August 22, 2010
Conviction Conservatives and the American RenaissanceBy Greg Richards
We are in the midst of a weak economic recovery from a very deep recession, and economic numbers, particularly unemployment, remain poor. What to do? In order to answer that question, we need to reflect on where we are now.
America is at the divergence of Robert Frost's "two roads." Which one are we going to take? Are we going to take the road less traveled, the road of American exceptionalism and historic success, or are we going to take the road the Left wants us to take, the road already traveled by Europe, the road of democratic socialism?
Are we going to celebrate initiative and achievement, which built the country and supports our public officials in their current lavish lifestyle, or are we going to go the route of a nomenklatura -- where a thin layer of people at the top direct the activities of the rest of us while insulating themselves from the consequences of those actions -- the road of socialism? The Soviet Union and pre-capitalist China showed us where this leads. The end of the socialist road is poverty and stagnation paired with the loss of liberty.
These are not ordinary times. The Obama administration is the Left -- Angelo Codevilla's Ruling Class -- come to power. They think this is the beginning of something, but in reality, as the public sees what it means, in health care, in government expenditures, in restrictions on our liberty, it is the end of something.
We may see a sea change in Congress in the elections this November. The best outcome would be an overwhelming turnover of incumbents, with most of the seats being filled by conviction conservatives activated by the Tea Party movement -- conservatives of the stripe of Allen West, Ilario Pantano, and Star Parker. More Republicans with vague statements of opposition to Obama are not going to move the needle. What we are going to need is a mass of conviction conservatives who can retool the government in Washington, reorient its mores, and ignite an American renaissance.
The large question going forward is what kind of America we will have. Will the public sector be working for the private sector, as has been true historically in America, or are we going to choose the road where the private sector is working for the public sector, as happens in socialist societies, where the premium jobs are government jobs, as is already happening, with federal workers earning twice what those in the private sector earn?
There is $1.8 trillion cash on the balance sheets of American businesses. Why isn't it being spent? One answer is that it will be spent at some point. But if we take a larger view of why it is not being spent, we can say that there is doubt in the minds of risk-takers as to whether the next level of economic activity is going to be centered here or somewhere else. Is America still committed to the success of private enterprise, or have we chosen the other road -- the belief that more government spending, which must be funded by private activity, is the key to our future?
Is a government job now going to be the best choice for a career, given its high pay, easy working conditions, and benefits unobtainable in the private sector? Or are we going to restructure and reestablish the primacy of the private sector? We may require a legal initiative -- something like a synthetic bankruptcy -- to restructure pensions and benefits that have already been negotiated.
What has gone wrong? We are looking at massive failures in our leadership: in our government leadership, in our business leadership, in our intellectual leadership. We need to reestablish good sense in public payrolls, in executive compensation, and in economic policies.
In an American renaissance, we are talking about changes in attitudes on the part of the public, a new paradigm. We are not talking only about legislation or policy that is decided politically in Washington. Of course, we need change there, but not only there. We need change in the smaller battalions of society as well.
In education, not only are costs out of control, but the product -- the learning of the students -- is deplorable. We need to reassert the control of the product by the customer. The product can still be provided by professionals, but customers must be able to choose the product they want. Those who want their five-year-olds to be educated about gay sex can choose that curriculum. Those who favor the three Rs can choose that. The public school of the future is likely to be a condominium, where the children go to school in the same building, have the same recess, lunch, and other activities, but have different classroom experiences depending on the choices of parents. As with most products in our advanced economy, customers do not need to know how the product is produced in order to choose the product they want. But the customer has to be in charge, and serving the customer has to be the primary objective. A socialist system, such as we have now in public education, serves itself, not the customer.
What to do? In government, the new watchword has to be...
GARP: Government At a Reasonable Price.
We, the public, are going to have to manage government expenses and establish a new parsimony in what we pay for public services. We cannot leave it to the experts, who will line the pockets of their constituents as a prelude to lining their own pockets.
The great bull market that ran from 1982 into 2000, and particularly the spectacular stock gains in the 1990s, resulted in managements during that period getting wildly compensated through options and stock such that it was possible for the manager of a public company to make as much as $1 billion during his tenure. Managers came to be rewarded as if they were entrepreneurs without taking the risks or adding the value of entrepreneurs.
Everyone knows that "pay for performance" is a racket because management gets paid whether it performs or not, and even a lot of performance is due to the franchise that preexisted the tenure of the current management. Pay for performance culminated in spectacular pay for failure, whether it was financial executives destroying their franchises and walking away with hundreds of millions or industrial executives such as those in Detroit doing the same thing. There have always been scoundrels at the edges of finance, but in the last decade, the scoundrels were in the pilot house. Both in finance and in the auto industry, management didn't let just their shareholders down -- they let the country down. Imagine whole industries like finance and autos being so atrociously managed that they need to be bailed out by the public, especially while executives are taking home eight-figure paychecks! And especially in the auto industry, while the union contracts crippled the companies, how could managements ask for sacrifice when they were paying themselves so much? High pay for executives is damaging well beyond the sheer money involved.
What to do? Shareholders have to find a way to assert their interests, and particularly their long-term interests in maintaining and building the company franchise, more forcefully. Pay for top executives has to be separated into two tranches -- an administrative tranche for showing up each day, which might be in the range of $800,000, and then a bonus determined by the board based on its judgment of the contribution made by management that year.
But economists are dangerous because they do not understand balance sheets. If you own a ranch but find you are losing money on your cattle, as a rancher you are in trouble. You are negative on your current account. But if you then sustain your income by selling off a portion of your ranch each year, to an economist, you are doing fine. You are negative on your current account, but you are equilibrating your finances in your capital account...everything is fine! But of course, in the real world, you are selling off your homestead, and if you sell it all, you are then out on the street. Economics does not take this problem into account. That is why economists are so unconcerned about our trade deficit.
The Japanese model, the export-led model, is a mercantilist model. It is a predatory model when viewed from the standpoint of industry in our country. The theory of free trade is based on a model developed early in the 19th century by David Ricardo called "comparative advantage." Ricardo showed that if, for instance, France was more efficient at making wine and England was more efficient at growing sheep and making wool, that it would make both countries better off if they concentrated on the industry in which they had a comparative advantage and then traded for the goods they didn't make. And this was true even if one country is inferior in making both goods! It should concentrate in the good in which it is relatively more efficient and buy the other good from the other country. However, note that in this example, efficiency of production is based on physical endowments. If endowments are "created by doing" -- if by making automobiles, one becomes relatively more efficient and knowledgeable in their manufacture -- then the theory of comparative advantage becomes ambiguous.
The success of Japanese mercantilism has been noted and practiced by other countries, most particularly China. And we now have a large and chronic trade deficit with China. In addition, we see China making requirements that to participate in its market, our firms have to locate operations there and even do research and development there. This is resulting in our trade deficit reducing our productive capacity and, very likely, accounts for a large part of our new high unemployment rate.
What to do? We must be much more aggressive with mercantilist countries in enforcing the rules of the road so that we protect out production and technology. We cannot always let the other country set the rules. This includes but is not limited to currency value. It means the government must be more proactive than pure free-market theory would suggest. With countries whose markets are open, free trade works fine. But with mercantilist countries, the relationship must be managed, and it is better to manage it badly than not to mange it.
It may be that we are going to need Churchillian leadership -- a person or a group who will tell us that they have nothing to offer but blood, toil, tears, and sweat. We have to remember those who went before us, and particularly those who gave up their lives in their youth to "take the objectives" that brought us to our high estate. It is for us, the posterity they sacrificed for, to be worthy of that sacrifice.
We don't despair. We are with Harry Truman, who said the American people always do the right thing, but sometimes it takes them a while to figure out what the right thing is. We don't panic because we remember Adam Smith's observation that there is a lot of ruin in a great nation, and we aren't ruined yet. And we chip away at the problem while supporting those running for office who do get it -- those conviction conservatives who will come to serve and to restructure the paradigm, to take the road less traveled.