So, according to a couple of professors out of Washington University in St, Louis and the University of Virginia (by way of the New York Times), the Constitution is an outdated piece of parchment that has no place in the modern world, which is pretty much the view of the “progressives” who believe in a “living Constitution” (which is probably one of the dumbest legal-philosophical ideas in existence – the whole point of a constitution is to protect against change). The professors are publishing an article that documents how foreign countries are adopting constitutions that are modeled after non-American documents. According to one of the authors (per the Times), Professor David S. Law, the reason is that “[n]obody wants to copy Windows 3.1.” Also according to the article, Justice Ginsburg, during an interview in Egypt last week, stated “’I would not look to the United States Constitution if I were drafting a constitution in the year 2012,’. She recommended, instead, the South African Constitution, the Canadian Charter of Rights and Freedoms or the European Convention on Human Rights.”

This pretty appalling stuff, especially from Ginsburg. Our Constitution isn’t Windows 3.1 and newer constitutions aren’t necessarily improvements because they offer more “rights.” As Justice Scalia said “[e]very banana republic in the world has a bill of rights.” The strength of our Constitution derives from its annunciation of principles that all can agree upon and on its system of checks and balances. The Constitution exists to help limit federal government encroachment over the individual, and so it was purposefully drafted to allow the maximum amount of freedom possible to states and individuals at the expense of the federal government, except in cases where it is absolutely necessary to have a unified federal stance, such as national defense.

Alan Blinder has an Op-Ed in the Journal Today.  In it, he lays out four “myths” about the deficit.  This is the second:

• Myth No. 2 is that America’s deficit problem is so acute that government spending must be cut right now, despite the struggling economy. And any fiscal stimulus, even the payroll-tax extension, must be “paid for” immediately.

Wrong. Strange as it may seem with trillion-dollar-plus deficits, the U.S. government doesn’t have a short-run borrowing problem at all. On the contrary, investors all over the world are clamoring to lend us money at negative real interest rates. In purchasing-power terms, they are paying the U.S. government to borrow their money!

We should accept more of these gracious offers and use the funds to finance pressing needs for jobs programs, infrastructure projects, even mortgage foreclosure mitigation. And because the U.S. really does have a humongous long-run deficit problem, we can and should commit now to paying for any such spending many times over—but later. For example, it would be smart to borrow, say, another $500 billion this year and then pay for it, say, 10 times over, with $5 trillion in deficit reduction spread over 10 years—starting, say, in 2014.

For a man who has spent as much time advising Washington as Blinder has, one would think that there would be a little less naivete in his piece.  Here Blinder acknowledges the long-term problem, but says in the short-term we should borrow more heavily on the theory that in the long-term we will pay down the debt by reducing spending.  Just once, I’d like to see someone writing one of these “spend now/pay later” pieces cite some actual evidence that a decision by government to spend more today on the theory that it will be paid for by responsible fiscal policy in the future has actually been carried through to its conclusion.  We always get the first piece of the equation, but never the second.  Every Congress is sovereign, and the actions of Congress today do not bind the Congress of ten years from now.  There is no way to enforce long-term thinking, nor is there much evidence that it actually goes on.  If Blinder, or anyone else is a position of influence, is going to advise a public policy prescription to a pressing national concern, it would be nice if the prescription was tailored to the government as it actually operates, not as he would like it to operate.

The Los Angeles Times penned a particularly (and there is no other way to say this) stupid editorial yesterday, called “Keep California’s bullet train on track,” in which the Times argues that despite all of the evidence to the contrary, the proposed California bullet train is really a blessing and an excellent value.  When you go to the webpage where the editorial is located, the header is entitled “Keeping faith with California’s bullet train,” which is particularly apt if you take Merriam-Webster’s definition of faith as a “firm belief in something for which there is no proof.”

What is remarkable about the editorial is that is manages to fairly definitively lay out the case for precisely why the high-speed rail project will be a huge waste of time, money and manpower, but then goes on to conclude precisely the opposite.  Apparently, the concepts of causation and logic appear to have entirely escaped the collective notice of the Times’ editorial department.

First, the Times acknowledges the recent finding of the independent review panel that concluded what everyone already knew: the project isn’t financially viable.  Everyone already knew it because it was obvious from the get-go that the rosy projections of the planners were ridiculous on their face, a fact which was confirmed by the state auditor, inspector general, the legislative analyst and the UC Berkley Institute of Transportation Studies.  The paper then acknowledges that no funding source has been identified, the location of the first segment is doomed to fail and running the Fresno to Bakersfield spur will be immensely costly.

The Times then goes on to say that the problem with these problems, is that they are political (i.e., the decisions that led to this point were political and would have been different in other circumstances).  Thus, the Times argues, if only the reality were different there wouldn’t be a problem.  It is a remarkable concept.  The Times is trying to make the case that a fundamentally political decision (whether to build a railroad and where to place it) would succeed if only politics weren’t taken into account.  The only way this makes any sense is if one assumes, as the Times apparently does, that the railroad is an absolute necessity and unequivocally beneficial project that nobody in their right mind would object to, and thus the only decisions left to make are technical (where to place the track for maximum efficiency, etc.).  Such questions as whether it is a good idea to have a high-speed rail at all, how much it costs to build, how many people it displaces and how much it costs to operate are, apparently, irrelevant to the Times, which has already concluded the complete desirability of the railroad.

This makes the next paragraph of the editorial all the more strange, since here the paper acknowledges that the project is highly risky, is far more costly than people were led to believe when it was proposed, has no source for funding its further development and will arrive years beyond its deadline, if ever.  Of course, after listing these negatives, which basically cover every major issue involved with the development of high-speed rail, the Times declares that there isn’t anything new in analysis and thus it is still backing the development of the train.  Talk about faith.

So, rather than admit that even if these concerns aren’t new, they are a significant indictment of high-speed rail, the paper instead tries to bring in some outside examples to show how, eventually, high-speed rail will be a wonderful addition to California’s transportation network.  First, they compare the project to L.A.’s subway, and claim that if voters hadn’t blocked the development of the subway because of all of the construction mismanagement and cost overruns, they would be enjoying wonderful public transportation.  Leaving aside that one has to question, given just how big and sprawling L.A. is, just how much use this mythical  subway to the sea would have gotten, and just how much traffic really would have been alleviated by its construction, the Times seems to be relatively untroubled by waste and mismanagement.  Apparently, concerns about such things are not legitimate barriers to erecting (perceived) wonderful public-works projects.

The second example the Times digs up is the Big Dig in Boston.  According to the Times, Bostonians are now reveling (well, according to the Boston Globe) in the parts of the Big Dig that used to be a highway but which is now a greenway.  Also according to the paper, in a few years Bostonians will have forgotten all about the years of traffic jams caused by the construction and the $22 billion spent to put a few miles of above ground road below ground (up from the $2.8 billion it was estimated to have cost at the time it was proposed in the 1980s).  To the Times, this is the long-term view of things.  After all of the waste, mismanagement, blown out budgets and other disasters associated with the project, if you get some modicum of enjoyment out of it then it was worth it.  It is, without a doubt, the stupidest way to judge the success and value of a public-works project ever conceived by man or editorial board.

Of course the people of Boston will enjoy their greenway (paid for, by the way, thank to Tip O’Neil, with money from other states).  The issue is not whether people will enjoy the benefits of the Big Dig after all is said and done, the question is whether it was a worthy project on balance.  If you come to my small town of 5,000 people and put in the finest amenities (new streets, street lamps, park, gold-plated fountain, light-rail, local airport, new school building, new city hall building, etc.)  at exorbitant costs and cause years of construction misery, I will certainly enjoy those amenities at the end of the day, but the question must be asked, should the money have been spent on other, more productive and beneficial activities then, say, a solid gold fountain placed in my local park?

Apparently, the Times is incapable of asking that question, for the editorial then points to, of all things, the Egyptian pyramids as examples of worthwhile endeavors that “seldom come without cost or sacrifice.”  According to the editorial, the pharaoh Sneferu had to try to build the first pyramid three times before he finally got it right, with the first two collapsing under their own weight.  Then, the Times goes on to say “but who remembers that now?”, and, approvingly, says that the pyramids are now “wonders of the world.”  So, to be clear, the Times judges the pyramids – crypts dedicated to kings that serve no functional purpose and which exist only to glorify  dead tyrants, built at enormous public expense, using slave or near-slave labor, which probably killed thousands during construction, as wonderfully successful, beneficial and laudable projects because people alive 4,000 years later get to enjoy them as historical artifacts.

There’s no arguing with that logic.

Paul Krugman’s newest work a piece simply entitled: “Keynes Was Right.” I want to focus on only one thing Krugman says in the article, since taking apart his defense of the Stimulus as not being significant or big enough has been thoroughly debunked elsewhere. Krugman opens up his piece with this paragraph:

“’The boom, not the slump, is the right time for austerity at the Treasury.’ So declared John Maynard Keynes in 1937, even as F.D.R. was about to prove him right by trying to balance the budget too soon, sending the United States economy — which had been steadily recovering up to that point — into a severe recession. Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way.”

For an economist that is essentially a politician at this point (or maybe a community organizer), Krugman’s choice of a quote is notable for its naïveté and it shows just how disconnected someone can be who studies and bases his argument only on theories of politics and not on practices in politics. I would liken Krugman to a theoretical physicist who, when confronted by contradictory results from experimental physicists argues the reality must be wrong because the theory is right. In this case, the assumption which bears no relation to reality is that governments (at least in Western societies today) are rational (and Keynesian) economic actors who implement austerity during boom times.

In Washington and elsewhere, the logic by those in power (presidents, congress, members of parliament, prime ministers) inevitably goes something like this when the world is moving along: “Times are good. We are collecting a lot of tax revenue. Let’s spend that money and make wonderful improvements (in infrastructure, public works, etc.) with all this “excess” money. There will be roads for Bob, a new airport for Jim, guaranteed free access to healthcare for Sue, more teachers per pupil for Cathy and a high speed train for Tim. We can afford all of this now and in the future we may not be able to, so spend while we have the money. And, if we don’t have all of the money, we’ll borrow what we need based on these great projections of continuing prosperity that makes credit cheap. Besides, we will all get reelected by grateful constituencies that get their priorities funded.”

When the world is suffering, the logic goes like this: “Times are bad. We have very little money but we have made promises to Jim, Sue, Cathy and Tim. Some of those promises are even guaranteed by law. The ones that aren’t we dare not keep for fear of angering the constituencies. What do we do? We borrow lots of money. We burnt through our cash in good times, but we can always promise to pay in the future, when we are sure times will be good again and we will have so much productivity that it will be easy to pay down our debt. Also, Keynes said we should increase government spending in a recession. We don’t think his advice during the good years is particularly relevant – he was writing in a much different time – but his advice on spending during recessions is every bit as poignant now as it was the day he put pen to paper. Besides, we will all get thrown out by angry constituencies that don’t get the money we promised them.”

In short, it is very simple. Politicians make decisions for many different reasons and, usually, for their own political interests. Even if we assume Keynesian theory is right, politicians do not study Keynes – they only borrow those principles that conform to the choices they are already going to make and use the theory as a fig leaf. You cannot make a serious argument as an observer of the political process that assumes, as Krugman does, that economic theory will win over political reality. When empirical data contradicts theoretical formulas, you need to rethink your formulas.

The ACLU has filed a lawsuit against the state of Wisconsin, which is attempting to put into place voter ID laws similar to those that have been proposed and/or adopted in many other states.  The ACLU is alleging that the voter ID laws disenfranchise voters, particularly minorities and the poor.  Meanwhile, Eric Holder is alleging that the purpose of the voter ID laws is to intentionally suppressed minority voters, presumably because they tend to vote Democrat, and is reported to be considering his own lawsuit.  In general, the political left has been opposed to voter ID laws, and have rung the racism bell to try and guilt their way to victory.  Said Holder at a speech in Texas:

“It is time to ask: What kind of nation and what kind of people do we want to be? Are we willing to allow this era — our era — to be remembered as the age when our nation’s proud tradition of expanding the franchise ended?”

Apparently for Holder and the ACLU, verifying that a voter is actually who he says he is is simply too much to deal with.  The fact that people may be disenfranchised because of fraud and improper voting seems to be of little concern to them.  It should be.  Extra votes and fraudulent votes introduce into the system a level of corruption that we should not tolerate.  Voting ranks among the most important rights that a citizen has, and it is just as important that legitimate votes not be tainted by mendaciousness as it is that legitimate votes not be denied for frivolous or malicious reasons.

The history of the Jim Crow South and denial of voting rights through overt acts of intimidation and legislation by private citizens and the government has colored our modern discourse on the verification issue.  Opponents of IDs often allege racist motives by proponents and argue that minorities will be unfairly burdened by basic ID requirements.  When direct appeals to racism fail, they claim that disenfranchisement occurs because there is a class of citizens that is too poor or burdened to get ID.  Both arguments are pathetic.

If racism and outright voter suppression is a real issue, then let us use of the criminal justice system.  Certainly our current attorney general will not have a problem pursuing allegations of voter intimidation (well, except if it is implemented by the Black Panthers in Philadelphia) or suppression using all of the resources at his disposal.  And, should there be actual cases, he will be wholly justified in prosecuting the offenders.  There is no excuse for intentionally denying citizens their legitimate right to vote.

Similarly, if there are instances where there are citizens who find themselves without ID due to financial or other burdens, the solution is to create a system where we get them IDs, gratis.  Most people in this country have IDs because they are needed for most of the basic aspects of modern life.  Think about what a person needs ID for in this country today.  Among many, many other things, you need an ID to:

1. Buy alcohol
2. Board a plane
3. Buy an Amtrak ticket
4. Purchase spray paint
5. Go to the movies
6. Open a bank account
7. Enter some federal buildings
8. Drive
9. Rent a car
10. Get a mortgage

Are any of these things more important or fundamental to a democracy than voting?  Do any of these items merit more stringent protections than voting?  It is inconceivable that the solution to the problem that there is some small fraction of people in the U.S. with issues getting proper ID is to decide that verification isn’t important at all, and that we should err on the side of, in effect, taking a person’s word that he is who he says he is.  Those who oppose identification and verification of voters at the polls are just as guilty of disenfranchising citizens as those that would actively prevent legitimate voters from exercising their franchise.  For elections to be legitimate, the must both include all those who have a right to vote and exclude those that don’t.  Allowing people to vote who have no right hurts us all and undermines our rights as citizens.  In the twenty first century, we possess the money (which is a relatively small amount), technology and systems we need to accurately identify voters.  Opponents of ID laws should be working with states to improve our processes, not trying to destroy them.

Today, David Blood and Al Gore have an op-ed in the Wall Street Journal, in which they didn’t just offer an embarrassed excuse for interjecting politics into businesses, but a full-on paean to its desirability.  They euphemistically describe this goal as “sustainable capitalism,” by which they appear to mean capitalism that is managed by politicians and is subject to their whims in much the same manner as Russia “manages” its democracy.

The authors commence their argument with the familiar trope that it’s a brave new world out there and new controls are needed to rectify a host of problems.  Of course, the threats that the authors identify as being of serious concern are, with the exception of global warming, merely many of the same issues of the 70s, 60s, 1890s and 1880s recycled.  To quote:

 The disruptive threats now facing the planet are extraordinary: climate change, water scarcity, poverty, disease, growing income inequality, urbanization, massive economic volatility and more.

If you go back to the writings of Paul Ehrlich and the Population Bomb you can find all of these dangers spelled out in great deal.  You can also read about how the world, as we know it, should have ended about ten to twenty years ago from massive famine, disease, etc.  Go back to the 1890s and you can find writers talking about the issues of poverty, poor environment and income inequality in Britain and elsewhere.  In short, the “rare turning point in history when dangerous challenges and limitless opportunities cry out for clear, long-term thinking” is nothing of the sort.  It is not different this time and the issues the authors identify, while real, have been with us since the industrial age began.

So, now that Bood & Gore have set up their argument with an appeal to urgency, what exactly is it they want?

 Before the crisis and since, we and others have called for a more responsible form of capitalism, what we call sustainable capitalism: a framework that seeks to maximize long-term economic value by reforming markets to address real needs while integrating environmental, social and governance (ESG) metrics throughout the decision-making process.

The authors then go on to posit that, rather than asking why “sustainability” adds value, people should ask “Why does an absence of sustainability not damage companies, investors and society at large?”  Blood and Gore proffer a series of conjectures about why ESG metrics matter, all stemming from their belief that profitability is enhanced by paying attention to ESG:

1. Developing sustainable products and services can increase a company’s profits, enhance its brand, and improve its competitive positioning, as the market increasingly rewards this behavior.
2. Sustainable capitalism can also help companies save money by reducing waste and increasing energy efficiency in the supply chain, and by improving human-capital practices so that retention rates rise and the costs of training new employees decline.
3. Third, focusing on ESG metrics allows companies to achieve higher compliance standards and better manage risk since they have a more holistic understanding of the material issues affecting their business.
4. Researchers (including Rob Bauer and Daniel Hann of Maastricht University, and Beiting Cheng, Ioannis Ioannou and George Serafeim of Harvard) have found that sustainable businesses realize financial benefits such as lower cost of debt and lower capital constraints.
5. Sustainable capitalism is also important for investors. Mr. Serafeim and his colleague Robert G. Eccles have shown that sustainable companies outperform their unsustainable peers in the long term. Therefore, investors who identify companies that embed sustainability into their strategies can earn substantial returns, while experiencing low volatility.

Having diagnosed the advantages of ESG (which may or may not be true) the authors run into logical problems when they come to their prescriptive analysis (or, rather, there would be logical problems if their real objective was to create a more efficient system, which it most emphatically is not).

If Blood & Gore are right, and all of the points above are true, then we have a very easy problem to deal with.  Companies like to make more money, not less.  They prefer to spend less than more.  They prefer a lower cost of capital to a higher cost.  They would rather outperform their peers than underperform.  If the advantages that the authors claim are really there, then all they need to do is produce the hard evidence that presumably underlies their argument and companies and investors will take ESG metrics into account.  They’d be fools not to and, even if some are foolish, the companies and investors that do incorporate ESG into their decision making will, over time, beat the ones that do not, thereby  leaving everyone left standing at the end of the day using ESG metrics.

Of course, the hard data isn’t really there, which is why the authors want to have the government require ESG reporting.  ESG is really about pressuring companies to follow green programs, politically correct policies and whatever flavor of the month the left is supporting.  ESG reporting requirements are meant to allow politicians to bang companies that fail to show the appropriate level of deference to the environmental, social and governance (read union) goals of left-wing politicians and labor leaders.  Positioning the adoption of ESG metrics as a pro-investment, pro-competition move is an insidious attempt to obfuscate Blood & Gore’s true objective, which is to create a political weapon that can be used to pressure companies to take all sorts of investor-unfriendly, unprofitable actions that are politically profitable and/or desirable by a select liberal constituency.

There is an overarching problem that pervades the discussion of the Euro whenever I hear finance people and economists talk about it – logic.  Almost invariably, discussions of the Euro by financial people revolve around logical and rational arguments that focus on the currency’s strengths and weaknesses, the fiscal position of the Eurozone countries, etc.  They talk about the Euro as if it is the same as the dollar, pound or yen.  The problem is that it is not.

The dollar, pound and yen are strictly currencies – placeholders for value.  The Euro, however, is two things – a currency and an idea, and this makes it doomed to fail.  The Euro was pushed forward, not only to simplify trade and increase economic capabilities, but also to attempt to unite a divided continent and entwine its nations together so tightly that the problems of history wars, disunity, etc. would be shunted aside.  The Euro was a building block on the path to a greater United States of Europe, whereby sovereignty would be extinguished (or at least marginalized) to the point where there would be not only fiscal union, but political union as well.

The problem with this is that it is a fantasy.  The peoples of Europe have long histories as disparate groups.  Germans and Spaniards have very different views of the world, as do French and Greeks.  The only way that a United States of Europe becomes a reality is for organic, slow change to occur over many years to the point where the peoples of Europe feel that they are close enough together to actually form a political union.  Of course, this slow process is (and was) of no interest to the elite bureaucrats in Europe, who barely believe in democracy (they just like its veneer) and seem to prefer a technocracy of unelected officials who will (of course) run things as they should be run.  The ultimate evidence of this was the European constitution, where when the people did not deliver the result the bureaucrats want, they deemed the electorate to be fools and sent it right back.

Now, back to the Euro and its discussion in financial circles, the finance types who discuss the Euro tend to completely ignore the idea side of its raison d’etre.  That also means that they usually fail to discuss, or give enough wait to, the issue of sovereignty.  They talk about Euros as if the economic formulas and analysis that apply to currencies without the mandate to help unify a continent can be used.  They can’t.  The individual states of Europe are, for the time being, still sovereign and, unlike California, can always resort to abrogating their obligations.  This is important because decisions about whether to stay in the Euro or leave it are driven just as much, if not more so, by political considerations, domestic needs and politicians’ desires to stay in power as they are by fiscal sense.  Decisions that are seemingly stupid and would be considered incoherent were they to be taken by U.S. or Japanese policy makers make perfect sense in the context of a conclave of divided, sovereign states that each have different priorities.

In the end, the sovereignty distinction is everything.  The Euro will fail, whether today or tomorrow, because it is an attempt to create political unity through a top-down system, rather than an outcome of political unity that started from the bottom up.

Andy Stern, former head of the SEIU, had a remarkable piece in yesterday’s Wall Street Journal – remarkable for its naiveté, obtuseness and sheer gullability.  It was one of the worst things I have ever read in a serious newspaper.  The piece, entitled “China’s Superior Economic Model” is a paean to the Chinese state and its political leadership.  With its creation, Stern joins the list of left-leaning pundits (think Friedman) who see authoritarianism and central planning as a panacea for a messy world.  The errors are many and the truths are few, so where to begin?

How about with the fact that if China there are no free employee public unions, and Andy Stern’s very reason for existence wouldn’t be tolerated?  In Wisconsin, Scott Walker and the Republicans, through legal means, changed the law to prevent collective bargaining of public sector unions.  Andy Stern vehemently opposed Walker’s actions, as was his right.  Yet, here we find him supporting a regime that tolerates no dissent and no political organizations that do not toe the party line or are not controlled by the Communist party.  If Stern had tried to form the SEIU or a similar organization in China, he would have been thrown in jail and, perhaps, tortured or executed.

Stern proceeds in his piece to comment:

 “[f]or me, the tension resulting from the chorus of American criticism paled in significance compared to reading the emerging outline of China’s 12th five-year plan. The aims: a 7% annual economic growth rate; a $640 billion investment in renewable energy; construction of six million homes; and expanding next-generation IT, clean-energy vehicles, biotechnology, high-end manufacturing and environmental protection—all while promoting social equity and rural development.”

Road maps are great – they lay out exactly how one should proceed and show where one should end up.  Paul Ryan has a road map, but I doubt Andy Stern likes it.  Of course the road map looks good – it is a one-sided unverifiable analysis of what China would like to do.  Have you ever seen a plan that said “we are going to contract our economy by 3%, increase unemployment, install old technology and produce pollution?”  The problem here is that the road map which Stern likes is an illusion.  China cannot guarantee a 7% economic growth rate for five years, though it can try.  It may be able to build 6 million homes, but the question is does that make sense?  Why should China build the homes and where should they be put?  In a free market, individuals decide that question, in China, it is by government fiat.  That is what has led to an entire ghost city in China – lots of homes but nobody wants to live there.  Ditto for all the rest of it.  Everything sounds good, but then you realize China is building high-speed rail that costs billions and doesn’t work because it comes from a centrally planned vision.  Finally, there is that last gem “promoting social equity and rural development.”  If there is one thing that doesn’t exist in communist states, it is “social equity.”  There is clearly a dominant political class in China which controls everything, tells people how to live and demands obedience.  The idea that they care about equity is laughable, just look at what they do to people who speak up about poor conditions and bad government.

A little bit further down the page:

 “The current debates about China’s currency, the trade imbalance, our debt and China’s excessive use of pirated American intellectual property are evidence that the Global Revolution—coupled with Deng Xiaoping’s government-led, growth-oriented reforms—has created the planet’s second-largest economy. It’s on a clear trajectory to knock America off its perch by 2025.”

The jury’s definitely still out on this point.  Remember when Japan was going to take over the world?  Predicting fifteen years into the future is very difficult and with China’s hyper-economy it is possible the whole system could crash and burn.  This is a country experiencing massive upheaval on numerous fronts.  It is also a country of corruption and lawlessness with little to no respect for intellectual property or rule of law.  It is true, many have flocked to China with investments because it is a hot area, but who knows what will happen?  Russia and Venezuela looked like good places to invest, until the governments started confiscating assets.

There is much more to comment on regarding Stern’s piece, but the bottom line is that it is full of assumptions that are less than sound, admiration for a dictatorial regime with an atrocious regard with respect to human rights and rule of law and arguments for the centralization of power in the hands of a select few.  I assume Stern likes the China model because he believes the centralized control of the economy is an evolutionary step over free market capitalism (points made in his article).  He must then also assume that, like in the U.S., public labor unions can capture the centralized decision makers through political contributions and alliances that will thereby enable unions to extract more money and more benefits for their members.  All of this rests on the assumption that unions will be welcomed and embraced by the central authorities.  The irony, of course, is that in communist China, there is no place for public unions because there is no need of their money – when you are a corrupt central government you don’t have any political competition which means you don’t need those resources.  Of course, Stern isn’t concerned about the Chinese workforce.  What he really wants is to take what he sees as the “best” of the Chinese system (central control by politicians and bureaucrats) and marry it to the current U.S. system to wind up with centralized powers beholden to public employee unions that, as a result, give those unions wages and benefits in excess of what they would otherwise have.  It makes complete sense from Stern’s point of view, but it is an albatross for everyone else.

St. Augustine once wrote: “Give me chastity and continence, but not yet.” This would seem to sum up, quite nicely, the arguments that have poured forth from the economic left in support of more deficit spending. Robert H. Frank, self-described “deficit hawk” writing in The Daily Beast on July 21, stated “I believe we need to start paying down the mountain of debt the federal government has been running up. But not now, not as we continue to struggle to emerge from the deepest downturn since the Great Depression. Cutting spending now is the very last thing we should do.” In other words, let’s all be celibate – right after the fiscal orgy.

Leaving aside the manifest problems with the Keynesian assumption of the multiplier effect, the problem with this line of reasoning is that it exists in a fantasy world of government rationality and singularity of purpose, neither of which can be verified or empirically observed for any length of time. Perhaps if one could guarantee that the government, once the current crisis is over, would turn to cutting the budget and implementing fiscal responsibility then one should favor government spending in the short-term (again, assuming the Keynesian view of the world is accurate, for which there is quite a lot of theoretical and modeling evidence but far less empirical evidence). The problem, however, is that there is no such guarantee and there can never be one.

In truth, our government is not a single entity with a CEO who can order the entire organization to turn about on a strategic dime and reverse policies. We have a President and Congress that often have conflicting goals, as well as binding laws which structurally both limit the options available to the current government and encourage fiscal irresponsibility. Every politician has multiple goals, the first of which is to get elected, followed by implementing favored policies, helping constituents, promoting American interests and getting re-elected. (I am assuming here that our elected officials believe in serving the national interest, not always a reasonable premise). These are omnipresent concerns that will not end with the conclusion of the fiscal crisis.

Following the liberal plan to spend more money, we will be left with a mountain of debt that must be repaid. The money to do this can come from one or a combination of four sources. First, we could see rapid growth in the economy. This is largely what brought us prosperity in the 1990s. It’s an ideal solution, but should we formulate our fiscal strategy around assuming it will occur? Second, we can raise taxes. Raising taxes will reduce our overall economic output and will have to be levied on the middle class since there is no way taxing “the rich” could feasibly pay for all of the debts we are incurring. Third, we can inflate our currency, thereby hurting people who are fiscally responsible and save their money for retirement. Fourth, we can make some hard choice and cut entitlement spending. Who wants to bet on Congress making hard choices in the future and voluntarily reducing spending before there is absolutely no other option (a la Greece)? (For further illumination in this area, see “Supercommitte”). What’s more, since we have the ability to inflate our currency, unlike Greece, what do you want to bet that Congress holds out even past the point of no other option and simply forces the Fed to do the dirty work by fait accompli?

The view of the deficit (what to call them… whales?) is that, whatever the damage and pain inflicted today is, it can be reversed through wise and prudent policies in the future. This may work in computer simulations and in economics equations, but it is a political fantasy. Congress always talks about fiscal restraint and responsibility, and it is always going to happen in the future. Now is never the right time. When times are bad we simply must spend to get out of the recession. When times are good and there is plenty of money to pay for everything, why would we cut spending?

Any deficit whale that wants to make the case for massive amounts of upfront spending first must acknowledge the credibility problem inherent in believing that future government actions will conform to optimal economic assumptions and scenarios. The failure to acknowledge – and therefore plan for – this fact eviscerates all of the whales’ credibility. While Frank or Krugman are only too happy to point out the pain that may be caused in the short-term by foregoing massive stimulus spending, they are silent as to a workable plan for returning to fiscal responsibility in the future that has any connection to reality.

What is even more appalling is that the structural transformation that the country is currently undergoing means that even if there was a political will to do something in the future, it still may not be possible to fix our problems. States like California are finding this out the hard way. They entered into long-term contracts & commitments that were cheap at the time but with exorbitant back-end payments (such as bloated pensions) and now the courts are ruling that the states have no right to abridge their contractual obligations. While the federal government may have more ability to modify its commitments than the individual states, courts have often restrained federal action when it comes to entitlements. More importantly, even if the federal government has the authority to abrogate the promises it makes today at a later date, is it ethical to make such promises today knowing that there is a significant chance that they will be broken at a later date because of irresponsible actions taken now?

The deficit whales need a better argument, one that bridges the chasm between theoretical economics and economic policies made within the political context. (Again, I am granting them the assumption that their economic analysis is correct). One of the great virtues of Milton Friedman was that he married reality to his economic theories and understood that government structures make implementing what, in the abstract, might be the ideal choice a very difficult, if not impossible task. Calling for more spending today and ignoring the political reality of tomorrow solves nothing.

In 1973, Milton Friedman wrote a letter which is, quite possibly, one of the best pieces of prose ever written about government and its limits. (You can find the letter here: http://www.johnlatour.com/barking_cats.htm).

What Friedman lays bare, quite nicely, is the liberal fallacy that the main problems of government exist because there is a deficit of good people in power. This notion gives rise to the fundamental belief that to fix the problems of the world, all we need to do is find the right “good” people who are intelligent, wise and selfless and who will take the appropriate steps in furtherance of the best interests of all the people. It is a comforting thought, because it means that we are in control of our destiny and we need only to tweak the machinery to get it right. The alternative, the reality, is much bleaker, even if it is true, and there is a tendency for many people not to want to acknowledge it. The reality is, as Friedman put it, that there are laws to bureaucratic systems and organizations in the same way there are laws of nature, and they are not easily fixed by changing those in power. It is the system itself which prevents the effective implementation of many good ideas. Centralization fails not because people aren’t good or intelligent, but because it is simply not possible for centralized bureaucratic institutions to be intelligent enough or wise enough to make decisions for hundreds of millions of people. The power and insight of decentralized decision making by the many is simply so much greater than that of a centralized power that they do not even compare. That is why free markets work and planned economies do not.