Sunday, July 27, 2008

Blame Capitalism and Soak the Rich

It requires gobsmacking chutzpah for politicians and demagogues to blame their policy failures on the markets. The clock is about to be turned back on an era of deregulation started by Ronald Reagan (Financial Week). I've long stopped watching Lou Dobbs who has transformed over the years from a seemingly lucid reasonable financial reporter to a raving protectionist lunatic but here's his take on the Fannie Mae and Freddie Mac bailout (Club for Growth):

And I love the idea that all these free traders, free marketeers now got to have the government to, to bail them out. If I hear one of these ignorant, hypocritical, sanctimonious free traders ever talk about free markets again, they should be pilloried. I mean they are absolutely - this is an administration of jerks and cowards and fools. I mean it's unbelievable.
Newsflash: Fannie Mae and Freddie Mac are GSE's. I can't help but think that Dobbs actually does know that the "G" in GSE stands for Government and the "S" stands for Sponsored - but that he assumes is viewers don't. It took McCain a while to come around to the view that this was a bad deal particularly for US taxpayers but at least he did - as noted in the WSJ:
"Americans should be outraged at the latest sweetheart deal in Washington," the Republican presidential hopeful wrote in the St. Petersburg Times, stating the clear but all-too-often unspoken reality about this greatest of boondoggles. Yesterday 80 Senators voted to end debate on the bill. Only 13 voted against. That makes it all but inevitable that the bailout will pass today and go to the President early next week. Senator Jim DeMint has slowed the bill by requesting a commitment from his colleagues that sometime in the future, they would hold a vote on barring Fannie and Freddie from lobbying.
Just a few days earlier, Paul Gigot from the WSJ lambasted both McCain and Obama for not bothering to pay attention to the issue and the unwieldy mess that is set to get worse:
The abiding lesson here is what happens when you combine private profit with government power. You create political monsters that are protected both by journalists on the left and pseudo-capitalists on Wall Street, by liberal Democrats and country-club Republicans. Even now, after all of their dishonesty and failure, Fannie and Freddie could emerge from this taxpayer rescue more powerful than ever. Campaigning to spare taxpayers from that result would represent genuine "change," not that either presidential candidate seems interested.
It's a strange strange world, when even the New York Times points out US hypocrisy in pushing China to deregulate its financial sector and for governments to stop protecting banks while the US is about to do quite the opposite leading Steven Malanga from the Manhattan Institute to remind us of the selective application of capitalism that lead to this mess in the first place and will likely result in a even bigger mess / slower economic growth to come. Malanga also points to the tax system which has become a "a vehicle for achieving social goals instead of principally a method of raising revenue."

And what an odd vehicle that is. After all, ask a politician who should pay for this debacle? Well tax the rich of course (as Obama now advocates). As the rhetoric goes, the rich should "pay their fair share". But what does that mean? Here's the situation now:

Both the Tax Prof Blog and Power Line link to the recent editorial in the WSJ titled "Their Fair Share". Note that this is in an era of lower taxes for the rich! So let's get this straight - higher taxes may lead to a more "egalitarian" society but that's if you're willing to accept that everyone is generally poorer and the rich end up paying less. How can this be? Notes the WSJ: "Because they either worked less, earned less, or they found ways to shelter income from taxes so it was never reported to the IRS as income." A good synopsis of this effect here from Fund Mastery Blog. Don't let any of these facts get in the way of a politician collecting votes from those who envy the rich and detracting from the reality that government deficits aren't the result of a revenue problem but a spending problem.

Other helpful reminders from Freakonomics and Will Wilkinson that the problems the US now faces really aren't the result of capitalism no matter how much politicians may wish to paint them as such. Of course, with the political mood in the US swinging towards politicians who promise voters stability by spending their money, I don't have enough faith that the efforts or exhortations from those like Wilkinson or Freakonomics will matter except to say I told you so later.

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