Are we European?

In its June 19th edition, the British magazine, The Economist offered its take on New Mexico’s political landscape: “The Spanish families and Indians were members of Roosevelt’s New Deal coalition and have remained Democrats since; in almost European fashion, they tend to view the government as beneficent. The Anglo newcomers are more dog-eat-dog individualists.”
The article (sorry for the subscription link) is the seventh in a series on swing states in the upcoming US Presidential election. In the by-line, New Mexico is said to be “perhaps the oddest of them all.” Well, no argument there!

A Day of Deliverance

“The second of July 1776 will be the most memorable epoch in the history of America. I am apt to believe it will be celebrated by succeeding generations as the great Anniversary Festival. It ought to be commemorated as the day of deliverance by solemn acts of devotion to God Almighty, solemnized with pomp and parade, shows, games, sports, guns, bells, bonfires and illuminations from one end of the continent to the other from this time forward, forever more. You will think me transported with enthusiasm but I am not. I am well aware of the toil and blood and treasure that it will cost us to maintain this Declaration and support and defend these States. Yet through all the gloom, I can see the rays of ravishing light and glory. I can see that the end is worth all the means. And that posterity will triumph in that day’s transaction even though we should rue it, which I trust in God we shall not.”
Such was the opinion of John Adams, expressed in a letter to his wife Abigail. No, John wasn’t wrong on his dates. The 2nd of July, 1776 was the day that Richard Henry Lee’s resolution declaring independence from Great Briton was actually adopted by the Second Continental Congress. Two days later, on the 4th, Congress adopted Jefferson’s draft of the actual document: “The Declaration of Independence.” Somewhat by historical accident, we have come to celebrate the later date and not the earlier one.
For more on America’s founding, including original documents, historical background, biographies and quotes, see some of the following:
The Founder’s Constitution (maintained by the University of Chicago Press and Liberty Fund)
From Revolution to Reconstruction (by the Department of Humanities Computing, University of Groningen, The Netherlands)
The Avalon Project (by the Yale Law School)
The Founder’s Almanac (by the Heritage Foundation)
Whenever you decide to celebrate, we at the Rio Grande Foundation wish you a very happy Independence Day!

The Great Communicator’s Legacy

I remember a critic once hissed, “Ronald Reagan was two-thirds show and one-third substance.” I’ve often wondered how someone could dismiss Reagan’s substance so readily. Most of us are passively swept along by the tumultuous currents of history. A very few are audacious enough to defy the currents and determine their own course. Ronald Reagan went further. He not only went his own way, but he brought history with him.
When he came to office, unemployment was climbing near 8 percent and the economy was sinking. Meanwhile, inflation was soaring at 12 percent per year. In today’s prices, gas was selling for $2.87 a gallon and interest rates were at 21 percent (the highest level since the Civil War).
The dominant macroeconomic school of thought, Keynesianism, could not even account for simultaneous economic stagnation and inflation. But Reagan listened to a new generation of economists which included Milton Friedman, Robert Lucas and Robert Mundell. They counseled tight monetary policy to break the back of inflation and an easing of the tax burden to free the economy.
Reagan stood by Federal Reserve Chairman Paul Volker as he sharply reduced the supply of money. The President then ushered (cajoled) historical 25 percent tax cuts through Congress. The monetary policy change promised to be painful in the short run. Unemployment soared to nearly 11 percent, and the economy dipped deeper into recession. Despite flagging government revenue, Reagan stayed the course: he would not go back on the income tax cuts.
When the last of the tax cuts finally came into effect in 1983, everything turned around. The economy suddenly grew at a 4.3 percent annual growth rate. GDP then leapt ahead at a 7.3 percent clip the following year and remained strong there on out. Gas prices and interest rates steadily declined. Unemployment began falling too, reaching a low of 5 percent by 1989. The stock market more than doubled in value under his watch. What’s more, inflation remained in check.
In foreign affairs, Reagan was equally influential. He launched the nation on the largest peacetime military buildup in U.S. history and began talking tough about the evils of totalitarian communism. He challenged the decades-old belief that the only way to avoid nuclear war was an offensive strategy called “mutually assured destruction” (MAD). Instead, he proposed a defensive strategy, the Strategic Defense Initiative. And in pure Reagan form, he even promised to share the technology with the Soviets. Eventually, Reagan found “peace through strength.” He and President Gorbachev would negotiate the first-ever reduction in strategic arms.
Between 1974 and 1980, 10 nations had fallen under communism. After 1980, not one more nation would fall. During his two terms, dictatorships collapsed in Chile, Haiti, and Panama. Nine more nations moved toward democracy: Bolivia, Honduras, Argentina, Grenada, El Salvador, Uruguay, Brazil, Guatemala, and the Philippines. Nicaragua soon followed. Within three years after Reagan left office, the Soviet Empire itself had dissolved and Eastern Europe was liberated. In 1975 the late Senator Daniel Patrick Moynihan had written that, “Increasingly, democracy is seen as an arrangement peculiar to a handful of North Atlantic countries.” By the early 1990s, that was no longer true.
Not all was good. Like every other president in the 20th century, Reagan presided over an expansion in government. In 1989, the federal government was almost twice its 1980 size. Welfare reform would have to wait for another president. And we are still waiting for Social Security reform. He launched an expensive but ultimately futile War on Drugs. And, of course, there was the gross mismanagement that led to the Iran-Contra Affair.
For better or worse, Reagan cast a long shadow. He virtually towers over the latter-half of the twentieth century. So how on earth could he be considered “one-third substance?” The answer lies in the other two-thirds. For all his substantive influence on history, the Reagan “show” was even larger. He was a showman and proud of it. Somehow his Midwestern tongue made complicated economic doctrine and grand historical visions accessible to the common ear. And it is in his mellifluent voice that freedom found one of its greatest spokesmen.

A one sided coin?

“There’s no free lunch,” reported retiring State Representative Max Coll in a recent interview with the Albuquerque Tribune. Well, that sounds like something an economist would say! Unfortunately, the representative went on to comment, “If you’re going to cut taxes someplace, you’re going to have to raise them somewhere else.”
I thought the fiscal coin had two sides: taxing and spending?
Read the full story here.

Are Barriers to Trade Compassionate?

When Gregory Mankiw, President Bush’s Chairman of the Council of Economic Advisors recently noted the benefits of outsourcing jobs, politicians crawled over one another to be the first to denounce his idiocy. Senators Clinton, Kennedy and Schumer, for example, wrote “[we are] troubled by the astonishing statement of…Gregory Mankiw, that ‘outsourcing is just a new way of doing international trade’.” Read the story here.
I must give the press some credit. The media have not let the senators get away with their blithe dismissal of Mr. Mankiw. After all, Mr. Mankiw is hardly some right wing nut (Look at what he named his dog!). What’s more, the Chairman is in rather good company. On his side are the vast majority of Ph.D. economists (for evidence on the extent of the profession’s faith in free trade see the Survey of Americans and Economists on the Economy, 1996). Luckily, the press has actually picked up on this. See, for example, this story by the AP, and this one in our own Albuquerque Journal.
The basic economic story is not terribly complicated: barriers to trade do two things: they raise profits for a select few (steel workers, farmers, etc.) and they raise prices for consumers at large. What is more, it can be shown with minimal recourse to graphing paper that when we add up all the price increases and compare them with the profit increases, the price increases outweigh the profit increases.
Unfortunately, most economists want to stop the story there, assuming they have won over the skeptic. They should not assume so. I suspect that when he or she hears this story, the average America says “So what? If we remove the trade barrier, someone will loose their job. I’d rather have 50,000 consumers pay one extra dollar for a product, than have one worker loose a $30,000 job. I don’t care that the barrier is more expensive, the benefits are everything to the worker.” This is actually a good point.
But there is a better counter point. The economy is constantly changing. Ninety percent of Americans were once farmers. Now a tiny fraction of Americans work on the farm. Thousands were once blacksmiths. Now almost no one is. These changes had to come. And they will have to come for other industries too. But every year we leave steel tariffs and farm subsidies in place is another year that we encourage 18 year olds to go into the steel and farm industries. We are lulling millions of workers into industries that cannot support them.
The inevitable result will be too many steel workers and too many farmers. When those industries collapse, millions will lose their jobs at once. Is that compassion?
My compliments to Anthony J. Evans of The Filter for pointing out Mankiw’s Animal Spirit.

A Tax With No Revenue?

There are many things to appreciate about America’s decentralized, federalist system. One is the fact that we can all learn from the mistakes of another state or local government without having to bear the bad consequences. Arizonans, Texans and Coloradoans, for example, have benefited from New Mexico’s experiment in socialism-lite. They have seen that New Mexico’s high tax rates and bloated government spending have made the state one of the poorest in the nation.
But even New Mexicans can learn from others. This county in North Carolina has recently decided to impose a hotel tax. Never mind the fact that the county has no hotels. They put the tax in place for “down the road,” according to Jeff Jennings, the Chairman of the County’s Board of Commissioners. How many hotel managers do you suppose will be eager to move into this county? I’d guess that the commissioners will have to look WAY down the road before they see any tax revenue from their new tax.