A Lesson for American’s on their Constitution

“The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

– The Tenth Amendment

Based on this there should be no argument over the constitutionality of Obamacare. Unless the power to force people to purchase health-insurance is specifically mentioned in the enumerated powers of the federal government, which it isn’t, the federal government cannot force people to do so. The distinction that it is simply a tax and not a mandate is a false one as if you tax any activity/good too highly you stop people from being able to pursue that activity or buy that good, it would clearly be unconstitutional to tax private media establishments out of existence. The federal government also only has the power to tax in ways specifically mentioned in the constitution, hence the need for the sixteenth amendment.

Another key aspect of the US constitution is that the supreme court of the United States is not the sole voice determining the constitutionality of a law, Congress and the President both have an equal duty to uphold the constitution and so do the states. Indeed in the early years of the American Republic before Lincoln began America’s long journey down the road to tyranny, a belief in the right of the states to pursue a policy of nullification was widely held. This was a view held by both Thomas Jefferson and the “father of the constitution”, James Madison, as outlined in the Kentucky and Virginia resolutions in 1798 and 1799 respectively, in response to what they viewed as the unconstitutional Alien and Sedition Act. One would have thought that the man who wrote the constitution might be a rather informative voice on such a matter.

Most of the founding fathers would be horrified to think that the American people are willing to allow a branch of the federal government be the last voice in determining the extent of the power of the federal government. The states do have the right to nullification, it is implicit in the framing of the constitution and if conservatives today are serious about opposing Obamacare they would do well to start by reading the Kentucky and Virginia resolutions.

The government admits the minimum wage increases unemployment.

Vince Cable, the Business Secretary, announced yesterday that the minimum wage would be frozen at £3.68/hour for 16-17 year olds and £4.98/hour for 18-20 year-olds in the UK. Explaining what will no doubt be seen by many as a ghastly bourgeois attack on the proletariat by stating:

“‘I believe that the recommendations of the Low Pay Commission strike the right balance between pay and jobs, and have therefore accepted all the rate recommendations. The Low Pay Commission has done a good job in difficult circumstances…In these tough times freezing the youth rates has been a very hard decision – but raising the youth rates would have been of little value to young people if it meant it was harder for them to get a job in the long run.”

Very true you might say, now what is the big deal? The problem is that we fail to apply this same logic to the wider situation. The nation is facing a crisis with regards to youth unemployment, we are facing the prospect of a lost generation where 18-year-olds cannot get work, go on benefits and never get off them, never learn any skills, never increase their productivity and therefore their earning potential down the line. We are facing a national catastrophe not just in terms of youth unemployment but the labour market as a whole. There are families in Britain where no-one in three generations has had a job and Vince Cable finally has a solution, some great insight that can help: The minimum wage increases unemployment! For surely if as he so assuredly tells us, keeping the minimum wage steady at the same rate can help ease youth unemployment the same can be said for the rest of the labour market and surely the lower the better, indeed lets just get rid of the damn thing! If we must persist in social engineering and wealth redistribution just send checks out to people. Whatever you do don’t make someone a criminal for only paying a young lad £4.50/hour when otherwise the same 18 year-old would be sitting on his ass, picking up his dole check every fortnight, impregnating other jobless young people and playing his PlayStation – learning no useful skills to better himself later in life, giving himself no sense of self-worth and being nothing but a leech on society.

We need to learn to appreciate as a country that labour is a commodity like any other, if you artificially increase the price you will have surplus, this surplus is unemployment. You would think we might have learnt this by now given that we have been observing the phenomena for as long as governments have tried to legislate prices. Hopefully now the government has accepted this principle so blatantly we can start applying it elsewhere.

South Carolina should be considered a success for Ron Paul

Many pundits in the media would have you believe that the result in South Carolina was a poor showing for Ron Paul. While he did finish last with 13% of the vote, I think it is worth drawing attention to the fact that he increased his share 3.25x since 2008, reinforcing an argument I have made before that the Ron Paul movement represents a rapidly growing minority and quite possibly the future of the Republican Party and American politics. Ron Paul has also increased his share of the vote from 2008 to 2012 from 10% to 21% in Iowa and 8% to 23% in New Hampshire, 2.1x and 2.9x his respective 2008 results. If we take the average of these three results Ron Paul has increased his share of the vote by 2.75x since 2008. If this pattern continues Ron Paul could cause serious problems for the other Republican contenders. Using this multiplier on his best 2008 results we can project that in 2012 he will gain:

38.5% of the vote in Nevada

49.5% in Maine

44% in Minnesota

68.75% in Montana

57.75% in North Dakota

30.25% in Kansas

and 46.75% in Alaska

Now admittedly it is unlikely that each state will have exactly 2.75x the 2008 vote share for Ron Paul, however it does not seem too preposterous that his share of the vote across America will rise by this amount and if it anywhere near approaches the swing already seen in the first three states to vote, then Ron Paul will be a very happy man.

The Development of a 7th Party System?

It is possible to break the development of the US party system into several eras, each being dominated by two political parties and each lasting for a few decades before some seismic political shift breaks the status quo with the system rearranging itself. The first of these systems dominated the early years of the Republic with the Federalists of Hamilton and the Democratic-Republicans of Jefferson and Madison. The former broadly speaking favoured a stronger central government and the latter sound money and more limited government. This paradigm was broken around 1828 with the Federalists losing prominance and the Democratic Republicans splitting between the Democratic party of Jackson and the Whigs of Henry Clay. The main issues of contention in this era were economic interventionism as the Democrats favoured Laissez Faire and sound money and the Whigs a greater degree of government involvement in industrialisation. The parties were also increasingly split along religious and ethnic lines with Germans and Catholics voting strongly Democratic and the Whigs being favoured by the growing evangelical movement in the North: a pattern of religous and ethnic influence on politics that was to become increasingly important.

This Second system collapsed as the abolitionist movement grew and the Republican party took the place of the Whigs, the regional, ethnic and religious divides increased over this period and saw the Republican party become the party of the Evangelical Yankee vote in the North-East and the South along with Catholics and German Lutherans in the North and mid-West vote for the Democrats. This alignment was interrupted by the civil war when the Democrats were virtually wiped out in the North but by the 1880s this alignment has returned. There were many reasons for this party affiliation: the South disliked the pietism and abolitionism of the Yankee’s, their hatred of the Republican party only intensified by the civil war, the Germans and Catholics disliked the prohibitionist movement within the Republican party, the Germans also objected to the inflationary monetary policy of the Republican’s and were great supporters of the Gold standard, a central part of the Democratic platform. An important thing to note about the late 19th century is that the demographics were moving strongly towards the Democratic party with the increasing numbers of Germans, Italians and Irish. Had the  party system stayed the same the Democrats would have become dominant.

However, as before, things changed quickly in the election of 1896 with William Jennings Bryan seizing control of the Democratic party, pushing for prohibition and campaigning against the gold standard, in the process alienating much of the democrats support in the North. At the same time McKinley dropped prohibition from the republican party and supported the Gold standard, in so doing winning the German vote. This opened the way for the “progressive era” and the fourth party system, dominated by the Republicans, during this period the Democrats only really gained support from Southerners and the Irish.  This alignment held until the new-deal when the Democrats became the majority party and this in turn only broke down in the 1960s when the civil-rights movement caused the South to abandon the democrats for the republicans. This has changed slightly in the mean time but we are essentially still in the same party system where the Democrats are prima facie the party of big government and social programs despite being slightly more anti-war and liberal on social issues, and the republicans are nominally the party of Business, interventionist foreign policy, fiscal prudence and social conservatism. I use caution with these party characterisations because whatever the rhetoric the resultant policy once in government is surprisingly similar.

Understanding this ever changing nature of the American party system is important and I hope my brief summary is enough to appreciate my argument about the American politics of today. It seems to me that the situation is ripe for another shift in the political dynamic of the United States and perhaps the development of what might one day be called the 7th party system. Regardless of whether Ron Paul wins the republican nomination – and I believe he probably won’t – the movement he has created since 2007 will only increase in significance in the coming years, he himself has talked about his run not so much being a candidacy for president, but a cause.

The really significant thing about Ron Paul is not that he is garnering support within the Republican party, but that he so clearly doesn’t fit the party dynamic, he attracts the support of both Republicans and Democrats and incurs the wrath of both. If the libertarian movement continues to grow within the Republican party – perhaps someday to dominate it – it will alienate many of the current factions and interest groups within the party. Similarly many Democrats who once endorsed them for their anti-war and pro-civil liberties stance will start to realise there is an alternative. This is what makes it likely that we will see a realignment in American politics: 5 years ago one could characterize the Republicans as fiscally and socially conservative and democrats as fiscally and socially liberal (ignoring the fact that fiscally conservative in America actually means classically liberal), once this dynamic breaks down and one party is socially liberal and fiscally conservative  many will find themselves ill at ease with their party. Just as in the past when major shifts in one party pushed people to change allegiance, should the Republicans take up a libertarian ideology this would have much the same effect. The social conservatives would leave the Republican party, so might big business such as the military-industrial complex and Democrats who primarily supported them for their social liberalism will move to the Republicans. This will likely leave a Democratic party with only the people who valued their big-government welfarism higher than social liberalism and this may leave a gap for the social conservatives to move in.

This is all highly speculative and being on the wrong side of the Atlantic it is difficult for me to judge the mood on the ground but I do not see it as too unfeasible that the big government republicans might form an alliance with the big government democrats. Indeed, it would be a much more logical alignment than there is currently, the libertarian ideals of social and economic liberalism (fiscally conservative for Americans) should be seen as two sides of the same coin. Likewise Democrats who support government intervention in economic affairs might be expected to have equally little qualms about government intervention in private affairs and vice-versa for the social conservatives.

All of this is dependent upon the Ron Paul faction of the Republican party continuing to gain ground but I have little doubt that they will. When looking at polling it is more important to look at the momentum than the numbers as they stand. Paul maybe represents 15-20% of the Republican party, but that is probably more than double what he did in 2008. As America’s financial condition continues to worsen and she continues to be bogged down in foreign wars and see her liberties legislated away, there can only be one direction of support for Ron Paul and the probable heir to his movement, Rand Paul. I would not be surprised to see a Rand Paul candidacy in 2016 or 2020 win the Republican nomination and the presidency.

Why Ron Paul supporters should want Obama to win

While it might initially seem a contradiction in terms, the cause of liberty may well be served best by another four years of Obama. This is based on the premise that while Ron Paul could do very well in the Republican primaries he is unlikely to win the nomination at this time. If this is a correct prediction and Romney wins the nomination, I would contend that in a Romney vs Obama race, while Romney may be a marginally better option, the economy will continue to worsen under a Romney presidency as he essentially represents a continuation of the current policy of massive deficits, foreign wars and unprecedented government intervention in the economy.

There is a parallel in this between UK and US politics. The Labour government from 1997-2010 inherited from the Conservatives; a growing economy, falling unemployment, expanding manufacturing and a negligible budgetary deficit. As a result the blame for the economic shambles we were in by 2010 should have been, and largely was, firmly placed on the Labour party. Then in come the Conservatives but unfortunately the Conservative party of today is a shadow of its former self: David Cameron is no Margaret Thatcher. This is the parallel of Mitt Romney, neither the Tories led by Cameron in the UK or the current GOP led by Romney in the US are going to be willing or able to take the vital and drastic measures necessary to avoid the coming economic collapse.

The problem with this is that it muddies the water over who and what policies are to blame, in the UK Labour left office before their Keynesian economic policies could be seen for the disaster they were, and the worsening economic condition in the UK is beginning to be viewed by the public not as a result of the continuation of the policies of Labour but rather the result of reckless free market austerity economics perceived to be relished by the Conservatives (see my blog yesterday for why this is complete nonsense). Essentially when the next stage of this economic crisis plays out, it will not be seen as clear cut as to which party and policies are to blame and we may well return to a Labour government in 2014-15. Had Labour won in 2010 and overseen the complete decimation of the British economy, possibly with the collapse of the pound, we might have kept them out of government for a generation, such as happened in 1979. This may have created the opportunity for a much more radical Tory government in a few years.

This is what Americans must be wary of, if the economy is still trundling along in November and Romney is elected only for the economy to completely collapse 6 months later, perhaps after some token tax and spending cuts, America may well arrive at the same situation we are currently enjoying here in the UK. It will be unclear to the public unclear where the blame truly lies possibly resulting in a return to the democrats in 2016. Over the longer term it could well be more desirable for Ron Paul types in America if Obama wins in 2012 and when the economy is well and truly sunk under his second term, America may finally elect a President willing to make the reforms and cuts necessary to fix America’s economic problems.

Cameron and Osborne: Politics over Economics

If you listened to the BBC or the legions of screaming public sector workers sucking in the teat of the state, you would be under the impression that we are in the midst of draconian, politically motivated cuts the like of which had never been seen before in this country. In reality we have cut very little, indeed we spent more in 2011 that in 2010, we are barely cutting enough to keep pace with increased interest payments. We spent £660.1bn* in 2010 and last year we spent £683.4bn, indeed in the areas of Pensions, Welfare, Education, Defence and Health we spent more in 2011 than in 2010, a pattern that is set to continue with public spending increasing every year throughout the course of this parliament, there is inflation to be contended with but nonetheless, draconian cuts? Of course the government might hope that growth will fill the rather ominous gap between revenue and expenditure but with growth pretty much non-existent, another recession in the offing and even by the government’s own estimates the deficit coming in at £130bn in 2012, we would appear to have made very little impact since May 2010.

A simple explanation as to why this is the case is that Cameron and Osborne were full of it before the election. After having supported virtually everything Labour did economically from 2004 onwards in what was one the the most irresponsible and dangerous expansions of government spending in history, with the Conservatives promising to match 4/5ths of Labour’s increases in spending. The Etonian duo finally rediscovered their fiscally conservative aspirations only when it had become obvious to every tom dick and harry that we were on the verge of bankruptcy, and so they promised to eliminate the budget deficit by 2015. The problem was that they had no idea how they were going to do this, having argued for the spending in the first place they could attempt no grand ideological argument about the role of the state, they could not argue that they represented prudent economic management having been vindicated in their criticism of high government spending, thus having credibility and gravitas when they argued for cutting government. They had subscribed to the new-keynesian policies of messers Brown and Balls and thus their only option was to downplay the size of the problem and the scale of the reduction in government spending required. Had there been a consistent barrage of criticism against the demand-side deficit economics of Brown in the years preceding the crisis, had there been a consistent and logical economic argument over what to do when the crisis struck, the public may have been willing to listen to a Supply-side economic solution. As it was, Cameron and Osborne were stuck in an ideological crisis in 2008 with no credibility and a habit of listening to spin doctors. As a result they did what they believed would play best with the public, they promised to solve the economic problems by essentially doing very little, the result? Thanks to no economic leadership or doctrine from the Conservative party and an alienation of the right wing due to the EU, law and order, the NHS and economics, the Tories failed to win a majority, being forced to compound their problems by sharing government with an incompetent, statist, ideologically vacant, protest group: the Lib Dems.

Osborne’s grand economic plan was essentially to rely on hugely optimistic growth forecasts to fill tax receipts, make token cuts in spending and allow the BoE to inflate away the debt thereby balancing the budget before the next election and then cutting taxes for votes. The problem is that anyone with a skeptical eye could see that the growth forecasts were vastly optimistic, with massive public and private debt, government deficits sucking capital out of the private sector, high regulation and taxation, an insolvent banking sector, a debt crisis in Europe, a bankrupt US, a possible hard landing in China, Japan still in the doldrums after 20 years and inflation driving imported oil prices higher among many other obstacles, Britain was always going to struggle to grow its economy. Had Cameron and Osborne had the political will and economic foresight to come clean about the size of the budgetary shortfall and the severity of the measures required to solve the crisis we might not have witnessed Cameron today in the midst of economic disaster admitting that abolishing the 50p tax was not possible. We live in a country where government is nearly 50% of GDP, marginal rates of taxation for high incomes are well over 50%, we have 28% CGT, 26% corporate tax and 20% VAT: we are a vastly overtaxed nation. We crush economic incentive at every turn in order to continue funding unproductive jobs in the public sector. The only way for the UK to unleash the powers of industry and grow its economy, is to slash taxation and regulation while cutting government spending to balance the budget not in 5 years, but preferably this year. However, due to their lack of political will or economic gravitas we are hamstrung with a PM and Chancellor who are unable to do the one thing that might save us. Instead we will continue to run unprecedented deficits (likely made worse by another round of bank failures), the BoE will continue to print up the shortfall and we will continue to self-inflict an economic wound by destroying savings and taxing success.

*All budgetary statistics are taken from http://www.ukpublicspending.co.uk/index.php

Merkozy: A lesson in economics 101

As is the natural reaction of any good Briton when they see the frogs in a spot of bother, we laugh, only to subsequently decide that we better help them out. Today a 8 billion euro auction of French debt resulted in demand nearly halving and yields on the 10-year rising to 3.29pc, prima facie this would still seem perfectly manageable but in the same day that Italian yields have bumped above 7pc and with France now having the highest yields among the six AAA rated Eurozone economies the portents are far from good. Now aside from the ludicrousness of anyone in the Eurozone still being rated AAA which will be a topic for another day, France’s AAA rating is under serious threat – Standard & Poors stated in December that it would downgrade French debt two notches and German debt by one should a lasting solution to the debt crisis not be found. One cannot help but feel for little Sarkozy that all of this is happening only a few months before his potential reelection and so in my great empathy and altruism I have decided to help the Merkozy duo appreciate some economic reality.

Firstly politicians can no more hold back the force of financial markets than could Canute hold back the tide, there are major economic imbalances that markets need to equilibrate and the longer politicians try to stop them the more overwhelming and damaging it will be when the damn finally bursts. Now I will put my cards on the table now and state that I am one of those hardcore laissez-faire Austrian influenced types who believes just about every problem can be solves by free-markets so here goes.

The Keynesian/Monetarist types are often keen to tell us that the existential problem in the Eurozone is a result of misaligned economies being forced into a strong single currency dominated by the ultra-competitive North, resulting in a massive loss of competitiveness in the Mediterranean countries and a further resulting gain in competitiveness in the North. Now this on the surface would seem to reflect reality, as competitive Germany uses an undervalued currency due to the noncompetitive South, its exports become much cheaper to the rest of the world and so boom, conversely weaker economies such as Spain face a currency too highly valued, their goods become expensive to export, exports and production decrease and unemployment ensues, leading to significant deficits that need to be funded. So far all well and good but the reaction of the Anglo influenced elites to either cut the South loose or to open the printing presses of the ECB in order to force competitive devaluation for the South is not the only solution, it is merely the easiest political solution. It is always easier to decrease real wages and budget deficits by inflation than it is to openly cut state spending or reform labour laws to force internal devaluation.

Deflation and fixed exchange rates worked in the 19th and early 20th centuries, we had fixed exchange rates for the entire world until 1971, so there is clearly no intrinsic unassailable reason why it should be impossible for 17 relatively similar and intertwined European economies. Economists and Polticians offer many explanations for unemployment but ultimately there is only one long term cause of unemployment, the supply of labour outstrips demand, now with any good the way this oversupply is rectified is by the price decreasing to a level at which supply equals demand, labour is a commodity like any other in this sense. The reason why long term unemployment exists is due to labour costs above the market level, this was a phenomenon that first developed on any significant scale in the 1920s and was what J.M. Keynes highlighted when he talked of “sticky wages” where there was a resistance to wages declining in nominal terms even in a deflationary environment where real wages were increasing. Several things in labour markets had changed in the 1920s compared to the pre-war years including unemployment insurance and powerful trade-unions, in an attempt to achieve lower real wages Keynes suggested devaluation of Sterling and causing prices to rise in the hope nominal wages would stay the same. This is in essence what is being suggested when people call for “monetary easing” by the ECB or the cutting loose of the weaker eurozone members. However would it not seem sensible to be honest with the people and instead of causing inflation; to reform labour markets to allow flexible wage rates, or reform the role of government, cut taxes and spending and allow highly regulated socialist economies in Europe to increase their productivity thereby justifying their high real wages? Note that it need make no difference to someone’s standard of living whether they get paid more in nominal terms or less but with cheaper prices. But alas, these are difficult political decisions and although economically sound it is always easier politically to print print print.

If Europe is to persist in its path towards “even greater union” it better be able to make the economic reforms neccessary to act as a single bloc, inflation can only lead to the destruction of savings and long term competitiveness. Unfortunately I do not think Merkozy will make the right decisions, rather they will attempt to bail-out the South and in doing so destroy their own credit ratings leading either to mass default or inflation through the ECB. Budgets must be balanced, regulation and labour markets reformed or just as in the United States and the UK, Europe will face two stark choices: default or inflate, the US and UK seem to have chosen the latter, it is not too late for the Eurozone to save itself from the greater of two evils. Whatever the end result economic law states: you cannot prosperously live on borrowed money forever.