Are Interests More Powerful than Ideas?

It is not enough to win the battle for ideas among intellectuals

by Mario Rizzo

There is an interesting interview with Ed Feulner, the outgoing president of the Heritage Foundation, in the weekend (Dec. 8-9) Wall Street Journal. The interview got me thinking about the progress made in the pro-economic-liberty cause, not only over the years of Heritage, but since, say, 1960. I choose this year deliberately because it was the year I became aware, as an almost-teenager, of the interconnection between politics (Nixon-Kennedy) and the economy (inflation and  unemployment).  I soon afterwards read Henry Hazlitt’s Economics in One Lesson.

What has changed since 1960 with regard to economic liberty? From an intellectual perspective, so many more people are aware of Ludwig von Mises, Friedrich Hayek and non-Keynesian economic thought. Milton Friedman spread his ideas about market-oriented economic policy. Thanks originally to James Buchanan and Gordon Tullock, we know again about public choice and rent seeking. (Somehow intellectuals had forgotten the lessons taught by James Madison and others.) Most economists are, at long last, convinced that Mises and Hayek were broadly correct about socialist calculation.

And yet government is more involved in more aspects of the economy, by far, than in 1960.

Oh yes, I am aware of the argument (cited by Feulner) that the “pie” has grown larger so although the state’s take is greater we have more absolutely left over. First, the appropriate measure is not taxation – but spending. (As Friedman taught us.) Second, but even by the pie measure federal spending is now about 25% of GDP and total government spending is about 40% of GDP. This is far higher than in 1960. Third, there are also many more interventions – regulations – beyond taxation. Fourth, I do not count my freedom in terms of my command over material goods.

World manufacturing output, 2011

By Mark J. Perry 

The charts above are based on new data from the United Nations on GDP and its components for more than 200 countries, updated through 2011.

1. The top chart compares the annual manufacturing output from 1970 to 2011 (measured in current US dollars) for the five countries that produced the most manufacturing output last year: China, US, Japan, Germany, and Italy.  As I reported earlier, China is now officially the world’s largest manufacturer, with output in 2011 ($2.34 trillion) that was 23% higher than the $1.9 trillion of factory output in the U.S.

2. The U.S. is still a world leader in manufacturing and America’s factory output continues to increase, despite the rise of China to the world’s No. 1 manufacturer.  The bottom chart below puts the enormous size of the U.S. manufacturing sector into perspective, by comparing America’s manufacturing output in 2001 ($1.904 trillion) to the combined manufacturing output of Germany, Italy, Korea, Brazil and the Russian Federation, which are the countries that are ranked No. 4 through No. 8 in 2011 for manufacturing output.

3. It’s also important to remember that China’s manufacturing workforce is estimated to be around 100 million and could be as high as 110 million, compared to America’s manufacturing employment of less than 12 million.  Therefore,the U.S. is producing slightly less manufacturing output than China, but U.S. worker productivity is so high compared to China, that China needs almost ten factory workers for every one American worker to produce roughly the same amount of output.

How Unconventional Oil And Gas Is Supercharging The U.S. Economy

The bottom line is that US has a unique opportunity before it

by Julie M. Carey

It’s an exciting time to be in the energy industry in America. The impact of unconventional oil and gas development on the U.S. economy is considerable, with potentially hundreds of billions of dollars in investments, millions of new jobs, and a renaissance of American ingenuity and innovation.

In thinking about what is to come, looking back five years helps set the stage. January 2008: The energy sector was facing the great recession, high current and future expected natural gas prices, and job losses to China. There was a generally poor outlook for the energy industry and the economy.

Few could have predicted the changes that were to come.  Unforeseen happenings include the North Dakota oil rush, liquefied natural gas facilities being used as export facilities (instead of as import facilities as originally planned), railroads hauling crude oil, and jobs coming back from China. And, this is just the beginning. The commencement of the crude oil and natural gas revolution can be boiled down to one simple equation:

Abundant resources + cost effective extraction = high production levels of unconventional oil and gas.

The net effect is a reshaping of the U.S. energy industry and our economy. Additionally, the country’s increased reliance on natural gas (displacing coal) has already benefited the environment, and will continue to do so in the future.Carbon emissions hit a 20-year low (in the first quarter 2012 according to EIA)  and some industry observers believe that the U.S. could meet the Kyoto agreement standards by 2020 (even though the U.S. did not sign it).

The End of the University as We Know It

Few who will be affected by the changes ahead are aware of what’s coming

By NATHAN HARDEN

In fifty years, if not much sooner, half of the roughly 4,500 colleges and universities now operating in the United States will have ceased to exist. The technology driving this change is already at work, and nothing can stop it. The future looks like this: Access to college-level education will be free for everyone; the residential college campus will become largely obsolete; tens of thousands of professors will lose their jobs; the bachelor’s degree will become increasingly irrelevant; and ten years from now Harvard will enroll ten million students.

We’ve all heard plenty about the “college bubble” in recent years. Student loan debt is at an all-time high—an average of more than $23,000 per graduate by some counts—and tuition costs continue to rise at a rate far outpacing inflation, as they have for decades. Credential inflation is devaluing the college degree, making graduate degrees, and the greater debt required to pay for them, increasingly necessary for many people to maintain the standard of living they experienced growing up in their parents’ homes. Students are defaulting on their loans at an unprecedented rate, too, partly a function of an economy short on entry-level professional positions. Yet, as with all bubbles, there’s a persistent public belief in the value of something, and that faith in the college degree has kept demand high.

The figures are alarming, the anecdotes downright depressing. But the real story of the American higher-education bubble has little to do with individual students and their debts or employment problems. The most important part of the college bubble story—the one we will soon be hearing much more about—concerns the impending financial collapse of numerous private colleges and universities and the likely shrinkage of many public ones. And when that bubble bursts, it will end a system of higher education that, for all of its history, has been steeped in a culture of exclusivity. Then we’ll see the birth of something entirely new as we accept one central and unavoidable fact: The college classroom is about to go virtual. 

The Crisis of American Self-Government

Is it still possible to pull back from the brink of America's Europeanization?

By SOHRAB AHMARI

'We have now an American political party and a European one. Not all Americans who vote for the European party want to become Europeans. But it doesn't matter because that's what they're voting for. They're voting for dependency, for lack of ambition, and for insolvency."

Few have thought as hard, or as much, about how democracies can preserve individual liberty and national virtue as the eminent political scientist Harvey Mansfield. When it comes to assessing the state of the American experiment in self-government today, his diagnosis is grim, and he has never been one to mince words.

Mr. Mansfield sat for an interview on Thursday at the Harvard Faculty Club. This year marks his 50th as a teacher at the university. It isn't easy being the most visible conservative intellectual at an institution that has drifted ever further to the left for a half-century. "I live in a one-party state and very much more so a one-party university," says the 80-year-old professor with a sigh. "It's disgusting. I get along very well because everybody thinks the fact that I'm here means the things I say about Harvard can't be true. I am a kind of pet—a pet dissenter."

Partly his isolation on campus has to do with the nature of Mr. Mansfield's scholarship. At a time when his colleagues are obsessed with trendy quantitative methods and even trendier "identity studies," Mr. Mansfield holds steadfast to an older tradition that looks to the Western canon as the best guide to human affairs. For him, Greek philosophy and the works of thinkers such as Machiavelli and Tocqueville aren't historical curiosities; Mr. Mansfield sees writers grappling heroically with political and moral problems that are timeless and universally relevant.

Some Fundamental Insights Into the Benevolent Nature of Capitalism

Freedom means the absence of the initiation of physical force

by George Reisman

By the "benevolent nature of capitalism," I mean the fact that it promotes human life and well-being and does so for everyone. There are many such insights, which have been developed over more than three  centuries, by a series of great thinkers, ranging from John Locke to Ludwig von Mises and Ayn Rand.

I'm going to briefly discuss about a dozen or so of these insights that I consider to be the most important, and which I believe, taken all together, make the case for capitalism irresistible.  I'll discuss them roughly in the order in which I present them in my book. Let me say that I apologize for the brevity of my discussions. Each one of the insights I go into would all by itself require a discussion longer than the entire time that has been allotted to me to speak today. Fortunately, I can fall back on the fact that, in my book at least, I  think I have presented them in the detail they deserve.

And now, let me begin. 

1) Individual freedom—an essential feature of capitalism—is the foundation of security, in the sense both of personal safety and of economic security. Freedom means the absence of the initiation of physical force. When one is free, one is safe—secure—from common crime, because what one is free of or free from is precisely acts such as assault and battery, robbery, rape, and murder, all of which represent the initiation of physical force. Even more important, of course, is that when one is free, one is free from the initiation of physical force on the part of the government, which is potentially far more deadly than that of any private criminal gang. (The Gestapo and the KGB, for example, with their enslavement and murder of millions made private criminals look almost kind by comparison.)

The fact that freedom is the absence of the initiation of physical force also means that peace is a corollary of freedom. Where there is freedom, there is peace, because there is no use of force: insofar as force is not initiated, the use of force in defense or retaliation is not required. 

The economic security provided by freedom derives from the fact that under freedom, everyone can choose to do whatever he judges to be most in his own interest, without fear of being stopped by the physical force of anyone else, so long as he himself does not initiate the use of physical force. This means, for example, that he can take the highest paying job he can find and buy from the most competitive suppliers he can find; at the same time, he can keep all the income he earns and save as much of it as he likes, investing his savings in the most profitable ways he can. The only thing he cannot do is use force himself. With the use of force prohibited, the way an individual increases the money he earns is by using his reason to figure out how to offer other people more or better goods and services for the same money, since this is the means of inducing them voluntarily to spend more of their funds in buying from him rather than from competitors. Thus, freedom is the basis of everyone being as economically secure as the exercise of his own reason and the reason of his suppliers can make him.

Leszek Balcerowicz: The Anti-Bernanke

The man who saved Poland's economy, on America's mistakes and the better way to heal from a financial crisis

By MATTHEW KAMINSKI

As an economic crisis manager, Leszek Balcerowicz has few peers. When communism fell in Europe, he pioneered "shock therapy" to slay hyperinflation and build a free market. In the late 1990s, he jammed a debt ceiling into his country's constitution, handcuffing future free spenders. When he was central-bank governor from 2001 to 2007, his hard-money policies avoided a credit boom and likely bust.

Poland was the only country in the European Union to avoid recession in 2009 and has been the fastest-growing EU economy since. Mr. Balcerowicz dwells little on this achievement. He sounds too busy in "battle"—his word—against bad policy.

"Most problems are the result of bad politics," he says. "In a democracy, you have lots of pressure groups to expand the state for reasons of money, ideology, etc. Even if they are angels in the government, which is not the case, if there is not a counterbalance in the form of proponents of limited government, then there will be a shift toward more statism and ultimately into stagnation and crisis."

Looking around the world, there is no shortage of questionable policies. A series of bailouts for Greece and others has saved the euro, but who knows for how long. EU leaders closed their summit in Brussels on Friday by deferring hard decisions on entrenching fiscal discipline and pro-growth policies. Across the Atlantic, Washington looks no closer to a "fiscal cliff" deal. And the Federal Reserve on Wednesday made a fourth foray into "quantitative easing" to keep real interest rates low by buying bonds and printing money.

As a former central banker, Mr. Balcerowicz struggles to find the appropriate word for Fed Chairman Ben Bernanke's latest invention: "Unprecedented," "a complete anathema," "more uncharted waters." He says such "unconventional" measures trap economies in an unvirtuous cycle. Bankers expect lower interest rates to spur growth. When that fails, as in Japan, they have no choice but to stick with easing.

The Coming Fiscal Tsunami

As a nation, we are about to be drowned by entitlement debt

by David Koitz

The United States will soon confront a major economic problem, perhaps one unparalleled in the nation’s history. It won’t strike tomorrow, next week, or next month, but it is out there, its roots sown by the demographics of the past half-century and a body politic hesitant to tamper with aging institutions of government. When it emerges, like a tsunami, the destructive consequences of amassing unprecedented federal indebtedness will be overwhelming, and though seemingly distant, when it rears its head it will rise suddenly in our consciousness as if coming without warning.

While a searing left-right ideological debate pervades the nation’s economic dialogue, the enormity of our hovering dilemma gets short shrift. The lack of clarity in the policy discourse, the inclination by lawmakers to procrastinate on politically difficult decisions, and the propensity to pass blame and kick the can down the road are stunning. But like the tearing down of the Twin Towers, a hurricane devastating the Louisiana coast, or an earthquake striking San Francisco, our looming fiscal problem has no political division. It is not a Democratic or Republican problem. It has no party signature. It is simply an American problem. And as it draws ever closer, the need for political convergence becomes ever more pressing.

The problem is very transparent. Unlike the miasma of derivative markets or the opaque operations of hedge funds, it’s not clouded by the vagaries of our financial institutions. It’s a pretty straightforward dilemma. As our federal budget deficits have grown, the level of debt taken on by the U.S. Treasury has risen precipitously. Some people take solace by looking at other nations, whose debts represent a considerably larger share of their economic output, making our debt seem manageable. But given the sheer magnitude of our problem, this measure may obscure how significant even a moderate increase in the debt would be and the risk it would pose if we stay on our current course.

The challenges in our path are not modest. Starting today and continuing over the next 20 years, the post–World War II baby-boom generation will nearly double the nation’s aged population, and the baby trough that followed (and has lingered since) will slow the growth of the working population. The baby boomers and the major advances in life expectancy for subsequent generations will cause a swelling number of recipients of Medicare, Medicaid, and Social Security, and the expenditures of those programs will soar, programs whose creation and inherent promises largely preceded the birth of those who now or will soon seek their benefits.

The Doctor Won't See You Now

Look for health care bottlenecks

By mark steyn

A few years ago, my small local hospital asked a Senate staffer if she could assist them in obtaining federal money for a new building. So she did, expediting the process by which that particular corner of northern New Hampshire was deemed to be "underserved" and thus eligible for the fed gravy. At the ribbon-cutting, she was an honored guest, and they were abundant in their praise. Alas, in the fullness of time, the political pendulum swung, her senator departed the scene, and she was obliged to take a job out of state.

Last summer, she returned to the old neighborhood and thought she'd look for a doctor. The sweet old guy with the tweed jacket in the neatly painted cape on Main Street had taken down his shingle and retired. Most towns in the North Country now have fewer doctors than they did in the 19th century, and the smaller towns have none. The Yellow Pages list more health insurers than physicians, which would not seem to be an obvious business model. So she wound up going to the health center she'd endowed so lavishly with your tax dollars just a few years earlier.

They gave her the usual form to fill in, full of perceptive inquiries on her medical condition: Do you wear a seat belt? Do you own a gun? How many bisexual men are you now having sex with? These would be interesting questions if one were signing up for eharmony.com and looking to date gun-owning bisexuals who don't wear seat belts, but they were not immediately relevant to her medical needs. Nevertheless, she complied with the diktats of the Bureau of Compliance, and had her medical records transferred, and waited ...and waited. That was August. She has now been informed that she has an appointment with a nurse-practitioner at the end of January. My friend pays $15,000 a year for health insurance. In northern New Hampshire, that and meeting the minimum-entry requirement of bisexual sex partners will get you an appointment with a nurse-practitioner in six months' time.

Why Nazism Was Socialism and Why Socialism Is Totalitarian

Robbers, Pickpockets and other Criminals

by George Reisman

My purpose today is to make just two main points: (1) To show why Nazi Germany was a socialist state, not a capitalist one. And (2) to show why socialism, understood as an economic system based on government ownership of the means of production, positively requires a totalitarian dictatorship.

The identification of Nazi Germany as a socialist state was one of the many great contributions of Ludwig von Mises.

When one remembers that the word "Nazi" was an abbreviation for "der National sozialistische Deutsche Arbeiters Partei — in English translation: the National Socialist German Workers' Party — Mises's identification might not appear all that noteworthy. For what should one expect the economic system of a country ruled by a party with "socialist" in its name to be but socialism?

Nevertheless, apart from Mises and his readers, practically no one thinks of Nazi Germany as a socialist state. It is far more common to believe that it represented a form of capitalism, which is what the Communists and all other Marxists have claimed.

The basis of the claim that Nazi Germany was capitalist was the fact that most industries in Nazi Germany appeared to be left in private hands.

What Mises identified was that private ownership of the means of production existed in name onlyunder the Nazis and that the actual substance of ownership of the means of production resided in the German government. For it was the German government and not the nominal private owners that exercised all of the substantive powers of ownership: it, not the nominal private owners, decided what was to be produced, in what quantity, by what methods, and to whom it was to be distributed, as well as what prices would be charged and what wages would be paid, and what dividends or other income the nominal private owners would be permitted to receive. The position of the alleged private owners, Mises showed, was reduced essentially to that of government pensioners.

The iron fist in the velvet glove of gay marriage

A radical gloss attached to the continuing encroachment of the state upon our private, intimate lives

by Brendan O’Neill 

Following the publication yesterday of the Lib-Con government’s proposals for introducing gay marriage, there has been a frenetic debate about whether religious freedom will be harmed by allowing homosexuals to get hitched. The government has given assurances that religious institutions will not be forced to carry out same-sex weddings (and has actually banned the Church of England from doing so), yet still the eye of this stormy debate has focused on whether religious groups’ rights to uphold and celebrate only traditional marriage will be dented by the government’s fervent promotion of same-sex marriage.

What a massive red herring. What an enormous distraction from the real authoritarian instinct motoring the Conservative Party’s and others’ conversion to the cause of gay marriage. The central problem with the gay marriage agenda is not that at some point in the future an unwilling man of the cloth might be strong-armed into giving his blessing to a gay union, but rather that it allows the state to do something that was traditionally considered beyond its purview: to redefine the meaning of marriage and, by extension, the meaning of the marital home, the family, and our most intimate relationships. Some have sought to depict the drive for gay marriage as a continuation of the struggle for civil rights that exploded in the mid-twentieth century; it’s better understood as a continuation, and intensification, of the modern state’s desire to get a foot in the door of our private lives and to assume sovereignty over our relationships.

Food Fight

California brings the nanny state to the kitchen table

BY TROY SENIK

California’s new state motto might as well be “Does this dress make me look fat?” No other state comes close to California’s aesthetic obsession, which has birthed innumerable diet and fitness fads and made the gym into the equivalent of a state church. Considered on its merits, it’s a largely unobjectionable trend—laudable, even, for its emphasis on self-improvement. But when wed to two of California’s more unfortunate proclivities—a reflexive, nearly primitive worship of all things “natural” (usually evangelized by someone carrying an iPhone) and an insatiable appetite among government officials for meddling in the most minuscule aspects of everyday life—it spells trouble.

It should come as no surprise, then, that the City Council in Los Angeles, the state’s epicenter of vanity, recently made headlines by expanding its portfolio to include citywide dietary management. Last month, the body unanimously voted to approve a resolution exhorting Angelinos to participate in “meatless Mondays,” a weekly exercise in herbivorousness justified on multiple grounds: from combating obesity (which cynics might note is a malady afflicting some of the council members) to reducing carbon footprints to preventing animal cruelty (apparently tolerable the other six days of the week). It was as if council members dared one another to see how many liberal erogenous zones they could stimulate with a single initiative.

French Thief Complains that Victims Are Running Away

Atlas is shrugging

French Prime Minister: “I’m upset that the wildebeest aren’t remaining still for their disembowelment.”

by Daniel J. Mitchell

I predicted back in May that well-to-do French taxpayers weren’t fools who would meekly sit still while the hyenas in the political class confiscated ever-larger shares of their income.

But the new President of France, Francois Hollande, doesn’t seem overly concerned by economic rationality and decided (Obama must be quite envious) that a top tax rate of 75 percent is fair. And patriotic as well!

So I was pleased – but not surprised – when the news leaked out that France’s richest man was saying au revoir and moving to Belgium.

But he’s not the only one. The nation’s top actor also decided that he doesn’t want to be a fatted calf. Indeed, it appears that there are entire communities of French tax exiles living just across the border in Belgium.

Best of all, the greedy politicians are throwing temper tantrums that the geese have found a better place for their golden eggs.

France’s Prime Minister seems particularly agitated about this real-world evidence for the Laffer Curve. Here are some excerpts from a story in the UK-based Telegraph.

France’s prime minister has slammed wealthy citizens fleeing the country’s punitive tax on high incomes as greedy profiteers seeking to “become even richer”. Jean-Marc Ayrault’s outburst came after France’s best-known actor, Gerard Dépardieu, took up legal residence in a small village just over the border in Belgium, alongside hundreds of other wealthy French nationals seeking lower taxes. “Those who are seeking exile abroad are not those who are scared of becoming poor,” the prime minister declared after unveiling sweeping anti-poverty measures to help those hit by the economic crisis. These individuals are leaving “because they want to get even richer,” he said. “We cannot fight poverty if those with the most, and sometimes with a lot, do not show solidarity and a bit of generosity,” he added.

In the interests of accuracy, let’s re-write Monsieur Ayrault’s final quote from the excerpt. What he’s really saying is: “We cannot buy votes and create dependency if those that produce, and sometimes produce a lot, do not act like morons and let us rape and pillage without consequence.”

A Funny Thing Happened On The Way To The Fiscal Cliff

It will be Nottingham and the Sherwood Forest 

 “If I've told you once, I've told you a hundred times; do not fan the girls when they're wet! But you'll never learn; you'll be a eunuch all your life.”   -Lycus

By Mark J. Grant
There are 16 days left before we all shoot over the falls and are plunged into the freezing water. The markets are pretending it will never happen and that some magical incantation will be found to set everything right in the moments before we take the dive. The lethargy is noticeable and the apathy is like someone has thrown the wet towel of complacency over everyone’s shoulders. The crowd meanders. The mob is a headless jumble of people and the clock ticks and ticks and does not stop ticking. The unknown is recognized but like some mindless lemming staring at the cliff I do not think that many understand the gravity of the situation.

Lycus: “Is it contagious?”

Pseudolus: “Have you ever seen a plague that wasn’t?”

In the best case scenario, according to most people, some agreement will be reached. I hate to even agree that this is the best case but this is what almost everyone thinks and so I will go along with it for the moment. This best case scenario however includes an assumption that I do not believe will be correct which is that something formulated by common sense will be the result and it is just there that I hold little hope. To be quite open; I am more frightened of what our political leaders might concoct than what we face at the cliff. The Democrats cry for more stimulus in a time when we cannot afford the stimulus and the social programs we now have but “more money” seems to be the only words in their vocabularies these days. Ok, they can also say “tax the rich” but it is a limited amount of words that they speak now.

It’s against the law of the United States to take one’s own life. The penalty is death.

Obama claims a mandate. Who gave him this mandate one may reasonable ask; the 47.5 million people on food stamps, the people living on the tax benefits of those that work, the people who game the system so that they never have to find a job and enjoy a life paid for by those that are gainfully employed? That is one heck of a mandate isn’t it and yet that is the basis of his claim.

Argentina’s Debt Conundrum

Argentine officials will need to present their arguments before the court in February

By Eduardo L. Yeyati

Argentina is in a quandary. Prior to its 2005 sovereign-debt exchange, its legislature enacted a “lock law,” which barred the way to any future offers to holders of bonds on which Argentina defaulted in 2002. While the lock law helped to boost the participation rate in the 2005 exchange, holdout creditors remained, and have pursued litigation to force repayment.

In late November, Thomas Griesa, a United States federal judge in New York, ordered Argentina to deposit the $1.33 billion owed to holdouts into an escrow account by December 15. Griesa lifted the stay on his order from February 2012, following indications from Argentina’s government that it intended to ignore the ruling – including public statements calling the holdouts “vulture funds” and a vow by President Cristina Fernández de Kirchner never to pay. The ruling, pending appeal, leaves Argentina with three options: violate its own law, violate US law, or default again.

In his ruling, which was based on the pari passu (“equal footing”) clause included in the bonds, Griesa included the Bank of New York Mellon (the bondholders’ trustee) among entities that act “in active concert and participation” with Argentina, and cautioned it against transferring funds if Argentina ignores the order. As a result, if Argentina chooses to pay exchange bondholders as usual, BNY Mellon may refuse to transfer the funds, triggering a technical default.

The French Death Rattle

What remains to be seen is how the end will come

By Brigitte Granville

Moody’s announcement in November that it had downgraded France’s sovereign-credit rating by one notch from its AAA rating prompted one blogger to poke fun at rating agencies’ tendency either to get things completely wrong or to recognize suddenly a crisis that had long been staring them in the face. The blogger joked, “If this recognition by a rating agency that France has problems is an example of the first failing, a recovery must have begun; if it is an example of the second failing, the country faces a dire reckoning.”

French President François Hollande’s government claims to have awoken to the threat. In a recent interview, Finance Minister Pierre Moscovici likened the measures being undertaken to reduce the country’s debt burden and restore competitiveness to a “Copernican revolution...because these choices were not clear for a French government or for a center-left government.”

As proof of this new realism, the government has been trumpeting its response to the set of policy recommendations that an expert panel led by the business executive Louis Gallois presented two weeks before the downgrade. The response is centered on a payroll-tax cut, which will be offset by spending cuts and a higher value-added tax.

In the run-up to the downgrade, an analyst at Moody’s said that the decision would be based largely on whether the government heeded the Gallois report’s call for a “competitiveness shock” to France’s economy. The downgrade thus suggests that Moody’s considered the government’s response insufficient.

The Fed's Contradiction

Easier money hasn't led to more growth, so we need still easier money

by WSJ Editorial

Four years ago this month the Federal Reserve began its epic program of monetary easing to rescue an economy in recession. On Wednesday, Chairman Ben Bernanke declared that this has worked so well that the Fed must keep easing money for as long as anyone can predict in order to save a still-sputtering recovery.

That's the contradiction at the heart of the Fed's latest foray into "unconventional policy," which is a euphemism for finding new ways to print money: The economy needs more monetary stimulus because it is still too weak despite four years of previous and historic amounts of monetary stimulus. In the words of the immortal "Saturday Night Live" skit: We need "more cowbell."

In his press conference Wednesday, Mr. Bernanke was at pains to say this week's decisions were nothing new, merely an implementation of the policy direction that the Fed's Open Market Committee had set in September. This is technically true, but the timing and extent of the implementation are more than details.

The Fed committed Wednesday to purchase an additional $45 billion in long-term Treasury securities each month well into 2013, in addition to the $40 billion in mortgage assets it is already buying each month. At $85 billion a month, the Fed's balance sheet will thus keep growing from its current $2.9 trillion, heading toward $4 trillion by the end of the year. Four years ago it was less than $1 trillion.

The Constitution And Paper Money

The power to emit bills of credit or issue paper money was not delegated to the United States

by CLARENCE B. CARSON

The United States Constitution does not mention paper money by that name. Nor does it refer to paper currency or fiat money in those words.^[1] There is only one direct reference to the origins of what we, and they, usually call paper money. It is in the limitations on the power of the states in Article I, Section 10. It reads, “No State shall . . . emit Bills of Credit . . . .” Paper that was intended to circulate as money but was not redeemable in gold and silver was technically described as bills of credit at that time. The description was (and is) apt. Such paper is a device for expanding the credit of the issuer. There is also an indirect reference to the practice in the same section of the Constitution. It reads, “No State shall . . . make any Thing but gold and silver Coin a Tender in Payment of Debts . . . .” Legal tender laws, in practice, are an essential expedient for making unredeemable paper circulate as money. Except for the one direct and one indirect reference to the origin and means for circulating paper money, the Constitution is silent on the question.

With such scant references, then, it might be supposed that the makers of the Constitution were only incidentally concerned with the dangers of paper money. That was hardly the case. It loomed large in the thinking of at least some of the men who were gathered at Philadelphia in 1787 at the Constitutional Convention. There were two great objects in the making of a new constitution: one was to provide for a more energetic general government; the other was to restrain the state governments. Moreover, the two objects had a common motive at many points, i.e., to provide a stronger general government which could restrain the states.

Measures to Prevent a Flood of Unbacked Paper Money

One of the prime reasons for restraining the state governments was to prevent their flooding the country with unbacked paper money. James Madison, one of the leaders at the convention, declared, in an introduction to his notes on the deliberations there, that one of the defects they were assembled to remedy was that “In the internal administration of the States, a violation of contracts had become familiar, in the form of depreciated paper made a legal tender . . .”^[2] Edmund Randolph, in the introductory remarks preceding the presentation of the Virginia Plan to the convention, declared that when the Articles of Confederation had been drawn “the havoc of paper-money had not been foreseen.”^[3]

Too Big to Jail

Our Banking System's Latest Disgrace

By Neil Barofsky

You can be forgiven if you watched the Department of Justice’s announcement yesterday of a $1.92 billion settlement with HSBC with a sense of disappointment--and déjà vu. The event checked all the boxes in a theatrical routine that has become all too familiar.

Descriptions of breathtaking misconduct involving the facilitation of massive drug trafficking and transactions with rogue terror-sponsoring nations? Check.

Broad boasts about the "historic" nature of the settlement that will certainly end the type of criminal misconduct alleged? Check.

Mea culpas from the offending institution with promises that it has really learned its lesson this time and will never ever engage in dastardly conduct again? Yep, that too. 

Nothing, however, was quite as it appeared. Sure, HSBC paid a record fine, but there was something vitally important missing from yesterday's press conference: actual criminal charges for obvious criminal conduct.

Some perspective: HSBC sent more than $800 million in bulk cash from Mexico to the United States, a good chunk of which apparently represented proceeds from some of the most notorious Colombian drug cartels. As someone who tried the first narcotics money laundering case involving extradition from Colombia, let me assure you that this is a lot of money, the discovery of which usually generates vigorous prosecutions and lengthy prison sentences. And it wasn’t HSBC’s only dirty business: There were also hundreds of millions of more dollars of illegally disguised transactions with rogue nations such as Iran and Sudan.

The Federal Reserve's Zombie Economy

Crony capitalism is remaking American business to be more like government

By Elizabeth MacDonald

Deutsche Bank is out with a new warning that says the Federal Reserve’s latest round of an estimated $1.02 trillion in total annual purchases of U.S. Treasuries and mortgage-backed securities is creating lemon socialism, a U.S. economy filled with the financially undead.

Deutsche notes that stock markets are based on winners and losers, but there are neither right now. That’s because the Fed keeps pumping liquidity into the system, so everyone wins. When everyone wins, no one makes money, a bridge to nowhere Japan has already crossed.

The Fed’s balance sheet could rise from $2.8 trillion currently to $4 trillion by the end of the year, even $6 trillion by the time the U.S. jobless rate gets down to the new 6.5% level the central bank wants, as the Fed stuffs a lot of paper padding at the foot of the fiscal cliff.

“Central banks should be more selective with their intervention,” says Deutsche’s equity research team. “Normally, weak companies fail, leaving the winners to advance and new companies to enter; but at the moment no company can win because the losers never leave the field as they receive support through continuous liquidity injections.”

Deutsche's equity team adds if the Fed were to “let markets decide, then equity markets would probably fall." It also notes: "But, as it is, if real investors can’t predict which way markets will go, then they will stay on the sidelines."

Deutsche also says that all of this government help essentially turns into government resentment, and it turns profits--or your wallets--into sitting ducks, a bulls-eye painted on them.

"Capital is rewarded through profits, but currently high profits can either appear socially unacceptable or as easy targets for taxation," Deutsche says.