Liberty and Tyranny Read online

  EVENT 4: The Federal Reserve Board’s role in the housing boom-and-bust cannot be overstated. The Pacific Research Institute’s Robert P. Murphy explains that “[the Federal Reserve] slashed interest rates repeatedly starting in January 2001, from 6.5 percent until they reached a low in June 2003 of 1.0 percent. (In nominal terms, this was the lowest the target rate had been in the entire data series maintained by the St. Louis Federal Reserve, going back to 1982)…. When the easy-money policy became too inflationary for comfort, the Fed (under [Alan] Greenspan and then new Chairman Ben Bernanke at the end) began a steady process of raising interest rates back up, from 1.0 percent in June 2004 to 5.25 percent in June 2006….”19 Therefore, when the Federal Reserve abandoned its role as steward of the monetary system and used interest rates to artificially and inappropriately manipulate the housing market, it interfered with normal market conditions and contributed to destabilizing the economy.

  In 2008 and 2009, the federal government spent tax dollars at a frenzied pace to try to rescue the financial markets from its own mismanagement. Troubled Asset Relief Program (TARP) outlays could reach $1 trillion or 7 percent of the nation’s gross domestic product. TARP was originally enacted so the government could buy risky or nonperforming loans from financial institutions. But the mission changed within weeks—the government began using the funds to buy equity positions in financial institutions, presumably to inject cash directly into these entities. An oversight panel concluded that $350 billion of the TARP funds cannot be adequately accounted for.20

  The Federal Reserve also provided assistance of $30 billion for Bear Stearns, $150 billion for AIG, $200 billion for Fannie Mae and Freddie Mac, $20 billion for Citigroup, $245 billion for the commercial paper market, and $540 billion for the money markets.21 It is poised to lend over $7 trillion to financial institutions, or over half the size of the entire American economy in 2007.22

  According to Bianco Research president James Bianco, the federal bailout far exceeds nine of the costliest events in American history combined:

  Event

  Cost

  Inflation-Adjusted Cost

  Marshall Plan

  $12.7 billion

  $115.3 billion

  Louisiana Purchase

  $15 million

  $217 billion

  Race to the Moon

  $36.4 billion

  $237 billion

  S&L Crisis

  $153 billion

  $236 billion

  Korean War

  $54 billion

  $454 billion

  The New Deal

  $32 billion (est.)

  $500 billion (est.)

  Invasion of Iraq

  $551 billion

  $597 billion

  Vietnam War

  $111 billion

  $698 billion

  NASA

  $416 billion

  $851.2 billion

  TOTAL

  Over $3.9 trillion.23

  The entire cost of World War II to the United States was $288 billion, or $3.6 trillion when adjusted for inflation.24

  Congress also passed, and President George W. Bush signed, fiscal spending bills to try to alleviate the economy’s ills, such as the $152 billion Economic Stimulus Act of 200825 and the $300 billion Housing and Economic Recovery Act of 2008.26 Congress and President Barack Obama are upping the ante by hundreds of billions more or so with the so-called American Recovery and Reinvestment Plan of 2009.27

  The Wall Street Journal reports that when stimulus and bailout spending is combined, “the federal spending share of GDP will climb to 27.5%.” Put another way, more than $1 of every $4 produced by the economy will be consumed or controlled by the federal government. The Journal also notes that “all of this is fast pushing the U.S. to European spending levels, and that’s before Obama’s new health-care entitlements.”28

  The crisis created in the financial markets is of the Statist’s making. But he learns nothing from the destruction he unleashes, for he is not motivated by virtue and he does not act with prudence. Instead, his framework is ideological. As President Obama’s chief of staff, Rahm Emanuel, openly admitted, “Rule one: Never allow a crisis to go to waste. They are opportunities to do big things.”29 By wrestling decision making from the free market, the Statist is able to exercise enormous control over the individual and society generally.

  The oil industry is a favorite target of the Statist, since fuel runs the engine of America’s vast economy. The Statist knows that the consumer is particularly sensitive to increases in gasoline prices because of his frequent visits to the gas station. The Statist tells him that these increases are due to “greed,” “profiteering,” and “price gouging” by the oil companies. Of course, oil is a commodity in worldwide demand, with use in China and India, the earth’s most populous nations, growing rapidly. Approximately 70 percent of the price of a gallon of gasoline is the cost of crude oil.30 Therefore, supply and demand on the world market directly influence availability and pricing in the United States.

  But apart from the world market, the Statist will never and must never concede that he is sabotaging the provision of affordable, reliable, domestic supplies of energy by significantly and purposefully driving up costs to the oil companies in addition to worldwide supply and price influences. The Statist’s heavy hand has gripped the oil industry for more than one hundred years. The oil industry is hardly free to operate as efficiently as it could or to be as responsive to consumer demands as it would like. It has become, in essence, a quasi-state-run enterprise, because it cannot drill, transport, refine, and store fuel without receiving government permission, complying with government regulations, and paying taxes at every level of production.

  When the Statist prevents the oil companies from drilling new wells in places such as Alaska, the Great Lakes, and most coastal areas, he is driving down the supply of domestic crude oil and gasoline. How can a nation cut itself off from most of its energy resources and hope to prosper or, in the long run, even survive?

  Moreover, America’s refining capacity has not changed much over the last thirty years. As Investor’s Business Daily reported in March 2008, no new refinery has been built in the United States since 1983. “In 1982, the U.S. economy was served by 301 refineries. By 2007, the number had dwindled to 149. Productivity has kept output steady over the years at 17 million barrels a day. But the U.S. economy has grown by 125%.”31

  The Statist has created a myriad of regulations that dictate a long list of gasoline “blends” as well as seasonal and regional variants that create costly complexities and inefficiencies in the domestic production of usable fuel products. Expanding existing refineries or building new plants must meet newer and more onerous regulations than those applicable to older refineries.32 These are all hidden, government-imposed surcharges that are magnified throughout the economy and, in the end, are borne by the consumer.

  The Statist deflects public scorn for the consequences of his own central planning by blaming the very industry he is sabotaging for supply dislocations and price hikes. He conducts aggressive public relations campaigns that consist of congressional show trials where oil executives are forced to appear before committees and television cameras and defend their business activities in testimony given under the penalty of perjury—as if they may have committed some crime. To underscore this perception, the Statist regularly calls for federal investigations of the oil industry, alleging “collusion,” “monopolistic practices,” or other illegal conspiracies. Invariably, the investigations clear rather than indict these businesses.

  And what of those oil industry profits? Much reporting on oil company revenues, with headlines shouting “oil companies made record profits,” is sophomoric and misleading. Rather than serving as watchdogs of the government, too many in the media give voice to the most demagogic statists. In 2007, the oil companies earned between eight and nine cents for every dollar of gasoline sales.33

  Again, Investor’s Business Dail
y recently summed up the oil industry profit situation this way:

  From 1977 to 2004, according to Tax Foundation data, U.S. oil companies cleared $630 billion after taxes while paying $518 billion in federal and state corporate taxes at an average rate of 45%. Over the same period, an additional $1.34 trillion in excise fuel taxes was collected from consumers by the oil companies and turned over to various governments.34

  Government, not the oil industry, is the biggest “profiteer” from oil. And it uses the tax revenue to expand its own authority at the expense of the individual, as it does with an endless number of other industries—including electric power, coal, lumber, pharmaceuticals, automobiles, aircraft, and agriculture. The Statist’s intrusion in the free market is boundless.

  However, it should be emphasized that the Conservative is not a corporatist—that is, he is not a special pleader for oil companies or any other corporations. He defends free markets because he defends the civil society and the Constitution’s limitations on federal authority against the tyranny that threatens them. Therefore, the Conservative also opposes crony capitalism, where the Statist uses the power of government—often at the behest of a given industry or corporation—to subsidize one favored enterprise at the expense of another. The Statist’s purpose, as always, is to extend his own reach.

  For example, ethanol has been around since the 1800s. If it were a viable alternative or additive to gasoline, which supposedly would reduce oil use, gasoline prices, and automobile emissions, the free market would have responded positively. But the consumer and the producer were not all that interested. Of course, that did not dissuade the Statist. For years, large agricultural corporations and environmental groups have lobbied the federal government to promote ethanol production and use. Having already severely damaged the supply of domestic oil, the Statist responded to the lobbying efforts by using tax dollars to heavily subsidize ethanol production, imposing tariffs on the importation of ethanol, forcing the automobile industry to build more ethanol-friendly vehicles, and setting mandates on domestic ethanol production and use levels—15 percent of American cars are to run on ethanol by 2017.35

  As ethanol and other biofuels require corn, sugarcane, and additional crops to produce blends of gasoline, these essential crops are diverted from food production to energy production. And as demand for corn and sugarcane increases, more farmers around the world respond by converting their fields from rice, wheat, and soy to the more profitable crops used in biofuels. Government policy played a significant role in driving up demand and prices not only for fuel but food, contributing mightily to severe food shortages and even famine in the Third World.

  As demand for corn increased in the United States, and since corn in one form or another is fed to most livestock, the price of beef, fowl, and dairy products went up as well. A ripple effect occurs across the economic and global landscape.

  And what of the supposed environmental benefits of ethanol? The Associated Press reported:

  Ethanol is much less efficient [than gasoline], especially when it is made from corn. Just growing corn requires expending energy—plowing, planting, fertilizing and harvesting all require machinery that burns fossil fuel. Modern agriculture relies on large amounts of fertilizer and pesticides, both of which are produced by methods that consume fossil fuels. Then there’s the cost of transporting the corn to an ethanol plant, where the fermentation and distillation processes consume yet more energy. Finally, there’s the cost of transporting the fuel to filling stations. And because ethanol is more corrosive than gasoline, it can’t be pumped through relatively efficient pipelines, but must be transported by rail or tanker truck. In the end, even the most generous analysts estimate that it takes the energy equivalent of three gallons of gasoline to make four gallons of the stuff…. 36

  The Statist, therefore, created instability and unpredictability across various industries with detrimental consequences, intended and unintended, across the globe. Yet he will not take a step back.

  There are times when the Statist interferes with the free market to try to stave off what the late economist Joseph Schumpeter, among others, described as creative destruction. As he explained,

  Capitalism…is by nature a form or method of economic change and not only never is but never can be stationary…. The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that enterprise creates… [T]he history of the productive apparatus of a typical farm, from the beginnings of the rationalization of crop rotation, plowing and fattening to the mechanized thing of today—linking up with elevators and railroads—is a history of revolutions. So is the history of the productive apparatus of the iron and steel industry from the charcoal furnace to our own type of furnace, of the history of the apparatus of power production from the overshot water wheel to the modern power plant, or the history of transportation from the mail coach to the airplane. The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and the factory to such concerns as U.S. Steel illustrate the same process of industrial mutation…that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in…. 37

  Today, the American automobile industry, once the envy of the world, faces the prospect of creative destruction. Henry Ford perfected the use of the assembly line in the mass production of the Model T. He changed the face of America and the world. Over time, however, it became another favorite target of the Statist. The Wagner Act of 1935 granted monopoly power to unions to bargain for certain employees and call strikes, thereby enabling them to charge monopoly rates for their labor. Beginning in its heyday in the 1950s and 1960s, the United Auto Workers (UAW) used its negotiating muscle to extract progressively onerous and untenable salary and benefit concessions from American automobile manufacturers under the threat of debilitating strikes. Consequently, the American automakers are saddled with costs that make it extremely difficult to compete with nonunion, foreign manufacturers in the United States and overseas.

  The Heritage Foundation found that UAW workers at U.S. factories cost more than $70 per hour compared with a cost per hour for nonunion Japanese autoworkers in the United States of $42 to $48 per hour. With combined wages and benefits, the UAW worker costs nearly $130,000 per year, while the nonunion worker costs about $80,000 a year. Under UAW contracts, workers are not laid off. They are paid nearly full wages not to work for a period of years. And workers can retire after thirty years on the job, no matter their age, and receive pension and health benefits for the rest of their lives.38

  In addition to wages and benefits, the UAW’s inefficient work rules make it difficult for American automakers to adapt to economic conditions and consumer demand.39 Ford’s contract with the UAW is 2,215 pages long.40 Of course, management entered into a series of contracts over the years agreeing to these arrangements. However, the power of the UAW under the Wagner Act ultimately made management’s resistance futile.

  In 2007, Congress passed new Corporate Average Fuel Economy (CAFE) standards, costing the U.S. auto industry an additional $110 billion in research, manufacturing, production, and related compliance costs.41 A high-level automobile industry source expects that by the time the new standards are fully implemented, the consumer will pay an additional $5,000–$6,000 per vehicle. And the average 2007 model car is already carrying at least $2,000 in additional “up front” costs for recently mandated safety equipment.42 Add to this the wild swings in fuel costs resulting, in large part, from the government’s interference in the energy market—making it difficult to predict consumer demand in the out years—by 2008, General Motors and Chrysler were essentially broke, and Ford was on the brink.
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br />   It cannot be said that the American automobile industry’s critical condition is a result of an unfettered free market. The Statist has played a central role in its undoing and has made a mess of the once vibrant industry. However, does this justify the taxpayer bailing out the industry and the UAW with tens of billions of dollars in subsidies? The answer is no.

  The current model of manufacturing American automobiles and organizing employees is unsustainable. So, too, is the government’s unrelenting interference in the auto industry’s management, labor relations, vehicle designs, etc. The Big Three must seek relief in bankruptcy, which will allow them to newly organize their businesses, including eliminating some of their more onerous operational and labor restrictions, and to become more responsive to modern conditions. The Statist, however, remains an implacable problem. He is not subject to creative destruction. Rather, he hangs over the market as a dark cloud. Even as he dangles billions of dollars in bailout money before the industry, the Statist insists on further advancing the destructive agendas of his environmental and labor constituencies, whose support he needs to continue in power. As the Wall Street Journal reported, “When is $25 billion in taxpayer cash insufficient to bail out Detroit’s auto makers? Answer: When the money is a tool of Congressional industrial policy to turn GM, Ford and Chrysler into agents of the Sierra Club and other green lobbies.”43 Another crisis, another opportunity.