Browsing the blog archives for January, 2010.

Venezuela and the Socialist Cycle


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.


Sandra Day O’Connor and race-based college admissions


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.

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The Fed’s Easy Money


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.