There is almost no limit to the ability of investors to ignore the lessons of the past. This cost them dearly last year. Here are six of the most important of these lessons:
1) Beware of market forecasts, even by experts.WSJ.com - Opinion: Freedom Is Still the Winning Formula
For 15 years, The Wall Street Journal and The Heritage Foundation have been measuring countries' commitment to free-market capitalism in the "Index of Economic Freedom." The 2009 Index, published this week, provides strong evidence that the countries that maintain the freest economies do the best job of promoting prosperity for all citizens.
The positive correlation between economic freedom and national income is confirmed yet again by this year's data. The freest countries enjoy per capita incomes over 10 times higher than those in countries ranked as "repressed." This year, for the first time, the Index also correlates economic freedom with important societal values like poverty reduction, human development, political freedom and environmental protection. The linkages are robust, with economically freer countries performing significantly better on every indicator of well-being.
It would be ironic indeed if the world's advanced economies, in seeking to address current woes, abandoned the system that has brought them and others around the world the amazing levels of prosperity experienced over the last half century.
Researchers paid healthy adults $800 to have cold viruses sprayed up their noses, then wait five days in a hotel to see if they got sick. Habitual eight-hour sleepers were much less likely to get sick than those who slept less than seven hours or slept fitfully.
"The longer you sleep, the better off you are, the less susceptible you are to colds," said lead author Sheldon Cohen, who studies the effects of stress on health at Pittsburgh's Carnegie Mellon University.
Many of us who know Rand's work have noticed that with each passing week, and with each successive bailout plan and economic-stimulus scheme out of Washington, our current politicians are committing the very acts of economic lunacy that "Atlas Shrugged" parodied in 1957, when this 1,000-page novel was first published and became an instant hit.
Rand, who had come to America from Soviet Russia with striking insights into totalitarianism and the destructiveness of socialism, was already a celebrity. The left, naturally, hated her. But as recently as 1991, a survey by the Library of Congress and the Book of the Month Club found that readers rated "Atlas" as the second-most influential book in their lives, behind only the Bible.
For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises -- that in most cases they themselves created -- by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.
The current economic strategy is right out of "Atlas Shrugged": The more incompetent you are in business, the more handouts the politicians will bestow on you. That's the justification for the $2 trillion of subsidies doled out already to keep afloat distressed insurance companies, banks, Wall Street investment houses, and auto companies -- while standing next in line for their share of the booty are real-estate developers, the steel industry, chemical companies, airlines, ethanol producers, construction firms and even catfish farmers. With each successive bailout to "calm the markets," another trillion of national wealth is subsequently lost. Yet, as "Atlas" grimly foretold, we now treat the incompetent who wreck their companies as victims, while those resourceful business owners who manage to make a profit are portrayed as recipients of illegitimate "windfalls."
It would be irresponsible in the extreme for an individual to forestall a personal recession by taking out newer, bigger loans when the old loans can't be repaid. However, this is precisely what we are planning on a national level.
When the government spends, the money has to come from somewhere. If the government doesn't have a surplus, then it must come from taxes. If taxes don't go up, then it must come from increased borrowing. If lenders won't lend, then it must come from the printing press, which is where all these bailouts are headed. But each additional dollar printed diminishes the value those already in circulation. Something cannot be effortlessly created from nothing.
The good news is that economics is not all that complicated. The bad news is that our economy is broken and there is nothing the government can do to fix it. However, the free market does have a cure: it's called a recession, and it's not fun, easy or quick. But if we put our faith in the power of government to make the pain go away, we will live with the consequences for generations.
Not to spoil the party, but this is not a new idea. Keynesian "pump-priming" in a recession has often been tried, and as an economic stimulus it is overrated. The money that the government spends has to come from somewhere, which means from the private economy in higher taxes or borrowing. The public works are usually less productive than the foregone private investment.
In the Age of Obama, we seem fated to re-explain these eternal lessons. So for today we thought we'd recount the history of the last major country that tried to spend its way to "stimulus" -- Japan during its "lost decade" of the 1990s. In 1992, Japanese Prime Minister Kiichi Miyazawa faced falling property prices and a stock market that had sunk 60% in three years. Mr. Miyazawa's Liberal Democratic Party won re-election promising that Japan would spend its way to becoming a "lifestyle superpower." The country embarked on a great Keynesian experiment:
Participants at last week's United Nations climate conference in Poznan, Poland, were taken aback by a world seemingly turned upside-down. The traditional villains and heroes of the international climate narrative, the wicked U.S. and the noble European Union, had unexpectedly swapped roles. For once, it was the EU that was criticized for backpedalling on its CO2 targets while Europe's climate nemesis, the U.S., found itself commended for electing an environmental champion as president.
The Brussels summit symbolizes a turning point. The watered-down climate deal epitomizes the onset of a cooling period in Europe's hitherto overheated climate debate. It may lead eventually to the complete abandonment of the unilateral climate agenda that has shaped Europe's green philosophy for nearly 20 years.
Like all unions, teachers unions have a vested interest in restricting the labor supply to reduce job competition. Traditional state certification rules help to limit the supply of "certified" teachers. But a new study suggests that such requirements also hinder student learning.
Unions claim that traditional certification serves the interests of students. But it's clear that students would be better served if the teaching profession were open to more college graduates. Teachers learn by teaching, not by mastering the required "education" courses associated with state certification.
Far from regulating teacher quality, forcing prospective teachers to take a specific set of education-related courses merely deters college graduates who might otherwise consider teaching. That outcome may serve the goals of labor unions, but it's hard to see how it helps the kids. If we want better teachers and more of them, relaxing certification standards would be a good place to start.
Nonsense.
Bankruptcy doesn't make assets -- such as factories, machines, contractual options to buy raw materials, workers' skills -- disappear. If markets still exist for products produced by these firms, Chapter 11 is the best way to discover this. Some workers might lose their jobs and some suppliers might lose their markets, but there would be no industry-wide collapse of the sort portrayed by the bailout's cheerleaders.
A government bailout of the Big Three keeps huge amounts of productive inputs in firms that can't use them efficiently. Forcing taxpayers to subsidize the continued employment of gargantuan quantities of raw materials, labor and capital goods in unproductive pursuits is a recipe for economic stagnation.
The risks of fossil fuels remain speculative, but if they really are the apocalypse of Mr. Hansen's prophecies, then the cleanest remedy is a tax. That would raise energy and all other prices as the incentive for new technologies and investments. But a tax would be neutral, eliminating the market distortions caused by subsidies and regulation, and the proceeds could be used to offset other taxes. The transition to a world in which growth is not tied to carbon would still be long and extremely expensive, but a tax would be the least painful way to get there.
Practically every day the government launches a massively expensive new initiative to solve the problems that the last day's initiative did not. It is hard to discern any principles behind these actions. The lack of a coherent strategy has increased uncertainty and undermined the public's perception of the government's competence and trustworthiness.
The Obama administration, with its highly able team of economists, has a golden opportunity to put the country on a better path. We believe that the way forward is for the government to adopt two key principles. The first is that it should intervene only when there is a clearly identified market failure. The second is that government intervention should be carried out at minimum cost to taxpayers.
1) Set high academic standards for all of our kids, supported by a rigorous curriculum.
2) Greatly improve the quality of teaching in our classrooms, supported by substantially higher compensation for our best teachers.
3) Measure student and teacher performance on a systematic basis, supported by tests and assessments.
4) Increase "time on task" for all students; this means more time in school each day, and a longer school year.
Everything else either does not matter (e.g., smaller class sizes) or is supportive of these four steps (e.g., vastly improve schools of education).
Democrats are fervent supporters of public education, and the party genuinely wants to help disadvantaged kids stuck in bad schools. But it resists bold action. It is immobilized. Impotent. The explanation lies in its longstanding alliance with the teachers' unions...
Democrats favor educational "change" -- as long as it doesn't affect anyone's job, reallocate resources, or otherwise threaten the occupational interests of the adults running the system. Most changes of real consequence are therefore off the table....
What should the Democrats be doing? Above all, they should be guided by a single overarching principle: Do what is best for children.
It all boils down to a simple question. Will President Obama have the courage to unite with the rebels inside his party, champion the interests of children over the interests of adults, and be a true leader who really means it when he talks about change? We can only stay tuned. And have the audacity of hope.
[Obama's plan for] tax credits will do little or nothing to promote economic growth because they do not reduce marginal tax rates -- the rate on the next dollar of income -- to provide powerful, meaningful incentives for productive activities such as investment, entrepreneurship and work. A tax credit is effectively a cash grant that can only affect incentives up to the amount of the grant. Indeed, such tax credits would likely reduce economic growth because the credits are phased out as income rises, and so effectively impose higher marginal tax rates over those income levels.
Marginal tax rates for middle-income families in the 25% tax bracket are too high.... Reducing the marginal tax rates for these middle-income earners would lead to income increases for middle-income workers, just as reducing excessive marginal tax rates for higher-income workers did, going all the way back to the Kennedy tax cuts of the 1960s.
[A] 40% cut in middle-class income tax rates would provide a powerful boost to the economy, greatly expanding incentives for savings, investment and work. This would be much more effective than Mr. Obama's tax plan with it's $1.3 trillion in redistributive tax credits, as well as yet another so-called stimulus package based on another $300 billion or more in increased government spending.
Government stimulus bills are based on the idea that feeding new money into the economy will increase demand, and thus production. But where does government get this money? Congress doesn't have its own stash. Every dollar it injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It's merely redistributed from one group of people to another.
Oh, and the presence of frozen water was discovered on the surface of Mars, thanks to a 770-pound spacecraft named Phoenix.
Time will tell which of these events proves the most consequential. But surely the 420 million mile voyage of the little Phoenix lander and its five-month sojourn near Mars's north pole deserves a mention.
In a normal audit, these mistakes could be expected to cut both ways. Instead, nearly every "fix" has gone for Mr. Franken, in some cases under strange circumstances.
If Minnesota wants to retain its reputation as a state with clean elections, it needs to run an honest recount.
The financial panic has hit Detroit hard, but its problems go back decades and are far deeper than reduced access to credit among car buyers.
A bailout might avoid any near-term bankruptcy filing, but it won't address Detroit's fundamental problems of making cars that Americans won't buy and labor contracts that are too rich and inflexible to make them competitive... While GM has spent billions of dollars on labor buyouts in recent years, they are still forced by federal mileage standards to churn out small cars that make little or no profit at plants organized by the United Auto Workers.
Rest assured that the politicians don't want to do a thing about those labor contracts or mileage standards.
Here are five interrelated and durable myths about the 1929-39 Depression:
- Herbert Hoover, elected president in 1928, was a doctrinaire, laissez-faire, look-the-other way Republican who clung to the idea that markets were basically self-correcting. The truth is more illuminating...
- The stock market crash in October 1929 precipitated the Great Depression. What the crash mainly precipitated was a raft of wrongheaded policies that did major damage to the economy...
- Where the market had failed, the government stepped in to protect ordinary people. Following in Hoover's footsteps, FDR concentrated on trying to raise farm income by such tactics as setting quotas on production and paying farmers to remove acreage from production -- even though this meant higher prices for hard-pressed consumers and had the effect of both lowering productivity and driving farmers off their land.
- Greed caused the stock market to overshoot and then crash. The real culprit here -- as in the housing bubble in our own time -- is... a speculative fever induced by excessively easy credit and broken by the inevitable return to more realistic valuations...
- Enlightened government pulled the nation out of the worst downturn in its history and came to the rescue of capitalism through rigorous regulation and government oversight. To the contrary, the Hoover and Roosevelt administrations -- in disregarding market signals at every turn -- were jointly responsible for turning a panic into the worst depression of modern times...
In their 1,600-word dispatch "Next President Will Face Test on Detainees," reporters William Glaberson and Margot Williams discover that, gee whiz, many of the prisoners at Guantanamo Bay really are dangerous terrorists.
As we learned under FDR (internment camps), LBJ (spying on political enemies) and Bill Clinton (rendition to Arab regimes), liberals aren't as punctilious about civil liberties when liberals run the government.
Argentina is a constitutional republic with many historical similarities to the U.S. It has a rich immigrant heritage and an abundance of natural resources. But the U.S. is a rich, advanced country and Argentina is poor.
How did the breadbasket of South America fall so far behind? One explanation goes back some 90 years, when the Argentine Supreme Court began chipping away at property rights as a way of addressing economic inequality. Argentine politicians quickly learned that lawful plunder was their path to power.
This history is still being written, and the latest chapter ought to frighten Americans.
When Franklin Delano Roosevelt first proposed legislation that authorized the secretary of agriculture to engage in Soviet-style central planning -- a program so rigid that it regulated how much wheat a homeowner could grow for his own family's consumption -- he rejected arguments of unconstitutionality. He proclaimed that the Constitution was "quaint" and written in the "horse and buggy era," and predicted the public and the courts would agree with him.
Remember that FDR had taken -- and either Mr. Obama or Mr. McCain will soon take -- the oath to uphold that old-fashioned document, the one from which all presidential powers come.
Unfortunately, these presidential attitudes about the Constitution are par for the course. Beginning with John Adams, and proceeding to Abraham Lincoln, Woodrow Wilson and George W. Bush, Congress has enacted and the president has signed laws that criminalized political speech, suspended habeas corpus, compelled support for war, forbade freedom of contract, allowed the government to spy on Americans without a search warrant, and used taxpayer dollars to shore up failing private banks.
All of this legislation -- merely tips of an unconstitutional Big Government iceberg -- is so obviously in conflict with the plain words of the Constitution that one wonders how Congress gets away with it.
Many voters -- progressive Democrats, the asset-safe rich, academics and college students -- regard this as where America should go. They explicitly want America's great natural energies transferred away from unwieldy economic competition and toward social construction.
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