Will we survive Obamanomics?

From the Gilroy Dispatch

Officially, President Obama’s $3.6 trillion budget is titled “A New Era of Responsibility.”

That’s false on two counts. It’s an era – not of responsibility, but of big-government taxation, spending, and regulation. And it’s not new. History is full of attempts to inflate the state to grow the economy. Virtually all have ended badly. As the recent sell-off reminds us, Wall Street’s verdict on Obamanomics has been quick and sharp.

The president’s budget is right in castigating the “troubled past” of the Bush administration, which spent money like a drunken sailor on education, healthcare, bailouts, and two seemingly endless wars in the greater Middle East, with virtually no regard for how to pay for a rapidly growing national debt.

But now we must confront the troubled future. Obama has adopted the big-spending policies of George W. Bush, with trillions more proposed for education, bailouts, and healthcare. He wants to sharply reduce (but not end) the American presence in Iraq. At the same time, he plans to deploy an additional 17,000 troops to Afghanistan, which may lead to an expanded quagmire there.

Hasn’t Obama read the bestseller “Three Cups of Tea: One Man’s Mission to Promote Peace … One School at a Time,” by Greg Mortenson and David Oliver Relin? A Pakistani general who talked with Mr. Mortenson aptly identified the real problem in Afghanistan: “The enemy is ignorance. The only way to defeat it is to build relationships with these people, to draw them into the modern world with education and business. Otherwise the fight will go on forever.”

In some ways, Obama’s plans are more grandiose than Bush’s. He wants to encourage green technology and energy independence, and move toward national healthcare. The cost is enormous. The deficit for this year alone is expected to reach $1.7 trillion.

To help pay for this, Obama proposes the largest tax increase in history. Some of this, such as new taxes on oil and gas companies, is explicit. Some of it, such as the new cap and trade program, is quite subtle. And some of it will “merely” repeal the Bush tax rates on high incomes. But all of it represents a tremendous muzzle on the economy at a time when it needs to be unleashed.

Even these huge tax hikes won’t be nearly sufficient to pay for the outlays. In fact, to pay for it in full, The Wall Street Journal pointed out, Uncle Sam would have to confiscate every penny earned by Americans making at least $75,000 a year.

What’s the future for Obamanomics? The stock market’s reaction doesn’t bode well. The Dow has fallen more than 18 percent since the last trading day of Bush’s term. Clearly, Wall Street thinks that Obama’s tax, spend, and regulate policies will be a disaster.

Despite the dire headlines, the world is not coming to an end, we are not headed into another Great Depression, and free-market capitalism has not breathed its last breath.

In my book, “The Big Three in Economics,” I found that the press has frequently and prematurely written the obituary of Adam Smith and his free-market philosophy, only to see a new and more vibrant global marketplace reemerge after being savagely attacked by Keynesians, Marxists, and assorted socialists. Market capitalism survived and prospered after the boom-bust industrial revolution of the 19th century, and the Great Depression and world wars of the 20th century. It will recover from the financial panic of 2008-09 and Obamanomics.

Adam Smith, the supreme defender of market capitalism, expressed this optimism well in 1776 when he wrote in “The Wealth of Nations”:

“The uniform, constant, and uninterrupted effort of every man to better his condition … is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration.”

The ideas of Adam Smith and his modern followers will make a comeback. Already, pro-market forces are gathering in Congress to defeat Obama’s ambitious and highly socialistic agenda. Charities and nonprofits are already up in arms about the proposed limits on tax deductions for wealthy donations for good causes.

I’m doing my part by holding the world’s largest gathering of free minds at FreedomFest, July 9-11, 2009, in Las Vegas.

Details: www.freedomfest.com.

Proof Is in the Dow

“The Obama budget is nothing less than an attempt to end the ideas of Ronald Reagan.” — New York Times

Adam Smith, the father of free-market economics, once stated, “There is much ruin in a nation.”  President Obama is out to prove it in his Newspeak program he calls “A New Era of Responsibility.”  It should be called “A New Era of Irresponsibility.”

And there’s no better proof than the stock market’s reaction to Obamanomics, which is big-government Keynesianism at its worst.  Since Obama took office, the Dow is down a whooping 15% — and that’s after the huge sell off in the market in 2008 by more than 30%.

And the market has continued to drop precipitously since Obama addressed Congress and announced his obscene $3.6 trillion budget for fiscal year 2010.  This budget includes:

the largest tax increase in history, including a monstrous tax on oil & gas (cap and trade) and the repeal of the Bush tax rates on incomes higher than $200,000 for individuals and $250,000 for couples.  Contrary to Obama’s claim, over 65% of tax filers in this category are small business owners and investors.

the highest level of federal spending since 1945, from today’s 21% of GDP to a whooping 27.7%.  This includes new entitlements in health care and energy.

Clearly Wall Street has spoken:  Obama’s tax, spend and regulate policies are a disaster for the nation.

And sadly Obama doesn’t get it.

What should investors do?  Play it conservative.  Be well-diversified in global stocks.  Maintain a high cash position, look for bargain opportunities, and keep squirreling away gold and silver coins.

And do not despair.  It is not time to head for the hills, although some wealthy friends are talking about moving to New Zealand, or the Bahamas.  (One friend of mine has already taken the extreme step of renouncing his US citizenship!)

In writing “The Big Three in Economics” (click here to order), I found that Adam Smith and his “system of natural liberty” have come under attack on many occasions by his sworn enemies Keynesians, Marxists and socialists, and has often been left for dead, but always makes a comeback.

As Adam Smith declared in his 1776 classic “The Wealth of Nations,”

“The uniform, constant, and uninterrupted effort of every man to better his condition . . . is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration.”

In sum, the ideas of Adam Smith, and his modern followers, including Ronald Reagan, are far from dead.  They are only in hibernation.  The free-market giant will soon be awakened by our dire situation.

Hopefully pro-market forces in Congress (both Republicans and Democrats)  will filibuster the Obama tax increases and budget excesses.  Charities and non-profits are already up in arms about the proposed limits on tax deductions for wealthy donations for good causes.

I’m doing my part by holding the world’s largest gathering of free minds at FreedomFest, July 9-11, 2009, in Las Vegas, the focal point of liberty.  For details, go to www.freedomfest.com.  I hope you will join us.

I know I’m a dreamer but I’m not the only one.

Obamanomics Is Making Matters Worse

Unfortunately, the [Keynesian] balance week is unbalanced. ~ Milton Friedman

We have outlived the short-run and are suffering from the long-run consequences of [Keynesian] policies. ~ Ludwig von Mises

Last week, Treasury Secretary Timothy Geithner announced another solution to the financial crisis — his new “Financial Stability Plan.” Since the announcement, Citigroup has fallen 51 percent, Bank of America is down 46 percent, and Wall Street had its worst week in 2009.

So much for the Financial “Stability” Plan.

As John Adams once said, “Facts are a stubborn thing.”  The Obama model of Keynesian-style bailouts and massive deficits is simply failing to cure the growing financial crisis.

Despite all the bailouts President Obama has put forth — for the banks, the big 3 auto companies, and homeowners — the global economy is still reeling.

In fact, I would argue that Obamanomics (Keynesian economics in disguise) is counterproductive and making matters worse.  That’s because business and Wall Street recognize that there is no free lunch — government spending is piling up huge debts that will need to be paid back, probably through the printing presses.  And inflation — another evil — will come back with a vengeance.

Keynes is famous for the line, “In the long run, we are all dead.”  And that’s what Wall Street fears — that financially we are all going to be killed by excessive debt.

Lack of confidence in Obama, Geitner and Bernanke is why gold is going through the roof now, and is approaching $1,000 an ounce. The U.S. Mint is having a hard time keeping up with demand for American eagle gold and silver coins.

The problem is Keynesian-style policy, the darling of the establishment politicos and media giants.  Keynes has suddenly trumped Adam Smith.  And that’s dangerous.

One day last week, I walked into the largest Barnes & Noble bookstore in New York and saw a big display table up front with all kinds of books on John Maynard Keynes and Keynesian economics.  One book, The Return of Depression Economics, was written by Paul Krugman, the caustic New York Times columnist who just won the Nobel Prize.

Another book was called The Case for Big Government by Jeff Madrick, the editor of Challenge magazine.  I can understand writing a book in support of good, efficient, strong, and productive government, but “big” alone?  Most Americans prefer the motto “cheaper and better.”

The biggest surprise at Barnes & Noble was to see my own book, The Big Three in Economics, prominently displayed along side all the Keynesian and Marxist books.  It has suddenly become my most successful book.

Mark Skousen with the Totem Pole of Economics

But mine was the only book there that took a dim view of Keynes and Marx and their solutions to the financial crisis (always more government, more taxes, and more regulations).  For my money, Adam Smith and his followers (Ludwig von Mises, Friedrich Hayek, Milton Friedman, Murray Rothbard) deserve to be on top of the Totem Pole of Economics.

Unfortunately, Keynes is all the rage now.  The British economist became famous in the 1930s for advocating going off the gold standard, running deficits and bailing out troubled banks with easy money as a way to end the Great Depression.
Today’s politicians, from George Bush to Barack Obama, have suddenly become Keynesians during this financial crisis, spending money they don’t have in a vain effort to right the ship.  Even Newsweek has gone so far to say, “We are all socialists now.”  Alan Greenspan, the ex-student of Ayn Rand, now favors nationalization of the big American banks Citibank and Bank of America.

Every investor and gold bug should know the enemy: Keynes, the advocate of big government and the welfare state, and Karl Marx, the radical who advocated outright state socialism and total central control of the means of production.
After World War I, Randolph Bourne observed, “War is the health of the state.”  Today he might say, “A financial crisis is the health of the state.”

It looks like modern-day statists are getting their wish.  We’re getting big government, good and hard.  Adam Smith and Milton Friedman are out of favor, while John Maynard Keynes, the patron saint of bailouts, inflation, and the welfare state, is making a comeback with a vengeance.

The tentacles of the leviathan state are growing by leaps and bounds.  In 2009, global governments will be the largest shareholders in commercial banks, reversing 20 years of retreat by the state.  The costs of entitlements are exploding upwards, and Congress hasn’t had the courage to address future liabilities.  Social Security and Medicare are government-sponsored Ponzi schemes that will make Bernie Madoff’s embezzlement look like a picnic.

The late management guru Peter Drucker said, “Government is better at creating problems than solving them.” In fact, wrote a cynical Ducker, government has gotten bigger, not stronger, and can only do three things well — taxation, inflation, and making war.  According to Drucker, the state has become a “swollen monstrosity….Indeed, government is sick — and just at a time when we need a strong, healthy, and vigorous government.”  (He said all this in 1969.)  If you want to solve problems, he counseled, you must turn to business and the private sector.

But where does one get the straight scoop on Keynes, Marx, and their nemesis, Adam Smith and the followers of free-market capitalism?

I have no apologies for where I stand on the issue.  In writing The Big Three, I commissioned a Florida woodcarver, James Sagui, to create “The Totem Pole of Economics.”  (The Tolem Pole of Economics is shown on the back cover of the book.)  Clearly, my hero is Adam Smith, the author of The Wealth of Nations, published in 1776, a declaration of economic independence.

Adam Smith, the 18th century philosopher, is on top of the Totem Pole for his advocacy of a revolutionary new doctrine which he called a “system of natural liberty,” what we might call laissez faire or free-market capitalism.  He used the “invisible hand” to symbolized how the private actions of individual entrepreneurs would lead to the public good.

Today’s advocates of Smithian economics have real solutions to the crisis, as I’ve outlined in previous HUMAN EVENTS columns:  suspend “mark to market” accounting rules, make the Bush tax cuts permanent, slash the corporate tax rate, and mostly importantly “do no harm.”  Also, it wouldn’t hurt to take a look at the Canadian banking system, ranked #1 in the world in soundness (US is #40) for its conservative reserve requirements and nationwide branching.  (Not a single Canadian bank has failed in either the Great Depression or now.)

Keynes is ranked below Adam Smith, because he supported big government and the welfare state as a way to stabilize the crisis-prone capitalist economy, the “middle ground” between laissez faire and totalitarian socialism.  But as we have seen, Keynesian activism has led to much mischief in the world today, and countries that have adopted his bureaucratic, regulated mindset have witnessed “slow growth” and “stagflation” style economies.

And Marx is the “low man” on the Totem Pole.  His radical solution, government ownership and control of the production, distribution and consumption of goods and services, would be, as Hayek says, “the road to serfdom.”

Adam Smith and his “system of natural liberty” have come under attack many times by his arch enemies, the Marxists and Keynesians.  But Smithian economics has nine lives, and has always managed a comeback.  With your help, Adam Smith will return.

Click here for a copy of The Big Three in Economics.

From Poverty to Riches: Is There a Magic Elixir?

From The President’s Desk
Published in Ideas on Liberty
July 2002

by Mark Skousen

“The problem of making poor countries rich was much more difficult than we thought.”

—William Easterly, World Bank1

“If there is one formula for our success, it was that we were constantly studying how to make things work, or how to make them work better.”

—Lee Kuan Yew, former Prime Minister, Singapore2

William Easterly has spent his entire adult life working for the World Bank, living in the Third World, and helping poor countries develop into rich countries. You would think he would severely lecture the World Bank and his fellow economists about the dumb policies governments have pursued.

Instead, Easterly throws his hands in the air and offers no clues to the “elusive” quest for growth. He confirms a few economic truths, such as “incentives matter” and “government can kill growth,” but ultimately he thinks luck has as much to do with it as anything. “There are no magic elixirs,” he sighs. The almighty empirical evidence solemnly declares it. Foreign aid doesn’t work. Foreign investment doesn’t work. High savings don’t work. Investment in machinery doesn’t work. Education doesn’t work. Technology doesn’t work. Tax cuts don’t work. All have failed to live up to expectations. It’s time for the economist to be humbled: “It’s very, very hard to predict success in sports, music, and politics—as well as in economics.”3

Over the years I have witnessed a split in the economics profession. Some adhere to the view that we live in an Age of Ignorance; that we know very little about how the world economy really operates and what government policies should be pursued. They are in large measure armchair critics and doubting Thomases.4 Others believe we live in an Age of Enlightenment; that despite maddening uncertainties about the marketplace, we do know with some assurance how a freely competitive market economy works and we have learned a great deal about what governments should and should not do. It is sad commentary to see that despite his honesty, Easterly, a seasoned veteran in the war on world poverty, tends to fall into the former category. He certainly lost an opportunity to clear the air and reveal the root causes and cures of poverty.

Singapore’s Economic Miracle

Perhaps one reason Easterly’s story ends in tragedy is that he apparently spent too much time in failed economies and not enough time in successful ones. I notice that his book says almost nothing about Chile, the economic model of Latin America, or the Four Tigers—Hong Kong, Korea, Taiwan, and Singapore.

Contrast Easterly’s confused story with Lee Kuan Yew’s autobiographical account of Singapore. Lee became president of the tiny, poverty-stricken British colony after it was granted independence in 1965. In one generation, he oversaw its transformation into an Asian giant with the world’s number-one airline, best airport, busiest port of trade, and the world’s fourth-largest per capita real income.

How did this economic miracle happen?

First, Lee offered real leadership. He was a seminal figure in Asia who accomplished extraordinary things. He built an army from scratch, won over the unions, and destroyed the communists after the British left a vacuum. Despite strong opposition, he insisted on making English one of four official spoken languages, knowing it was fast becoming the language of international business. Singapore, like other Southeast Asian countries, was known for its nepotism, favoritism, and covert corruption; Lee cleaned up the courts, police, and immigration and customs offices. Today Singapore is ranked as the least corrupt country in Asia. Singapore was also dirty, so Lee began a “clean and green” campaign. Rivers, canals, and drains were cleaned up and millions of trees, palms, and shrubs were planted.

The Lee government tore down dilapidated shacks and replaced them with high-rise apartments. He imposed law and order by demanding severe sentences for murder and other crimes. Today Singapore ranks no. 1 in the world for security. To reduce traffic congestion, a huge problem in Asian cities, Singapore built an underground subway system, and imposed an electronic road-pricing program. Every vehicle has a “smart card” on its windshield, and the toll amount varies with the road used and the time of day. During rush hour, the price goes up. “Since the amount people pay now depends upon how much they use the roads, the optimum number of cars can be owned with the minimum of congestion.”5 A sound economic principle!

Lee rejected Soviet-style central planning and domestic heavy industry, although he did target certain industries for development. He focused on a two-pronged plan to advance Singapore: First, his government encouraged domestic industry to leap over their neighbors and link up with the developed world of America, Europe, and Japan, and tried to attract their manufacturers to produce in Singapore. Second, Lee wished to create a First World oasis in the Third World by establishing top standards in security, health, education, communications, and transportation, and a government offering a stable currency, low taxes, and free trade. Singapore would become a “base camp” for multinational corporations from around the world. And, after years of effort, it worked.

Under Lee’s brilliant leadership, Singapore has advanced far beyond anyone’s dreams. Yet we cannot ignore his mistakes—his paternalistic strong-arm tactics, his interventionist targeting of industries, his forced saving programs, his denial of a free press, and his excessive punishments for certain crimes. It will be interesting to see how Singapore performs, both as a people and economy, after Lee Kuan Yew is gone. We can only hope that economic freedom will lead to political liberty.

1. William Easterly, The Elusive Quest for Growth (Cambridge, Mass.: MIT Press, 2001), p. 291.
2. Lee Kuan Yew, From Third World to First: The Singapore Story, 1965–2000 (New York: Harper Collins, 2000), p. 687.
3. Easterly, p. 208. Despite Easterly’s failure to come to any clear conclusions, his book offers an honest and often entertaining appraisal of development literature.
4. See my columns, “Is This the Age of Ignorance—or Enlightenment?,” June 1994; “European Unemployment: The Age of Ignorance, Part II,” January 1995; and “The Age of Confusion,” August 1995.
5. Lee, p. 206.

Mark Skousen is president of FEE.

Here’s a Tax-Deductible Way to Honor an American Hero

December 2001
PERSONAL SNAPSHOTS
Forecasts & Strategies

by Mark Skousen

“A noble man cannot be lost in a crowd.” — Maori Saying

I just returned from my 25th appearance at the New Orleans Investment Conference. I know hundreds of you have been to this classic “granddaddy “of seminars. There’s a reason why this investment conference has lasted so long. Jim Blanchard, the founder, wanted to bring together investors who not only wanted to preserve their capital, but also cared about their country. As he used to say, “What’s the point of being a millionaire if you are on the Titanic?” His conferences always mingle solid investment advice with a hefty dose of sound money and free-market ideas. Last month we heard from Milton Friedman and John Stossel, among other giants in the freedom movement.

Jim was first and foremost a teacher (he used to teach high school in New Orleans), and he wanted his subscribers and conference attendees to know that inflation and the ups-and-downs of the economy were caused by government, not capitalism. He urged his followers to read Ayn Rand’s novels (he named one of his children Anthem!) He was one of the original goldbugs, and he devoted his entire career to the cause of liberty and sound money. In the early 1970s, he formed the National Committee to Legalize Gold. Because of Jim’s untiring efforts, in 1974 it once again became legal for Americans to own gold. Jim saw gold ownership as a fundamental human right, a hedge against government mismanagement.

Jim was also an entrepreneur who turned a $50 investment into a $115-million precious-metals coin business. He started the Blanchard group of mutual funds. He used his profits for many good causes, and his love of liberty led him to support pro-freedom forces and anti-Communist causes in Africa and Europe.

Finally, Jim overcame personal tragedy. He was nearly killed in an automobile accident at age 17 and was unable to walk. But his handicap only spurred him on. He became a powerful figure for liberty, entrepreneurship and sound money.

Tragically, Jim died of a heart attack in 1999 at age 55.His family issued a formal notice with the sentence: “James U. Blanchard III was a man who accomplished much against great odds, and changed more people’s lives than he ever knew.”

How to Honor Jim’s Life: The Blanchard Scholarship Fund

Since Jim’s untimely death, I’ve often wondered how we — untold numbers of friends and followers who were inspired by Jim’s example — honor our friend ’s memory. When I became the president of the Foundation for Economic Education (FEE), I thought of a way to honor Jim ’s life: to create the James U. Blanchard III Memorial Scholarship Fund. The scholarship fund will help teach students all over the world the principles of sound money and free markets. To qualify to become a Blanchard Scholar, students will be required to write an essay on inflation, sound money, entrepreneurship, limited government and other topics Jim advocated. Once chosen, Blanchard scholars will qualify to attend a weeklong course at FEE headquarters in Irvington-on-Hudson, New York, on free-market economics. We hold several of these seminars each summer (go to www.fee.org for the current schedule). Typically, it costs about $1,000 to pay for one student at a weeklong FEE seminar, including room and board, tuition, books and materials, and airfare. But through the generous support of the Blanchard Scholarship Fund, students will be able to attend and learn about the freedom philosophy. And their lives will be changed forever.

Jim, by the way, was a strong supporter of FEE, and read regularly the monthly magazine, The Freeman (now called Ideas on Liberty). He was a friend of Leonard Read, the founder of FEE. And FEE, by the way, is one of the few free-market organizations that favors a gold standard. It’s a perfect match.

So far the response has been incredible. Friends everywhere have come forward and made contributions. Will you join us? You can make donations by check, credit card, securities or other assets. All donations to the Blanchard Fund are tax deductible through the Foundation for Economic Education, which is an IRS-approved 501(c) 3 educational organization.(Rick Rule, one of my recommended brokers, has offered at no charge to assist anyone who wishes to donate stock — him at Global Resource Investments at 800/477-7853). For more information on FEE, go to our website, www.fee.org. Send your donation to: The Foundation for Economic Education, 30 South Broadway, Irvington-on-Hudson, New York 10533. For donations by credit card, call 800/960-4FEE (4333). Be sure to designate “Blanchard Scholarship Fund,” which will be kept as a segregated account. Thank you!

P.S. Any donation above $100 will receive a complimentary one-year subscription to our flagship monthly publication, Ideas on Liberty. You’ll love it!

This Icon of Capitalism Had the Answers

October 2001
PERSONAL SNAPSHOTS
Forecasts & Strategies

by Mark Skousen

“The business career is a stern school of all the virtues. The business man pursues fortune.”— Andrew Carnegie

After moving to New York last month to become the president of the Foundation for Economic Education (FEE), I took the opportunity to pay my respects to an icon of capitalism, Andrew Carnegie (1835-1919). His body is buried only a few miles up from FEE headquarters in Sleepy Hollow cemetery. In three ways, Carnegie reflects the spirit of FEE — was a fierce defender of free-enterprise capitalism, he gave generously to good causes, and he worked hard for the cause of world peace and democracy.

“CAPITALISM IS MORE NOBLE THAN COMMUNISM “

As a joint creator (along with J.P. Morgan) of U.S. Steel, the first billion-dollar corporation in the world, Carnegie was a successful entrepreneur who benefited humanity by offering cheaper and better steel with which to build a modern world. He rejected the “robber baron “title. Capitalism was not a device to enrich the rich at the expense of the poor, as the Marxists contend; “Capitalism,” he said, “is about turning luxuries into necessities.” He started out as a poor Scotch immigrant, a classic Horatio Alger. He liked to be different; his favorite advice to young men was, “Attract attention.”

For him, there were other values in the world than just those of the business culture: He loved books and became friends with intellectuals, writers and statesmen such as Herbert Spencer, Mark Twain and William Gladstone. He was intensely competitive, even glorying in beating his friends in golf. In business, he drove down the cost of steel, even as he improved the quality. “Cheaper and better ” became the American way. “Watch the costs, and the profits will take care of themselves,” he explained in his book, The Gospel of Wealth, first published in 1900. He made no apologies for his ruthless competitive spirit, which he justified as a Darwinian form of “survival of the fittest “and as a fulfillment of Jesus ’s parable of the talents. Like an old-fashioned Hank Reardon in Ayn Rand’s novel, Atlas Shrugged, Carnegie wasn’t merely an apologist for anarchic individualism; he was its celebrant. Carnegie objected strenuously to the “progressives “who favored socialism and communism over individualism. He said communism had been tried, and failed.

“The Man Who Dies Rich Dies Disgraced.”

Following his retirement in 1901,the Man of Steel did not live it up with ostentatious mansions, limousines and hundred-dollar cigars, which Thorstein Velben labeled “conspicuous consumption “of the idle rich. Like The Millionaire Next Door, Carnegie spoke of the millionaire’s duty to live a “modest” lifestyle, shunning extravagant living and administering his wealth for the benefit of the community. To do otherwise, he warned, would encourage an age of envy and invite socialistic legislation attacking the rich through progressive taxation and other onerous anti-business regulations.

Carnegie practiced what he preached, giving away over $350 million in his lifetime. One of his first acts after U.S. Steel went public was to put $5 million into a pension and benefit plan for his workers. He was careful in his philanthropy, avoiding at all costs “indiscriminate charity.” He disdained the conventional practice of accumulating wealth solely to be bequeathed to heirs, which he regarded as “sterile” and even “perverse” if it resulted in profligate living. Instead, he spent millions building 2,811 public libraries, donating 7,689 organs to churches, and establishing Carnegie Hall in New York and the Carnegie Institution in Washington. He financed technical training at the Carnegie Institute of Technology, and established a pension fund for teachers through the Carnegie Foundation for the Advancement of Teaching. I cannot help but think that were he alive today, he would be a major donor to FEE!

“Democracy Means That Privilege Shall Cease.”

Finally, Carnegie devoted the rest of his life to promoting world peace and democracy. He was convinced that the United States surpassed Europe economically in part because Europe was constantly embroiled in wars with its neighbors while the United States largely avoided such conflicts.(If the U.S. must maintain a high defense budget to eradicate terrorism, it could severely retard economic growth.) He was a passionate believer in democracy, universal suffrage and equality of opportunity through free public education. But he opposed equality of property or ability, and argued that all citizens had the right to choose their own occupation and had the right to earn income in any amount and spend it as they wished. He expressed distaste for royalty, aristocracy and any form of state religion.

The Spirit of Andrew Carnegie Lives at FEE

Today I am happy to report that the world has a goodly share of modern-day Andrew Carnegies. As the new president of FEE,I have had the pleasure of becoming aware of these unique men and women of the business world who have not only added value to the global economy through their entrepreneurial efforts, but have sacrificed time and money to promote FEE and its mission. For example, last week Larry Reed, president of the Mackinac Center for Public Policy and a FEE trustee, told me about a FEE donor who spent half his life sponsoring FEE seminars on free-market economics in his hometown, often a considerable personal sacrifice of time and financial resources. Another individual, upon hearing that a FEE student seminar might need to be canceled due to a lack of attendees, stepped up and arranged for several dozen students to attend. The seminar turned out to be a great success. Hundreds of other FEE supporters have arranged conferences, raised funds and distributed copies of our flagship publication, Ideas on Liberty, to their friends and acquaintances. And with your help we are planning many new programs to spread of the gospel of FEE and to “attract attention,” as Andrew Carnegie would advise.

How to Help FEE

I am developing some new ways to help FEE teach Americans and the rest of the world the simple but powerful principles of economics. One goal is to dramatically increase the circulation of Ideas on Liberty. If you haven ’t subscribed yet, you should —$30 for a 12 subscription to: Foundation for Economic Education, Irvington on Hudson, New York 10533, telephone 914/591-7230. We are also spending money to create a top-notch interactive website at www.fee.org. We are planning special seminars on “Fast Track Executive Economics Courses “at various investment conferences (Money Shows, New Orleans, Atlanta, etc) to explain the basics of the roller-coaster global economy. Plus we’re expanding our student and business seminars to teach future generations the benefits of the free market. If you give $100, you become a “Friend of FEE “and will receive many benefits. I look forward to hearing from you.

Social Security Reform: Lessons from the Private Sector

IDEAS ON LIBERTY
Economics on Trial
MARCH 2001

by Mark Skousen

“Of all social institutions, business is the only one created for the express purpose of making and managing change. Government is a poor manager.”
—Peter F. Drucker 1

In the ongoing debate over the privatization of Social Security, one story has been over-looked: The private business sector in the United States has already faced the pension-fund problem and resolved it.

Here’s what happened. After World War II, major U.S. companies added generous pension plans to their employee-benefit programs. These “defined benefit” plans largely imitated the federal government’s Social Security plan. Companies matched employees’ contributions; the money was pooled into a large investment trust fund managed by company officials; and a monthly retirement income was projected for all employees when they retired at 65.

Management guru Peter F. Drucker was one of the first visionaries to recognize the impact of this “unseen revolution,” which he called “pension fund socialism” because this Social Security look-alike was capturing a growing share of investment capital in the United States.2 Drucker estimated that by the early 1990s, 50 percent of all stocks and bonds were controlled by pension-fund administrators.

But Drucker (who doesn’t miss much) failed to foresee a new revolution in corporate pensions—the rapid shift toward individualized “denned contribution” plans, especially 401(k) plans. Corporate executives recognized serious difficulties with their traditional “defined benefit” plans, problems Social Security faces today. Corporations confronted huge unfunded liabilities as retirees lived longer and managers invested too conservatively in government bonds and blue-chip “old economy” stocks. Newer employees were also angered when they changed jobs or were laid off and didn’t have the required “vested” years to receive benefits from the company pension plan. Unlike Social Security, most corporate plans were not transferable. The Employment Retirement Income Security Act (ERISA), passed in 1974, imposed regulations on the industry in an attempt to protect pension rights, but the headaches, red tape, and lawsuits grew during an era of downsizing, job mobility, and longer life expectancies.

The New Solution: Individualized 401(k) Plans

The new corporate solution was a spin-off of another legislative invention—the Individual Retirement Account (IRA). The 401(k) rapidly became the business pension of choice, and there is no turning back. These “defined contribution” plans solve all the headaches facing traditional corporate “defined benefit” plans. Under 401(k) plans, employees, not company officials, control their own investments (by choosing among a variety of no-load mutual funds). Corporations no longer face unfunded liabilities because there is no guaranteed projected benefit. And workers and executives have complete mobility; they can move their 401(k) savings to a new employer or roll them over into an IRA.

According to recent U.S. Labor Department statistics, there are about nine times more defined-contribution plans than defined-benefit plans. Almost all of the major Fortune 500 companies have switched to defined-contribution plans or hybrid “cash-balance” plans. Companies that still operate old plans include General Motors, Procter and Gamble, Delta Airlines, and the New York Times Company. IBM, a company that once guaranteed life-time employment, switched to a “cash-balance” plan two years ago, giving its 100,000 employees individual retirement accounts they can take with them in a lump-sum if they leave the company before retirement (long-service workers are still eligible for IBM’s old defined-benefit plan). But virtually all “new economy” companies, such as Microsoft, AOL, and Home Depot, offer 40 l(k) plans only.

Why Social Security Needs Reform

Congress could learn a great deal studying the changes corporate America has made in pension-fund reform. In fact, Social Security is in a worse position than most corporate plans were. Since less than a fourth of all contributions go into the Social Security “trust fund,” the government program is more a pay- as-you-go system than a defined-benefit plan, where most of the funds go into a corporate managed trust fund. As a result, the unfunded liability, or payroll-tax shortfall, exceeds $20 trillion over the next 75 years. To pay for so many current recipients, Congress has had to raise taxes repeatedly to a burdensome 12.4 percent of wages, and payroll taxes will need to be raised another 50 percent by the year 2015 to cover the growing shortfall.3 Few corporate plans require such high contribution levels.

Moreover, the Social Security trust fund is poorly managed, so much so that experts indicate that the annual return on Social Security is 3.5 percent for single-earner couples and only 1.8 percent for two-earner couples and single taxpayers.4

Clearly, converting Social Security into personal investment accounts would be a step in the right direction, a policy change already achieved in Chile and other nations. Unfortunately, government—unlike business—is not prone to innovation. As Drucker notes, “Government can gain greater girth and more weight, but it cannot gain strength or intelligence.”

1. Peter F. Drucker, “The Sickness of Government,” in The Age of Discontinuity (New York: Harper, 1969), pp. 229, 236.
2. Peter F. Drucker, The Unseen Revolution: How Pension Fund Socialism Came to America (New York; Harper & Row, 1976). This book was reprinted with a new introduction as The Pension Fund Revolution (New Brunswick, N.J.: Transaction, 1996).
3. Andrew G. Biggs, “Social Security: Is It a Crisis that Doesn’t Exist?” Cato Social Security Privatization Report 21 (www.cato.org), October 5, 2000, p. 3.
4. Ibid., p. 32.

What If Social Security Was Like a 401(k)?

Forecasts & Strategies
Personal Snapshots
December 2000

by Mark Skousen

“Of all social institutions, business is the only one created for the express purpose of making and managing change…. Government is a poor manager.” -Peter F. Drucker, “The Sickness of Government,” The Age of Discontinuity (1969)

In the ongoing debate over the privatization of Social Security, one story has been overlooked: The private sector in the United States has already solved its own pension fund crisis by converting their old “defined benefit” plans into individualized 401(k)s.

Here’s the story: After World War II, major U.S. companies added generous pension plans to their employee benefit programs. These “defined benefit” plans largely imitated the federal government’s Social Security plan. Companies placed funds into a large investment pool based on employees’ salaries, the trust fund was managed by company officials, and a monthly retirement income was projected for all employees when they retired at age 65.

The Old Pension Plan System Fails

But over the years, corporate executives recognized serious difficulties with their traditional pension plans, similar to the problems Social Security faces today. Corporations confronted huge unfunded liabilities as retirees lived longer and managers invested too conservatively in government bonds and blue-chip “old economy” stocks. Newer employees were also angered when they changed jobs or were laid off and didn’t have the required “vested” years to receive benefits from the company pension plan. Unlike Social Security, most corporate plans were not transferable. The Employment Retirement Income Security ACT (ERISA), passed in 1974, imposed regulations on the industry in an attempt to protect pension rights, but the headaches, red tape and lawsuits grew during an era of downsizing, job mobility and longer life expectancies.

The New Individualized Solution

The new corporate solution was a spin-off of another legislative invention-the Individual Retirement Account (IRA). The 401(k) rapidly became the business pension of choice, and there is no turning back. These “defined contribution” plans solve all the headaches facing traditional corporate “defined benefit” plans. Under 401(k) plans, employees, not company officials, control their own investments (by choosing among a variety of no-load mutual funds). Corporations no longer face unfunded liabilities because there is no guaranteed projected benefit. And workers and executives have complete mobility; they can move that, 401k savings to a new employer or roll it over into an IRA.

According to recent Labor Department statistics, there are about nine times more defined-contribution plans than defined-benefit plans. Almost all of the major Fortune 500 companies have switched to 401(k) plans or hybrid “cashbalance” plans. Companies that still operate old plans include General Motors, Procter & Gamble, Delta Airlines and The New York Times Company. IBM, a company that once guaranteed lifetime employment, switched to a “cashbalance” plan two years ago, giving its 100,000 employees an individual retirement account that they can take with them in a lump sum if they leave the company before retirement (long-service workers are still eligible for IBM’s old defined-benefit plan). But virtually all “new economy” companies, such as Microsoft, AOL and Home Depot, offer 401(k) plans only.

Congress could learn a great deal studying the changes corporate America has made in pension fund reform. Converting Social Security into personal investment accounts is a step in the right direction, a policy change already achieved in Chile and other nations. Unfortunately, government – unlike business – is not prone to innovation. As Peter Drucker notes, “Government can gain greater girth and more weight, but it cannot gain strength or intelligence.” Hopefully, Bush will prove me wrong.

UPDATES

Death of Leader, Communist Party USA: Two months ago, Gus Hall, 90, longtime leader of the Communist Party USA died. In reading Hall’s life story in The New York Times, I was reminded of my father’s own story as an FBI agent in the 1940s, when he was an undercover agent and spied on Gus Hall in Cleveland, Ohio. In 1948, Hall was convicted of espionage under the Smith Act and spent eight years in prison. My father, Leroy Skousen, lived a fascinating life as a missionary, FBI agent, lawyer, and anticommunist speaker. His life has been written up in a book titled Thunder Broke the Heavens, available from Skousen Publishing Co., P.O. Box 2488, Winter Park, Florida 32790, $20 postpaid (checks/cash only).

The Anti-Capitalistic Mentality, Updated

Economics on Trial
Ideas on Liberty
November 2000

by Mark Skousen

“In the excitement over the unfolding of his scientific and technical powers, modern man has built a system of production that ravishes nature and a type of society that mutilates man.” -E. F. SCHUMACHER (1)

In 1956, Ludwig von Mises countered myriad arguments against free enterprise in his insightful book, The AntiCapitalistic Mentality. “The great ideological conflict of our age,” he wrote, “is, which of the two systems, capitalism or socialism, warrants a higher productivity of human efforts to improve people’s standard of living.” (2)

Unfortunately, Mises’s counterattack has done little to stem the tide of anti-market sentiments. One that continues to be popular is E. F.Schumacher’s 1973 book, Small Is Beautiful which has recently been reprinted in an oversized text with commentaries by Paul Hawken and other admirers. Schumacher has a flourishing following, including Schumacher College (in Devon, England) and the Schumacher Society (in Great Barrington, Massachusetts). Hawken hails Schumacher as a visionary and author of “the most important book of [his] life.” (3) Schumacher’s message appeals to environmentalists, self-reliant communitarians, and advocates of “sustainable” growth (but not feminists the old fashioned Schumacher cited favorably the Buddhist view that “large-scale employment of women in offices or factories would be a sign of economic failure” (4) ).

From Austrian to Marxist to Buddhist

Oddly enough, Fritz Schumacher’s background is tied to the Austrians. Schumacher was born in Germany in 1911 and took a class from Joseph Schumpeter in the late 1920s in Bonn. It was Schumpeter’s course that convinced Schumacher to become an economist. While visiting England on a Rhodes scholarship in the early 1930s, Schumacher encountered F. A. Hayek at the London School of Economics and even wrote an article on “Inflation and the Structure of Production.” (5) But his flirtation with Austrian economics ended when he discovered Keynes and Marx. He renounced his Christian heritage and became a “revolutionary socialist.” The Nazi threat forced him to live in London, where he was “interned” as an “enemy alien” during World War II. After the war, he worked with Keynes and Sir William Beveridge and supported the nationalization of heavy industry in both Britain and Germany. But his real change of heart came during a visit to Burma in 1955, when he was converted to Buddhism. “The Burmese lived simply. They had few wants and they were happy,” he commented. “It was wants that made a man poor and this made the role of the West very dangerous.” (6)

Schumacher greatly admired Mahatma Gandhi and his saying, “Earth provides enough to satisfy every man’s need, but not for every man’s greed.” Eventually he wrote a series of essays that became his classic, Small Is Beautiful, published in 1973. In the 1970s, he became passionate about trees and began a campaign against deforestation. After a successful book tour in the United States, including a visit with President Jimmy Carter, he died in 1977 of an apparent heart attack.

The Lure of Buddhist Economics

Schumacher’s message is Malthusian in substance. Small Is Beautiful denounces big cities and big business, which “dehumanizes” the economy, strips the world of “nonrenewable” resources, and makes people too materialistic and overspecialized. According to Schumacher, individuals are better off working in smaller units and with less technology.

His most important chapter is “Buddhist Economics,” with its emphasis on “right livelihood” and “the maximum of wellbeing with the minimum of consumption.” Foreign trade does not fit into a Buddhist economy: “to satisfy human wants from faraway places rather than from sources nearby signifies failure rather than success.” (7) In sum, traditional Buddhism rejects labor-saving machinery, assembly-line production, large-scale multinational corporations, foreign trade, and the consumer society.

There are two problems with Schumacher’s glorification of Buddhist economics. First, it denies an individual’s freedom to choose a capitalistic mode of production; it enslaves everyone in a life of “nonmaterialistic” values. And second, it clearly results in a primitive economy. Mises responded to both these issues: “What separates East and West is . . . the fact that the peoples of the East never conceived the idea of liberty . . . . The age of capitalism has abolished all vestiges of slavery and serfdom.” And: “It may be true that there are among Buddhist mendicants, living on alms in dirt and penury, some who feel perfectly happy and do not envy any nabob. However, it is a fact that for the immense majority of people such a life would be unbearable.” (8)

I have no objection to preaching the Buddhist value that sees “the essence of civilization not in a multiplication of wants but in the purification of human character.” Nor do I disapprove of localized markets (see my favorable review last November of the Grameen Bank, which makes small-scale loans to the poor). But none of this idealism should be forced on any society. Ultimately we must let people choose their own patterns of work and enjoyment. Clearly, whenever Third World countries have been given their economic freedom, the vast majority have chosen capitalistic means of production and consumption. As a result, poor people have been given hope for the first time in their lives-a chance for their families to break away from the drudgery of hard labor, to become educated, see the world, and enjoy “right living.”

Freedom is beautiful!

1. E. F. Schumacher, Small is Beautiful Economics as if People Mattered: 25 Years Later with Commentary (Point Roberts, Wash.: Hanley & Marks, 1999 (1973)), p. 248.
2. Ludwig von Mises, The Anti-Capiaadatie Mentality (South Holland, Ill.; Libertartan Press, 1972 [1956]),p. 62.
3. Paul Hawken, Introduction to Schumacher, p. xiii.
4. Ibid., p. 40.
5. Sec The Economics of Inflation, ed. by H, P. Willis and J. A Chapman (New York: Columbia University Press, 1935).
6. Quoted in Barbara Wood, E. F. Schumacher: His Life and Thought (New York: Harper & Row, 1984), p. 245.
7. Schumacher, p. 42.
8. Mises, p. 74.

Bankrupt Millionaires

Personal Snapshots
Forecasts & Strategies
October 2000

Bankrupt Millionaires
by Mark Skousen

“In the midst of the biggest economic boom ever, millionaires are going bankrupt.” – Forbes (October 2, 2000)

Last March, I reported the findings of Professor Thomas J. Stanley, author of The Millionaire Next Door and The Millionaire Mind, that the rich are model citizens-frugal, well-educated, balanced, religious and happily married. But according to the October 2 Forbes, a growing number of millionaires are going bust. Doctors, lawyers, accountants and executives are declaring chapter 7 and 13 bankruptcies at record numbers during this time of prosperity, due to bad business decisions, poor budgeting, overuse of credit cards and divorce. I also know a few financial gurus who continue to dispense advice yet are strapped (but I won’t mention any names).

There are several important lessons here:

(1) An above-average income is no guarantee of financial success. Forbes describes individuals earning $300,000 a year, and some with assets exceeding $5 million, going under. Las Vegas singer Wayne Newton was earning a million dollars a year when he went bankrupt in the early 1990s. (He blamed it on his advisors for getting him into leveraged real estate projects.) Earning more money is not the answer to one’s financial problems-living within your budget is.

(2) Open-ended credit card and business debt is a major source of trouble. If you can’t pay off your credit cards every month, you are headed for trouble. Replace them with debit cards or the American Express card, which requires you to pay off your obligation every month.

(3) Avoid margin debt and leveraged business ventures. The majority of busted millionaires made the mistake of getting in over their heads in leveraged real estate deals and highflying stocks. In many cases, greed drove them to put too much of their savings into one risky scheme.

(4) Most importantly, always spend less than you make, year after year. This advice may sound simplistic, but I’m amazed at how often it is violated.

The Best Book on Avoiding Bankruptcy

There are some excellent books on the subject: Rich Man, Poor Man by Robert T. Kiyosaki, The Wealthy Barber, by David Chilton or High Finance on a Low Budget, by my wife, Jo Ann, and me (all available through amazon.com). But the classic work on the subject is The Richest Man in Babylon (New Library edition). I require it in all my investment classes. It tells the story of Arkad: “In old Babylon there once lived a certain very rich man named Arkad. Far and wide he was famed for his great wealth. Also was he famed for his liberality. He was generous in his charities. He was generous with his family. He was liberal in his own expenses. But nevertheless each year his wealth increased more rapidly than he spent it.”

How could Arkad accomplish this financial miracle of being a big spender and yet still grow richer every year? Simple. Whether he earned a lot or a little, he always set aside at least 10 percent of his income, which he religiously saved and invested. He scrupulously avoided living beyond his means. Thus, in times when he earned more, he could afford to spend more-even as he added to his net worth.

My Financial Life Story

I read The Richest Man of Babylon when I was a young adult and have followed it ever since with great success. I started college with $50 in my pocket, but have always lived frugally. I pay cash for everything, including big-ticket items like cars. I seldom buy stocks on margin. I put aside 10%-20% of my income every year through my pension plan and Automatic Investment Plans (AIP) with various brokers. Like Arkad, I spend money liberally on my family, church, charities and other good causes (such as the Foundation for Economic Education). My only major debt was my home, and I paid off my mortgage several years ago, so I am totally debt free. Yes, I invest frequently in high-risk ventures, but I always diversify enough to keep out of trouble.

If you haven’t read The Richest Man in Babylon, I suggest you do so. It is entertaining and enlightening-and will keep you financially straight.