Examining the Myth of Good Government and the Coming Fiscal Collapse

     

“Beyond a certain limit, military spending constitutes the classic example of parasitic growth.” ~ Thomas E. Woods, Jr.

Thomas E. Woods, Jr.; Rollback: Repealing Big Government Before the Coming Fiscal Collapse; Regnery Publishing, Inc. (2011)

In Rollback, Thomas Woods provides a thoughtful, clearly written wake-up call. The breadth of the topic is a bit ambitious, particularly for such a portable read, but Woods provides numerous, wide-ranging examples that will lead readers to reconsider some of their assumptions and expectations. At times, one might be left a bit confused whether Woods thinks government fiscal collapse is inevitable, or if we still have time to forestall that collapse by “repealing big government.” Either way, however, he leaves no doubt he believes we have large-scale upheaval ahead of us, and that the architecture of much of our federal as well as state government faces a forced and forceful diet.

Woods is a fellow at the Ludwig von Mises Institute. The Mises Institute was founded in 1982 by Lew Rockwell, former chief of staff for Rep. Ron Paul of Texas. The Institute has been a center for academic scholars dedicated to the principles of the “Austrian School” of economics as well as classical liberalism more generally. The Austrian school is so named due to the influence and collaboration of founding members like Friedrich Hayek, Ludwig von Mises, and Carl Menger. In the United States, Murray Rothbard became one of the leading Austrian voices, which rejected much of the mathematical and statistical foundations of mainstream economics and their application in government economic programs. The Austrian school stands out for its dedication to free markets and a sharply curtailed role for government in society, and Woods’s Rollback clearly reflects this perspective.

Woods opens Rollback with two neat quotes, including a long running truth from a Roman senator and historian named Tacitus – “The more corrupt the state, the more numerous the laws.” This idea is fleshed out most explicitly in Rollback’s Chapter 6, “The Myth of Good Government,” where Woods looks carefully at the asserted justifications and politically practical sources of demand for a variety of government programs and extensive regulatory practices. One common thread to those examples is the notion of regulatory capture, where regulation is sought out and developed by the industries being regulated, at the expense of consumers and the common good.

But the fiscal challenges we face arise from a broader set of political influences, including general public laziness and acquiescence in programs based, in Woods’ eyes, on fiscally unsustainable promises. He takes a closer look at Medicare and Social Security, and depicts demographic icebergs likely to sink the ship.

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Some fun facts from Rollback’s opening chapter include:

A May 2010 poll found that an incredible 85% of graduating college students planned to move back in with their parents after graduation, facing an average of $23,000 in debt before they even start working.

Many states are “going bust”; seven states likely to see their pension systems fail by 2020, and thirteen more by 2025.

Dozens of cities are contemplating bankruptcy.

Washington D.C. has seen demand for new homes rise faster than another other large American city, and it also has the highest median household income of any of the 25 largest metropolitan areas.

This last item is related to Wood’s opening quote about “the more corrupt the state, the more numerous its laws.” Included along with the 50 states, Washington D.C. has by far the highest income per capita, and it also has by far the largest numbers of lawyers per capita. When you want to get cynical, one way to think about DC is as a factory full of lawyers and lobbyists, who make laws and programs enriching their clients and themselves at the expense of the rest of us.

In Chapter 2, Woods turns to Barack Obama and the “Change We Can Believe In,” finding not much change nor little to believe in, particularly in the new Administration’s health care programs. The chapter’s strongest and most interesting elements, however, deal with the stimulus programs for the weak economy, their pork-barrel origins, and their unseen costs that can actually retard recovery.

From there, Woods broadens his perspective to a general review of the role of government in economic crisis, with particular reference to the origins and solutions developed for our Great Recession in recent years. Woods provides a careful review of housing market finance and the consequences of government programs like Fannie Mae and Freddie Mac, and their interplay with monetary policy of the Federal Reserve.

Woods and others have strong words, in hindsight, for what they assert were artificially low interest rates arising from Fed monetary policy in 2002-2006 as seeding the recent housing crisis. This perspective may be a little too easy, in hindsight, and it can also deflect attention from other worthy sources of investigation into regulator behavior, including the Fed’s outsourcing of capital and other financial regulations to the anointed set of credit rating agencies. This proved a critical point of failure, Fed advertising that it promotes financial stability to the contrary. But to his credit, Woods at least notes the credit rating interaction with capital regulation problem. And those that think the effective repeal of the Glass-Steagall separation of commercial and investment banking in the Gramm-Leach-Bliley Act of 1999 was a central element of our latest meltdown would do well to look at Woods’ argument here. It wasn’t the repeal of Glass-Steagall, for example, that allowed banks to invest so heavily in well-rated but disastrous mortgage-backed securities. They were allowed to do so before Glass-Steagall, as well.

Woods has harsh words for the financial regulators and their claims to expertise and foresight before our latest crisis. In turn, more and better regulation, the argument goes, is not the solution for our financial system down the road. Fewer public guarantees and government programs could be a better route. Along these lines, Woods cites economist and historian Robert Higgs, who has said of the regulators:

“Had they been given even greater powers, budgets, and staffs, what enchantment would have transformed the regulators into smart, dogged champions of the public interest, rather than the time-serving drones and co-conspirators with the regulated firms that they have always been?”

Woods also includes one of my favorite economists, George Stigler, in his argument here. Stigler was a Nobel prize winner and a central leader in the University of Chicago economic and business schools, and the “Chicago School” of regulation. Stigler has provided some of the most important foundations for the “capture theory” of regulation, how regulators get co-opted by special interest groups.

“If Stigler is correct, then we have here another reason to consider it simplistic, even childish, to foist major tasks of economic stabilization onto regulatory bodies in the superstitious hope that this race of supermen will identify and act upon problems before anyone else perceives them, and always with an eye to the public interest.”

If you thought Woods was too already too harsh on the Federal Reserve, well, the next chapter is dedicated to the Fed. Woods and others of the Austrian school are sharply critical of central banking generally, and Chapter 5 provides a brief and accessible review of their reasoning. The dollar has lost roughly 95% of its value since the Fed was created in 1913, depending on how you measure that, anyway, while Woods and others make a pretty good case that, from a longer-term perspective, our banking system has been more unstable with a central bank than it was without it. Woods is pleased by a revival in critical interest in the Federal Reserve in recent years, and tries to make a case that the Fed hasn’t just been a failure in his eyes – it has been a failure on its own terms, as well.

If special interest groups capture government programs designed and/or advertised to promote financial stability, but these programs actually destabilize and threaten us, what if that is also operating in the case of government’s role in promoting national security? This could be a little frightening, perhaps, but also a way of taking the blinders off and seeing the world realistically. (For that matter, what if our law enforcement authorities are captured by the criminals? A topic for another day). In Chapter 5, Woods turns to the Pentagon, with the main thesis arising from his assertion that “beyond a certain limit, military spending constitutes the classic example of parasitic growth.” Woods cites operations research professor Seymour Melman, from Columbia University, and Melman’s use of the term “overkill” to capture how many resources we have dedicated to the military sectors that have been taken and diverted from other opportunities. One fun fact in this discussion includes the fact that the U.S. strategic aircraft and missiles were capable of unleashing the equivalent of six tons of TNT for every person Earth even by the 1960s. Woods provides a wide variety of other sobering statistics about the cost and consequences of our global military establishment. Obama and Company took their share of criticism earlier in the book, but Woods, to his credit, certainly doesn’t leave the Republican party unscathed, particularly on this score.

In Chapter 6, Woods pulls back for a more general perspective on the role of government, and concludes with a chapter reinforcing his early ideas that fiscal strains will inevitably force examination of policies restricting government down the road. Some of Woods’ personal prescriptions include “opt-outs” for Social Security and Medicare, across-the-board cuts in federal spending, currency competition as an alternative to our current central banking system (citing Ron Paul, who has introduced legislation along these lines), state nullification of unconstitutional federal measures, a “repeal amendment” allowing states to annul specific federal laws if two-thirds of the states see fit, creative Internet-based mechanisms to “crack through the media monopoly” (Go Boiling Frogs!), and a very interesting if narrower proposal called “jury nullification.”

All in all, Rollback is a good read – provocative, clear and educational. You may not always agree with him, but you can learn from him.

Reprinted with permission from BoilingFrogsPost.com.

October 13, 2011

Bill Bergman [send him mail] is Senior Financial Analyst, “Follow the Money with Bergman” at Boiling Frogs Post. He has 10 years of experience as a stock market analyst sandwiched around 13 years as an economist and financial markets policy analyst at the Federal Reserve Bank of Chicago.