What 'stimulates' American commerce?

If Republicans can modify or delay the “stimulus” package, we might be in the midst of a debate over whether our economic woes can be overcome with government policies that encourage production or consumption. That is not likely for, as “post-partisan” President Barack Obama let slip, “We [meaning Democrats] won.” There has been a major divide between parties over this question at least since the Great Depression, and especially since President Reagan led a successful charge for cuts in income tax rates that gave rise to a 25-year boom.

The two opposing views are supply-side and demand-side political economy. The first holds that prosperity is driven by business enterprise, facilitated when income and other tax rates are low. The second maintains that the cause is consumers with spending power, boosted when federal spending “primes the pump” with new government programs.

Let us admit that supply and demand are as inseparable as the concave and convex sides of a curved line. No one can buy what is not for sale and nothing can be sold when there are no customers. But bearing in mind that commercial republics like the United States are vastly more prosperous than primitive societies largely dependent upon agriculture, we must consider that something accounts for the difference.

That “something” is the entrepreneur, who neither commands wealth nor depends upon the beneficence of others. Unlike landed aristocrats or powerful oligarchs, those in business for themselves provide a good or service which a sufficiently profitable number of people need or want, and freely choose.

The supply-side approach demonstrated its capacity for fostering national prosperity when Congress in 1981 reduced the highest income tax rate from 70 to 50 percent, and decreased the number of brackets from 14 to five. Double digit inflation, unemployment and interest rates all fell to lower levels.

In the early 1960s President Kennedy effectively made the case that the existing top tax rate of 91 percent on incomes of $200,000 yielded little revenue to the government because wealthy persons legally shielded their income in ways Congress had made possible with tax breaks.

Why is this? The explanation lies in a combination of human nature and mathematics. High tax rates are, to say the very least, burdensome. So if they can avoid it, people will find ways around them. If someone earns a million dollars and is taxed at 91 percent, that only theoretically (but not actually) nets the government $910,000 . For if he reduces his taxable income through various tax shelters to, say, $500,000, the government gets only $455,000. And even this is fanciful.

On other hand, if the income tax rates are lowered, the enterprising businessman is more likely to invest more and earn more on his money. If he then makes two million dollars under a more favorable tax regime, at 50 percent that yields a million dollars, or more than twice as much as he actually paid under the higher tax rate.

Thus, not only did this policy revive stagnant commerce, it yielded more revenue for the government than ever. Indeed, even substantial federal deficits each year during the Reagan years put no drag on our growing prosperity. We had high defense spending to face down the Soviet military threat along with increases in social welfare spending, but lowered tax rates kept commerce humming.

The demand side approach was first implemented in the administration of Franklin Roosevelt. Income tax rates, which already had risen in the previous administration, went even higher, causing the recession inherited from Herbert Hoover to expand into a Great Depression as the government added agencies and bureaus on an unprecedented scale.

Deflation and high unemployment plagued us during FDR’s first two terms, and only World War II’s demands for armaments and supplies turned the corner. Then, for the first time, income tax was withheld from pay checks to ease the pain of taxing not just the wealthy (who can’t pay it all) but everybody else with any income.

Currently, Democrats are saying that the failures of the New Deal were due to the federal government not spending enough money fast enough. But that is just so much blowing of smoke, for even the government cannot spend money fast enough to stimulate anything except a passion for the political power made possible by enlargement of government beyond its constitutional functions.

The government cannot spend us into prosperity and certainly cannot pay for it with confiscatory tax rates which free people will always find ways to avoid, if they do not move their enterprises elsewhere. Real political economy consists in restraining the government, not unleashing it.

Whatever happened to political economy?

In a previous column I questioned the idea that there is something called "the economy" and suggested instead that we refer to our multiple transactions in the global marketplace with the term of the United States Constitution, viz., commerce. This is not just a matter of semantics. For if we choose our words with care, we accurately name the things to which the words refer. Before the term "economy" was applied to our domestic and foreign commerce, it referred to a virtue–of individuals, businesses and nations. The first dictionary definition of economy, after all, is "Careful, thrifty management of resources, such as money, materials, or labor."

Just as households and businesses must practice economy in order to make the most prudent use of their resources, so must governments. But with its powers of taxing, spending and borrowing, government has access to considerably more resources than any household or business. That means the temptations and opportunities for abuse are much greater.

As the purpose of our national government is to make laws for the common defense and general welfare, it is not, by definition, designed, like the household, to meet the daily recurrent needs of anyone; or, like a business, to make a profit. It exists to make households and businesses safe and secure.

For most of our history, American government has practiced political economy, out of conviction and necessity. That is, it is limited in its scope and its powers and not entitled to huge sums to conduct its functions, however greater those were than anyone else’s. And as long as the federal government in particular performed its constitutional functions, heavy taxation was both difficult to justify and hard to obtain against jealous state governments.

To appreciate the soundness of this limited view of economy, it is helpful also to be mindful of what commerce is and why it is so indispensable to modern republics. In ancient times, commerce referred to sea going trade, as commerce includes the root "mer," meaning sea. Hence, Athens, a naval power, supported commerce that its rival, Sparta, a land-based power, took little interest in.

Commerce contributed greatly to the decline of medieval feudalism, a system that combined perpetual armaments and subjugation by the lords of the peasants. Those aristocrats who aspired to national crowns found the nascent commercial classes a vital alternative to depending upon their rivals for financing their kingdoms, especially their wars.

The middle class, so called because its members were neither aristocrats nor peasants, made money in trade with cities and states other than their own. In return for protection or favored treatment, they would lend money to kings.

There were essentially two approaches that kings of the early modern nation states took toward the generation of national wealth. One supported acquisition of precious metals and hoarding them for national purposes. Spain, the first great nation at this time, was an exponent of that view. Another view, favored in Britain, was that it was better to encourage merchants to build their fortunes with limited regulation, as a growing commerce funded government with minimal taxation.

Adam Smith’s Wealth of Nations provided the most powerful argument for the second view of national wealth. The British government was no less tempted to commandeer the resources of the country than the Spanish, but Smith made a compelling case for laissez-faire (let them do as they please) as far more productive than national missions to exploit natural resources the world over to enrich the government’s coffers. Smith’s famous "invisible hand" was not blind to the avarice of businessmen (quite the contrary) but rather saw them as more efficient producers than any government could ever be.

As we stand on the brink of massive efforts to "rescue our economy" from its current credit crisis, it is helpful to remember these historical lessons on how to build up national wealth and, by implication, what diminishes it. The federal government tried to spend its way of the Great Depression and failed, just as its massive programs 30 years later failed to end poverty. Only individuals and businesses practicing economy, supported by a government practicing the same virtue, can accomplish that.

To the extent that our government embarks on a massive program of public works, business bailouts, unemployment compensation, forced unionism and uneconomical energy schemes, our current crisis will become much worse and we will imagine only that we didn’t do enough rather than far too much to "save" our commerce.

Lawyers & judges endangering elections

The world has marveled at the orderliness of America's "peaceful revolutions" ever since Jefferson's Democratic-Republicans first wrested power from the Federalist Party of Washington and Adams, But how long will voters remain peaceful when their will is cynically undermined by partisan lawyers and willful judges whose lust to see their interests prevail eviscerates any pretense of respect to fair elections?

In California in 2001, 61% of voters approved a state statute to preserve the historical and biological definition of marriage, only to see an activist supreme court rule that measure invalid based on a supposed conflict with the state constitution.

Backers of traditional marriage didn't protest or threaten violence against their political adversaries. Instead, they played by the rules, responding with a constitutional amendment to trump the courts. Attorney General Jerry "Moonbeam" Brown unethically rewrote the ballot summary to tip the scales against the amendment, but 52% of Californians nevertheless approved it.

Now, as supporters of same-sex marriage engage in sometimes violent protests in front of churches, gay activists and the ACLU are asking that same supreme court to invalidate yet another election.

In Washington state in 2004, voters elected Republican gubernatorial candidate Dino Rossi by a mere 261 votes, according to election day tallies. A second recount again showed Rossi the victor, this time by just 42 votes. Finally, a third count gave the lead to Democrat Christine Gregoire by 129 votes -- and the counting stopped.

In that election, numerous irregularities in Democrat counties aided Gregoire at each subsequent count. In King County (including Seattle), more than 700 ballots were "discovered" after election day. Some precincts showed more ballots cast than registered voters, while others tallied more votes than ballots. At least 129 felons were allowed to vote, and provisional ballots were mixed with regular ballots before anyone bothered to determine whether those provisional ballots were cast by legitimate voters.

Now we have the ongoing saga in Minnesota, where Sen. Norm Coleman, a Republican, led alleged comedian Al Franken, a Democrat, by 725 votes after the initial count. That lead slipped to 438 within two days as election officials announced "adjustments" ‹ like finding a box of uncounted ballots that unanimously favored Franken in the trunk of an election worker's car.

Minnesota law explicitly limits the recount to those ballots counted on election day. That means the validity of ballots is decided by citizen election judges who make those determinations at polling places before their judgment can be clouded by knowing who is ahead or by how much.

Not surprisingly, lawyers for Franken, aided by veterans of Gregoire's election heist, want election boards, courts -- anyone -- to allow previously rejected ballots to be scrutinized and selectively added to the count.

Elections can only be legitimate when conducted according to rules stipulated by both sides prior to voting. But Franken's legal beagles could care less about the rules. Their mission is to win even if that means renegotiating the rules in court to strike down laws that, in 20/20 hindsight, adversely impact Franken.

Another of those inconvenient laws, as John Fund reports in the Wall Street Journal, is the federal Help America Vote Act, which requires that provisional ballot votes remain anonymous.

In Washington, a judge allowed lawyers for Gregoire to obtain a list of uncounted provisional ballots. From that list, they gleaned the names of those who voted for the Democrat and engineered the counting of those votes -- but not those who voted for the Republican. By the time Republicans figured out the Democrats' game, it was too late.

Franken's attorneys are deploying a similar strategy in direct contravention of Minnesota's election law and of rules administered by the Democrat secretary of state. They just may succeed in using the courts to steal another election.

When Americans can no longer trust that their votes will be counted under rules established in advance or suspect that judges are all too willing to bend those rules, how much longer will our revolutions remain peaceful?

Mark Hillman served as Colorado senate majority leader and state treasurer. To read more or comment, go to www.MarkHillman.com.

2008 was no realignment

Adding considerable luster to the achievement of the Founding Fathers in building success and stability in the infant Republic is the fact that five of our first seven Presidents not only won and served out two terms but also departed office popular enough to insure the election of approved successors. What was achieved by five of the first seven has eluded all but four of the eighteen men elected President since 1900. Only Theodore Roosevelt (1908), Calvin Coolidge (1928), Franklin Roosevelt (1948-posthumously), and Ronald Reagan (1988) left office with sufficient popularity to effect the election of their chosen successors.

Any hope George W. Bush had of being the fifth President since 1900 to see his party win the White House three consecutive times was decisively crushed last November 4th. Instead he becomes the sixth president since 1900 to see his party driven from the White House, losers in two consecutive Congressional election cycles, and himself under a cloud of immense unpopularity. Thus W. joins Hoover, Truman, Johnson, Nixon and Carter.

Of the initial five history has largely restored the reputation of Truman; LBJ and Nixon have made only slight recovery; and Hoover and Carter are generally viewed as beyond redemption. Some time must pass before History instructs us how to think about George W. Bush.

Beyond the great distinction of becoming our nation’s first African -American President, Barrack Obama also joins FDR and LBJ as the only Democrats since 1900 to win the Presidency in a landslide.

In what Yogi Berra called “déjà vu all over again” the punditocracy is now proclaiming fundamental political realignment and the descent of the GOP, into permanent minority status.

In 1964 when LBJ crushed Goldwater many pundits opined that the Republican Party might like the Whigs disappear altogether. Four years later the GOP was in the White House and Democrats in chaos.

In 1972 when Nixon won forty-nine states and McGovern just one, everybody was reading Kevin Phillips's The Emerging Republican Majority and saying that just as the Civil War had destroyed the Democratic Party in the 19th century, the Viet Nam War had destroyed it in the 20th. Four years later the Dems were back in the White House and the Republicans were in chaos.

In 1988 following three consecutive landslide Presidential defeats many Democrats thought their party had to be reinvented by jettisoning liberalism. Four years after the Democrats were back in the White House and liberalism was very much alive and well.

Finally in 2004 after consecutive Presidential victories and a remarkable three straight victories in Congressional election cycles Republicans were hailing Karl Rove as the Architect of a permanent GOP majority. Four years later -well, we all know what happened in 2006 and 2008.

So, what does all this tell us about American politics?

First, and foremost things can change mighty fast. It is extremely unwise to read too much into even the most stunning partisan triumphs. The American people will punish most severely even those men and parties they have extravagantly affirmed just a few years before.

Second, electoral landslides happen frequently; genuine political realignments occur very, very rarely.

Fully half (13 of 27) of the Presidential elections since 1900 have resulted in landslides.

Yet only twice in our entire history have we seen full-blown political realignment and it required the massive trauma of the Civil War and the Great Depression to trigger those.

Finally the margin between victory and defeat even in a landslide (usually defined as six or more percentage points) is very narrow. If even one voter in twenty voted the “other way” Obama’s landslide becomes a decisive victory for McCain.

Two thirds of the electorate is pretty fixed in their partisan attachment. It is the loosely bonded or independent third in the middle that decides all elections. If just one in seven of those voters switch sides from one election tot the next- pretty likely if the country is experiencing an unpopular war, a sagging economy or both- the entire electoral configuration can be transformed, hence the old adage that “All of American politics is played between the forty yard lines”.

The moral of the story ? It’s a little early to place your bets for 2012 or even 2010.

William Moloney’s columns have appeared in The Wall St. Journal, USA Today, Washington Post, Washington Times, Philadelphia Inquirer, Baltimore Sun, Denver Post, and Rocky Mountain News.

Primer: Repeat after me

It is not the government’s responsibility to save Chrysler, GM, or Ford. Looking back, it was not the government’s responsibility to save AIG, Citigroup, or any other financial institution. Looking ahead, it is not the government’s responsibility to save coal companies, homebuilders, retailers, manufacturers, or hot dog carts. It is not the government’s responsibility to “protect” jobs – even when those jobs are held by member of politically powerful labor unions.

It is not the government’s responsibility to “create” jobs – the only jobs the government has the power to create are government jobs, and the world doesn’t need more bureaucrats.

It is not the government’s responsibility to prevent foreclosures, where people took out loans they cannot afford to pay back.

It is not the government’s responsibility to make sure that everyone has high-speed internet and cable TV. For that matter, it is not the government’s responsibility to pay for anyone’s personal expenses, be they medical costs, gasoline, or pedicures.

It is not the government’s responsibility to address “income inequality.”

To be clear, it IS the government’s responsibility to provide an environment where people and businesses can – through innovation, effort, and personal responsibility – achieve success, be self-reliant, and have the opportunity to strive for ever-greater achievement.

The ingredients are a fair, predictable legal system; dependable property rights; low taxes; and light regulation. That’s all.