By J.D. Seagraves, on January 14th, 2009
To partisans of the Austrian theory of the business cycle, the cause of the current financial crisis is as plain as day — and that’s why we’ve been predicting it for years. You would think that the neo-Keynesians, monetarists, and Marxists who made fun of us Austrians in 2006 and 2007, and said we’d never have a housing meltdown and financial crisis exactly like the one we’re having now, would come over to our way of thinking — or at least acknowledge that we were right in this one case. But instead, they continue to make fun of us and deride the gold standard as “quackery.” Have they no shame?
Apparently not. And it shouldn’t be surprising. After all, followers of non-Austrian schools are practitioners of non-reality based economics. To them, economics is a religious faith. Since everything is make-believe, they can just pretend that the Austrian school didn’t predict this crisis years ago and that they weren’t poo-pooing those predictions. They can pretend that the Phillips Curve has validity and that stagflation is impossible. They can even delude themselves into thinking that Herbert Hoover was a laissez-faire “do-nothing” and FDR’s New Deal “got us out of the Depression” — or worse yet, that war is good for the economy!
Believing in any of these bogus ideas is akin to medieval doctors practicing the humoural theory of medicine. It was the official doctrine of the church, and therefore, it was accepted even when it was clearly false. Today, the state has replaced the church and Keynesianism is the official state religion.
Why don’t more economists recognize the reality staring them in the face? Well, for one, they’re educated in government-controlled schools. Only two universities in the entire United States do not accept federal money, and as central banking and fiat money are vital tools of Big Government, little else is going to be taught. What’s more, over 50 percent of professional economists in the United States work for the government, with 32 percent working directly for the feds. How can we expect economists to be objective on the question of central banking when their paychecks are monetized by the Federal Reserve? Heck, a huge share of the world’s economists are employed directly by central banks!
So it’s no surprise that “respected” economists — propagandists, really — are pro-Fed. Only one central-banking critic has ever won the Nobel prize: F.A. Hayek of the Austrian school. The greatest economists of the 20th century — Ludwig von Mises and Murray Rothbard — never got the recognition they deserved. But as the predictions they made continue to come true, one has to wonder how long the general public will maintain its faith in the high-priests of economic voodoo that dominate the economics profession.
By J.D. Seagraves, on January 8th, 2009
One good thing about the current economic crisis is that it has greatly increased people’s interest in Austrian economics in general, and in the gold standard in particular. There had already been several high-profile leaders in economics, finance, and business who had come out in favor of hard money and abolishing the Fed. Then on December 17, political shock jock Rush Limbaugh had the following to say about the gold standard:
“When you take the dollar off the gold standard, for example, there’s nothing backing up the dollar. When the dollar is worth, you know, whatever the inflated value of it is, when there’s nothing substantive behind it, when you have all these runaway trains here — and we’ve reached a point where it’s all coming due here at one time; and we’re going to make it even worse with this trillion-dollar stimulus package of Obama’s. The idea that we’ve gotta go in there and have all this new government spending because we’re going to emulate FDR? Well, the dirty little secret is that FDR prolonged the Great Depression with the exact thing Obama is going to do.”
Of course Limbaugh, a GOP hack, cannot comment on anything without getting a potshot in on Obama or some other leading Democrat, but if Limbaugh were to use his powers for good rather than evil, this would be a good thing, right?
Well, maybe. But if Limbaugh does come out for gold — and it’s not exactly clear he’s going all the way with the idea from the quote above — it could actually be a bad thing, in my opinion, since it would further perpetuate the misguided notion that laissez-faire libertarians are in league with “conservatives” like Rush Limbaugh, Sean Hannity, Ann Coulter, etc. We’re not.
Limbaugh and his ilk have no interest whatsoever in libertarian ideas when their political party rules the White House or Congress (or God forbid, both!). No, when conservatives are in power, they’re too busy expanding government for their own pet interests. But the truth of the matter is, we would be totally unable to fund the Right Wing progam under the gold standard.
War, in particular, is virtually impossible to fund under a hard-money regime, and that’s why the gold standard was suspended during the Civil War, World War I, World War II, and Vietnam. In fact, any anti-war liberal — the type of people that Limbaugh hates — should embrace the gold standard as the ultimate companion of international peace. How sweet it would be for the Left to return to its laissez-faire roots and shut up the fake capitalists like Rush Limbaugh once and for all. Almost as sweet as it would be if Cindy Sheehan and Dennis Kucinich renounced socialism in favor of laissez-faire.
By J.D. Seagraves, on January 2nd, 2009
When the Progressives succeeded in implementing a national ban on alcohol in 1920, just 1 in 100,000 American deaths could be attributed to alcoholism. By 1927, that number had quadrupled. Clearly, people hadn’t stopped drinking just because it had been made illegal. In fact, many scholars believe alcohol consumption increased across the board during the Prohibition era: the number of people consuming any alcohol, the amount they consumed, etc. One thing that’s for certain is that the potency of the booze imbibed was much greater. This is a direct result of the Progressives’ meddling interventionism.
This is part of the conceit of the political Left: they think that just by passing a law, anything can be made so. But the reality is that passing a law banning alcohol did nothing to dampen demand; it only constrained supply. This, in turn, led to higher profits for the illegal products, which incentivized bootleggers to stimulate demand.
Just imagine yourself in a bootlegger’s shoes: Because your product is in short supply, the people who really want it are willing to pay more to get it. Thus, you have greater profit potential. Knowing this, it only makes good business sense that you would try to expand your customer base via “marketing.” This is why alcohol consumption among women and children spiked tremendously during Prohibition.
Now consider this: with alcohol illegal, would it be worth your risk to deal in beer and other comparatively tame beverages? A warehouse full of beer kegs would be easy for the feds to find, whereas a few vials of moonshine would be much easier to conceal. You could sell the potent stuff and let people dilute it themselves — or not.
This same principle applies to today’s miserably failed “War on Drugs.” Cocaine, heroin, and even marijuana are much more potent today than they would be under a regime of free choice. Marijuana, for example, now features THC levels nearing 10%. Just a decade ago, THC content stood at only 5%. Ten years before that, in 1987, the average batch of weed was only slightly over 3% THC. And in the 1960’s, levels of THC (the active ingredient in marijuana) were much lower still.
Americans were much smarter in the 1920s than they are today. Former leading prohibitionists, such as John D. Rockefeller, admitted their mistake and realized Prohibition as the great failure that it was. Forty years later, the War on Drugs would ramp up with gusto. The same scenario has played out again, only worse, but this time, no one is willing to admit that the “cure” is far worse than the disease. And as a result, America continues to suffer.
By J.D. Seagraves, on December 31st, 2008
A recent headline at CNN.com said “Fed bails out GMAC with $6 billion.” Since I had heard it was the Treasury department funding the GMAC giveaway, I had to check the story to make sure this wasn’t another $6 billion being thrown down the drain. Fortunately, CNN just got it wrong: it was the feds , not “the Fed,” engaged in this particular instance of kleptocracy.
CNN’s error, of course, is not surprising. After all, an easy majority of financial journalists in the mainstream media clearly do not know the difference between the discount rate and the fed funds rate, nor do they have any clue what the Federal Reserve is or what it does. But thinking about the Fed made me realize that CNN’s error was actually no error at all. It will be the Fed that ultimately bails out GMAC.
The Treasury, after all, doesn’t have $6 billion, and it’s not going to tax us to get it — that’s way too old school. Where will Hank Paulson get the money, then? By issuing new debt. And who will buy this debt? A substantial portion of it will be bought by the Fed, which can “monetize” any debt or asset (i.e., print money to pay for it and say the new money is “backed by the debt (or asset)” for which it was printed).
More importantly, it is the power of the printing press that leads everyone else (China, Saudi Arabia, etc.) to buy American debt. If these foreign bondholders thought that their interest and principal would have to be financed by taxation, they’d know there’d be a second American Revolution before they recouped their investments. Instead, they know their money is “safe” so long as the Fed can create it at will to make good on the government’s bonds.
But there’s a reason “safe” appears in scare quotes. The Fed is creating an unprecedented amount of money, and as Austrian economic theorist Peter Schiff pointed out in a recent Wall Street Journal editorial, “each additional dollar printed diminishes the value those already in circulation.” Foreign bondholders are currently putting up $1 million to receive $21,360 in annual interest. If the dollar’s decline in purchasing power merely maintains current ten-year trends, then the real value of the principal at the end of the ten-year maturity will be just $767,330. And is anyone deluded enough to think price inflation won’t be much higher over the next ten years than it has been over the past decade?
Apparently so — for now. But as soon as these creditors wise up to the fact that the U.S. is broke, be prepared for a massive devaluation of the dollar: it’s going to zero.
By J.D. Seagraves, on December 19th, 2008
One persistent problem in America’s political discourse is the misuse of the term “free market.” So-called “conservatives” like President Bush and his Republican acolytes like to claim that they support the “free market,” and liberals, normally skeptical of everything that comes out of conservatives’ mouths, take their word for it. The Right defends the system we have as “free market capitalism,” which aids the Left in its straw-man attacks against it. A side effect of this inexact taxonomy is that real free-market partisans are misconstrued as defenders of “Big Business.” But as Austrian theorist and Cato blogger Roderick Long demonstrates , this is far from being the case.
There is currently a debate raging between the so-called “left” and “right” factions of the libertarian underground. The so-called “left” faction, led by Professor Long, insists that businesses would be smaller and more democratic in the absence of the state. The “right” faction, while not defenders of the current system (which many of them consider to be “fascist”) argue that businesses would be even larger under completely laissez-faire, and this would probably be a good thing.
The libertarian-right’s case is based on the size-limiting effects of anti-trust laws and protectionist trade policies, among other regulations. At first, this argument is compelling, but as Long points out, these effects are likely very minimal when compared to the tremendously destructive impact the government has on would-be small businesses. Just imagine, he says, if there were no longer any licensing requirements for starting a taxi service: tens of thousands of cab companies would start up tomorrow. What if you could open a restaurant in your living room? What if you could start a daycare without jumping through burdensome regulatory hoops? What if you could hire people at any wage at which they were willing to work? Indeed, there would likely be no unemployment under laissez-faire.
It should be stressed that, for the most part, the “left” and “right” factions of anarcho-libertarianism agree on the proper role for government: none . Neither faction supports the regulations that keep firms small or prevent them from starting up at all. This is largely an academic debate about how laissez-faire would work if ever adopted, but both sides agree that it would work better than the current system, and that it is more moral.
Personally, I come down on Professor Long’s side, and I think it’s important for libertarians to differentiate themselves from conservatives at every turn. Libertarians are not conservatives — they are liberals in the classical sense. In fact, modern liberalism is merely a variant of classical conservatism, which is one reason there’s so little difference between the two Establishment parties. Long says that today’s liberals attempt to use conservative means to achieve liberal ends, such as full employment. But in reality, classical liberal ends (laissez-faire) would achieve those ends more effectively, and more morally, too.
By J.D. Seagraves, on December 12th, 2008
I really hate shoveling snow. I live on a large corner lot with lots of sidewalk, so the job can take me over an hour. Snowblowers, I’ve found, are overrated. I’ve had two and neither did a very good job and both had maintenance issues. I bought both used, so that might be part of the problem, but when faced with buying a new one (after my 2005 model died this past week), I thought about how much I hated dealing with the snow and questioned the economics of hiring someone to do the shoveling for me.
It’s a little embarrassing. I’m thirty and work from home. I guess I could be considered “lazy” for not doing my own snow removal, but I prefer to think of myself as an ardent believer in the economic concepts of comparative advantage and the division of labor . So I went on Craig’s List and posted a job for “Regular Snow Removal, Good Pay” with all the details. Since there was only one local posting offering snow-removal service, I didn’t know if I’d get a response… But I didn’t have to wait long to find out.
Almost instantly, I got two emails. By the time I woke up the next day, I had ten. By the end of the second day, more than twenty. Two people stopped by my house to introduce themselves. And after about eight inches of snow rained down last night, a third young man showed up, unannounced, to take care of it for me.
I paid him $40 and he did a great job. Was this worth it? Well, consider this: as a freelance writer, I typically earn between $25 and $50 an hour. My average is probably around $40. So, assuming I can find an extra hour of work to do, I just have to think of it this way: would I rather spend an extra hour writing or shoveling snow? It’s an easy decision for me to make. In fact, even if I earned only $20 or even $10 an hour, I still think it’d be worth it — that’s how much I hate dealing with the snow.
The exuberant responses I’ve gotten from people wanting to shovel my sidewalk and driveway have me thinking of other ways I can kill two birds with one stone: help people who are out of work and lessen the number of unpleasant tasks I have to perform. I’m thinking of hiring someone to do my family’s laundry, for example. It’s the type of thing that always seems to get only half done (i.e., all of my clean clothes are still in the basement, not hung up in my closet) for one reason or another. Perhaps picking up an extra hour or two of writing work (which I enjoy) could save me and my wife from having to do the laundry (a constant source of marital strife) and help someone put food on the table too. Capitalism is win-win.
By J.D. Seagraves, on December 10th, 2008
One of the many demonstrably false myths of the official state religion — and by that I mean Keynesian economics — is the notion that we can have perpetual inflation at a “reasonable level” with no adverse affects. In this blog entry, I’ll demonstrate why this is indeed a myth.
Certain types of businesses do better during an inflationary environment, while others would (theoretically, at least) do better under a stable money supply, or even deflation. A clear example of a type of business that does well under inflation is anything connected to government — after all, with the Fed monetizing its budget deficits, the federal government gets new money first and dishes it out to government contractors. The more inflation, the more money there is for these economic rent seekers.
By contrast, a type of business that would do well under a stable money supply, or even better with deflation, would be “hard money” lenders. By this, I mean pawn shops, payday lenders, etc. After all, one of the advantages of being a debtor in an inflationary environment is that you get to pay off your debts with depreciating dollars. By the same token, if you’re a debtor in a deflationary environment, you have to pay off your debts with dollars that are worth more over time. This isn’t a very good deal for you, but it is for the lender.
Now hard-money lenders have a bad reputation in modern America — but they shouldn’t. After all, they’re only providing a service to customers who want loans and who can’t get them elsewhere. Do they charge high rates? Yes, but given that their customers are high credit risks, these rates are warranted. Perhaps the differential between what a poor credit risk is charged by a hard-money lender and what a good credit risk is charged by a Fed bank is larger than it should be, but that’s because Fed banks can create money for loans out of thin air, while hard-money lenders can only lend money that they actually have. If people with good credit did seek out hard-money loans, they’d pay much higher rates than they do with Fed banks.
In fact, the above is an example of what I’m trying to demonstrate. Inflation discourages hard-money lending, in general, though it keeps the business open to poor credit risks that the Fed banks refuse to serve. If we transitioned into a deflationary environment, in which banks did not create as much money to lend, then “higher quality” borrowers would seek out hard-money loans. The market for hard-money loans would thus expand, and with the expansion of the market, more firms would move into this business.
This is precisely why reversing the course on inflation is so politically difficult. As inflation becomes the norm, resources are shifted to businesses that are profitable in that environment. Reversing course would render these businesses unprofitable, and cause unemployment. And no politician likes unemployment — people out of work tend to vote for the other guy. This is why the Fed and the politicians who control it are always pushing for more and more inflation. They all hope that the can keep the corpse of the U.S. economy animated until they’re out of office. But I think they’ve finally pressed their luck too far this time.
While, economic volatility often keeps us on our toes, experienced hedge fund firms like GoldenTree Asset Management and others can provide sound investment decisions even in tough economic climates.
By J.D. Seagraves, on December 5th, 2008
On
w:st="on">December 1, 2008, the National Bureau of Economic Research
(NBER) made the shocking announcement that the
w:st="on">U.S. economy is in recession. In
fact, NBER says we’ve been in a recession since last December. That this was
considered “news” is yet another indictment of the mainstream media. Who
exactly didn’t know that the U.S.
was in the midst of a recession? NBER’s
class=GramE> declaration of the obvious merited no more serious news attention
than a proclamation by NASA that the earth in fact orbits the sun. After
all, the ongoing debate of the past several months hasn’t been whether or not
we’re in recession, but who precisely is to blame for it?
There’s No Painless
Fix for the Economy
Austrian economists accurately predicted this recession,
even as statists of all stripes (monetarists to
Keynesians, as if there’s a difference) predicted permanent prosperity.
Therefore, I think the Austrian take on who’s to blame is worthy of a hearing.
As I’ve discussed in other articles on Citizen Economists,
the Austrian theory of the business cycle holds that it is the government’s
artificial creation of money and credit that causes asset bubbles that
eventually have to burst. But interventionists of the left and right want to
blame other culprits—greedy businessmen, unions, speculators, foreigners,
immigrants, welfare recipients—take your pick. Thus in misdiagnosing the cause,
liberals and conservatives also err in prescribing a cure.
A tremendous amount of faith is being put in President-Elect
Barack Obama’s ability to
“fix” the economy. But unfortunately, the odds of him “fixing” our current mess
are only slightly better than the odds he’ll reveal himself to be the
reincarnation of Grover Cleveland. Obama, well-
class=GramE>intentioned or not, cannot possibly “fix” the economy—at
least not without causing a lot of pain in the meantime. And that option is not
on the Obama menu.
Paul
class=SpellE>Volcker’s Orchestrated Recession
What needs to be done? Well, Obama
should rely on the wisdom of Paul Volcker, who is on
class=SpellE>Obama’s economic-advisory team. When Volcker
was tapped to chair the Federal Reserve in 1979, the country’s economic outlook
was nearly as bad as it is today. Four decades of pseudo-socialism under FDR,
Truman, Eisenhower, JFK, LBJ, Nixon, and Ford had wrecked the foundations of
the U.S.
economy—even the gold standard had been sacrificed. Austrians predicted
hyperinflation, the end of the dollar-reserve system, and maybe even the
implosion of the U.S.
government. They made these predictions because they were confident that no one
would have the political will to do what needed to be done—raise interest rates
through the roof, choke off monetary growth, and intentionally throw the
economy into a deep recession.
That’s just what Volcker did—and
he was hated for it. In fact, Ronald Reagan tried to get Volcker,
who had been appointed by Jimmy Carter, dismissed. But while
class=SpellE>Volcker’s orchestrated recession was deep, it was also
short. Coming out of it, the U.S.
economy boomed. In fact, Reagan even reappointed him in 1983. But four years
later, the Gipper goofed with his appointment of
hardcore inflationist Alan Greenspan to succeed Volcker,
and the same story began to play out again. Now we’re right back to where we
were in 1979—and 1929.
style='mso-bidi-font-weight:normal'>U.S.
style='mso-bidi-font-weight:normal'> Economy Headed For Credit O.D.
Why is it that the Fed and the politicians keep on wrecking
the economy? Two reasons: ignorance and greed. They truly don’t understand
economics, and who can blame them? Most economists don’t, either. Secondarily,
while politicians are quick to accuse businessmen and Wall Street speculators
of being “greedy,” it is the political class that’s greediest of all—greedy for
power. Inflation of the money supply allows them to buy more votes without
raising taxes, and so they direct the Fed to perpetually expand money and
credit. Why should the politicians care? Most of them will be out of office by
the time the fiat money hits the fan.
So when the chickens start coming home to roost, as they are
now, the government and the Fed pursue a policy of throwing gasoline on the
fire. They try to cure the problems of inflation with more inflation. A more
accurate analogy is that of the heroin addict. When he starts having withdrawal
symptoms, another shot of junk will make him feel better for the moment. But as
time goes by, it requires more and more H to keep him balanced, and eventually,
he dies of an overdose. This is where the
w:st="on">U.S. economy is headed.
What
class=SpellE>Obama Could Do – But Won’t
The best case scenario would be for Obama
to follow an even more aggressive version of Volcker’s
1979 playbook and direct Ben Bernanke to pursue a
hard-money course. Despite being an arch-inflationist Keynesian,
class=SpellE>Bernanke would undoubtedly follow the long line of
supposedly “independent” Fed chairmen by doing exactly what the president
ordered. This would mean raising interest rates, preferably by closing the
Fed’s discount window, selling its entire hoard of government bonds (and other
assets), and possibly buying gold with the proceeds (or simply retiring the dollars).
This would help put the economy back on sound footing for
the first time since 1913, but it would also be very painful in the short run.
It would definitely cost Obama any chance at
re-election, and the next president would undoubtedly reverse course.
Therefore, even if Obama were aware of the Austrian
theory and believed in it, chances are he wouldn’t pursue this course of action
until into his second term. And we don’t have four years to wait.
By J.D. Seagraves, on November 26th, 2008
In 2007,
Citigroup was the largest bank in the world, worth over $300 billion. This was
the peak of the Federal Reserve’s latest inflationary bubble, and business for
Citigroup—a chief participant in the Fed’s legal counterfeiting—was good.
Fast
forward to November 21, 2008. Citigroup’s stock was more than 94 percent off
its high of less than two years before. Now, just like AIG—once the world’s
largest insurer—Citigroup was in need of a huge dose of corporate welfare in
order to stay afloat. “It’s for the good of the country,” apologists said.
“Citigroup is too big to fail.” Clearly this was untrue: Citigroup was too big not
to fail.
The
Covert Bailout
If you
don’t follow financial markets as part of your job (or a sick and twisted
hobby), then you might have missed the news about Citi—whose bailout was nearly
five times larger than AIG’s. There was no vote taken by Congress, and that’s
because, the last bailout was the bailout to end all bailouts—or at least end all
discussion of bailouts: it gave the Treasury department the authority to bail out
any firm, any time, any place, without congressional
approval. All the Treasury secretary has to do is “notify” Congress. Isn’t that
quaint?
But don’t
worry: the Treasury department is barely on the hook for Citi’s welfare
package. Instead, the Federal Reserve will shoulder most of the burden. The Fed
doesn’t collect taxes, so where will it get the money to bail out Citi? It create
it out of thin air!
Just take a
look at the details: The total bailout package is $306 billion. Citigroup
itself will assume the first $29 billion in losses—wow, how honorable. It will
also assume 10 percent of all losses beyond the first $29 billion. The Treasury
department will take on 90 percent of the next $5 billion, and the FDIC (the
bankrupt Federal Deposit Insurance Corporation) will take on 90 percent of the
next $10 billion. Then the Fed will create new money to cover 90 percent of the
next $262 billion.
The
Fed’s Magic Checkbook
Now the Fed
doesn’t technically “print” money—that’d be too cumbersome. Instead, it writes
fraudulent checks, “monetizing” debt against its promise to pay. How will it
pay later? By writing more checks! This is absolutely no different from you having
a magic checkbook that allowed you to write any check for any amount without
bouncing.
By
“monetizing” this debt, the Fed expands the money supply electronically. If
need be, Fed Chairman Ben Bernanke calls up his partner in crime Henry Paulson
at the Treasury department and asks him to print up some more paper. But more
often than not, the money just exists in cyberspace.
The
Deleterious Effects of Inflation
What are
the effects of all this new money being created? Well for one, expanding the money
supply is by definition inflationary. The Fed and its fellow central banks have
tricked the world into thinking “inflation” refers to rising prices, but
truthfully, rising prices are an effect of inflation. Inflation is the
creation of new money, which tends to cause prices to rise since there are more
dollars (or euros or yen) chasing the same number of goods and services.
Secondly,
there is a redistributionist effect. When the Fed creates billions of new
dollars and gives them to Citigroup, the value of the dollars in your pocket
goes down. The value of each individual dollar in Citigroup’s account goes
down, too, but the increased quantity of dollars in their possession via the
bailout increases the company’s total purchasing power. Thus, it’s not as if
the Fed creates money to give to Citigroup at no one’s expense—it’s at everyone’s
expense except Citigroup’s. Of course, thousands of corporations get billions
of dollars this way all the time, so they’ll never complain. Meanwhile, Joe
Sixpack is wondering why he can only afford a three-pack for the price he paid for
a case last year.
The
People Are Waking Up
Inflation
is theft, and for the first 137 years of our republic, most Americans
understood this. That’s why monetary policy was the driving issue behind three
consecutive presidential elections, 1892 through 1900. Sadly, central banking
has not been an issue on the voters’ minds since the passage of the Federal
Reserve Act in 1913, at least not until recently.
This past
weekend, on November 22, thousands of Americans gathered in cities with Federal
Reserve regional branches in order to protest central banking and fiat money.
November 22, of course, is the anniversary of John F. Kennedy’s assassination.
JFK is rumored to have been a behind-the-scenes opponent of the Fed, and it is
substantiated that he planned to issue U.S. Treasury notes backed by silver.
Conspiracy theorists allege that this is one of the reasons behind his
assassination, and while the evidence supporting this theory is thin, one thing
is for certain: monetary policy is a matter of life and death, and it’s time
that more Americans wake up to this fact.
By J.D. Seagraves, on November 10th, 2008
A few weeks before the election, “Joe the Plumber” asked Barack Obama about his tax plan, and Obama said that he intended to reform the tax code to “spread the wealth.” The McCain campaign seized on this gaffe and ran with it: what Obama was advocating, they said, was tantamount to “socialism.”
The “socialist” charge was repeated many times throughout the remainder of the campaign, and it continues to be levied against President-Elect Obama even after his historic election. Recently, Investor’s Business Daily editorialized that the “change” Obama favors “can only be described as socialistic.” But what does this even mean?
Is “Socialist” Nothing but a Slur?
Kansas City Star editorialist Lewis Diuguid says that “socialist,” in the context used by McCain and his supporters, is nothing more than a thinly veiled racial epithet. After all, Diuguid points out, iconic African-Americans such as Martin Luther King, Jr., W.E.B. Dubois and Paul Robeson were all smeared as “socialists” by their racist opponents. But the inconvenient truth is that King, Dubois and Robeson were socialists.
Dubois and Robeson were long-time members of the Communist Party of America, and Martin Luther King, in just one of many examples, once gave a speech in which he called for a “better distribution of wealth” and opined that “maybe America must move toward a democratic socialism.” Socialism was “not the sum of these men,” says libertarian Lew Rockwell, “but they were all red-blooded socialists.”
Regardless, “socialist” can definitely be used as a mean-spirited slur, but the word also has a legitimate meaning. The question remains: Is Barack Obama a socialist?
What is Socialism?
Socialism is defined as an economic system wherein the means of production and distribution are collectively owned, typically by a monopoly government. Politically, a socialist state can be democratic, dictatorial or anything in between: contrary to popular belief, the method in which leaders are chosen is not an element of socialism.
There is no such thing as “private property” under socialism: production is centrally planned by committees on the basis of what they think people want or need. Theoretically, each individual is expected to produce according to his ability and consume according to his need. It sounds like heaven on earth—or does it?
It is often said that socialism is good in theory but bad in practice. Actually, this is untrue. The Austrian economist Ludwig von Mises proved that socialism is not good in theory and cannot work in practice. Mises’s 1922 work Socialism demonstrated that a pricing system and for-profit ownership of the means of production are necessary to signal to producers what to produce. Mises thus predicted the collapse of the Soviet Union, with great accuracy, almost 70 years before the fall of the Berlin Wall.
Democratic Socialist or Social Democrat?
Even the most paranoid “ditto head” could not seriously think that President Obama will collectivize all U.S. property in the hands of the federal government. Clearly, Obama will not usher in a truly socialist America. He might, however, move us in the direction of greater “social democracy.”
Our national confusion in regard to political taxonomy dates back to the New Deal, when the word “liberal” changed meanings in America. Previously, a “liberal” had been someone who emphasized individual liberty, private property and limited government. These were the ideas that dominated the Democratic Party from Jefferson through Cleveland, and although Woodrow Wilson’s “progressivism” represented a departure, Franklin Delano Roosevelt actually campaigned as a traditional, classically liberal Democrat. Once in office, however, FDR “flip flopped”—and took the term “liberal” with him.
What we now consider “liberalism” in the United States is referred to as “social democracy” throughout the rest of the world, and “social democrats” are often slurred by their opponents as “socialists.” But social democracy differs from socialism in that it leaves at least nominal ownership of industry in private hands, while heavily regulating, subsidizing and managing various sectors of the economy in pursuit of social goals. Key elements of social democracy include government-controlled education and healthcare, a broad economic safety net, environmentalism, protectionism, multiculturalism and a foreign policy that “promotes democracy.”
Dawning of a New Age?
In that same editorial cited earlier, Investor’s Business Daily said Obama “may be guided by principles different from what we’re used to and on which the nation was founded.” Based on his campaign rhetoric, President-Elect Obama certainly sounds like a social democrat, but does he really represent a radical change from our recent history as a nation? After all, George W. Bush signed Sarbanes-Oxley into law, expanded federal funding of education and healthcare and invaded a sovereign nation in order to install a “democracy”—his presidency may not have been textbook social-democratic, but it certainly leaned in that direction.
The truth is that our nation was founded on the classically liberal principles of political decentralism and laissez-faire. Regardless of what right-wing radio says, these founding principles are not at risk of going down the drain under President Obama because they were jettisoned decades ago. So while the Obama administration might represent a modest shift to the “left” (whatever that means), the essential nature of America’s political and economic systems will remain unchanged under his leadership. And that’s unfortunate.
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