21st Century Culture: Free Enterprise vs Government Control

Arthur C. Brooks

This is not the culture war of the 1990s. It is not a fight over guns, gays or abortion. Those old battles have been eclipsed by a new

Free Enterprise needs to exist for the gears to move.

struggle between two competing visions of the country’s future. In one, America will continue to be an exceptional nation organized around the principles of free enterprise — limited government, a reliance on entrepreneurship and rewards determined by market forces. In the other, America will move toward European-style statism grounded in expanding bureaucracies, a managed economy and large-scale income redistribution. These visions are not reconcilable. We must choose.

It is not at all clear which side will prevail. The forces of big government are entrenched and enjoy the full arsenal of the administration’s money and influence. Our leaders in Washington, aided by the unprecedented economic crisis of recent years and the panic it induced, have seized the moment to introduce breathtaking expansions of state power in huge swaths of the economy, from the health-care takeover to the financial regulatory bill that the Senate approved Thursday. If these forces continue to prevail, America will cease to be a free enterprise nation.

I call this a culture war because free enterprise has been integral to American culture from the beginning, and it still lies at the core of our history and character. “A wise and frugal government,” Thomas Jefferson declared in his first inaugural address in 1801, “which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government.” He later warned: “To take from one, because it is thought that his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to every one of a free exercise of his industry and the fruits acquired by it.” In other words, beware government’s economic control, and woe betide the redistributors.

Now, as then, entrepreneurship can flourish only in a culture where individuals are willing to innovate and exert leadership; where people enjoy the rewards and face the consequences of their decisions; and where we can gamble the security of the status quo for a chance of future success.

Yet, in his commencement address at Arizona State University on May 13, 2009, President Obama warned against precisely such impulses: “You’re taught to chase after all the usual brass rings; you try to be on this “who’s who” list or that Top 100 list; you chase after the big money and you figure out how big your corner office is; you worry about whether you have a fancy enough title or a fancy enough car. That’s the message that’s sent each and every day, or has been in our culture for far too long — that through material possessions, through a ruthless competition pursued only on your own behalf — that’s how you will measure success.” Such ambition, he cautioned, “may lead you to compromise your values and your principles.”

I appreciate the sentiment that money does not buy happiness. But for the president of the United States to actively warn young adults away from economic ambition is remarkable. And he makes clear that he seeks to change our culture.

The irony is that, by wide margins, Americans support free enterprise. A Gallup poll in January found that 86 percent of Americans have a positive image of “free enterprise,” with only 10 percent viewing it negatively. Similarly, in March 2009, the Pew Research Center asked individuals from a broad range of demographic groups: “Generally, do you think people are better off in a free-market economy, even though there may be severe ups and downs from time to time, or don’t you think so?” Almost 70 percent of respondents agreed that they are better off in a free-market economy, while only 20 percent disagreed.

In fact, no matter how the issue is posed, not more than 30 percent of Americans say they believe we would fare better without free markets at the core of our system. When it comes to support for free enterprise, we are essentially a 70-30 nation.

So here’s a puzzle: If we love free enterprise so much, why are the 30 percent who want to change that culture in charge?

It’s not simply because of the election of Obama. As much as Republicans may dislike hearing it, statism had effectively taken hold in Washington long before that.

The George W. Bush administration began the huge Wall Street and Detroit bailouts, and for years before the economic crisis, the GOP talked about free enterprise while simultaneously expanding the government with borrowed money and increasing the percentage of citizens with no income tax liability. The 30 percent coalition did not start governing this country with the advent of Obama, Nancy Pelosi and Harry Reid. It has been in charge for years.

Let’s talk European Double Dip

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RT

The US and Russia are gaining traction on an economic rebound, with China posting rudely healthy 1Q 2010 GDP growth. But its timeEurope double dip for Europe to get ready for Recession – the sequel.

Jean Claude Trichet is an urbane, intelligent and eminently reasonable man, and the ECB he leads has, as he rightly pointed out during Thursday’s Lisbon press gathering to announce a non rate movement, done a sterling job in defending the Eurozone against inflationary pressures for the better part of a generation.

Surrealism

But there was an air of surrealism that the late Luis Bunuel would have enjoyed. There were the press representatives all revved up for quick and punchy responses to the emerging contagion and what the ECB could offer. What they go was the ECB President languidly going on about Eurozone growth and inflationary pressures, and keeping the Eurozone budgetary house in order. He offered nary a word of substance about the fire which has broken out in its Greek kitchen, and even less in recognition of the potential for the curtains in its Mediterranean sunrooms to become part of the conflagration. It was sort of like a man reading out a weather report involving light breeze, some cloudy patches and fine and mild conditions in general – whilst on fire, and in heavily French accented English.

The truth be told, nothing more should be expected of him. His job is, as head of the ECB, to keep inflation rates at or about 2% first and foremost, issue warning about potential deviations from the inflationary comfort zone, and bend ECB monetary policy to maintaining or seeking it. He shouldn’t be expected to don red underpants and cape and try to be superman.

What he did say was that default wasn’t an option as far as he was concerned for Greece, but he also couched that by noting it was up to Greece, the nations lending to it, and the IMF to come to an arrangement to head that off. When asked directly about whether inflation or the Euro was the prime focus for the ECB, he was emphatic about the former.

Somewhere in the back of his mind however he must surely be countenancing the possibility of a further return to recession in Europe, and the likelihood that in the medium term he will need to cut rates once again in order to head off deflation rather than inflation, and to try again to get the Eurozone some traction on an economic recovery.

Borrowing costs heading north

For the simple matter is that the Greek debt, and the Eurozone response to it, is already starting to lift borrowing costs, and they could indeed jump considerably higher if the contagion he didn’t want to speak about yesterday were to, as appears increasingly possible, take hold in Spain, Portugal and Italy in particular.

This week already sees overnight and 3 month dollar LIBOR up, along with the LIBOR-OIS spread, as ‘Club Med’ CDS have widened sharply, and Greek Portuguese and Spanish government bond yields have pushed higher – to record levels for the latter two against the 10 Year German Bunds. A couple of screens away one can observe Greek three year bonds rising from 11-17% in a week, and other 3 year bonds from Spain and Portugal up a percent. Whilst it isn’t Lehman Brothers panic mode, there is still some way to go, and there is a faint whiff of counterparty risk coming from somewhere.

Lots of Eurozone debt

The reason for this is quite simple. A lot of Europe has far too much debt, and most nations have structural budget deficits adding to it. Greece might be out in front, but Portugal, Spain and Ireland are in the pack not far behind it, and the Italians are at best a half length behind them. The exposure of European banks to these nations is well over 2 trillion dollars. 2 trillion is also the total European debt rollover requirement of this year, with more than a trillion of that belonging to the Club Med watching their yield and CDS needs start to get pointy. Spain alone is mulling more than $550 billion.

Now at this point the first thought is that the Germans are the first logical place to look in terms of bailing all of this out and making sure that the liquidity keeps flowing. Notwithstanding the quite reasonable concerns of German taxpayers about bailing out what they see is profligate sun drenched laggards, and the pragmatic thought that German banks are amongst those where the money will end up, which is essentially socializing potential losses for them, with those same taxpayers picking up the tab, there is another fly in the ointment. Last year Germany passed a law limiting its federal government budget deficit to 0.35% of GDP from 2016. That means that opening the sluices now to help anyone too much could pressure that need.

This leaves – without wanting to point fingers of blame at anyone – a dysfunctional Eurozone large in any consideration of the future. And that counterparty risk starts to take a more overt shape.

Euro Banks bracing for a hit

Any possibility that Greece, and then possibly other nations, may either default, or restructure in some other way, is going to see the lenders – the banks – get less in the Euro than they are currently exposed for. That means potentially large writedowns. From there the next logical step for the banks is that they lend a lot less, and presumably jack up interest rates on what they have already lent. In the case of European banks there is an added issue in terms of their underlying capital base, which is in many cases less than their US counterparts. So that leaves the prospect of either a financial sector tightening due to higher borrowing costs for the state and major lenders, if not a financial sector tightening due to capital flight, a financial sector tightening due to banks having holes blown in their balance sheets, writedowns, or in the worst case, financial sector tightening due to banking collapses and corporate or state insolvencies.

With the increasing likelihood that Eurozone banks are likely to take a hit one way or the other, there isn’t a great deal the ECB can look to do. It could look to monetize debt by printing money, but that would let the inflation dog out of the bag and involve a lengthy negotiation process with a number of politicians from across the EU to get agreement on. It could look to buy any debt from banks and try and get banks in turn to buy sovereign debt, which would be the first step in taking over whole national banking systems and presumably would require a lot more lengthy political discussion – and Trichet did note at Thursdays press conference that the move to help Greece out this way announced last weekend had been arrived at as a one off. If the process of getting a game plan together for the Greeks together is any indication then any political approval process is likely to take time.

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