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Wednesday, May 27, 2009

The New Empathetic Corporatist Economy

by Jordan and Michelle S

President Obama has taken his promise to “spread the wealth” for the sake of “fairness” and actually went through with it, much to the dismay of people who want the economy to recover. Since January, Mr. Obama has pretty much nationalized the auto industry, proposed a major increase in government participation in the health care industry and will change the rules of credit card companies so that those with good credit are subsidizing those who had bad credit. Not since the fascistic New Deal has an economy been chopped up and served so willingly to rabid, hungry bureaucrats by the elected representatives of the people. This is what is known as corporatism, and it will not bode well for those who want to prosper in America.

Corporatism and Cartels

Since the Second World War, the American economy has been one of a mix of private business and government intrusion. America's free market ideology went out of style when the anti-capitalist myths of the Great Depression took hold. Unlike World War One, when the socialized/nationalized wartime economy fell apart due to the reluctance of the American people to give their financial future the unsympathizing government, the Progressives of the New Deal ingrained it into the new American generation that the state is your friend, your father, your mother, your eternal watcher and caretaker. The Nanny State that emerged was so powerful that every Republican president up to Reagan refused to take it on.

The National Recovery Administration (NRA), the Tennessee Valley Authority (TVA), the War Industries Board (WIB); all the alphabet soup agencies created by FDR did not simply nationalize the economy, though that did occur in some sectors. No, instead of simply taking control of the economy and running it through and through, the agencies regulated the economy into submission to fit the goals of the government. This is what's known as corporatism. It was a major part of early-to-mid century economies of all the major powers: America, the United Kingdom, Fascist Italy and Nazi Germany. Only the Soviet Union, a communist nation, rid itself of major private industry.

The New Deal agencies would use an iron fist to direct the economy. For example, the NRA instituted price controls on everything from dry cleaning to the price of a newspaper on the street. This was in the name of helping the “forgotten man” who supposedly survived on selling products at above-market prices. Businessmen were actually thrown in jail for violating these regulations, the most famous being a dry cleaner who charged five cents lower than the NRA mandated. The fetish with price controls went so far that tons upon tons of food (wheat, pigs, etc) were burned or culled by order of the government so that the prices would stay high for farmers.

Within these agencies, though, were the very men of industry FDR would assail in his speeches and his fireside chats. The steel makers, the arms manufactures, the bankers, the auto makers; all those who found it easier to work with the government than to fight it. These men took it upon themselves to carve out their own little sections of the economy for their respective companies. These economic fiefdoms are called cartels. The military-industrial complex that the left-wing warns us of all the time is one of these cartels, created out of FDR's need to coral industry to suit the purpose of the government. Unwittingly, the left and their crusade to humanize the economy is creating new complexes run by federal paper pushers that will drain the innovation and the dynamic prosperity our still somewhat free markets provide.

Cars, Crutches and Credit

George W. Bush told the American people just before the November 2008 election that it was necessary to abandon the free market in order to save the free market. His position was reminiscent of Herbert Hoover’s in the aftermath of the 1929 stock market crash. Bush unveiled the Troubled Asset Relief Program (TARP), which allowed the government to essentially become a shareholder in major banks and the auto industry.

Instead of banks and the auto industry taking their lumps and overhauling their business models, top executives ran to the government for help. Upon doing so, the government now has the power to tell these companies how to run their business. This does not bode well for the companies and the American people.

The “Big Three” and “Big Brother”

Recently, President Obama called for the Chief Executive Officer of General Motors to step down. Although, General Motors did not perform well under the leadership of Rick Wagoner, the government should not be making these decisions. In the past, these decisions were made by the company’s shareholders. However, now that the government is a “shareholder,” the President and other bureaucrats otherwise known as “car czars” can use force to implement their agenda. In addition, bureaucrats can tell the auto industry what kind of cars they will make and what type of workers they employ. As a result, the stranglehold the United Auto Workers Union (UAW) has on the car companies will be tighter.

In the end, both the consumer and the company are hurt. The UAW’s mandates have driven labor costs to almost twice the cost of their foreign competitors. The cost is then passed to the consumer who has elected to buy better made foreign cars. If American car companies cannot sell cars, they are forced to lay off workers. Therefore, one must ask what good the UAW had done for America when consumers pay more money for cars that cannot match the quality of their foreign competitors’ products. Unions destroyed the American steel industry in the 1970’s and 80’s, and now the American auto industry is in serious trouble.

To further complicate matters, the Obama Administration has unveiled new fuel efficiency standards that will eventually require vehicles to have a much higher mile-per-gallon rate. One would think a mandate like this would benefit consumers. After all, why not have higher standards? Why not rely less on foreign oil? Why not make cars that are better for the environment? The truth is consumers would not be better off, and these mandates have not reduced our oil consumption in the past.

First off, hybrid vehicles are more expensive, and there is no cost benefit when comparing fuel savings to the higher cost of the vehicle. Second, the demand is simply not there, as Americans prefer bigger cars. Third, the United States is obviously not the sole country that uses oil. Therefore, even if we reduced our oil consumption, which in turn, would lower prices; the overall world demand would NOT decrease. Therefore, increased demand elsewhere in the world would drive prices up. Increased demand from China and India was a key factor in driving up crude oil prices to record levels in 2007.

“Big Brother” offers a “lending” hand

Most of America’s largest banks got in line with the auto industry to ask Uncle Sam for a bailout. As a result, the banks are now under the “brilliant” leadership of Congress. Just as the government tells the auto industry what kind of cars they will make, banks will be told to whom they will lend money. The government will also tell them what kind of financial shape they are in based on bureaucrat derived stress tests. Although government mandates such as the “Community Reinvestment Act” were not the sole cause of the housing bust, these types of mandates created the sub-prime mortgage sector and led to reckless lending practices. These reckless practices caused a surge in demand for housing, which drove the cost of housing up to a level that was disproportionate with inflation.

Through quasi-public institutions, Fannie Mae and Freddie Mac as well as the Federal Reserve, the government has had its hands in the banking industry since 1913 (the year the FED was born). The very same government that caused one of the biggest financial debacles in decades now wishes to tell banks and lending institutions how and to whom they should extend credit. The government through the Federal Reserve and congressional mandates has created a society that lives on credit. Debt is a way of life for the average American today. Accessibility is what drives demand. Increased demand drives up prices. Remedial economics shows how easy access quickly inflates prices. Have you ever wondered how your grandfather was able to pay cash for his automobiles and even his home? Answer: limited access to credit. The accessibility of credit and the amount of credit people can receive is sole cause of deflating purchasing power. Since our government cannot manage debt either, the value of the U.S. Dollar is declining.

“Big Brother” and “Band-Aids”

Uncle Sam is very generous. Bureaucrats wish to tell us what kind of cars to drive, how much credit we should have, and now they want to provide us with healthcare. The biggest argument that is made against privately-run healthcare is that profits are put ahead of the care of human beings. This hypothesis is severely flawed in the sense that the elimination of “profit” does not eliminate the constant need to control costs. In addition, this conclusion neglects to consider the fact that profits allow reinvestment for better technology and better personnel which directly results in better care for the individual.

The second argument that is made in favor of government run health care centers on the government being a competitor to private sector insurance providers. The sad attempt by politicians to turn the supply-side argument of increased competition leading to lower prices is pure fallacy. This is due to the fact that the government will not merely be a competitor to private insurance companies. The government will impose very strict regulations on private insurance companies by requiring insurers to insure all applicants and place price caps on premiums. In the meantime, the government could borrow from taxpayers and the U.S. Treasury to make up for its shortfalls. The cost of compliance for private insurers would be exorbitant and allow the government to squeeze them out in an effort to MONOPOLIZE the industry. So much for competition…

Healthcare is NOT FREE if the government provides it. People will see tax increases not seen before on both federal and state levels. Employers’ cost of compliance will come at the expense of jobs and growth.

Last but not least, one must ask if they really want a government bureaucrat making their personal decisions when it comes to their own health care and the health care of their loved ones – the very government that has trouble delivering your mail.

Empathy Rewards Mediocrity

Both FDR and Obama made promises of an empathic government. They told the “forgotten man” that he'd be heard. They promised the little man his check would be bigger. They promised the hard worker that selling his labor would not be in vain. They took on the fat cats, the bankers, the traders, the factory bosses, all the name of fairness for the employed and the poor. It's a nice notion, like any other do-gooder idealism, but it’s impractical and inefficient past a certain point (that point being crossed decades ago by FDR). The federal government's economic role is not that of feelings and paternal instinct, but of streamlining and protection of property. No where in the Constitution does it talk about giving the greedy their due or making sure Jimmy the Carpenter can buy his family some new clothes for Christmas. Those powers are left to each state to make on their own time and on their own dime.

The federal government's supposed empathic regulation ends up creating cartels around the powerful chairmans and minions of the economic congressional committees. Decades of federal usurpation and consolidation of economic liberty has fed congressional corruption to the point that trillions upon trillions of dollars have vanished into the crony black hole, never to be seen again, unless you happen to drive by the home of John Murtha's nephew. He received of tens of millions of taxpayers dollars for “warehouse services” for the military, but, ironically, has a skeleton crew watching such sensitive and expensive material. Chris Dodd protected his sweetheart deals with Countrywide while writing up new regulations for banks. Barney Frank kept his mouth shut about Fannie Mae and Freddie Mac, two of his major donors, while beating his chest over freer, less toxic banks. Diane Fienstein received millions upon millions of dollars of bailout money for a company her husband runs. Chuck Schumer cries about credit cards, but last year he publicly leaked confidential letters that sunk a California bank at the same time he defended the solvency of New York banks, which eventually crashed anyway. Empathy, indeed.

Despite our objections to government pseudo-empathy governing economic regulation, we recognize that there is a need for a basic safety net in today's world. Basic welfare for those who truly cannot work, basic unemployment for those who have been recently laid off and cannot find work, medical coverage for the low-income elderly and the low-income disabled, protection of bank accounts under the FDIC; these things are the thin armor of the economy. While it cannot protect everything, it does stop many dangers and allows for flexibility and speed; characteristics essential to the prosperity of our nation. What the President and the Democrats have proposed with the auto industry, health care and credit cards is solid metal plate. It may attempt to protect everyone, but it’s cumbersome and near impossible to move quickly. Granted, it may be able to take some hits, but once it is knocked off balance it'll tumble end over end until it hits bottom.

The light armor and adaptability of the American economy is what has allowed it to prosper for so long and so well during peacetime. The post-war boom cited by many preaching collectivists was actually a confluence of military and economic history. Continental Europe was physically and mentally annihilated by World War II and the Spanish Civil War. The United States sold them everything they needed to rebuild themselves. Since the post-war period, every boom has been heavily driven by the ambition and the innovation of private business, not the empathetic government bureaucrat. Mr. Obama's new economy will destroy that ambition and innovation in favor of “fair” cartel-style redistribution, led by the less than trustworthy leaders of the Congressional committees.

The new socialized corporatist economy will take a nation driven to the top by exceptionalism and bring it low by rewarding mediocrity and blocking economic progress.


harry said...

Whereas I recognise and respect the contents of this article as being heartfelt and sincere, I am more than a little peeved by the number of "typos". Words missing preventing the correct construction of sentences and, for example, "unemployment for the recently laid off" er...I think what was meant was State or Federal unemployment benefit in the form of monthly checks for those recently laid off etc.

Does this kind of thing matter? Well, yes in my opinion. This kind of sloppiness undermines any carefully thought out argument because if the person/s seeking to persuade me to their way of thinking apparently does not have the time to re-read and correct their own article/s then why should I take the argument seriously? Sorry, but matters such as are being discussed here are too important to be neglected in this fashion. And I do not believe for one second that this kind of inattention would get past any editor of a worthy daily or political publication.

Michelle S said...

Thank you for your feedback, Harry. Spelling and grammatical errors are taken very seriously here; and although we do not have the benefit of professional editors that writers of the Wall Street Journal or Washington Post enjoy, we don’t feel that is an excuse to be sloppy. Poorly written articles do take away from the meaning, and I’m very grateful when our readers point out something we may have missed.

I don’t normally comment on pieces I don’t write. However, I assume responsibility for the entire article if I co-write something, and I’m sure Jordan wouldn’t mind if I attempt to provide clarification on the section you referenced. He may also chime in.

I would be grateful if you can point out other mistakes/omissions, but the reason why he didn’t spell out state and federal unemployment benefits simply because only a state benefit technically exists. However, I take your point because most people are not vastly familiar with how the system works and therefore, deserves further clarification.

Although employers are required to pay both a Federal and State unemployment tax (better known as FUTA and SUTA), the federal tax simply authorizes the IRS to collect the tax which is used only to fund state workforce agencies. SUTA, the state unemployment tax, is paid directly to state workforce agencies and is used solely for the payment of benefits to the unemployed.

If you are used to reading me, I would have spelled all of that out and lost people half way through. The point that should be taken from this is when federal mandates require extensions of benefits up to 6-9 months as well as benefits for part-time workers; this significantly increases the tax burden on employers. The FUTA tax rate alone is 6.2% of taxable wages. When employers are required to pay these high tax rates, it comes at the expense job creation/growth and higher salaries for those employed – so in essence this is a tax that ALL EMPLOYEES pay in reality.

Thanks again for your feedback.