Thursday, December 31, 2009

Anatomy of a Myth II – The Racist Constitution.

Maybe it’s just me, but I was taught that the Constitution counted black people as 3/5ths of white people. It was just something we were told was due to the racism of the times. That’s how it was in those unenlightened days, after all, what could you expect from a bunch of rich white slave owners? Those founders may have been learned wise men, but they were also flaming racists, or so we were told. Fortunately for the Constitution and the Founders, the 3/5ths language in Article 1, Section 2 is not what we were taught.

Critics use the 3/5ths enumeration language to justify all sorts of anti-founder, anti-American, sentiment. If the Constitution itself can be viewed as a racist document, does that not cast doubt on the holiness of the whole enterprise of these United States? Isn’t that what some have preached for years? Does that not sound familiar? There’s only one problem with this argument; the premise is flawed because the 3/5ths language in Article 1, Section 2 is not about race or racism.

Oh, I’m not claiming that racism didn’t exist among the founders and in colonial America. I can’t imagine an economy based on forced African labor as anything but racist. But the Constitution, and in particular the 3/5ths provision in Article I, Section 2 studiously avoids that issue. The framers were pretty aware that history would be looking over their shoulder and accordingly chose language that would not be harshly viewed by future generations. They were doing what they could, in their way, to plot a course in the direction of their founding dream of a society in which “all men were created equal”, and were treated that way.

So, what about that 3/5ths thing; what does it really say in Article I, Section 2? The founders enumerated non-free Persons as 3/5ths of a free Person. In other words, it was about slavery not race. Free blacks, of which there were many by 1787, were enumerated exactly as free whites. Moreover, the constitution refers to all men, free and “other” as “Persons”. This is no accident. Incidentally, white slaves would have been enumerated exactly as black slaves, at 3/5ths. That’s right, there were occasional white slaves too!

So why the distinction and the 3/5ths thing in the first place? Madison explains in Federalist #54 that enumeration served two purposes in the constitution: representation and taxation. The more Persons you had, the more you were taxed and the more representatives you could send to the federal govt. Slaves didn’t pay taxes or vote but did swell the population of a state, therefore the 3/5ths thing was arrived at as a compromise for calculating taxes and representatives. Of course, free blacks were fully enumerated before they could vote; just like women.

Article 1, Section 2 never mentions race or slaves, only “free Persons”, “Indians”, and “other Persons”. Indians, who also paid no taxes and couldn’t vote, were enumerated as “zeros” presumably because they didn’t contribute economically like slaves did. Again, none of this precludes the reality of racism among the people of the time, but it does point out the lack of a racial aspect to Article 1, Section 2.

Thomas Sowell, one of my favorite economists, and incidentally a black man, tells a story in one of his books where he was questioning a professor and asked where slavery came from. The professor responded that that was the wrong question. The right question was, where did freedom come from, because slavery was woven into the human fabric from the outset; it is only in modern times that freedom has become the norm. We have abolitionists and philosophers around the world to thank for the freedom that we all enjoy today. Among them were the wise men who wrote our founding documents and made it clear, if you look closely, where they expected us to end-up.

Sunday, December 20, 2009

The Irony of Keynes

If I were to ask you to name the single biggest ideological struggle of our time what would you say? Capitalism vs. Communism? Liberalism vs. Conservatism? Democrat vs. Republican? Sure, those are all big ones, but to me the struggle at the root of all those is an economic one; Supply Side Economics (SSE) vs. Demand Side Economics (DSE). As John Maynard Keynes (1883 – 1946), the man most associated with DSE said about economics: “In reality, the world is ruled by little else. Practical men (and women), who believe themselves quite untouched by any such intellectual influence, are usually slaves of some dead economist." Wow, talk about irony!

For most of the last 100 years we have oscillated between these two economic theories. In the 30’s it was pure DSE. In the 60’s and 80’s it was mostly SSE. Often it’s been a blend of the two. But now we are back to pure DSE and not since the 30’s have we put so many eggs in that basket. In fact, the experiment we are conducting right now is a historic case study in economics and the result will determine our economic future. One possibility is that everything will work out just fine  Then again, it could be an epic and profound human disaster! Have I got your attention?

Now, if you’re like me, you’ve heard these terms over the years and have a basic understanding of them. But, speaking for myself, I sometimes get confused by the language of economics. A further source of confusion enters in when economists let their unrevealed political bias color their explanations. Not being an economist, but as someone who has studied this stuff on my own gives me a perspective that might help others get to the essence behind SSE and DSE. In that spirit, the following is a summary of the big poli/economic debate of our time using simple language which absolutely reflects my bias.

Here are my boiled-down definitions of SSE and DSE:
  • Supply Side Economics is the theory that people will enthusiastically SUPPLY their efforts and capital if they are free to realize the rewards. 
  • Demand Side Economics is the theory that people will enthusiastically DEMAND goods and services if they are subsidized to do so.

Supply Side Economics is all about freeing people to create and produce.

Demand Side Economics is all about re-distributing wealth to get people to consume and spend.

Politicians use terms like “targeted spending”, “deficit spending”, and “investment”, instead of "wealth redistribution".  But those terms violate double-entry accounting rules; they only show one side of the ledger. Where does the spending or investment come from?   It has to come from someone, right? Are we really gaining anything by taking a dollar from one person and giving it to someone else? Well, yes in a sense we are: as the old saying goes, “If you rob Peter to pay Paul, you’re guaranteed to gain Paul’s vote!” And the vote tally goes up exponentially when Peter has yet to be born! In fact, this is the politician’s favorite funding source. Politicians get elected time and again by re-distributing wealth from the unborn to active voters. It’s a classic heads I win, tails you lose scenario where the winners never have to face the losers in an election. This has become the essence of DSE today.

DSE or “Keynesian Theory” when associated with John Maynard Keynes usually refers to targeted re-distribution exemplified by short-term “stimulus” designed to minimize a dip in the “business cycle”. Cash for Clunkers, the 787 Billion Dollar Stimulus Bill, and TARP are recent examples of the original intent of DSE re-distribution. But that is a small part of total DSE. Most wealth re-distribution is done to achieve political or social goals and not for specific economic benefit. Social Security, Medicare, Medicaid, and Obamacare are all re-distributive programs and are social and political programs first and foremost. But regardless of the intent, the economic effects are the same. Thus all re-distribution behaves as Demand Side Economics.

So, what is the difference between wealth re-distribution and “normal” government spending? I maintain that any fiscal expenditure for a reason other than the essential roles of government is a form of wealth re-distribution. Neither SSE nor DSE questions the need for essential government services, or the idea that taxes must be collected in order to fund them. But of course, the devil is in the details.  In this case the detail is how a society defines the “essential roles of government”.  In our case we can start with the US Constitution and call anything in that document essential. Anything we have added above and beyond our constitution is, I would contend, wealth re-distribution.

This definition helps answer one of the big questions surrounding Supply Side Theory: What is the optimum level of taxation which will promote prosperity? The answer: Just enough to fund the essential roles of government.  Anytime we spend government money on things not explicitly enumerated in the Constitution, we are choosing DSE re-distribution over optimum prosperity.

Again, there are often compelling socio/political reasons for a society to engage in wealth re-distribution. But what often is obscured is the economic damage and deceit involved in this choice. Unfortunately, the underlying premise of DSE is flawed as is the generational theft which accompanies it.

So, what is the big flawed premise of DSE? In short; Supply can satisfy Demand, but Demand can never satisfy Supply. Put another way, all the Demand in the world can never Supply food for the hungry unless there is a reason for producers to Supply food. Demand alone does no good. Remember the old Soviet Union? Was the Demand for groceries any less in the Soviet Union than in the US - yet who could forget those pictures of the Soviet food stores with empty shelves? Naked Demand is like the person wandering through a desert dying of thirst; they have infinite Demand for a drink but it does them no good without a Supply of water.

The theory is that Demand alone will stimulate producers to Supply more. But the flaw in that thinking is that the re-distribution of wealth works exactly in the opposite direction in two ways: first, by taking money from producers it reduces the reward for them to create Supply, and second, it disincentivizes Demanders to contribute their labor. It’s a classic lose-lose scenario.

Socio/political reasons aside, engaging in DSE in the name of helping the Economy is nonsense. And this is not just a critique of Obamanomics. George W Bush is often mistakenly called a “Supply-Sider” for lowering taxes, and yes he did lower taxes which aided prosperity. But his record is much more complicated than that, for while lowering tax rates, he also engaged in plenty of DSE, especially in his last two years with the Pelosi/Reid Congress. Ultimately, he was both a Supply-Sider and a Demand-Sider and thus he was neither.

The current course we are on is as close to a pure Demand Side Economic model as we are likely to ever see. That makes this a watershed moment in the debate over economic theory. Too bad for us we may end up, as the father of DSE John Maynard Keynes famously said, “slaves of some dead economist”. If that isn’t ironic enough for you, consider this; we are being led into this servitude by our First Black President.

Tuesday, December 15, 2009

Deja Vu All Over Again

Yesterday, Barack Obama summoned the heads of the country’s biggest banks to the White House for a good tongue lashing about how they were the villains who caused the financial panic and now it’s their job to fix the economy... by making reckless loans again… No seriously, that’s exactly what happened!

Well, at the risk of confusing you with facts, I’d like to remind you of a little history; the history of a certain Community Organizer, the Community Organization he worked with, and the banking regulation called The Community Reinvestment Act (CRA) which forced the banks to look the other way when writing mortgages.

The Community Organizer, the young Barack Obama, as you’ve guessed by now, was not the lead singer at the time but rather another voice in the chorus. But there he was with Project Vote and ACORN (Association of Community Organizations for Reform Now) in Chicago while they were agitating for looser lending standards by banks so that minorities with poor credit could get mortgages and buy houses. It was a two pronged effort: first, get the government to force the banks to make the loans and second, get the government to purchase the dubious loans from the banks. The second part was to happen through Fannie and Freddie, the giant Government Sponsored Entities (GSEs) who wind-up owning most mortgages in the end.  This is ACORN's own website on the CRA:

The strategy started off slowly in the 70s under Carter but by the 90s, when Barack Obama was in the thick of it and Bill Clinton was trolling for votes in the inner city, it was a match made in heaven! Together, ACORN with their army of Community Organizers including the young Barack Obama and Bill Clinton, tweaked the CRA just enough to really get the ball rolling and shook-down the banks to not just make the risky loans, but they also made it almost risk free by making it super easy to unload the paper onto the unsuspecting public through the GSEs. This is what lit the fire we all know as the Subprime Mortgage Crisis of 2008/2009. If you have doubts about any of this, try finding any mention of Subprime Mortgages prior to the CRA. Good Luck.

To repeat, this is just the history of what lit the fire. The rest was done by a host of other factors which are beyond the scope of this brief history. But this author would contend that once the fire was lit, the damage was done and all the other factors just determined the precise timing of the blaze.

Now that you have been reminded of this history, does it not strike you as a tad comical that Obama is now lecturing the bankers on their responsibilities for both the Subprime Mortgage Crisis and getting back to the important business of making reckless loans once again? Admit it, you are laughing a little... I can see the tears running down your cheeks…

Friday, December 11, 2009

Follow the Money

Everyone with an interest in such things is wondering; "Are we still a private-enterprise free-market economy or are we now socialist?" After all, the government now owns or virtually controls the car companies, the banks, most of the healthcare industry (soon to be all), the biggest insurer, education, a chunk of the media (think about it), the mortgage market, energy exploration, everyone’s basic retirement plan, passenger trains, airport screeners, the postal service, and on and on and on… But I think all this misses the point. If we were still a private-enterprise free-market economy, we could easily reverse all this with one election. Unfortunately, that is not very likely even with 2010 shaping up to be a big win for smaller government, and to understand why, all one needs to do is “follow the money”; in this case, the tax money.

We have now reached the tipping point where half of the US population either pays virtually no taxes or perceives that they pay no taxes. (Source: US Gov.),,id=133521,00.html

Thanks to 100 years of progressivism, a massively progressive income tax, the Earned Income Tax Credit (EITC), entitlements galore, and stealth taxes which no one is aware of paying, only a minority of Americans are openly paying the tab. That doesn’t mean that the others are paying nothing. They are paying plenty, but they do so in ways that are hidden from them. Payroll taxes are matched by the employer but no worker ever thinks of that money as theirs; it is. Corporate income tax is added to the price of everything we buy, but no one thinks of that money as theirs; it is. The costs of business regulation are built into the prices of goods and services but no one realizes it is a tax. When the Fed pumps out money and deficits skyrocket, no one thinks of that money as theirs: it is and when inflation hits, they learn it. The bottom line is that a majority of Americans now embrace socialism (although they don't recognize it as such) because they believe someone else will pick up the tab; they won’t.

The political reality is that we are no longer a reliable private-enterprise free-market economy. Majorities rule in a democracy and as long as a majority of Americans perceive they are getting a free ride on someone else’s dime, they will continue voting for entitlements, earmarks, socialism, re-distribution, and big government. We will not travel this path towards socialism in a straight line as history has already shown, but travel it we will! Just follow the money…

Wednesday, December 9, 2009

Live by the Sword, Die by the Sword

"Live by the Sword, Die by the Sword"  Ever hear that one?  It's an oldie but a goodie.  Well, I got a new one for ya  (I probably didn't invent it though) "Live by the Dollar, Die by the Dollar".

Watching the actions in Washington these last 11 months and knowing our "Shadow President" (George Soros, and I am not saying that with tongue in cheek!) we are being hacked to death by fiscal and monetary policy aimed directly at our currency.  Conveniently, the Shadow President is a world renowned currency trader who has made billions shorting the dollar.  I'm not a conspiracy guy, but isn't it interesting that gold has been signaling a major devaluation, the 12 Trillion dollar debt with the 100 Trillion dollar unfunded liability grows exponentially, Fed rates are near 0%, and there's ample evidence that all roads in ObamaLand  lead back to George Soros?

At this point there are a few things one can do to hedge this scenario:  1.  Buy gold on the dips.  2.  Borrow dollars (mortgage-up responsibly) and enjoy the low rates and devalued debt service.  3.  Take out a hefty life-insurance policy on Glenn Beck and Andrew Breitbart.  And number 4.  Impeach Soros!  

Well, at least some of those are practical!

Saturday, December 5, 2009

Anatomy of a Myth

If I were to bet you a million dollars, could you tell me which President famously asked Americans to fight terrorism by “going shopping”? (Please email me immediately if you want to take this bet and don’t read on!)

Of course I’d win this bet because no American President including George W Bush ever said those words and the reason you think he did is because of Time Magazine.

Here is the line from the Time Magazine article from September 21, 2001 analyzing Bush’s speech from a few days earlier:

And for God's sake keep shopping — "I ask your continued participation and confidence in the American economy" — and keep praying:

Time Magazine said “keep shopping” not George W Bush. Notice where the quotes are.
Here's the whole enchilada:,8599,175757,00.html

Bush did once utter the words "I encourage you all to shop even more!" But this was in 2006 while he was ribbing reporters during the Christmas shopping season and the context was the economy and the early Christmas retail numbers!

I bring this all up because I hear this lie repeated constantly and it stuck in my craw when I heard it this week from a big Democrat in the context of how great Obama was compared to Bush “who just asked Americans to go shopping!”

But this is nothing new. Much of what we know, just ain’t so when it comes from indirect and filtered sources. So much of what we're fed by the pop-media is little more than agenda driven propaganda.  Constant repetition keeps the “myth train” rolling on and on and on. I’d have much more faith in our Democracy if fewer people were sucked-in by these tactics.

One other thing I’d add to this subject is a speech Bush made to airline employees also in September 2001 where he asked Americans to continue flying for business and tourism and to "go to Disney World", etc. Remember that between the 9/11 attacks and the anthrax attacks, the whole economy including retail and tourism came to an abrupt standstill. There were even widespread reports of anthrax being introduced into mall air systems! What President would not use the bully pulpit to ask Americans for “continued participation and confidence in the American economy”? Think about it…
UPDATE:  Oh, and you owe me a million dollars.

Wednesday, December 2, 2009

Magic Bullets Part V - Health Care (plus Climategate)

I like this little video I saw on PajamasMedia today.  It goes well with Magic Bullets Part III...

Also, while at Instapundit, I saw this on Climategate.  PajamasMedia is doing great work every day!
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PajamasMedia, Hide-The-Decline! Video