In their calls for greatly expanding the Federal Reserve System’s and Treasury Department’s roles in the economy, Chairman Bernanke, Secretaries Paulson and Geithner, and their academic enablers have repeatedly emphasized the temporary nature of these “emergency” measures. “History is full of examples in which the policy responses to financial crises have been slow and inadequate, often resulting ultimately in greater economic damage and increased fiscal costs. In this episode, by contrast, policymakers in the United States and around the globe responded with speed and force to arrest a rapidly deteriorating and dangerous situation,” said Bernanke in September. Yeah, no kidding. But, we are assured, the basic structure of our “free-enterprise” system remains soundly in place.

However, as Bob Higgs has taught us, “temporary,” “emergency” government measures are never that. Indeed, virtually all the major, permanent expansions of US government in the twentieth-century resulted from supposedly temporary measures adapted during war, recession, or some other “crisis,” real or imaginary. Cousin Naomi’s “disaster capitalism” thesis is exactly backward: it is socialism, or interventionism, that thrives during the crisis, and Washington, DC never looks back. I mean, does anyone seriously believe that the Fed will deny, or give back, the authority to purchase whatever financial assets it wishes at some future date when it deems the crisis officially “over”? Will the Treasury credibly commit never again to purchase equity or guarantee debt or otherwise protect some major industrial or financial firm after the economy returns to “normal”? Not a chance. Everything the authorities have done in the last two years to deal with this “emergency” will become part of the federal government’s permanent tool kit.

Today’s WSJ has a good example of Higgs’s ratchet effect, a front-pager on Boeing’s dependence on export loan guarantees from the Export-Import Bank, a federal government agency created in — you guessed it — 1934, as a temporary agency to deal with the Great Depression. “No company has deeper relations with Ex-Im Bank than Chicago-based Boeing. Without Ex-Im, aviation officials say, Boeing this year could have been forced to slash production, endangering hundreds of U.S. suppliers, thousands of skilled American jobs and billions of dollars in export contracts.” Bank official Bob Morin is described as “Ex-Im Bank’s rainmaker. His Boeing deals accounted for almost 40% of the bank’s $21 billion in business last year. To help Boeing through the credit crunch, his team has spent the past year developing government-backed bonds that promise to raise billions.” So, a massive industrial-planning apparatus, supposedly born during a temporary crisis, lives on as the lifeblood of a huge, politically connected US company.

Thank goodness all that money flowing to Goldman Sachs is only temporary!

[Cross-posted at Organizations and Markets]

President Bush provided the initial bailout for GM and Chrysler in December 2008, so it’s reasonable to look back a year later and ask: Was the bailout necessary?  Did it work?

In hindsight it is readily apparent that the answers are: No, and No.

President Bush argued that the bailout was needed to keep GM and Chrysler out of bankruptcy, because nobody would want to buy cars from the companies if they went bankrupt.  There would be questions about whether warranties would be honored, whether dealers would be available for service, and other issues that would come up with a durable good purchase.

We can see that the bailout didn’t work, because after receiving bailout money from the Bush administration, and then another dose from the Obama administration, both companies declared bankruptcy in June anyway.  And, because the bailout didn’t work, it’s easy to see that it wasn’t necessary.

In hindsight it is easy to see we should have allowed GM and Chrysler to go bankrupt last year.  Perhaps they could have reorganized, shed some of their liabilities and become viable concerns again.  Perhaps they would have had to liquidate, in which case their factories and their brands would have gone to companies that could have made better use of them.  Indeed, that is what ultimately happened to Chrysler, which was taken over by Fiat.

What happened to GM was much worse.

Because GM accepted the bailout money, President Obama forced Rick Wagoner out as GM CEO.  Americans should have been outraged at the precedent that, apparently, gives the president of the United States the power to determine who will be the CEO of a private corporation.

When GM declared bankruptcy, because of the federal money GM had received, President Obama strong-armed bondholders into accepting pennies on the dollar for the GM debt they held, while giving the United Auto Workers 17.5% ownership in the restructured company.  Bankruptcy law does not give a company’s employees claims in front of debt holders.

The federal government seized 61% of the restructured GM, placing the government’s claims ahead of debt holders.  This was unfair to the company’s bondholders, it effectively nationalized the automaker, and the nationalization and confiscation of bondholder assets makes it virtually impossible for GM to repay the federal government and escape its current status as a government-owned company.

The federal government has now sunk $50 billion into GM, and it is difficult to see how GM could ever raise enough money to buy their way out from under government control.  Certainly they can’t borrow it, after the federal government screwed the previous bondholders.

The Bush administration went back on its word when it bailed out GM and Chrysler.  They used TARP money for the bailouts.  Treasury Secretary Paulson originally said the TARP money was only to be used only for financial institutions, and repeated that when the auto companies originally approached the administration for a bailout.  So, GM and Chrysler went to Congress, but when Congress refused to bail them out Bush and Paulson did what they said they wouldn’t and gave the companies TARP money.

The problem originated with TARP, which essentially gave Secretary Paulson a blank check.  When you’re spending someone else’s money, it’s easy to spend it irresponsibly.

We’ve all heard that hindsight is 20-20, but on the anniversary of the auto industry bailout we need to articulate why it was such a bad idea so that it becomes a part of the public consciousness.  We need a public understanding that the bailout was a huge mistake to keep it from being a public policy precedent.

Remember that great Cold War movie, “WarGames“? It portrays a young computer nerd who makes his way into a government computer and sets it on a course convincing top government officials that the end of the world is imminent. Based on the computer simulation playing out on their screens, which they believe reflects reality, the top brass cranks up the danger alarm to DefCon1 and sets out to unleash deadly global countermeasures. Finally, at the 11th hour, a scientist who had turned his back on the whole concept of such computer gaming convinces the government not to act—to wait and see that the end of the world is not reality; it is a computer simulation—and all is saved.

The plot is eerily similar to that coming to light from the Climate Research Unit’s hacked emails: advocates of global warming fed data into computers to model catastrophic events unfolding right before our eyes that demand immediate and draconian countermeasures.

Except, they’re just computer models.

Here is one such example of how actual temperature readings have been “enhanced”:

“Before”—raw temperature data from New Zealand:

“After”—the same data, adjusted for undisclosed reasons:

The accompanying story explains:

About half the adjustments actually created a warming trend where none existed; the other half greatly exaggerated existing warming. All the adjustments increased or even created a warming trend, with only one (Dunedin) going the other way and slightly reducing the original trend.

The shocking truth is that the oldest readings have been cranked way down and later readings artificially lifted to give a false impression of warming, as documented below. There is nothing in the station histories to warrant these adjustments and to date Dr. Salinger [the lead scientist] and NIWA [New Zealand’s National Institute of Water and Atmospheric Research] have not revealed why they did this.

Michael Mann’s famous “hockey stick,” used to great effect by well-known former politicians and other alarmists, employs similar “tricks,” as does the work of his colleagues—now all trying desperately to get us to believe that the term “trick” really means “scientific method.”

Now that it has been revealed that all of the raw data upon which all of these doomsaying models have been built have been thrown away, with our supposing to just “trust” that the manipulated data remaining has been manipulated correctly; and now that we’ve seen a dozen years of no warming that the scientists have admitted among themselves flies in the face of their models (“Hide the decline”), how about we finally stop playing ClimateGames, step down from DefCon1/Kyoto/Copenhagen, and play a nice game of chess?

Carden, Art and Robert A. Lawson. 2009. Human Rights and Economic Liberalization, under review at Business and Politics.

This paper has made the rounds at a handful of conferences and is finally available. Thanks to everyone who has offered comments and suggestions.

The abstract:

Using several case studies and data from the Economic Freedom of the World annual report and from the CIRI Human Rights Data Project, we estimate the effect of human rights abuses on economic liberalization. The data suggest that human rights abuses reduce rather than accelerate the pace of economic liberalization.

The paper started as a specific comment on Naomi Klein’s The Shock Doctrine, which I discuss here in a review essay for the Journal of Lutheran Ethics (HT: Bob Lawson for recommending me for that assignment). A side question: is a “review essay” a journal article? A book review? A floor wax? A dessert topping? After seeing this listed in “book reviews” I’ve decided to move it from “journal articles” to “book reviews” on my CV.

In any event, when I was reading The Shock Doctrine last summer I came across a bunch of claims that could be tested using the CIRI human rights data and the EFW Index. Not surprisingly, the data suggest that torture is not a “silent partner in the global free-market crusade” but an impediment to economic liberalization. Our data only go back to 1980, but I would suspect that the out-of-sample properties of the estimates are pretty good. At the margin, Pinochet’s tyranny likely reduced economic freedom. If not, then I’m inclined to agree with Milton Friedman that Pinochet’s Chile was an outlier.

This is worth considering in light of the development of “disaster statism” during the crises of 2008 and 2009. Here are a few more links. Tyler Cowen reviews The Shock Doctrine for the New York Sun and calls it “a true economics disaster.” Steve Horwitz asks two questions. Johan Norberg dismantles Klein. Klein responds. Norberg responds in kind. The Economist offers a “Naomi Klein smackdown roundup” (HT: Peter Klein). Jonathan Chait’s review in The New Republic pulled no punches. Chait’s review also explains why we think this is worth our time and energy: ideas matter, and if influential people are going to treat The Shock Doctrine as the Left’s twenty-first century answer to The Road To Serfdom, it warrants our attention.

Cross-Posted at Division of Labour and the Mises Blog.

I hoped Christy Romer would be a voice of reason within Obama’s economic team. What was I thinking? If yesterday’s WSJ op-ed is any indication, her role has been reduced to that of cheerleader for the President’s preposterous “stimulus” program. The editorial is a string of banalities, unsupported by argument or evidence, about the wonderful effects of stimulus and the need to “confront the challenges” that remain. For example, noting that real GDP increased slightly in the third quarter of 2009, after a sharp fall in the first quarter, she says that the “vast majority of professional forecasters attribute much of this dramatic turnaround to the fiscal stimulus.” Professional forecasters? Of course, we have no idea what GDP would have been in the absence of stimulus. And what of the secondary consequences, both short- and long-term? What of the unseen? She even praises the cash-for-clunkers program, recently skewered by my old friend John Chapman.

She knows all this. As Christy’s teaching assistant at Berkeley I saw her explain, patiently and carefully, how government programs have side effects, often unintended (she specifically used the airplane-child-safety-seat example of the Peltzman effect). All forgotten now. Some version of Lord Acton’s dictum, I guess.

[Cross-posted at Organizations and Markets]

Independent Institute Senior Fellow Robert Higgs is interviewed here on Fox News “Freedom Watch with Judge Napolitano,” regarding the Federal Reserve System. Based on his recent article, “A Reader’s Guide to Bernanke’s Preemptive Attack” on The Beacon, Dr. Higgs responds to the November 29th Washington Post article by Ben Bernanke, “The right reform for the Fed,” in which just days before his re-nomination, confirmation hearing as continued Fed Chairman, Bernanke states his strong opposition to the “Audit the Fed” amendment by Congressman Ron Paul (HR 1207: Federal Reserve Transparency Act of 2009) to the Financial Stability Improvement Act of 2009 (HR 3996). “Audit the Fed” has 317 co-sponsors in the U.S. House of Representatives and 30 co-sponsors in the Senate and would authorize the General Accounting Office to audit and make public the complete operations of the Federal Reserve. According to Bernanke however:

These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States.

The government’s actions to avoid financial collapse last fall — as distasteful and unfair as some undoubtedly were — were unfortunately necessary to prevent a global economic catastrophe that could have rivaled the Great Depression in length and severity, with profound consequences for our economy and society

In response in his article, Dr. Higgs states:

Monetary-policy propaganda is a high art . . . . Let’s get serious. If the Fed is known for anything historically, it is for first pushing the monetary accelerator to the floor, then stomping on the monetary brake. To praise this outfit for its contribution to financial and economic stability is akin to praising Josef Stalin for his commitment to human rights. . . . had the government refrained from all of its extraordinary interventions of the past year or so, the worst of the adjustments would already have been made, and a genuine recovery would now be in progress.

Just like Lyndon Johnson, Obama appears to be dedicated, most of all, to the welfare state at home, but, if for nothing but political reasons, committed to the agenda of escalating war. Like Johnson, he was elected partly on the implicit basis that he’d be more peaceful than his warmongering Republican opponent, only to quickly disappoint peaceniks nationwide. Like LBJ, will Obama only serve one full term as a result?

Already, there are efforts to rejuvenate the legacy of LBJ. Perhaps this is because the establishment recognizes the current president faces a similar situation: He is admired by his liberal base for his efforts to expand government at home, but these same voters, at best, only tolerate his foreign policy as a lesser of evils. But will he prove to be a lesser of evils?

In announcing the Afghanistan surge, Obama is conscious of the parallels. For months now, commentators on left and right have warned the president not to be another Johnson and not to let Afghanistan become another Vietnam. See this great column by rightwinger Tony Blankley, for example. Aware of the parallels, Obama in his speech attempted to dispel them. The president says: Vietnam had wide popular opposition to the American presence, the Vietnam war was less internationally popular and Vietnam didn’t attack America, unlike Afghanistan on 9/11.

The first two points are dubious, and the third is a stretch at best. October 2001 was a good time to debate whether Afghanistan was really the source of 9/11. Eight years later, Obama is simply rewinding back the debate to that time. But he is wrong in the sense that most of the planning was in the west, al Qaeda is not really in Afghanistan any more, and neither, probably, is Pakistan. And even if they were, how long a war on the Afghan people would be justified in retaliation for 9/11? If American troops were still occupying Afghanistan 20 years from now, would 9/11 still be the excuse?

Such factors may play into a most encouraging trend in public opinion. Isolationist — as in, non-interventionist — sentiment is wider and deeper in America than any time since 1964, according to a new poll.

As the war continues to escalate, I predict foreign policy will split the left and right. Some on the left will continue to support Obama, and even come to accept or even endorse his foreign policy, largely on the basis of partisanship and the hope of more socialism at home. On the right, many will continue to attack Obama for not doing enough, for neglecting Afghanistan—although they rarely made such a critique of Bush—but other rightists will come to an America First point of view, thinking this war has gone too long and without any meaningful purpose in sight. Already, I’m hearing rightwing radio split on Afghanistan. The question that interests me is whether many conservatives will come out in direct support of Obama, as the war rages on, or if there are more conspicuous attacks against American interests, and whether many liberals will come to outright oppose him.

That’s what we need for the longterm cause of liberty and peace: A realignment, with the more statist, establishment, pro-government and pro-war wings of left and right joining, and the more anti-state wings joining. Only by destroying the modern political spectrum, which is seemingly designed as a conspiracy against liberty—by splitting up dissent against the state into two factions and thus making it difficult to ever have a large-ranging populist revolution against the government—will the dialectic dynamic between statism and classical liberalism (libertarianism) of earlier eras be restored. Hopefully, Obama’s LBJ moment will have the silver lining of bringing this about.

In a December 1 article in Wired, “In Role as Kingmaker, the Energy Department Stifles Innovation,” former Tesla Motors Chief Marketing Officer Darryl Siry critiques the federal government’s campaign of “green” corporate welfare for the American automobile industry (Advanced Technology Vehicles Manufacturing Loan Program). With the recent Climategate revelations that indicate that the stampede for mandated reductions in CO2 emissions is based on fraud and junk science, Sury’s comments are especially noteworthy.

Of all of the Department of Energy programs intended to advance the green agenda while stimulating the economy, the Advanced Technology Vehicle Manufacturing incentive to spur the development of cleaner, greener automobiles is perhaps the most ambitious. But it has a downside.

The energy department has approved direct loans to Nissan, Ford, Tesla Motors and Fisker Automotive totaling about $8 billion out of a budget of $25 billion. The magnitude of this program dwarfs other DOE campaigns like the $2.4 billion given to battery and electric vehicle component manufacturers and the $4 billion disbursed for “smart grid” projects.

To the recipients the support is a vital and welcome boost. But this massive government intervention in private capital markets may have the unintended consequence of stifling innovation by reducing the flow of private capital into ventures that are not anointed by the DOE.

As Siry correctly points out, such policies cripple innovation and create enormous economic inefficiency. They are in fact nothing short of classic, national industrial policy or mercantilism or corporatism in which government officials try to plan and control economic development by selecting who wins and who loses.

Startup companies that enjoy DOE support, most notably Tesla Motors and Fisker Automotive, have an extraordinary advantage over potential competitors since they have secured access to capital on very cheap terms. The magnitude of this advantage puts the DOE in the role of kingmaker with the power to vault a small startup with no product on the market—as is the case with Fisker—into a potential global player on the back of government financial support.

As a result, the vibrant and competitive market for ideas chasing venture capital that has been the engine of innovation for decades in the United States is being subordinated to the judgments and political inclinations of a government bureaucracy that has never before wielded such market power.

However instead of proposing an end to such corporatism in order to restore free-market competition and innovation, Siry believes that such corporate welfare should be expanded and broadened for all companies to utilize:

A potential solution to this problem may seem counter-intuitive. The best way to avoid market distortion would be for the DOE to cast the net more broadly and provide loans and grants to a larger number of companies—which ironically means being less selective. Subject to the existing equity matching requirement, this would allow the private markets to function more effectively in funding a broader range of companies and driving more innovation. Several innovative companies with great potential have been in the DOE pipeline for many months. Perhaps it is time for the DOE to stop playing favorites and start spreading the love.

For superb examinations of the economic and social folly of such national industrial policy and corporatism, please see the following books:

Depression, War, and Cold War: Challenging the Myths of Conflict and Prosperity, by Robert Higgs

Crisis and Leviathan: Critical Episodes in the Growth of American Government, by Robert Higgs

HT: Andy Cleary

President Obama’s decision to send another 30,000 U.S. troops to Afghanistan during the next six months does not seem to make much sense, no matter how one looks at it. Political actions often represent tried-and-true ploys to enrich the politician’s supporters at the expense of his opponents and the great mass of the people. And perhaps this action simply falls into that category. But even if it does, it makes little sense, because Obama would seem to have many avenues open for buying more support elsewhere with the additional $30 billion a year that will be spent on this Big Push.

Hardly anybody has real enthusiasm for the plan. Democrats and Republicans in Congress are both lukewarm, at most; some are stridently opposed. The military bigwigs apparently support it, but, again, it seems that the president can appease this powerful  interest group just as readily in alternative, less politically risky ways.

We might go out on a limb and assume that the president is telling the truth about his reasons for sending the additional troops: he believes, as he declares in his speech today, that “we must deny al-Qaida a safe haven. We must reverse the Taliban’s momentum. … And we must strengthen the capacity of Afghanistan’s security forces and government.”  Why?  Because “”it is from here that we were attacked on 9/11, and it is from here that new attacks are being plotted.” If these statements express the president’s actual thoughts, then he is much less astute than he is usually given credit for. These reasons are so weak as to seem almost far-fetched.

Al-Qaida, if such an organization may actually be said to exist as anything more than a sprawling, loosely articulated collection of hyper-zealous, anti-American Muslims, does not need Afghanistan to plan and mount attacks against the United States and U.S. allies. Such terrorists may spring, as they have sprung, from many places in Asia, Africa, and Europe. They have emerged in Indonesia, Turkey, Spain, and Germany, just as they have emerged in Afghanistan, Pakistan, Saudi Arabia, and other Middle Eastern venues. Even if U.S. forces held Afghanistan in an iron grip – an unachievable condition — the security of Americans in America would not thereby be appreciably enhanced. In short, subduing U.S. opponents in Afghanistan is a low-yield investment, at best.

Worse, it is almost certainly a losing investment. Opposition to the U.S. forces and their Afghan puppets arises for the most part from the deeply entrenched tribal character of the Afghan people and their implacable desire to rid the country of any and all foreign occupiers. One need not have studied the history of the place for a lifetime to have learned this lesson.

To make his Big Push idea even more impenetrable, the president promises that eighteen months after the buildup is complete, troops will begin to be withdrawn. Does anyone really imagine that the Taliban and other anti-American groups in Afghanistan are too stupid to sit tight and wait for the foreign devils to depart? If these groups are anything, they are in the fight for the long haul. They can afford to be patient.

As they have in other occupied countries, U.S. authorities declare that they will accomplish their mission by building up “legitimate” government troops and police, by training and equipping them until they are strong enough to whip the insurgents. This plan is no more promising in Afghanistan than it was in Vietnam – indeed, I would venture that it makes even less sense in Afghanistan than it did in Vietnam. The problem is not that the “legitimate” side is not strong enough or trained well enough to defeat the “bad guys.” The problem is that hardly anybody wants foreign forces in the country. The insurgents will keep fighting until the occupiers lose their stomach or their economic or political support for remaining, and as soon as the foreign forces take their leave, their local puppets will get themselves to Switzerland or another remote refuge to distance themselves from their countrymen’s vengeance. The problem is not that the pro-U.S. forces, such as they are (and nearly all of them are in their places for the money),  do not know how to fight – in Afghanistan nearly every adult male knows how to fight. The problem is that nearly all of them — even in their heart of hearts those who have been tempted by the money to join the pro-U.S. side – want the Americans and the other foreign occupiers out of their country. U.S. policy makers talk as if they lack the wit to comprehend this elementary fact.

Which suggests, of course, that the president and other top U.S. decision makers are not telling us the truth about their reasons for their decisions, especially this Big Push, which seems like the military analogue to the basic economic mistake of throwing good money after bad. Bygones, economists insist, are bygones. The costs already born are not recoverable; the more than 800 American servicemen who have already died in Afghanistan cannot be brought back to life. The vast sum of money expended, so far with absolutely nothing of genuine worth to show for it, represents forgone opportunities forever sacrificed. The idea that because so much has been committed already, the U.S. forces must remain until they “win the war” is foolish in the extreme, indeed, irrational.

Above all, the president and the other big shots, if they really cared about the well-being of the American people at large, would steer clear of trying to accomplish the impossible. The war in Afghanistan is not winnable in any meaningful sense. It’s a pure waste, suffered at a time when the American people have a multitude of more urgent needs crying out for additional resources. Which brings me back again, empty-handed, to the puzzling question I posed at the start: what is Obama thinking?

Obama’s speech writers were apparently unable to find a more meaningful quotation form Eisenhower than the unremarkable: “Each proposal must be weighed in the light of a broader consideration: the need to maintain balance in and among national programs.” Of course, had they Googled for a few seconds they would have found Ike’s warning about the dangers of the Military-Industrial Complex. Then again, given the nature of Obama’s speech, they probably made the right choice.