] drafting of legislation.  This leads to all manner of unfortunate misunderstandings as to what it is that we are doing.”

Becky Quick:   “But you say doing this in ‘public’.  That means doing it under the light of day where people can actually see what’s happening?”

Dingell:  “Uh, you’re just seeing the unfortunate consequences of public drafting of legislation and it makes a fine mess because people don’t understand the complexities of this.”

Quick:  “So it should done behind closed doors…?”

Dingell:  “Bismark observed, ‘If you like sausage, or legislation, don’t watch either one made.'”

Carl Quintanilla:  “Right, right. We’re watching it get done this time.”

Quick: “I don’t know, I’ve always thought that the openness is something that’s a good thing though, the more people that are involved, the better.”

Rep. Brady: “It is.”

Quintanilla:  “That’s assuming that people really understand and have time to pay attention to the detail, right?”

Quick: “I guess it depends on whether you trust what’s happening behind closed doors or not though.”

Brady:  “I’ll tell you… We held over 51 Town Hall meetings, the people who came to our Town Hall meetings were knowledgeable, they’d read the bill, they knew health care issues. Their problem is too much of this has been done behind closed doors.   They want it to be open.  They want their ideas heard.  And it’s not.”

At an earlier point in the interview, John Harwood turned to Rep. Brady and said “Are you really going to stand in the way of the Congressman realizing his dream”?    Brady calmly ticked off a number of initiatives that Republicans would do instead.   But the point is that this isn’t about Dingell’s dream.   It’s about doing what will produce the best result, according to the people affected, in the most fiscally responsible manner, which just might include having the government doing a whole lot less than what’s been done thus far.

It would seem that the truth about the nasty rotten sausage that pass for many of our laws, and the factory conditions where they’re produced, are exactly what is getting people worked up and causing them to look more closely over the process.    Dingell’s obviously not happy with that (and we can probably count on him never signing on to H.R. 554, requiring that all non-emergency legislation and conference reports receive 72 hours of Internet exposure prior to debate).   When people see something disgusting,  a common reaction is to recoil and try to ensure that they don’t see it again.  Better yet, they act to find the cause of the disgust and fix it.

It’s safe to say that we’d all be better off by ramping down the production lines at the sausage factory that is the US Congress.

Something’s askew with President Obama’s stance towards unions.

As reported by Neil King Jr. in a September 30th Wall Street Journal article,  Education Secretary Arne Duncan is staring down opposition from the teachers’ unions in his bid to (gasp!) improve outcomes within public schools through the promotion of charter schools, merit pay, and changing the rules for hiring and firing teachers.   Duncan’s plans reflect Obama’s vision from his campaign, and as someone who considers himself entirely pro-teacher, but anti-teacher-union, I want to applaud and give credit where due.

But such support flies in the face of Obama’s otherwise strong support for union organizing and one would think by extension, what unions are all about.   Such support includes the promotion of the Orwellian-named “Employee Free Choice Act” where simply put, workers would lose their right to a secret ballot on whether or not to have a union.   You read that correctly, and it is comical to listen to union leaders try to defend the proposal.      Note that the March 6, 2009 low in the S&P500 was within days of the revelation that EFCA  might not be the legislative layup many people anticipated.

Reviewing the text of Obama’s September 15th speech to the AFL-CIO, where he spoke of the need to grow the nation’s labor unions, it is impossible to not see the similarities in his descriptions of the state of labor in the early 1930’s and the state of big government today:

“It was a tough place for workers in the 1930s. “A benevolent dictatorship,” said the local steel boss. Labor had no rights. The foreman’s whim ruled the day, and the company hired workers from different lands and different races, the better to keep them divided, it was thought at the time.”

Isn’t Obama himself relishing the opportunity to be nothing less than a benevolent dictator?   His stable of “czars”, upwards of two dozen depending on who’s counting, could be straight out of Stalin’s Russia of the 1930’s.   Rahm Emanuel, Nancy Pelosi and Harry Reid play the roles of foremen very well, thank you.   And the very presence of a union in any company acts to keep labor and management divided.

Specifically regarding merit pay, if it is appropriate for teachers, how is it not appropriate for all workers?    Yet one does not suspect that unions are chomping at the bit to see EFCA passed so that they can then push merit pay for all.   As Dennis Van Roekel, president of the National Education Association has said, “If you pay one teacher more you have to pay someone else less.”    Merit pay contradicts the very essence of a union’s purpose, which is to promote equality and unity of the group at the expense of the individual.   Any principal who might be inclined to pay their standout teachers more may in fact be restricted by their need to then pay all teachers more, including those not deserving.   Obama can not simultaneously encourage the creation and expansion of unions, but be against their most fundamental philosophies.

A clear alternative

It is instructive to envision a potential public school system without a union.   It would start with the district superintendent, hired by the school board, a body that must answer to the voters.   The superintendent’s mandate would be to implement the vision and objectives of the voters as discerned by the school board.   The superintendent would in turn hire the management staff of each of the schools in the district: principals, assistant principals as well as district-wide administrators.    In turn, each of the principals would hire the staff of their particular school, coordinating with the district wherever operational efficiencies can be gained.   Department heads, working closely with the principal, would complete the staffing process with teachers and assistants.

Teacher compensation and school operating procedures would be dictated entirely by the management of the school district, according to whatever standards and requirements were necessary to hire the proper staff.  Principals could use any number of techniques, including sign-on bonuses, short or long-term contracts and performance bonuses, customized work schedules and job descriptions, etc., as they see fit. The principal might consider soliciting regular feedback from parents about all aspects of staff performance, and the superintendent might do likewise for their principals.

Competition between school districts would ensure that they treated their teachers fairly.  The best teachers would quickly see their value rise in the marketplace, and a district would have every incentive to keep them happy, according to a personalized definition of happiness as defined by each particular teacher.   To some it might mean more pay.  To others, greater flexibility in scheduling or job description, or any combination of factors.  Likewise, principals would have total flexibility over replacing teachers that were not meeting performance standards.    Measurement of performance would exist at all stages in the system, with the buck ultimately stopping at the public voting booth.

There’s actually nothing novel about such a system.   It’s already in place at thousands of highly successful public companies large and small around the world, with shareholders and customers voting with their dollars in real-time.  And they don’t have unions.

“But hey, schools are different!   How can a principal have so much control over a teacher’s job when their class may have any number of challenges that change year to year? A teacher can’t pick their students!  How could a teacher’s performance ever be fairly evaluated, with their compensation controlled by that?”   Indeed, at a dinner years ago where I sat next to the local teachers’ union president, he described these very concerns to me at length.

These concerns are a complete red herring.  Hundreds of millions of employees work effectively with their management teams to solve tremendously difficult problems all the time and have done so for decades.    It is what makes them “professionals”.    None of this is to suggest that today’s teachers are not professionals.   Hardly.   But the above system would respect that professionalism more, attract and retain the best and most qualified personnel, treat them as individuals and not segregate them into groups of convenience, and produce a better product for the customer – the students, parents and taxpayers.

Perhaps you think that the school dynamic represents the most challenging managerial problem conceivable.   It still does not follow that the solution would involve inserting a group of people unaccountable to the customer, a group whose very presence guarantees the introduction of additional complexity and inefficiency between the two parties involved, into the equation.   Yes there are occasionally times for “mediation”, but why require building that in from the start?

As parents we’ve already done the hard part:  We’ve entrusted our most valuable possessions, our children, to the staff of our school system.   So why can’t we trust the school staff, working closely with us as parents and voters to come up with fair and reasonable organizational systems that all can live with, ones that work best to meet the objectives of the voters?  And if there are laws in place that prevent the above from happening, like New York’s Taylor Law, then that is where legislative action must take place.   We need to start thinking about some basic questions:  What do the teachers’ unions do to advance the goal of providing a great education at a reasonable and sustainable cost, and why is their existence even necessary?  Just who’s running our school districts anyway?   Who should be running them?

With successes like those seen in Philadelphia, teachers’ unions are terrified by the prospect of more widely exposing themselves as an emperor with no clothes.   Unions in general have seen their ideas losing attraction in the marketplace, in the form of steadily declining memberships, and are now seeking to use the force of big government to achieve their goals.  We should all have the “audacity of hope” to see that campaign politics stay out of this trend.