Wednesday, December 24, 2008

Are Obama and the Intellectuals 'Rewriting' the History Surrounding FDR's NEW DEAL So They May Justify Adapting it to the Current Financial Crisis?

A Trap in Obama’s Spending Plan


New York Times

December 21, 2008

As the recession deepens, President-elect Barack Obama is gearing up to spend hundreds of billions of dollars on public investment projects, counting on them to lift the economy, as they have in the past.

But this time that may not happen. Public spending, American style, has worked best in good times, when people have jobs and executives are eager to invest. A new public highway is soon lined — in good times — with stores and malls filled with consumers. A dollar spent by government generates three or four from the private sector.

That symbiosis makes a humming economy hum more, as it did in the 1950s and ’60s. But it may not work that way when the American economy is in full retreat, as it was in the 1930s and seems to be today.

As a measure of the current disaster, the Federal Reserve last week lowered interest rates to an unheard-of near-zero percent and offered in effect to give away money if a fearful nation would only spend it. But panicked by investment losses or fearful for their jobs, people tend to hold back. In such circumstances, a new road could be lined not by shopping malls, but by empty, overgrown land.

That is the risk facing Mr. Obama’s plan. By January, Congress will probably be asked to approve an outlay of more than $700 billion. Spent in one year on construction, research or equipment, it might well offset the contraction at first. But unless it also revived general confidence, the economy could collapse again, once the money was gone.

“If that spending can’t get the private sector going, then it is just a make-work maintenance operation,” said Stanley Moses, an economist at Hunter College in New York.

History illustrates how tricky it can be to make public spending work as intended. The many dams Franklin D. Roosevelt’s administration built generated an abundance of electricity, lowering its cost so that families could afford to operate the appliances then becoming available. The construction itself put money into workers’ pockets. But the appliances were too costly for most families during the Depression, and the manufacturers wouldn’t extend credit. For all the money spent by the Roosevelt administration, public investment was failing to jump-start a key private-sector industry.

His administration was inventive, however, and found a way around the problem by subsidizing installment purchases. That was when appliance production finally rose. In time, installment plans evolved into consumer loans and charge cards, and that helped make the American consumer economy the envy of the world.

These symbiotic relationships between the public and private sectors — playing off each other in ways hard to anticipate and hard to channel — became an essential ingredient of American prosperity from World War II until the mid-1970s.

“It is not in the nature of a market system to have adequate private investment all of the time,” said Robert Pollin, co-director of the Political Economy Research Institute at the University of Massachusetts at Amherst. “So we used public investment to smooth things over and improve the climate for private investment.”

That changed. In the 1970s, the public reacted against high taxes and growing budget deficits, and conservatives argued that putting money in private hands would lift the economy more effectively. Public investment tapered off, and was used less as a tool of economic policy as the economy experienced the increasingly sharp ups and downs of the 1980s, 1990s and the new century.

Now, in the opening months of the worst bust since the Great Depression, Mr. Obama is expected to seek sustained outlays over at least two years to repair roads, bridges and waterways; to build and repair public schools; to expand the broadband network; to digitize medical information; to advance green technology. An economic adviser says his goal is “to encourage private investment, particularly in areas where we have too little investment today, for example, solar systems and wind power.”

But Mr. Obama is bucking a deep private-sector funk, a bit like what Roosevelt described in his first Inaugural Address as “fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.” Borrowers and lenders have pulled back. Business investment has plummeted. So has consumer spending. “A psychology of bad times is becoming the mindset of the public,” says Andrew Kohut, director of the Pew Research Center, a survey operation.

Like Roosevelt’s dams, Mr. Obama’s expenditures will no doubt generate jobs and wages in the construction phase. But in 1937, Roosevelt, thinking that the private sector could sustain itself, pulled back on public spending. Some historians say this was a big reason the economy sank again.

Mr. Obama faces a similar danger. Green-technology spending might spawn a far more efficient solar panel, but investors still might shrink at manufacturing it. What if consumers — having lost equity in their homes and scrimping on cars, vacations, even college tuition — were reluctant to buy and install the panels? “There are so many problems today and no good news, and that is enough to stop the impact of what Mr. Obama does,” said Mr. Moses of Hunter College.

The president-elect and his advisers recognize this danger. But they — and many others, including some Republicans — see no other choice. “The most important thing the new administration can do at a moment when the collective psyche has been so shattered is to spend money now on tangible things,” said Mark Zandi, chief economist at Moody’s, who advised John McCain’s presidential campaign. “People want to see up front a repaired bridge, a new energy technology, a better water system. They want to feel these will have huge benefits down the road, and that might get them spending again.”


Whatever the obstacles, Mr. Obama’s plan would mean giving up the view — widely held since the 1970s by economists, policy makers and business executives — that the private sector, by itself, is the key source of prosperity and full employment, and government spending is inefficient.

Perhaps with that in mind, Mr. Obama evoked as an illustration of his plan’s breadth not the desperate 1930s, but the prosperous 1950s and ’60s. That was when President Dwight Eisenhower and Congress set out to build the Interstate System of highways — a gift to an expanding auto industry and to trucking that also linked the country, encouraging all sorts of other investments.

But there is a big difference between Eisenhower’s era and Mr. Obama’s. By 1950, the Depression’s gloom had been banished by the common effort of World War II, followed by immense postwar demand for American production. Road building was just one public investment that set off huge private outlays. The space program stands out; so does military spending, which spurred computer development and created the Internet. And Medicare, born in the 1960s, became intertwined with private medicine.


Such symbiotic successes prompted a French journalist, Jean-Jacques Servan-Schreiber, to issue a warning to Europe in 1968. In “The American Challenge,” a best seller, he wrote that “the government official, the industrial manager, the economics professor, the engineer and the scientist have joined forces” to support American economic growth, and that the juggernaut would soon reduce Europe to an American colony.

He was wrong. Europe outpaced the United States in its embrace of public-private symbiosis. And now Mr. Obama proposes, in effect, to restore the formula in this country.


[See: Lawrence A. Kogan, European Universities Learn Importance of Technology Transfer, Financial Times (9/29/06) at: ; ].


The Great Depression, The New Deal, World War II and the Crash of '08

By Larry Beinhart

Posted December 16, 2008

Let's start with what everyone can agree on. There was a Great Depression, then the New Deal, then World War II. Also, that America emerged from that war as the world's economic powerhouse and embarked on an astonishing period of growth, prosperity and power.

What is controversial is how much good the New Deal did or did not do. The economy grew, but there was a downward blip from 1936-38 when Roosevelt raised taxes and cut spending in an attempt to balance the budget. (If you're interested, see graph

Unemployment was at about 25% at the start of the Great Depression. In 1940 it was still at 15%.

The universal consensus used to be that the New Deal was effective, though not perfect. Moreover, it saved the United States from embracing the extremes of Fascism or Communism as so many other countries did. But the Right has invested huge sums of money and put a great deal of effort into manufacturing and then selling the claim that Roosevelt's policies were not effective.

"Before we go into a new New Deal, can we just acknowledge that the first New Deal didn't work?"

George Will, ABC, The Roundtable

Even that the New Deal was counter-productive.

UCLA Economists: Government Intervention Prolonged Great Depression 2004 study found FDR's 'misguided policies' delayed recovery. By Paul Detrick Business & Media Institute

What then - according to the Right - ended the Great Depression?

The "New Deal" Was an Utter Failure. It was, in fact, the Second World War that brought an end to the Great Depression.Exposing Liberal Lies (Web Blog)

Actually, there's not much doubt that World War II finally fixed the unemployment problem and lifted the economy up to a significantly higher level.

Here, from a more reputable, fair and balanced source:

The war decisively ended the depression itself.

Christopher J. Tassava, EH (economic history) net.

But what was World War II, for America, as an economic event?

The United States entered World War in December of 1941.

So '41 can be treated, in economic terms, as a pre-war year.

In 1941, tax revenues were 7.7% of GDP (Gross Domestic Product) and government spending was 12.1% of GDP.

Taxes went up.

Deficits were disregarded. Government spending zoomed.

By 1944, tax revenues were 21.7% of GDP and government spending accounted for 45.3% of GDP. Almost half.

It was the New Deal without restraint.

It was Keynesian economics on steroids.

It was Roosevelt unleashed. If the New Deal did not end the Great Depression, but World War II did, what's the lesson?

By the numbers, it has to be that the New Deal was too half-hearted.

It was also that patriotism was able to overcome the backwardness of Republicans and the shortsightedness of the rich.

War is an expensive endeavor. It is also, in and of itself, not a very profitable one. As we've seen with the Iraq, Afghanistan and War on Terror adventures, it can be like throwing money into a pit and blowing it up.

Why did WWII create such success for the United States?

Looked at it strictly as an economic event, we put all our efforts and assets and all our credit into fighting half the world and we emerged as the only modern industrial nation left intact. Though it was not (as far as I know) a conscious goal, and it was a high risk way to get there, we came out of it with a dominant market share of all manufacturing and technology and even agricultural sectors.

What does this tell us about what the response to the crash of '08 should be? It should be whole-hearted. Not half-hearted. We should not fear high taxes, deficits, or government spending. Provided - provided - that we will be producing something of serious economic benefit.

This is not a war against a foreign power. It is an effort against the problems of our own economy.

We have to determine what those problems are and what they are not. They are not the sub prime crises or the housing bubble. Those are symptoms. There are two real problems.

One is our faith in free markets to the degree that it is magical thinking. Markets are never free (in that ideal, magical way), they are never honest by themselves, they are never far-sighted, and they don't supply everything that either a strong economy or a healthy society needs.

If there is an advantage, a greater profit, to be had through fraud, deception, excessive risk taking, collusion and monopoly, diversion of funds, failure to live up to contracts, bribing, buying or influencing governments (which are the only, and necessary, check on fraud, deception and all the rest), some members of the business community will engage in them. They will, at least in the short run, and often in the long run, out perform their more honest competitors.

There are things we need for economic health that established business have battled tooth and nail and will continue to fight until their death and ours.

The second is that in the last seven years we have come to the crisis point of a long term trend. We crossed the line from being a producing economy to being a credit economy. This is an unsustainable condition.

It is also a consequence of the underlying philosophical proposition that free markets create the best of all possible worlds.

The goal must be to transform America into an economy that produces more than it consumes.

The question is how to do that?

Oddly enough, the solutions that have been proposed are on the right track.

1. Invest in infrastructure. Expenditures on infrastructure become an invisible subsidy for all other business. They make all other business cheaper, faster, easier and more efficient. Expenditures on infrastructure, for the most part, cannot be outsourced. [THIS ASSUMES THAT THE STRUCTURES REQUIRED ARE MANUFACTURED IN THE U.S.]

2. Energy independence. Imported oil normally accounts for about a third of the US trade deficit. The way to end that is to produce our own energy and to consume less energy. The question is how? The green answers are wind, solar, tidal energy, possibly geo-thermal. These are infrastructure intensive. The primary cost is building machinery, setting it up and then building efficient transmission lines. Money that we spend on oil pours out of America just like dumping it down a sewer. Money spent on infrastructure stays in town. Then there's "clean" coal and nuclear. There's lots of literature that says both are feasible. I don't know who paid for it. The problem is to include all the costs - the environmental destruction - and actual, effective regulation. Theoretically, both are easily solved. In the real world, it has proved to be unlikely.

3. National health. [EUROPEAN/CANADIAN HEALTHCARE MODEL DESIRED] The private health care we now is the worst of all possible worlds for a modern, westernized society. Its bureaucratic, wasteful, and it rations care. Its far and away the most expensive system. It sends money to non-productive places. It make American business non-competitive.

4. Government goal setting for business and technology. [EUROPEAN MODEL] The glory of free market capitalism is that it is innovative. Thousands, even hundreds of thousands of different people come up with new ideas and try them out. Most fail, a few are wild successes. That won't go away. Imagination, ambition, greed, innovation, will remain. There are lots of things wrong with central planning. One is that it "distorts" the economy. Compared to what? To imaginary free markets? Probably. To where we are now? Unlikely. Can it be worse? Probably not. The second is that it stifles innovation. Compared to what? Innovation in financial instruments? Clearly, the market, left to itself, did not produce alternative energy, popular, efficient American cars, pleasurable mass transit, a new electrical grid, a solution to the obesity epidemic, a reduction in the prison population, and a host of other things.

We have a choice. Go to war for our economic future and well being. Or muddle along with half measures, lost in a fog of pseudo-free market theology, and let ourselves be drained by our own parasites and plundered by the more driven, forward thinking, and committed.

Larry Beinhart is the author of Wag the Dog, The Librarian, and Fog Facts: Searching for Truth in the Land of Spin.


The Disaster Called the New Deal

By David Gordon

Book Review of New Deal or Raw Deal? How FDR's Economic Legacy Has Damaged America, By Burton Folsom, Jr. Threshold Editions, 2008.


Ludwig von Mises Institute

Readers of The Mises Review will not be surprised to learn that Folsom considers the New Deal a failure. Nevertheless, even those already familiar with such books as John T. Flynn's The Roosevelt Myth will find Folsom's book valuable. Folsom advances new and important arguments.

His anti–New Deal verdict is hard to dispute: levels of unemployment at the end of the 1930s remained at depression levels. In May 1939, Treasury Secretary Henry J. Morgenthau Jr., one of Franklin Roosevelt's best friends, testified before the House Ways and Means Committee: "I say after eight years of this Administration we have just as much unemployment as when we started… And an enormous debt to boot" (p. 2). When he spoke, unemployment exceeded 20 percent. Further, and here Folsom has absorbed the pioneering research of Robert Higgs, not even the onset of World War II ended the Depression. True enough, unemployment ended; but this was only because of the draft. Absent this military slavery, there is every reason to think that Roosevelt would have continued to struggle with unemployment.

A diehard defender of Roosevelt might essay two replies to this indictment. He might argue that Roosevelt was insufficiently far-reaching: despite his radical reputation, Roosevelt only reluctantly embraced the Keynesian prescription of increased public spending. Roosevelt did indeed spend a great deal on government programs; but this must be balanced against his tax increases. When the two are taken together, the stimulus that New Deal outlays provided the economy was less than needed to restore prosperity. William Leuchtenburg, one of the most influential historians of the New Deal, favors this approach.

"The havoc that had been done before Roosevelt took office," Leuchtenburg argues, "was so great that even the unprecedented measures of the New Deal did not suffice to repair the damage." … Some historians say that FDR should have done more deficit spending during the recession of 1937. (p. 12)

Folsom wisely rejects this argument. It rests on a familiar fallacy, classically exposed by Frédéric Bastiat in the 19th century and Henry Hazlitt in the 20th. Spending by the government does not add to employment, since taxes displace private spending and investing. Folsom aptly quotes Hazlitt in this connection:

"Every dollar of government spending must be raised through a dollar of taxation," Hazlitt emphasized. If the WPA builds a $10 million dollar bridge, for example, "the bridge has to be paid out of taxes… Therefore," Hazlitt observed, "for every public job created by the bridge project a private job has been destroyed somewhere else… All that has happened, at best, is that there has been a diversion of jobs because of the project." (p. 84)

Keynesians of course have a response ready. They will say that investors, owing to pessimism about the future, would not have spent on their own the money the government takes in taxes. Instead, they would have hoarded it; had the money remained in private hands, the increase in employment would have been less than what occurred under the beneficent auspices of Washington.

Folsom ably dispatches this Keynesian canard. If businessmen were reluctant to invest, precisely the antibusiness attitude of the Roosevelt administration was in large part responsible. Roosevelt supported confiscatory rates of taxation; small wonder, then, that investors were reluctant to embark on new projects. They had good reason to think that if they were to be successful, Roosevelt would grab their profits for his own dubious schemes. Polls of businessmen taken in 1939 make evident this reluctance.

In March 1939, for example, AIPO [American Institute of Public Opinion] asked a national sample, "Do you think the attitude of the Roosevelt administration toward business is delaying business recovery?" More than twice as many respondents said "yes" as said "no." (p. 248)

Unfortunately, there is a gap in Folsom's case. His argument, as so far presented, is sound; but what if the government simply increases the money supply? In that case, defenders of interventionism will claim, the new jobs created by the government generate a net increase in employment.

To refute this, one needs the Austrian theory of the business cycle. Government spending, if it takes place through the expansion of bank credit, will, if "successful," result in another artificially created boom. The recovery thus generated will result in the long run in even worse economic distress, once that new boom in turn collapses. Nor can a policy of further monetary expansion indefinitely postpone disaster. Eventually people's confidence in the monetary system will crumble, and a hyperinflation will result.

Folsom, though not blind to the danger of inflation, ignores Austrian theory. In his own account of the continued severity of the depression that began in 1929, he rightly stresses the malign effects of the Smoot-Hawley tariff. Its extraordinarily high rates greatly restricted trade, not only through restricting imports but also because of retaliatory tariffs imposed by other nations. But he says nothing at all about the Austrian view, i.e., that the expansion of bank credit during the 1920s was the principal cause of the 1929 crash.

Quite the contrary, he follows Milton Friedman and the Chicago School in bemoaning the Federal Reserve's contraction of the money supply.[1] He appears not to be aware of the Austrian view. He does not cite Hayek or Mises on the cycle, and he ignores Lionel Robbins's outstanding The Great Depression. (The fact that Robbins wrongly repudiated his own book should not make one reluctant to benefit from its analysis.) He includes only one reference to Rothbard's America's Great Depression, and this is in connection with Herbert Hoover and the RFC (p. 276, note 18).

But I come not to bury Folsom, but, mostly, to praise him. One of his best insights is that the New Deal programs were financed in large part by the poor. At Roosevelt's behest, excise taxes were imposed on many popular items of consumption; and these weighed especially heavily on the impoverished. "In the first four years of Roosevelt's presidency, revenue from excise taxes exceeded that of income and corporate taxes combined" (p. 126). (I do not think it right, though, to call excise taxes "regressive," as Folsom does. Everyone paid the same rate; the poor were not charged more.)

This was far from the only way in which New Deal programs hurt the poor. Blacks fared very badly under Roosevelt, the supposed great exemplar of enlightened modern liberalism. Minimum-wage laws proved a stumbling block to efforts by blacks to secure jobs. These laws prevented employers from undercutting unions by offering lower wages to nonunion members. Since blacks faced exclusion from many of the powerful unions, they were in effect frozen out. Roosevelt, by the way, allowed unions freely to violate private-property rights: sit-down strikes, i.e., the forcible seizure and occupation of an employer's property, were for him quite in order. In the famous sit-down strike by Walter Reuther's United Auto Workers against General Motors, neither "Governor Frank Murphy of Michigan nor President Roosevelt was willing to support evicting the strikers from GM property" (p. 120).

Roosevelt was not much concerned with the effects of his programs on blacks. Indeed, he did little to support civil rights: he would not, e.g., support antilynching legislation. To do so might antagonize important Southern congressmen. Despite his seeming indifference to blacks, Roosevelt gained support among many members of the black community, in part owing to carefully calibrated publicity gestures by members of his administration. Nevertheless, several prominent blacks saw through him. Roosevelt snubbed Jesse Owens after the latter's triumph at the 1936 Berlin Olympic Games; and thereafter Owens campaigned against him. Joe Louis sent a telegram of support to Wendell Willkie in the 1940 election: "'Win by a knockout,' Louis telegrammed" (p. 210).

Folsom ably addresses an objection to his anti-Roosevelt thesis. If Roosevelt's policies were such a miserable failure, why was he reelected? In 1936, he won by a landslide over the Republican candidate, Governor Alf Landon of Kansas. Moreover, not even the most bitter anti-Roosevelt partisan can deny the president's popularity.

In part, Folsom claims, the answer lies in Roosevelt's great personal charm. Even opponents, such as the eminent journalist Arthur Krock, found themselves under its sway. Krock once explained to Roosevelt why he no longer attended presidential press conferences. "You charm me so much that when I go back to write a comment on the proceedings, I can't keep it in balance" (p. 223).

But Folsom has a deeper explanation. Roosevelt manipulated welfare programs, especially jobs under the WPA, to gain votes. WPA officials were quite willing, if need be, to twist arms in order to gain votes for the president and his congressional supporters. More generally, under the expert advice of Emil Hurja, the principal assistant to Postmaster General James Farley, polls were undertaken to indicate where patronage and pork could be used to best advantage.

Folsom here uses to good advantage a long-forgotten book, Who Were the Eleven Million? by David Lawrence, the founder and editor of US News & World Report. Through a county-by-county analysis of the 1936 election, Lawrence showed that voting for Roosevelt varied directly with the patronage and jobs extended. Sometimes one can trace in detail the way particular acts of political beneficence shifted voters to the Democratic camp. The Republicans were caught in a bind. As the party out of power, they could not match Roosevelt as a dispenser of favors. They could to an extent try the path of virtue, denouncing Roosevelt's tactics for what they were; but this tactic could not be pushed too far. To do so risked alienating voters who benefited from the government's largesse. Thus, Landon promised to maintain payments to farmers under the AAA, fatally compromising his denunciation of Roosevelt for political manipulation of welfare.

Folsom places great emphasis on Roosevelt's character, and the president comes off very poorly indeed. Politicians are hardly noted for honesty, but even judged by the low standards of the breed, Roosevelt was mendacious. In a speech in the 1920 election, when he ran for vice president on the Democratic ticket, Roosevelt falsely claimed to have drafted the constitution of Haiti. When challenged, he denied ever making the statement, though numerous witnesses attested that he had done so. Folsom might also have mentioned the charges of dubious dealings leveled against Roosevelt's Warm Springs Foundation for polio victims. (Folsom does mention this project but says little about it.)

The president did not grow more honest with age. Though he had promised to stay neutral in the fight between Alben Barkley and Pat Harrison for Senate majority leader, he came down decisively for Barkley, who won the vote, 38-37.[2] As a result, he converted the popular Harrison from a strong New Dealer to an opponent.

Roosevelt also had an unslakeable thirst for power. Though the 1936 elections gave the Democrats overwhelming control of Congress, this was not enough for Roosevelt. He sought to purge those who were not fully behind his program. In particular, he could not forgive those who dared to oppose his unsuccessful proposal to pack the Supreme Court. He opposed long-serving and influential Democratic congressmen, favoring instead more pliant newcomers. (One favorite was Lyndon Johnson, whose later efforts to bring the New Deal to South Vietnam were not altogether a success.) In most cases, Roosevelt's efforts proved unavailing. The once-dominant Roosevelt, despite his undoubted political gifts, found himself in a much weaker political position at the end of the 1930s than he had been in 1936. Roosevelt had overreached.

Roosevelt's quest for power and disdain for criticism had a sinister side. He used government agencies, especially the FBI and IRS, to harass his political opponents. Thus, at the president's instigation, a case of tax evasion against former Treasury Secretary Andrew Mellon was pursued, though known to be without basis by Elmer Irey, the head of the special intelligence unit of the IRS. Robert Jackson, who ordered the prosecution of Mellon, was later elevated to the Supreme Court. Mellon was eventually vindicated. As soon as Jesse Owens and Joe Louis criticized Roosevelt, IRS investigations of them commenced. Readers of this well-documented book will view Roosevelt with distaste.[3]


[1] It is possible to support the Austrian view of the Depression's cause while still rejecting the Fed's monetary policy once the Depression started as overly deflationist, but it is most unlikely that Folsom adopts this approach. For a criticism of Chicago orthodoxy, see Murray Rothbard, America's Great Depression, and Melchior Palyi, The Twilight of Gold.

[2] I cannot resist the story of Barkley's death. In a speech in 1956, he said, "I would rather be a servant in the House of the Lord than to sit in the seats of the mighty" and moments later dropped dead from a heart attack.

[3] There appears to be a mishap in the text of p. 306, note 38. Folsom refers to a letter from Arthur Sears Henning to Herbert Hoover, apparently on the court-packing plan, and thanks Gary Dean Best for calling this letter to his attention; but the letter is not mentioned in the accompanying text.


George Will: ‘The First New Deal Didn’t Work

By Faiz Shakir

Nov. 23rd, 2008

Economists on both the left and right broadly agree that the need for stimulative government spending is necessary to prevent a further collapse of the global economic system — just as the New Deal and the deficit spending of World War II restored the health of the global economy in the last century.

This morning on ABC’s This Week, conservative columnist George Will echoed the false right-wing meme that FDR’s New Deal policies made the Depression worse:

Before we go into a new New Deal, can we just acknowledge that the first New Deal didn’t work?

As Nobel-laureate Paul Krugman wrote recently in the New York Times, “There’s a whole intellectual industry, mainly operating out of right-wing think tanks, devoted to propagating the idea that F.D.R. actually made the Depression worse. So it’s important to know that most of what you hear along those lines is based on deliberate misrepresentation of the facts. The New Deal brought real relief to most Americans.”

Krugman observed that the true short-comings of the New Deal policies resulted from the fact that they were not bold enough over the short-term:

[T]he truth is that the New Deal wasn’t as successful in the short run as it was in the long run. And the reason for F.D.R.’s limited short-run success, which almost undid his whole program, was the fact that his economic policies were too cautious. […]

In short, Mr. Obama’s chances of leading a new New Deal depend largely on whether his short-run economic plans are sufficiently bold. Progressives can only hope that he has the necessary audacity.

Brad DeLong offers this chart to emphasize the value of the New Deal.


Fresh Debate About FDR's New Deal

by Jim Powell

Jim Powell, a senior fellow at the Cato Institute, is author of FDR's Folly, How Roosevelt and His New Deal Prolonged the Great Depression, (Crown Forum, 2003).

December 2, 2003

It has been 70 years since Franklin Delano Roosevelt launched his New Deal in an effort to banish the Great Depression of the 1930s -- perhaps the most important economic event in American history. The New Deal was controversial then, and it's still controversial, because it failed to resolve the most important problem of the era: chronic unemployment that averaged 17 percent.

Newsweek columnist Robert Samuelson acknowledged that if World War II hadn't come along, America might have stumbled through many more years of double-digit unemployment. Samuelson, however, is among those who give FDR high marks for handling the political crisis of the 1930s, the worst political crisis this country has faced since the Civil War.

But the political crisis was caused by the double-digit unemployment, and in my new book, FDR's Folly, How Roosevelt and His New Deal Prolonged the Great Depression (Crown Forum, 2003), I report mounting evidence developed by dozens of economists, at Princeton, Brown, Columbia, Stanford, the University of Chicago, University of Virginia, University of California (Berkeley) and other universities, that double-digit unemployment was prolonged by FDR's own New Deal policies.

How can that be? Consider just a few of FDR's policies. The New Deal tripled federal taxes between 1933 and 1940 -- excise taxes, personal income taxes, inheritance taxes, corporate income taxes, dividend taxes, excess profits taxes all went up, and FDR introduced an undistributed profits tax. A number of New Deal laws, including some 700 industrial cartel codes, made it more expensive for employers to hire people, and this discouraged hiring.

Frequent changes in the tax laws plus FDR's anti-business rhetoric ("economic royalists") discouraged people from making investments essential for growth and jobs. New Deal securities laws made it harder for employers to raise capital. FDR issued antitrust lawsuits against some 150 employers and companies, making it harder for them to focus on business. FDR signed a law ordering the break-up of America's strongest banks, with the lowest failure rates. New Deal farm policies destroyed food -- 10 million acres of crops and 6 million farm animals -- thereby wiping out farm jobs and forcing food prices above market levels for 100 million American consumers. FDR's Folly spells out much more in startling, sometimes hilarious detail.

Robert Bartley, who edited the Wall Street Journal for three decades and is now a commentator, called for a fresh debate about the New Deal. Newspaper publisher Conrad Black, author of Franklin Delano Roosevelt, Champion of Freedom, responded by claiming that if "workfare" recipients were included among the "employed," then New Deal unemployment rates were lower than the U.S. Department of Labor has reported for decades. Those tempted to agree with Black might listen to jazz great Louis Armstrong's 1940 tune "The WPA" -- referring to FDR's biggest "workfare" program, the Works Progress Administration. Among the memorable lines: "Sleep while you work, rest while you play, lean on your shovel to pass the time away, at the WPA."

There's a fascinating split between economists and political historians about the New Deal. The idea that FDR cured double-digit unemployment, wrote author and commentator Thomas Sowell in a recent column, "was never pervasive among economists, and even J.M. Keynes -- a liberal icon -- criticized some of FDR's policies as hindering recovery from the depression."

Meanwhile, pro-FDR political historians such as James MacGregor Burns, Arthur M. Schlesinger, Jr., Frank Freidel, William Leuchtenburg, and Kenneth S. Davis, have focused on the personalities, elections, speeches, "Fireside Chats" and other aspects of the New Deal's political story, disregarding evidence about the economic consequences of New Deal policies. This continues to be the case with younger political historians like Alan Brinkley, author of The End of Reform: New Deal Liberalism in Recession and War, who called the New Deal "a bright moment." Disregarding the economic consequences, too, are children's book authors like Joy Hakim, whose recent bestseller Freedom: A History of US includes a glowing account of New Deal heroics.

Aside from FDR's Folly, the only major work mentioning evidence about the economic consequences of the New Deal is by Stanford University political historian David M. Kennedy: his 1999 book Freedom from Fear, winner of a Pulitzer Prize. "Whatever it was," he wrote, the New Deal "was not a recovery program." The New Deal might be gone, but the debate goes on.
[See also Europe & United Nations Try to Cram Down US Throat Socialist Financial and Environmental Global Governance; Will Bush & Successor Swallow?, ITSSD Journal on Economic Freedom, at: ].

Thursday, November 13, 2008

Are Bush Calls For Defense of Capitalism Too Late, Amid Euro-Socialist, Sandanista and US Congressional Clamor for Regulate, Tax & Spend Policies?

Saving capitalism
By Filomeno S. Sta. Ana III
Business World Yellow Pad
Vol. XXII, No. 81
Monday, November 17, 2008 MANILA, PHILIPPINES
The title of an Associated Press report was: "Bush warns: Don’t disturb capitalism." The story, however, did not state whether George W. Bush really uttered those words. Yet, the title captures the gist of Bush’s speech that he delivered at the Federal Hall on Wall Street.

The speech was intended to communicate the US position for the meeting of the G-20 countries — a group of highly developed countries and some influential developing countries called emerging markets. The crucial G-20 meeting was an occasion to address the collective action problems in response to the global financial and economic crisis.

The AP story quoted Bush extensively:

"We must recognize that government intervention is not a cure-all." "Our aim should not be more government. It should be smarter government." "It is true that this crisis included failures, by leaders and borrowers, by financial firms, by governments and independent regulators. But the crisis was not a failure of the free-market system. And the answer is not to try to reinvent that system."

The lame-duck president is living in a different world. He wears blinders. He wishes to apply his ideology at all times. But his conservative economic creed of less government loses relevance in times of economic crisis.

Bush dislikes more government. But what do you call the US government bailout of financial institutions, amounting to more than US$700 billion? The fact is, the bailout was a necessary though insufficient condition, to restore confidence in the financial system and keep credit flowing, so as to resuscitate the real economy.

And to disparage government intervention, Bush uses the trick of inserting a red herring in his speech: "government intervention is not a cure-all." Only dumb people believe in a panacea.

But Bush is correct to say that we need "smarter government." Indeed, a smarter government would have taken precautionary measures through policy and regulation and could have thus averted a deep crisis. Unwittingly, Bush’s statement about "smarter government" merely confirms that he or his government isn’t smart. The US and the rest of the world are fortunate for two related reasons: First, Bush would no longer be around to preside over US policies and institutions. Second, the successor is Bush’s opposite.

One metaphor that best describes the current crisis of capitalism is the "gale of creative destruction." Raul Fabella, professor at University of the Philippines School of Economics, reintroduced this metaphor when he spoke in a public forum about the Philippine economy. Raul borrowed the term from Joseph Schumpeter. The "gale of creative destruction" is precisely what makes capitalism resilient. Destroy the old and build the new. Thus, the current crisis will destroy the free-market model, which was dominant for at least two decades, and deflate its "triumphalism." Supplanting it will be a system that enhances the role of government, institutions, and regulation in a market economy.

Recent actions taken by the richest countries — e.g., recapitalization and nationalization of banks as well as enormous fiscal spending — have socialist characteristics.

But what’s wrong about having socialist features or having socialism? The conservatives have labeled Barack Obama socialist. His plan to introduce universal health coverage in the US is socialistic. In fact, Hillary Clinton’s proposed health reforms are more radical than Obama’s program. That makes Hillary not only a feminist but a socialist, too. So what?

Schumpeter, who did not advocate socialism, nevertheless thought that socialism could not be avoided. In his address titled "The March into Socialism," Schumpeter said "the capitalist order tends to destroy itself and that centralist socialism is...a likely heir apparent."

Schumpeter gave three reasons for believing that capitalism is destroying itself and that socialism is the likely alternative. It is not capitalism’s failure but its successes that will lead to its demise.
  • First, Schumpeter thought that technological progress and bureaucratic administration in modern capitalism eventually stifle entrepreneurship and innovation.

  • Second, the advance of capitalism leads to the dominance of large corporations and the decimation of social strata such as small businessmen and farmers that are pillars of individual proprietorship. This weakens capitalism’s institutional scaffolding.

  • Third, capitalist culture promotes rational and critical thinking, and this leads to the emergence of deep intellectuals who turn against the system.
To illustrate, the communist leaders in the Philippines, the Lavas and Jose Maria Sison, came from the elite and were products of the best schools.

Socialism, too, has its own version of creative destruction. Old socialism — the central command economy — has vanished except in a surreal place called North Korea. The "actually existing socialism" is a market economy. And it is in the socialist economies of developing countries where rapid growth has occurred — in China and in Vietnam. The social democrats likewise claim they are socialists. And surely, living in the Scandinavian countries is like living in heaven. Markets and competition, on the one hand, and socialism, on the other hand, can thus co-exist. In fact, they can complement each other.

As leaders put in place the new reforms to tackle the present and future economic global crises, we can expect a further convergence of so-called capitalism and so-called socialism.

As the unrepentant communist but "capitalist roader" Deng Xiao-Ping once said, it does not matter whether the cat is black or white so long as it catches mice.

Mr. Sta. Ana coordinates Action for Economic Reforms (


Bush Pushes For Free Market

Inside Business


Date : 16/11/2008

Reporter: Alan Kohler

ALAN KOHLER, PRESENTER: President Bush's big speech on Thursday in which he defended free market capitalism and small government sounded a bit like the ravings of the captain of the Titanic as he went down with the ship, blaming the iceberg.

No one's recommending a switch to socialism, just better capitalism, specifically better regulation of it. [REALLY?? ARE YOU SURE ABOUT THAT??] In fact, in the same speech President Bush talked about the need for more and better regulation of financial markets before contradicting himself by suggesting that the threat to economic prosperity comes not from too little government but too much government.


The crisis was not a failure of the free market system, he declared.

Actually, I think you'll find it was, Mr President. The crisis is now greatest wherever the market was freest. Governments around the world are being forced reluctantly to nationalise their banking system in various ways, including Australia, where the Government has guaranteed bank deposits. And the G20 government leaders are meeting in Washington, the global HQ of regulatory failure, trying to agree on a fiscal rescue for the world economy and to restrain themselves from protectionism in their hour of emergency.

And then there's the car industry. As much a foundation of capitalism as the housing sector and the financiers to which they are both coupled, the US car industry, including its offshoots in Australia, is the author of its own misery, having failed to deal with their customers' changing energy needs. Instead of preparing for the future the car barons lobbied congress to be exempt from it. But the future arrived anyway, and they're now for the wrecker's yard. Kevin Rudd has coughed up $6.2 billion of taxpayers' money to support the car industry here, and in America, a debate is raging over whether to bailout Detroit to save millions of jobs. Another triumph for the free market.


The worst economic system … except for all the others
Canadian Post Editorial Page
Posted by Kelly McParland
November 15, 2008, 9:00 AM
Winston Churchill once told the British House of Commons that “democracy is the worst form of government except all those other forms that have been tried from time to time.” In the economic sphere, perhaps the same could be said about capitalism: It’s the worst way to order markets — except for all the other ways that have ever been tried.

We’re not talking about pure laissez-faire capitalism here. If that ever existed, it disappeared around the time of the trust busters and muckrakers of a century ago. Rather, we mean the basic concept that free markets are preferable to centrally planned economies.
There will always be a regulatory role for government preventing fraud and abuse, mitigating the peaks and valleys of the investment cycle, and settling contractual disputes, among others.
But in general, markets work best when consumers are free to spend their disposable income as they choose (and are left with as much disposable income as possible), when executives and entrepreneurs — not bureaucrats — make business decisions, and government is mostly left to play umpire.

Take Canada’s economy for instance. Three of its four largest economic expansions since the Second World War have occurred since the Canada-U.S. Free Trade Agreement and NAFTA were signed. Economic nationalism failed to produce the benefits its advocates envisioned. When bureaucrats and politicians tried to pick economic winners and losers, protect aging industries with direct grants, limit foreign investment and erect tariff barriers against imports to spark domestic production, our economy was flat (or at least flatter), and for longer periods, than during the period since free trade.

There can be no denying that free markets produce spikes and troughs, such as the trough the world’s financial markets are experiencing now. And each time one occurs, there are calls — as there will be this weekend from G20 leaders gathered in Washington. D.C. — for more international oversight by governments against future downturns. But, as history shows, government regulatory initiatives are just as likely to prolong hardship as they are to ameliorate it.

In a speech to the Manhattan Institute Thursday, U.S. President George Bush said “It’s true this crisis included failures — by lenders and borrowers and by financial firms and by governments and independent regulators. But the crisis was not a failure of the free-market system.” This is true, if ironic, coming from Mr. Bush. His administration’s initial $700-billion bailout package has done as much to deepen the current crisis as it has to solve it.

The idea that the government had to intervene to save the financial system was not in itself misguided. As others have noted, the financial markets are the equivalent of a basic utility: Their failure would mean the collapse of the entire economy. Amidst a credit freeze-up in which bankers had no idea who was hiding what radioactive assets on their balance sheets, lending ceased. Washington had little choice but to oil the gears with extra liquidity.

Unfortunately, the public servants controlling the $700-billion oil can had little idea where to direct the spout. Initially bureaucrat-driven, the Bush White House had to rework its stimulus plan this week to make it consumer-driven because financial regulators were doing preposterous things with the bailout money, such as using it to secure the credit of corporations and banks that were not in financial trouble.

Yet, even though Mr. Bush’s own cabinet has failed to live up to his faith in free-market capitalism, his words are nonetheless true. As he rightly pointed out, many European countries have lately experienced economic freefalls as large as the Americans despite being far more heavily regulated. Even Sarbanes-Oxley, the complex compliance regulations placed on U.S. business in the post-Enron era, failed to do anything to prevent or lessen the current woes.

Would any of us want to go back to the days of regulated airfares? The end of regulation in air travel has opened up flights and jet holidays to millions of Canadians who could never afford them when government set the price. The same is true of the cost of long-distance calling, cellphones and the rapid expansion of choice in cable television: The moment government ceased being the economic decision-maker, and turned over that task to the consumer, choice when up and price went down.

Canada and the world does not need a return to wage and price controls, rent controls, 6-and-5 inflation targets, foreign investment reviews or any of the other ways governments in the past 50 years have tried to smooth out the bull and bear cycles of the market.

If G20 leaders want to do something useful, they can look for ways to make markets work better, rather than trying to concoct ambitious news schemes to increase government presence in economic choices, something that almost always just makes matters worse.

National Post


US laissez-faire to battle European 'social market' at G20


14.11.2008 @ 17:31 CET

EUOBSERVER / BRUSSELS - Ahead of the G20 meeting of the world's leading industrialised and emerging economies this weekend, the president of the United States and the president of the European Commission have laid down their markers for what should be the solutions to save the global economy.

On Thursday, US President George W. Bush made an impassioned plea for laissez-faire capitalism and warned against turning away from free markets, while commission President Jose Manuel Barroso extolled the virtues of public intervention and the European welfare state model built at the end of World War Two.

The European 'social market' model has been celebrated by President Barroso (Photo: wikipedia)

"In the wake of the financial crisis, voices from the left and right are equating the free enterprise system with greed and exploitation and failure," said the US leader in a speech on Friday (14 November) at the Federal Hall National Memorial.

He conceded that there had been failures, but the blame for these should be pinned on borrowers, financial firms and regulators, not capitalism.

"But the crisis was not a failure of the free market system," he said.

"And the answer is not to try to reinvent that system. It is to fix the problems we face, make the reforms we need, and move forward with the free market principles that have delivered prosperity and hope to people all across the globe."

Mr Barroso, himself a conservative, [IS THIS A JOKE?? A 'CONSERVATIVE' WHAT??] said that the US has had to catch up with the European lead on all major global issues [??] and now the US is behind on what is necessary to fix the world economy.


"When our American friends now are ready to embrace a real commitment to fight climate change, this is exactly what we are been saying and promoting for some time. When our American partners are saying they want to engage more in a multilateral world, this is exactly what the EU has been saying and promoting for some time. When our American partners now are saying they should put some rules in a financially unpredictable, sometimes unregulated market, this is exactly what the EU has been supporting for some time," he told a European Network of Foundations conference on democracy promotion in Brussels today.

"When our American friends now are saying that they should find some ways of promoting some public tools, some public systems, in terms of social security, public education, this is exactly what we Europeans have been doing at least since the end of the Second World War, with the development of our social market economy," he said.


Global governance

European political parties, businesses, and NGOs too have all laid out what they hope to see agreed to.

The national chambers of commerce from each of the G20 countries issued a joint declaration calling on world leaders to agree to strengthened national and international supervisory structures and improve the quality of regulatory standards, but warned governments against raising tariffs and protectionism.

"The World Trade Organisation should be taken as a positive example of global governance," the 20 chambers said in a statement.

Meanwhile, the Socialist grouping in the European Parliament on Thursday issued a five-point plan from Manchester where their MEPs had been having a strategising pow-wow, for a rebuilding of the world financial system and how to boost the economy.

Their "Manchester Declaration", is a largely Keynesian document, calling for a European green investment package to put money in people's pockets and make the shift to a low-carbon economy, targetting in particular vulnerable households and small businesses.

The left-of-centre MEPs call for much greater levels of intergovernmental co-ordination and public spending.

"The European Union has a key role to play in raising and channelling funds. There should be no taboo," said French Socialist MEP Pervenche Berès, chair of the European Parliament's economic and monetary affairs committee. "The member states should discuss the possibility of the EU issuing Eurobonds to invest in European projects."

Priming the global pump

UK premier Gordon Brown, who is likely to play a prominent role in the G20 discusions, having been the architect of the bail-out packages adopted in part or in whole by other EU capitals that saved their banks from a complete credit crunch.

However, despite his also being a member of the Socialist political family, he is expected at the summit to emphasise the need for co-ordinated global tax cuts to prime the global economic pump, although he also supports government spending increases.

"We need to agree on the importance of co-ordination of monetary and fiscal policy," he said before heading to Washington.

"There is a need for urgency. By acting now, we can stimulate growth in all our economies. The cost of inaction will be far greater than the cost of any action."

The Labour prime minister has also repeatedly warned against new "over-regulation" in response to the crisis. Nevertheless, Mr Brown is also pushing for international oversight of the world's top 30 banks by a college of supervisors.
In a curious twist of fate, French President Sarkozy, who, being of the conservative UMP party, has been perhaps the most dirigiste of EU leaders in the solutions he has embraced both at the European level and what he hopes to see the G20 endorse.

Mr Sarkozy, who currently chairs the EU's six-month rotating presidency, will argue for the development of cross-border regulation of financial institution lending practices and investment decisions.

On Thursday he also used the opportunity of the lead-up to the summit to deliver an obituary for the US dollar as a world currency.

"I am leaving tomorrow for Washington to explain that the dollar - which after the Second World War under Bretton Woods was the only currency in the world - can no longer claim to be the only currency in the world. What was true in 1945 cannot be true today," he said.

While Germany put up one of the main blocks to French plans for the development of a common European stimulus package at a summit of EU leaders last week, Chancellor Angela Merkel supports Mr Sarkozy's wish to see regulation of hedge funds and an end to excessive remuneration for bank executives.

However, despite their differences, the EU leaders head to Washington united on a plan of action they are to take to the meeting that would see greater transparency of financial transactions through revised accounting standards, the construction of an early warning system to tackle risks and a central role for the International Monetary Fund (IMF) "in a more efficient financial architecture."

Many aspects of the European plan are likely to meet resistance from President Bush, who remains unconvinced that deregulation of financial markets had any role to play in the crash.

Thus while Brussels is impatient that action be taken urgently to deal with the crisis, in many ways does not expect much from this first summit, and the French EU presidency has called for a second G20 summit to be held next February in order to involve the Democractic president-elect, Barack Obama, who will only send former Clinton Administration secretary of state Madeleine Albright and and former Iowa Congressman Jim Leach to the Washington meeting.

G20 undemocratic, say NGOs

Development NGOs nevertheless believe that the transatlantic differences are largely superficial, as all G20 leaders, from centre-left to centre-right, have long been convinced of the need for ever greater market liberalisation, if not all to the same degree.


A coalition of 630 civil society organisations has criticised the meeting as undemocratic as 170 countries have not been invited even though the decisions reached by the G20 affect everyone.

The groups are demanding that future global summits involved all goverments and that the United Nations be the convener, not the United States. They also want to see the engagement of citizens' groups and social movements and full transparency during all discussions.

They are particularly worried about giving the World Bank and the International Monetary Fund new powers.

"The policies of northern governments, the World Bank and the International Monetary Fund pursued for the past thirty years have failed spectacularly," said Vitalis Meja with Afrodad.

"And now, the response is to bring 20 governments to DC for a new ‘Washington Consensus'."

Friends of the Earth and the Jubilee Debt campaign criticised the positions of all the leaders heading into the summit.

"While those that created the crisis have been bailed out (bonus intact) with unprecedented sums of taxpayer money, the poor in developed and developing nations have received nothing," they said in a statement.

"Let's call time on global greed," they continued. "The same systems that create poverty here – unfair trade rules and tax systems, debt burdens, privatisation and attacks on welfare spending – also create poverty in the developing world."

© 2008 All rights reserved.



Socialists set out five-point plan to beat recession. Said Socialist Group leader Martin Schulz today: ”We support the call for a new Bretton Woods to create a new, more accountable, more stable and fairer system of global financial governance.

13/11/2008 - Socialists set out five-point plan to beat recession.

In response to the official recognition of recession in the EU today, Socialist Euro MPs today set out a five-point plan to rebuild the world financial system and boost the economy.

The Group, which has been holding talks in Manchester, UK, this week, issued a three-page Manchester Declaration on the financial crisis.
The declaration, published after discussions by video-conference with EU Commissioner Joaquim Almunia, sets out a five-point action plan for the EU. It builds on a policy position adopted last week by prime ministers and party leaders of the Party of European Socialists, led by former Danish premier Poul Nyrup Rasmussen.

Said Socialist Group leader Martin Schulz today:”We support the call for a new Bretton Woods to create a new, more accountable, more stable and fairer system of global financial governance.

“We face the deepest economic crisis in 80 years with dramatic job losses. In addition, more than 150 million jobs may disappear next year throughout the developing world, as a result of the rich world’s credit crunch. Governments have saved the banks with public money but it is now pay-back time.”

Said Pervenche Berès, chairwoman of the European Parliament’s economic and monetary affairs committee: “Only strong, coordinated government action both at European and international level can restore confidence, secure and create more jobs, fill order books, and boost demand from both business and consumers. The more coordinated such actions are, the more effective they will be.

“The European Union has a key role to play in raising and channelling funds. There should be no taboo. The member states should discuss the possibility for the EU to issue Eurobonds to invest in European projects.”

The Socialist Group called on its member parties across the 27-nation EU to take on board the substance of the Manchester Declaration.

Calling for strong European and international coordination, the Declaration urges:

  • Targeting measures to help on those who need it most and in particular small firms and vulnerable households. This will involve rapidly restoring levels of lending to households and businesses, especially SMEs


  • A European ban on mega-bonuses and golden parachutes;


  • Refusal of compulsory redundancies [??]

  • Implementation of a European Green Investment package to boost the economy, avoid a long-lasting recession and help Europe to meets its climate and energy goals

  • Revival of the Doha world trade talks to reach successful, development-friendly conclusions.


Solange Hélin Villes 32 2 283 21 47 + 32 476 51 01 72


President Bush Discusses Financial Markets and World Economy
Federal Hall National Memorial
New York, New York
November 13, 2008
THE PRESIDENT: Thank you very much. Please be seated. Thank you. Larry, thank you for the introduction. Thank you for giving Laura and me a chance to come to this historic hall to talk about a big issue facing the world. And today I appreciate you giving me a chance to come and for me to outline the steps that America and our partners are taking and are going to take to overcome this financial crisis.
And I thank the Manhattan Institute for all you have done. I appreciate the fact that I am here in a fabulous city to give this speech. (Applause.) People say, are you confident about our future? And the answer is, absolutely. And it's easy to be confident when you're a city like New York City. After all, there's an unbelievable spirit in this city. This is a city whose skyline has offered immigrants their first glimpse of freedom. This is a city where people rallied when that freedom came under attack. This is a city whose capital markets have attracted investments from around the world and financed the dreams of entrepreneurs all across America. This is a city that has been and will always be the financial capital of the world. (Applause.)

And I am grateful to be in the presence of two men who serve ably and nobly New York City -- Mayor Koch and Mayor Giuliani. Thank you all for coming. Glad you're here. (Applause.) I thank the Manhattan Institute Board of Trustees and its Chairman Paul Singer for doing good work, being a good policy center. (Applause.) And before I begin, I must say, I would hope that Ray Kelly would tell New York's finest how much I appreciate the incredible hospitality that we are always shown here in New York City. You're the head of a fabulous police force, and we thank you very much, sir. (Applause.)

We live in a world in which our economies are interconnected. Prosperity and progress have reached farther than any time in our history. Unfortunately, as we have seen in recent months, financial turmoil anywhere in the world affects economies everywhere in the world. And so this weekend I'm going to host a Summit on Financial Markets and the World Economy with leaders from developed and developing nations that account for nearly 90 percent of the world economy. Leaders of the World Bank, the International Monetary Fund, the United Nations, and the Financial Stability Forum are going to be there, as well. We'll have dinner at the White House tomorrow night, and we'll meet most of the day on Saturday.

The leaders attending this weekend's meeting agree on a clear purpose -- to address the current crisis, and to lay the foundation for reforms that will help prevent a similar crisis in the future. We also agree that this undertaking is too large to be accomplished in a single session. The issues are too complex, the problem is too significant to try to solve, or to come up with reasonable recommendations in just one meeting. So this summit will be the first of a series of meetings.
It will focus on five key objectives: understanding the causes of the global crisis, reviewing the effectiveness of our responses thus far, developing principles for reforming our financial and regulatory systems, launching a specific action plan to implement those principles, and reaffirming our conviction that free market principles offer the surest path to lasting prosperity. (Applause.)
First, we're working toward a common understanding of the causes behind the global crisis. Different countries will naturally bring different perspectives, but there are some points on which we can all agree:

Over the past decade, the world experienced a period of strong economic growth. Nations accumulated huge amounts of savings, and looked for safe places to invest them. Because of our attractive political, legal, and entrepreneurial climates, the United States and other developed nations received a large share of that money.

The massive inflow of foreign capital, combined with low interest rates, produced a period of easy credit. And that easy credit especially affected the housing market. Flush with cash, many lenders issued mortgages and many borrowers could not afford them. Financial institutions then purchased these loans, packaged them together, and converted them into complex securities designed to yield large returns. These securities were then purchased by investors and financial institutions in the United States and Europe and elsewhere -- often with little analysis of their true underlying value.

The financial crisis was ignited when booming housing markets began to decline. As home values dropped, many borrowers defaulted on their mortgages, and institutions holding securities backed by those mortgages suffered serious losses. Because of outdated regulatory structures and poor risk management practices, many financial institutions in America and Europe were too highly leveraged. When capital ran short, many faced severe financial jeopardy. This led to high-profile failures of financial institutions in America and Europe, led to contractions and widespread anxiety -- all of which contributed to sharp declines in the equity markets.

These developments have placed a heavy burden on hardworking people around the world. Stock market drops have eroded the value of retirement accounts and pension funds. The tightening of credit has made it harder for families to borrow money for cars or home improvements or education of the children. Businesses have found it harder to get loans to expand their operations and create jobs. Many nations have suffered job losses, and have serious concerns about the worsening economy. Developing nations have been hit hard as nervous investors have withdrawn their capital.
We are faced with the prospect of a global meltdown. And so we've responded with bold measures. I'm a market-oriented guy, but not when I'm faced with the prospect of a global meltdown. At Saturday's summit, we're going to review the effectiveness of our actions.
Here in the United States, we have taken unprecedented steps to boost liquidity, recapitalize financial institutions, guarantee most new debt issued by insured banks, and prevent the disorderly collapse of large, interconnected enterprises. These were historic actions taken necessary to make -- necessary so that the economy would not melt down and affect millions of our fellow citizens.

In Europe, governments are also purchasing equity in banks and providing government guarantees for loans. In Asia, nations like China and Japan and South Korea have lowered interest rates and have launched significant economic stimulus plans. In the Middle East, nations like Kuwait and the UAE have guaranteed deposits and opened up new government lending to banks.

In addition, nations around the world have taken unprecedented joint measures. Last month, a number of central banks carried out a coordinated interest rate cut. The Federal Reserve is extending needed liquidity to central banks around the world. The IMF and World Bank are working to ensure that developing nations can weather this crisis.

This crisis did not develop overnight, and it's not going to be solved overnight. But our actions are having an impact. Credit markets are beginning to thaw. Businesses are gaining access to essential short-term financing. A measure of stability is returning to financial systems here at home and around the world. It's going to require more time for these improvements to fully take hold, and there's going to be difficult days ahead. But the United States and our partner are taking the right steps to get through this crisis.

In addition to addressing the current crisis, we will also need to make broader reforms to strengthen the global economy over the long term. This weekend, leaders will establish principles for adapting our financial systems to the realities of the 21st century marketplace. We will discuss specific actions we can take to implement these principles. We will direct our finance ministers to work with other experts and report back to us with detailed recommendations on further reasonable actions.

One vital principle of reform is that our nations must make our financial markets more transparent. For example, we should consider improving accounting rules for securities, so that investors around the world can understand the true value of the assets they purchase.

Secondly, we must ensure that markets, firms, and financial products are properly regulated. For example, credit default swaps -- financial products that insure against potential losses -- should be processed through centralized clearinghouses instead of through unregulated, "over the counter" markets. By bringing greater stability to this large and important financial sector, we reduce the risk to our overall financial systems.

Third, we must enhance the integrity of our financial markets. For example, authorities in every nation should take a fresh look at the rules governing market manipulation and fraud -- and ensure that investors are properly protected.

Fourth, we must strengthen cooperation among the world's financial authorities. For example, leading nations should better coordinate national laws and regulations. We should also reform international financial institutions such as the IMF and the World Bank, which are based largely on the economic order of 1944. To better reflect the realities of today's global economy, both the IMF and World Bank should modernize their governance structures. They should consider extending greater voter -- voting power to dynamic developing nations, especially as they increase their contributions to these institutions. They should consider ways to streamline their executive boards, and make them more representative.

In addition to these important -- to these management changes, we should move forward with other reforms to make the IMF and World Bank more transparent, accountable, and effective. For example, the IMF should agree to work more closely with member countries to ensure that their exchange rate policies are market-oriented and fair. And the World Bank should ensure its development programs reflect the priorities of the people they are designed to serve -- and focus on measurable results.

All these steps require decisive actions from governments around the world. At the same time, we must recognize that government intervention is not a cure-all. For example, some blame the crisis on insufficient regulation of the American mortgage market. But many European countries had much more extensive regulations, and still experienced problems almost identical to our own.

History has shown that the greater threat to economic prosperity is not too little government involvement in the market, it is too much government involvement in the market. (Applause.)
We saw this in the case of Fannie Mae and Freddie Mac. Because these firms were chartered by the United States Congress, many believed they were backed by the full faith and credit of the United States government. Investors put huge amounts of money into Fannie and Freddie, which they used to build up irresponsibly large portfolios of mortgage-backed securities. And when the housing market declined, these securities, of course, plummeted in value. It took a taxpayer-funded rescue to keep Fannie and Freddie from collapsing in a way that would have devastated the global financial system. And there is a clear lesson: Our aim should not be more government -- it should be smarter government.

All this leads to the most important principle that should guide our work: While reforms in the financial sector are essential, the long-term solution to today's problems is sustained economic growth. And the surest path to that growth is free markets and free people. (Applause.)

This is a decisive moment for the global economy. In the wake of the financial crisis, voices from the left and right are equating the free enterprise system with greed and exploitation and failure. It's true this crisis included failures -- by lenders and borrowers and by financial firms and by governments and independent regulators. But the crisis was not a failure of the free market system. And the answer is not to try to reinvent that system. It is to fix the problems we face, make the reforms we need, and move forward with the free market principles that have delivered prosperity and hope to people all across the globe.

Like any other system designed by man, capitalism is not perfect. It can be subject to excesses and abuse. But it is by far the most efficient and just way of structuring an economy. At its most basic level, capitalism offers people the freedom to choose where they work and what they do, the opportunity to buy or sell products they want, and the dignity that comes with profiting from their talent and hard work. The free market system provides the incentives that lead to prosperity -- the incentive to work, to innovate, to save, to invest wisely, and to create jobs for others. And as millions of people pursue these incentives together, whole societies benefit.

Free market capitalism is far more than economic theory. It is the engine of social mobility -- the highway to the American Dream. It's what makes it possible for a husband and wife to start their own business, or a new immigrant to open a restaurant, or a single mom to go back to college and to build a better career. It is what allowed entrepreneurs in Silicon Valley to change the way the world sells products and searches for information. It's what transformed America from a rugged frontier to the greatest economic power in history -- a nation that gave the world the steamboat and the airplane, the computer and the CAT scan, the Internet and the iPod.

Ultimately, the best evidence for free market capitalism is its performance compared to other economic systems. Free markets allowed Japan, an island with few natural resources, to recover from war and grow into the world's second-largest economy. Free markets allowed South Korea to make itself into one of the most technologically advanced societies in the world. Free markets turned small areas like Singapore and Hong Kong and Taiwan into global economic players. Today, the success of the world's largest economies comes from their embrace of free markets.

Meanwhile, nations that have pursued other models have experienced devastating results. Soviet communism starved millions, bankrupted an empire, and collapsed as decisively as the Berlin Wall. Cuba, once known for its vast fields of cane, is now forced to ration sugar. And while Iran sits atop giant oil reserves, its people cannot put enough gasoline in its -- in their cars.

The record is unmistakable: If you seek economic growth, if you seek opportunity, if you seek social justice and human dignity, the free market system is the way to go. (Applause.) And it would be a terrible mistake to allow a few months of crisis to undermine 60 years of success.

Just as important as maintaining free markets within countries is maintaining the free movement of goods and services between countries. When nations open their markets to trade and investment, their businesses and farmers and workers find new buyers for their products. Consumers benefit from more choices and better prices. Entrepreneurs can get their ideas off the ground with funding from anywhere in the world. Thanks in large part to open markets, the volume of global trade today is nearly 30 times greater than it was six decades ago -- and some of the most dramatic gains have come in the developing world.

As President, I have seen the transformative power of trade up close. I've been to a Caterpillar factory in East Peoria, Illinois, where thousands of good-paying American jobs are supported by exports. I've walked the grounds of a trade fair in Ghana, where I met women who support their families by exporting handmade dresses and jewelry. I've spoken with a farmer in Guatemala who decided to grow high-value crops he could sell overseas -- and helped create more than 1,000 jobs.

Stories like these show why it is so important to keep markets open to trade and investment. This openness is especially urgent during times of economic strain. Shortly after the stock market crash in 1929, Congress passed the Smoot-Hawley tariff -- a protectionist measure designed to wall off America's economy from global competition. The result was not economic security. It was economic ruin. And leaders around the world must keep this example in mind, and reject the temptation of protectionism. (Applause.)

There are clear-cut ways for nations to demonstrate the commitment to open markets. The United States Congress has an immediate opportunity by approving free trade agreements with Colombia, Peru*, and South Korea. America and other wealthy nations must also ensure this crisis does not become an excuse to reverse our engagement with the developing world. And developing nations should continue policies that foster enterprise and investment. As well, all nations should pledge to conclude a framework this year that leads to a successful Doha agreement.

We're facing this challenge together and we're going to get through it together. The United States is determined to show the way back to economic growth and prosperity. I know some may question whether America's leadership in the global economy will continue. The world can be confident that it will, because our markets are flexible and we can rebound from setbacks. We saw that resilience in the 1940s, when America pulled itself out of Depression, marshaled a powerful army, and helped save the world from tyranny. We saw that resilience in the 1980s, when Americans overcame gas lines, turned stagflation into strong economic growth, and won the Cold War. We saw that resilience after September the 11th, 2001, when our nation recovered from a brutal attack, revitalized our shaken economy, and rallied the forces of freedom in the great ideological struggle of the 21st century.
The world will see the resilience of America once again. We will work with our partners to correct the problems in the global financial system. We will rebuild our economic strength. And we will continue to lead the world toward prosperity and peace.

Thanks for coming and God bless. (Applause.)
Can Bush and Flaherty save capitalism?
By Peter Foster

Canadian National Post
Posted: November 13, 2008, 9:19 PM by NP Editor
Antidote to Father d’Escoto’s ‘liberation theology’ at the UN
It is encouraging that at least two key participants in this weekend’s G20 meetings in Washington have come out in favour of battered capitalism. Yesterday, both President George W. Bush and Canadian Finance Minister Jim Flaherty declared that the current crisis did not represent a failure of markets.

In a speech in New York, Mr. Bush even delivered a much needed paean for the easily forgotten achievements of economic freedom. Mr. Bush’s address to the Manhattan Institute might be dubbed “the speech John McCain never gave, but should have, and that Barack Obama never will.” He referred pointedly to the voices both from the left and right who were equating the crisis with “greed and exploitation.” They were, he suggested, very wrong.The Dow, as if picking up the president’s positive message, gained almost 1,000 points in the wake of the speech. That obviously wasn’t the only reason for the rally, but there’s no doubt that the market welcomes some respite from six months of relentless Wall Street and capitalism bashing.

Typical of anti-capitalist humbug were the noises emerging this week from a UN meeting on inter-faith tolerance promoted by one of the most religiously intolerant regimes on earth, Saudi Arabia.

One of its masterminds was the recently elected head of the UN General Assembly, Miguel d’Escoto Brockmann, a former Sandinista government official and perpetual proponent of rabid, anti-Western “liberation theology.” Señor d’Escoto kicked off the conference with towering condemnation of the West’s “unbridled greed.”

“It is a time of numerous bankruptcies,” declared Father d’Escoto, “but the worst is the moral bankruptcy of humankind’s self-proclaimed ‘more advanced societies,’ which has spread throughout the world. It is not only Wall Street that needs to be bailed out. We need to bail out all of humankind from its social insensitivity.”

Father d’Escoto’s social sensitivity is more than adequately attested to by the fact he is a past recipient of the Lenin Peace Prize (previously the Stalin Peace Prize). When he was elected head of the General Assembly, he declared, “I do not want to turn this presidency into a place to take it out on the United States.” But then since he had described Ronald Reagan as the “butcher of my people,” U.S. representatives were a little cynical of such professed even-handedness.

Father d’Escoto has called for a more democratic UN, although we have to remember that his idea of democracy is of the one-way variety embraced by the former Sandinistas.

The red cleric, it should be noted, appointed Maude Barlow as the UN’s special envoy for water. Upon her appointment, Ms. Barlow told the Wall Street Journal: “I don’t think I would have been offered a role there by anyone but someone like Father Miguel. He cares deeply about the poor.”

But not deeply enough, it seems, to reflect on why socialism has proved so disastrous for them. Mr. Bush’s speech yesterday was a welcome antidote to such drivel.

Although no Senator Obama — the new gold standard (if that’s not an oxymoronic term) for political rhetoric — Mr. Bush elicited enthusiastic applause several times when referring to the resilience and financial status of New York, and to how free market capitalism was “more than an economic theory.” It had been, he said, “the highway to the American dream.” It had produced the steamboat and the airplane, the computer and the CAT scan, the Internet and the iPod. It had worked wonders in other economies, from Japan and South Korea, through Singapore, Hong Kong and Taiwan. The United States, he also pointed out, had bounced back many times before; in the 1940s, in the 1980s — at the end of which it had won the Cold War — and after 9/11.

The President also delivered one very clear warning to his successor that a key policy response to the 1929 stock market crash had been the introduction of the disastrous Smoot-Hawley tariff, which had been designed to protect jobs but had served only to lengthen breadlines by destroying trade.

Mr. Bush’s speech was more directly aimed at the world leaders he will be meeting over dinner tonight at the White House, and on Saturday, to discuss the financial crisis. He is obviously keen to ward off the assault of dirigistes such as French President Nicolas Sarkozy. Mr. Bush declared that G20 participants should reaffirm that “free-market principles offer the surest path to lasting prosperity.”

In a piece in the Financial Times (which you can also read on our site) meanwhile, Mr. Flaherty too had rare kind words for the invisible hand, downplayed grand global financial architectural plans and suggested that reform — like charity — should begin at home. “The open market system did not fail in this crisis,” he said.

When it comes to regulation, it seems, we have myriad examples of what doesn’t work, but in terms of bringing people out of poverty, in promoting innovation and even, as Mr. Bush suggested, “social justice,” there is no substitute for capitalism. It was inspiring to hear the President reaffirm that fact, and point out that the perpetual danger is not from too little government, but from too much, especially of the kind promoted down at Turtle Bay.

Financial Post

Bush makes case for the free markets

Speech in advance of economic summit defends American capitalism

The Associated Press

updated 2:40 p.m. ET, Thurs., Nov. 13, 2008

NEW YORK - President George W. Bush asserted Thursday that the global financial crisis is “not a failure of the free market” and urged world leaders to adopt modest financial reforms that stop short of the tighter regulations Europeans favor.

“Our aim should not be more government. It should be smarter government,” Bush said during a speech in New York, a day before about two dozen world leaders converge on Washington for a weekend summit he is hosting.

Bush called on the leaders to embrace “reasonable” reforms, saying changes won’t work if they shun the free market system or restrict trade.

The president delivered a vigorous defense of free-market capitalism and easier global trade to frame his approach to the high-level gathering. Bush invited representatives of some of the world’s biggest industrial democracies, emerging nations and international bodies to Washington to start developing a more coordinated world response to the economic woes that have millions of people struggling to keep their jobs, their homes and their hopes.

With the severe economic downturn threatening to end Bush’s tenure on a sour note before President-elect Barack Obama takes over, he will host the leaders at a White House dinner Friday and review causes and solutions for the financial mess Saturday.

It was fitting that Bush’s argument against regulatory overreach was delivered not in Washington but from the heart of Wall Street. He spoke at venerable Federal Hall, which was home to the first Congress and is within shouting distance of New York Stock Exchange.

Bush called for reforms to strengthen the global economy long-term and said leaders at this weekend’s meeting would “discuss specific actions we can take.”

Among the areas for possible agreement, Bush listed:

 Bolstering accounting rules for stocks, bonds and other investments so investors have a clearer sense of the true value of what they buy.

 Requiring “credit default swaps” — a type of corporate debt insurance — to be processed through a central clearinghouse. That would help provide crucial information on the parties involved in these complex, unregulated products. Prices for this insurance soared in the aftermath of the Lehman Brothers’ bankruptcy and imperiled American International Group, a major insurer of this kind of corporate debt.

 Taking a fresh look at rules aimed at preventing fraud and manipulation in trading of stocks and other securities.

 Better coordinating financial regulations among countries.

 Giving a wider variety of countries voting power at the International Monetary Fund and the World Bank.

Notably absent from his speech was any talk about what the U.S. might do to bail out the troubled auto industry or the debate over a second U.S. stimulus package.

“The crisis was not a failure of the free market system,” Bush said. “And the answer is not to try to reinvent that system.”

But Bush’s argument that “government intervention is not a cure-all” came as some critics think his administration already is overstepping in private markets. The federal dollars being spent or put on the line to rebuild the nation’s financial system could easily run into the trillions. Already the Bush administration has enacted a $700 financial rescue package, backed the purchase of investment bank Bear Stearns, bought stock in leading banks, engineered a government takeover of mortgage giants Fannie Mae and Freddie Mac, guaranteed money market fund holdings and funneled billions to stabilize troubled insurance giant American International Group.

“I’m a market-oriented guy, but not when I’m faced with the prospect of a global meltdown,” Bush said.

At the same time, the president aggressively defended the U.S. against charges from around the world that insufficient U.S. regulation led to the credit collapse worldwide.

This was his way of pushing back against both the criticism and the calls by allies for more intrusive rules. Heading into the meeting, Europeans are seen as looking more urgently for broad changes and tighter universal banking regulations than is the United States.

“Many European countries had much more extensive regulations and still experienced problems almost identical to our own,” Bush said.

Some critics have said that lax oversight by U.S. and other regulators failed to detect problems and respond with action that could have prevented the meltdown. The crisis began with the collapse of the U.S. housing market, which froze credit, then shook the broader financial sector and finally rippled overseas.

“History has shown that the greater threat to economic prosperity is not too little government involvement in the market, it is too much government involvement in the market,” he said. “It would a terrible mistake to allow a few months of crisis to undermine 60 years of success.”

Dan Price, Bush’s deputy national security adviser for international economic affairs, rejected suggestions of discord with other nations and said it was “grossly inaccurate” to suggest the U.S. was not taking a firm lead in reform.

“We are no less committed to fixing the problems, and addressing regulatory and other deficiencies, than any other leader,” he said.

While in New York, the president addressed a conference at the United Nations on religious tolerance and met privately with King Abdullah of Saudi Arabia.

The summit is just the first in a series intended to deal with the enormity of the economic meltdown, and the next meeting won’t be until after Bush leaves office on Jan. 20.

In the United States alone, the nation’s jobless ranks zoomed past 10 million last month, the most in a quarter-century, as 240,000 more people lost jobs. In the latest dire sign, American automakers say they are struggling to survive.

Obama is steering clear of the summit but will have a couple representatives available to meet with leaders on his behalf.

Besides the United States, the countries represented will be Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea and Turkey. Those countries and the European Union make up the so-called G-20.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


Bush defends capitalism on eve of economic summit


Associated Press
November 13, 2008

NEW YORK – President George W. Bush fervently defended U.S.-style free enterprise Thursday as the cure for the world's financial chaos, not the cause. He warned foreign leaders ahead of a weekend summit not to crush global growth with restrictive new rules.

"We must recognize that government intervention is not a cure-all," Bush said from Wall Street, setting his own tone for the two-day meeting that begins Friday in Washington seeking solutions to the economic crisis that has spread around the world. "Our aim should not be more government. It should be smarter government."

The president acknowledged that governments share the blame for the severe economic troubles that have hit banks, homes and whole countries.

He spelled out his prescription, which includes tougher accounting rules and more modern international financial institutions. But he stopped short of the tighter oversight and regulation that European leaders want. All his ideas came with a warning: Don't disturb capitalism.

"In the wake of the financial crisis, voices from the left and right are equating the free enterprise system with greed, exploitation and failure," Bush said.

"It is true that this crisis included failures, by leaders and borrowers, by financial firms, by governments and independent regulators," Bush said. "But the crisis was not a failure of the free market system. And the answer is not to try to reinvent that system."

That warning about the dangers of too much government intervention came not long after he championed the biggest bailout in U.S. history: a $700 billion taxpayer-funded plan to rescue the financial industry. His government has also signed off on costly rescues for housing, insurance and other financial institutions.

The U.S. wields enormous clout in any global response to the economic crisis, and Bush is host for the weekend gathering, bringing together heads of state from the world's biggest economies as well as emerging nations. It is intended to be the first in a series.

But Bush's personal influence is waning.

In about two months, Democrat Barack Obama will take over as president. Though the president-elect does not plan to attend this summit, he has authorized former Iowa Rep. Jim Leach and former Secretary of State Madeleine Albright to represent him. Obama's transition team says they will primarily be listeners on the periphery of the meetings.

The world leaders come to Washington with their own ideas for change. French President Nicolas Sarkozy, British Prime Minister Gordon Brown and others are advocating a broader overhaul of financial regulations than Bush wants. The Europeans also want a pledge for concrete changes in just 100 days.

The stated goal for this weekend is to examine the causes of the crisis and begin mapping out principles for a response.

But Britain's Brown, on his way to the summit, declared, "There is a need for urgency."

It was fitting that Bush's argument against regulatory overreach was delivered not in Washington but on Wall Street. His speech venue was venerable Federal Hall, home to the first Congress and within shouting distance of the New York Stock Exchange.

There was freshly sobering news on the U.S. economy: The number of newly laid-off people seeking unemployment benefits jumped to a level not seen since just after the Sept. 11, 2001, terrorist attacks. Still the Dow Jones industrial average surged 553 points at the end of the trading day.

Some of Bush's admonitions raised questions about his own past actions, including last month's big bailout law.

Also, he is one of those voices from the right who railed about greed, saying in an unguarded moment in July that Wall Street "got drunk and now it's got a hangover."

On Thursday, he defended his administration against charges from some leaders that insufficient oversight and regulation in the U.S. contributed to — even caused — the mess by failing to raise alarms. Obama is among those who say no one was minding the people's business as the housing market plunged, credit markets ground to a halt and the broader financial system went into distress.

White House aides play down Bush's differences with other nations, saying the leaders have much in common, as evidenced by the gathering itself.

Bush's list of possible areas for agreement include:

  • Bolstering accounting rules for stocks, bonds and other investments so investors have a clearer sense of the true value of what they buy.

  • Requiring "credit default swaps" — a type of corporate debt insurance — to be processed through a central clearinghouse. That would help provide crucial information on the parties involved in these complex, unregulated products.

  • Taking a fresh look at rules aimed at preventing fraud and manipulation in trading of stocks and other securities.

  • Better coordinating financial regulations among countries.

  • Giving more countries voting power at the International Monetary Fund and the World Bank.

Besides the United States, the countries represented at the White House dinner Friday and meetings on Saturday will be Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea and Turkey. Those countries and the European Union make up the so-called G-20.

Australian Prime Minister Kevin Rudd said before he left for Washington that he would raise with fellow leaders his view that a system in which executives of financial firms are rewarded for maximizing risk "cannot be sustained." He said, "That's just dumb, it's wrong and it's bad."

Trade union leaders from participating countries planned to join AFL-CIO leaders Friday in meetings with several foreign heads of state, including Brazilian President Luiz Inacio Lula da Silva, and with IMF Managing Director Dominique Strauss-Kahn and World Bank President Robert Zoellick.

The labor leaders are calling for re-regulation of global financial markets, an internationally coordinated fiscal stimulus and balanced economic growth to address income inequality.

AP Writers Jeannine Aversa and Jim Kuhnhenn contributed to this story from Washington.




What accounts for Europe’s and America’s different attitudes toward the free market?

By Augustin Landier, David Thesmar, and Mathias Thoenig

STERN Business (Fall/Winter 2007)

Throughout the Western world, a vast region generally viewed as dominated by capitalism, people’s attitudes toward the virtues of free markets vary widely. According to the World Value Survey, only 22 percent of French people believe that owners should run their businesses and appoint their managers, while as much as 58 percent of Americans agree with this statement, to cite one example.

Academics have focused on a range of issues to explain the dispersion of pro-free market attitudes. Some argue that the uniqueness of US history – a large, ethnically heterogeneous society – has endowed modern American citizens with persistent anti-redistributive beliefs. The political economy view holds that people that gain the least from globalization are less likely to support it (for example, unskilled workers in the North, skilled workers in the South, people working in industries with high trade exposure). Still others argue that differences can be ascribed to cultural factors such as patriotism, neighborhood attachment, or a strong sense of identity.

We set out to understand what determines attitudes toward free markets by investigating how beliefs about the market economy vary across individuals, time, and countries. We constructed a dataset based on economic data like pension funding and stock market participation, and on opinion surveys, like the World Value Survey (WVS), which collects data on age, gender, and income, and measures attitudes toward economics, marriage, and religion across dozens of countries; and the Internal Social Survey Program (ISSP), whose 1996 wave contained questions on ethnicity, private property, and attitudes on state interference with free competition. By running regression analysis on this data, we were able to investigate the influence of certain factors in accounting for the differential attitudes.

Our analysis of the WVS focused on the answers given to questions about (1) the benefits/harms done by competition; (2) whether owners, employees, or the state should run the firms; (3) the merits of private ownership of business and industry; and (4) the trustworthiness of large firms. The data show a large variation in cross-country attitudes toward free markets. Two examples are given in Table 1, which focuses on the 18 richest countries in our sample and displays mean variables for all three waves of the WVS.

In the cross section of countries, preference for redistribution and attitudes toward free markets showed little, if any correlation. But this was less true at the individual level. People that tended to favor income equality also tended to distrust competition, large companies, and shareholder control of firms. In order to isolate the pure effect of “pro-free market” beliefs, we used as control variables attitudes such as: trust (many existing studies have shown that trust explains well the cross section of various economic outcomes, such as GDP growth); aversion to inequality (defiance toward free markets may stem from a concern for equality); pro-trade (in many instances, defiance toward market forces can be defiance toward globalization); and religion (academic work has shown, in general, that being religious is positively correlated with a positive perception of work and thrift). When we ran the data, we found that the unconditional correlations were not very high, which suggests that individual determinants of opinions are very diverse across attitudes. And yet we found that all four “market” variables are positively correlated with each other. Pro-competitive people also tend to support less equality, seem to favor free trade, and tend to be less religious and less confident in other people, for example.


Why do attitudes toward free markets vary so much across individuals? The political economy view holds that self-interested individuals hold the beliefs that suit them best. In the developed world, for example, those least supportive of free trade also tend to have lower levels of education or work in industries where foreign competition is high. To test this hypothesis, we explored responses on two broad and distinct sets of issues: attitudes toward competition and attitudes toward the profit-motive. Attitudes toward ownership and competition shared some common determinants that proved to be statistically significant. Support for competition and owner control was also more prevalent among older people. (One possible explanation is that older people, being closer to retirement or more entrenched in their jobs, are more sheltered from the shocks of competition.) People with higher levels of income also showed strong support for market forces and self-interested behavior. Our preferred interpretation of this finding is that income is a proxy for the ratio of financial wealth to human capital. Another possibility is that income is a proxy for skill. Skilled labor is more protected from off-shoring and creative destruction that accompany for-profit management and tougher competition.

“French legal origin was strongly related to competition aversion, and British common law was related to a strong preference for owner control. These findings suggest that long-run institutional determinants rooted in the history and culture of a country dominate more recent developments in the organization of its economy.”

A more powerful test of the political economy view consists in combining the individual characteristics with country-level institutional features. We did so by looking at the cross-country dispersion in pension funding and financial development as a measure of the extent of financial markets institutions and compared how young and old people answered the questions. In theory, older people, who control a greater chunk of financial wealth, should display more free-market support in countries where they are the most likely to hold a larger fraction of financial wealth. Generally speaking, we found that in countries where pensions are funded, in financially developed countries, the old are much more likely to be supporters of the free market than the young. The probability that the young favor owner control was larger by 18 percentage points in the pension-funded countries. The probability that older citizens do so is larger by 30 percentage points.

It’s natural to wonder whether the institutional determinants that impact the support for markets come from very far in the past or are largely driven by recent developments. Several scholars have argued that in a cross-section of countries, distant legal origins matter. Compared with countries whose systems derive from French civic law, countries whose systems derive from British common law have a stronger propensity to protect debtholders and shareholders, have lower job protection, and facilitate entry by making business creation easier. When we ran the numbers, we found that legal origin has a significant impact. Notably, French legal origin was strongly related to competition aversion, and British common law was related to a strong preference for owner control. These findings suggest that long-run institutional determinants rooted in the history and culture of a country dominate more recent developments in the organization of its economy.

There’s more evidence that culture matters. Consider that only about 48 percent of American households own stocks directly or indirectly. This makes it unlikely that the median voter will support owner control or free competition just because it boosts the return of its portfolio. And yet, 57 percent of US respondents agreed with the statement that the “owners should appoint the management,” and more than 70 percent of US respondents who work for others agree with the proposition that “management should only care about profits.” The diffusion of equity ownership in the US cannot alone explain why American citizens support free markets more than do citizens of other countries.

Culture may be a factor in explaining such results. Scholars have argued that attitudes are affected by ethnic origins because they have a cultural component, and that culture is transmitted within the family. To test this hypothesis, we constructed two indices of cultural proximity to seven major western cultures: France, Germany, Russia, Spain, Sweden, the UK, and the US. The first index measures proximity to economic culture using as controls an aversion to inequality and a pro-trade attitude. The second index of cultural proximity is related to non-economic values, such as religious proximity.

We also looked at whether each country has been, at some point in history, a colony of one of the seven countries we mentioned above.

Our tests showed that cultural proximity to French economic attitudes predicts a significantly lower support for owner control, as does proximity to Germanic and Nordic economic attitudes.

Proximity to British attitudes does, however, predict a higher-than-average propensity to favor owner control. Countries with British legal origins and/or who have been, at some point, colonized by the British tend to display a higher degree of ownership control.

Meanwhile, countries that had been colonized by Spain and Russia are systematically less supportive of competition, while former Swedish and British colonies are more pro-competitive.

Generational Difference

For country differences in beliefs about markets to be permanent and unexplained by self-serving behavior, divergent beliefs of individuals need to persist throughout generations. But we also know that ideas and attitudes change over time. We tried to get at this issue by focusing on former communist countries and comparing attitudes toward free markets held by younger generations to attitudes of generations that were already adults when the Berlin Wall fell. We found that in the West, younger generations tend to be less pro-market in general. For people born after 1970, the probability of supporting owner control or competition was lower by 1 percentage point. The probability of supporting state ownership over private ownership was higher by 5 percent, a much larger difference.

But the generational divide was significantly larger in post-communist countries than in other countries. In former communist countries, the young are 7 percentage points more likely to support the for-profit motive, 9 percentage points more likely to support private ownership over state ownership, but only 2 percentage points more likely to support competition. These findings suggest that the forces that shape the preference for redistribution are not necessarily the same as those which shape attitudes toward market forces. Clearly, past shocks and shared experiences shape generation/population-wide attitudes.

To investigate further how fast beliefs can adapt from one generation to the next if the economic context changes, we looked at evidence from immigrants. For our purposes, we grouped country/language/ethnicity of origin into four broad categories: English-speaking countries, Continental Europe, Eastern Europe, and Nordic countries. The regressions we ran broadly confirm the results obtained on individual and country data. Respondents from English-speaking countries show consistently more support for both free markets and private property. Respondents of Eastern European origin show the strongest support for state ownership and an activist industrial policy.

We ran the same regressions focusing on US residents. The focus on the US is useful because it is the country where regions of origin are the most diverse. Here, we found mixed evidence that indeed, free market attitudes are strongly transmitted within the family and are weakly dependent of the economic context. For instance, respondents of Eastern Europe origin were 22 percent more likely to support redistribution; US residents of such origin were 6 percent less likely – not statistically significant – to do so. In general, the difference in attitudes between US citizens of Anglo-Saxon descent and other origins was both small and insignificant statistically, while the difference was strong on the worldwide sample. This suggests that such beliefs are much more conditioned by environmental characteristics than by transmission of family values.

What should we conclude from this investigation? First, we find that the traditional political view according to which individuals hold political opinions that are self-serving is consistent with the data. In general, individuals that would benefit more from a pro-market agenda exhibit stronger pro-market opinions. But this tendency alone can’t explain the sometimes significant differences between countries. The attitudes of a country toward markets are slow-varying and seem, on aggregate, to be strongly determined by historical and cultural factors. When it comes to explaining differences between countries’ views toward fundamental issues of markets and competition, economic theory matters. But so, too, do other factors, such as culture, legal systems, ethnicity, and family, matter.

Augustin Landier is assistant professor of finance at NYU Stern, David Thesmar is professor of economics at the Ecole Nationale de la Statistique et de l’Administration Economique (ENSAE) in Paris, and Mathias Thoenig is professor of economics at the University of Geneva.



[See: European Governments Educate Young Against Free Markets & American Capitalism in Favor of European Welfare State Dream - Europe's School Books Demonise Enterprise, ITSSD Journal on Economic Freedom, at: ].