Sunday, November 27, 2011

Recent financial crises and economic stagnation are symptoms of constitutional failure

Published in The Tennessean, Sunday, November 27, 2011

by Richard J. Grant

The progressives among us often insist that we need stronger laws and greater regulation. But they don't really mean it – at least not in any consistent sense. While happy to load us up with regulations at all levels of government, they do so only by either ignoring or defining away any limitations on government at the constitutional level.

If we are now dogged by a flourishing pack of sharp-toothed regulators, it is because the constitutional leash intended to limit the range of politicians’ powers has been loosened from its anchor. The U.S. Constitution was intended as a conservative document that would give the national government a few defined powers and no more. Government was constitutionally limited to protect citizens from the whim of the aspiring oligarch and the appetites of the mob.

The Orwellian phrase, “living constitution,” really describes a constitution that is moribund. Any constitution that is dislodged from its roots and ceases to be an effective anchor on the actions of the government that it once defined will also cease to be worthy of the name “constitution.” If its words can be interpreted to mean whatever our political leaders choose them to mean, then it would be at most a set of rules through which we choose our de facto rulers.

The recent financial failures and economic stagnation, as well as the cynically polarized political environment and increased systemic economic risks, are all symptoms of the process of constitutional failure. They are symptoms of unfettered government and politically empowered greed. Each of us is ever more at the mercy of the vagaries of the political market.

It is a sign of intellectual confusion when people use military terminology to describe business. Such terms as “captains of industry” or “robber barons” or “market power” all imply some coercive command over competitors, employees, and customers. But the defining feature of business is the voluntary exchange of property rights. Power, in the coercive sense, has nothing to do with it except when necessary to defend legitimate property rights.

A constitution that protects property rights from confiscation or arbitrary diminution is a constitution that protects a free people. A person's property is a product of that person's life; and a government that fails to protect that property from predation fails to protect the fullness of that life. This remains true whether people control their property as individuals or in voluntary associations such as cooperatives or corporations.

Such cooperation under well-constructed constitutional rules enables people to improve their property and their lives. This explains the exceptional history and economic development of the United States. Perhaps the exceptional moral leadership that arose in the 18th century was an accident of history, but its constitutional product served to shape the moral destiny of its citizens and to make them better able to withstand future historical accidents.

The progressive breakdown of this morality is manifested in an anti-constitutional mentality. It is now confusing when the President of the United States preaches to the Chinese about “following the rules of trade” as well as the need to “respect intellectual property rights” and have a sound currency. The Chinese need to hear it, but not from a president who is uninhibited in his ambition arbitrarily to redistribute the property of his own citizens, to force them to purchase prescribed products, and to regulate how they live.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Sunday, November 20, 2011

For supercommittee, cuts are all in the details

Published in The Tennessean, Sunday, November 20, 2011

by Richard J. Grant

During the past week, the total debt of the U.S. government surpassed $15 trillion. This brings the total debt up to about 99 percent of the annual production of the U.S. economy. Given that the debt has been growing more than four times faster than the economy, it should cross the 100 percent barrier by the end of the year.

Meanwhile, in Washington, the congressional “supercommittee” is supposedly working on proposals to reduce, if not eliminate, the annual budget deficit. We know for sure that they have no intention of eliminating the deficit. Their assigned task is to reduce the deficit by $1.2 trillion over the next 10 years.

This leaves two big questions: What is the benchmark from which the cuts will be made, and why will it take 10 years to reduce the deficit by an amount that is less than the last annual deficit?

As for the benchmark, the usual trick is to use projected spending, rather than actual current spending, as the starting point for cuts. Given that projected spending will always be set higher than current spending, it is possible to “cut” projected spending and then ignore the fact that actual future spending will still be higher. Rumors have it that the supercommittee will treat the reductions of planned future war spending as if they are real cuts.

A 10-year time frame allows politicians to spread any big-sounding cuts, real or otherwise, across the years such that the cut in any one year is minuscule. Ten years is also longer than any election cycle, putting any real results safely beyond the next election. The next Congress must deal with the mess left by the previous one, but it is not bound by its predecessor’s decisions. It can then proceed to shift its mess onto the next Congress, and so on.

This cycle will continue until a sufficiently high portion of voters comes to understand that higher government spending guarantees a higher total tax burden. Those who are most likely to believe that someone else is bearing that burden are those who are least likely to have the aptitude to understand that the burden really is being shifted onto them. They are the ones who don’t understand why their salary is so low or why their job has been outsourced or eliminated.

Half of the supercommittee is determined to raise taxes. They like to call this “revenue enhancement” in the hopes that you won’t understand that they really mean to raise your tax burden in order to buy your vote with your own money. But they can’t even be sure that raising tax rates on you or your neighbor will really bring in more tax revenue, at least not in the long run.

Whatever they say, they must know that higher tax rates reduce long-term economic growth even when we’re not in a recession. If your politicians were serious about increasing tax revenue in order to reduce the deficit, then they would look more seriously at reducing the regulatory burden that is crushing the tax base. That is, the regulatory burden that is hindering business and your ability to make a living.

As we let government spend more of our money for us and to tell us what to do with the rest, the more trouble we will have paying our bills.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Sunday, November 13, 2011

Even China seems to have learned welfare state flaws

Published in The Tennessean, Sunday, November 13, 2011

by Richard J. Grant

Of those people that I have met who express an aversion to the welfare state, those who express the strongest feelings are often those who grew up in the system but worked their way out and escaped. They recognize the perverse incentives that separate sustenance from any thought of production.

Charity without thought is unlikely to edify the recipient; and this describes the destination, if not the beginnings, of governmental welfare systems. When charity is transformed into entitlement, any moral obligation to lift oneself up is no longer enforceable by those who pay. To call such payments “a gift” is to insult both parties to the transaction. Society has lost something.

There are those who, like Blanche DuBois, are content to depend on “the kindness of strangers.” But someone must do the world’s work, and societies that understand this are those that survive and prosper. Welfare states throughout history have tended to waste away both morally and materially.

Weakness has always reduced one’s options in the community of nations. When a government runs out of its own citizens’ money, it must either economize on its own profligacy or become dependent on the finances of strangers.

Given our record-high budget deficits and accumulated national debt, the attitude with which the U.S. treasury secretary recently visited Beijing was no doubt very different from that of his predecessor 10 years ago. We can only imagine the thoughts of the Greek finance minister during visits to Brussels.

As the European Union begins to wither from the south up, its various finance ministers look longingly outward for “investment.” But societies that increasingly specialize in consumption are not what investors are looking for.

One such investor has shared his thoughts in an interview with Al-Jazeera news. Jin Liqun, the chairman of China Investment Corp., China’s sovereign wealth fund, makes it clear that his assigned task is to manage a profitable business. In other words, he must be a good steward of the resources that have been entrusted to his care.

If European leaders were listening, perhaps they could take it as a lesson in sustainability. Said Jin, “I think what is most important is to have an appropriate incentive system. We should not follow some of the bad examples as these kinds of so-called welfare societies in which hard working is not encouraged. Now if people who do not work make as much as those who work hard, of course this is an invitation to indolence. This is not what we want to see.”

This is not his father’s communism. Europe’s troubles are “the accumulated troubles of the worn-out welfare society.” Jin adds, “I think the labor laws are outdated. The labor laws induce sloth (and) indolence, rather than hard working. The incentive system is totally out of whack.”

A society that is built around featherbedding and early retirement is not a society that is built to last. It is a society disinclined to provide for itself; and it is a society not yet ready to accept the moral obligations of a recipient of charity.

Mr. Jin is well aware that China has its own troubles. He is not preaching; he is speaking as a steward of property. Whether his motive is profit or pure charity, he has the right to expect the best from those with whom he deals. We do, too.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Sunday, November 06, 2011

Feds lead public back toward mortgage trauma

Published in The Tennessean, Sunday, November 6, 2011

by Richard J. Grant

At a young age I was taught that, were a fire to break out in the stables, I should first cover a horse's eyes with a blanket before leading it to safety. A horse, like other animals and humans, will in a time of trauma have an urge to flee to the familiar, to the formerly safe.

Such human behavior is evident at the time of economic crises. There is a tendency to run to the apparent safety of the very institutions that caused the crisis, some of which continue to burn.

It should be no surprise that Freddie Mac (Federal Home Loan Mortgage Corporation) is asking taxpayers for another $6 billion in bailout money to cover its losses in the July-September quarter. Since the beginning of the 2008 financial crisis, Freddie Mac and its older sister Fanny Mae have burned through at least $169 billion of bailout money. It is estimated that they will come begging for at least another $51 billion in the next three years.

Both of these institutions are creations of government. Freddie Mac was created in 1970 to provide “competition” to the recently, and ostensibly, privatized Fannie Mae. Neither of these companies has ever been truly private. Nor could they be when their core product derives from their power to grant mortgage guarantees backed by the federal government.

Any attempt to insure the uninsurable will, especially when the force of government is brought to bear, lead to loss and corruption in the supposedly insured market. Those who blame the mortgage crisis on “Wall Street greed” are naïve. Greed has always been with us and is benign when the law protects property rights and allows free competition. It was government guarantees and government regulations that encouraged risky behavior and removed the natural checks on greed.

The belief that government can somehow decree an end to scarcity and the risks of life is a symptom of what the late Nobel laureate Friedrich Hayek called the “fatal conceit.” At the heart of this conceit is the belief that some central planner, some governmental institution, could possibly have the knowledge necessary to coordinate all the actions required to achieve their desires.

This is the error of the socialists and all those who assume that government officials have the knowledge necessary to regulate the actions and interactions of individuals in a community. The aspiring central planners seem not to understand that knowledge is dispersed throughout the community and does not exist independently, but is created through the actions of those individuals over whom they presume to rule.

Those who suffer from the fatal conceit are incapable of understanding the damage caused by interventions such as the Community Reinvestment Act. They do not understand that no outside observer, let alone a government official, has the knowledge necessary to direct the lending activity of a private financial institution. Accusations of “discrimination” against banks presume the possession of knowledge that the accusers cannot possibly have.

Eric Holder's Department of Justice, as if to double down on this conceit, has created a “fair lending” unit to toughen enforcement of the laws that pushed banks to increase their subprime lending in the run-up to the previous mortgage meltdown. It is a gift to that subset of voters who are still naïve enough to believe that there must be a horse in there somewhere.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011