Payday of Reckoning
New laws aimed at kneecapping payday lenders will end up hurting the poor.
Katherine Mangu-WardThe payday loan store is white, almost antiseptic, except for the large colorful posters in English and Spanish announcing fast loans, check cashing services, money orders, and prepaid debit cards. The location is a small storefront in suburban Virginia, a few blocks from the last stop on the Washington, D.C., Metro yellow line. The scene bears little resemblance to the gritty loan-shark image evoked by the many powerful critics of “predatory lending.” The only hint of seediness is the large sheet of tinted, presumably bulletproof glass separating the weary clerk from loan seekers.
Why do people here and elsewhere seek short-term, high-interest loans, using a chunk of their next paycheck as collateral? Well, what would you do if you needed $200 RIGHT NOW?
You could put it on your credit card. It’s the American way! Unless, like so many Americans, you’ve already maxed out your cards. The average U.S. consumer carries $6,226 in plastic debt, according to the credit reporting agency TransUnion. With a potentially long financial market contraction ahead, card companies have been aggressively reducing limits and discontinuing new offers. Although the Credit Card Act of 2009 makes it harder for companies to change their terms after the fact, the availability of credit is likely to shrink further. Maybe you need that $200 to make the minimum payments on those maxed-out cards.
You could write a personal check and hope to scrounge some money for your bank account in time to cover the transaction. Such faith has a low rate of return, and dashed hopes can be awfully expensive. A bounced check from a basic Bank of America checking account, for example, costs $35, plus any fees the stiffed merchant tacks on. Many banks offer overdraft protection—they’ll extract the money from you later—but charge between $10 and $35 for the favor. Repeated bounces and overdrafts have more serious consequences. American banks unilaterally closed 6.4 million checking accounts in the pre-recession year of 2005 alone.
You could borrow money from friends or relatives. Obtaining cash from intimates may get you the best interest rate on the market, but costs are extracted through other means. Family reunions can easily become awkward investors’ meetings, and as fans of Judge Judy can tell you, even a small loan can be a remarkably efficient way to destroy a friendship.
You could pay a bill late. A high-risk strategy. Utility and phone providers can be quick to cut off service and charge a disconnect and/or reconnect fee. You could be looking at an extra $40 to $70 penalty every time, not to mention costs incurred in lost productivity.
Or you could get a payday loan. Like I did.
Predatory Lending?
Payday lenders are the redheaded stepchildren of the consumer financial market. According to critics ranging from anti-poverty activists to the president of the United States, the industry exploits the poor by offering loans with bad terms to people who don’t know better. During his campaign, Barack Obama promised to “work to empower more Americans in the fight against predatory lending” by capping “outlandish interest rates.”
The coalition against payday lending is broad and deep, with opponents surfacing in unexpected places. In 2006 the Department of Defense issued a report slamming payday lending to soldiers, sailors, and Marines, characterizing them as “young and inexperienced borrowers” with limited ability to repay. Congress took up the cause, with Sen. Robert Menendez (D-N.J.) claiming that clusters of payday lending shops around military bases “negatively impact military readiness.” The following year saw a new federal law capping the annual rate on loans to active-duty military personnel and their families at 36 percent. In addition to the 12 states that have banned payday lending outright, Virginia has prohibited payday loans to members of the armed forces and their families.
With a powerful ally in the White House, payday loan opponents started to focus their efforts on the federal level. In June 2009, as part of its response to the financial crisis, the Treasury Department proposed consolidating various financial regulatory bodies into a single new bureaucracy called the Consumer Financial Protection Agency. Payday lenders, now largely unregulated on the federal level, are likely to fall under the new agency’s domain, which would make it easy for Obama to reach his goal of extending the military rate cap to “all Americans.”
As new post-crisis financial regulations began taking shape, the president and others started lumping payday loans with credit-default swaps, no-documentation mortgages, high-interest credit cards, and other financial products designed to make it easy—perhaps too easy—for the poor to take on debt.
Terms for payday loans can seem onerous. Interest rates on the short-term deals, measured on an annualized basis, often reach 400 percent. Borrowers who are living paycheck to paycheck can find themselves coming up short after the initial loan, beginning a cycle of indebtedness with ever-higher interest payments. But several recent studies suggest that well-intentioned restrictions on payday lenders wind up harming the very people such laws are intended to help, reducing their access to emergency cash and prompting them to use costlier, more dangerous, and more credit-damaging options.
Repeat Customers
Approaching the Virginia payday loan store in the freezing winter wind, I’m greeted by festive green banners offering check cashing for tax rebates. Inside, the line is composed entirely of females, mostly black women in early middle age. Judging by their clothes, several are on lunch breaks from white-collar jobs. I’ve only just arrived, but my fellow loan seekers are getting restless. The line is 10 people deep and moving slowly.
If my line had been a more representative cross-section of payday borrowers, seven or eight of the 10 would have annual incomes higher than $25,000, and two would earn more than $50,000. There would be four homeowners and six people with major credit cards in their wallets. Half would have attended some college, and nearly everyone would have a high school diploma. All these statistics come from the Community Financial Services Association of America, an industry group, but the industry’s left-wing critics at the Center for American Progress have produced strikingly similar numbers.
In that statistically representative line, you’d be unlikely to encounter more than one person over 55 years old. Six would have children at home; a narrow majority of the ones with kids would be married. And all would have jobs and bank accounts, since you can’t get a payday loan without at least one of each.
The payday lending industry was essentially created from scratch over the past two decades. Back in the early 1990s, supermarkets and dedicated check-cashing outfits would convert pay stubs into dollar bills, and the odd mom-and-pop shop might make a loan to a trusted customer against an upcoming paycheck. As banks went digital and checks became more reliable, check-cashing firms such as Advance America, ACE Cash Express, and Check ’n Go found payday lending to be a logical extension of their business. Today there are more than 20,000 payday lending outlets, more than all the Starbucks and McDonald’s stores in the country combined. Estimates from the industry’s opponents and supporters alike put the number of U.S. customers between 15 million and 20 million annually.
I made my visit to the payday lender on the 15th of the month, so most people in line were there to repay loans, not get new ones. According to the Community Financial Services Association of America, whose numbers are similar to those of state regulators, 90 percent of loans from payday lenders are repaid by the due date. This figure compares favorably to, say, the current repayment rates for subprime adjustable rate mortgages.
Critics tend to focus on the minority who can’t or don’t pay back their loans on time. Kathleen Day, a spokesperson for the Center for Responsible Lending, says: “The model that the payday industry is based on is repeat borrowers. If no one in the payday industry rolled over a loan, they would not be making money. It’s true that most of the customers don’t roll over, but those who do pay the profit.”
That sounds plausible. Everyone knows people who are bad with money, and it’s easy to see how someone with cash flow problems could wind up getting suckered into re-upping over and over, taking out a new, slightly larger loan immediately after repaying the first one, eventually paying more than the principal in interest. But those aren’t the people that lenders actually rely on to stay in business, according to a 2005 study from the Federal Deposit Insurance Corporation’s Center for Financial Research.
“We do not find that loan renewals or loans from frequent borrowers are more profitable than other loans per se, although they certainly contribute to a store’s loan volume,” concludes the study, which was prepared by economists Mark Flannery of the University of Florida and Katherine Samolyk of the federal Division of Research and Statistics. Flannery and Samolyk also found that lender profitability did not increase in stores located in poorer neighborhoods—the places where you’d expect more return customers and rollovers.
The Uses of Usury
As horrifying as 400 percent annual interest sounds, it doesn’t reflect the experience of the typical borrower. No one keeps a payday loan for a year; that’s not how these things function. Payday lenders charge about $15 per $100 on a seven- or 14-day loan, plus another $20 or so in fees. They check your paperwork and then give you $100 in cash. You leave a post-dated personal check as insurance and promise to come back in two weeks with $135. If you show up empty-handed, or not at all, they cash your check. If the check bounces, the firm sends debt collectors after you—not the knee-breaking kind, but the same guys who interrupt your dinner when you miss a couple of credit card payments. If you miss your deadline to repay, the lender refuses to deal with you again. Nine out of 10 customers pay on time.
If the level of hostility against payday lending is disproportionate to the percentage of payday defaults, that may be partly due to cultural traditions. For much of human history, stretching at least as far back as biblical prohibitions against the practice, lending money at interest, otherwise known as usury, has been considered extremely bad form.
Trawl through online arguments against payday lending, and you're likely to come across something like this, from Americans for Fairness in Lending: "Prophet Ezekiel includes usury in a list of 'abominable things,' along with rape, murder, robbery and idolatry." The site also notes that in his Inferno, Dante "places usurers at the lowest ledge in the seventh circle of hell—lower than murderers." In Hamlet, Polonius famously advises: "Neither a borrower nor a lender be;/For loan oft loses both itself and friend/ And borrowing dulls the edge of husbandry." Charges of usury periodically inflamed pogroms against Jews in Europe. (Jewish law forbids charging interest to other members of the tribe but not to gentiles, which is the historical reason moneylending is associated with Jews.) Koranic instructions against interest are enforced in the Islamic world even today.
The traditional view of usury as morally corrupt changed only during the Enlightenment. As a young man in 1787, the philosopher Jeremy Bentham wrote a controversial defense of usury in which he attacked the aging Adam Smith for supporting legal limits on the rate of interest, noting that to restrict people’s choices was to reduce the overall welfare. The British author G.K. Chesterton has pointed to Bentham’s essay as the moment when “the modern world began.” Capitalism isn’t possible without capital, and accumulating capital in a world without interest-bearing loans is almost impossible. Hatred and fear of usury still lingers in the industrialized world in the attenuated form of vague moral outrage at high-interest loans.
Payday lending is currently regulated in 37 states, plus the District of Columbia, and banned in a dozen more. Many of the laws include references to this ancient sin. “Most states have usury laws,” says Day, the spokesperson for the Center for Responsible Lending. “This is a very old Judeo-Christian idea, that it’s a bad thing to bury people in debt.” But the contemporary definition of usury has always been fluid. Sometimes charging any interest at all is enough to qualify. Other times it’s more a matter of what’s perceived as a fair deal. These days, 36 percent is the typical maximum legally allowed interest rate for states where loans are regulated, but there are and always have been multiple exceptions, especially when politicians want to get things done.
Extinction by Regulation
My first attempt at a payday loan came at ACE Cash Express in the gentrified Adams Morgan neighborhood of Washington, D.C. Since it was in the middle of a cold snap, I was grateful I didn’t have to travel far for my cash. But when I got inside, the elderly woman behind the counter told me the shop no longer offered payday loans, and as far as she knew, neither did anyone else in the city. “Not since they banned them here,” she explained, with the air of someone who has answered the same question many times.
In fact, the District of Columbia didn’t explicitly ban payday loans, but the city’s Payday Loan Consumer Protection Amendment Act of 2008 did cap total costs of loans in the city at 24 percent, which amounted to the same thing. Major payday lenders promptly pulled out of D.C., citing a lack of profitability. Former mayor Marion Barry, now a city councilman, initially co-sponsored the bill but ended up casting the only vote against it. “We are putting this industry out of business,” Barry warned. He was right.
At the Virginia lender, a group of women—two of whom were there to pay off loans and one of whom was picking up Chinese food next door—gossiped about the state of the industry. One woman, who kept her fur hat firmly in place while waiting, used to do her loan business downtown at a store near her office. But the interest cap ended that. “They only cash checks and do money orders there now, which doesn’t do me a bit of good,” she said.
Other than the limits on lending to members of the armed forces, there is no federal regulation specific to the industry, although that will change if President Obama gets his way. Payday loan opponents are using the ban on lending to military families the same way pro-lifers use partial-birth abortion—to make small, uncontroversial headway on a big, controversial issue. “The trend is toward the recognition that this is an abusive product,” says industry critic Day. “If it’s not good for active duty military, why is it good for anyone else?”
As federal regulation moves along, battles continue at the state level. In Ohio and Arizona last November, residents voted to impose maximum rates of 28 percent and 36 percent, respectively. Arizona’s Proposition 200 reapplied the state’s usury rate cap to payday lenders, who had previously enjoyed an exemption. In North Dakota, a similar bill was rejected by a legislative vote of 88 to 5.
What happens when a rate cap is imposed statewide? Dartmouth economist Jonathan Zinman looked at the payday lending industry in Oregon, where in 2007 an effective cap of $10 per $100 borrowed was imposed along with a minimum borrowing term of 31 days. (In neighboring Washington, by contrast, the standard is $15 per $100 and there is no minimum term.) Oregon’s Consumer and Business Services Department reported 346 licensed payday lending outlets at the end of 2006, six months before the cap kicked in. Seven months after the cap took effect, that number had fallen to 105. In September 2008 it was 82. In a December 2008 working paper, Zinman concluded that former payday customers in Oregon ended up using less desirable alternatives such as overdrafts and utility shutdowns, and that “restricting access caused deterioration in the overall financial condition of the Oregon households.” In summary, “restricting access to expensive credit harms consumers.”
A February 2008 study for the Federal Reserve Bank of New York found similar results: “Compared with households in states where payday lending is permitted, households in Georgia [after a May 2004 ban on payday lending] have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate,” wrote Federal Reserve research economists Donald P. Morgan and Michael R. Strain. In North Carolina, where payday loans were banned in December 2005, “households have fared about the same. This negative correlation—reduced payday credit supply, increased credit problems contradicts the debt trap critique of payday lending, but is consistent with the hypothesis that payday credit is preferable to substitutes such as the bounced-check ‘protection’ sold by credit unions and banks or loans from pawnshops.”
Two weeks before I got my loan, new restrictions took effect in Virginia, including a rate cap of 36 percent. As predicted, payday lending chains are now fleeing the commonwealth. Check ’n Go stopped originating loans in Virginia and will soon close its 68 storefronts and fire its 100 employees. The State Corporation Commission counted 630 payday lending stores in April, down from 786 in December.
A Borrower Be
After I waited in line, my transaction took seven minutes and 32 seconds, a time prominently displayed on my receipt. Of course, I’d come prepared. To qualify for a loan, I had to bring a recent pay stub, a current bank statement, a utility bill from the current month, a recent phone bill, a Social Security number, and a blank check.
My $200 loan came in $20 dollar bills, with a side of paperwork. The terms of my particular loan—I was to pay $251.31 in 30 days—were spelled out very carefully in one pile, with generic information about Virginia lending laws in a second one. In large type, outlined in a gray box, was the amount of money I would have to pay the company when my loan came due. My personalized paperwork also told me that the “cost of my credit as a yearly average” was 292.63 percent.
Even with all that large print, interest rates can be confusing. “When you go into these places where people are holding two jobs and they’re desperate for money and someone says that they can roll it over for another week,” says Day, “they don’t realize they’re paying $45 on a $100 loan.” But in my line, people were very aware of the rates, grumbling about them and, in one case, asking detailed questions to figure out the cheapest way to carry some debt for an additional month.
In a bid to encourage educated decisions about borrowing, President Obama has said he would like to nudge traditional banks to get back into the small loan business. This would give borrowers an alternative to payday lenders and drive them toward institutions with more historical layers of regulation and reporting requirements. But if the recent mortgage crisis is any indication, the banks aren’t even particularly adept at helping people understand the terms of their home loans. Furthermore, they seem to be far less efficient than payday lenders, something they recognized when they got out of the business years ago. According to the most recent estimate available—a 1999 Commercial Bank National Average Report from the Federal Reserve—the cost for a small bank to originate and maintain a simple loan for one month is $174. As more of Obama’s lending restrictions come into effect, that cost is likely to increase. By comparison, Steven Schein, spokesman for the Community Financial Services Association of America, says it costs payday lenders $12 to originate a $100 loan.
But giving up the dream of poor people obtaining quick loans in marble lobbies is tough for opponents of payday lending. So the FDIC has created a program called the Small Dollar Loan Pilot Program in an effort to meet that demand while routing around payday lending companies. Thirty-one banks with a total of 550 branches are participating, a tiny fraction of eligible institutions. Goodwill Charities has partnered with a credit union in Wisconsin to offer payday loans based on paperwork and processes identical to those of a typical payday lender but charging just $10 per $100. These ventures are minuscule compared with their fully commercial counterparts. And they aren’t growing, despite offering an identical product at subsidized rates.
The Freedoms of Payday Lending
I’d happily lay out 50 bucks, the net cost of my payday loan, to avoid awkward interactions with my phone company, my doctor, my friends, my colleagues, my bank, or, worst-case scenario, the boys in blue.
But $50 is also a lot of money, especially for someone who periodically has trouble coming up with $100 or $200. So why don’t people flock to experiments like those by Goodwill and the FDIC? “You have to attend a financial literacy class,” says Schein, the spokesman for the Community Financial Services Association of America. “You have to keep a certain amount of money in the savings account. The nonfinancial requirements really annoy the customer. It all has to do with the notion that banks are going to be charities now.” In the white, tiled storefront of the payday lender, no one hassles you. No one asks questions. It’s fast and relatively anonymous. You don’t have to put on your Sunday best and go down to the bank hat in hand, like they do in old movies.
Payday lending is essentially off the record. As with pawnshops, the money you get from a payday loan doesn’t enter into your credit rating, unless things go catastrophically wrong—i.e., you fail to pay your loan on time, your check bounces, the company can’t track you down, and it sends your name to a collection agency.
A 2004 survey by the Cypress Research Group, conducted on behalf of the Community Financial Services Association of America, found that while 65 percent of customers said they chose payday loans because of convenience (less paperwork, quick and easy process, fast approval), 85 percent said they had savings accounts and 35 percent had credit cards with credit available. A 2009 study from the Center for American Progress found that people taking out payday loans were overwhelmingly doing so to purchase necessities or cope with emergencies, not to engage in discretionary spending. Payday borrowers are full participants in the American financial system. They happen to have selected the services of a payday lender to meet their particular needs.
Maybe the women in line with me at the payday lending store weren’t trapped or tricked. Maybe they weren’t usuriously sinned against, or sinning. Maybe they just needed some cash, looked at their options, and made the best decision they could. As more and more people find themselves in need of a little extra money, why take away the best of a bad set of choices?
Katherine Mangu-Ward (kmw@reason.com) is a senior editor at reason.
The Body Politics
On health-care reform, Democrats have become their own worst enemy.
Peter SudermanAs health-care reform struggles to stay afloat, Democrats are desperate to pin the blame on Republicans. But the truth is, no matter how much Democrats gripe, it's their own fault.
With the passing of Ted Kennedy, Democrats have only 59 votes in the Senate, one less than they need to break a filibuster. Until this week, Democrats held out hope that at least one Republican would sign on. But when Senate Finance Committee Chairman Max Baucus finally released his plan on Wednesday, Olympia Snowe, the most likely GOP vote, quickly backed out.
That leaves Democrats with just one option: Go it alone. And that won't be easy. Because a party that not long ago was united behind a leader and a purpose—guaranteeing health insurance to all Americans—has, in just a few short months, descended into disarray.
As the health-reform push enters its final stages, here's who's causing headaches:
Sen. Jay Rockefeller: As a member of the Senate Finance Committee, Rockefeller is a key vote. And he's repeatedly said there's no way he'd vote for the Baucus plan as it stands. He hasn't just knocked the plan, he's knocked the planner, taking aim at Baucus' feints toward bipartisanship. "You don't run a committee that way," he told Politico. The West Virginia senator is so miffed by the failure to include a government-run public plan, a favorite idea among liberals, that he took his complaints all the way to Obama—and still came out shaking his head. Nor is he willing to consider compromises like co-ops or a public option "trigger." For Rockefeller, no public plan means no way.
Sen. Mary Landrieu: Rockefeller, though, faces tough opposition from moderates like Landrieu who have expressed serious reservations about including a public option. At the beginning of last week, Landrieu worried that a public plan might "undermine the private insurance system."
Rep. Nancy Pelosi: Pelosi, the House's top Democrat, also sniffed at the Baucus plan, expressing disappointment in the bill's lack of a public option, saying she wanted "modifications" to make mandatory insurance more affordable.
Sen. Ron Wyden: Like Pelosi, Wyden, another Finance Committee member whose own more radical reform bill has been sidelined, has taken issue with the expenses the plan could impose on the middle class. Shut out, Wyden took his objections straight to the public, putting a stern op-ed in The New York Times detailing the "problem" with the Baucus bill. But increasing middle-class subsidies would also make the bill more expensive—a politically risky move.
Sen. John Kerry: For Kerry, the current Baucus plan is a non-starter. The former presidential candidate has also stated worries about the plan's cost to lower-income Americans—and said it's got to change before passage.
"It's not going to be the bill we're going to vote on," Kerry said when the Baucus plan hit.
Sen. Dianne Feinstein: Any move to make the bill more expensive would risk the wrath of Democrats like Feinstein, who recently told the San Francisco Chronicle, "There is real concern over debt and deficits, and whether this bill will create additional entitlements." Of course, Feinstein doesn't want the bill cut too much: She's also expressed concern that Obama's cost cuts will come out of her home state's public hospitals.
Sen. Bill Nelson: Nelson, a Florida senator answerable to the votes of numerous senior citizens, has expressed tacit support for the measure, but he's also taken issue with the plan's cuts to Medicare. In a strident statement on the Senate floor, Nelson said it would be "intolerable" to ask seniors to give up the "substantial benefits" they now enjoy.
But intraparty bickering isn't the only hurdle for Democrats. They also have to balance the demands of liberal interests like labor unions and major health-care players.
When health-reform efforts started, Democrats opted to buy off industry, which they saw as having killed the Clinton reform drive in the '90s. Every player got a handout—but the handouts may not add up. Insurance companies, for example, were promised comparative-effectiveness research—a government panel that would give them cover to say that treatment options just aren't worth the price. Rather than seem stingy, they can say, "Sorry, the government says this isn't effective."
The pharmaceutical lobby, meanwhile, came on board in hopes of expanding the market for brand-name drugs. But comparative-effectiveness research might slash the sales of some of those same drugs—especially the most profitable ones. The drug companies haven't jumped ship yet but they're fighting hard to nix the insurers' handout.
Cranky Congress critters. Inter-industry feuding. What's left? Oh right: Voters. As Robert Goldberg of the Center for Medicine in the Public Interest says, Democrats "forgot about the fact that health reform affects people, not just interest groups." On that front, Obama's prime-time speech before Congress was supposed to give health reform a bump. It did, but just for a few days. Heading into the weekend, the bump had vanished. And pollster Scott Rasmussen's survey of likely voters indicated that "just 42% now support the plan, matching the low first reached in August."
Still, it's hard to blame voters. If Democrats can't find a plan they all like, why should the public?
Peter Suderman is an associate editor at Reason magazine. This article originally appeared in the New York Post.
Reason.tv: Nick Gillespie on Freedom Watch With Judge Andrew Napolitano
" height="288" width="480">Linker, Tanenhaus & Liberal Fascism
Via RCP, I found this odd post by Damon Linker on Sam Tanenhaus' book, The Death of Conservatism. Among other things, he writes:
And yet Tanenhaus makes his counter-intuitive case with elegance and rigor, drawing on the ideas and policies of dozens of writers and public figures—including Edmund Burke, James Burnham, Whittaker Chamber, William F. Buckley, and Michael Oakeshott—whose conservative credentials are unimpeachable. An intellectually serious conservatism would jump at the chance to engage with an author who uses its leading lights to argue that the movement has gone seriously astray. But that’s not what contemporary conservatives are doing. When they aren’t ignoring Tanenhaus’s book, they’re doing what they do best: policing orthodoxy.
Take Peter Wehner’s representative remarks about the book, published on Contentions, Commentary’s group blog. A former assistant to Karl Rove in the Bush White House, Wehner is a master of deploying the rhetorical trick that contemporary conservatives use to convince themselves that they’re always right. At bottom, it amounts to a high-minded version of the old Pee-Wee Herman taunt, “I know you are, but what am I?” There are countless examples. A handful of liberals stupidly describe conservatives as fascists, so Jonah Goldberg responds by writing several hundred pages about the threat of liberal fascism. (Get it?) ...
And so on. Then, once Linker has cleared his throat by attacking conservatives for their rigid and ideological attacks on Tanenhaus' book he proceeds to....echo most of the conservative attacks on Tanenhaus' book, albeit with considerable boot-licking.
A few things come to mind. First, Linker gets a great deal entirely wrong. If anything, conservatives have lavished more attention on — and been more deferential to — Tanenhaus' book than they would if it were written by almost anyone else. Tananhaus was invited to make his case at the American Enterprise Institute — twice! — and each time he was given a very respectful hearing. The book's been widely discussed on the right, including in this space. The editorial note in the latest issue of Commentary is on Tanenhaus. I have a long piece in the magazine pegged to Tanenhaus. The Claremont Review of Books has a big review coming out on it. The New Criterion devoted considerable space to it. All this despite the fact that Tanenhaus' book is simply a rehash of an outdated magazine piece (also discussed too much at the time of its publication), which is usually cause for considered indifference. Moreover, the thesis of both his magazine piece and book has been completely overtaken — and swamped — by events. But instead he's received considerable engagement.
One reason for this is Tanenhaus is a nice guy who, in the past, has seemed open to conservative ideas. He's respected because of the great work he did on his Chambers biography. And he's greatly feared because he controls perhaps the single most important redoubt of the liberal establishment (he edits both the book review and the "Week in Review" sections of the Times), which still controls the commanding heights of the culture. (I don't expect any invitations to write for the Times in the foreseeable future.)
But here's the thing: The Death of Conservatism is simply, irrefutably, a wildly unpersuasive piece of work (full disclosure Tanenhaus is not a fan of mine). Here's how I put it in the latest issue of National Review (sub required):
Much has been written about Tanenhaus's book already. Indeed, it's hard to think of a book that unites more factions of conservatism than Tanenhaus's tome, about which the apparently universal consensus is that it is completely, totally, and in every way imaginable unpersuasive. Not bad or uninteresting, mind you; just unpersuasive, like a wild-eyed witch-doctor ooga-boogaing about why he should be allowed to remove your spleen. It's all heart-felt, passionate, even artistic, but you'd want a second opinion. In order to make his case, Tanenhaus offers a series of incredible (as in not credible) assertions about the political landscape that leave the reader asking, "Were we watching the same movie?" For instance, in Tanenhaus's telling, George W. Bush was a doctrinaire, dogmatic, true-blue, radical right-winger who bullheadedly refused to work with the political opposition on centrist policies. Not only that, during Bush's tenure all of the discredited ideas of the "revanchist" wing of the Republican party — those would be the ideas advanced in this magazine, in case you were unclear — were fully deployed, and failed. "During the two terms of George W. Bush, conservative ideas were not merely tested but also pursued with dogmatic fixity."
That Bush was a proud promoter of "compassionate conservatism," explicitly rejecting Buckleyite conservatism; that he massively expanded entitlements and worked with Teddy Kennedy on education; that he signed campaign-finance reform, supported amnesty for illegal immigrants, and was utterly mute about racial quotas: None of this counts in Tanenhaus's estimation. Ditto that Bush signed the first stimulus bill and backed the first bailouts of this economic crisis. That this magazine sharply disagreed with Bush on these issues and others in no way immunizes us from the charge that we spent eight years serving as a revanchist PR machine for the White House. Oh, and in case you didn't know: William F. Buckley was a Disraelian pragmatist willing to work with liberals and sagely resigned to the modern welfare state.
Don't be alarmed by that Twilight Zone vibe you're getting. It's perfectly normal. In fact, it's intended. At an event hosted by the American Enterprise Institute, I told Tanenhaus that his description of things had a decidedly "otherworldly" feel to it. He responded by pleading "Guilty as charged" and saying that otherworldly writing was a great tradition among intellectuals, or some such, and that he did not shirk from the accusation one bit. It almost sounds like he's saying his narrative is fake-but-accurate.
Linker's finger-wagging notwithstanding, it's clear from the second half of his post that even Linker basically agrees. Heck, even Tanenhaus understands that no one except the liberals blurbing his book (Toobin, Matthews et al) find his argument plausible. It seems to me it's a hard case to make that conservatives are simply "policing orthodoxy" when our critique is very, very close to none other than Gary Wills' critique in The New York Review of Books. Last I checked, Wills is not on the distribution list for our VRWC talking points.
One last point of personal privilege (I'll let Pete Wehner defend himself as he's fully capable of doing). Something in the water over at TNR virtually guarantees that those folks treat my book unfairly or ignorantly (or both!) and Linker's no exception. For the record, I do not object to a "handful" of liberals calling conservatives fascists as Linker crudely snorts (talk about policing orthodoxy!). What I say is that American liberalism, infected by Frankfurt School Marxism (via Adorno, Hofstadter et al) as well as Popular Front leftism generally, has convinced itself that American conservatism is a close relative of fascism and that the further right you move in the American political system, the closer you get to fascism. This idea suffuses our popular culture, academia and a great deal of the liberal journalistic establishment.
Linker is either dishonest or ignorant if he thinks just a "handful" of liberals have been infected by this article of faith of the left (though it's nice to know he thinks they're "stupid" for having been). It has been a staple of much TNR analysis for over half a century. Bill Clinton, Al Gore, Lyndon Johnson, and Harry Truman all trafficked in this stuff. Truman arguably won in 1948 by accusing Dewey of being a Hitlerite stooge. Stalin stooge Henry Wallace — when he was the editor of TNR and when he ran for president — made such noises regularly. LBJ's campaign spoke in code about Goldwater being a frontman for the forces of "hate" which meant fascists. Martin Luther King Jr. deciphered the code for those who didn't understand: “We see dangerous signs of Hitlerism in the Goldwater campaign.” Jesse Jackson a generation later: “The Christian Coalition was a strong force in Germany.” He continued: “It laid down a suitable, scientific, theological rationale for the tragedy in Germany. The Christian Coalition was very much in evidence there.”
As anyone who's actually read my book (I doubt that includes Linker) knows, I can go on for quite a while like this. Personally, I think one of the most telling critiques from the left of my book is to deny that this fundamental misunderstanding of the right is ingrained on the left.
Linker is intent on telling conservatives what we would do if we were "intellectually serious." He should try harder to lead by example.
Private Property's Philosopher
Professor Hans Hoppe, in his outstanding new introduction to the reissue of The Ethics of Liberty, hits the nail on the head. He contrasts Murray Rothbard with Robert Nozick, a much more famous figure among academic philosophers and political theorists. Although both writers embrace libertarianism (Nozick much less ardently or consistently than Rothbard), their styles of thinking differ entirely. Nozick, according to Hoppe, is impressionistic and given to flights of fancy. Rothbard, by contrast, reasons by strict deduction from self-evident axioms.
Agree with him or not on Nozick, no one can dispute the accuracy of Professor Hoppe's characterization of Rothbard. Although I read Ethics of Liberty for the first time several years before its initial publication, and mistakenly thought I knew the book well, rereading it has punctured my complacency. Rothbard is even more consistent and rigorous than I had imagined.
One illustration must here suffice. As even Macaulay's schoolboy knows, Rothbard grounded his political ethics on the principle of self-ownership: each person rightfully owns his or her own body. Few libertarians would dissent; but few, if any, have seen the implications of this principle so clearly as Rothbard.
To many libertarians, freedom of contract is the be-all and end-all. As Rothbard notes, unlimited freedom of contract, far from being a consequence of self-ownership, in fact contradicts it. Given self-ownership, and acquisition of property through "mixing one's labor" with unowned property, of course, one may enter freely into all sorts of agreements with others.
Unfortunately, many libertarians, devoted to the right to make contracts, hold the contract itself to be an absolute, and therefore maintain that any voluntary contract whatever must be legally enforceable in the free society. Their error is a failure to realize that the right to contract is strictly derivable from the right of private property, and therefore that the only enforceable contracts … should be those where the failure of one party to abide by the contract implies the theft of property from the other party. (p. 133)
You cannot then, sell yourself into slavery. You can voluntarily submit to the will of another; but, should you change your mind, no legal force can compel you to obey another's bidding. Why not? Contract, to reiterate, does not stand as an absolute: only what fits together with self-ownership can be enforced. You can only give away your property, not yourself.
So far, I suspect, most libertarians would follow Rothbard. (Nozick, if I have understood him, would not.) Once you think about a contract to enslave yourself, unlimited freedom of contract loses its surface plausibility. But Rothbard goes further; and here the immense force of his systematic consistency emerges.
Rothbard uses the principle of self-ownership to solve a complicated problem of legal theory. What is the basis for enforcing a contract? According to some theorists, including such eminences as Oliver Wendell Holmes and Roscoe Pound, a contract is in essence a promise. Because you have, in return for a consideration, promised to perform some act, you may be compelled to keep your promise.
A variant of this position holds that a contract leads the parties to expect behavior of a specified kind. They accordingly plan their own actions and suffer loss if their expectations are disappointed. To help ensure that expectations are met, contracts may be enforced.
Rothbard easily dispatches these theories. Both contract as promise and contract as fulfilled expectation negate self-ownership. You may alienate only your property, not your will. Rothbard draws the drastic, though strictly logical, consequence that no promise as such can be enforced. Every legally binding contract must involve a transfer of titles between the parties at the time the contract is made.
Our author's conclusion follows from his premise; but why accept the axiom of self-ownership? Here once again I found my rereading instructive. I had, I imagined, the essence of Rothbard's argument firmly in mind. He argues that all societies confront three alternatives: each person owns himself, some people own others, or each person owns a part of everyone else.[1]
So far, so good. But then I went wrong. I was inclined to think that Rothbard next resorted to moral intuitions. Isn't it obvious that each person should own himself and that slavery must be rejected?
Rothbard's actual argument is much more subtle and complex than the sketch embedded in my mind. He relies heavily in his defense of self-ownership on a point of fact. Everyone in reality is in control of his own will. If I obey another, I must always make the decision to do as he wishes; and the threat of violence on his part should I follow my own course leaves the situation unchanged. I must decide whether to accede to the threat.
"So what?" you may say. "Even if Rothbard is right that you cannot, in some sense, alienate your will, how does he get to the conclusion he wants? From the fact that you control your own will, how does the ethical judgment follow that you ought not to threaten violence against another self-owner? Isn't Rothbard guilty of that dread fallacy, the derivation of an ought from an is?"
To our imagined objector, Rothbard would demur. He does indeed derive an ought from an is, but he denies that he is guilty of fallacy. Instead, he maintains that ethical principles follow from the nature of man. Because man has free will, it does indeed follow that he ought not to be coerced by others, unless of course he initiates violence: then, Rothbard holds, one may respond with all necessary force. ("Tolstoyan" is not, in our author's vocabulary, a word of praise.)
Is Rothbard right? If he is, he has overthrown the dominant way of doing moral philosophy today. In making his case, Rothbard displays his remarkable scholarly ability to extract just what he needs from a vast array of sources. The works of little-known Aristotelian philosophers, such as John Wild and John Toohey, SJ, figure to great effect as Rothbard builds his argument.[2]
Rothbard bases his system on self-ownership and defends that principle through an ethics of natural law. But it is not only in the foundation and consistent elaboration of his system that he displays his skill. I was again and again amazed, as I went through the book, how often Rothbard anticipates the objections of his critics.
If you may acquire unowned property through Lockean labor mixture, does this not unfairly bias matters in favor of the first possessor? Imagine a group of shipwrecked sailors swimming toward an uninhabited island. Does the first person to reach the island acquire it? Can he then refuse entry to his shipmates, unless they pay exorbitant rents to him? If he can, has not something gone wrong with the system, supposedly ironclad in its logic?
Not at all. Rothbard easily turns aside the objection.
Crusoe, landing upon a large island, may grandiosely trumpet to the winds his "ownership" of the entire island. But, in natural fact, he owns only the part that he settles and transforms into use.… Note that we are not saying that, in order for property in land to be valid, it must be continually in use. The only requirement is that the land be once put into use, and thus become the property of the one who has mixed his labor with, who imprinted the stamp of his personal energy upon, the land. (p. 64)
We may imagine another objector at this point. Suppose Rothbard can handle the objections of Georgists and others that first possessors can in his system hold property to ransom all others. Is not his system, however logical, of no practical relevance?
Most property titles today do not stem by a clear line of transmission from a Lockean first owner. On the contrary, would we not find that many land titles go back to acts of violent dispossession? Perhaps even as we speak we trespass on land originally owned by Indian tribes. Would not an attempt to put Rothbard's system into practice quickly lead to chaos?[3]
As usual, Rothbard has thought of the objection himself. He answers that the burden of proof lies on someone who disputes a land title. If the objector cannot make good his claim, the present possessor owns his land legitimately. Absent a clear proof by the objector that land has been forcibly wrested from him or his ancestors, the current possessor's claim holds good.
But what if the objector can make good his claim? Then Rothbard is entirely prepared to follow out the implications of his system. Many landowners in Latin America and elsewhere would in a Rothbardian world find themselves in very reduced circumstances.
[A] truly free market, a truly libertarian society devoted to justice and property rights, can only be established there [in the underdeveloped world] by ending unjust feudal claims to property. But utilitarian economists, grounded on no ethical theory of property rights, can only fall back on defending whatever status quo may happen to exist. (p. 70)
The brief reference to utilitarian economists suggests another aspect of Rothbard's thoughts, one that Professor Hoppe has insightfully stressed. Our author was keen to distinguish his thought from alternative defenses, in his view mistaken, of the free market. One of his criticisms particularly interested me, for personal reasons.
For many years, Murray in a good-natured way teased me for undue partiality to Robert Nozick. I foolishly resisted his counsel, though I eventually came to see the light. After renewed attention to his chapter on Nozick, I am at a loss to understand why it took me so long to change my mind.
As Rothbard notes, a key part of Nozick's argument for the state rests on a crucial equivocation. Rothbard contends that ideally, protective services should be provided by competing private protection agencies. A compulsory monopoly agency, i.e., a government, is neither necessary nor desirable.
Against Rothbard, Nozick deploys an argument that at first seems devastating. Grant Rothbard his private market anarchism, Nozick suggests. Then, in a way entirely consistent with Rothbard's system, a monopoly agency will spring up. Rothbard's system defeats itself.
Rising to the challenge, Rothbard locates a crucial weakness in Nozick's argument. Nozick concerns himself greatly with cases in which protection agencies clash over the appropriate procedures to use in trials of criminals. One outcome that Nozick canvasses is an agreement among the agencies on an appeals court.
So far Nozick is on the right lines, and Rothbard himself lays great stress on the need for agreements of exactly this kind. But, according to Nozick, agencies that so come to agreement have coalesced into a single agency. Rothbard finds in this step neither rhyme nor reason: do disputants who agree to arbitration suddenly constitute a single firm? Nozick's refutation of Rothbard rests entirely on an arbitrary definition.
I have been able to address only a few of the topics in this rich and thoughtful book. Yet in doing so, I fear that I have tried my readers' patience by too-frequent reminiscence. But this book has meant a great deal to me.
Conceived in Liberty
One hundred and seventy-nine years ago, a short span in the life of a nation, the representatives of the American people, in arms against the British Crown, proclaimed on a new continent a new philosophy of government. After the end of the military struggle for independence this philosophy was set forth in detail, and with rare insight and erudition, in the Federalist Papers and finally embodied in the Constitution of the United States.
The Fourth of July could well be an occasion for getting a firm grasp on the principles on which the American Republic was founded. Our educational institutions have not coped adequately with the task of communicating these principles to students. I know from personal experience that it is possible to go through a first-rate preparatory school and an excellent college without being impressed by the sheer thrill of political and intellectual adventure associated with the launching of the United States as an independent nation.
For it was an adventure, about which there were many prophets of gloom and doom on the other side of the Atlantic and some in the newly emancipated colonies themselves. Here were thirteen sparsely populated states, more distant from each other in terms of travel and communication than New York now is from London or Tokyo, starting out as a new nation without institutions which most Europeans then regarded as essential to stability without a monarchy, an hereditary aristocracy, or an established national church.
It was easy to imagine a relapse into anarchy, followed by the emergence of a "strong man" as dictator. But apart from the tragic schism of the Civil War (slavery and the right of a state to secede from the Union were two issues which the Constitution left unsolved), the United States has enjoyed almost two centuries of ordered freedom, unmarred by plots, internal sedition and successful or unsuccessful coups d'état.
The ideal of self-government, first proclaimed for the three million Americans of 1776, scattered along the Atlantic fringe of the country, still works for 160 million Americans who have filled up a vast country. The debt which Americans today owe to the men who framed the institutions of the young Republic, to Washington and Jefferson, Hamilton and Madison, Adams and Jay, is beyond estimation.
These men sometimes differed among themselves; but when they differed, it was usually because they emphasized two aspects of a single political truth. The product of their collective wisdom, the United States Constitution, is a mechanism of extraordinarily delicate balance. So far as human wisdom could foresee dangers and provide safeguards, the individual is secured against oppression by the central government, the states are left in possession of all the functions which are not clearly the proper concern of the federal government, and the powers and limitations of the three branches of the federal government are so defined that no one of these branches can dominate the others and become all-powerful.
The Founding Fathers' Forethought
No form of government devised in history was so careful to avoid the dangers of concentrated power and so favorable to letting the citizen go as far and as fast as his individual capacity would carry him, without state coddling, state regulation and state domination, which always go hand in hand. The Founding Fathers were mindful of the admonition voiced by one of the strongest and clearest political thinkers of the Revolution,
The institutions now made in America will not wholly wear out for thousands of years. It is of the last importance, then, that they should begin right. If they set out wrong, they will never be able to return, unless it be by accident, to the right path.
Adams and Jefferson, Madison and Hamilton, and many of their colleagues were men of exceptional learning. They were steeped in the Greek and Latin classics, in the history of medieval and modern Europe, in British and French constitutional theory and practice. At the same time they were not cloistered scholars, but men of action, who played leading roles in overturning an old form of government and setting up a new one. As a result of this double capacity, they possessed a panoramic view of the rise and fall of states in the past combined with a clear, intimate knowledge of the special conditions of America.
A coherent body of ideas figures prominently in the philosophy of the founders of the American Republic and may be studied to advantage in the Federalist Papers. These ideas, incidentally, are not only of tremendous historical importance, but are of the utmost reality and vitality in our own time. For the noble ideal of liberty, the word most often used in the literature of the American Revolution, has been horribly perverted by fanatics and cynically misused by tyrants.
It was not only in Jacobin France that many crimes, as Madame Roland cried on the scaffold, were committed in the name of liberty. As Professor J. L. Talmon brings out in his erudite and stimulating book, The Rise of Totalitarian Democracy (Beacon Press), the ideological origins of Soviet communism are not entirely in the writings of Marx and Engels.
Robespierre and the French Jacobins, nourished on Rousseau and some of the less known collectivist thinkers of the eighteenth century, worked out a conception of a virtuous elite that was morally entitled to persuade the people — with the aid of the guillotine, and for the people's own good, of course — to hold and express unanimous opinions which would coincide with those of the virtuous elite. This was the Model T version of modern communism, and fascism borrowed something in theory and a good deal in practice from communism.
Against all utopian conceptions, such as Rousseau's "general will," which would lead to an absolute concentration of governmental power, the Founding Fathers set their faces like flint. From study and personal experience they knew what liberty was and what it was not. They knew that a mob or political party operating without opposition could be just as cruel, just as destructive of freedom, as an absolute monarch or a military dictator. One of the clearest and profoundest statements of this deep distrust of concentrated state power is that of Madison in Number 47 of The Federalist:
The accumulation of all powers, legislative, executive and judiciary, in the same hands, whether of one, a few or many, and whether hereditary, self-appointed or elective, may justly he pronounced the very definition of tyranny.
Safeguards against Big Government
Far from deifying the state, the Founding Fathers regarded government as a necessary but dangerous instrument, which required many safeguards against abuse. Although they were accustomed, especially in New England, to the grassroots local democracy of the town meeting, they drew a careful distinction between the terms democracy and republic. Madison states the distinction in Number 14 of The Federalist:
In a democracy the people meet and exercise the government in person; in a republic they assemble and administer it by their representatives and agents. A democracy, consequently, will be confined to a small spot. A republic may be extended over a large region.
It is evident from the tone of The Federalist and other political writings of the time that the Founding Fathers were not devotees of unlimited majority rule or of over-strong government. They recognized that minorities and individuals have rights, such as life, liberty and property, which no majority may lawfully take away. It is significant that the Constitution devotes at least as much attention to telling the government what it may not do as to telling it what it may do, and its prohibitions are expressed in plain, unambiguous, uncompromising language:
Congress shall make no law respecting an establishment of religion or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press.
It is worthwhile to contrast these simple flat assurances with the long-winded resolutions of the United Nations on these subjects, full of escape clauses, weasel words, and loopholes for evasion. The Declaration of Independence takes its stand on "the laws of Nature and of Nature's God"; and belief in natural law and inalienable rights which men possess independently of government and which no government may lawfully deny, withhold, or abridge is one of the cornerstones of American liberty.
In the literature of the American Revolution there is no demagogic attempt to set human rights against property rights. In the Federalist Papers and in other publications it is recognized that the right to acquire and own property is a basic and very important human right. As
The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence.
Here, then, are the foundations of the free society of the American Republic: belief in natural law and inherent, inalienable human rights, intense distrust of any concentration of power in government, a suspicious attitude toward tyranny, whether of monarch or mob, including tyranny of the majority. Insofar as these foundations have been respected, America has prospered and grown great. It is where they have been most eroded and whittled away that some of the clearest danger signals in our national life are flying.
The Young French Visitor
Some of these danger signals were clear as early as the 1830s to the most profound and clear-sighted observer of the young American Republic, Alexis de Tocqueville. His work, Democracy in America, is a double masterpiece. It is a most penetrating study of the United States, its political institutions, its psychological traits, at the time of Andrew Jackson's presidency, and it contains some strikingly accurate predictions of the American future. It is also a most searching study of the positive and negative sides of the leveling democracy which was beginning to prevail in the Western world. And it is written in a style that is always lucid and readable and often strikingly brilliant. For understanding the main political and psychological currents in the American history, de Tocqueville's work is a worthy companion of the cogent, close-knit reasoning of the Federalist Papers.
As an observer of American life, de Tocqueville steers a middle course between sentimental gush and the squeamish repulsion which some cultivated Europeans like Mrs. Trollope felt for the free-and-easy frontier manners, with the copious expectorations of tobacco juice and the habit of calling all and sundry colonel or captain. He notes the self-reliant individualism of the American character:
The citizen of the United States is taught from his earliest infancy to rely upon his own exertions in order to resist the evils and the difficulties of life; he looks upon social authority with an eye of mistrust and anxiety, and he only claims its assistance when he is quite unable to shift without it.
Praised Local Initiative
As an authentic nineteenth-century liberal, de Tocqueville approves this tendency; he notes that the sum of private undertakings far exceeds all that the government could have done. He notes that there is no such thing as an American peasant and that although education is spread thinly, there are no pools of total illiteracy and stagnation. Again and again he praises the vitality of local initiative which builds excellent schools and churches and keeps the roads in good repair without any meddling interference from a centralized bureaucracy. And he pays to America of that time two compliments which are more impressive because he does not spare criticism on other points:
The European generally submits to a public officer because he represents a superior force, but to an American he represents a right. In America it may be said that no one renders obedience to man, but to justice and to law….
All commodities and ideas circulate throughout the Union as freely as in a country inhabited by one people. Nothing checks the spirit of enterprise…. The Union is as happy and free as a small people, and as glorious and strong as a great nation.
De Tocqueville is not blind to the fact that Americans possess the defects of their virtues. He notes a considerable downgrading of intelligence in high places since the formative years of the Republic. There is a memorable picture of the restless materialism which causes Americans to pursue illusions to the end of their days:
A native of the United States clings to this world's goods as if he were certain never to die; and he is so hasty in grasping at all within his reach that one would suppose he was constantly afraid of not living long enough to enjoy them. He clutches everything, he holds nothing fast, but soon loosens his grasp to pursue fresh gratifications…. Death at length overtakes him, but it is before he is weary of his bootless chase of that complete felicity which is forever on the wing.
A source of fascination in de Tocqueville is his rare gift of accurate prediction. Some of his observations fit America, and the world, in the middle of the twentieth century even better than the conditions of his own time. There was no income tax in the America which de Tocqueville visited; but he foresaw the shape of things to come:
Universal suffrage invests the poor with the government of society…. Wherever the poor direct public affairs and dispose of the natural resources it appears certain that, as they profit by the expenditure of the State, they are apt to augment that expenditure…. I have no hesitation in predicting that, if the people of the United States is ever involved in serious difficulties, its taxation will speedily be increased to the rate of that which prevails in the greater part of the aristocracies and monarchies of Europe.
There is the famous and remarkable forecast of the era of the American-Russian Cold War:
There are, at the present time, two great nations in the world which seem to tend toward the same end, although they started from different points: I allude to the Russians and the Americans…. All other nations seem to have nearly reached their natural limits…but these are still in the act of growth…. The Anglo-American relies upon personal interest to accomplish his ends, and gives free scope to the unguided exertions and common sense of the citizens; the Russian centers all the authority of society in the single arm; the principal instrument o£ the former is freedom; of the latter servitude. Their starting point is different and their courses are not the same; yet each of them seems marked out by the will of heaven to sway the destinies of half the globe.
De Tocqueville was alarmed not by "excessive liberty" in the United States, but by inadequate securities against tyranny. For, like other nineteenth-century libertarians who were democrats only with reservations — like Burckhardt, Acton, Mill — he realized that there was danger in the tyranny of the majority and sensed that the dykes which the framers of the Constitution had erected against this kind of tyranny were being weakened by the upsurge of democracy in the raw.
He realized that the day of the absolute hereditary monarch and of the privileged aristocrat was gone; but he saw new perils to liberty on the horizon of the future. With remarkable perspicacity he foresaw two developments which became realities in the twentieth century: the totalitarian society of communism and fascism and the paternalistic Welfare State. Regarding the former, he noted the likelihood that
those hideous eras of Roman oppression, when the manners of the people were corrupted, their traditions obliterated, their habits destroyed, their opinions shaken and freedom, expelled from the laws, could find no refuge in the land
might recur. Certainly the crimes of a Stalin, a Hitler, a Mao Tse-tung, far exceed anything that could be laid to the charge of a legitimate ruler in the era of royal absolutism.
Still more vivid and eloquent is de Tocqueville's imaginary sketch of a paternalistic state which would not practice the bloody oppression of dictators, but would reduce each nation "to nothing better than a flock of timid and industrious animals, of which the government is the shepherd," that would undertake "to spare its subjects all the care of thinking and all the trouble of living." The American Republic was, in the winged phrase of Lincoln, conceived in liberty.
But liberty is one of the most complex, as it is one of the most precious, of human conceptions. It flourishes best in the kind of equilibrium between government and citizen, individual and society, majority and minority which the Founding Fathers wrote into the Constitution. The dangers to true liberty vary from generation to generation; but it can never be maintained without constant struggle. There is no surer guide to the principles of political liberty than the Federalist Papers; no more penetrating and imaginative study of the forces that may wreck or sap liberty than de Tocqueville's great classic.
There could be no better Fourth of July reading than some of the outstanding passages in both these works.
Paul Krugman's Identity Crisis
Anyone who reads Paul Krugman, our latest "Nobel Prize-winning economist," knows that Krugman believes inflation is not a threat to the economy at all. He is a regular defender of large fiscal deficits and expansionary monetary policy, claiming that they are the road to salvation from our so-called deflationary spiral. (We'll ignore the fact that this "deflationary spiral" involves six straight months of price increases and regular complaints from Mr. Krugman himself about skyrocketing costs in health care.)
In 2009, Krugman stated that "deficits saved the world." However, in 2003, when Alan Greenspan and the Bush administration were destroying this country's balance sheet, Krugman was scared to death about inflation. The rest of this article references several paragraphs from Mr. Krugman's March 11th, 2003, article, "A Fiscal Train Wreck."
With war looming, it's time to be prepared. So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.
Since 2003, not only has the dollar lost purchasing power, but also inflationary pressures have grown like cancers. As a result, our deficits are bigger and our economy is weaker. Meanwhile, Ben Bernanke has run the printing presses at full speed and given no indication that he will slow them down any time soon.
Last week the Congressional Budget Office marked down its estimates yet again. Just two years ago, you may remember, the C.B.O. was projecting a 10-year surplus of $5.6 trillion. Now it projects a 10-year deficit of $1.8 trillion.
In 2009, the deficit projection is now $9 trillion. That's a $14 trillion swing from the $5.6 trillion surplus eight years ago. We should do ourselves a favor and stop acting like any of their projections are realistic. If Vegas were taking bets, the point spread would be another $7 trillion. As far as the CBO goes, Mr. Krugman says himself,
the Congressional Budget Office operates under ground rules that force it to wear rose-colored lenses.
We are royally screwed when a $9 trillion budget deficit is the rose-colored version. Maybe we should be preparing for a $16 trillion deficit.
What's really scary — what makes a fixed-rate mortgage seem like such a good idea — is the looming threat to the federal government's solvency.
That may sound alarmist: right now the deficit, while huge in absolute terms, is only 2 — make that 3, O.K., maybe 4 — percent of G.D.P. But that misses the point.
If Paul Krugman was worried about a $3 trillion budget deficit and a debt-to-GDP ratio of 4 percent six years ago, a $9 trillion budget deficit and a debt-to-GDP ratio of 40 percent today should have him preparing for financial Armageddon. The reality of the situation is that we are facing the biggest currency crisis in our nation's history.
Because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest.
This is exactly what most sane economists are saying today. Ironically, Mr. Krugman now likes to conveniently ignore those Social Security and Medicare liabilities that he was so frightened about in 2003. Let us not forget, he also conveniently ignores our newly pledged liabilities to Fannie Mae and Freddie Mac as well.
My prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.
And as that temptation becomes obvious, interest rates will soar.
His point here is 100 percent correct and crucial. The government, now under Barack Obama, has officially entered the stage of printing money to pay its bills and inflate away the debt. The problem is that Mr. Krugman now denies that such actions (printing money) are even occurring, and uses a megaphone to cheer the quantitative easing performed by Ben Bernanke.
He also regularly attacks any person who even mentions the possibility of interest rates rising. The Paul Krugman of 2009 completely disagrees with the Paul Krugman of 2003.
I think that the main thing keeping long-term interest rates low right now is cognitive dissonance.… The ultra-establishment Committee for Economic Development now warns that "a fiscal crisis threatens our future standard of living."
Obviously, Mr. Krugman was fearful of inflation. He wanted his nice home in Princeton to be paid off with funny money from the Federal Reserve. In the near future, he'll finally get his wish.
The key message is that in 2003, Mr. Krugman wrote a great article with an incredibly accurate picture of the financial health of the United States at the time. There is no question that George W. Bush was the worst president we ever had. There is also no question that Alan Greenspan was the worst Federal Reserve Chairman we ever had.
The problem is that everything Mr. Krugman now writes entirely contradicts his 2003 article, despite the fact that every fundamental problem the economy faced six years ago is now much worse. Mr. Krugman has no issues with Barack Obama and Ben Bernanke committing the same atrocities the previous administration committed. President Obama has ramped up every budget, including the military budget, while Bernanke runs the presses faster than Greenspan ever did.
Mr. Krugman has consistently stated throughout 2009 that there is no danger of interest rates rising in the future and that the budget deficit is not disastrous by comparison to 1940s United States and 1990s Japan.
But our GDP consists heavily of government spending and a consumer-based service sector (which is apparently a nonissue in the mindset of your typical Keynesian crackpot). Therefore, our GDP severely overstates our nation's productive capacity and is no longer a measure of our economic strength. How can a country that produces so little have a high Gross Domestic "Product"?
After World War II, the United States was a creditor nation. Japan is currently a creditor nation. The present day United States is a debtor nation, in fact the largest one the world has ever seen. Our nation's debt is held externally while the 1940s United States' and 1990s Japan's were held internally.
In the past, we financed our debt through 30-year bonds, as did Japan. Today, a large portion of our debt is financed through 2-year bonds. What happens if those interest rates creep higher? The United States must turn to the printing press to avoid default.
Investors still can't believe that the leaders of the United States are acting like the rulers of a banana republic. But I've done the math, and reached my own conclusions — and I've locked in my rate.
Given our administration's actions, we are officially becoming a banana republic; no matter how many times Mr. Krugman tells us on TV "we are not Argentina." Mr. Krugman made a wise choice in 2003 to convert his mortgage to a fixed rate over the course of 30 years. Why on Earth would he recommend that the entire nation take out debt financed in 2-year bonds? America is essentially signing up for a subprime mortgage, and we are assuming that we can simply refinance before the rates reset.
Mr. Krugman should do us all a favor and stop lying to the American people. When interest rates rise, and inflation skyrockets out of control, millions of Americans are going to wonder why Paul Krugman told us it wouldn't happen. With every word he writes, I wonder how big that conscience of a liberal really is.
No comments:
Post a Comment