Of Free Speech and Insensitivity Training

There is a poignant scene in “Lawrence of Arabia”, a movie with many poignant scenes, in which Lawrence demonstrates to a fellow officer how to snuff out a candle.  He pinches the flame with his fingers.  The other officer gives it a try but jerks back his hand when his fingers are scorched. 

“That hurts,” the officer complains.  Lawrence replies, “Certainly it hurts.  The trick is not minding that it hurts.”

There is a lesson there, particularly important for a society that has become hypersensitive to injury, real or imagined.  Hurt may come from something as small as a look—or failure to look.  It may come from an article of clothing, either worn or neglected.  Lately flags have been targeted as sources of personal and even societal pain.  Hurt may come from something as small as a word.  Indeed, I think that most often today and in our society, both words and our sensitivity to words have become sharpened.

If we are to preserve freedom of speech—in all its important varieties—we need to develop some insensitivity, as in not minding when it hurts.  Freedom of speech only matters when someone hears something he does not like.  The choice then is intolerance and silence or freedom and not minding the hurt. 

Another way to look at it is that we most desire freedom of speech when we are the speaker.  From the point of view of listener, we may have mixed emotions.  We may like what we say, but when we do not like what we hear do we wish to silence the speaker, or do we accept the options of free speech, to turn away or to endure another’s unpleasant rodomontade?

Freedom of speech was made part of the First Amendment, because rulers and monarchs were at pains to inflict genuine physical hurt whenever they took offense at the words of their subjects.  The First Amendment’s protection of free speech was needed to protect people using words that hurt people in government, that offended people in power.

Even though enshrined in the Constitution, freedom of speech has to be won by each generation, because it is constantly in jeopardy.  Americans are nearly unanimous in their support of freedom of speech when it is speech that they like, speech that reinforces their own views, and especially speech that praises and flatters.  We do not particularly need the Constitution to protect that kind of speech.  Speech that is unpopular, speech that goes against the grain, speech that is obnoxious to our opinions, speech that challenges our beliefs, that is the speech the Founders fought to protect.  Most of human progress has come from that kind of speech.  It is speech that is worth protecting today and that many try to silence.

President Obama and his political friends are fond of declaring that “the debate is over,” whether referring to Obamacare, the Dodd-Frank Act, climate change, same-sex marriage, or other important issues of significant disagreement.  I expect that soon we will hear President Obama, Secretary of State Kerry, and other administration spokesmen insist that the debate is over with regard to the nuclear deal with Iran.  In a free republic, can the debate ever really be over?

This is nothing new; it is a continuation of a very old struggle.  Despots great and petty since early ages have exercised what power they might to silence ideas and expressions they did not want to hear, or did not want others to hear.  The gallows, flames, and torture chambers of yesteryear are matched today by bullets, bombs, and bayonets from radical Islam and totalitarian governments.  In the West, where constitutions solemnly embrace free speech, voices are silenced by public ridicule, elaborate and intrusive regulations on what can and cannot be said and when and where—reinforced by government fines, restrictions, confiscations, and jail time. 

I recently visited my son at his new job at a large factory.  He was very careful to spell out to me a lengthy list of subjects I should not bring up, whether from fear of his colleagues, company policies, or federal, state, and local regulations.  I have been given similar training at my place of work.

When I was young I was taught to be courteous and not seek to offend.  I was also taught to be slow to take offence.  Do children today repeat the rhyme I heard as a child?  “Sticks and stones may break my bones, but names can never hurt me.”  I wonder.  Or are our children taught today that there is great reward in being the sensitized “victim” of someone else’s “offensive” words?  Where do we find freedom in that?

Of Banks and Over Taxed Regulators

Banks, who needs them?  A quick question and a quick answer:  a thriving, prospering banking system is essential for a thriving, prospering modern economy.  Banks bring together the resources of savers and the needs of borrowers, particularly borrowers who seek funds to establish or expand businesses or families and individuals who use occasional borrowing to smooth out their income (good banking principles penalize people who would borrow in order to live beyond their means, but more on that at another time). 

Banks also created and maintain the payments system, the means by which money is transferred quickly and accurately throughout the nation and even internationally.  Bank services include as well a variety of wealth management tools by which individuals, families, businesses, and governments can store, grow, and make best use of their financial wealth. 

Without banks, almost none of these services would be available.  Many non-banks provide bank-like services, but they all come to find the need to rest their own services at some point on a bank.

Banking in the United States has grown with the nation, from very simple institutions in the eighteenth and early nineteenth centuries, to a wide variety of bank types, charters, and business models, as diverse as the financial demands of the customers of the largest and most diverse economy in the world.  I once presented at a meeting in Chicago a list of about two-dozen different types of banks in the United States.  We have national banks, state chartered banks, small community banks, larger regional banks, and very large banks with extensive national and international business products and services.  All of these operate and compete together, with a body of customers behind each one who think that their bank offers the best available choice of services that they want.  No other nation in the world has a banking industry like ours.

The recent recession and financial panic—and the inevitable politicizing of finance that came in its wake—have thrown much into confusion and imposed upon sound and prudent bank supervision harmful ideas born of reckless sloganeering and hubristic financial engineering.  The complexity of banking—no more complex than information technology, communications systems, or modern manufacturing—has been superseded by even more complex bank regulation. 

The rules governing banking are too much and too many to function reasonably.  They have become more than the very human people in the multitude of bank regulatory agencies can manage.  The disciplining role of markets and the valuable service of banker judgment have in large measure been replaced by bureaucratic procedures and the judgments of government officials.  These officials have had little if any practical experience making loans, taking deposits and putting them to work, building financial wealth, or otherwise providing products to customers.  Government officials cannot run businesses.  Now, their government jobs have become so demanding and complex, that they will not be able to do their own jobs, either.  Too much has been placed upon them.

Those most harmed by all of this are bank customers.  For the moment, bank profits are up, but that is because their losses are down as they recover from the recession, not because services to customers are expanding.  As a result of government interest rate policies, depositors earn almost nothing on the money that they place in banks.  The expanding oversight involvement of bank regulators makes it dangerous for banks to offer new services to customers; the risk of breaking any of thousands of pages of regulations has become too great.  It takes almost half an hour to open a new bank account, something that used to take minutes.  Fewer credit-worthy borrowers today qualify for mortgages than just a year ago, before new regulations went into effect.  The number of banks has been declining in recent years, dropping at the rate of nearly one for every business day, week in and week out.  Only one new bank has been opened since 2010.  We have fewer banks today than the nation had in 1893.  A stagnant industry is less able to evolve to meet changing customer needs and preferences.

For the good of all of us who rely upon banking services, and for the sanity of financial regulators, we need to return to the principles of good banking.  We need to restore a system of supervision that is measured, not by how much banker judgment it takes over, but by how it adds value to the ability of banks to serve customers.  Government agencies—and the laws that they administer—that are derived from a founding document that begins with the words, “We the People,” should do nothing less, and nothing more.

On another day I would like to share some thoughts about how banks are being goaded to become their own enemies.

Of Liberty and Breaking the Rules

Sometime in the 1990s, before the days of YouTube, I received a homemade video from a man who owned and operated a small business near Dallas, Texas.  He ran a landscaping company, had a handful of employees, and, according to the video, was in violation of some rule or regulation of the federal government every day.  He did not intend to be in violation.  He did not want to be in violation.  As he explained, it was just impossible to comply with all of the requirements. 

The video began with the owner sitting behind his desk, explaining the problem.  He stood up and took the camera with him as he walked through different parts of his operations, pointing out what was required of him, his business, and his colleagues. 

In the main office he described the employment rules, the tax laws, the related mandates and regulations that applied because he had hired other people.  He walked over to the equipment and described the numberless “safety hazard” regulations, from warning notices that had to be glued beneath the seats of garden tractors, to how he and his workers used, carried, and stored their tools, gear, and machines, and what they were supposed to wear while using them.  He discussed the multitude of formal requirements for managing and applying the fertilizers, pesticides, and other chemicals that are commonly used in his business, including their handling, storage, clean up, and their transportation.  Speaking of transportation, because his company used trucks and other vehicles, there was another long list of rules and regulations that applied to that part of the firm.

Added to all of this, there were numerous reports, applications, notices, and other papers to be filed with a variety of agencies on a regular basis.  When he was through, he sat down again behind his desk and said, “I break the law every day.  I don’t intend to, but I cannot avoid it.  I can’t keep up with it all as long as I stay in business.”

How did we get here?  Is this America?  Is this the land of the free and the home of the brave?  Is this a land of freedom sustained by law?  It is an unknown America, too unknown to most but too familiar to people who run a business, especially the people who own a small company.  The rest of us see little of it, though perhaps we suspect it is there.  Some of us catch glimpses. 

In a large business it takes longer for the regulatory burden to become overwhelming.  For a while the boss can hire more people to help carry the load.  In the large firms of America there is a host of employees who produce no goods or offer any services to any customers.  They spend their careers complying with their slices of these federal rules, laws, and mandates so that some of the other employees can be involved in what the business is all about, providing something to a customer for which the customer is willing to pay. 

The customer may not realize that a large share of what he pays for he never receives; it goes to pay those people who work to keep the business in compliance with the government rules.  More than businessmen would be wealthier without this heavy, dead hand clamped on firms, factories, and farms.  The necessities and luxuries of life would all be a lot cheaper.  Or, another way to say it, we would get more of the goods and services we pay for, less of our money sunk into these hidden costs for unproductive activity. 

America’s Founders sought to create a land of freedom, not dominated by government and the officiousness of government functionaries.  To them “unregulated” was a goal, not a criticism.  They also knew the danger of what could happen, even in America.  James Madison wrote, “It will be of little avail to the people that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood. . .”  (James Madison, Federalist no. 62)

And yet here we are.  What the Texas businessman faced in the 1990s has not become any lighter since.  When was the last time that you read the full text of a law?  Who has read the Obamacare statute, the Dodd-Frank Act, or any of the other voluminous, incoherent laws recently enacted, each written on more than a thousand pages?  For each page of law enacted by Congress today government bureaucrats write ten pages of rules and regulations, all of which are enforced as law though never voted on by anyone who himself has been voted into office by the people.

In the land of the free, whose founding document begins with “We the People”, why do we tolerate it?  One of the complaints against the king of England in the Declaration of Independence reads, “He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people, and eat out their substance.”  And yet we have done the same to ourselves.  The Dodd-Frank Act alone created several New Offices and has already stimulated the hiring of more than a thousand new officers.

“I wear the chain I forged in life,” replied the Ghost.  “I made it link by link, and yard by yard; I girded it on of my own free will, and of my own free will I wore it.  Is its pattern strange to you?”

Scrooge trembled more and more.

“Or would you know,” pursued the Ghost, “the weight and length of the strong coil you bear yourself?  It was full as heavy and as long as this, seven Christmas Eves ago.  You have laboured on it, since.  It is a ponderous chain!”

(Charles Dickens, A Christmas Carol)

There was a time when the chains had to be broken to restore the rule of law.

Of Washington and the Life of the Nation

Washington, D.C., is a strange place.  I speak from experience.  My whole working career has been in Washington.  In many meetings with people visiting Washington I have explained to them that Washington is not America.  Few have been surprised by the remark.  In many visits away from Washington (and in connection with my work I accept nearly every invitation to leave town and be among those whose lives too many in Washington try to run) I am ever and powerfully reminded how different the rest of America is from Washington.  I have not been surprised.  Kansas City is much closer to America than Washington ever was or will be. 

In support of the point I offer a few painful examples.  I see one each day that I drive into the city.  Looking at the cars around me I note that very few are more than a few years old.  At the same time I am impressed by how many of the cars are foreign luxury models.  It is typical, when paused at a stop light, to notice that many of the surrounding cars are BMWs, Mercedes, Lexus, Acuras, Audis, and not an insignificant number of Jaguars, high end Range Rovers, and Porsches.  I also see a lot more Prius cars and other hybrids.  This is not to say that there is anything inherently wrong with driving any of these or any other late model high-priced cars.  I merely note it as very different from what I see when paused at a typical traffic light in other cities and towns in America.

As an aside, I am grateful to the people who buy and drive a Prius or other model of hybrid, because they subsidize my purchase of gasoline.  Their cars do use less gasoline (though not enough less to compensate their owners for paying so much more for their cars), leaving more for people like me who drive regular gasoline-consuming vehicles.  That reduction in gasoline demand helps reduce the price. 

The Prius drivers might be offended were I to tell them, however, that I am entirely unimpressed by their conspicuous token of environmental sensitivity. Their purchase and operation of a Prius, after all, is very likely more harmful to the environment than is my more conventional automobile.  First of all, they pay $10,000 or more extra to buy their hybrid, and if the price system works at all efficiently that means that making a Prius or other hybrid consumes far more in resources than making a conventional car.  Second, the hybrid car fans and their coteries in the D.C. area have convinced the masters of the highway networks to create special less-traveled commuter lanes that the hybrid drivers are permitted to use, meaning that they reduce the efficiency of the highway infrastructure.  So, to the Prius drivers of the world I say, thanks for the subsidy, but save your enviro lectures for when you are looking in the mirror.

The automobiles of the nation’s capital region are a sign of an even more painful reality of how Washington is different from the rest of America.  It is also the wealthiest part of the nation, by far.  On April 25, 2013, Forbes magazine published an article about the richest counties in the United States in terms of average income (Tom Van Riper, “America’s Richest Counties”).  Six of the ten richest counties are in the Washington, D.C. region, including the top two and one more out of the top five.  While recession lingers in the rest of the nation, Washington and its suburbs are doing rather well, with unemployment down to 5.5%, well below the national average.

I will also say that I am not opposed to wealth and wealthy people.  I wish all of the world to be wealthier and rejoice that it is far wealthier today than people of just a few generations ago could have dreamed.  But we could all live so much better still.  I ache that the policies of governments around the world stifle economic growth and development and hold so many of their people down in poverty.  The poor nations of the world are not poor because their people are less talented and intelligent than others, but because their governments are so oppressive and have been for generations.

Therein lies my beef with the wealth of Washington and its environs and the key to its estrangement from America.  That wealth is hard to explain from the perspective of value added to the rest of the nation.  Washington is basically a one-company town.  Unlike other one-company towns, however, it produces little that adds enough value to the lives of others that would allow it to prosper in open competition in free markets.  The product of Washington instead is forced upon the rest of the nation, whose productive income is confiscated to keep the Washington wealth-eating machine going. 

Try to name an economic product or activity that is not somehow subject to special handling by or permission from someone in Washington or controlled from Washington.  After the Dodd-Frank Act, for example, all financial activities have become more subject to direction by Washington bureaucrats than ever before.  Today, a bank has to pay more attention to its regulators than it does to its customers.  Who gets the best attention out of that arrangement?  The same is true for energy producers, communications firms, health care providers, and you can continue the list.  All that special handling comes with a toll, payable in taxes, or borrowed from the financial markets, or layered upon private incentive and individual initiative.  Today in Washington the most convincing argument for new rules and laws is to announce that something is “unregulated.”  When you regulate liberty, how much liberty survives?  How much of America survives? 

Next year, 2014, will mark the 200^th anniversary of the burning of Washington by the British in the War of 1812.  The curious thing about the burning of Washington was that it did not make a lick of difference.  The rest of the nation went on about its business, little harmed or even affected.  The same was true during the Revolutionary War when the British occupied Philadelphia.  Rather than end the war it did nothing to bring the British victory.  In America the nation was not run by its government, and in fact government was mostly irrelevant to the daily life of the people.  That was very different from European experience, where nations were so dominated by their rulers that capturing the capital was tantamount to beheading the country.

Washington is strange to America.  That can be tolerable, but only if it is smaller and less significant.  Let the real nation draw its life from the people and live where they live their lives without direction from their rulers.  Let us have a Washington whose disappearance would not mean much to the rest of the nation.

Of the Rule of Law and the Separation of Powers

In the 1990s I was part of a congressional delegation to Argentina.  At that time the Argentine economy was growing strongly and steadily, inflation was low, the currency was pegged to the dollar, convertible 1-for-1.  Trade barriers were being lowered, commerce was booming.  I recall asking Argentines what could possibly darken what seemed to be a very bright future.  They were quick to reply:  “Here in Argentina we have no rule of law.  You can have no confidence in getting justice from the courts.”

That reminded me of Washington Irving’s observation on a European judge, from his famous work, The Alhambra:

It could not be denied, however, that he set a high value upon justice, for he sold it at its weight in gold.

Not long after that visit, the politics of income redistribution and confiscation threw the Argentine economy into turmoil, where it has remained.

I recently spoke with an economist friend of mine, who was waxing eloquent about the attractive monetary and tax policies in Bulgaria.  I remarked that this would probably invite foreign investment.  He replied, “No, there is no rule of law there.”

The point is that good economic policy cannot long survive inadequate legal safeguards.  Many businesses that made major investments in China, attracted by a market of a billion people, have learned that the lack of a reliable legal and justice system in China has undermined much of the business value they thought to find.  A similar story has been holding back investment and economic development in Russia.

Bringing that home, I would venture that concern for changing rules (or even lack of rules)—the substitution of arbitrary bureaucratic powers in Washington over objective rule of law—has been inhibiting more robust investment in the United States, a major cause for our current anemic economic recovery.

An ancient king in the Western Hemisphere, named Mosiah, warned, “because all men are not just it is not expedient that ye should have a king or kings to rule over you.” (Mosiah 29:16)  Because men are not consistently just, freedom has historically rested upon rule by law rather than rule by men.

Fundamentally, that was the very reason for the American Revolution.  Our revolution was based on the rule of law, an assertion of the rule of law, a response to violations of the rule of law by the English king and parliament.  Most of the Declaration of Independence is a lengthy litany of violations of law by the English rulers.  The Revolution was designed to take power away from man and men and rest it upon laws and rights, soon to be secured by a written supreme law embodied in the Constitution.  Any erosion in the force and effect of the Constitution is an erosion of the rule of law and of the freedoms that rely upon law for their defense.

The Progressive Movement that thrived about a century ago, and found a major advocate in the federal government in President Woodrow Wilson, aggressively proposed an alternative to the rule of law.  This program was the Rule of Experts.  Their new view—and it really was a very old view though they dressed it up in modern-sounding rhetoric—was that there are Benign People, Experts, who know the process of modern government better than most people do, to whom we can safely yield governing authorities. 

It sounds akin to the ancient theory of Divine Right of Kings, that the monarchs of the world are chosen by God and endowed with greater wisdom and perspective than the average man and woman.  To their benign expertise and fatherly care was to be entrusted the governance of the rest of us.

The modern Rule of Experts people have much the same view, that these experts were endowed by their universities and other sources of expertise with ability far above that of most, and it would be wise to trust ourselves to their benign care.  Not very democratic, and in fact these Benign Experts make no secret of their impatience with the Congress and other constitutional brakes on arbitrary authority.

As King Mosiah wisely pointed out that men are not always just, it is also appropriate to recognize that putting men in government does not make them any more reliably wise than the rest of us.  The American Founders thought to address this problem by dividing political power among not only three branches in the Federal Government but also by embracing the federal system of dividing government with the States.

The current regulatory structure and program of the United States rest heavily on the idea that Benign Experts should be entrusted with authority for many of the big questions facing Americans and for many of the much smaller questions, too.  That is certainly the structure of the Dodd-Frank Act, to offer one recent, prominent example among many.

Charles Calomiris, of the Columbia University business school, described the theory of the Dodd-Frank Act and related regulations this way:

The implicit theory behind these sorts of initiatives, to the extent that there is a theory, is that the recent crisis happened because regulatory standards were not quite complex enough, because the extensive discretionary authority of bank supervisors was not great enough, and because rules and regulations prohibiting or discouraging specific practices were not sufficiently extensive.

(Charles W. Calomiris, “Meaningful Banking Reform and Why it Is so Unlikely,” VoxEU, January 8, 2013)

This program of federal regulation has been imposed increasingly in contravention of the basic constitutional principle of separation of powers, by merging legislative, executive, and judicial authority in “independent” regulatory agencies.  The unelected federal regulator today decides the details and specifics of binding mandates, identifies violators of those regulations, assesses guilt, and applies penalties.

Taken together our current regulatory system, by merging rather than maintaining the separation of powers of the Constitution, is eroding the rule of law.  It is returning us to the age old practice of rule by men, with all of the potential for abuse of rights and freedoms, abuses that fill up most of the sadder pages of human history.

During the debate over the creation of the new financial consumer Bureau, Senate Banking Committee Chairman Dodd boasted that with this new agency people would no longer have to come to Congress for the enactment of new consumer laws.  The Bureau would take care of all that.

There are serious operational flaws—too often overlooked—in the program of governance by Benign Experts.  First, the regulators are not dispassionate umpires, limited to calling the balls and strikes.  These umpires are also players in the game, the federal agencies each having their own set of particular interests and incentives that they take care of first.

Second, reliance on Benign Experts assumes an unproven, undemonstrated level of knowledge, insight, and forecasting skills.  AEI President Arthur Brooks, in his book, The Battle, provides one of many examples of this flaw:

Federal Reserve economists were still forecasting significant positive growth and moderate unemployment in May and June 2008.  They believed that economic growth in 2009 would be 2.4 percent, and unemployment would be 5.5 percent.  What we experienced instead was negative growth, double-digit unemployment, and the destruction of at least $50 trillion in worldwide wealth.  No one can get the numbers exactly right, to be sure.  But getting them this much wrong certainly lends a whole new meaning to the expression ‘margin of error.’

(Arthur C. Brooks, The Battle, p.46)

It is not that regulators are dumber than the rest of the population, but they are no smarter either.  The regulatory problems are increasingly too great for any designated group of humans to solve. 

Third flaw, mission creep:  power attracts power.  Even if the tasks are too great, require too much knowledge, insight, foresight, and other skills in unachievable degree, the regulators still take them on, especially if the task increases the reach and influence of the agency.  

I offer two examples from an example-rich environment.

Basel III capital rules started from a simple idea, that banks all around the world should be subject to the same capital standards.  Capital (the financial cushion a bank carries against losses) is one of the three key elements of sound banking, the other two being liquidity and earnings.  These international rules did not remain simple.  Developed by an international team of experts from around the world, who labored on them for years, the rules number hundreds of pages, affecting the entire financial structure and business model of a bank, any bank.  Congress was not involved and has no particular role in approving the rules.  When exposed to public review they attracted thousands of comment letters expressing dismay that they are a bad fit for the U.S. economy.  In the end, though, the regulators can go ahead with what they alone think is best.

A second example would be the Federal Reserve.  One hundred years ago this year the Fed was created with a specific, identifiable, and rather narrow purpose, to provide liquidity for the banking system in times of financial stress.  Before long, the Federal Reserve gained control of monetary policy and built up the practice of controlling interest rates.  Later, it was given the task of promoting maximum employment.  Under Dodd-Frank the Federal Reserve’s role in supervising banks and bank holding companies was expanded to supervising any financial business considered to be significant for financial stability.  Each of these powers has drawn the Federal Reserve away from its narrow, objective task, to broad fields of subjective authority. 

Perversely, this expansion of authority into more judgmental areas is eroding the independence of the Federal Reserve, making it yet one more political player in Washington, with responsibilities that far exceed human ability to fulfill, but which reach to every business and every home.  The Fed’s prolonged policy of keeping short-term interest rates at or about zero has penalized all who save and live off of their savings, transferring trillions of dollars from savers to borrowers, the biggest borrower being the Federal Government, a policy decided by a small group of Washington experts.

I offer a partial but simple solution to point us back toward strengthening the rule of law and reducing our exposure to the rule of man and men, however expert they might be.  Return the lawmaking and the policy decisions to the elected representatives.  It is a messy process, but exactly the messy process that the Founders intended to preserve freedom from the encroachment of arbitrary and oppressive government.  The regulators, which are theoretically part of the executive branch, should be left with the duty of implementing the laws and policy decisions that the elected and accountable representatives make. 

If Congress were required to write the rules and mandates and delegate to the executive agencies only the execution, the mandates of government would be circumscribed by the limitations of a legislative body forced to be directly accountable for what it has wrought.  It is easy for legislators to complain about bad regulatory decisions, when all too often these are decisions that Congress never should have delegated to regulators in the first place.

We would still have laws and regulations, but the laws might be more direct and specific, and perhaps fewer and surely smaller.  We would probably not have Dodd-Frank Acts that number thousands of pages read by no congressman or Senator, containing a cacophony of half-baked ideas and multiple solutions to the same problem, all left for the regulators to sort out.  

And legislators might recall this caution, from Thomas Paine:

Laws difficult to be executed cannot be generally good.

(Thomas Paine, The Rights of Man)

Of Lawlessness and the Constitution of the United States

Trivia question for the day:  What is the smallest national legislature in the world?  If you answered, the Supreme Court of the United States of America, give yourself 25 points and a chance at the bonus question:  What is the highest law of the land?  If you answered, the Constitution of the United States of America, subtract 50 points from your score and shake hands with the moderator as you leave the contest in polite and condescending disgrace.

If you are a student of the history of the United States, particularly of its founding, and if you are in addition a constitutional scholar, including some experience reading the writings of the writers of the Constitution, you can take some solace in knowing that your second answer used to be right.  It was right for most of the first 100 years of the history of the United States, and remained right for another 50 years or so after that, although things were already changing in the late 1800s.

In the latter part of the 1800s the Progressive movement, and its fellow travelers the Positivist legal scholars, asserted its voice in America with the notion that law was not at all really connected to natural law as the Founders believed and intended.  In the Progressive/Positivist view, law was whatever lawmakers wanted it to be, and that extended to how the Constitution was to be interpreted.  The Constitution was a collection of written words, words whose meanings were to be interpreted by the new supreme legislature, the Supreme Court, to accommodate the Progressive/Positivist agenda.

The whole idea of a constitution is that there are some fundamental, basic laws that do not change, or that change only by the specific decision and action of super majorities of the population (super majorities to ensure that the rights of minorities are safeguarded).  To preserve their integrity those fundamental laws are written down and taught and embraced from generation to generation.  In the United States, it was on the basis of written constitutions that our nation came together, first the Articles of Confederation, and later the Constitution.

The Constitution of the United States begins with the words, “We the People”.  All of these were new, exceptional ideas.  The approach at the time in the rest of the world was, “You the People”, with a despot, monarch, or some small group of people governing the rest of the population.  In America things were different, and the Founders sought to enshrine and perpetuate that difference within strong bands of a written constitution and the division of governmental power prescribed  and preserved by the Constitution.

It does not seem so different or exceptional anymore.  It seems that today the law, constitutional or otherwise, can be changed or written by five out of nine unelected people in black robes issuing their decrees from a Greek temple in Washington, D.C.  The rest of the 313 million who make up We the People have no more say about it.  That is tolerable, and even desirable if these nine, or the five of the nine, limit themselves to enforcing the laws and Constitution that the people themselves have established through constitutional process.  It becomes intolerable when they just make it up, as they have been increasingly doing since the 1930s.  That is not law.  It is tyrannical lawlessness.

This is very real to the 313 million who are expected to follow the dictates of this tiny legislature.  Under the influence of the lawless behavior of the members of the Supreme Court and their failure to uphold the Constitution, lawlessness and lack of respect for the Constitution are spreading throughout the American system of government.  In very recent years we have witnessed a narrow majority in the Congress, violating its own procedures, pass legislation that obviously violated the Constitution. The executive branch, suspected by the nation’s Founders as ever prone to plans to oppress the people, has exerted an increasingly cavalier attitude toward the Constitution.

These lawless acts themselves are not trivial.  They were explicitly designed to restrict the freedoms of the people, whether with regard to their healthcare choices, how they conduct their financial affairs, or how they find, develop, and use energy—all pretty fundamental to the way that the people live their daily lives.  Under the rule of law we would look to the courts (among other places) to uphold the law and turn back unconstitutional and thus lawless efforts to take away the rights of the people.  Too often lately we look to the courts in vain.  It is far from a sure thing these days that the Court will come to the rescue of the Constitution and the freedoms it was written to protect, witness the suspense that precedes each new decision.

The recent Obamacare decision is the latest and most painful insult to “We the People” yet to come from the Supreme Legislature.  For now, the Five have said that the Commerce Clause of the Constitution cannot be used to force Americans to buy health insurance.  No need.  The Five decided that the taxing authority can be used to force people to do whatever our leaders in Washington want us to do—although they failed to indicate which taxing authority was used. 

The Founders were chary with the taxing authority that they extended to Washington, putting strong walls and tight rules around its exercise.  Remember, it took an amendment to the Constitution to allow an income tax.  Obamacare is not an income tax, or any of the other constitutionally allowed taxes.  Yet a tax it is, now decreed by the five of the nine Justices, that can be applied to anyone—and the anyone is mostly younger adults—who choose in the future not to buy health insurance.  The Five did not say what we might next be forced by taxes to do:  that is just a blank that they have left for people in Washington to fill.

In the days when the Constitution was the highest law of the land one of its great defenders, Daniel Webster, declared in a pleading before the Supreme Court that, “The power to tax is the power to destroy.”  The Chief Justice of that Court, John Marshall, quoted and enshrined that thought in his ruling, McCulloch v. Maryland.  Today that power is now available, at the will of the Five, to destroy the freedoms of the people, freedoms that the Constitution and the earliest Courts served to protect.

Of Presidential Czars and Constitutional Crises

In this age of crisis, one after another, it would not be surprising if you did not notice that the United States has entered into a constitutional crisis, brought on by recent political moves of President Obama.  The resolution of the crisis will affect the balance of power and authorities in our government, which balance was created by our Founders to protect the freedom of the people.

That balance has worked very well for some 200 years, although elsewhere I have noted that American children no longer seem to use a phrase that was common when I was a child.  In those days not so very long ago a child would commonly defy the intimidation or bullying of another by retorting, “This is a free country.”  Our freedom has been eroding.  It is in serious danger yet again.

Let us pause a moment to reflect upon our written Constitution.  It is a miraculous document, created by people who had only a few years before risked their lives, their fortunes, and their sacred honor to throw off monarchy and tyranny and create a nation where the rights of the individual were not only respected but guarded.  One of the first acts under the Constitution was to add to it a Bill of Rights, as if the Founders wanted to underline that the Constitution was all about personal liberty and preserving it.  Each and every item in the Bill of Rights, our first ten amendments to the Constitution, is a further limitation on the power of government over the rights of the individual.

Americans of various religious faiths, including those who disavow the existence of God, have over the last two centuries recognized the inspired nature and deep wisdom of the Constitution.  Many see and acknowledge even the hand of God directly manifested in its inspiration and promotion (see Doctrine and Covenants 101:80).

The Constitution is based upon the dread, born of painful experience, of entrusting men and women with the power of government over the rest of us.  It takes little historical research to find endless examples of how that power has been abused in nearly all times and places of the world.  Yet anarchy is no less a curse, one with which our Founders were also acquainted.

To balance and counter the two dangers, of tyranny and anarchy, the Founders relied upon a system of government that divided power.  No one would have a monopoly or even a predominance of power.   To begin with, the power of government overall would be strictly limited (and the Bill of Rights limited it even more), all but essential government powers remaining with the citizenry.  Then government power was divided between State and Federal authorities.  The power of the Federal government was further divided between three separate and equal branches of government.

The Founders did not believe in efficient government.  Rather, they believed that an inefficient government was needed as an efficient means of preserving the rights of the citizens.  While dividing authority among three branches, it was intended that neither branch could operate without the eventual cooperation of the others.  As had been seen in the English battles between king and parliament, tyranny and oppression resulted when either branch was able to rule without the consent of the other.

The United States has similarly suffered when weakness of president or congress allowed the other branch of government to operate without adequate check or balance.  The weakness of President Andrew Johnson allowed the tyranny of carpetbaggers with Congressional approval to oppress the people of the broken South following the Civil War, promoting poverty and racial hatred that lasted there for a hundred years.  The tyranny of the Franklin Roosevelt administration turned a deep recession into a Depression that lasted for a decade, disappointing people all around the world in the value of democracy and encouraging the dictators in Italy, Japan, Germany, and the Soviet Union who brought us World War II.

The first two years of the Obama Administration witnessed another period of weakened Congressional power, with a Congress all too ready to do the bidding of the President.  A willing Congress passed on to the executive branch control over the healthcare system, the financial system, and added trillions of dollars to government debt, only narrowly refusing to give bureaucrats authority to control the carbon dioxide that all humans exhale.

In the elections of 2010 the electorate voted to restore the balance by electing a congress that would object to the excesses of the executive branch.  That is precisely what the new members of Congress, with uneven success, have been trying to do over the past year.

President Obama is getting frustrated with the situation.  With the new year he has announced that he is going to try to govern without the Congress.  At a speech in the wealthy Cleveland suburb of Shaker Heights, President Obama said the following, “when Congress refuses to act, and as a result, hurts our economy and puts our people at risk, then I have an obligation as President to do what I can without them.”  Then to emphasize that he means what he says, he announced the appointment of Richard Cordray, the former Attorney General of Ohio, who was defeated in the last election, to be a new federal financial consumer czar, without Senate confirmation.  The Senate has refused to confirm Cordray, but President Obama plans to install him in office anyway.

The appointment confirmation process was one of the protections of the Constitution to limit the power of the President.  The Constitution carefully and explicitly divided the power to give government authority to unelected officials, placing with the President the ability to nominate but requiring that Senate approval be gained before the nominee could take office.  As I can testify from personal experience, it is a frustrating process.  The Founders must have assumed that the Senate would from time to time refuse to consent to some nominees, in which case the President could not proceed, the authority of the government would not be extended to that man or woman.

The Founders were also practical people.  They knew that there would be times when government posts needed to be filled when the Senate was not in session.  So the Constitution allows the President to make temporary appointments without Senate confirmation, but only when the Senate is in recess.  This practical element of the Constitution was not intended to get around the normal procedure requiring in effect President and Senate to agree before giving powers of government to unelected officials unaccountable to the people whom they would govern.

The problem for President Obama is that the Senate has refused to approve the nomination, but they also refuse to go into a recess.  What to do?  President Obama’s solution is to declare on his own that the Senate is in recess and appoint Cordray anyway. 

Hence, our constitutional crisis.  Can the President give governmental power over the people to anyone that he wants without Senate consent?  The Constitution says no, and the President says yes.  Normally, we would all take comfort in the reassurance that the courts will enforce the Constitution, but court decisions of recent decades have shaken confidence.  This presidential act of hubris is surely headed for the courts.  If the justices fail to do their duty, then the powers of unelected federal bureaucrats (unaccountable to people or Congress) will grow, and individual liberty will be significantly eroded.  For now, I am pinning my hopes on the judicial branch rising to the emergency.

Of Government Debt and Historic Ratings

Apologists for the Obama administration desperately wish to make light of the unprecedented downgrading of the credit rating of U.S. Government debt from the virtually riskless category of AAA to the slightly riskier rank of AA. The apologists, when they cannot divert attention from the issue altogether, rely upon one or both of two arguments: 1) it was all a big mistake, an irrational and inappropriate decision; or 2) the downgrading does not really matter, it does not mean much.

Apology 1) merits this observation. Maybe it was a mistake. The other two major rating agencies so far have not taken a similar step, even while making noise about the possibility. That kind of public and open debate and disagreement is important for this land of free speech, most particularly with regard to opinions on government policies and their consequences.

The question of the ability of the U.S. to continue to service its debt is certainly open for debate. What is not debatable is that we are now in a condition where it is debatable. We have not been in a situation—since the emergence of the United States onto the world stage of major nations—where our ability to service our debt was at all in question. That we are is new, historic, and not disputed. Under the Obama Administration a lot of unthinkable things have suddenly become all too thinkable, from socializing medicine, or backing away from our support for Israel, to the government taking over the banking system. Add to that list of unthinkables the riskiness of U.S. Government debt.

Apology 2) is without merit. The noise from the Obama Administration suggests that it really does matter, a lot. It is important to note that the S&P decision came after the Congress and the Administration very predictably reached agreement on raising the debt ceiling. The issue is not about the debt ceiling. The issue would still exist if there were no debt ceiling. The issue is the natural debt ceiling, the one that comes when the debtor is no longer able to make good on his promises of repayment. The downgrade is advice to all investors anywhere in the world that the safety of U.S. Government debt can no longer be taken for granted. It has moved from being riskless to an investment that carries some risk—you may debate how much, but you can no longer deny that there is some.

Maybe there is great wisdom in that. Maybe all government debt, from any source, should be recognized as carrying risk. There is always political risk. History is replete with evidence that governments lie to their own people and to their investors, so perhaps a Triple-A “riskless” rating should never be given to any government promises. But apart from willingness to pay, to honor debt agreements, the recognition today is that the U.S. government debt is on a trajectory to where the government cannot—to where it will be unable to—honor its debt commitments.

That is not unprecedented. There are several historical examples where governments amassed debts that were too heavy to repay. It has usually led to the downfall of the governments. The Roman emperors tried to manage their uncontrolled spending on cheap popularity by debasing the coinage (a form of inflation) that wrecked the economy and eventually the empire itself. The debts of the English King Charles I led to rebellion that cost him his head in 1649. A similar chain of events brought on the French Revolution. More recently, the Soviet debt crisis of the 1980s set in motion the final events that broke up the USSR. Other sovereign debt crises are unfolding today before our eyes. All that S&P said was that the U.S. Government cannot act like it is immune from joining the sad list without making major changes in spending and borrowing programs.

Which is to say that the S&P decision matters greatly. There will be much debate about how much it matters, but only charlatans or simpletons will maintain that it does not matter at all. Once you have lost your virginity, there is no reclaiming it. It is a watershed to move from perceived risklessness of debt to the recognition of some risk. Risk costs money, as investors have to hedge against the possibility of some degree of non-payment, whether through changes in terms or through repayment in debased (inflated) currency.

Already investors are starting to move some of their money out of government debt—now exposed to greater market risk—into bank deposits where even with interest rates artificially depressed by the Federal Reserve the principal is not exposed to changes in market values. More significantly, an important anchor of certainty in our economy—the assumption of absolute security of U.S. Government debt—has been pulled up, rougher going for any ships that have to navigate an economy already turbulent with uncertainties.

In the early days of the Obama presidency the media and the President himself were eager to point out how this or that development was history-making, that this or that initiative was historic. Downgrading the credit rating of the debt of the U.S. Government is certainly historic. Let us hope that President Obama does not make any more history.

Of People and Government

One hundred-fifty years ago William Tecumseh Sherman was engaged in the early efforts to put down the rebellion in the southern slave states. He had the idea that it would require several hundred thousand troops. The savvy people of the day seriously thought that Sherman was crazy. After the war and more than a million soldiers later Sherman had another insightful comment:

My opinion is, the country is doctored to death, and if President and Congress would go to sleep like Rip Van Winkle, the country would go on under natural influences, and recover far faster than under their joint and several treatment.
(William T. Sherman, letter to General Ulysses S. Grant, February 14, 1868, in William Tecumseh Sherman, Memoirs of William T. Sherman, p.922)

We need more Shermans today. No one knew better than Sherman what government could do militarily. He also knew its limitations and understood that military competence does not transfer to economic competence.

The federal government, having caused the recent economic turmoil and the resultant recession by an elaborate and pervasive system of guaranties and subsidies, then precipitating a financial panic with massive intervention programs that drove investors out of the markets, quickly followed up with new laws to take over the healthcare and financial systems, simultaneous with uncontrolled spending. The government has tried all that it can do—and far more than it should do. The government’s quack medicine recurrently and unpredictably applied, like in the 1930s, is making sure that private initiative has little chance for recovery.

This highlights the fundamental question: do you or do you not trust people. This is not a new question. It is as old as government, which is practically as old as time. The evidence of the ages is clear: trusting people is the only economic system that works.

The reason is not complicated. Government economic programs are run by men and women making decisions about things that they do not fully understand, applying their own incentives to other people’s money, property, and talents. As smart as these men and women might be—and they are neither smarter nor dumber than the rest of the population—they are not smart enough to know enough to run an economy of over 300 million individuals making billions of economic decisions every day. No mortal is, and until the Second Coming of Christ government remains in the hands of the mortals.

Fortunately, if you trust the people you do not need to make their choices for them. Leave them alone, and they will know best how to invest their money, how to create new jobs, how to invent new products, how to be more efficient, and they will do it in the best ways that they know how, because their own money, resources, and reputations are on the line. Those who are best at these many tasks will succeed the most.

Because government has different incentives and does not work that way, the founders of the United States adopted a government whose founding document begins with the words, “We the People”. Today we have a changing system of government, increasingly based upon the idea of, “You the People”, and it is not working very well. That formula never has.

Of Depressions and Government Rescues

The government is running out of things to do. I am referring to the economy and with reference to improving the economy. A successful government program to recover from the financial crisis and recession that the government caused is turning out to be much harder than presidential candidate Barack Obama promised.

All prolonged recessions and depressions are caused by governments. The recent financial crisis occurred, first, because the elaborate house of cards of government promises and guarantees that dominated the mortgage and housing markets was flattened by a puff of the wind of reality. With government reinforcement and in fact much prodding, builders were encouraged to build more houses bigger and faster than people could use them, realtors were rewarded for selling them, mortgage brokers were drawn to get mortgages for people who could not afford them, and investors were lured into thinking that there was no risk in pumping their money into funding these mortgages. Reality eventually took over, as it always does.

All of this would have caused a major recession, but former Treasury Secretary Hank Paulson ensured that the recession would turn into a full blown financial panic. Nearly every Sunday in the fall of 2008 Paulson was on national camera, little hiding his deer-in-the-headlights expression, announcing the latest desperate and ill-conceived Federal financial rescue program. Remember that the disastrous $700 billion Troubled Asset Relief Program (that was not used to purchase assets after all) was Paulson’s idea. The markets were spooked by it. Markets tanked when Congress defeated it and tanked again when Congress passed it about a week later (sweetened with enough pork to buy needed votes). Investors went on strike.

President Obama has been unsuccessful, coming up on three years, in ending the strike. In fact, each time investors have shown some interest in coming back some new government plan or program has renewed enough uncertainty to drive investors back to the sidelines. For example, in early 2009 bank stocks were starting to recover until the Administration decided to impose stress tests to see how banks would fair if the Obama recovery plan failed. Investors returned to their seats to watch, and even the regulators’ findings that the banks could weather continued recession did not bring more than a tepid response from bank investors. The Obama Administration’s plan to restructure the entire banking and financial system—realized in the Dodd-Frank Act—has served to warn investors against taking new investment risks until they could see how it would all play out. It now seems clear that the financial crisis has been replaced by a regulatory crisis, with the regulators already falling way behind the mandates of the last Congress to write hundreds of new rules and no bank able to make any business plans extending much beyond a few months.

The housing markets remain at depression levels. New Dodd-Frank rules are making it much harder for families to get, lenders to offer, and investors to fund new mortgages for new houses. Is an economic recovery even conceivable with housing and mortgage markets mired in depression?

Our government has tried pulling its other levers. The United States has never, ever, witnessed the amount of government spending intended to stimulate the economy artificially. The Federal Reserve has expanded the money supply by trillions of dollars. Most of that Federal Reserve money has gone into funding government deficits, driving down the value of the dollar, and stimulating the prices of gold, silver, oil, and other commodities. The government takeover of the healthcare system, it was argued, was the only way to control medical costs that were said to be harming the economy.

Of course, there are more government actions waiting in the wings. The Administration wants to raise taxes dramatically, especially on investors and businesses—the energy business, the banking industry, investment firms, anyone who uses carbon (one of the elements necessary to life and essential to breathing), “rich” people, and small businesses that would be caught in the definition of “rich people.”

And yet the economy remains in the doldrums. Nothing seems to work. It conjures up memories of the Great Depression, that economic recession that Franklin Roosevelt was eager to take over. Through the whole decade of the 1930s FDR tried one thing after another to restore economic recovery, but nothing worked. Instead, FDR helped weaken world faith in representative government, greatly encouraging the willingness of desperate people to embrace the desperate measures of the dictators in Italy, Germany, Japan, and the Soviet Union who gave us World War II.

The Obama Administration has tried everything that government can do. Why not now try getting government out of the way and letting the people solve this one as they always have? Investors still have plenty of money ready to invest, if they were only confident that the rules would not change and that their investments would not be taxed away. Businessmen would be eager to hire new employees if they only knew how much the employees would cost and that some new government program would not impose new costs and burdens on their business. Banks would love to lend to businesses and provide mortgages if the regulators would stop changing the rules and discouraging banks from making loans to anyone other than to the government.

Maybe there is the worry that government will not get credit for the recovery if there is no new government program to point to, no government guarantee to praise, no stimulus spending to trumpet. Maybe that would be O.K. But I would be ready to vote for the government leaders who removed the obstructions to investment, lowered tax rates, lifted regulatory burdens, and dispelled the clouds of regulations and barriers to growth that are gathering on the horizon.

Of the Dodd-Frank Act and Preparing for the Next Crisis

Last year Congress passed and President Obama signed into law the Dodd-Frank Act. As advertised, the Dodd-Frank Act was to restructure the entire financial system of the nation to ensure that we do not have another melt down of the economy, at least not one related to the financial system. With that promise, the Dodd-Frank Act set in motion an extensive program of federal government control of the banking and investment industries. Ever after, financial firms would be more responsible to bureaucracies in Washington than they would be to their own customers, but everything financial would be “safer.”

The Dodd-Frank Act is failing. In fact, judged by the most demanding measures possible, those set out by its framers in the Administration, it is an abject failure. And it is getting worse, not better, and it is making financial things worse, not better. A repeat of the troubles of 2007 through 2009 is becoming more likely rather than more remote.

A few days following enactment of Dodd-Frank, Treasury Secretary Timothy Geithner gave a speech at New York University’s Stern School of business in which he outlined six principles that would guide implementation of the new law. It is altogether fitting and proper that we should judge the success of the implementation by those six principles. Secretary Geithner challenged us to do so. He said, “You should hold us accountable for honoring them.” In a few days it will be ten months since President Obama signed the law in a formal White House ceremony. Let us examine progress of the last ten months by the standard of the six principles.

Principle One: Speed, moving as quickly as possible to bring clarity to the new rules of finance. The Dodd-Frank Act mandated an unprecedented program of new regulations that are so numerous and complex that describing them defies hyperbole. Estimates range between 250 and 500 new regulations to be promulgated. One of Washington’s prestigious financial law firms, Davis-Polk, noted by way of illustration that one of the agencies tasked with writing new regulations, the Commodity Futures Trading Commission (CFTC), normally has at most four regulations that it is working on at a time. At the end of December the CFTC had 31 regulations under work.

But starting regulations is not completing them. The Davis-Polk study noted that the law required 26 regulations to be completed in April 2011, but not a single deadline was met. Some 40 Dodd-Frank regulations are now behind schedule. That is not to criticize the regulators, who are cutting as many corners as possible to meet the deadlines. It illustrates how impossible it is to implement Dodd-Frank as mandated.

Principle Two: Full transparency and disclosure, with the regulatory agencies consulting broadly as they write new rules. Compliance with this principle is even worse than the speed test. In fact, in a vain effort to meet the unrealistic deadlines of the Dodd-Frank Act, regulators are shortening comment periods, consulting with each other as little as possible, and in general trusting to their own hasty judgment far too much. One agency head remarked to a banker group that the agency leadership did not need to have long discussions with the public; they have been thinking about the issues and already know what they want to do.

Principle Three: Avoid layering of new rules on top of old, outdated ones, eliminating rules that do not work, and wherever possible streamlining and simplifying. Barbara Rehm, a financial reporter with the independent trade newspaper American Banker, recently observed, “None of the numerous people interviewed could name a single rule that has been repealed or simplified.”

Principle Four: Avoid risking killing freedom of innovation, striving to achieve a careful balance, safeguarding freedom and competition. Since enactment of the Dodd-Frank Act there has been no innovation in the financial services industry, as businessmen do not know what they will be allowed to do and what will be banned once the Act is implemented. Actually, it is worse. The best minds in financial firms have been focused on how to meet the needs of the regulators rather than on how to meet the needs of their customers, and the only competition is among the regulators over who can be “tougher” on the financial industry.

Principle Five: Make sure that we have a more level playing field, both between banks and non-banks as well as with regard to America’s foreign competitors. In this category the talk and promises are extensive and good. So far there are no results. In fact, foreign regulators are quietly backing away from copying the regulatory excesses of the Dodd-Frank Act, positioning American firms to surrender the global financial leadership that they have built up over the last 100 years.

Principle Six: Actually, Secretary Geithner provided a bonus, squeezing two parts into this last standard. Part One: Have more order and coordination in the regulatory process so that regulatory agencies are working together, not against each other. Coordination among the regulators is haphazard at best, with plenty of agency competition in evidence. The new Orwellian Bureau of Consumer Financial Protection has not even been set up, and the other regulators are already competing with it to show who can be more punitive on financial firms in the name of helping their customers. Even the States are joining in, with various state attorneys general pressuring banks to cough up $20 billion to some kind of fund to be used by officers of the Obama Administration to help the fortunate troubled homeowners of their choice.

Principle Six, Part Two: Conduct a careful assessment of costs and benefits of the burdens involved with the regulations. Cost/benefit analyses have been cursory at best but more often non-existent. The inspector general of the CFTC recently chastised his agency for ignoring meaningful inquiry into the cost of its proposed regulations. Ten Republican legislators, troubled by this neglect, sent a letter to all the financial regulators asking for their cost/benefit analyses. There has been no reply.

Ten months into the implementation process, how must we judge the Dodd-Frank Act? Holding Secretary Geithner and the Obama Administration to their own standards, it is hard to avoid a conclusion of complete failure. This is no surprise to those of us who criticized the whole premise of the Dodd-Frank Act, that the government failures that brought on the financial crisis could be resolved by increasing the role of government. So far government is failing in the regulatory implementation crisis created by the Dodd-Frank Act. Do not look to government to be ready to respond to the next financial crisis when that arrives, especially if the confusion of the Dodd-Frank Act helps to hasten that day.

Of Liberty and Barackracy

When President Barack Obama leaves office, he will leave Americans with less liberty than they had when he took office. Absorbing many liberties that Americans had, making decisions for Americans that they used to make for themselves, will be a vast array of new government agencies, the new Barackracy.

I chose the term “Barackracy” with care. It ends with a suffix similar to that in “democracy.” Democracy means rule or government by the people. Barackracy is similar to the well-known term, “bureaucracy.” That is not accidental. Bureaucracy was a pejorative term, coined in early modern times to criticize the French government, which had become by and large run buy unelected officials in government agencies, the bureaus. At the time, elective governments—and indeed, constitutions—in France would come and go with amazing frequency, but the bureaucracy and the bureaucrats who ran the operations of government would always be there and would carry on largely undisturbed. For much of what mattered in day-to-day life, France was ruled by the bureaus.

The bureaucracy helped to make France what it is today. More and more decisions over a wide range of matters in the ordinary lives of ordinary people were made by the bureaus. The Soviet Union learned from the French model and could probably not have been created without drawing upon that example. The Soviets expanded upon the French model, but the Soviets did not invent it. Even with the Soviet Union dissolved, the Russians are having a very difficult time establishing the liberties of the people, because the Russian bureaucracy survives at the core of the current Russian government.

When the United States was created we had no bureaucracy. In the early years of the Constitution we had only three departments of government, the State Department, the Treasury Department, and the War Department. These three departments focused on the three acknowledged purposes of the federal government, to conduct our international relations, provide for the common defense, and have a national system of revenues to pay for it all.

Instead of bureaucracy, we had liberty, protected for a time by a federal system of government that dispersed governmental power among the states and within a system of checks and balances. The founding fathers had already seen how government limited freedom and how government tended to grow if left unchecked.

Each order from a bureaucrat limits liberty. The decisions of bureaucrats, operating on behalf of the government, have the authority of law and occupy the field where individual decisions used to operate. And, unlike private decisions, the mandates of the bureaucracy are backed by force. Several decades ago Alan Greenspan described the power of bureaucratic decisions this way:

At the bottom of the endless pile of paper work which characterizes all regulation lies a gun.
(Alan Greenspan, “The Assault on Integrity,” in Ayn Rand, Capitalism: The Unknown Ideal, p.119)

At the core of each proposal by Barack Obama to change America lie several new government offices and agencies that arrogate to themselves the power to make decisions that so far have been made by the people themselves. In the Obama “Cap and Trade” plan designed to save us from global warming (or now, “climate change” since it is no longer clear whether the earth is getting warmer or colder) are various agencies that will decide how people can use energy, what they can buy, how their products are made, and what they pay for them. The healthcare legislation will have an unnumbered collection of new government agencies to decide who gets to buy health insurance and from whom, at what price, with what features, covering which illnesses, under which treatments. The proposed new Barackracy will include new agencies to determine what financial services can be offered to you, who can offer them, and on what terms. It will also decide which banks and other financial firms can survive and which ones should be bailed out. There are other plans, too.

In each case, liberty is replaced by government decisions, made by people who are never up for election, accountable to no one. The Senate sponsor of the financial Barackracy bill, Senator Chris Dodd, said that with a new financial consumer regulator it will no longer be necessary to go back to Congress for new consumer legislation—the new Barackracy will have that legislative power. What if you do not like what the new agency does? Or, just what if you would like to decide for yourself? That liberty would be gone.

In the days ahead the power of the Constitution created to preserve the liberties of the people will be tested. The surrendering of our nation—described by Abraham Lincoln as possessing a government “of the people, by the people, and for the people”— over to rule by the new Barackracy certainly seems to be inconsistent with both the spirit and the letter of the Constitution. We will look next to the courts to uphold the Constitution and the liberty it was established to protect.