Commenting Tuesday (February 5) on the Toyota gas pedal situation, Transportation Secretary Ray LaHood used an interesting choice of words: “We’re not finished with Toyota…” Herein lies the heart of the matter.

We are familiar with the problems Toyota is having. The company is struggling to replace defective gas pedals on several of its models as fast as it can. As will most company crises of this magnitude, facts detailing how the crisis occurred and how it could have been avoided will disseminate in the coming weeks and months. For now, we must focus on the basics.

Toyota clearly erred in producing cars with the defective gas pedal. This is a serious problem, and Toyota bears the responsibility for resolving it as soon as possible. By all indications, the company is taking drastic steps to do just that. Offering no excuses, Toyota halted sales of affected vehicles while its engineers rapidly developed a solution. In Asian fashion, the company hesitates to defend itself and even apologized to its customers and asked for a second chance. Toyota’s crisis response appears to be responsive and appropriate.

Secretary LaHood’s response to Toyota, however, is suspect. Although it is LaHood’s responsibility to investigate the situation and take appropriate action, talking down the company is clearly inappropriate. In Tuesday’s statement, he added that DOT officials flew to Japan in December to remind the company “about its legal obligations,” as if Toyota was not keenly aware already. Meanwhile, a Congressional hearing is planning to investigate whether Toyota’s U.S. President Jim Lentz misrepresented the recall remedy. Expect CNN to cover this grilling intently. Like LaHood, the Democrats are seizing this opportunity to pile on. As Rahm Emaneul advised, one should “never let a good crisis go to waste.”

There are several reasons why this is happening. First and foremost, because the U.S. government has a controlling interest of GM, it also has the perverse incentive to use government power to beat down its competitors whenever it can. As I warned in a previous blog, the government will do whatever it has to do to make GM profitable again. The Toyota crisis also represents a golden opportunity to remind the public that corporations will cheat them whenever possible if the government doesn’t regulate them heavily. We’ve heard the “capitalism bad-government good” mantra ad infinitum for over a year now.

As we watch this crisis run its course, it’s worth considering two key questions. First, given the fact that vehicle recalls are commonplace, while do Democrats and the DOT feel the need to demonize Toyota in this particular case? Second, if the DOT (or more specifically, the NHTSA) is charged with protecting the safety of the general public, then why is the agency only taking aggressive action now, six model years after the earliest reported problem? Be careful…if your answer to the first question is that Toyota is getting what it deserves because its negligence was so gross and this particular problem is so widespread, then our government should have been on top of this a long time ago. Will the DOT be investigated for delaying action to “save the public?” Certainly not.

Early indications suggest that the problem is primarily with vehicles built in the U.S., not Japan. Regardless, rest assured that interesting facts will emerge in the next few months that shed light on the crisis. Some might not bode well for Toyota, but others will likely detail problems with federal regulators. You can also rest assured that the DOT will blame any shortcomings related to its response on Bush and/or budgetary problems, and will simply ask for more of your tax money to do a better job controlling the evil capitalists in the future.

We can learn a lot about the cycle of socialism by watching Venezuelan President Hugo Chavez.

To be clear, Chavez is not a well-intentioned, misguided socialist. He seeks the power, world attention, and hemispheric domination we associate with tyrannical forms of government. Chavez assumed the presidency in 1998 on a platform of radical change designed to aid the poor and disenfranchised. Once elected, he began to “take back what belonged to the people” by nationalizing the oil, steel, and other industries. Revenues from oil—the lifeblood of the economy—financed many of his projects. As long as oil prices were high, things seemed to be going well.

Socialism always stifles the incentive to produce and innovate. Unlike private oil companies, Chavez failed to reinvest sufficient funds back into the business. Declining oil revenues began to take a toll on the country. Facing mounting criticism and economic hardship, Chavez attacked the press, closing down many of his television opponents in 2006. Today, TV stations are required to air his frequent speeches or risk prosecution.

Earlier this year, Chavez announced a currency devaluation to encourage Venezuelans to purchase more products manufactured at home, assuming local industries can actually meet the demand. The government also announced rotating blackouts to manage a power shortage. Meanwhile, frustrated Venezuelans have been told that they must sacrifice for the collective and think long term.

Venezuela is a textbook case of the socialism cycle. A leader is elected by appealing to the masses on the basis of class warfare. Some nationalization and wealth redistribution occurs after the political victory, but the engine of production sputters due to excessive government intervention and a lack of incentives. The newly elected leaders blame this problem on the capitalists for being greedy and not acting in the interest of society as a whole. Opposition mounts, and we begin to see restrictions on freedom of speech to keep it in check. Capitalism is denounced as completely degenerate, so more nationalization and government control follows. The standard of living declines and the masses are told that capitalists and foreigners (Americans) are the cause of all social and economic ills. The socialist utopia simply can’t work until all vestiges of greed are eliminated. Total failure is becoming more and more apparent, but the masses are told to stay the course.

Could the U.S. follow such as cycle? The tradition of liberty is probably strong enough to keep our country from going as far, but we already see the same pattern here. Obama was elected on a platform of hope and change based on class warfare. Once elected, he immediately addressed the “healthcare crisis” by demanding that businesses make sacrifices for the good of the country. Those that did were spared—temporarily—from further punishment—while that that did not were publically flogged as the villains. Although Obama has hinted at media control and a return to the “fairness doctrine,” such an effort has not yet materialized. Even after his massive stimulus spending, the economy remains in the tank. Obama is on the ropes and the public is waking up, yet he reminds us that our current problems are really Bush’s fault and challenges us to stay the course.

What does the future hold? History warns us that transitions from socialism to capitalism aren’t always peaceful. For Venezuela, let’s hope that the people get their country back soon without bloodshed. As for the U.S., Scott Brown’s election may stave off the left’s healthcare package for the time being, but more work needs to be done. Brown is not a real conservative, but he’s certainly better than Massachusetts has sent to the Senate in a long time. Cautious optimism is in order, but let’s not get too excited. A lot can happen between now and November.

In a 2003 ruling, Supreme Court Justice Sandra Day O’Connor suggested that using race as a factor in college admissions decisions might make sense only for a limited period of time. Now retired, O’Connor just published an essay with Cornell Law School Dean Stewart J. Schwab on the prospects for revisiting the need for race-conscious admissions policies at U.S. colleges (see The Next 25 Years: Affirmative Action in Higher Education in the United States and South Africa). In the essay, O’Connor and Schwab made a chilling statement about the role of the high court:

“When the time comes to reassess the constitutionality of considering race in higher-education admissions, we will need social scientists to clearly demonstrate the educational benefits of diverse student bodies, and to better understand the links between role models in one generation and aspirations and achievements of succeeding generations.”

Justice O’Connor, please tell me what social science research has to do with the constitutionality of anything? Using race as a factor in college admissions decisions is either constitutional or it’s not. Does this mean that gun control is constitutional if a group of social scientists suggest that such a policy might reduce crime? Should freedom of the press be curtailed if social scientists suggest that doing so might result in a more orderly society? A law or practice is constitutional if it is consistent with the original intent of the document itself. Neither public opinion nor current research should be a judicial consideration.

Unfortunately, O’Connor’s thinking is commonplace among activist judges. To them, assessing the constitutionality of a law or practice doesn’t really involve the Constitution at all. It’s all about what seems to make sense at the moment.

In a completely market driven economy, interest rates—like all other prices—are determined by supply and demand. The Fed largely determines interest rates in the U.S., however, and for this we pay a heavy price. Earlier this month, even Fed Chairman Ben Bernanke himself acknowledged that the Fed’s “easy money” policy during the early 2000s contributed to the housing boom and subsequent bust. Yet, the Fed is on course to repeat its mistakes once again.

Let’s say you ran a bank and were free to determine your own interest rates. How would you decide what to charge your customers? You might start with projected inflation to compensate for the fact that the money you get back in the future will be worth less than what you loan out today. Inflation would also be factored into the interest rate you pay on your deposits, a key source of the cash you need for loans. You’d also have to add enough to cover your overhead and the risk associated with the various types of loans (in case you don’t get your money back). Finally, you’d add some profit. Other banks would consider these factors as well, so rates would be driven down to levels that reflect the best management of risk and overhead, with only modest profits.

In a centrally planned economy, interest rates are determined by government officials who might consider some of these same factors before assigning rates based on sophisticated economic models and presumed acumen. Although our economy is relatively market-oriented, such is not the case in the banking industry. Instead of relying largely on savings to finance loans, banks can get their money directly from the Fed at lower rates set by Bernanke’s team. In effect, the Fed sets the rates charged by banks.

In a representative democracy like ours, allowing a quasi-government entity like the Fed to manipulate interest rates can be deadly. Political pressure mounts and the Fed usually responds with rates lower than the market would otherwise support, especially in a down economy. Few Americans complain because they like the lower rates. They just don’t understand the long term damage.

When the price of money—the interest rate—is too low, businesses and consumers will want to borrow more. This means more cars, houses, business expansion, consumer goods, and ultimately MORE DEBT. For any economic growth to be sustainable, debt must be supported by a commensurate level of savings (preferably not by the Chinese). If not, the house of cards will tumble down and create another crisis, more political pressure, and the need to artificially lower interest rates again. Add to this the irresponsible, unsustainable spending in Congress and it’s easy to see why BOOM AND BUST is common to our economy.

Many Keynesian economists are suggesting that the Fed raise the interest rates they charge to banks to address this problem. They are missing the point. No central planning entity—not even the Fed—is capable to calculating optimal interest rates. While most of us are comfortable letting market forces largely determine the price of consumer goods, we are told that only highly trained economists should determine the price of money. Nothing could be further from the truth.

The sooner we abolish the Fed the better. We need to rebuild our economy on solid footing, and the hocus pocus of both artificially low interest rates and massive government spending should be rejected. At the present rate, we are merely laying the foundation for the next economic collapse, and this one could be even bigger.

I hope you enjoyed the Christmas season, but let’s face it—2009 has been a tough year. The economy is in the tank, unemployment hovers around 10%, the national debt has spiraled out of control, and we are one big step closer to socialized medicine. What will 2010 bring? Here are a few things I anticipate:

1. IMMIGRATION REFORM (aka, amnesty) is a key objective of the Obama administration and the Democrats. Converting illegals into citizens is a voting boon for those on the left. We didn’t hear much about immigration in 2009 because the Democrats did not want the public to realize that the healthcare “reform” package would apply to tens of millions of NEW CITIZENS if an amnesty bill passes. I wonder if McCain and Graham will see things differently this time around. Democrats want to get immigration done before the 2010 elections. This is a battle we must win.

2. TAXES WILL RISE, as is already apparent in the healthcare legislation. There is talk of a bipartisan deficit-cutting commission. While not a bad idea in theory, such a commission infers that the current debt problem is bipartisan and that some sort of compromise is needed to resolve it. Such a commission would likely recommend tax hikes, a few token spending cuts, and means testing for programs like Social Security. Useful measures such as a rollback of the stimulus program would probably not be part of the deal. A bipartisan commission would allow Democrats to spread the blame associated with the 2009 spending spree and get Republicans to sign on to more wealth redistribution as part of the solution.

3. OBAMA WILL MOVE TO THE CENTER. With the midterm elections little more than 10 months away, we can expect more talk from the Democrats about fiscal responsibility and national security, lest the voters hold them accountable for the current malaise. Don’t be fooled. Obama’s record speaks for itself, and the Democrats in the House and Senate are his enablers.

4. THE DENIGRATION OF CONSERVATIVES IN THE MEDIA WILL INTENSIFY. The Democrats and the mainstream media will paint those who argue for fiscal responsibility, limited government, and border control as right wing extremists, especially as the midterm elections draw near. A few RINOs will become media darlings by calling for less extremism and more compromise with the left. This has been part of the Democrat playbook for years. Get on the offensive early, and don’t be surprised.

There’s a lot of work ahead. Maybe real conservatives will take back the House and 2010 will be a year of real change. Let’s keep fighting the good fight!

Amnesty is back. Rep. Luis Gutierrez has introduced a bill in the House that would ultimately provide citizenship for illegals who pay a $500 fine, learn English, and pass a background check, referring to such a plan as a “moral obligation.” Some of the unanswered questions are obvious:

1. Will illegals who cannot pay the $500 “fine” really be deported?
2. What level of English proficiency will be required, who will judge, who will provide the training, and how long will illegals have to pass the test?
3. If we have a moral responsibility to those in need who enter our country illegally, then don’t we have the same obligation to the rest of the developing world?

Asking these questions is worthwhile, but we should focus on the core issue. No illegal immigrant should be able to pass a background check anyway. Each committed a serious offense when he or she entered the US illegally. Of course, amnesty would create millions of new voters, most of whom would support the party of big government that facilitated their citizenship. This is why Democrats fight so hard for amnesty, and why many Republicans (Graham, McCain, etc.) are afraid to oppose it.

Illegal immigration costs Americans a fortune each year. While we might benefit from cheap farm, manufacturing, and construction labor, the hidden costs of public education, criminal justice, and healthcare alone are devastating. Heritage Foundation Senior Research Fellow Robert Rector has already done the math, so I won’t go over it again here. Suffice to say that the long term economic burden is huge. Unfortunately, many in corporate America favor various work schemes for illegals because they benefit from cheap labor while society at large pays the cost.

Predictably, the subtle and sometimes overt media bias is back as well. USA Today reported on December 15: “There are 12 million illegal immigrants in the USA. Activists call for an overhaul of immigration law that would offer them a way to earn legal status. Rep. Luis Gutierrez, D-Ill., introduced a bill Tuesday that would give illegal immigrants who pay fines, pass background checks and meet other requirements a path toward legal residency.” Note that illegals would only get a “way to earn legal status” or “a path toward legal residency.” Gutierrez clearly wants CITIZENSHIP, which means AMNESTY FOR ILLEGALS. USA Today avoids these terms because of its editors know where most Americans stand on the issue. The story also includes the obligatory heart-tugger, a reference to Rigoberto Padilla, a non-American whose dreams could be shattered by a cruel system called border enforcement. (http://www.usatoday.com/news/nation/2009-12-15-deport_N.htm)

For the record, I understand why a citizen another country would enter the US illegally. Many come to the US to work and help feed their families. Most are nice people and see the lack of immigration enforcement as the game it is. If I lived in poverty elsewhere and the US borders were open, I’d come also. We shouldn’t blame the illegals. We should blame ourselves. Amnesty, however, doesn’t fix the problem, it only exacerbates it.

Many of the arguments from the previous debate will remain unchanged when “immigration reform” takes center stage again, but there are two key differences. First, we will be told that most illegals are young workers who will help pay the taxes needed to finance near-bankrupt programs for older Americans like Social Security and healthcare. This argument is a simply an admission that programs like Social Security are merely vote-buying Ponzi schemes. How many more workers must be imported to pay the Social Security claims of these young workers several decades from now?

The second difference is political. Democrats largely favor amnesty, and there are more of them now than when Bush mistakenly supported the effort. Fortunately the 2010 elections are getting closer, and some Democrats might fear the wrath of voters if they support such a measure. Regardless, the key for stopping amnesty—sooner or later—is retaking the House in 2010 with REAL conservatives and passing real immigration reform that limits legal immigration at a reasonable level and controls the border. Let’s keep our eyes on the ball.

Economic ignorance is commonplace. Here are 3 examples from the past few days:

1. I don’t know if a second stimulus will work, but I’m glad Obama is doing something.

2. We’ll never get our economy back on track if the rich don’t pay more taxes.

3. [The economics of] healthcare is too complicated for me to figure out. I’m just glad the government is stepping in to make sure I get it.

For many of you, the logical flaws in these statements is obvious. As for comment #1, why is “doing something” better than doing nothing if what is being proposed has already been tried and failed? Why must the government “do something” whenever a problem exists? Shouldn’t it act only when it can solve the problem.

As for #2, the “rich” do most of the hiring in a free market economy, and they hire fewer people when they pay more taxes. You could argue that the rich should pay LESS in taxes before the economy will recover.

#3 suffers from the same problem as #1, the idea that government needs to control our lives when things get complicated.  In both instances, I responded by asking the person what he or she was doing to learn more about the issue (stimulus spending or healthcare). Following the blank stares, I had my opening and countered with 2-minute presentations of some basic facts.

I rarely win free market converts in a few minutes, but I do try to make people think. Perhaps they’ll start listening more critically to the news, or maybe they’ll come back to discuss the issue again later. Perhaps someone else will pick up where I left off. If we are going to change Washington next November, I’m convinced we need to stay informed ourselves, and educate our friends, neighbors, and coworkers. It won’t happen overnight.

By the way, the runner-up for “top 3″ this week was “I’m not sure what’s going on in Copenhagen, but we need to do something about the environment.” I’ll save my thoughts on this gem for another day.

Ben Bernanke is currently fighting for Senate reconfirmation as Chairman of the Federal Reserve. Bernanke has presided over a more expansionary and intrusive Fed than our country has ever seen. His agency’s rabid expansion of the money supply will trigger price inflation over the long term, and the Fed’s current near-zero interest rate is sending capital out of the country and setting the stage for another round of bad loans. Kentucky Senator Jim Bunning provided a brilliant and pithy assessment of Bernanke’s performance. I can’t improve on it, so I’ll link to it below and encourage you to read it: http://blogs.wsj.com/economics/2009/12/03/bunning-statement-on-bernanke-you-are-the-definition-of-a-moral-hazard/

It’s worthwhile to take a step back from Bunning’s acumen and consider the role of the Fed in the first place. The Federal Reserve was established in 1913 for a number of reasons, most notably to lend stability to the U.S. banking system and control inflation. The central bank has failed in both respects. U.S. banking is experienced considerable instability under the Fed’s guidance, and we are all aware of what the current banking crisis is costing us. The dollar increased in value by 13% in all of the years prior to 1913, but has decreased by 92% since the establishment of the central bank. Simply stated, the Fed is the cause of much of the inflation and instability we experience. Any serious assessment of the Fed would consider it to be a failure, yet Bernanke and others continue to insist that it will do a better job if it gets more power and control. It’s time we end this facade.

Unfortunately, few Americans understand the damage that the Fed routinely inflicts on everyday Americans. The Fed taxes us indirectly when it expands the money supply, thereby lowering the purchasing power of the dollars we earn and save. Artificially low interest rates encourage risky borrowing, and create an environment where average people must put their money at risk to just to keep up with inflation. Today, many have turned to gold, leading Bernanke and others to suggest that the Fed should play a role in bursting what he sees as “bubbles” in gold, silver, and other commodities. This is central planning at the core, and it does not work.

Much of what the Fed does is undisclosed, but the momentum for a complete audit of the central bank is growing. HR1207, co-sponsored by Republican (libertarian) Ron Paul and Democrat Alan Grayson has passed the House and the Senate version (S604) is currently under consideration, where Jim DeMint and others are fighting for passage. Bernanke and other Keynesian economists have referred to the bill as dangerous and irresponsible. It’s high time the American people understand how an unbridled Fed is destroying prospects for long term economic growth. Ending the Fed is the ideal situation, but restricting its power is a good move in the short run. HR1207 is a definite step in the right direction.

I urge you to keep an eye on Bernanke’s confirmation hearings and the fate of S604. It’s easy to get preoccupied with the healthcare debate, but Bernanke and S604 are too important to ignore.

The ongoing debate on the so-called “jobless recovery” is intensifying. The Obama line is that his aggressive (massive) spending “saved the economy from the brink” and current stagnation is part of a long term problem created by Bush ineptness. Finishing the job requires more government intervention and debt, as the free market is simply unable to do the job without government supervision. The notion of a second stimulus has been bantered around by some on the left as well. 

Republicans have largely rejected the Obama narrative, but don’t seem to be clear about what should be done. Some are suggesting business tax credits for new hires or temporary income tax cuts. These are not bad ideas per se, but they don’t directly address the core problem, harmful government intervention in the economy. It’s crucial that Republicans reject the Keynesian thinking and social engineering that got us into this mess in the first place, and these ideas don’t quite hit the mark.

The notion of a temporary tax cut is appealing at first glance, and is certainly better than more government spending. The problem with this proposal is that tax cuts only reduce the size of government when they are permanent and are accompanied by spending reductions. The Obama balance of high taxes and higher spending is unsustainable and economically irresponsible. A temporary tax cut suggests that Obama’s approach may not be optimal at the moment, but could be workable when the economy recovers. Nothing could be further from the truth.

Likewise, a tax credit for businesses that hire workers could have some short term positive benefits. But providing a temporary tax break for new hires encourages companies to hire workers whose value to the business would be less that the wages they pay. Such a program amounts to a government subsidy, and layoffs will follow when the tax credit expires. If businesses cannot afford to hire workers, then why not reduce their regulatory burden and taxes on a permanent basis?

Obama’s massive government intervention has failed, and Republicans must decide how to respond. One option is to propose a blend of conservative and neo-Keynesian programs that don’t address the core problem of fiscal irresponsibility and Constitutional neglect. The pundits tell us that such a proposal would attract moderates to the fold. Bush drifted in this direction during his presidency and lost the conservative base. McCain tried a similar approach in 2008 and never got it back.

Another option is to tell the complete truth. Many Americans sense something terribly wrong with Obamanomics and are open to an alternative. The left’s healthcare package wreaks of big government and restrictions on individual liberty, and those who thought the Dems were about responsible change are seeing the party for what it really is. Republicans have a chance to propose a real solution, not just a shift to the middle. 

So what should a real solution look like? Here are a few pieces of the puzzle:

1. An immediate halt to all stimulus spending.

2. Permanent tax cuts, including a simplified flat or fair tax system, a substantial cut in the capital gains tax, and the elimination of wealth transfer through the tax code (i.e., earned income tax credits). 

3. A substantial reduction in the size and scope of government that brings about spending cuts and reduced regulatory burdens on business.

4. A reorganization (if not elimination) of the Fed to end its meddling in the economy.

5. An end of global negotiations on climate change. The evidence for anthropogenic global warming is spotty at best. Cap-and-trade and other socialist schemes should be summarily rejected.

If you think I sound a little extreme, you’re right. Capitalism is the solution to our economic problems and need not be “kept in check” by bureaucrats. We owe no apologies for a system that created the wealthiest nation on earth. It’s time we take a real stand. The Dems have given us a perfect opportunity to do so. We might not get another chance.

You know things are bad when the Chinese lecture you about free market economics. Recall the laughter Geithner received from Chinese students five months ago when he assured them that their dollar-based assets were secure. Well, the following appeared in this morning’s Wall Street Journal:

Liu Mingkang, chairman of the China Banking Regulatory Commission, said that a weak U.S. dollar and low U.S. interest rates had led to “massive speculation” that was inflating asset bubbles around the world. It has created “unavoidable risks for the recovery of the global economy, especially emerging economies,” Mr. Liu said. The situation is “seriously impacting global asset prices and encouraging speculation in stock and property markets.” Early Monday, a spokesman for China’s Ministry of Commerce added further criticism of the Obama administration, targeting recent measures by Washington against Chinese exports. “We’ve always known the U.S. and the West as free market economies. But now we’re seeing a protectionist side,” the spokesman, Yao Jian, told a monthly press briefing. Mr. Yao also rejected criticism of China’s currency policy, saying the yuan’s exchange rate has little to do with trade imbalances with the U.S. and that China should keep the exchange rate stable.

Liu Mingkang must have ready my post last week on the state of the economy. The Fed is keeping interest rates too low (below market rates), encouraging risky and otherwise questionable investments that would otherwise not be made. Our economy should be adjusting to the recession by allowing the transfer of capital from less productive enterprises to more productive ones. Instead, the Obama administration and the Dems in Congress are spending massive amounts to control the economy and discourage this regenerative process. It’s a blend of Keynesian economics and Marxism that even perplexes the Chinese.

I don’t agree with the Chinese position on the yuan’s exchange rate. The weak dollar is supposed to be good for exports in the short run, but has little effect on trade with countries like China whose currency value is largely tied to the dollar anyway. We can’t really lecture the Chinese on letting the market determine currency exchange rates when we are attempting to control the market in every other respect. Either the market works or it doesn’t.

The problem is really bigger than this. The U.S. is no longer the standard for free market economics. We’ve traded our moral authority and influence in the world for “change we can believe in.” I just hope we can keep a lid on the current socialist experiment until the 2010 elections.