Both a Prescient and Depressing Assessment by Henry Manne...

In my view, Henry Manne (pictured left) is sadly, but completely on the money and he doesn’t sugar-coat this at all.

We are very much entering a deepening Keynesian cycle. We’ve started this cycle, at least officially, in January of 2007.

How bad does it get?

How much economic liberty and individual freedom will we all lose?

That’s hard to say.

Especially given how naïve and gullible so many “Leftist youths” are. It seems easy to get them to embrace austerity in the name of the environment, the most ubiquitous of personal intrusions (what you can and cannot eat, how much exercise should be mandated) in the name of “health,” and they’ve been incredibly easy to get to replace individual rights with protections for terrorists and child-rapists.

The question doesn’t seem t be whether it’ll get better or worse. We KNOW it’ll get much, much worse. The only real question for those who cherish liberty is, “How much worse will it get,” and short of either some ham-handed over-reaching that even somehow alienates hordes of today’s naïve and gullible youth, or an even more massive economic crisis that can’t be blamed on market failure in a Keynesian cycle, it figures to get very bad indeed.

And Manne is right again in acknowledging that NEITHER Obama nor McCain will do much to change that. In fact, the ultimate difference between these two is minimal, at least in terms of economic liberty and individual rights.

We are entering a dark period for liberty from any conceivable perspective;

"That we are in the midst of one of the most serious financial crises in history is clear. The general causes of this economic maelstrom are now pretty well known: expansion of credit via low-interest rates by the Fed; subsidization and grotesque encouragement of inappropriate housing loans (courtesy primarily of Messrs. Dodd, Frank and Schumer and the FMs); a bad accounting call on mark-to-market by the SEC; and finally exacerbation and opaqueness engendered by financial instruments too complex to evaluate, decipher or untangle.

"Some might add government actions and regulations past and present, such as bans on short-sales or threats to close markets, that have prevented the private sector from making fast and efficient corrections. But that idea is not part of the consensus that has emerged.

"The great credit crisis of 2008 and its aftermath come as a result of a "perfect storm" of almost unrelated events. Leftist attitudes were reaching a crescendo among the ideological classes, spurred on by such disparate and often logically irrelevant notions as racism, feminism, environmentalism, global warming, a health care crisis, an unpopular war and high energy costs. The political part of the mix included a bizarre set of primary elections and unlikely final candidates, one of whom is perhaps the most liberal figure in American politics. Globalization and increasing international trade stirred up the nativists and protectionists more than usual. The inevitable market-distorting results of interest rates kept too low showed up alongside a poor man's affirmative action lending program, all of which created a bubble that had to burst eventually. And new and not well-understood financial devices and organizations were creating public confusion and mistrust.

"It was unlikely that all these influences would come to fruition at the same time, but they did. That is the nature of random events. The unlikely happens, and, almost by definition, no one is prepared for it when it does...

"...The political direction of the country is now determined for a long time to come, and it is inevitably leftward. Politicians would never resist a popular but massive demand for more government regulation (even the few with enough brainpower to recognize what is going on). The business community has never been a strong supporter of free market capitalism, and it certainly cannot be counted on to change its stance this time around. The media, the various leftist trend-setting elites and university faculties have been waiting a long time for an opportunity just like this, and we can be sure that they won't squander it. The shrillness of their attacks on free markets will reach new heights of righteous indignation and assumed moral and intellectual superiority.

"No policy issue based on private property, low taxes, small government or free trade will escape the charge that any unregulated free market will lead to disastrous excesses just as happened with the great financial crisis of 2008. This will be true for such soon to be rebuffed ideas as tuition vouchers for private schools, private health care, lower estate taxes, deregulation in its many forms, reduced use of eminent domain, tort liability restraint and free trade.

"We can anticipate a new reign of mercantilism, as the protectionists among us wield this strong new weapon against globalization and open markets. And all of this is true in large degree regardless of who wins the forthcoming election...

"...Bankers eager for federal help now will find themselves regulated not far short of total federal control of their business behavior. Banks won't be permanently nationalized, but what we will get will differ from that result semantically more than factually. Derivatives, for all their promise of alleviating panics and distributing risk, will not now be allowed to evolve into the brave new system once predicted for them. Accounting rules will become even more convoluted as we continue to ask for more information out of double-entry bookkeeping than it can ever deliver.

"Still, there is a glimmer of hope left to those who detest this seemingly inexorable slide into socialism or its first cousin, the super-regulatory state. That glimmer comes from the ghosts of Adam Smith, Milton Friedman and Friedrich Hayek, who still haunt the halls of the left. And in spite of all the claims made that this debacle marks the demise of free market philosophy, it won't go away so easily.

"This time around, unlike during the New Deal, there is a substantial intellectual establishment to ride herd on leftist proclivities. There are numerous free market blog sites, which, for instance, can be properly credited with forcing modification of the recent short-sale ban. There are countless free market think tanks in Washington and all around the country exerting considerable influence on government policies. Libertarians are a small but growing political factor, and there are even a few university economics departments and law schools where sanity prevails or is at least occasionally evident.

"Like it or not, these few intellectual bastions of freedom philosophy will be about the only thing that keeps these ideals alive in the coming years. But we should never underestimate the power of good ideas. Like the bad ones we are about to witness in large numbers, they may just have to bide their time until a new crisis causes the fickle and uninformed public to demand a new direction.

"If these ideas are maintained in the inventory of ultimate possibilities, then there is always the chance of their public rediscovery and rebirth. It has happened with liberty before. And one thing is absolutely certain: Sooner or later the new era will end in another crisis. Perhaps then the defenders of freedom will be able to claim the moral high ground."


Henry G. Manne is the dean emeritus of the George Mason University School of Law.

Read the entire piece at http://www.forbes.com/2008/10/13/crisis-economy-friedman-oped-cx_hm_1014manne_print.html

The Misery Index...

Get familiar with this term kids, it was something that all of us, who lived through the 1970s knew very well.

It’s about to come to the foreground again. Yippeee!

The Misery Index is a compilation of the prevailing inflation rate and the unemployment rate to give a picture of the nation’s “misery.” These are the two most basic economic indicators – giving a snapshot of (1) at what rate the costs of goods and services increasing and (2) how many people are out of work.

The misery index was created by economist Arthur Okun (pictured above), an adviser to President Lyndon Johnson in the 1960's. It’s simply the unemployment rate added to the inflation rate. It’s assumed that both a higher rate of unemployment and a worsening of inflation combine to create economic and social costs/”misery” within an economy.

Suffice to say, with annual unemployment rates over 20%, the 1930s are unquestionable the worst decade for Misery and the “Misery Index,” so most data collected starts with post-WW II America.

Truman finished off FDR’s last term in 1948 with an 11.5 Index.

His own term saw 1949 come in at 5.1, 1950 at 6.3, 1951 at 11.2 and 1952 at 5.3.

To date, Dwight D. Eisenhower and William J. Clinton were the only post-WW II U.S. Presidents to preside over eight straight years of single digit Misery Indexes, with Ike dodging a bullet in 1958 when it hit 9.6 and Bill Clinton dodging one in 1993 with a 9.7!

GW Bush would’ve been only the third U.S. President to preside over eight straight years of single digit Misery Indexes, but with the current Misery Index at around 9.88 and rising (August's was 11.47), that doesn’t look like it’s gonna happen for George W.

The only other two Presidents to preside over single digit Misery Indexes throughout their tenures were JFK (1961 = 7.8, 1962 = 6.8 and 1963 = 6.9) and LBJ, whose spending spree’s bills didn’t come due until the 1970s.

Richard Nixon’s first term saw the first double digit Misery Index since 1951, when 1970 came in with a rollicking 10.2. The Index spiked to a high of 11 during his last full year (1973) and spiked even more during 1974 (he resigned that July) hitting 16.7 for that year!

Things got even worse for poor Gerald Ford, who followed Nixon’s “We’re all Keynesians now” view through his thirty months. Under Ford the Misery Index surged to a whopping 17.7 in 1975 and was brought back down to 13.5 (actually 13.45) in 1976...Happy Birthday America!

Unfortunately for Americans, that 13.5 was going to be the BEST they were going to see in awhile!

Jimmy Carter, who ran as a “Center-Right Democrat” and governed as a far-Left Liberal, saw the Misery Index increase EVERY year of his administration, the FIRST and, to date, ONLY post-WW II U.S. President to hold that distinction.

Under Carter the Misery Index climbed from 13.6 (1977) to 13.7 (1978) to 17.07 in 1979 and finally all the way to 21 in 1980, the year Ronald Reagan ended Carter’s tenure and the reign of Keynesian policies in America.

Did Reaganism work?

Just look to the Misery Index. Reagan’s first term was the FIRST time a post-WW II U.S. President presided over four straight years of DECREASING Misery Indexes!

The Misery Index fell from 18 (17.97) in 1981 to 15.87 in ’82, to 12.82 in ’83, to 11.81 in ’84. It dropped to 10.74 in 1985 and then dropped off into the single digits over his last three years. That was the first three year stretch of single digit Misery Indexes since 1967 thru 1969.

George Bush Sr. presided over four straight years of double digit Misery Indexes and became only the second post-WW II U.S. President to do that, although his 10.6 four year average pales in comparison to the stultifying Misery of the Carter years that come in at a staggering 16.5!

Hmmmmm, come to think about it, that sought of puts the lie to the Clinton’s idiotic campaign slogan used against George Bush Sr.’s economy, “The Worst Economy Since the Great Depression,” doesn’t it?

Bill Clinton’s first two years had a combined two year average of 9.4 (9.9 and 8.8 respectively), but once the Gingrich Congress stepped in and cut government spending, his final six years saw an average annual Misery Index of just 7.3, the lowest average in THREE DECADES!

1998’s Misery Index of just 6.05 was the LOWEST since 1956!

Amazingly enough, G W Bush’s seven year annual average Misery Index (2001 thru 2007) is very close to Bill Clinton’s average annual Misery Index over his last seven years (leaving off his first, and worst 9.9 in 1993). Bush’s seven year average, to date is 7.9, compared to Clinton’s 7.5!

With 2008 looking like it’s going to approach 10 for the first time since 1992, Clinton and Bush’s eight year averages will probably be very close.

Incredibly enough Supply-Siders Clinton and Bush have combined to deliver FIFTEEN straight years of single digit Misery Indexes.

With 2008 teetering on the brink (it was 11.47 for August 2008), the year is averaging 9.98 through the first eight months, we COULD see the first double digit Misery Index since 1992.

Where do we go from here?

That’s anybody’s guess.

What we have currently is a Republican Gerald Ford running against a Democratic Jimmy Carter.

Anybody care for a 1970s redux?

Cause here it comes. That's why lessons like this are important. Those who don't know history, are indeed doomed to repeat it.

A 1970s Redux? Sure Looks That Way...

Both New York City and State are looking at a fiscal meltdown.

America is involved in a protracted, increasingly unpopular and widely misunderstood war.

Inflation, interest rates and unemployment are on the rise.

Is this 1978 or 2008?

Sometimes, it’s hard to tell. The current occupant of the White House has been a reckless social spender throughout most of his administration – the “No Child Left Behind” and the “Prescription Drug boondoggle” are just two of the most glaring examples.

Like the 1970s era Republican, Richard Nixon, he has embraced a number of disastrous Keynesian policies, most recently an ill-conceived “Housing Bailout” program on top of another poorly thought-out “Stimulus package” that seeks to give taxpayers up to $2500 to “stimulate the economy.”Somewhere, John Maynard Keynes, the icon of failed anti-market economic policies is smiling.

The Dow Jones has reacted to the all this by shedding over 3000 points. The surging price of energy (oil) throughout the first six months of this year and rising healthcare costs have ramped up inflation, while massive government spending has put even more pressure on the credit markets. Locally, high-tax localities like New York City are contracting as they find themselves with LESS in tax revenues and most have to responded, first with higher taxes, fees and fines and subsequently with major cuts in government services.

Is there irony in the fact that a President (G W Bush) who began his administration with one of the greatest stimulus packages ever – the Supply Side inspired ACROSS THE BOARD TAX CUTS, would be undone by his accommodation with Democratic inspired Keynesian policies? Absolutely, it’s a bitter irony.

Even MORE ironic, is the fact that the Democratic Congress that has been in session since January 2007 has seen energy prices (oil and natural gas) rise precipitously under their watch.

The prospects for 2008 look very much like those of 1976. Jimmy Carter, a trained engineer and business owner ran on a campaign of “change” away from the policies of the unpopular Nixon administration, just as Barry/Barrack Obama now runs on “change” and “hope,” and against yet another unpopular President and another misunderstood war.

January 1977 thru January 1981 was the last time a Liberal led House and Senate teamed with a liberal Democratic President and it quickly delivered Stagflation (double digit inflation, unemployment and interest rates) at home and humiliation on the world stage – the failed helicopter rescue of the Iranian hostages, due, in large part, to Carter’s reckless and dangerous Military cuts.

Will Keynesian policies fail AGAIN?

Absolutely.

Will, we (middle and higher income working Americans) pay the price for all this?

Without question!

America faces the same reality that France and Germany do. India and China are not only industrializing rapidly and demanding unprecedented amounts of energy, but are forcing the world to embrace free trade and an ever more open/free market economy.

In an interview with Ted Koppel for the Discovery Channel’s “The People’s Republic of Capitalism,” one Chinese official noted that “Many Western European nations, such as France, England and Germany are more socialistic than we are.” He could’ve easily added the United States and been equally correct.

America has veered away from the marvels of the Free Market over some ill-conceived dream of “financial security,” for established businesses and the jobs they create.

That “deal with the devil” has resulted in the contemporary Corporatism (the highly regulated economy that is today embraced by Europe and the United States).

The 20th Century have clearly shown that there is only ONE alternative to contemporary Corporatism and that is the unbridled Free Market.

The “Command (State Directed) Economy” of socialism has only resulted in massive poverty and mass murder, as the middle and upper classes must be eradicated in order for the state to take possession of their property.

What would a true Free Market look like?

It would look like an ugly rugby scrum, a cannibalizing, free-for-all in which the clever gain and the weak are hopelessly buoyed about on waves they neither control nor understand. In short, it would look like an economic masterpiece.

That kind of economy, although offering little nor no security to neither established businesses and industries, nor the millions of workers who work for them, would deliver unprecedented levels of innovation, scientific and industrial advancement and an as yet unattained level of prosperity for the greatest possible number of people.

Of course, it would also remove government subsidies and sanctions from established industries and bar government from regulating cut-throat competitors out of the market in order to “protect American jobs and American businesses.”

John Maynard Keynes argued that government spending, especially large scale social spending and rebuilding projects actually improved the economy.

J M Keynes was wrong.

Like Karl Marx, John M Keynes was not a trained economist and that showed with his pathetic showing when he debated the great economist and fellow Nobel Laureate Friedrich Hayek.

Sadly over the last six decades, while Hayek may have overwhelmingly won the head-to-head battle with Keynes and Keynesianism, the Keynesians still have a long shot at winning the war.

After all, government not only doesn’t want to be shut out of the economy, it refuses to allow itself to be. So it seems that no matter how badly Keynesianism screws up, it will always have its share of well-connected supporters.