Tuesday, February 10, 2009

I Resign From the Mont Pelerin Society

by Paul Craig Roberts

I have come to the conclusion that the Mont Pelerin Society is no longer an effective force for freedom, becoming instead another tool in behalf of US hegemony, ringing Russia with US military bases and puppet governments in the name of "supporting democracy." As far as I am aware, the MPS has not addressed the Bush administration's assault on US civil liberties or the disrespect the Bush administration has shown for the US Constitution and international law, particularly the Geneva Conventions. Nor has the society taken exception to US wars of aggression in behalf of undeclared agendas.

I don't see how the society can function in behalf of liberty when its long-time Treasurer is so closely associated with the Republican Party, now thoroughly neoconized. The alacrity with which the Heritage Foundation jumped on the Bush administration's propaganda bandwagon about "the Russian invasion of Georgia" epitomizes the new association of "freedom" with American hegemony.

As Secretary of State Rice put it (according to Matthew Lee, AP News, August 18, 16:17 EST), "'We are not going to allow Russia to draw a new line at those states that are not yet integrated into the trans-Atlantic structures', she said, referring to Georgia and Ukraine, which have not yet joined NATO or the European Union but would like to."

But, of course, the US and its NATO allies are going to draw a line around Russia.

What does the Caucasus have to do with the North Atlantic? Why is NATO, which was created to keep the Soviet Army out of Western Europe, still around almost two decades after the disappearance of the Soviet Union? Why has its membership doubled, and why is it being extended to the Black Sea? Is Mongolia next? The US strategic objective – to ring Russia with bases and puppet states in order to exercise hegemony over Russia – will lead to war, the destruction of liberty and perhaps life on earth. This gratuitously insane neoconservative foreign policy is one that will lead to nuclear war. It stands in total contradiction to the alleged values of the Mont Pelerin Society.

As every great libertarian and the founding members of the MPS acknowledged, war is the greatest enemy of liberty.

The US used force to rip Kosovo out of Serbia and to hand it to Muslim drug runners in exchange for a US military base. The US bombed Serbian civilians and accused the Serbians of war crimes. South Ossetia has been autonomous since the early 1990s from which date Russian and Georgian peacekeepers have been in S. Ossetia. The US puppet president of Georgia attacked S. Ossetian civilians with his American and Israeli trained and equipped army, killing about 2,000 and driving 30,000 into Russia, and the Georgian peacekeepers turned their weapons upon the Russian peacekeepers. The American puppet, installed by the neocon National Endowment for Democracy, committed this war crime in order to ethnically cleanse S. Ossetia of Russians and to end the separatist movement in order to smooth Georgia's entrance into NATO.

The "Russian invasion" was a response to this US-sponsored war crime. No real fact or truthful account can be found in the Heritage presentation or the US media. I do not want to be associated with an organization that is a front for American hegemony and wars based on propaganda, lies, and deceit. If Milton Friedman and F.A. Hayek were still alive, I am certain they would join me in resignation.

PAUL CREIG ROBERTS ON THE COLLAPSE OF THE DOLLAR

Driving Over the Cliff

The Washington Morons

Driving Over the Cliff

By PAUL CRAIG ROBERTS

Is there intelligent life in Washington, DC? Not a speck of it.

The US economy is imploding, and Obama is being led by his government of neconservatives and Israeli agents into a quagmire in Afghanistan that will bring the US into confrontation with Russia, and possibly China, American’s largest creditor.

The January payroll job figures reveal that last month 20,000 Americans lost their jobs every day.

In addition, December’s job losses were revised up by 53,000 jobs from 524,000 to 577,000. The revision brings the two-month job loss to 1,175,000. If this keeps up, Obama’s promised three million new jobs will be wiped out by job losses.

Statistician John Williams (shadowstats.com) reports that this huge number is an understatement. Williams notes that built-in biases in seasonal adjustment factors caused a 118,000 understatement of January job losses, bringing the actual January job loss to 716,000 jobs.

The payroll survey counts the number of jobs, not the number of employed as some people have more than one job. The Household Survey counts the number of people who have jobs. The Household Survey shows that 832,000 people lost their jobs in January and 806,000 in December, for a two month reduction of Americans with jobs of 1,638,000.

The unemployment rate reported in the US media is a fabrication. Williams reports that in changes since 1980, particularly in the Clinton era, "‘discouraged workers’ those who had given up looking for a job because there were no jobs to be had--were redefined so as to be counted only if they had been ‘discouraged’ for less than a year. This time qualification defined away the bulk of the discouraged workers. Adding them back into the total unemployed, actual unemployment, [according to the unemployment rate methodology used in 1980] rose to 18% in January, from 17.5% in December.”

In other words, without all the manipulations of the data, the US unemployment rate is already at depression levels.

How could it be otherwise given the enormous job loss from offshored jobs. It is impossible for a country to create jobs when its corporations are moving production for the American consumer market offshore. When they move the production offshore, they shift US GDP to other countries. The US trade deficit over the past decade has reduced US GDP by $1.5 trillion dollars. That is a lot of jobs.

I have been reporting for years that university graduates have had to take jobs as waitresses and bartenders. As over-indebted consumers lose their jobs, they will visit restaurants and bars less frequently. Consequently, those with university degrees will not even have jobs waiting on tables and mixing drinks.

US policymakers have ignored the fact that consumer demand in the 21st century has been driven, not by increases in real income, but by increased consumer indebtedness. This fact makes it pointless to try to stimulate the economy by bailing out banks so that they can lend more to consumers. The American consumers have no more capacity to borrow.

With the decline in the values of their principal assets--their homes--with the destruction of half of their pension assets, and with joblessness facing them, Americans cannot and will not spend.

Why bail out GM and Citibank when the firms are moving as many operations offshore as they possibly can?

Much of US infrastructure is in poor shape and needs renewing. However, infrastructure jobs do not produce goods and services that can be sold abroad. The massive commitment to infrastructure does nothing to help the US reduce its huge trade deficit, the financing of which is becoming a major problem. Moreover, when the infrastructure projects are completed, so are the jobs.

At best, assuming Mexican immigrants do not get most of the construction jobs, all Obama’s stimulus program can do is to reduce the number of unemployed temporarily.

Unless US corporations can be required to use American labor to produce the goods and services that they sell in American markets, there is no hope for the US economy. No one in the Obama administration has the wits to address this problem. Thus, the economy will continue to implode.

Adding to the brewing disaster, Obama has been deceived by his military and neoconservative advisers into expanding the war in Afghanistan, a large, mountainous country. Obama intends to use the draw-down of US soldiers in Iraq to send 30,000 more American troops to Afghanistan. This would bring the US forces to 60,000 -- 600,000 fewer than US Marine Corps and US Army counterinsurgency guidelines define as the minimum number of soldiers necessary to bring success in Afghanistan--and less than half as many as the army that was unable to occupy Iraq.

The Iranians had to bail out the Bush regime by restraining its Shi’ite allies and encouraging them to use the ballot box to attain power and push out the Americans. In Iraq the US troops only had to fight a small Sunni insurgency drawn from a minority of the population. Even so, the US “prevailed” by putting the insurgents on the US payroll and paying them not to fight. The withdrawal agreement was dictated by the Shi’ites. It was not what the Bush regime wanted.

One would think that the experience with the “cakewalk” in Iraq would make the US hesitant to attempt to occupy Afghanistan, an undertaking that would require the US to occupy parts of Pakistan. The US was hard pressed to maintain 150,000 troops in Iraq. Where is Obama going to get another half million soldiers to add to the 150,000 to pacify Afghanistan?

One answer is the rapidly growing massive US unemployment. Americans will sign up to go kill abroad rather than be homeless and hungry at home.

But this solves only half of the problem. Where does the money come from to support an army in the field of 650,000, an army 4.3 times larger than US forces in Iraq, a war that has cost us $3 trillion in out-of-pocket and already incurred future costs. This money would have to be raised in addition to the $3 trillion US budget deficit that is the result of Bush’s financial sector bailout, Obama’s stimulus package, and the rapidly failing economy. When economies tank, as the American one is doing, tax revenues collapse. The millions of unemployed Americans are not paying Social Security, Medicare, and income taxes. The stores and businesses that are closing are not paying federal and state income taxes. Consumers with no money or credit to spend are not paying sales taxes.

The Washington Morons, and morons they are, have given no thought as to how they are going to finance a fiscal year 2009 budget deficit of some two to three trillion dollars.

The practically nonexistent US saving rate cannot finance it.

The trade surpluses of our trading partners, such as China, Japan, and Saudi Arabia, cannot finance it.

The US government really has only two possibilities for financing its budget deficit. One is a second collapse in the stock market, which would drive the surviving investors with what they have left into “safe” US Treasury bonds. The other is for the Federal Reserve to monetize the Treasury debt.

Monetizing the debt means that when no one is willing or able to purchase the Treasury’s bonds, the Federal Reserve buys them by creating bank deposits for the Treasury’s account.

In other words, the Fed “prints money” with which to buy the Treasury’s bonds.

Once this happens, the US dollar will cease to be the reserve currency.

In addition, China, Japan and Saudi Arabia, countries that hold enormous quantities of US Treasury debt in addition to other US dollar assets, will sell, hoping to get out before others.

The US dollar will become worthless, the currency of a banana republic.

The US will not be able to pay for its imports, a serious problem for a country dependent on imports for its energy, manufactured goods, and advanced technology products.

Obama’s Keynesian advisers have learned with a vengeance Milton Friedman’s lesson that the Great Depression resulted from the Federal Reserve permitting a contraction of the supply of money and credit. In the Great Depression good debts were destroyed by monetary contraction. Today bad debts are being preserved by the expansion of money and credit, and the US Treasury is jeopardizing its credit standing and the dollar’s reserve currency status with enormous quarterly bond auctions as far as the eye can see.

Meanwhile, the Russians, overflowing with energy and mineral resources, and not in debt, have learned that the US government is not to be trusted. Russia has watched Reagan’s successors attempt to turn former constituent parts of the Soviet Union into US puppet states with US military bases. The US is trying to ring Russia with missiles that neutralize Russia’s strategic deterrent.

Putin has caught on to “comrade wolf.” He has succeeded in having the president of Kyrgyzstan, a former part of the Soviet Union, evict the US from its military base. This base is essential to America’s ability to supply its soldiers in Afghanistan.

To stop America’s meddling in Russia’s sphere of influence, the Russian government has created a collective security treaty organization comprised of Russia, Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Tajikistan. Uzbekistan is a partial participant.

In other words, Russia has organized central Asia against US penetration.

To whose agenda is President Obama being hitched? Writing in the English language version of the Swiss newspaper, Zeit-Fragen, Stephen J. Sniegoski reports that leading figures of the neocon conspiracy--Richard Perle, Max Boot, David Brooks, and Mona Charen--are ecstatic over Obama’s appointments. They don’t see any difference between Obama and Bush/Cheney.

Not only are Obama’s appointments moving him into an expanded war in Afghanistan, but the powerful Israel Lobby is pushing Obama toward a war with Iran.

The unreality in which he US government operates is beyond belief. A bankrupt government that cannot pay its bills without printing money is rushing headlong into wars in Afghanistan, Pakistan, and Iran. According to the Center for Strategic and Budgetary Analysis, the cost to the US taxpayers of sending a single soldier to fight in Afghanistan or Iraq is $775,000 per year!

Obama’s war in Afghanistan is the Mad Hatter’s Tea Party. After seven years of conflict, there is still no defined mission or endgame scenario for US forces in Afghanistan. When asked about the mission, a US military official told NBC News, “Frankly, we don’t have one.” NBC reports: “they’re working on it.”

Speaking to House Democrats on February 5, President Obama admitted that the US government does not know what its mission is in Afghanistan and that to avoid “mission creep without clear parameters,” the US “needs a clear mission.”

How would you like to be sent to a war, the point of which no one knows, including the commander-in-chief who sent you to kill or be killed? How, fellow taxpayers, do you like paying the enormous cost of sending soldiers on an undefined mission while the economy collapses?

Memo From Middle America

Memo From Middle America By Allan Wall

Wargaming Mexico—Will The U.S. Have To Invade?

In Mexico, the ongoing battles between the drug cartels, and between the drug cartels and the government, go on and on—and the body count continues to mount.

The statistics are grim indeed, and getting grimmer . In calendar year 2008, there were 5,612 Mexicans killed in narco-related violence, doubling the 2007 figure of 2,700.

In 2009, the killings began almost immediately, with the first cartel execution taking place about half an hour after midnight. On January 27th, Mexico’s paper of record El Universal reported that since January 1st, there had already been 400 cartel-related executions. That’s 400 in less than a month! By the time you read this, it’s almost certain to be more. [En 25 días suman ya 400 ejecuciones, January 27, 2009]

Most of those killed in cartel violence are either (a) security personnel, that is, police or soldiers, (b) cartel operatives, or (c) both. Nevertheless, the violence has begun to spill over into the general population.

When I visited Mexico during Christmas vacation (my first visit to Mexico after having moved back to the U.S.) I didn’t personally witness any such violence. However, in the metropolitan area in which I was visiting, there was a shootout in an exclusive neighborhood and another shootout downtown, in which gunfire endangered the lives of shoppers in a traditional marketplace.

Where is all this going? Nobody knows of course, but a number of analysts have tried to figure it out.

A recent scenario that has already attracted a lot of attention, including a response from the Mexican government, came from the United States Joint Forces Command [USJFC], which is the military command overseeing most military forces in the continental U.S. According to its official website,

"… the command helps national decision makers make informed choices on supporting operations, assists military commanders to identify potential readiness problems and develop appropriate strategies and maintain the nation's forces at the highest possible level of readiness."

The USJFC recently released its 2008 analysis, the "The JOE 2008" [PDF]("JOE" being an acronym for Joint Operating Environment).

This document, released Nov. 25th, 2008, contains an analysis of the world situation along with some speculation on possible future scenarios.

Regarding Latin America in general, the report has this to say (on page 38):

“A serious impediment to growth in Latin America remains the power of criminal gangs and drug cartels to corrupt, distort, and damage the region’s potential. The fact that criminal organizations and cartels are capable of building dozens of disposable submarines in the jungle and then using them to smuggle cocaine, indicates the enormous economic scale of this activity. This poses a real threat to the national security interests of the Western Hemisphere.”

Then, zeroing in on Mexico:

"In particular, the growing assault by the drug cartels and their thugs on the Mexican government over the past several years reminds one that an unstable Mexico could represent a homeland security problem of immense proportions to the United States."

Later, on page 36, it says that

"In terms of worst-case scenarios for the Joint Force and indeed the world, two large and important states bear consideration for a rapid and sudden collapse: Pakistan and Mexico."

After discussing Pakistan, the USJFC presents its Mexico scenario:

"The Mexican possibility may seem less likely, but the government, its politicians, police, and judicial infrastructure are all under sustained assault and pressure by criminal gangs and drug cartels. How that internal conflict turns out over the next several years will have a major impact on the stability of the Mexican state. Any descent by Mexico into chaos would demand an American response based on the serious implications for homeland security alone."

It’s important to point out that the JOE report is not predicting a "rapid and sudden collapse" of Mexico. It is, however, presenting the possibility as a worst-case scenario. After all, the purpose of the report is to analyze the situations and set out scenarios.

Unsurprisingly, the report was rehashed and recycled through various media—and rejected by the Mexican government.

Mexican Foreign Minister Patricia Espinosa, responding to the USFCG report, (and another by General Barry McCaffrey) pointed out (correctly) that most of the violence is occurring in only six Mexican states, and that 93% of those killed were either drug dealers or security forces, which means that only 7% were "innocent bystanders". [Mexico Rebuffs ‘Failed State’ Claim, By Adam Johnson Financial Times, January 18, 2009]

That’s all true, and helps to put the situation in perspective. But it’s still bad enough. As mentioned earlier, the "innocent bystanders" are in more and more danger.

The highhanded impunity of the narco-gangs to do as they please is still unabated, as the gruesome murders continue to pile up. Massive corruption within various Mexican police forces frustrate the government’s attempt to get control of the situation.

Mexico has a way of frustrating tidy predictions. Nobody can say with authority where the situation will wind up because there are many factors in play.

As the saying goes, there is a lot of ruin in a nation, and I personally don’t see a rapid governmental collapse as imminent. (Brenda Walker, my VDARE.COM colleague, disagrees).

But one has to consider the possibilities, and yes, even consider worst-case scenarios. After all, it doesn’t take a big imagination to guess where refugees from a breakdown in Mexico would be heading. A big hint—most of them would not likely be fleeing to Guatemala!

Plus, we don’t have to speculate about Mexico becoming a security threat to the United States. It already is a security threat to the United States, with illegal immigration, drug trafficking and general lawlessness along the border. Moreover, Mexican cartels are already operating north of the border.

So while we can wish Mexico’s President Calderon well in gaining control of the situation—and I certainly do—our policy-makers need to be working on some viable contingency plans in case a worst-case scenario—or even just a worse scenario than the current one—come to pass.

We already know that we need to get control of our border. That’s a given, regardless of what happens. The best way to show Mexico and the rest of the world that we are serious about that is to put the U.S. military on the border.

I used to be against putting the military on the border, because I didn’t think patrolling the Mexican border was the role of the military. Maybe it wouldn’t be, under normal situations. But this situation isn’t normal.

Besides, the border is already militarized—on the Mexican side! (See my previous article on the subject here .)

Since the Mexican army is already on the south side of the border (with repeated crossings by Mexican soldiers and/or facsimiles thereof) ours might as well be on our side of the border. It’s only logical, and would stabilize the situation if done properly.

When I was serving in Iraq with the National Guard in 2005, I wrote up a proposal for putting the National Guard on the border. You can read it here .

Coincidentally, after I returned there was a National Guard deployment to the border—sort of, but not really what I had proposed. It wasn’t serious enough. What we really need is a massive, permanent, and serious joint force deployment on the border.

Such a deployment could be effective regardless of wherever else our military forces are engaged worldwide. That is, if we continue to deploy troops to the Middle East, which we are likely to do for some time, then border duty is good training. After all, much of the Southwest physically resembles much of the Middle East. And if, in the future, we withdraw troops from the Middle East, we can deploy more troops on the border. Either way, it’s a winning strategy.

Another action we can take that might actually improve the situation: completely reconsider our narcotics policy. We need to take a close look at drug prohibition, asking ourselves if it’s really the best way to deal with the very real problems of drug abuse. Such an analysis involves thinking outside the box and defying longstanding taboos, neither of which is popular in the political world.

On the U.S. side of the border, our government’s "War on Drugs" has been an abject failure. It hasn’t reduced the consumption of illegal drugs, and has endangered our civil liberties. Plus, it raises unrealistic hopes in what our form of government should even be expected to handle, in solving this and other problems. As Ron Paul put it so succinctly on the Morton Downey Jr. show back in 1988, "The government can’t make you a better person." (For an entertaining video of the exchange, view here.)

Our War on Drugs bears many historical similarities to the Prohibition of Alcohol of a previous generation, which also involved Americans buying the prohibited substance from Mexico!

But at least back in the Prohibition days, U.S. lawmakers had enough respect for the Constitution that they felt the need to amend it in order to prohibit alcohol (the 18th Amendment ) and later to repeal prohibition with the 21st Amendment. Nowadays, our lawmakers don’t even give a hoot about justifying the War on Drugs (and many other policies) constitutionally.

South of the border, our failed War on Drugs has helped to cause the current situation, by financing the warring drug cartels. It’s no coincidence that there is so much violence in border towns such as Tijuana and Ciudad Juarez. Those cities are right next to the U.S., and the cartels are fighting over drug routes into the United States, their biggest market.

So what’s the better strategy to help Mexico’s war on the cartels? Is it giving Mexico weaponry, or is it legalizing drugs?

Let’s face it; a big part of the problem is the enormous demand for drugs in the United States. It’s not a simple question of evil Mexican drug dealers and innocent Americans. A significant proportion of the American populace is voluntarily buying narcotics. Americans are thus the principal financiers of Mexican drug cartels. And drug prohibition drives the prices up, providing yet more incentives for Mexican drug dealers and the cartels to sell more drugs and fight for their smuggling routes.

And with the increasing integration of our own government with that of Mexico, we pressure Mexico to go after the cartels when we can’t even reduce demand!

The late Milton Friedman was a critic of the war on drugs, and the deleterious effects it has on other countries. In 1998, Friedman described it thusly:

"Our drug policy has led to thousands of deaths and enormous loss of wealth in countries like Colombia, Peru and Mexico, and has undermined the stability of their governments. All because we cannot enforce our laws at home. If we did, there would be no market for imported drugs. There would be no Cali cartel. The foreign countries would not have to suffer the loss of sovereignty involved in letting our advisers and troops operate on their soil, search their vessels and encourage local militaries to shoot down their planes. They could run their own affairs, and we, in turn, could avoid the diversion of military forces from their proper function." It’s Time to End the War on Drugs, Hoover Digest, 1998, #2

That was in 1998, when the main danger was in relatively faraway Colombia. Now, our principal problem is right next door—in Mexico. But the analysis is the same.

(Milton Friedman also said that "It’s just obvious that you can’t have free immigration and a welfare state." They didn’t listen to him on that topic either!)

And what about the weapons? While the drug smuggling goes from south to north, weapons smuggling, both countries agree, goes from north to south. The cartels obtain most of their weapons from the U.S. and bring them to Mexico, despite Mexico’s stricter gun laws.

This is a sore point with the Mexican government, whose attorney general has complained of "absurd" American gun laws.

But if you have a porous border you can’t start to get picky about who or what is crossing it, because a porous border will have illegal aliens, drug smugglers, weapons smugglers, and all sorts of other persons and contraband moving back and forth over it.

Which brings us once again to the need to get control of the border, which would help Mexico too in the long run.

The Bush administration, rather than defending and explaining our gun rights to Mexico, announced a project called Operation Gunrunner to share databases of American gun dealers with the Mexican government, potentially endangering our own citizens' rights to bear arms. And who can doubt that the Obama administration is continuing such a project?

Our ability to influence developments in Mexico is limited. But sensible and pragmatic drug and border policies would greatly improve the situation for us, and to a certain extent for Mexico as well. Drug legalization could potentially reduce the high prices and reduce the violence in Mexico. Controlling the border needs to be done anyway to stop mass illegal immigration. A serious U.S. military presence on the border could bring much-needed order and send a powerful message.

Nevertheless, we also need to be wargaming contingency plans for various worst-case scenarios. It’s about having viable plans available for use in disastrous situations we can hopefully avoid. But at least you have the plans, in case the disasters do occur.

For example, what would we do if an absolutely chaotic situation in Mexico resulted in millions of refugees streaming northward? Would we keep them out? Would we just let them in to settle wherever they liked and further destabilize our own country? Or could we temporarily settle them in refugee camps on the border, to eventually return them to Mexico?

Is somebody somewhere figuring this out?

It may even be necessary at some future point to militarily intervene in some form or fashion in Mexico itself. This ought to be a last resort, but it can’t be ruled out. Besides all the practical challenges, the danger of invading Mexico is that it would directly entangle our military in Mexican society with all its various factions and attendant complications. All sorts of no-win scenarios could result.

In such a scenario, the U.S. might actually wind up annexing Mexico. Given the current demographic composition of both countries, this could transform our population overnight (as if we’re not transforming enough already). Annexing Mexico would definitely not be like when we annexed the mostly empty Southwest back in the 19th century. If we annexed all of Mexico, in reality, Mexico would be annexing us!

So we also need to wargame possible Mexico interventions with a view of getting in, getting the job done, and getting out.

If the U.S. ever does have to invade, I’d like to volunteer to serve as American Governor of Occupation in Mexico, for as long as such a position is necessary.

It’s the least I could do. But I hope it never comes to that.

American citizen Allan Wall (email him) recently moved back to the U.S.A. after many years residing in Mexico. In 2005, Allan served a tour of duty in Iraq with the Texas Army National Guard. His VDARE.COM articles are archived here; his Mexidata.info articles are archived here and his website is here.

The Humiliation of America

The Humiliation of America

By Paul Craig Roberts

"Early Friday morning the secretary of state was considering bringing the cease-fire resolution to a UNSC vote and we didn’t want her to vote for it." Olmert said. "I said ‘get President Bush on the phone.’ They tried and told me he was in the middle of a lecture in Philadelphia. I said ‘I’m not interested, I need to speak to him now.’ He got down from the podium, went out and took the phone call."[PM: Rice left embarrassed in UN vote, By Yaakov Lappin , Jerusalem Post, January 12, 2009]

"Let me see if I understand this," wrote a friend in response to news reports that Israeli Prime Minister Olmert ordered President Bush from the podium where he was giving a speech to receive Israel’s instructions about how the United States had to vote on the UN resolution. "On September 11th, President Bush is interrupted while reading a story to school children and told the World Trade Center had been hit--and he went on reading. Now, Olmert calls about a UN resolution when Bush is giving a speech and Bush leaves the stage to take the call. There exists no greater example of a master-servant relationship."

Olmert gloated as he told Israelis how he had shamed US Secretary of State Condi Rice by preventing the American Secretary of State from supporting a resolution that she had helped to craft. Olmert proudly related how he had interrupted President Bush’s speech in order to give Bush his marching orders on the UN vote.

Israeli politicians have been bragging for decades about the control they exercise over the US government. In his final press conference, President Bush, deluded to the very end, said that the whole world respects America. In fact, when the world looks at America, what it sees is an Israeli colony.

Responding to mounting reports from the Red Cross and human rights organizations of Israel’s massive war crimes in Gaza, the United Nations Human Rights Council voted 33-1 on January 12 to condemn Israel for grave offenses against human rights.

On January 13, the London Times reported that Israelis have gathered on a hillside overlooking Gaza to enjoy the slaughter of Palestinians in what the Times calls "the ultimate spectator sport."

It is American supplied F-16 fighter jets, helicopter gunships, missiles, and bombs that are destroying the civilian infrastructure of Gaza and murdering the Palestinians who have been packed into the tiny strip of land. What is happening to the Palestinians herded into the Gaza Ghetto is happening because of American money and weapons. It is just as much an attack by the United States as an attack by Israel. The US government is complicit in the war crimes.

Yet in his farewell press conference on January 12, Bush said that the world respects America for its compassion.

  • The compassion of bombing a UN school for girls?

  • The compassion of herding 100 Palestinians into one house and then shelling it?

  • The compassion of bombing hospitals and mosques?

  • The compassion of depriving 1.5 million Palestinians of food, medicine, and energy?

  • The compassion of violently overthrowing the democratically elected Hamas government?

  • The compassion of blowing up the infrastructure of one of the poorest and most deprived people on earth?

  • The compassion of abstaining from a Security Council vote condemning these actions?

And this is a repeat of what the Israelis and Americans did to Lebanon in 2006, what the Americans did to Iraqis for six years and are continuing to do to Afghans after seven years. And still hope to do to the Iranians and Syrians.

In 2002 I designated George W. Bush "the White House Moron." If there ever was any doubt about this designation, Bush’s final press conference dispelled it.

Bush talked about connecting the dots, but Bush has failed to connect any dots for eight solid years. "Our" president was a puppet for a cabal led by Dick Cheney and a handful of Jewish neoconservatives, who took control of the Pentagon, the State Department, the National Security Council, the CIA, and "Homeland Security." From these power positions, the neocon cabal used lies and deception to invade Afghanistan and Iraq, pointless wars that have cost Americans $3 trillion, while millions of Americans lose their jobs, their pensions, and their access to health care.

"These obviously very difficult economic times," Bush said in his press conference, "started before my presidency."

Bush has plenty of liberal company in failing to connect a $3 trillion dollar war with hard times. The Center on Budget and Policy Priorities blames Bush’s tax cut, not the wars, for "the fiscal deterioration."

Bush told the White House Press Corps, a useless collection of non-journalists, that the two mistakes of his invasion of Iraq were: (1) Putting up the "mission accomplished" banner on the aircraft carrier, which, he said, "sent the wrong message," and (2) the absence of the alleged weapons of mass destruction that he used to justify the invasion.

Although Bush now admits that there were not any such weapons in Iraq, Bush said that the invasion was still the right thing to do.

The deaths of 1.25 million Iraqis, the displacement of 4 million Iraqis, and the destruction of a country’s infrastructure and economy are merely the collateral damage associated with "bringing freedom and democracy" to the Middle East.

Unless George W. Bush is the best actor in human history, he truly believes what he told the White House Press Corps.

What Bush did not explain is how America is respected when its people put a moron in charge for eight years.

Paul Craig Roberts [email him] was Assistant Secretary of the Treasury during President Reagan’s first term. He was Associate Editor of the Wall Street Journal. He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University. He was awarded the Legion of Honor by French President Francois Mitterrand. He is the author of Supply-Side Revolution : An Insider's Account of Policymaking in Washington; Alienation and the Soviet Economy and Meltdown: Inside the Soviet Economy, and is the co-author with Lawrence M. Stratton of The Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of Justice. Click here for Peter Brimelow’s Forbes Magazine interview with Roberts about the recent epidemic of prosecutorial misconduct.

Obama's Stimulus Rope-a-Dope

Obama's Stimulus Rope-a-Dope

Barack Obama is nothing if not a master rope-a-doper. For months last year, anxious liberals pleaded with him to respond to John McCain’s lacerating attacks. And, for months, Obama soared above the fray. Then, in early September, the McCain campaign squeezed out two ludicrously dishonest ads—accusing Obama of force-feeding sex education to kindergarteners and of calling Sarah Palin a pig. The press screamed bloody murder—Joe Klein labeled the former “one of the sleaziest ads I’ve ever seen;” Joy Behar of “The View” personally told McCain they were “lies.” At which point Obama saw an opportunity. With the media having pronounced McCain the aggressor and him the victim, Obama began to wail away—on healthcare, on McCain’s age, even Charles Keating—with virtual impunity.

My sense is that we’re seeing something similar play out with the stimulus. For weeks now, Obama has soared above the fray—inviting dour-looking Republicans to the White House for cookies and patiently hearing them out on Capitol Hill. Once again, the Republicans have exploited this stance, notching a series of tactical victories, like their unanimous no-vote in the House last week. And, once again, liberals have panicked. “[W]hy in these desperate times does he seem to care so much about being liked by the side he defeated?” Tina Brown wondered.

But complaints like this miss what’s been accomplished these last few weeks: Obama has completely defined the stimulus narrative on his own terms. To the average voter, Obama has been earnest and conciliatory while the Republicans have been cynical, self-serving, and puerile. Which, if the past is any guide, is precisely the moment he’ll start playing hardball.

In fact, Obama spent Monday basically telegraphing these intentions. The headlines from his trip to Elkhart, Indiana, focused mostly on his comments about the urgency of the stimulus. But the day’s key moment took place toward the end of the town hall meeting. After a weekend in which the White House scrupulously avoided any indication it preferred the House version of the stimulus to the stingier Senate compromise, Obama let it be known that he’d like to see some of the Senate’s education cuts restored.

Then, at his press conference last night, Obama sounded like a man who was done soliciting ideas and was ready to lay out the stark terms of debate: A vote against for the stimulus is a vote against jobs—in particular, the 4 million the plan would save or create. (He used the word “jobs” 19 times in his 1,000-word preamble.) Once the questioning began, he explicitly announced the end to the bipartisan phase of this operation: “I think that, as I continue to make these overtures, over time, hopefully that will be reciprocated,” he said. “But understand the bottom line that I've got right now, which is what's happening to the people of Elkhart and what's happening across the country. I can't afford to see Congress play the usual political games.”

Here’s what I’d guess is likely to happen over the next few days: The conference committee tasked with ironing out differences between the House and Senate stimulus bills will undo most of the roughly $65 billion in cuts to state aid, education, and health care spending the Senate centrists negotiated. To pay for it, they’ll junk the $70-billion in Alternative Minimum Tax relief the Senate showered on the upper-middle class.

Republicans will protest that Obama and Congressional Democrats have trampled on the Senate compromise and unilaterally re-imposed their liberal priorities. They’ll sprinkle in a collection of shopworn clichés, like “behind closed doors,” and “dead of night.” But, in the end, it won’t matter. The media, having already proclaimed Obama the Beltway’s only bona fide bipartisan, is hardly going to rewrite the narrative at this late stage. And no senator who voted for the bill in the first time around is going to want to explain why he or she suddenly became “anti-job.”

By yesterday evening, you could almost see it dawn on Senate minority leader Mitch McConnell that he’d been played. “This package, had it been developed in genuine consultation, could have had a different result,” McConnell bleated, following a Senate vote that paved the way for the conference committee to convene. “But at the end of the day, it was--the administration decided--let the package be developed in Congress by the majority.” Right, Mitch. Tell it to someone who cares.

--Noam Scheiber

Impressed Me Not

Impressed Me Not
by
On Obama's first White House press conference.

Through most of his inaugural primetime press conference, Barack Obama seemed like he was channeling a particularly loquacious combination of Joe Biden, Bill Clinton, and the ghost of Hubert Humphrey. The president's response to the first question from the Associated Press about the risks of sounding too apocalyptic about the economy ran (or, to be more accurate, crawled) for nearly 1,200 words--and ended with Obama saying "Okay" with an implicit question mark as if he were requesting permission to keep on talking. A national poll from the Pew Research Center released Monday afternoon found that 92 percent of Americans described Obama as a "good communicator." There is a suspicion that those astronomic numbers had dipped by the time that Obama exited from the East Room of the White House at 9 p.m. on the dot.

In Obama's defense, the press conference was the first extended glimpse that many Americans had of their new president since the Inaugural Address. No one can deny the complexity of the economic challenges facing the nation--and President Obama is uniquely equipped to play Explainer in Chief. But Obama radiated the sense of a leader who has digested too many economic briefings and memorized too many talking points in preparation for his primetime rendezvous with the public. He clearly came out in an over-caffeinated mood ready to do battle with his Republican congressional foes, whom he had already vanquished-and, as a result, he over-reacted to last week's Fox News commentary instead of focusing on the exact shape of the stimulus. What shone through the entire press conference is how irked the president is with laissez-faire conservatives who believe, even now, "that the government has no business interfering in the marketplace" and that "FDR was wrong to intervene back in the New Deal." (Presumably Amity Shlaes, the Roosevelt-ripping author, should not plan on any immediate Oval Office invitations).

It is inevitable that the Obama press conference will be reviewed as political theater, since it was light on ... well ... that amorphous thing called news. The president's strongest answer was in response to the evening's fluffiest question, about Alex Rodriguez's confession that he had taken steroids. After an honest baseball fan's lament ("it tarnishes an entire era"), Obama jumped to a larger point that transcends sports--the lesson in A-Rod's downfall for the young: "There are no shortcuts; that when you try to take shortcuts you may end up tarnishing your whole career." Obama also took advantage of the presidential prerogative to duck when he was asked a tricky question about ending the ban on media coverage of the flag-draped coffins arriving at Dover Air Force Base. "We are in the process of reviewing those policies in conversations with the Defense Department," Obama said without revealing his hand. "So I don't want to give you an answer now, before I've evaluated that review and understand all the implications involved."

Obama's maiden presidential press conference (complete with a question from Helen Thomas) was orchestrated to revolve around what the president called "the most profound economic emergency since the New Deal." The president clearly wanted to mobilize his supporters who have been languidly following the congressional maneuvering over the stimulus package. But there was little in Obama's remarks that spoke to issues that the congressional conference committee will soon be squabbling over. Having won on the Senate cloture vote, Obama might have risked a few tart remarks about, for instance, the addition to the legislation of $70 billion in middle-class subsidies to ward off the dread Alternative Minimum Tax. But Monday night, Obama, with his lengthy soliloquies, seemed content to simplify the choice as between those who support the stimulus and do-nothing Republicans. The new president may have made a far more powerful case if, in his first primetime appearance, he was behind the desk in the Oval Office, giving the kind of speech at which he excels.

What Obama was decidedly not Monday night was Kennedy-esque. When JFK unveiled the live presidential primetime press conference 48 years ago, he answered 37 questions in the space of 40 minutes; Obama only half-responded to 13 questions in the space of an hour. Admittedly, Kennedy, who had survived a narrow election, was trying to demonstrate with his competence that he was a worthy successor to Dwight Eisenhower. Obama--who romped home in November and certainly does not lie awake worrying about invidious comparisons with George W. Bush--was trying to sell a set of economic talking points. As a result, the reporters and their questions were little more than potted palms as President Obama declaimed from the East Room.

When a president is as popular as Obama, the atmospherics of his first primetime performance are apt to be forgotten in a week or two. And blessed with the good will of almost all Americans to the left of Sean Hannity (and that is a wide swath of political territory), Obama has the luxury of experimenting with different formats to reach the voters. My guess is the primetime press conference is a gambit that may not be repeated for quite a while. But the next time that Obama tries it, he might consider taking his stage cues from that White House master of brevity known as Silent Cal Coolidge.

From hope to doomsday

From hope to doomsday

The way things are going, we can expect to wake up one morning to find the president of the United States wandering the streets of Washington in sack cloth with a placard predicting, well, the end.

He’s already given us everything but the exact date on which the world will end as he leads a chorus of his supporters demanding that Congress adopt his every nostrum lest our economic crisis transform itself into a “catastrophe,” as Mr. Obama put it, or “absolute collapse,” as Rep. David Obey (D-Wis.) warned, or even “Armageddon,” in the words of Democratic Sen. Claire McCaskill (Mo.).

It’s almost as if our new “transformational” president is himself being transformed into a character from a New Yorker cartoon or, worse, into Jimmy Carter. The optimistic campaign has been replaced almost overnight by a sort of whining pessimism that is, well, unbecoming of a president. Obama keeps reminding those who disagree with him that it was he who won in November. This political defeat has convinced the president that those who oppose his views should simply abandon their views and principles as unpopular, unworkable and destined for the scrap heap of history.

Maybe. But ideas have a funny way of surviving elections. Democrats and liberals didn’t give up their belief that government and those who wander the halls of its bureaucracy know best because voters disagreed with them. On the contrary, Democrats fought to preserve the programs they had initiated while in the majority and to simply repackage them in attempt after attempt to sell bigger government to a doubting public. To give them their due, Democrats did so because they honestly believe people should put their faith in government rather than in markets and personal judgment.

Even those who disagree strongly with their views have to admire the tenacity with which Democrats have fought for government solutions over the years. They’ve ignored the evidence of what works and doesn’t work as well as the views of mere voters. Liberals have explained away every excess of government and every boneheaded result of the policies they espouse. When the regulations they’ve championed distort markets and create unintended problems, Democrats blame the markets themselves and seek even more regulation. When foreign leaders act like the thugs and criminals most of us believe them to be, liberals excuse their behavior as a natural human reaction to us.

Now, finding themselves in power, liberals (or progressives, as they now call themselves) seem to believe Republicans and conservatives should conclude from the result of one historically rather close national election that they should abandon their beliefs. Many of them, like Mr. Obama himself, are angry that this isn’t happening. What is happening is that Mr. Obama’s idea of a “bipartisan,” “post-partisan” or “trans-partisan” America is becoming clearer every day; it’s an America in which everyone, regardless of party, agrees with him.

Mr. Obama’s anger was on display last week as he attacked those who dared disagree with him, blaming them for the nation’s current problems and suggesting that if things get worse, as he sadly predicts they will, it will be their fault and not his. It was on display when he attacked radio host Rush Limbaugh, of all people, for being critical of what he and his administration want to do for us, and it is on display as his supporters in and out of Congress suggest that people like Limbaugh must be denied access to the airwaves because they have the temerity to actually continue to disagree with President Obama.

The president whined last week that he and his team have had to work long into the night since the Inaugural as they wrestle with the nation’s economic problems. And by week’s end, Obama surrogates began to argue that since Republicans over-spent while in power, they have no right to complain as the new administration takes spending to an entirely new level.

There is no denying the seriousness of the current recession, but the specter of a still-popular president on television night after night to predict that things are going to get much, much worse is not something one would call confidence-inspiring. One can lead by inspiring or by trying to scare the heck out of people. In our country, at least, successful presidents have used the inspirational approach — the approach that Mr. Obama took during his campaign, but which he seems to have abandoned.

Perhaps as he goes forward, the president should ask his speechwriters to study the Reagan rather than the Carter leadership model.

Lessons From the Great Inflation

Lessons From the Great Inflation

Paul Volcker and Ronald Reagan's forgotten miracle created a quarter century of prosperity--and a dangerous bubble of complacency.

Robert J. Samuelson |

If you asked a group of scholars to name the most important landmarks in the American story of the last half-century, they would list some or all of the following: the war in Vietnam, the civil rights movement, the assassinations of the Kennedys and Martin Luther King, Watergate, the sexual revolution, the invention of the computer chip, Ronald Reagan’s election in 1980, the end of the Cold War, the creation of the Internet, the emergence of AIDS, the terrorist attacks of September 11, and the two wars in Iraq. Looking abroad, these scholars might include other developments: the rise of Japan as a major economic power in the 1970s and ’80s, the emergence of China in the 1980s from its self-imposed isolation, and the spread of nuclear weapons.

Missing from most lists would be the rise and fall of double-digit U.S. inflation. This would be a huge oversight.

We have arrived at the end of a roughly half-century economic cycle dominated by inflation, for good and ill. Its rise and fall constitute one of the great upheavals of our time, though one largely forgotten and misunderstood. From 1960 to 1979, annual U.S. inflation increased from a negligible 1.4 percent to 13.3 percent. By 2001 it had receded to 1.6 percent, almost exactly what it had been in 1960. For this entire period, inflation’s climb and collapse exerted a dominant influence over the economy’s successes and failures. It also shaped, either directly or indirectly, how Americans felt about themselves and their society; how they voted and the nature of their politics; how businesses operated and treated their workers; and how the American economy was connected with the rest of the world. Although no one would claim that inflation’s side effects were the only forces that influenced the nation during these decades, they counted for more than most historians, economists, and journalists think. It’s impossible to decipher our era, or to think sensibly about the future, without understanding the Great Inflation and its aftermath.

Stable prices provide a sense of security. They help define a reliable social and political order. Like safe streets, clean drinking water, and dependable electricity, their importance is noticed only when they go missing. When they did just that in the 1970s, Americans were horrified. From week to week, people couldn’t know the cost of their groceries, utility bills, appliances, dry cleaning, toothpaste, and pizza. People couldn’t predict whether their wages would keep pace with prices. People couldn’t plan; their savings were at risk. And no one seemed capable of controlling inflation. The inflationary episode was a deeply disturbing and disillusioning experience that eroded Americans’ confidence in their future and their leaders.

There were widespread consequences. Without double-digit inflation, Ronald Reagan almost certainly would not have been elected president in 1980; the conservative political movement that he inspired would have emerged later or, conceivably, not at all. High inflation incontestably destabilized the economy, leading to four recessions (those of 1969–70, 1973–75, 1980, and 1981–82) of growing severity. High inflation stunted the increase of living standards through lower productivity growth. High inflation caused the stock market to stagnate; the Dow Jones Industrial Average was no higher in 1982 than in 1965. And it led to a series of debt crises that afflicted American farmers, the U.S. savings and loan industry, and developing countries.

(Story continues after the video.)


Click above to watch Robert Samuelson discuss this story.

Afterward, declining inflation—“disinflation”—led to lower interest rates, which led to higher stock prices and, much later, higher home prices. This disinflation promoted the last quarter century’s prosperity. In the two decades after 1982, the business cycle moderated so that the country suffered only two relatively mild recessions (those of 1990–91 and 2001), lasting a total of 16 months. Monthly unemployment peaked at 7.8 percent in June 1992. As stock and home values rose, Americans felt wealthier and borrowed more or spent more of their current incomes. A great shopping spree ensued, and the savings rate declined. Trade deficits—stimulated by Americans’ ravenous appetite for cars, computers, toys, and shoes—ballooned. At the same time, this prolonged prosperity helped spawn complacency and carelessness, which ultimately climaxed in a different sort of economic instability and the financial turmoil that assaulted the economy in 2007 and 2008.

Who Was to Blame?

Double-digit inflation was not an act of nature or a random accident. It was the federal government’s greatest domestic policy blunder since World War II, the perverse consequence of well-meaning economic policies, promoted by some of the nation’s most eminent academic economists. These policies promised to control the business cycle but ended up making it worse.

The episode invites comparison with the war in Vietnam, the biggest foreign policy blunder in the post–World War II era. Both arose from good intentions: The one would preserve freedom; the other would expand prosperity. Both had intellectuals as advocates, whether economists or theorists of limited war. Both suffered from overreach and simplification; events on the ground constantly confounded expectations. But there is a big difference. One (Vietnam) occupies a huge space in historic memory. The other (inflation) does not.

This inflation had no comparable precedent in American history. Sudden bursts of inflation had occurred before, almost always during wars when the government printed more money to pay for guns, soldiers, ships, and ammunition. What happened in the 1960s and ’70s was different. America’s most protracted peacetime inflation was the unintended side effect of policies designed to reduce unemployment and eliminate the business cycle. It was a product of the power of ideas.

In the 1960s, academic economists argued—and political leaders accepted—that the economy could be kept permanently near “full employment” (initially defined as 4 percent unemployment). Booms and busts, recessions and depressions, had long been considered ugly and unavoidable aspects of industrial capitalism. But once people accepted the idea that the business cycle could be mastered, the self-restraint that had silently kept prices and wages in check gradually crumbled. New assumptions emerged. If government could prevent recessions, then companies could always count on strong demand for their products. All higher costs (including higher labor costs) could be recovered through higher prices. Similarly, if the economy was always near “full employment,” then workers could press for higher wages without facing job loss. If their current employers wouldn’t pay, someone else would. Government wouldn’t tolerate substantial unemployment; that was its promise. The result was a stubborn wage-price spiral. Wages chased prices, which chased wages. Inflation became self-fulfilling and entrenched.

Everything rested on an illusion, the Phillips Curve: the notion that there was a fixed tradeoff between unemployment and inflation. If true, that meant a society could consciously decide how much of one or the other it wanted. If, say, 4 percent unemployment and 4 percent inflation seemed superior to 5 percent unemployment and 3 percent inflation, then we could choose the former. The trouble was that the tradeoff didn’t exist, except for brief periods. In an important 1968 paper, the economist Milton Friedman explained that, if government tried to hold unemployment below some “natural rate,” the result would simply be accelerating inflation. Another economist, Edmund Phelps of Columbia University, developed the concept almost simultaneously. By their logic, governmental efforts to push unemployment down to unrealistic levels were doomed to failure.

What would actually happen in the 1970s—the constant acceleration of inflation—was foretold by Friedman and Phelps. But good ideas could not spontaneously displace the bad until actual experience demonstrated the differences, especially because the bad ideas were more politically attractive. For inflation to be reversed, the underlying politics and psychology had to change.

Americans detested inflation. We seemed to have lost control, both as individuals and as a society, over our fate. Since 1935, the Gallup Poll has regularly asked respondents, “What do you think is the most important problem facing the country today?” In the nine years from 1973 to 1981, “the high cost of living” ranked No. 1 every year. In some surveys, an astounding 70 percent of the respondents cited it as the major problem. In 1971 it was second behind Vietnam; in 1972 it faded only because wage and price controls artificially and temporarily kept prices in check. In 1982 and 1983, it was second behind unemployment (and not coincidentally: the high joblessness stemmed from a savage recession caused by inflation).

Among government officials, there was a widespread fatalism about continued inflation. President Carter often seemed forlorn at the prospect. Early in 1980, he was asked at a press conference what he planned to do about the problem. He replied, “It would be misleading for me to tell any of you that there is a solution to it.” His resignation was common. Inflation had so insinuated itself into the fabric of everyday life, the thinking went, that it could not be easily extracted. The standard remedy would be a horrific recession, or a depression, that would reduce wage and price increases. Inflation was rationalized as a reflection of the deeper ills of American society. It was not a cause of our problems; it was a consequence of our condition. Specifically, it was said to show that the nation was becoming ungovernable. Americans had more wants (for higher pay, more government programs, a cleaner environment) than could be met.

When Ronald Reagan won in a near landslide—50.7 percent of the popular vote against Carter’s 41 percent—inflation was the dominating concern. Voters didn’t know that Reagan could control it; but they did know that Carter couldn’t. Later, Carter himself judged that inflation had been the decisive issue against him, more important than his mishandling of the Iranian hostage crisis. Exit polls showed that 47 percent of Reagan’s voters rated “controlling inflation” as the most important issue, followed closely by 45 percent who valued “strengthening America’s position in the world.” In the Gallup Poll in September, 58 percent rated inflation as the No. 1 problem.

How Inflation Was Subdued

The subjugation of inflation was principally the accomplishment of two men: Paul Volcker and Ronald Reagan. If either had been absent, the story would have unfolded differently and, from our present perspective, less favorably. Reagan, president from 1981 to 1989, and Volcker, chairman of the Federal Reserve Board from 1979 to 1987, forged an accidental alliance that was largely unspoken, impersonal, and misunderstood. There was no particular personal chemistry between the men. Nor was there any explicit bargain—you do this, and I’ll do that. Although Reagan supported Volcker, many officials in his administration openly criticized him. Even while the alliance flourished, it sometimes seemed a mirage.

But the alliance was genuine, a compact of conviction. Both men believed that high inflation was shredding the fabric of the economy and of American society. The country could not thrive if it persisted. Buttressed by these beliefs, they broke with the past. Each had a role to play, and each played it somewhat independently of the other.

Volcker took a sledgehammer to inflationary expectations. He raised interest rates, tightened credit, and triggered the most punishing economic slump since the 1930s. In December 1980, banks’ “prime rate” (the loan rate for the worthiest business borrowers) hit a record 21.5 percent. Mortgage and bond rates rose in concert. By the summer of 1981, consumers had trouble borrowing for homes and cars. Many companies couldn’t borrow for new investment. Industrial production dropped 12 percent from mid-1981 until late 1982. In many industries, declines were steeper. In autos, it was 34 percent (from June 1981 to January 1982), and in steel it was 56 percent (from August 1981 to December 1982). By 1982 the number of business failures had tripled from 1979. Construction starts of new homes in 1982 were 40 percent below the 1979 level. Worse, unemployment exploded. By late 1982, it was 10.8 percent, which remains a post–World War II record.

It is doubtful that, aside from Reagan, any other potential president would have let the Fed proceed unchallenged. Certainly Carter wouldn’t have, had he been re-elected, nor would his chief Democratic rival, Sen. Edward M. Kennedy (D-Mass.). Both would have faced intense pressures from the party’s faithful, led by unionized workers—especially auto- and steelworkers—who were big victims of Volcker’s austerity. Nor is it likely that any of the major Republican presidential contenders in 1980 would have acquiesced, including George H.W. Bush, Howard Baker, and John Connally. Reagan’s initial economic program promised to reduce the money supply to curb inflation. He was the first president to make that part of his agenda, and he never retreated from it. As the economy deteriorated, he kept quiet. He refused to criticize Volcker publicly, to urge a lowering of interest rates, or to work behind the scenes to bring that about.

When the president did speak, he supported Volcker. At a press conference on February 18, 1982—with unemployment near 9 percent—Reagan called inflation “our No. 1 enemy” and referred to fears that “the Federal Reserve Board will revert to the inflationary monetary policies of the past.” The president pledged that this wouldn’t happen. “I have met with Chairman Volcker several times during the past year,” he said. “We met again earlier this week. I have confidence in the announced policies of the Federal Reserve.” Reagan’s patience enabled the Federal Reserve to maintain a punishing and increasingly unpopular policy long enough to alter inflationary psychology.

There was an outpouring of bills and resolutions to impeach Volcker, roll back interest rates, or require the appointment of new Fed governors sympathetic to farmers, workers, consumers, and small businesses. Rep. Jack Kemp (D-N.Y.), a prominent Republican “supply-sider,” wanted Volcker to resign. In August 1982, Sen. Robert C. Byrd of West Virginia, the Democratic floor leader, introduced the Balanced Monetary Policy Act of 1982, which would have forced the Fed to reduce interest rates.

Reagan’s popularity ratings collapsed. In May 1981, early in his presidency, Reagan’s approval had reached a high of 68 percent. By April 1982, it was 45 percent (46 percent disapproved); by January 1983, it was 35 percent, the low point (56 percent disapproved). As the economy sank, Reagan was advancing an economic program of across-the-board tax cuts, widely portrayed as favoring the rich, and spending cuts, widely portrayed as hurting the poor. He was portrayed as spearheading an economic assault against ordinary Americans.

On inflation, Reagan was clear-eyed. “Unlike some of his predecessors, he had a strong visceral aversion to inflation,” Volcker later said. Reagan was “influenced by people like Milton Friedman and understood that inflation was always a monetary phenomenon,” that it was “too much money chasing too few goods,” said William Niskanen, a member of Reagan’s Council of Economic Advisers. “He was the first president who understood that.…He knew that controlling inflation by regulation [controls] was absurd.”

Even now, the social costs of controlling inflation seem horrendous. Over a four-year period (1979–82), the U.S. economy’s output barely increased. It nudged ahead in the first two years and then fell back in the last two. Since 1950, there had been nothing like that. Unemployment peaked in 1982 near 11 percent—a figure that, a few years earlier, would have been widely judged inconceivable. Although lower inflation benefited most people, the casualties were numerous and broadly dispersed geographically and socially: small business owners, overextended farmers, industrial workers. The number of business failures in 1982 (24,908) was nearly 50 percent higher than in any other year since World War II, and it would double to 52,078 by 1984. From 1979 to 1983, farm income declined almost 50 percent.

But against these heartbreaking costs, there were larger long-term gains. Once the recession lifted, the economy and productivity growth revived impressively. When Reagan left office, Americans still worried about inflation, but it no longer gripped them with fear. Inflation was one problem among many, not a scourge shredding the social fabric. The taming of inflation reinvigorated the economy as nothing else; the expansion lasted from early 1983 until the late summer of 1990. At the time, it was the second longest peacetime expansion in U.S. history.

The Volcker-Reagan campaign discredited many of the ideas that had misgoverned national economic policy for nearly two decades. The notion that the Federal Reserve couldn’t control inflation was discredited. The notion that a little less unemployment could be exchanged for a little more inflation was discredited. In their place, a consensus slowly developed that “price stability”—a vague term that both Volcker and his successor, Alan Greenspan, defined as inflation so low that it barely affected people’s decisions—was desirable and would promote a more stable and productive economy.

The Forgotten Crisis

One of the dilemmas of a democratic society is how to take actions that, though immediately painful and unpopular, seem essential to the society’s long-term well-being. Coping with double-digit inflation posed precisely this problem. Any realistic program was bound to hurt millions of Americans, almost all innocent victims. This was so obvious that in the late 1970s a frontal assault on inflation seemed impossible.

What Volcker and Reagan wrought now seems ancient history: an isolated episode with little relevance to our present condition. This is utterly wrong. For every nation, there are crucial demarcation points that fundamentally alter society. The greatest of these for the United States was the Civil War. The Great Depression and World War II created another massive chasm. In our era, the fall of double-digit inflation is one of those separation points, though on a smaller scale—a gorge, not a canyon. Something profound and pervasive occurred: what I call the restoration of capitalism. Much of what we now consider routine and normal originated in the tumultuous transition from high to low inflation.

A majority of today’'Americans have never experienced double-digit inflation. In 2008 slightly more than 60 percent of today’s roughly 300 million Americans were born in 1962 or later, meaning that the oldest of them would have been only 17 or 18 when inflation peaked in 1979 and 1980. They were too young for it to have made much of an impression. Even for some of those who lived through it, the memory of inflation has faded.

In a very superficial way, that provides a serviceable explanation for the way inflation’s memory has faded. But the same arithmetic applies to Vietnam—indeed more so, since it was an earlier event—and yet Vietnam retains a powerful grip on the national consciousness. Something else must be at work.

Closer to the truth, I think, is a collective failure of communication and candor by the nation’s economists. At its base, double-digit inflation was their doing, a product of their bad ideas. There is now a widespread recognition of this, and although there are many technical studies of inflation and of the period of high inflation, there has not been much in the way of public apologies (from those who were complicit in the error) or reprimands (from those who were not, because they either dissented or were too young). There seems to be an unspoken pact of self-restraint to let bygones be bygones, perhaps out of collective embarrassment or a recognition that dwelling excessively on past failures might compromise economists’ prospects as government advisers and high-level appointees.

Over the course of 2008, inflation has risen to the uncomfortable level of about 5 percent, driven largely by higher prices for oil and food emanating from international markets. Whether it will go higher or subside to the negligible range of zero to 2 percent (a level at which most economists believe prices changes are so slight that they barely affect most consumers or businesses) is impossible to say. What is less uncertain is the similarity between our present predicament and the situation that led to higher inflation in the 1960s and ’70s. Then, a little inflation seemed unthreatening; but a little led to a little more, and a little more led to a lot.

Are You the Change You've Been Waiting For?

Why the Downturn?

Why the Downturn?

by

Meltdown

"Advocates of the free market must confront the fact that both the Great Depression and the current financial chaos were preceded by years of laissez-faire economic policies," write Katrina van den Heuvel, editor of The Nation, and author Eric Schlossel.

Knowing full well that inanities like this would become the received version of events, I wrote a book for the layman explaining what really happened to the economy, who the true culprits are, and why the free market is the only approach that hasn't been tried. It's called Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse, and it was released yesterday. My publisher has made a free chapter available for download.

I wrote Meltdown in order to give the free-market point of view the advantage of being one of the first, if not the first, of the inevitable avalanche of books on the crisis. (Paul Krugman, as well as the editors of The Nation, have published books of rehashed columns, but those don't count.) I also wanted the free-market point of view to have the advantage of a book-length defense in the first place. I know of one self-described libertarian who has a book on the economy coming out this year, but since he supported the bailouts, his prescription isn't exactly going to be traditional laissez faire.

And that, as we know, is the one position the establishment is trying to pretend doesn't exist. It's not exactly clear how the Federal Reserve's policy of pushing interest rates well below where the free market would have set them, thereby inflating the biggest asset bubble in the history of the world, could be the fault of the free market, or attributable to "laissez faire." But since hardly anyone discusses the Fed, no one has to answer this inconvenient question. The Fed's very existence is a violation of laissez faire. Yet the destructive effects of what it does are then blamed on the market. This charade has gone on long enough.

Here are some of the topics the book covers:

  • The housing bubble and its causes
  • Fannie and Freddie, the Community Reinvestment Act
  • The Federal Reserve System: the elephant in the living room
  • Is this a simple matter of "regulation" vs. "deregulation"?
  • Who predicted the crash, who didn't, and what that means
  • The "too big to fail" dogma
  • The bailouts: truth and propaganda
  • Where the boom-bust cycle comes from
  • The foolishness of fiscal "stimulus"
  • Previous booms and busts in American history, from the Panic of 1819 to the dot-com boom, and what we can learn from them
  • The policies that failed in Japan, and their eerie similarity to the policies urged upon us now
  • "Great Myths About the Great Depression"
  • Money, inflation, gold, silver, legal tender — and why they matter now
  • Common fallacies answered
  • How to minimize the (inevitable) pain

A very nice foreword from Congressman Ron Paul, for whom being vindicated is probably becoming a wearying thing, is an extremely welcome addition to Meltdown.

The Austrian School is not going to have another opportunity of this magnitude to get its message heard for a long time. If we don't seize this chance, we have only ourselves to blame. That's why I decided to write this book.

Thomas E. Woods, Jr., is a resident scholar at the Mises Institute. He is the author of Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. His other recent books include 33 Questions About American History You're Not Supposed to Ask, The Church and the Market: A Catholic Defense of the Free Economy, and The Politically Incorrect Guide to American History (a New York Times bestseller). Send him mail. Visit his website. See his article archives. Comment on the blog.

The Importance of Failure

The Importance of Failure

by

There is much discussion these days about bailouts. Are they needed? Are they just? I say no on both counts. Yet many economists, politicians, and businessmen tell us that bailouts are needed to prevent catastrophic economic collapse. Without commenting on the justice of bailouts, they warn that we are facing massive economic pain if we stand aside and let markets run their course. Bailouts can staunch this pain, they claim, and restore order and calm to the economy.

I don't buy the probailout folks' predictions of impending economic chaos. But what if they're right? What if the short-run pain in store is just too terrible to endure if we don't start bailing out key industries? After all, we're talking massive unemployment, a new wave of foreclosures, a shrinking economy — in a word, recession. If the dire forecasts of the bailouters are correct, we'd be stupid not to do it; we'd be like a beaver caught in a trap: slowly dying, yet too timid to chew off his own foot to escape.

Capitalism depends on three highly complementary, yet distinct, institutions: prices, property, and "profit and loss." Classical-liberal economists have demonstrated the essential role of these pillars of prosperity for centuries. These fundamental institutions of the market economy are like legs of a stool. If we gradually weaken one leg, we will eventually bring the stool toppling down — economic collapse.

In this light, the implications of bailout are clear. Bailouts are designed to insulate people from the effects of bad decisions. When market prices change dramatically, exposing yesterday's poor investment choices, bailouts come "to the rescue," promising those left holding the bag that they won't have to endure the full cost of their errors.

But we should realize, as the fine print always says, that prices are subject to change. Change is a defining feature of markets. Entrepreneurs make money by casting about for "wrong" prices and making bets on what direction particular prices will move in the future. Successful entrepreneurs, who correctly anticipate price changes, are rewarded with profits. Erroneous entrepreneurs, who do a poor job of estimating price movements, are penalized with losses. This is the essence of the market process.

Bailouts, then, attempt to erase the effects of losses, or economic failure. But such efforts inevitably undermine the loss aspect of "profit and loss." Profit and loss go together — like up and down, left and right, good and bad. If we try to do away with losses, we'll wind up diluting the meaning of profits. After all, why strive for profits if Uncle Sam will cover your losses with a bailout? Why bust your butt to compete and succeed if you can just clamor for a handout instead? Bailouts destroy the profit motive — and all the benefits of a competitive economy.

There's a great irony in bailouts, too. The only reason we can afford to even talk about bailouts is because of the accumulated wealth brought about by centuries of capitalism.

"If we try to do away with losses, we'll wind up diluting the meaning of profits."

Long ago, bailouts were unheard of; failure meant starvation, perhaps death. Consider the caveman: Ug's tribal chief couldn't afford to say, "It OK Ug no kill deer this week. It not Ug's fault. Tribe will bail out Ug."

If he wants his tribe to stick around, the chief must say, "Ug no kill deer: Ug family starve."

But modern man lives in a world of comparative abundance. If Doug is laid off because of recession, he'll have to find a new job and maybe tighten his belt. But Doug doesn't face starvation in our economy, and there are ample opportunities for him to adjust to economic changes. Yes, Doug will suffer somewhat during the transition, but the short-term pain of economic failure will guide him toward more productive, successful choices.

Failure is no fun, but it does teach essential lessons. We shouldn't miss out on those lessons simply because we think we can afford to bail people out. Instead of trying to abolish failure via bailouts, we should let markets work, let failure run its course, and be so much the wiser for it.

OBAMA HIT TURBULENCE

Trade Obstacles Will Prolong the Economic Crisis

Trade Obstacles Will Prolong the Economic Crisis

The threats are coming from, and would affect, all parts of the globe.

Are we already seeing the beginning of the kind of downward spiral in trade and cross-border investment that turned the 1930s into an economic and political catastrophe?

[Europe and Recovery] David Gothard

If so, the outlook is grim indeed, because the globalization of the past 20 years or so in particular has made all our livelihoods much more dependent on international trade and financial flows than in the past. A generation of splitting up and stretching supply chains around the world, of outsourcing and migration, and of cross-border direct investment and integration, mean that every person's living standard depends on what happens in other countries. This has been an astonishing force for growth and the reduction of global poverty for nearly 30 years. But it means the adverse impact of protectionism will be severe.

Consider that in 2006 a fifth of U.S. manufacturing jobs were generated by exports, directly or indirectly, according to the latest annual report of the U.S. Council of Economic Advisers. Workers in these jobs earn up to 18% more than people working for firms not engaged in exports. Other economies are much more dependent on trade than the U.S. is, so the threat to living standards from a slump in trade is enormous.

The threat is also imminent. The extent of the integration of most of the world's economies means 21st-century protectionism takes many forms, and we are starting to see a number of them. The U.S. House of Representatives attached "Buy America" provisions to the government stimulus package. The British government has persuaded oil company Total to give jobs to British workers in order to end wildcat strikes over the employment of Italians. Malaysia's government has instructed its firms to lay off foreign nationals first. Brazil's government has edged up tariffs on manufactured goods. Some commentators in the U.K. have welcomed devaluation as a useful tool in the policy armory. As Prof. Simon Evenett of the University of St. Gallen points out, there has been a dramatic increase in the discussion of protectionism in the world's media. This development reflects the trend in the policy debate.

The reason for this trend is clearly the slump in exports and cross-border investment during the past few months. No major exporting country has escaped a fall in export volumes since last September. Some of the major emerging economies, including Brazil and China, have seen a particularly steep decline, given their pivotal role in global supply chains for industries such as apparel and automobiles. The challenge for policy makers is to halt the downward spiral in demand rather than acting in protectionist ways which will accelerate it.

This is quite a challenge. The scale and complexity of globalization -- the sheer variety of flows of people, goods and investments across borders -- mean that it is no longer sufficient to simply prevent tariffs from rising or avoid competitive currency devaluations. Governments need to avoid the many other ways in which they can discriminate against foreign companies and foreign workers: Inward-investment regulations, state aid, tendering processes, employment laws, health and safety regulations, and instructions to bank managements about lending policies can all become protectionist tools.

It is all too easy to disguise protectionist measures, and all too tempting to engage in them given the political pressures from voters to safeguard their jobs and living standards. Many politicians continue to pay lip service to the importance of trade and open economies while advocating measures that will actually undermine the openness which is the only possible engine for restoring growth in the future.

Politicians are of course accountable to their voters. It would be foolish to ignore political imperatives. However, political leaders have a responsibility to act in the long-term interests of their populations rather than responding to every short-term demand with a quick fix. They also have an opportunity at the forthcoming G-20 summit in London to agree among themselves some principles which will help limit the spread of the virus of protectionism.

At a minimum there are three kinds of measures they must agree. One is support for international as well as domestic lending by banks, including trade credit. International trade and investment flows cannot be sustained without the financial infrastructure which supports them.

The second concerns exchange rates, whose movements have been too extreme and are a source of uncertainty extremely detrimental to trade flows. Over time we will need to see a gradual revaluation of the Chinese currency, as a reduced U.S. balance of payments deficit and reduced Chinese surplus will be needed to rebalance the global economy. Meanwhile, the G-7 and the G-20 should signal their determination to prevent further sharp currency moves.

Finally, and of overwhelming importance, our political leaders must live up to their rhetoric on the need to conclude the Doha Development Round successfully this year. There is little sign so far that any negotiators are taking this pledge seriously, but governments must deliver on it in the coming months. The successful conclusion of the multilateral trade round will be a significant test of leadership, both in its direct impact and in its symbolism. Particular responsibility rests with two countries: the United States and India.

I am not sure that the lessons of the 1930s have been absorbed by our political leaders. They have poured taxpayer money into bank bailouts, increased spending programs and encouraged central banks to slash interest rates and "print money." But there is no sign that they understand that all the nations of the world economy sink or swim together, and that history's verdict on their management of this crisis will depend on looking outward for our lifeboats.

Mr. Sutherland is chairman of BP and a former director-general of the General Agreement on Tariffs and Trade and the World Trade Organization.

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