Economic Teaching at the Universities

How This Happened

by Llewellyn H. Rockwell, Jr.

For years, many of us puzzled about how something so stupid and destructive as the New Deal could have happened. The stock market crashed because it was overinflated. That's nothing new. History is filled with credit bubbles that pop. Resources are reallocated to reflect economic reality and we move on.

The New Deal was different. It actually began under Hoover, who initiated new spending programs, jobs programs, and tried to inflate the money supply and bail out the banks. He was blasted by FDR for his big government policies, and FDR won the election. Once in power, FDR went nuts, instituting a program of central planning that combined features of the Soviet and Fascist models.

It was one idiotic program after another. They tried to raise wages when they should have fallen. They tried to save banks that should have collapsed. They destroyed resources when they were most needed. They encouraged spending when people should have been saving. They smashed the dollar at a time when it needed to be shored up. They cartelized business when competition was most necessary.

What were the results? Economic growth went nowhere between 1933 and 1939, with real gross domestic product per adult still 27 percent below trend at the end. Per capita GDP was lower in 1939 than in 1929. Unemployment was at 17.2 percent in 1939. This was actually higher than it was in 1931. This is despite 100 percent increases in monetary expansion. Taxes had tripled. Employing people became ever more expensive due to unions and national income guarantees.

Every time the economy would bottom out and genuine recovery would begin, policy would knock it back down again. Other seeming upturns were entirely artificial: make-work instead of real work, for example. Regimentation was everywhere so that business couldn't compete, farmers were destroying livestock and crops on command, and dissidents were being ferreted out through police-state tactics.

In other words, the whole project was a massive dud. It turned what might have been a short downturn into a decade-long national calamity, the biggest cost of which was freedom itself. And then as a coverup for the calamity, there was war. At last FDR found some use for those unemployed workers: send them to kill and be killed at taxpayer expense. As for wartime price controls and nationalization, it was the New Deal by other means.

(For a full account, with all the detail, in scintillating prose, see Flynn's Roosevelt Myth.)

Was it some sort of national insanity?

No, it was a power grab, and the current political moment shows precisely how this happens. A small group of elites, cut off from the broader reality, decides to finagle the system to serve itself and its friends in the short term while forgetting the big picture and the long term. Sensible people try to point out obvious facts, but their voices are drowned out.

But none of this happens without some philosophical rationale. Even before J.M. Keynes came along to give bad economic ideas a scientific gloss, the notion that government could gin up the economy with spending and inflation was pervasive. Laissez-faire economic theories had already fallen out of favor with the elites who controlled the universities, print houses, and government agencies.

Many nutty ideas were in the air. It's remarkable to see how many pro-Fascist books, for example, were in print in the 1920s and '30s. It was widely assumed that the future of the good society was bound up with the idea of "economic planning." This was an interesting phrase. It covered all forms of socialism plus the interventionist state. "Planning" was the intellectual fashion, and there were very few dissidents.

Once the crisis hit, the intellectual reality became the political reality. (Higgs describes the process in Crisis and Leviathan.)

Now that we are living amidst this, it is easier to come to terms with how the New Deal came about. It makes those in the know feel completely helpless. We look at what is happening to bank reserves and we know what is coming. When the economy recovers — even if only cosmetically — and lending starts again, the internal dynamic of the fractional-reserve system will come into operation. We could be facing inflation at 10 percent or 20 percent or even much higher, depending on how spending psychology plays itself out.

Then we listen to speeches by the president-elect, who is going on about the great stimulus package he is going to push through Congress. It's like listening to one quack doctor propose bleeding the patient even as the last quack doctor who bled the patient is packing his bags to leave. You want to shout: is there a real doctor in the house? But it seems like no one is listening.

What's striking here is how the historians are the ones with power right now. Bush has gone nuts with inflation and intervention as a way of avoiding Hoover's fate, even though the actual historical record (versus the historians' fantasies) shows that Hoover was the first New Dealer. Meanwhile, the Obama clique hopes to recreate the FDR disaster by following his plan detail by detail, even though the plan was stupid and didn't work.

To watch all this happening is like watching a slow-moving train headed over a cliff. The problem is that the engineers have ear plugs in and blinders on.

Will this go on for ten years like the last time? Will it end in World War III, as if following some historical script? Is it possible that we will go the way of Germany in the 1920s, straight into the abyss of hyperinflation and into the hands of a ghastly dictator? It is unwise to rule it out.

And yet, I'm not that pessimistic. It is extremely crucial to realize that there is a difference this time. In the 1930s, technological limits put severe restrictions on information delivery. Government propaganda easily dominated the culture. All of that has changed. Despite everything, people simply do not trust the government as they once did. Obama will enjoy a short honeymoon, but it will be over by summer.

What is still missing is one critical thing: a culture-wide love of liberty that is capable of intimidating and beating back the rogue regime. The conditions are right for this to actually happen, and to reverse the direction of politics today. But it will require all our efforts. Fortunately, everyone has the opportunity today to make a difference.

I hope my own book will help make a difference.

The last words in Ludwig von Mises's book Socialism bear repeating:

Everyone carries a part of society on his shoulders; no one is relieved of his share of responsibility by others. And no one can find a safe way for himself if society is sweeping towards destruction. Therefore everyone, in his own interest, must thrust himself vigorously into the intellectual battle.

Economic Teaching at the Universities

Economic Teaching at the Universities

by Ludwig von Mises

A few years ago, a House of Representatives Subcommittee on Publicity and Propaganda in the Executive Departments, under the chairmanship of Representative Forest A. Harness, investigated federal propaganda operations. On one occasion the committee had as a witness a government-employed doctor. When asked if his public speeches throughout the country presented both sides of the discussion touching compulsory national health insurance, this witness answered, "I don't know what you mean by both sides."

This naive answer throws light on the state of mind of people who proudly call themselves progressive intellectuals. They simply do not imagine that any argument could be advanced against the various schemes they are suggesting. As they see it, everybody, without asking questions, must support every project aiming at more and more government control of all aspects of the citizen's life and conduct. They never try to refute the objections raised against their doctrines. They prefer, as Mrs. Eleanor Roosevelt recently did in her column, to call dishonest those with whom they do not agree.

Many eminent citizens hold educational institutions responsible for the spread of this bigotry. They sharply criticize the way in which economics, philosophy, sociology, history, and political science are taught at most American universities and colleges. They blame many teachers for indoctrinating their students with the ideas of all-around planning, socialism, and communism. Some of those attacked try to deny any responsibility. Others, realizing the futility of this mode of defense, cry out about "persecution" and infringement of "academic freedom."

Yet what is unsatisfactory with present-day academic conditions — not only in this country but in most foreign nations — is not the fact that many teachers are blindly committed to Veblenian, Marxian, and Keynesian fallacies, and try to convince their students that no tenable objections can be raised against what they call progressive policies; the mischief is rather to be seen in the fact that the statements of these teachers are not challenged by any criticism in the academic sphere. The pseudoliberals monopolize the teaching jobs at many universities. Only men who agree with them are appointed as teachers and instructors of the social sciences, and only textbooks supporting their ideas are used. The essential question is not how to get rid of inept teachers and poor textbooks. It is how to give the students an opportunity to hear something about the ideas of economists rejecting the tenets of the interventionists, inflationists, socialists, and communists.

1. Methods of the "Progressive" Teachers

Let us illustrate the matter by reviewing a recently published book. A professor of Harvard University edits, with the support of an advisory committee whose members are all, like himself, professors of economics at Harvard University, a series of textbooks, the "Economics Handbook Series." In this series there was published a volume on socialism. Its author, Paul M. Sweezy, opens his preface with the declaration that the book "is written from the standpoint of a Socialist." The editor of the series, Professor Seymour E. Harris, in his introduction, goes a step further in stating that the author's "viewpoint is nearer that of the group which determines Soviet policy than the one which now [1949] holds the reins of government in Britain." This is a mild description of the fact that the volume is from the first to the last page an uncritical eulogy of the Soviet system.

Now it is perfectly legitimate for Dr. Sweezy to write such a book and for professors to edit and to publish it. The United States is a free country — one of the few free countries left in the world — and the Constitution and its amendments grant to everybody the right to think as he likes and to have published in print what he thinks. Sweezy has, in fact, unwittingly rendered a great service to the discerning public. For his volume clearly shows to every judicious reader conversant with economics that the most eminent advocates of socialism are at their wits' end, do not know how to advance any plausible argument in favor of their creed, and are utterly at a loss to refute any of the serious objections raised against it.

But the book is not designed for perspicacious scholars well acquainted with the social sciences. It is, as the editors' introduction emphasizes, written for the general reader in order to popularize ideas and especially also for use in the classroom. Laymen and students who know nothing or very little about the problems involved will draw all their knowledge about socialism from it. They lack the familiarity with theories and facts which would enable them to form an independent opinion about the various doctrines expounded by the author. They will accept all his theses and descriptions as incontestable science and wisdom. How could they be so presumptuous as to doubt the reliability of a book, written, as the introduction says, by an "authority" in the field and sponsored by a committee of professors of venerable Harvard!

The shortcoming of the committee is not to be seen in the fact that they have published such a book, but in the fact that their series contains only this book about socialism. If they had, together with Dr. Sweezy's book, published another volume critically analyzing communist ideas and the achievements of socialist governments, nobody could blame them for disseminating communism. Decency should have impelled them to give the critics of socialism and communism the same chance to represent their views to the students of universities and colleges as they gave to Dr. Sweezy.

On every page of Dr. Sweezy's book, one finds really amazing statements. Thus, in dealing with the problem of civil rights under a socialist regime, he simply equates the Soviet constitution with the American constitution. Both, he declares, are

generally accepted as the statement of the ideals which ought to guide the actions of both the state and the individual citizen. That these ideals are not always lived up to — either in the Soviet Union or in the United States — is certainly both true and important; but it does not mean that they do not exist or that they can be ignored, still less that they can be transformed into their opposite.

Leaving aside most of what could be advanced to explode this reasoning, there is need to realize that the American constitution is not merely an ideal but the valid law of the country. To prevent it from becoming a dead letter there is an independent judiciary culminating in the Supreme Court. Without such a guardian of law and legality, any law can be and is ignored and transformed into its opposite. Did Dr. Sweezy never become aware of this nuance? Does he really believe that the millions languishing in Soviet prisons and labor camps can invoke habeas corpus?

To say it again, Dr. Sweezy has the right — precisely because the American Bill of Rights is not merely an ideal, but an enforced law — to transform every fact into its opposite. But professors who hand out such praise of the Soviets to their students without informing them about the opinions of the opponents of socialism must not raise the cry of witch-hunt if they are criticized.

Professor Harris, in his introduction, contends that "those who fear undue influence of the present volume may be cheered by a forthcoming companion volume on capitalism in this series written by one as devoted to private enterprise as Dr. Sweezy is to socialism." This volume, written by Professor David McCord Wright of the University of Virginia, has been published in the meantime. It deals incidentally also with socialism and tries to explode some minor socialist fallacies, such as the doctrine of the withering away of the state, a doctrine which even the most fanatical Soviet authors relegate today to an insignificant position. But it certainly cannot be considered a satisfactory substitute, or a substitute at all, for a thoroughly critical examination of the whole body of socialist and communist ideas, and the lamentable failure of all socialist experiments.

Some of the teachers try to refute the accusations of ideological intolerance leveled against their universities and to demonstrate their own impartiality by occasionally inviting a dissenting outsider to address their students. This is mere eyewash. One hour of sound economics against several years of indoctrination of errors! The present writer may quote from a letter in which he declined such an invitation:

What makes it impossible for me to present the operation of the market economy in a short lecture — whether fifty minutes or twice fifty minutes — is the fact that people, influenced by the prevailing ideas on economic problems, are full of erroneous opinions concerning this system. They are convinced that economic depressions, mass unemployment, monopoly, aggressive imperialism and wars, and the poverty of the greater part of mankind, are caused by the unhampered operation of the capitalist mode of production.

If a lecturer does not dispel each of these dogmas, the impression left with the audience is unsatisfactory. Now, exploding any one of them requires much more time than that assigned to me in your program. The hearers will think: "He did not refer at all to this" or "He made only a few casual remarks about that." My lecture would rather confirm them in their misunderstanding of the system…. If it were possible to expound the operation of capitalism in one or two short addresses, it would be a waste of time to keep the students of economics for several years at the universities. It would be difficult to explain why voluminous textbooks have to be written about this subject…. It is these reasons that impel me reluctantly to decline your kind invitation.

2. The Alleged Impartiality of the Universities

The pseudoprogressive teachers excuse their policy of barring all those whom they smear as old-fashioned reactionaries from access to teaching positions by calling these men biased.

The reference to bias is quite out of place if the accuser is not in a position to demonstrate clearly in what the deficiency of the smeared author's doctrine consists. The only thing that matters is whether a doctrine is sound or unsound. This is to be established by facts and deductive reasoning. If no tenable arguments can be advanced to invalidate a theory, it does not in the least detract from its correctness if the author is called names. If, on the other hand, the falsity of a doctrine has already been clearly demonstrated by an irrefutable chain of reasoning, there is no need to call its author biased.

A biographer may try to explain the manifestly exploded errors of the person whose life he is writing about by tracing them back to bias. But such psychological interpretation is immaterial in discussions concerning the correctness or falsity of a theory. Professors who call those with whom they disagree biased merely confess their inability to discover any fault in their adversaries' theories.

Many "progressive" professors have for some time served in one of the various alphabetical government agencies. The tasks entrusted to them in the bureaus were, as a rule, ancillary only. They compiled statistics and wrote memoranda which their superiors, either politicians or former managers of corporations, filed without reading. The professors did not instill a scientific spirit into the bureaus. But the bureaus gave them the mentality of authoritarianism. They distrust the populace and consider the State (with a capital S) as the God-sent guardian of the wretched underlings. Only the government is impartial and unbiased. Whoever opposes any expansion of governmental powers is, by this token, unmasked as an enemy of the commonweal. It is manifest that he "hates" the state.

Now if an economist is opposed to the socialization of industries, he does not "hate" the state. He simply declares that the commonwealth is better served by private ownership of the means of production than by public ownership. Nobody could pretend that experience with nationalized enterprises contradicts this opinion.

Another typically bureaucratic prejudice which the professors acquired in Washington is to call the attitudes of those opposing government controls and the establishment of new offices "negativism." In the light of this terminology all that has been achieved by the American individual enterprise system is only "negative"; the bureaus alone are "positive."

There is, furthermore, the spurious antithesis "plan or no plan." Only totalitarian government planning that reduces the citizens to mere pawns in the designs of the bureaucracy is called planning. The plans of the individual citizens are simply "no plans." What semantics!

3. How Modern History Is Taught

The progressive intellectual looks upon capitalism as the most ghastly of all evils. Mankind, he contends, lived rather happily in the good old days. But then, as a British historian said, the Industrial Revolution "fell like a war or a plague" on the peoples. The "bourgeoisie" converted plenty into scarcity. A few tycoons enjoy all luxuries. But, as Marx himself observed, the worker "sinks deeper and deeper" because the bourgeoisie "is incompetent to assure an existence to its slave within his slavery."

Still worse are the intellectual and moral effects of the capitalist mode of production. There is but one means, the progressive believes, to free mankind from the misery and degradation produced by laissez-faire and rugged individualism, viz., to adopt central planning, the system with which the Russians are successfully experimenting. It is true that the results obtained by the Soviets are not yet fully satisfactory. But these shortcomings were caused only by the peculiar conditions of Russia. The West will avoid the pitfalls of the Russians and will realize the welfare state without the merely accidental features that disfigured it in Russia and in Hitler's Germany.

Such is the philosophy taught at most present-day schools and propagated by novels and plays. It is this doctrine that guides the actions of almost all contemporary governments. The American "progressive" feels ashamed of what he calls the social backwardness of his country. He considers it a duty of the United States to subsidize foreign socialist governments lavishly in order to enable them to go on with their ruinous socialist ventures. In his eyes, the real enemy of the American people is big business, that is, the enterprises which provide the American common man with the highest standard of living ever reached in history. He hails every step forward on the road toward all-around control of business as progress. He smears all those who hint at the pernicious effects of waste, deficit spending, and capital decumulation as reactionaries, economic royalists, and Fascists. He never mentions the new or improved products which business almost every year makes accessible to the masses. But he goes into raptures about the rather questionable achievements of the Tennessee Valley Authority, the deficit of which is made good out of taxes collected from big business.

The most infatuated expositors of this ideology are to be found in the university departments of history, political science, sociology, and literature. The professors of these departments enjoy the advantage, in referring to economic issues, that they are talking about a subject with which they are not familiar at all. This is especially flagrant in the case of historians. The way in which the history of the last 200 years has been treated is really a scandal. Only recently, eminent scholars have begun to unmask the crude fallacies of Lujo Brentano, the Webbs, the Hammonds, Tawney, Arnold Toynbee, Elie Halevy, the Beards, and other authors. At the last meeting of the Mont Pelerin Society, the occupant of the chair of economic history at the London School of Economics, Professor T.S. Ashton, presented a paper in which he pointed out that the commonly accepted views of the economic developments of the 19th century "are not informed by any glimmering of economic sense." The historians tortured the facts when they concocted the legend that "the dominant form of organization under industrial capitalism, the factory, arose out of the demands, not of ordinary people, but of the rich and the rulers."

The truth is that the characteristic feature of capitalism was and is mass production for the needs of the masses. Whenever the factory, with its methods of mass production by means of power-driven machines, invaded a new branch of production, it started with cheap goods for the broad masses. The factories turned to the production of more refined and therefore more expensive merchandise only at a later stage, when the unprecedented improvement which they had caused in the masses' standard of living made it reasonable to apply the methods of mass production to better articles as well. Big business caters to the needs of the many; it depends exclusively upon mass consumption. In his capacity as consumer, the common man is the sovereign whose buying or abstention from buying decides the fate of entrepreneurial activities. The "proletarian" is the much-talked-about customer who is always right.

The most popular method of deprecating capitalism is to make it responsible for every condition which is considered unsatisfactory. Tuberculosis and, until a few years ago, syphilis, were called diseases of capitalism. The destitution of scores of millions in countries like India, which did not adopt capitalism, is blamed on capitalism. It is a sad fact that people become debilitated in old age and finally die. But this happens not only to salesmen but also to employers, and it was no less tragic in the precapitalistic ages than it is under capitalism. Prostitution, dipsomania, and drug addiction are all called capitalist vices.

Whenever people discuss the alleged misdeeds of the capitalists, a learned professor or a sophisticated artist refers to the high income of movie stars, boxers, and wrestlers. But who contribute more to these incomes, the millionaires or the "proletarians"?

It must be admitted that the worst excesses in this propaganda are not committed by professors of economics but by the teachers of the other social sciences, by journalists, writers, and sometimes even by ministers. But the source from which all the slogans of this hectic fanaticism spring is the teachings handed down by the "institutionalist" school of economic policies. All these dogmas and fallacies can be ultimately traced back to allegedly economic doctrines.

4. The Proscription of Sound Economics

The Marxians, Keynesians, Veblenians, and other "progressives" know very well that their doctrines cannot stand any critical analysis. They are fully aware of the fact that one representative of sound economics in their department would nullify all their teachings. This is why they are so anxious to bar every "orthodox" from access to the strongholds of their "un-orthodoxy."

The worst consequence of this proscription of sound economics is the fact that gifted young graduates shun the career of an academic economist. They do not want to be boycotted by universities, book reviewers, and publishing firms. They prefer to go into business or the practice of law, where their talents will be fairly appreciated. It is mainly compromisers, who are not eager to find out the shortcomings of the official doctrine, who aspire to the teaching positions. There are few competent men left to take the place of the eminent scholars who die or reach the retirement age. Among the rising generation of instructors are hardly any worthy successors of such economists as Frank A. Fetter and Edwin W. Kemmerer of Princeton, Irving Fisher of Yale, and Benjamin M. Anderson of California.

There is but one way to remedy this situation. True economists must be given the same opportunity in our faculties which only the advocates of socialism and interventionism enjoy today. This is surely not too much to ask as long as this country has not yet gone totalitarian.

Castro Throws First Punch at Obama

Castro Throws First Punch at Obama, Demands Return of Gitmo

Fidel Castro

HAVANA — Fidel Castro on Thursday threw his first punch at President Obama after several weeks of praise for the new leader, demanding the U.S. return Guantanamo Bay military base to Cuba and criticizing the U.S. defense of Israel.

Castro's latest essay, published on an official Web site, came one week after he called Obama "intelligent and noble" and said he would cut back on his writings to prevent interfering with Cuban government decisions.

The missive Thursday raised new questions about what role he maintains in policy-making, especially coming while his brother, President Raul Castro, was in Moscow on an official visit.

The ailing 82-year-old former president wrote that if the U.S. doesn't give the U.S. base at Guantanamo back to Cuba, it will be a violation of international law and an abuse of American power against a small country.

The U.S. president must "respect this norm without any condition," Castro wrote.

Obama has ordered the prison for terror suspects on the U.S. base to be closed within a year, but Cuba also demands the return of the 45-square-mile territory the base occupies in the island's east. Raul Castro and other government officials have called for the return of the base, but with less critical words and tone.

The U.S., which acquired Guantanamo more than 100 years ago, considers it strategically important to maintain. The treaty granting its use remains in effect unless both Cuba and the U.S. abrogate it or the U.S. abandons the base.

The mission for Guantanamo "remains constant," spokesman Navy Chief Petty Officer Lewis Mesta told The Associated Press on Wednesday. "We will continue to provide logistical support for all U.S. Naval vessels who operate in the Caribbean theater."

In his Thursday essay, Castro also criticized Obama for backing Israel's defense against attacks by Palestinian militants. He said it demonstrated "the abusive character of the empire's power" and insisted it would contribute to "the genocide against the Palestinians."

Castro stepped aside after undergoing abdominal surgery 2 1/2 years ago and has not been seen in public since. His 77-year-old brother permanently replaced him as president nearly a year ago.

In an essay last week, Castro had praised Obama for "the sincerity of his words" and as "a living symbol of the American dream."

Castro wrote on Jan. 22 that he was cutting back on his occasional columns, known as "Reflections of Comrade Fidel," so he won't "interfere or get in the way of the (Communist) Party or government comrades in the constant decisions they must make."

He also said in that essay that he is unlikely to live through the end of Obama's four-year term, and that Cuban officials "shouldn't feel bound by my occasional Reflections, my state of health or my death."

Fidel Castro's essays have continued to carry weight and are diligently read in full at the top of midday and nightly radio and television newscasts before other national or international news. Thursday's essay arrived too late to make the evening news, which focused on Raul Castro's visit to Russia.

Obama To BAN Guns SPREAD THIS FOLKS, PLZ!

Foreign Aid and Bad Government

Foreign Aid and Bad Government

Helping entrepreneurs is the right approach.

IQBAL Z. QUADIR

Barack Obama has talked a lot about changing the way America relates to the world, and few areas are as ripe for reform as our policies on foreign aid. They have contributed to economic stagnation in poor countries and deprived America of large export markets. Entrepreneurship, not aid, is essential to rejuvenate markets in the developing world and, in turn, help America prosper.

During the Cold War, the U.S. instituted a policy of sending money to governments in poor countries to buy their political loyalty. While studies show that sending aid to foreign governments creates allegiance, it does not lead to economic progress. Instead, it makes governments in poor countries dependent on the U.S. rather than their citizens' taxes.

Pakistan has been one of the key recipients of U.S. aid over the last six decades, but there has been no real progress as a result. Pakistan is riddled with problems that are rooted in the disproportionate power of the state. Aid has only boosted that power.

In contrast, Malaysia saw its economy grow at twice the rate of Pakistan's over the same period of time. Fueled by trade rather than aid, Malaysian economic prosperity is decentralized, and its reliability as an ally much greater.

Tragically, the Cold War aid approach actually preserves suffering in poor countries. Aid empowers bureaucracies, promotes statism, and weakens government incentives to boost tax revenues through growth. Economic assets are often kept in the hands of the state, leading to monopolies, stagnation and extortion. All of this hurts entrepreneurs, who have the potential to create wealth and promote governmental accountability.

The history of Western economic and political advancement illustrates that it is the economic strength of citizens -- not governments -- that gives rise to checks and balances.

A case in point is England, where a lack of outside money created real accountability. In the 13th century, after the advent of property rights, the British monarch was forced to convene a group of citizens as a tax-legitimizing device. This group, known as the parliament, capitalized on the monarch's chronic need for money and made sure the monarch did not gain financial independence. Every time the monarch wanted to pass a new tax bill, the parliament obliged only after exacting more liberty from the crown. Over time, it was parliament that emerged as the more powerful branch of government. The monarch's shortage of money and a lack of outside aid were key to England's democratic success.

President Obama now has the opportunity to adopt a new aid approach that will actually help citizens. Such an approach would demonstrate our faith in democracy and serve long-term American interests.

What should this plan look like?

First, America must remove trade barriers on exports from the poorest countries, regardless of trade policies in those countries. With global market access, poor countries would automatically attract private investment, despite their institutional weaknesses. These institutions would become stronger over time as businesses flourish. Private investments capitalizing on access to global markets would necessarily employ low-cost labor, thus creating jobs.

Next, small entrepreneurs can be bolstered with seed money in the range of $25,000. Small entrepreneurs create jobs, products and services that form the bedrock of flourishing democracies. With some tangible changes in its operation, the International Finance Corporation (IFC) within the World Bank Group could promote development through entrepreneurs. The World Bank should stop lending to governments and be absorbed into the reformed IFC.

Third, America could give $1 million to match any grass-roots group capable of raising $1 million to establish a health clinic. These clinics -- one thousand could be built with $1 billion -- could provide crucial services to poor citizens and generate goodwill towards America.

In short, America should stop pouring billions into bureaucracies to buy short-term alliances and focus its efforts on bottom-up entrepreneurship. This would increase America's popularity, alleviate poverty, and promote real democratic change in these developing countries.

We should encourage governments to be sustained by citizens' taxes -- that is, democracies. Democracies will be enduring allies of America.

Mr. Quadir is founder and director of MIT's Legatum Center for Development and Entrepreneurship, and founder of Grameenphone, the largest cellphone company in Bangladesh.

'Think Long' to Solve the Crisis

'Think Long' to Solve the Crisis

It's the only way to sustain lasting benefits from the stimulus.

GEORGE P. SHULTZ

The current economic crisis must be viewed as a gigantic wake-up call. We have been living beyond our means for some years now, and the message is clear: We must change our ways. We are so blessed with human talent and resources that we can meet the challenges and succeed.

How did this crisis get started? The effort to identify the sources of the problem can easily lead us into staggering complexity, but the outline is simple. In the first place, the environment included a prolonged period of Fed-provided, exceptionally easy money.

People and institutions behave more responsibly when they have some of their own equity at stake, some "skin in the game." The current financial crisis emerged after this principle became virtually inoperative. In an effort to make housing more affordable, financial wizards, with the implicit backing of the federal government, figured out how to give houses away: no down payment and few if any questions asked about ability to service loans.

When you give something away, demand rises rapidly, as do prices, so rapidly rising prices made the easy terms look reasonable and seemed to validate them. Meanwhile, financial intermediaries packaged these mortgages and traded in them, in all too many cases with very high (30 or more-to-1) leverage. Once again, there was little equity in these deals.

All this separated the originator of the mortgage (that is, the risk) from the eventual holders and, at the same time, created financial instruments that were obscure. So people had little equity in the game but made lots of money even while not knowing exactly what they were doing. As Charles Prince, then head of Citicorp, said, "[A]s long as the music is playing, you've got to get up and dance." What a party!

And now we have the hangover: bailouts of many financial institutions by the taxpayers. The Fed and the Treasury already have exposures in the trillions of dollars.

These events are not isolated instances that sprung from the blue. Rather, they're the product of our failure to deal adequately with clear problems and to think ahead about future consequences. So now, think long.

Taken as a whole, our society has been living beyond its means for a long time now. The fact that we consume more than we produce is made possible by the ever-larger deficits in our trade balance with the rest of the world. We import more than we export. This negative balance of trade has its financial counterpart.

In recent times, we have failed to save enough to finance our own investments. This is true of Americans as individuals and families, but also of our biggest collective effort -- the federal government. Deficits, acts of dis-saving, have, with the exception of a few years, become chronic. When we support our activities by financing from abroad, we are selling to others a piece of our future. So, with all due recognition of the immediate need to encourage spending, let us not forget the long-term need for a return to a pattern of higher savings.

The fact is well known and well documented that Social Security will soon reach a point where the large inflow of money generated by the payroll tax is insufficient to cover promised benefits. This prospect presents a major budget problem. We know how to fix this problem in the long run without threat to the incomes of older people and without increasing the payroll tax. This can be done by using one of several possible changes in the method of indexing benefits and, eventually, indexing retirement age to account for greater longevity, with workers 65 or older and with workers at the low end of the income scale completely protected.

We know that the costs of our health-care system are spinning out of control, and we also know that a large amount of that money is wasted. We need a system that avoids those wastes, improves quality, keeps costs under control, and is universally available. There are paths to these goals. We also know that wage and price controls, with their important, adverse consequences in the long run, are not among them.

We know that the reason for our impressive health and longevity compared with earlier years is largely attributable to a breathtaking run of basic research and its application. In some cases progress is slow, and in others it is dramatic, as in the conquest of polio with the Salk vaccine. Funding for this basic research effort and for basic science generally is an investment in our future.

We have been on an energy roller-coaster for the last four decades or so. This time, more brilliant scientific minds than ever are at work, and more ideas with genuine applicability are appearing. Keep this effort going so that we can get on to a steady course of a more secure and less threatening energy future.

We are blessed with opportunities and with inventive and productive people. If we roll up our sleeves today, we will emerge stronger and with confidence in our future. A competent, sustained effort to deal effectively with long-term issues is essential to reap real benefits from any immediate stimulus to the economy.

Mr. Shultz, secretary of labor (1969-70), secretary of Treasury (1972-74) and secretary of state (1982-89) is a fellow at Stanford University's Hoover Institution.

Look at the Time

Look at the Time

In Congress and the boardroom, failure to recognize a new era.

• By PEGGY NOONAN

It looks like a win but feels like a loss.

The party-line vote in favor of the stimulus package could have been more, could have produced not only a more promising bill but marked the beginning of something new, not a postpartisan era (there will never be such a thing and never should be; the parties exist to fight through great political questions) but a more bipartisan one forced by crisis and marked by—well, let's call it seriousness.

President Obama could have made big history here. Instead he just got a win. It's a missed opportunity.

It's a win because of the obvious headline: Nine days after inauguration, the new president achieves a major Congressional victory, House passage of an economic stimulus bill by a vote of 244-188. It wasn't even close. This is major.

But do you know anyone, Democrat or Republican, dancing in the street over this? You don't. Because most everyone knows it isn't a good bill, and knows that its failure to receive a single Republican vote, not one, suggests the old battle lines are hardening. Back to the Crips versus the Bloods. Not very inspiring.

The president will enjoy short-term gain. In the great circle of power, to win you have to look like a winner, and to look like a winner you have to win. He did and does. But for the long term, the president made a mistake by not forcing the creation of a bill Republicans could or should have supported.

Consider the moment. House Republicans had conceded that dramatic action was needed and had grown utterly supportive of the idea of federal jobs creation on a large scale. All that was needed was a sober, seriously focused piece of legislation that honestly tried to meet the need, one that everyone could tinker with a little and claim as their own. Instead, as Rep. Mike Pence is reported to have said to the president, "Know that we're praying for you. . . . But know that there has been no negotiation [with Republicans] on the bill—we had absolutely no say." The final bill was privately agreed by most and publicly conceded by many to be a big, messy, largely off-point and philosophically chaotic piece of legislation. The Congressional Budget Office says only 25% of the money will even go out in the first year. This newspaper, in its analysis, argues that only 12 cents of every dollar is for something that could plausibly be called stimulus.

What was needed? Not pork, not payoffs, not eccentric base-pleasing, group-greasing forays into birth control as stimulus, as the speaker of the House dizzily put it before being told to remove it.

"Business as usual." "That's Washington." But in 2008 the public rejected business as usual. That rejection is part of what got Obama elected.

Instead the air of D.C. dithering continues, and this while the Labor Department reported Thursday what everyone knew was coming, increased unemployment. The number of continuing claims for unemployment insurance as of Jan. 17 was 4.78 million, the highest in the 42 years they've been keeping records. Starbucks, Time Warner, Home Depot, Pfizer: The AP's count is 125,000 layoffs since January began.

People are getting the mood of the age in their inboxes. How many emails have you received the past few months from acquaintances telling you in brisk words meant to communicate optimism and forestall pity that "it's been a great ride," but they're "moving on" to "explore new opportunities"? And there's a broad feeling one detects, a kind of psychic sense, some sort of knowledge in the collective unconscious, that we lived through magic times the past half-century, and now the nonmagic time has begun, and it won't be over next summer. That's not the way it will work. It will last a while.

There's a sense among many, certainly here in New York, that we somehow had it too good too long, a feeling part Puritan, part mystic and obscurely guilty, that some bill is coming due. Hard to get a stimulus package that addresses that. (The guilt was part of the power of Blago. He's the last American who doesn't feel guilt. He thinks something is moral because he did it. He's like a good-natured Idi Amin, up there yammering about how he's a poor boy who only wanted to protect the people of Chicago from the flu. You wish you could believe it! You wish he really were what he is in his imagination, a hero battling dark forces against the odds.)

I think there is an illness called Goldmansachs Head. I think it's in the DSM. When you have Goldmansachs Head, the party's never over. You take private planes to ask for bailout money, you entertain customers at high-end spas while your writers prep your testimony, you take and give huge bonuses as the company tanks. When you take the kids camping, you bring a private chef. Goldmansachs Head is Bernie Madoff complaining he's feeling cooped up in the penthouse. It is the delusion that the old days continue and the old ways prevail and you, Prince of the Abundance, can just keep rolling along. Here is how you know if someone has GSH: He has everything but a watch. He doesn't know what time it is.

I remember the father in the movie script of "Dr. Zhivago," inviting what's left of his family, huddled in rooms in what had been their mansion, picking up the stump of a stogie and inviting them to watch the lighting of "the last cigar in Moscow."

When you have GSH, you never think it's the last cigar.

But you don't have to be on Wall Street to have GSH. Congress has it too. That's what the stimulus bill was about—not knowing what time it is, not knowing the old pork-barrel, group-greasing ways are over, done, embarrassing. When you create a bill like that, it doesn't mean you're a pro, it doesn't mean you're a tough, no-nonsense pol. It means you're a slob.

That's how the Democratic establishment in the House looks, not like people who are responding to a crisis, or even like people who are ignoring a crisis, but people who are using a crisis. Our hopeful, compelling new president shouldn't have gone with this bill. He made news this week by going to the House to meet with Republicans. He could have made history by listening to them.

A final point: In the time since his inauguration, Mr. Obama has been on every screen in the country, TV and computer, every day. He is never not on the screen. I know what his people are thinking: Put his image on the age. Imprint the era with his face. But it's already reaching saturation point. When the office is omnipresent, it is demystified. Constant exposure deflates the presidency, subtly robbing it of power and making it more common. I keep the television on a lot, and somewhere in the 1990s I realized that Bill Clinton was never not in my living room. He was always strolling onto the stage, pointing at things, laughing, talking. This is what the Obama people are doing, having the boss hog the screen. They should relax. The race is long.

As a matter of fact, they should focus on that: The race is long. Run seriously.

A Warning to the President

A Warning to the President

The cost of abdicating to Nancy Pelosi.

Barack Obama promised to end the "politics of division," unite Washington's factions and overcome partisanship. And what do you know -- so far he has: The President's stimulus plan generated bipartisan House opposition, with every Republican and 11 Democrats voting against it on Wednesday. It passed 244-188.

The political class is feigning shock that Mr. Obama's stylistic olive branches to the GOP -- cocktail hour at the White House, cutting a line item for shrubbery on the National Mall -- failed to peel off even a single vote across the aisle. The chatter is that Republicans were taking a great political risk to oppose a President with 70%-plus approval ratings on his first piece of legislation.

But the real risk here is to Mr. Obama, and it isn't from Republicans. It's from his fellow Democrats. Given the miserable economy and the Beltway's neo-Keynesian policy consensus, a true compromise would have gathered overwhelming support. But rather than use Mr. Obama's political capital to craft such a deal, the White House abdicated to Speaker Nancy Pelosi. House Democrats proceeded to ignore all GOP suggestions as they wrote the bill, shedding tax cuts while piling on spending for every imaginable interest group. The bipartisan opposition reflects how much the Pelosi bill became a vehicle for partisan social policy rather than economic stimulus.

Genuine bipartisanship means compromises on policy, not photo-ops and hand shakes. The last two Democratic Presidents, Jimmy Carter and Bill Clinton, also came to power with big Democratic majorities in Congress, veered far to the left on policy, and quickly came undone. To adapt White House Chief of Staff Rahm Emanuel's now famous line, a 70% approval rating is a terrible thing to waste on the ideas of Henry Waxman and Pete Stark.

Democratic Stealth Care

Democratic Stealth Care

With the nation preoccupied by the financial crisis, Democrats have been quietly working to nationalize health care.

• By KIMBERLEY A. STRASSEL

Tom Daschle is still waiting to be confirmed as secretary of health and human services, not that he's in any rush. Democrats are already enacting his and Barack Obama's agenda of government-run health care -- entirely on the QT.

Martin Kozlowski

This was the real accomplishment of this week's House vote for the $819 billion "stimulus," and is the overriding theme of Congress's first month. With the nation occupied with the financial crisis, and with that crisis providing cover, Democrats have been passing provision after provision to nationalize health care.

If Democrats learned anything from the HillaryCare defeat, it was the danger of admitting to their wish to federalize the health market. Since returning to power, they've pursued a new strategy: to stealthily and incrementally expand government control. "What no one is paying attention to in the [stimulus]," says Wisconsin Rep. Paul Ryan, "is that Democrats are making a big grab at the health-care sector."

It began one week after the swearing-in, when Nancy Pelosi whipped through a big expansion of the State Children's Health Insurance Program. The Schip bill was Democrats' first stab at stealth expansion, unveiled in 2007, though vetoed by George W. Bush.

Initially designed for children of working-poor families, this new Super-Schip will be double in size, and even kids whose parents make $65,000 a year will be eligible. The program will also now cover pregnant women and automatically enroll their new arrivals. The Congressional Budget Office estimates 2.4 million individuals will drop their private coverage for the public program.

Still, it's the "stimulus" that has proven the real gift horse -- a behemoth that has allowed Democrats to speed up the takeover of health care under cover of an economic crisis. They initially claimed, for instance, the "stimulus" would provide Medicaid money to states struggling to pay existing bills. What in fact it does is dramatically expand the number of Americans who qualify for Medicaid.

Under "stimulus," Medicaid is now on offer not to just poor Americans, but Americans who have lost their jobs. And not just Americans who have lost their jobs, but their spouses and their children. And not Americans who recently lost their jobs, but those who lost jobs, say, early last year. And not just Americans who already lost their jobs, but those who will lose their jobs up to 2011. The federal government is graciously footing the whole bill. The legislation also forbids states to apply income tests in most cases.

House Democrat Henry Waxman was so thrilled by this blowout, it was left to Republicans to remind him that the very banking millionaires he dragged to the Hill last year for a grilling would now qualify for government aid. His response? A GOP proposal to limit subsidies to Americans with incomes under $1 million was accepted during markup, but had disappeared by final passage. In this new health-care nirvana, even the rich are welcome. CBO estimates? An additional 1.2 million on the federal Medicaid dime in 2009.

The "stimulus" also hijacks Cobra, a program that lets the unemployed retain access to their former company health benefits -- usually for about 18 months. The new stimulus permits any former employee over the age of 55 to keep using Cobra right up until they qualify for Medicare at age 65. And here's the kicker: Whereas employees were previously responsible for paying their health premiums while on Cobra, now the feds will pay 65%. CBO estimates? Seven million Americans will have the feds mostly pay their insurance bills in 2009.

The bill even takes a whack at the private market. Under the guise of money for "health technology," the legislation makes the government the national coordinator for electronic health records, able to certify what platforms are acceptable. This is an attempt to squelch a growing private market that is competing to improve transparency and let consumers compare providers and costs. In liberal-world, only government should be publishing (and setting) health-care prices.

Add it up, and Democrats may move 10 million more Americans under the federal health umbrella -- in just four weeks! Good luck ever cutting off that money. Meanwhile, the Democratic majority is gearing up for a Medicare fight, where it may broach plans to lower the eligibility age to 55. Whatever costs accrue, they'll pay for by slashing the private Medicare Advantage option.

Mr. Obama will, of course, offer his health-care reform at some point. But he's clearly happy to get what he can, when he can. Despite talk of entitlement reform, he's voiced no disapproval of this vast new health-care grab. And don't forget he chose Mr. Daschle, who appreciates stealth himself. In his 2008 book outlining his health-care reform, he offers his party two pieces of political advice: Move fast, before there can be a public debate, and write as vague a bill as possible.

Guiding all of this is the left's hope that by the time America wakes up to what's happening, it'll be too late. Democrats might be on to something.

Dodd of Indignation

Dodd of Indignation

Wall Street bonuses and sweetheart mortgages: Compare and discuss.

Senate Banking Chairman Chris Dodd has been in typically indignant form this week, opining on the financial crisis. Before his Tuesday hearing on Bernard Madoff, he demanded that regulators get to the bottom of any crime: "American investors deserve an explanation and the responsible parties must be held accountable!" And yesterday the Connecticut Senator denounced Wall Street bonuses and said, "I am urging -- in fact, not urging, demanding -- that the Treasury Department figures out some way to get the money back."

AP

Pardon us, Senator, but how about taking your own advice?

We refer to his promise to release mortgage documents for the two properties that he and his wife refinanced with Countrywide Financial in 2003. In June a former Countrywide loan officer charged that Mr. Dodd received preferential rates and had fees waived on those loans as part of a VIP program the company had for "friends" of the company's then-CEO Angelo Mozilo. Mr. Dodd first issued a denial and then, days later, acknowledged that he was a "VIP" with Countrywide but said he thought it was "more of a courtesy." In late June he pledged to make all pertinent documents public "at some point." We're still waiting.

Dodd Bedfellows

• Dodd and Countrywide 10/10/2008 – The Senator should take the witness stand.
• Mortgage VIPs 06/25/2008 – Sweetheart deals are just a phone call away.
• Angelo's Angel 06/19/2008 – The senate bailout for Countrywide needs more scrutiny.
• Congress and the Countrywide Scandal 06/18/2008 – Some senators want a bailout for big political donors. What a surprise.
• Beltwaywide Financial 06/16/2008 – The new ARMs: Angelo-rated mortgages for senators.

Increasing accountability is critical to rebuilding public trust in the financial system, as the Senator keeps telling us. Countrywide was one of the most irresponsible lenders in the subprime frenzy but it did not act alone. One reason it could pump out so much bad paper is because Fannie Mae and Freddie Mac were around to buy it and then resell it with a taxpayer guarantee. Messrs. Dodd and Mozilo were two of Fan and Fred's biggest supporters, with Mr. Dodd playing a role in pushing the companies to take on "affordable housing" loans from outfits like Countrywide.

Perhaps Connecticut's longest serving Senator was bamboozled by Mr. Mozilo and used bad judgment in backing the reckless lender. But loan officer Robert Feinberg, who oversaw Countrywide's VIP program, says Mr. Dodd knew he was getting favors from Mr. Mozilo. Mr. Feinberg says his job was to remind beneficiaries at every step of the process that they were getting a special deal because they were "Friends of Angelo." If true, it would mean that the Senator had a clear conflict of interest as a legislator promoting the business of a company doing him personal favors. Recall the Ted Stevens precedent.

The way to clear this up is to see all the documents and get Mr. Dodd to explain what happened, preferably under oath. But Mr. Dodd has been stonewalling. In July he said he would release the documents after President Bush signed the first housing bailout bill. Nothing. Then in October he said he wanted to wait until the Senate Ethics Committee completed its investigation.

That could take a while. On July 28 Ethics Chairman Barbara Boxer (D., Calif.) and Vice Chairman John Cornyn (R. Texas) issued a press release that explained "it has been the long-standing policy of the committee to defer investigation into matters where there is an active and ongoing criminal investigation and proceeding so as not to interfere in that process."

Earlier this month, Mr. Dodd's office confirmed that the law firm Perkins Coie has provided "ethics advice" to him, and we can't help but wonder what that entailed. The delay at the Ethics Committee in no way impedes Mr. Dodd from honoring his disclosure pledge. It's in his political interest to do so, assuming he has nothing to hide. A recent Quinnipiac poll showed his approval rating down to an all-time low of 47%. Rare is the politician who could clear his name overnight and chooses not to.