Thursday, July 15, 2010

Paul Romer’s Bold New Idea for Charter Cities

Paul RomerThe planet’s population will swell by two to three billion people over the next few decades. Where will all those people live? My guest on this week’s Global Prosperity Wonkcast has a bold new idea. Paul Romer is a senior fellow at the Stanford Institute for Economic Policy Research, a non-resident fellow here at the Center for Global Development, and one of the world’s leading growth economists. He is proposing brand new cities—he calls them ‘charter cities’—built from the ground up with sound rules designed to promote swift development.

The two ideas at the heart of Paul’s proposal are, first, that good rules are fundamental to development and, second, that new cities might be able to draw their rules, people, and land from different sources. He argues that inadequate property rights, legal systems, and other types of rules hold back development in poor countries. If the residents of a poor country could choose to live in a new city, governed by the rules of a well-functioning country, they might benefit enormously. If good rules are in place, Paul says, where that city is located doesn’t matter much.

The name ‘charter cities,’ Paul explains, comes from the historical example of the colony of Pennsylvania, which was founded under a charter drafted by William Penn. That charter enshrined new freedoms of religion– freedoms that were quite attractive to prospective immigrants. “It’s a nice illustration,” says Paul, “of how a new system of rules… could come into existence not through a vote or a consensus seeking process, but instead by creating a new entity and saying, ‘Who wants to opt in? Who wants to buy into these new rules?’”

In the podcast, we discuss existing cities that somewhat resemble Paul’s model—places like Hong Kong that, due to flukes of history, imported rules from distant countries. We also try to imagine what sorts of scenarios could support new charter cities. Surprisingly, Paul foresees a potentially large role for countries in the global south, especially China and India, in guaranteeing rules for these new cities.

One of the obvious bottlenecks to creating new cities is the need for land that is fit for habitation and has access to fresh water. Paul suggests a technological solution. By using large-scale renewable energy to desalinate ocean water and reprocess waste, cities can be built in locations that have until now been unlivable. Connections to the world would be provided by container ports, airports, fiber optic cables and satellites, so the new cities need not be located along rivers or existing trade routes. Paul imagines the arid coasts of Australia or Africa dotted with new, solar-powered, efficient cities, plugged into the global economy and providing immigrants with education and jobs.

Paul sees these well-designed, densely populated cities as part of the solution to the planet’s environmental woes. While some people in the developed world prefer a more rural lifestyle, cities are much more efficient and people in developing countries constantly express their preference for city life by moving to those cities that do exist.

“All throughout history, we’ve thought of heaven as the city on a hill. Done right, a city can be the pinnacle of human civilization. They’re the cathedrals of our era,” he says.

Listen to the Wonkcast to hear more about Paul’s proposal. Have something to add to our discussion? Ideas for future interviews? Post a comment below. If you use iTunes, you can subscribe to get new episodes delivered straight to your computer every week.

My thanks to Wren Elhai for his very able production assistance on the Wonkcast and for drafting this blog post.

Romer on Charter Cities

Romer on Charter Cities

Paul Romer
Hosted by Russ Roberts

Paul Romer of Stanford University talks with EconTalk host Russ Roberts about charter cities, Romer's idea for helping the poorest of the poor around the world. Romer envisions a city where the rules about property and safety and contract and so on are rules that allow individuals to flourish in an urban setting in contrast to the cities they live in now where so many aspects of economic and personal life are dysfunctional. Charter cities would be havens for the world's poor and could be created on uninhabited land in either rich or poor countries. This concept raises many difficult practical questions--some of them are discussed here along with how Romer came to be interested in creating the concept and how he hopes to bring it to reality.

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Global Economics - Global Exchange: Free Trade & Protection

Daniel Griswold Assails Trade Restrictions

Jeff Miron discusses the War on Drugs

Dan Mitchell on the Deficit

Dan Mitchell on whether Washington is Helping or Hurting the Economy

Obama's Approval Rating Hits Record Low

FinReg: More Harm Than Good?

Google Reports Profit

Google Reports Profit That Misses Analysts’ Estimates (Update1)

By Brian Womack

July 15 (Bloomberg) -- Google Inc., owner of the world’s most popular search engine, reported profit that missed analysts’ estimates as the company ramped up spending to take on social-networking sites such as Facebook Inc.

Excluding some items, profit was $6.45 a share in the second quarter, the company said today on in a statement. Analysts had estimated $6.52, according to a Bloomberg survey. Net income rose 24 percent to $1.84 billion, or $5.71 a share, from $1.49 billion, or $4.66, a year earlier.

Chief Executive Officer Eric Schmidt is hiring staff and has increased the pace of acquisitions to keep from losing business to Facebook, the world’s largest social-networking site, and Apple Inc., a competitor in mobile software and advertising. Google’s total expenses rose 22 percent to $4.46 billion in the second quarter.

“Google’s been pretty clear that, ‘Hey, we’re going to be putting in expenses,’” said Colin Gillis, an analyst at BGC Partners LP in New York who rates the shares “hold” and doesn’t own any. “They threw a lot of money into R&D and sales and marketing.”

Excluding revenue passed on to partner sites, sales were $5.09 billion, compared with an estimate of $4.98 billion in a Bloomberg survey of analysts.

Rising Dollar

Second-quarter estimates declined in recent weeks as the dollar strengthened against other currencies, including the euro, fueling concern that overseas revenue would be worth less when it’s brought back to the U.S. Analysts cut sales estimates by an average of $21.8 million in the past four weeks, according to Bloomberg data.

Google, based in Mountain View, California, rose $2.68 to $494.02 by 4 p.m. in Nasdaq Stock Market trading. The shares have fallen 20 percent this year.

The company’s cash and short-term investments were $30.1 billion during the second quarter. The company had $26.5 billion in the first quarter, up from $24.5 billion at the end of last year.

Google is using cash to invest in areas to help expand the company’s revenue in the future. Search-based online advertising spending is expected to rise 16 percent this year and 8.6 percent in 2011, according to EMarketer Inc. of New York.

“It’s reasonable to expect that they would be back in investment mode,” said Mark Mahaney, an analyst with Citigroup Investment Research in San Francisco, who doesn’t own the shares. “The question is how big is that investment mode.”

Acquisition Pace

Google is using its cash in part to expand through acquisitions. It has announced or completed more than a dozen purchases this year. In May, Google wrapped up its $750 million acquisition of AdMob Inc., a provider of display ads that go on mobile applications and websites, following approval by the U.S. Federal Trade Commission.

This year, AdMob and Google together may generate more than $100 million in U.S. mobile-ad sales, according to IDC in Framingham, Massachusetts.

Early this month, Google said it had agreed to buy flight- information provider ITA Software Inc. for $700 million. The deal gives it more of the online travel business and helps it compete with rivals Microsoft Corp. and

Google operations in China, the world’s largest Internet market, have come under pressure amid the company’s tussle with the government over censorship rules.

“The timing of the Google-versus-China dispute suggests that the revenue likely took a significant haircut in the second quarter,” Jordan Rohan, an analyst with Stifel Nicolaus & Co. who rates the stock a buy, wrote in a note, adding that China likely only contributes $100 million to $150 million annually to Google.

Stocks Recover Losses

Stocks Recover Losses, Treasuries Pare Gain as Goldman, BP Rise

By Nikolaj Gammeltoft and Elizabeth Stanton

July 15 (Bloomberg) -- U.S. stocks recovered early losses and Treasuries pared gains as BP Plc said it halted the flow of oil from its leaky Gulf of Mexico well and investors speculated Goldman Sachs Group Inc. will settle its fraud case.

The Standard & Poor’s 500 Index rose 0.1 percent to 1,096.48 at 4 p.m. in New York, reversing a 1.3 percent slide. The two-year Treasury yield gained less than one basis point to 0.61 percent after sinking to a record low below 0.58 percent. The euro surged to a two-month high above $1.29 and Spanish bonds jumped after the nation’s sale of 15-year debt eased concern it will struggle to fund its budget deficit.

The rallies in Goldman Sachs and BP’s U.S. shares in the final half hour helped the S&P 500 erase a drop triggered by government data showing that manufacturing output is weakening. The Goldman Sachs speculation was fueled by a Securities and Exchange Commission statement that it planned a “significant announcement,” while BP said the flow of oil stopped and it may know within two days if it’s safe to leave the seal in place.

“That triggered a rally in the oils and energy stocks,” Frederic Dickson, chief market strategist at D.A. Davidson & Co., said of the BP announcement. “Equally significant was the announcement that the SEC called a conference call. The speculation is that they may have reached an agreement with Goldman Sachs. Two pieces of speculative information triggered a change in sentiment.” Davidson, based in Great Falls, Montana, manages about $19 billion.

Goldman, BP

Goldman Sachs surged 4.4 percent in regular trading as investors correctly speculated that the SEC would announce a settlement of the fraud case after markets closed. The shares rallied another 4.7 percent in extended trading after the SEC said in an e-mailed statement that Wall Street’s most profitable firm will pay $550 million to settle the lawsuit accusing it of misleading investors in securities tied to subprime mortgages.

“It’s chump change,” said Matt McCormick, a portfolio manager at Cincinnati-based Bahl & Gaynor Inc., which has $2.7 billion under management. “The case has been a stone in the shoe for Goldman and now it looks like they can get back to running.”

BP’s U.S. shares surged 7.6 percent. Oil has stopped flowing into the Gulf of Mexico for the first time in about three months as the company pressure tests its damaged Macondo well, BP said. Senior Vice President Kent Wells commented today on a conference call.

A test that will measure the pressure inside the well has begun and will last from six hours to 48 hours, BP said in an e- mailed statement today. The test will determine if BP can leave the seal in place or if it will need to let the leak resume until it can be permanently capped with a relief well.

Earnings Watch

The S&P 500 has rebounded 7.2 percent from a 10-month low on July 2 amid optimism that second-quarter results will signal a strengthening economy. Analysts predict earnings in the S&P 500 grew 34 percent last quarter, according to Bloomberg data.

JPMorgan Chase & Co. , the second-largest U.S. bank by assets, this morning joined Intel Corp. and Alcoa Inc. in posting better-than-estimated earnings in the first week of the reporting season. JPMorgan rose as much as 1.2 percent in early trading, only to follow the market’s fluctuations and drop as much as 2.6 percent before closing 0.3 percent higher.

The early slump in stocks came after government data showed manufacturing in the U.S. contracted in June by the most in a year and wholesale prices declined more than anticipated, underscoring the Federal Reserve’s reduced forecasts for economic growth and inflation.

Regional Fed Indexes

The manufacturing slowdown continued in the northeastern U.S. this month, according to regional indexes compiled by Fed banks. The Philadelphia Fed’s index, which covers eastern Pennsylvania, southern New Jersey and Delaware, fell to 5.1 this month, the lowest level since August 2009, from 8 in June. The New York Fed’s manufacturing gauge, which includes northern New Jersey and southern Connecticut, dropped to 5.1 from 19.6. In both cases, readings above zero indicate expansion.

“The regional manufacturing data were very weak and there are signs of a global economic slowdown,” said Linda Duessel, who helps oversee $390 billion as equity market strategist at Federated Investors Inc. in Pittsburgh. “The question is still whether we will have a double-dip or a slowdown in growth.”

The Stoxx Europe 600 Index slipped 1.2 percent, led by declines in banks, commodity producers and industrial companies.

Greek lenders rallied, leading the nation’s ASE index to a 2.2 percent gain, after Piraeus Bank SA offered to buy stakes in two banks. National Bank of Greece, EFG Eurobank Ergasias SA and Alpha Bank SA rallied more than 5.6 percent as Piraeus Bank submitted a bid to buy “significant stakes” in state- controlled lenders Agricultural Bank of Greece SA and Hellenic Postbank SA. Piraeus Bank jumped 13 percent.

Oil Slips

Crude oil for August delivery lost 0.6 percent to $76.62 a barrel on the New York Mercantile Exchange, erasing an earlier gain of as much as 0.8 percent.

Agricultural commodities rallied. Wheat jumped the most in 19 months, with September futures rallying 6.7 percent to $5.9625 a bushel in Chicago, on speculation that a prolonged dry spell will widen damage to crops in Russia, the world’s fourth- largest exporter. Coffee climbed to a two-week high in New York, while corn rose to a six-month high and soybeans surged on forecasts for hot, dry weather that may damage U.S. crops.

The euro rose against 15 of 16 major counterparts after the Spanish debt auction. The Australian dollar fell against 13 of 16 major currencies on concern slower growth in China will dent demand for commodities. The yen strengthened against 11.

Spanish Bonds

The yield on Spanish 15-year bonds slipped 15 basis points to 5.07 percent.

Spain sold the full 3 billion euros ($3.8 billion) of 15- year bonds planned, attracting bids for 2.57 times the securities on offer compared with 1.79 at the last auction in April. Italy, Portugal and Greece also raised funds this week after the European Union and International Monetary Fund in May approved a backstop to bolster confidence in the region’s most indebted nations.

The Shanghai Composite Index of stocks posted the biggest drop among major emerging markets, sliding 1.9 percent, after the government said gross domestic product rose 10.3 percent in the second quarter, less than the 10.5 percent median estimate in a Bloomberg News survey of 28 economists. The 21-country MSCI Emerging Markets Index fell for the first time in six days, losing 0.5 percent.

Brazilian traders are paring bets for interest rate increases at the fastest pace in two months as the economy shows signs of slowing.

Yields on rate futures contracts due in January 2011 declined 15 basis points, or 0.15 percentage point, in the past two weeks, the most since May, to 11.21 percent. The plunge puts traders’ year-end forecast for the central bank’s benchmark Selic overnight rate at 11.7 percent, below the consensus economist forecast of 12 percent for the first time since at least September, according to data compiled by Bloomberg.

A Failed Obama Hero

Walter E. Williams
A Failed Obama Hero
Click  here to find out more!

Let's think about President Obama's failed economic stimulus program. Before getting to the nitty-gritty of why stimulus packages fail, let's look at the failed stimulus program of Obama's hero, Franklin Delano Roosevelt. FDR's Treasury Secretary, Henry Morgenthau, wrote in his diary: "We have tried spending money. We are spending more than we have ever spent before and it does not work. ... We have never made good on our promises. ... I say after eight years of this Administration we have just as much unemployment as when we started ... and an enormous debt to boot!"

Morgenthau was being a bit gracious. The unemployment figures for FDR's first eight years were: 18 percent in 1935; 14 percent in 1936; by 1938, unemployment was back to 20 percent. The stock market fell nearly 50 percent between August 1937 and March 1938. Columnist Walter Lippmann wrote, "With almost no important exception every measure he (Roosevelt) has been interested in for the past five months has been to reduce or discourage the production of wealth." The last year of the Herbert Hoover administration, the top marginal income tax rate was raised from 24 to 63 percent. During the Roosevelt administration, the top rate was raised at first to 79 percent and then later to 90 percent. Hillsdale College economic historian Professor Burton Folsom notes that in 1941, Roosevelt even proposed a whopping 99.5 percent marginal rate on all incomes over $100,000. Much more of the Hoover/FDR fiasco can be found in "Great Myths of the Great Depression".

The Great Depression did not end until after WWII. Why it lasted so long went unanswered until Harold L. Cole, professor of economics at the University of Pennsylvania, and Lee E. Ohanian, professor of economics at UCLA, published their research project "How Government Prolonged the Depression" in the Journal of Political Economy (August 2004). Professor Cole explained, "The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes. Ironically, our work shows that the recovery would have been very rapid had the government not intervened." Professors Cole and Ohanian argue that FDR's economic policies added at least seven years to the depression.

Where do the trillion-plus dollars come from that Congress and Obama are spending in an effort to stimulate the economy? How about Santa Claus, or maybe the Tooth Fairy? If you said, "Come on, Williams, you're being silly! The only way government can spend a dollar is to tax or borrow it," go to the head of the class. In the case of a tax, one should ask what would that taxpayer have done with the dollar had it not been taxed away. He would have spent it on something that would have created a job for someone. If the government hadn't borrowed the dollar, it might have been invested in some project that would have created a job. When government taxes, borrows and spends, it shifts unemployment from one sector to another. Of course, the sector that benefits tends to be a political favorite of the shifter.

Between 1787 and 1930, our nation has seen both mild and severe economic downturns, sometimes called panics, that have ranged from one to seven years. During that interval, no one considered it to be the business of the federal government to try to get the economy out of a depression because there was no constitutional authority to do so. It took Hoover, FDR and a frightened and derelict U.S. Supreme Court to turn what might have been a three- or four-year sharp downturn into a 15-year meltdown.

Iranian nuclear scientist returns home

Iranian nuclear scientist returns home to a hero's welcome
By Thomas Erdbrink and Greg Miller

TEHRAN -- An Iranian nuclear scientist at the center of a bizarre espionage drama arrived here to a hero's welcome Thursday morning, including a personal greeting from several senior government officials.

Shahram Amiri flashed victory signs to dozens of reporters as he stepped into Imam Khomeini International Airport, and his 7-year-old son broke down in tears as his father held him for the first time since Amiri disappeared in Saudi Arabia 14 months ago.

He was also greeted by Hassan Qashqavi, a high-ranking Foreign Ministry official, as well as a deputy interior minister and a deputy science minister.

Iran's Arabic-language news channel Al Alam extensively covered the arrival, but it was not shown live on state television, which does not broadcast in the early morning.

Amiri's tale has dominated Iranian media since Monday night, when he surfaced in front of Iran's diplomatic mission in Washington and asked for a ticket back to his homeland. Amiri, 32, told officials that he had been abducted by U.S. intelligence operatives and had spent much of the past year in Tucson being questioned about Iran's nuclear ambitions.

Amiri's reappearance was as mysterious as his disappearance and came just weeks after a series of Internet videos added to the intrigue surrounding the case. In the videos, Amiri claimed alternately to have been kidnapped by the CIA and to have come to this country on his own accord to pursue a PhD.

The case has emerged as a source of embarrassment for both governments. The Obama administration faced the departure of someone whose defection had been considered an intelligence coup. Iran described Amiri's desire to the leave the United States as a setback for American efforts, but Amiri may have compromised the secrecy of Iran's nuclear endeavors.

According to an official familiar with the account Amiri gave at the mission, his pleas to be released were finally granted when he was brought to Washington and sent to a nondescript storefront on Wisconsin Avenue, where Iranian representatives work in a space officially operated by Pakistan's embassy.

Within hours of arriving at the mission, Amiri told state-run Iranian television that "my kidnapping was a disgraceful act for America. . . . I was under enormous psychological pressure and supervision of armed agents in the past 14 months."

U.S. officials disputed Amiri's account, insisting that he defected voluntarily and provided valuable intelligence about Iran's nuclear program before increased worries over the safety of his family in Iran prompted him to seek a return. Secretary of State Hillary Rodham Clinton told reporters Tuesday that Amiri was and always had been free to go. "These are decisions that are his alone to make," Clinton said, noting that Iran has refused to release three American backpackers detained in the country for nearly a year.

Amiri's case has provided a rare public glimpse into the espionage sparring between the United States and Iran, much as the capture and swap of Russian undercover operatives this month exposed the extent to which such cloak-and-dagger endeavors have outlasted the Cold War. The United States and other nations contend that Iran is secretly developing the means to build a nuclear weapon, but the Iranian government says its program is entirely peaceful.

Amiri has said he worked at Iran's Malek-e-Ashtar Industrial University, which U.S. intelligence agencies believe is connected to the country's Revolutionary Guard Corps. Amiri is not believed to have been directly involved in the most secretive aspects of Iran's nuclear efforts, but intelligence officials said he provided significant insights during lengthy debriefings with the CIA.

"I don't think the U.S. government goes to great lengths to help people come over here unless there is significant intelligence value to be gained," said a U.S. official briefed on the case, who spoke on the condition of anonymity because he was not authorized to discuss it.

Amiri disappeared under mysterious circumstances in June 2009, about the same time that U.S. officials spoke of an "intelligence coup" involving a high-profile defector.

He appears to have been resettled in Tucson, where his presence was a carefully guarded secret until the scientist appeared in videos this spring. In the first, which aired on Iranian television, Amiri stares into what appears to be an amateur Web camera, claiming to have been tortured and pleading for human rights organizations to intervene.

But in a subsequent and more polished video that U.S. officials said was crafted with help from the CIA, Amiri is dressed in a suit coat before a backdrop that includes a chessboard and a globe turned to the Western Hemisphere. Amiri says he has never betrayed his homeland and asks "everyone to stop presenting information that distorts the reality about me."

Amiri also says he knows that the Iranian government "will take care of and protect my family." U.S. officials said fears for their safety appear to have been behind his decisions to release the videos portraying himself as a kidnapping victim, as well as his effort to return.

"The Iranians aren't beyond using family to influence people," said a second U.S. official, who added that Amiri's ability to appear in the videos, as well as reach the Iranian mission, "gives the lie to the idea he was tortured or imprisoned. He can tell any story he wants -- but that won't make it true."

Defectors who return to their native countries risk severe reprisals. In one of the most notorious cases, Saddam Hussein's son-in-law defected to Jordan in the mid-1990s and began providing information on Iraq's banned weapons programs. He and his brother -- another Hussein son-in-law who had defected with him -- returned to Iraq after being promised that they would not be punished, but both were killed within days.

Amiri arrived at the Iranian mission at 6:30 p.m. Monday, officials said. Only a security guard was present, and the two spoke in Farsi. In meetings with Pakistani diplomats, Amiri said he had been drugged after stepping into a cab in Medina, Saudi Arabia, last summer and woke up in the United States. He said he wasn't physically abused but claimed to have endured severe "mental torture."

Erdbrink reported from Tehran. Staff writers Karen DeYoung and Tara Bahrampour and staff researcher Julie Tate contributed to this report.

Hillary Clinton for President

Hillary Clinton for President

The secretary of state could mount a formidable challenge to Obama.

America's economy is failing to produce jobs, increase growth or raise confidence, and it will likely get even worse next year. Our federal government's spending has increased to $3.7 trillion this year from $2.98 trillion in 2008. Publicly held national debt is up by $2.4 trillion in less than two years, to about 63% percent of GDP from 40%, and is expected to reach 70% by 2012. Add in the unemployment rate, which has remained above 9.4% for over a year, and America is clearly failing economically.

Next January the economy will be further depressed by increasing tax rates. The top income tax rate will rise to 39.6% from 35%, and the phase-out of itemized deductions and personal exemptions will effectively lift the top bracket to about 40.8%. On New Year's Day the tax on dividends is scheduled to go up to 39.6% from 15%, and come 2013, ObamaCare will add another 3.8%.

Other bad public policies will further drag down the economy. ObamaCare will increase individual costs and expand the deficit. Failing energy policies, from Washington's inept response to the Deepwater Horizon oil spill to its effort to limit tapping America's oil supplies, will drive up our use of imported foreign oil beyond the current 67% of our country's oil consumption.


Add together all these increases in government regulation, spending and taxes and a dim employment outlook, and the result is a dramatic national decline in support of the White House, Congress and their administration of our national policies.

So what can be done to change America's policies and make our economy stronger? For one thing, we could elect a president with different thinking. Almost any Republican candidate would have that, and, as we will see in a moment, there is one obvious Democrat who would change our course too.

And why would the Democratic Party want to do that? Because the re-election of President Obama is becoming more problematic. The latest Rasmussen Reports polls show the dramatic decline of the presidential approval index, the difference between those who "strongly approve" of Mr. Obama's performance and those who "strongly disapprove." It began at plus 25% when the new president was sworn in, and has steadily declined to minus 13%.

It isn't just the president whose poll numbers are falling fast. According to recent Harris polling, Vice President Biden viewed favorably by 26% of the public and unfavorably by 45%. House Speaker Nancy Pelosi does even worse, 20% positive to 49% negative. A June Nevada poll gave Sen. Harry Reid, the majority leader, 33% approval and 52% disapproval.

But the greatest contrast and most interesting statistic is Secretary of State Hillary Clinton's ratings: 45% favorable and only 35% unfavorable.

That is not surprising, and there are some obvious factors that suggest she might have a chance of defeating President Obama if she were to challenge him for the 2012 Democratic nomination.

First, as Peggy Noonan wrote earlier this month, the conclusion one hears from most "normal" American people is that the president "is in over his head, and out of his depth." Even most progressives agree that "the Obama presidency has been a big disappointment," according to Eric Alterman of The Nation. That means there's a big opportunity for Mrs. Clinton.

Second, she is physically and intellectually strong enough to take on a difficult campaign. She showed that running against Obama two years ago.

Third, she is one of the most experienced prospective candidates the Democratic Party has had in a long while: wife of a governor, U.S. first lady, senator and now secretary of state. This is a good record to run on as someone who knows how the government works.

Fourth, she is an experienced foreign-policy adviser who understands the threats to our national security: unresolved conflicts in Afghanistan and Iraq, rising threats of nuclear capability in Iran and North Korea, and uncertainties in Pakistan.

Fifth, experience will be even more important to voters in the 2012 presidential election, whose 2008 gamble on someone with little experience is proving costly.

Finally, Washington's deadly left-liberal policies that have propelled the American economy in a very bad direction can be turned around. If Mrs. Clinton made the case that America must get rid of the huge debt the current administration has created, must create much better economic growth with lower tax rates, and must strongly assist employer job creation, she would appeal to a broad voter coalition.


All this must be obvious to the inner circle of the current president's administration. So what is he to do? That's pretty simple--just add his secretary of state to the 2012 ticket as his new running mate.

We don't know whether Mr. Obama is already thinking about making this kind of change next year, but we do know he needs some very good policy outcomes to be re-elected. And if none of these Obama changes come to pass, Mrs. Clinton could put together a very effective campaign to get the nomination for herself.

Considering how badly things are going in America just now, that could turn out to be a slam dunk for her and the disgruntled Democratic Party.

The rally is meaningless

The rally is meaningless
Commentary: Elliott Wave Financial Forecast says this will be a down year

Peter Brimelow

NEW YORK (MarketWatch) -- An investment letter that made money during the Crash of 2008 says the stock rally is meaningless and that this will be a down year.

To be fair, the Elliott Wave Financial Forecast [EWFF] said this in its monthly issue published in early July, before the recent bounce. But it anticipated this possibility, writing "The selling pressure will abate at times, but by the end of 2010, stock prices should be much lower."

Recently, I quoted EWFF anticipating a triple-digit Dow in 2016, much to the disgust of some readers. ( See June 17 column.)

EWFF has also made money over this difficult year to date, by Hulbert Financial Digest count. It's up 3.1%, versus negative 5.8% for the dividend-reinvested Wilshire 5000 Total Stock Market Index.

It was skeptical too soon of the post-March 2009 rally, so over the past 12 months it was down negative 2.13%, versus 22.89% for the total return Wilshire 5000.

But over the past three years, the letter is up annualized 5.81%, versus negative 9.36% annualized for the total return Wilshire.

In fact, EWFF has had a relatively good decade, which is another way of saying the stock market has not. Over the past ten years, the letter was up an annualized 1.51%, versus negative 1.51% for the total return Wilshire 5000.

(On the other hand, it should be noted that EWFF had an absolutely horrible time in the 1990s. See April 26, 2002 column.)

EWFF's unique selling proposition is the complex and esoteric Elliott Wave theory. But it spends a lot of time thinking about how the deflation that it believes the Elliott Theory predicts will actually play out. Its scenario for the rest of 2010:

"Credit turmoil is expanding into the municipal bond market, as the cost of insuring muni bonds relative to Treasuries is soaring. As these rates continue to rise, the toll on state and local finances will mount and many seemingly safe bond portfolios will be hard hit. Multiple non-confirmations in the precious metals complex indicate that the next major move for gold and silver is down. The U.S. Dollar index is correcting the complete rally pattern from last November. The long-term trend for the buck remains up."

In a recent interview, EWFF's founder Bob Prechter said:

"Investors should be primarily in greenback cash and Treasury bills, while holding a core position in gold-bullion coins and bags of U.S. silver coins, sometimes called 'junk silver.' They should hold no corporate bonds, municipal bonds, mortgage debt, auto debt, credit-card debt, foreign debt -- aside from Swiss money-market claims (the Swiss equivalent of T-bills) -- or any other IOUs that will soon evaporate in value. They should own no stocks or investment property. They should avoid all but the safest banks on the planet. Experienced traders should be short the S&P 500 Index Market Data Express: SPX /quotes/comstock/21z!i1:in\x (SPX 1,087, -8.56, -0.78%) ."

Prechter added: "I love gold. It's money. Our fiat system has no money, just debt. Outlawing gold as money in the U.S. was one of the most harmful decisions the government ever made. [But] gold is not a crisis hedge....In crises, people want cash. Debtors owe dollars, and creditors are owed dollars. During the serious part of the coming debt implosion, dollar bills and surviving dollar-denominated IOUs will likely go up in value faster than gold, which means the dollar price of gold will probably fall for a time."

(A reader points out that there are other Elliott Wave-oriented services -- for example Walter Murphy's Monthly Insights and Larry Katz' Market Summary and Forecast, that take a more optimistic view -- just as there are several Dow Theory letters with brawling interpretations. Unfortunately, the Hulbert Financial Digest does not follow these other Elliott services, basically because not enough of their subscribers have requested it.)

Way back when, Prechter had a rock band. He reported:

"In 2008, 34 years after my band made an LP, I started getting calls from collectors wanting copies. To make a long story short, a collectors' label called Yoga Records has decided to release the album on CD and digital download."

He added, "I think they're pricing it too low, but that's deflation for ya."

Empty Promises

Financial Reform's Empty Promises
By Sen. Tom Coburn

With President Obama expected to sign financial reform legislation into law in the next few days the public is hearing grandiose rhetoric about the bill's merits. The president has promised the bill will "end an era of irresponsibility" while Majority Leader Harry Reid (D-NV) said the bill will clean up Wall Street and "fix the system that caused the recession."

The public isn't buying these arguments. Four out of five Americans have little or no confidence in the bill, according to a Bloomberg Poll. Respondents also said the plan is more likely to help the financial industry than individual consumers, a fact that was confirmed by Goldman Sachs CEO Lloyd Blankfein during congressional hearings on the financial crisis. I asked Blankfein point blank if he supported the financial reform bill. He said, "on the whole, financial reform is, absolutely is essential ... the biggest beneficiaries of reform will be Wall Street itself."

In other words, the CEO of a financial institution the majority spent months demonizing supports the bill that supposedly reins in his firm. Still, the bill's backers won't acknowledge the massive disconnect between their rhetoric and their legislative product. If the CEO of Goldman Sachs supports the bill, it's no wonder the public is skeptical.

An even bigger problem than lending institutions that are too big to fail is a Congress the public views as too incompetent to succeed. The bill was written by career politicians, lobbyists and staff who have virtually no real world experience in business or investing and who, in many cases, are beholden to special interests. Few members of Congress will read the 2,300 page bill before voting on it and fewer will understand its implications.

The public doesn't trust Congress, an institution that can't pass a budget and is responsible for our $13 trillion debt, to manage and fix the dysfunctional and complex financial relationships on Wall Street. The public is also skeptical that a Congress that refuses to make rational borrowing decisions is going to effectively oversee the establishment of the Bureau of Consumer Financial Protection that will be responsible for micromanaging millions of borrowing decisions. Besides, of all the problems facing our economy, a shortage of government agencies is not near the top.

The bill has three key flaws.

First, the bill does not "fix the system." The bill fails to reform Fannie Mae and Freddie Mac, which incentivized banks to offer loans people couldn't afford. These entities have already cost taxpayers hundreds of billions of dollars in bailouts with no end in sight. As we've learned from the Gulf oil spill debacle, saying the spill is stopped doesn't stop the spill. Similarly, this bill's promises of grand reform do little to stop or prevent toxic assets from spewing into the economy now or in the future.

Second, the bills "fixes" are more likely to create uncertainty rather than financial stability. For instance, while pursuing the legitimate goal of regulating derivatives - the financial tools used to manage risk that Wall Street firms abused - Congress ended up writing a bill that treats companies like Home Depot, John Deere and Coca Cola like Goldman Sachs.

My colleague, Senator Saxby Chambliss (R-GA), the ranking member of the Senate Agriculture Committee, is warning that "requiring businesses that provide credit to our nation's producers (like the Farm Credit System Banks or John Deere Credit) to clear their interest-rate derivatives will result in higher interest rates being charged to our farmers, ranchers, electric cooperatives and renewable fuel facilities for business and equipment loans." In others words, the bill's fixes will create higher prices and fewer jobs.

The bill's fixes will also require years of complex rule making by government agencies which will create even more uncertainty and anxiety between lenders, companies and consumers at the worst possible time. Harvey Pitt, a former chairman of the SEC, aptly calls the bill "The Lawyers' and Lobbyists' Full Employment Act." The coming regulatory scramble will undoubtedly pit smaller firms against larger firms and will favor the big firms.

Finally, the bill was fast-tracked before the Financial Crisis Inquiry Commission could finish its work. The commission was created to find out what went wrong so we could prevent a similar crisis. Yet, we're passing a bill for political purposes rather than solving the problem. Congress has made an indefensible choice. Instead of passing a bill that could have created stability in the financial sector for a generation, Congress has passed a bill for an election.

In the real world no crisis is like the last one. The next financial crisis could be a liquidity crisis, a debt crisis, a crisis concerning the value of the dollar, or something else. This bill will not only fail to prevent the next crisis, but will create an economy that is weakened and less able to withstand the next crisis. Unfortunately, the financial reform bill shows the era of irresponsibility in Washington is far from over.

The high price of American hubris

The high price of American hubris
George Will

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The story mocks a cliche: As they were leaving the Garden of Eden, Adam said to Eve, "Darling, we live in an age of transition." The first sentence of Barack Obama's letter introducing his new strategic review says Americans have often coped with "moments of transition" such as today's "time of sweeping change." Such boilerplate makes one weep -- and yearn for serious, meaning unsentimental, assessments of America's foreign policy tradition.

One is at hand. Taken to heart, Peter Beinart's "The Icarus Syndrome: A History of American Hubris" might spare the nation some tears.

In the Greek myth, Icarus is given wings in the form of feathers affixed by wax to a wooden frame. He also is given a warning: Do not fly too high lest the sun melt the wax. In the ecstasy of soaring, he forgot, and fell to his death.

Beinart discerns three varieties of highflying foreign policy hubris in the past 100 years, beginning with Woodrow Wilson, who injected the progressives' faith in domestic policy expertise into foreign policy. He exemplified the hubris of reason, which supposedly could bring permanent, because "scientific," peace to Europe. The political science professor told his wife they should draft a constitution for their marriage, then "make bylaws at our leisure." As president, he created the Inquiry, a bevy of intellectuals using reason to revise the borders that history had given to Old World nations.

Colonel Edward House, Wilson's aide, said he and the president received the Inquiry's report on Jan. 2, 1918: "We actually got down to work at half past ten and finished remaking the map of the world, as we would have it, at half past twelve."

Wilson said, in effect, "Stop the world, America wants to get off." He actually said America would "in no circumstances consent to live in a world governed by intrigue and force." And so the next war came, on Sept. 1, 1939, when dignitaries were in Geneva, birthplace and cemetery of the League of Nations, unveiling a statue of Wilson.

The First World War -- a.k.a. the war to end all wars -- was followed by the Second World War, and then the Cold War and the hubris of toughness. America, which Beinart says needed "a wider menu of analogies," now saw every foreign policy challenge through the retrospective prism of Munich:

"In 1939, few American politicians believed that a Nazi takeover of Warsaw constituted a grave danger to the United States. By 1965, many believed we couldn't live with a North Vietnamese takeover of Saigon. In the 1980s, Americans lived peacefully, albeit anxiously, with thousands of Soviet nuclear warheads pointed our way. By 2003, many Washington commentators claimed that even Iraqi biological or chemical weapons put us in mortal peril."

The postwar belief that U.S. "credibility" was crucial, perishable and at stake in far-flung crises "meant," Beinart says, "that unimportant places were important after all," and turned the doctrine of containment into an uncontained, hence hubristic, impulse. As the restraining memory of Korea faded -- a memory that helped President Dwight Eisenhower conduct a prudent foreign policy -- the (in John Kennedy's inaugural formulation) "trumpet" calling on America to "pay any price, bear any burden" summoned the country to worry perhaps excessively about involvement in Guatemala and the Dominican Republic.

After the collapse of the Soviet Union, America's supremacy -- ideological, military and economic: the stock market doubled in value between 1992 and 1996 -- fed, Beinart says, a hubris of dominance. Using only air power, America compelled Serbia to remove its soldiers from part of Serbia -- the province of Kosovo. In Bosnia, America acted in response to ethnic cleansing. In Kosovo, Beinart argues, America acted to preempt ethnic cleansing: "Kosovo nudged open an intellectual door, a door George W. Bush would fling wide open four years later, when he cited 'preemption' to justify his invasion of Iraq."

Events eventually pop what Beinart calls "hubris bubbles." This may soon happen in Afghanistan, where Obama is in a tenuous, uneasy alliance with those Beinart calls "dominance conservatives."

Generational envy has, Beinart believes, propelled some Americans' searches for Hitlers to not appease. Boredom born of Cold War success caused them to find some. Hubris is a vice arising from ambition, which is, in moderation, a virtue. Hubris is a byproduct of success, of which America has had much. By producing folly, of which America has had too much, hubris is its own corrective. There is, however, a high tuition paid for such instruction.

My Biggest Mistake in the White House

My Biggest Mistake in the White House
Failing to refute charges that Bush lied us into war has hurt our country.


Seven years ago today, in a speech on the Iraq war, Sen. Ted Kennedy fired the first shot in an all-out assault on President George W. Bush's integrity. "All the evidence points to the conclusion," Kennedy said, that the Bush administration "put a spin on the intelligence and a spin on the truth." Later that day Senate Minority Leader Tom Daschle told reporters Mr. Bush needed "to be forthcoming" about the absence of weapons of mass destruction (WMD).

Thus began a shameful episode in our political life whose poisonous fruits are still with us.

The next morning, Democratic presidential candidates John Kerry and John Edwards joined in. Sen. Kerry said, "It is time for a president who will face the truth and tell the truth." Mr. Edwards chimed in, "The administration has a problem with the truth."

The battering would continue, and it was a monument to hypocrisy and cynicism. All these Democrats had said, like Mr. Bush did, that Saddam Hussein possessed WMD. Of the 110 House and Senate Democrats who voted in October 2002 to authorize the use of force against his regime, 67 said in congressional debate that Saddam had these weapons. This didn't keep Democrats from later alleging something they knew was false—that the president had lied America into war.

Senate Intelligence Chairman Bob Graham organized a bipartisan letter in December 2001 warning Mr. Bush that Saddam's "biological, chemical and nuclear weapons programs . . . may be back to pre-Gulf War status," and enhanced by "longer-range missiles that will threaten the United States and our allies." Yet two years later, he called for Mr. Bush's impeachment for having said Saddam had WMD.

On July 9, 2004, Mr. Graham's fellow Democrat on Senate Intelligence, Jay Rockefeller, charged that the Bush administration "at all levels . . . used bad information to bolster the case for war." But in his remarks on Oct. 10, 2002, supporting the war resolution, he said that "Saddam's existing biological and chemical weapons capabilities pose real threats to America."

Even Kennedy, who opposed the war resolution, nonetheless said the month before the vote that Saddam's "pursuit of lethal weapons of mass destruction cannot be tolerated." But he warned if force were employed, the Iraqi dictator "may decide he has nothing to lose by using weapons of mass destruction himself or by sharing them with terrorists."

Then there was Al Gore, who charged on June 24, 2004, that Mr. Bush spent "prodigious amounts of energy convincing people of lies" and accused him of treason, bellowing that Mr. Bush "betrayed his country." Yet just a month before the war resolution debate, the former vice president said, "We know that [Saddam] has stored away secret supplies of biological and chemical weapons throughout his country."

Top Democrats led their party in making the "Bush lied, people died" charge because they wanted to defeat him in 2004. That didn't happen. Several bipartisan commissions would later catalogue the serious errors in the intelligence on which Mr. Bush and Democrats relied. But these commissions, particularly the Silberman-Robb report of March 31, 2005, found that the "Bush lied" charge was false. Still, the attacks hurt: When they began, less than a third of Americans believed the charge. Two years later, polls showed that just over half did.
About Karl Rove

Karl Rove served as Senior Advisor to President George W. Bush from 2000–2007 and Deputy Chief of Staff from 2004–2007. At the White House he oversaw the Offices of Strategic Initiatives, Political Affairs, Public Liaison, and Intergovernmental Affairs and was Deputy Chief of Staff for Policy, coordinating the White House policy-making process.

Before Karl became known as "The Architect" of President Bush's 2000 and 2004 campaigns, he was president of Karl Rove + Company, an Austin-based public affairs firm that worked for Republican candidates, nonpartisan causes, and nonprofit groups. His clients included over 75 Republican U.S. Senate, Congressional and gubernatorial candidates in 24 states, as well as the Moderate Party of Sweden.

Karl writes a weekly op-ed for the Wall Street Journal, is a Newsweek columnist and is the author of the forthcoming book "Courage and Consequence" (Threshold Editions).

The damage extended beyond Mr. Bush's presidency. The attacks on Mr. Bush poisoned America's political discourse. Saying the commander-in-chief intentionally lied America into war is about the most serious accusation that can be leveled at a president. The charge was false—and it opened the way for politicians in both parties to move the debate from differences over issues into ad hominem attacks.

At the time, we in the Bush White House discussed responding but decided not to relitigate the past. That was wrong and my mistake: I should have insisted to the president that this was a dagger aimed at his administration's heart. What Democrats started seven years ago left us less united as a nation to confront foreign challenges and overcome America's enemies.

We know President Bush did not intentionally mislead the nation. Saddam Hussein was deposed and eventually hanged for his crimes. Iraq is a democracy and an ally instead of an enemy of America. Al Qaeda suffered tremendous blows in the "land between the two rivers." But Democrats lost more than the election in 2004. In telling lie after lie, week after week, many lost their honor and blackened their reputations.

Mr. Rove is the former senior adviser and deputy chief of staff to President George W. Bush.

Henry David Thoreau

Henry David Thoreau: Founding Father of American Libertarian Thought

Mises Daily: by

Henry  David Thoreau

[This article is transcribed from the Libertarian Tradition podcast episode "Henry David Thoreau."]

Henry David Thoreau was born David Henry Thoreau on July 12, 1817, in Concord, Massachusetts, a small country town about 20 miles northwest of Boston. Nancy Rosenblum of the Harvard University Department of Government writes in the "Introduction" to her very useful collection of Thoreau's political writings that Concord at this time was

newly opened to the railroad, to the poor Irish immigrants who built it, to southern slaves escaping by it, and to the growing national economy. John Thoreau's pencil-making business supported the family's modest middle-class household. Cynthia Thoreau was a founder of the Concord Female Anti-Slavery Society and a reformer. For many years she ran their home as a boarding house for reform-minded tenants and a haven for fugitive slaves and abolitionists escaping to Canada.

The way we pronounce the name "Thoreau" today, by the way — though it's closer to the name's French roots, is not what Thoreau himself and the other members of his family probably said. All sources agree that they put the emphasis on the first syllable of their name. According to some, they pronounced it like the word "thorough." According to others, they sounded the first "o" as it sounds in the words "more" and "store" — Thor′-o.

At any rate, young David Henry Thorough or Thor′-o went off to Harvard in 1833 at the age of 16. He graduated four years later, in 1837, at the age of 20, having taken a year off to teach grammar school in the small town of Canton, Massachusetts, around 15 miles southwest of Boston, probably to earn some money to help ease the burden on his parents, who were paying for his matriculation at Harvard.

When young Thoreau returned to Concord, he started signing himself Henry David Thoreau instead of David Henry Thoreau. He taught grammar school for a while and worked in his family's pencil business. During this time he became acquainted with Ralph Waldo Emerson, a former clergyman turned poet, essayist, and itinerant inspirational speaker, who also had income from a substantial inheritance that had come his way upon the death of his first wife.

Emerson had moved to Concord from Boston in 1834, when Thoreau was at Harvard. Virtually from the moment they first met in 1837, Emerson took a strong interest in the younger man, encouraging his writing, helping to arrange opportunities for publication, generally serving as a teacher and mentor. In 1841, when Thoreau was 24, Emerson invited him to come and live in his house. Thoreau would tutor the children, keep the family garden, and serve as Emerson's literary assistant, in return for his room and board and a small salary.

Thoreau accepted Emerson's offer, and though his tenure in Emerson's home was fairly brief — he moved on after two years — he never again worked at a regular job like schoolteacher or pencilmaker. Nathaniel Hawthorne, who met him in 1842 at Emerson's house, wrote that though Thoreau seemed highly intelligent and had a Harvard education in an era when few men had any more schooling than the local grammar school could provide them, "he has repudiated all regular modes of getting a living, and seems inclined to lead a sort of Indian life among civilized men — an Indian life, I mean, as respects the absence of any systematic effort for a livelihood."

What Thoreau really wanted to do was walk around the countryside, observing nature and making entries in his notebooks, which he would later write up in more finished form in his journal. As Nancy Rosenblum puts it, he liked "dividing his day between writing and walking the nearby fields and woods where he engaged in the systematic collection of botanical specimens and studies of temperature, ice, grasses, the succession of forests, and the dispersion of seeds." He wanted to lead the life of a naturalist, natural historian, and homespun philosopher.

"There were few things that he [Thoreau] could not do."
Robert Louis Stevenson

But this is not to say that he had no practical skills. Actually, he was a man of many skills. Not only could he teach school and make pencils and tutor children and garden and serve as a literary man's assistant, he could do all sorts of other work as well. As Robert Louis Stevenson put it in his 1880 essay on Thoreau, "there were few things that he could not do. He could make a house, a boat … or a book. He was a surveyor, a scholar," and "he could do most things with unusual perfection."

Van Wyck Brooks, in 1936 in his Pulitzer Prize-winning book The Flowering of New England, wrote of Thoreau that "there was nothing he could not do in the matter of painting and papering, building walls, repairing chicken-houses, pruning and grafting fruit-trees… [or] tinkering."

Emerson wrote of him in 1862, the year of his death, that

he could pace sixteen rods more accurately than another man could measure them with rod and chain. He could find his path in the woods at night, he said, better by his feet than his eyes. He could estimate the measure of a tree very well by his eyes; he could estimate the weight of a calf or a pig, like a dealer. From a box containing a bushel or more of loose pencils, he could take up with his hands fast enough just a dozen pencils at every grasp.

After he left Emerson's house in 1943 at the age of 26, Thoreau always made it clear that "he preferred, when he wanted money, earning it by some piece of manual labor agreeable to him, as building a boat or a fence, planting, grafting, surveying, or other short work, to any long engagement."

Surveying became his particular specialty. As Emerson noted,

his mathematical knowledge, and his habit of ascertaining the measures and distances of objects which interested him, the size of trees, the depth and extent of ponds and rivers, the height of mountains, and the air-line distance of his favorite summits, — this, and his intimate knowledge of the territory about Concord, made him drift into the profession of land-surveyor. It had the advantage for him that it led him continually into new and secluded grounds, and helped his studies of Nature. His accuracy and skill in this work were readily appreciated, and he found all the employment he wanted.

Not that Thoreau really wanted all that much employment. He estimated that it was necessary to work for money only six or seven weeks out of the year — one day a week on average — to support himself, if he lived frugally and wisely. Thoreau's doctrine, according to Van Wyck Brooks, was that "the order of things … should be reversed. The seventh should be man's day of toil, wherein to earn his living by the sweat of his brow; he should keep the rest of the week for his joy and wonder."

As we have seen, much of Thoreau's personal joy and wonder came from contemplation of nature. But nature wasn't his only source. There was also the world of books. Stevenson quotes him as preferring "books … in which each thought is of unusual daring," books "which … make us dangerous to existing institutions — such," Thoreau wrote, "I call good books."

Thoreau himself could certainly have been described as "dangerous to existing institutions." He stood, according to Emerson, for "abolition of slavery, abolition of tariffs, almost for abolition of government."

Yet where had Thoreau picked up such radical ideas in the first place? Wasn't it, at least in part, from Emerson himself? It was Emerson, after all, who wrote in 1833, when Thoreau was a teenage student at Harvard, that "a man contains all that is needful to his government within himself." It was Emerson who wrote in 1838, a year after meeting Thoreau and becoming his mentor and teacher, that

a man should be himself responsible, with goods, health, and life, for his behaviour; that he should not ask for the State's protection; should ask nothing of the State; should be himself a kingdom and a state; fearing no man; quite willing to use the opportunities and advantages that good government throw in his way, but nothing daunted, and not really the poorer if government, law, and order went by the board; because in himself reside infinite resources; because he is sure of himself, and never needs to ask another what in any crisis it behooves him to do.

It was Emerson who wrote in the early 1840s, when Thoreau, now in his mid-20s, was just beginning to publish, that "the less government we have the better — the fewer laws, and the less confided power," for "every actual State is corrupt. Good men must not obey the laws too well."

Still, as George Woodcock notes, in his classic 1962 work, Anarchism: A History of Libertarian Ideas and Movements, despite his periodic anarchistic outbursts, "one cannot regard Emerson as a complete anarchist. For him the state was a poor makeshift, but a makeshift that might be necessary until education and individual development had reached their goal in the production of the wise man." As Emerson himself put it, "to educate the wise man the State exists, and with the appearance of the wise man the State expires."

Thoreau is another kettle of fish altogether. As Woodcock writes, "Thoreau's condemnation of the state was more thorough, and in many other ways he fits more closely into the anarchist pattern than Emerson could ever do." Certainly the opening paragraph of his famous 1849 essay on "Civil Disobedience" signals a willingness to boldly go where Emerson had been a little too timid to tread. "I heartily accept the motto, 'That government is best which governs least,'" Thoreau wrote,

and I should like to see it acted up to more rapidly and systematically. Carried out, it finally amounts to this, which also I believe — "That government is best which governs not at all"; and when men are prepared for it, that will be the kind of government which they will have.

Government is at best but an expedient; but most governments are usually, and all governments are sometimes, inexpedient. The objections which have been brought against a standing army, and they are many and weighty, and deserve to prevail, may also at last be brought against a standing government.

Mises Academy

Of any standing government that did exist in any particular place, Thoreau argued, it was clear that "the authority of government … must have the sanction and consent of the governed. It can have no pure right over my person and property but what I concede to it." And Thoreau conceded nothing to any standing government. "I, Henry Thoreau," he wrote, "do not wish to be regarded as a member of any incorporated society which I have not joined." What he did wish to do he expressed simply and straightforwardly. "I simply wish to refuse allegiance to the State," he wrote, "to withdraw and stand aloof from it effectually."

And he believed that any truly legitimate State should be willing to tolerate such behavior. "There will never be a really free and enlightened State," he wrote,

until the State comes to recognize the individual as a higher and independent power, from which all its own power and authority are derived, and treats him accordingly. I please myself with imagining a State … which … would not think it inconsistent with its own repose if a few were to live aloof from it, not meddling with it, nor embraced by it.

What Thoreau was defending here, in 1849, was essentially the same concept the English philosopher Herbert Spencer defended two years later, in his book Social Statics, as "the right to ignore the State."

During the late 1840s and the 1850s, the biggest problem Thoreau had with the American State was that it would not ignore him — it would not leave him alone to ramble the local fields and woods, fill his notebooks and his journal pages, and work for money his one day a week. Instead it intervened in his life, insisting that he help it apprehend escaped slaves, if only by paying taxes to support the cost of this endeavor.

Even before these interventions began taking place, subsequent to the adoption of the fugitive slave law of 1850, Thoreau had not held the U.S. government in high esteem.

"This American government," he wrote,

never of itself furthered any enterprise, but by the alacrity with which it got out of its way. It does not keep the country free. It does not settle the West. It does not educate. The character inherent in the American people has done all that has been accomplished; and it would have done somewhat more, if the government had not sometimes got in its way.… Trade and commerce, if they were not made of india-rubber, would never manage to bounce over obstacles which legislators are continually putting in their way; and if one were to judge these men wholly by the effects of their actions and not partly by their intentions, they would deserve to be classed and punished with those mischievious persons who put obstructions on the railroads.

Thoreau posed and answered a rhetorical question.

How does it become a man to behave toward the American government today? I answer, that he cannot without disgrace be associated with it. I cannot for an instant recognize that political organization as my government which is the slave's government also.

After the adoption of a new, strengthened fugitive-slave law in 1850, however, Thoreau's contempt for the US government rose to a new height. And his contempt for the state government of Massachusetts grew as well. In an effort to block local cooperation with the new federal law, Massachusetts had adopted an ordinance of its own officially denying state officials the authority to "detain or aid in the … detention," anywhere within the state, "of any person, for the reason that he is claimed as a fugitive slave." But in 1851 and again in 1854, black citizens of Massachusetts were arrested and returned to their "owners," and the state government did nothing to prevent this injustice.

"I had thought," Thoreau wrote in his 1854 essay, "Slavery in Massachusetts," that

the Governor was, in some sense, the executive officer of the State; that it was his business, as a Governor, to see that the laws of the State were executed; while, as a man, he took care that he did not, by so doing, break the laws of humanity; but when there is any special important use for him, he is useless, or worse than useless, and permits the laws of the State to go unexecuted.


the whole military force of the State is at the service of a Mr. Suttle, a slaveholder from Virginia, to enable him to catch a man whom he calls his property; but not a soldier is offered to save a citizen of Massachusetts from being kidnapped!

The governor who permitted this, Thoreau thundered, "was no Governor of mine. He did not govern me."

Not surprisingly, the whole affair prompted Thoreau to think in greater depth about the question of whether it was worthwhile to have such a person as a governor in the first place. He concluded, again unsurprisingly, that "I think that I could manage to get along without one. If he is not of the least use to prevent my being kidnapped, pray of what important use is he likely to be to me?"

Thoreau never lived to see the end of chattel slavery in the United States. He had contracted tuberculosis during his Harvard years, and it had killed him by April of 1862. He didn't quite make it to his 45th birthday. He died a few months before Abraham Lincoln's Emancipation Proclamation and a little more than three years before the adoption of the Thirteenth Amendment.

His published work mostly reflects his interest in nature and natural history and his tendency to reflect on the larger implications of everyday rural life. His body of writing on political matters makes up a relatively small portion of his total production.

But, arguably, it is that political writing that is primarily responsible for his enduring reputation. It has assured that he is much, much more famous today than he ever was in the years of his lifetime. It has assured that generations of American students have known that the great writer, great naturalist, and great advocate of self-reliant individualism, Henry David Thoreau, is also one of the founding fathers of American libertarian thought.

Classical-Liberal Exploitation Theory

Classical-Liberal Exploitation Theory

Mises Daily: by

[The original version of this paper was delivered at the Second Annual Libertarian Scholars' Conference, New York City, October 26, 1974, as a response to a paper by Leonard Liggio.]

In the popular academic mind, the doctrine of class conflict seems to be inextricably linked to the particular Marxist version of the idea. Lip service is often paid — especially by those eager to diminish the claims to originality of Marx and Engels — to the fact that these writers had precursors in this approach to social reality.

Frequently a certain "French school," preceding Marx and Engels and influencing their views, is alluded to; Guizot, Thierry, Saint-Simon, and a few others are sometimes mentioned in this connection. But what that earlier perspective consisted in, and how it might differ from the more familiar Marxist model, is rarely if ever broached. And yet this earlier view is not only more correct and faithful to socioeconomic reality than the Marxist version (a point which must be assumed here, since there is no space to demonstrate it) but may well account for a discrepancy and contradiction within Marxism that has been noticed and commented upon but never explained.

When Marx says that the bourgeoisie is the main exploiting and parasitic class in modern society, "bourgeoisie" may be understood in two different ways. In England and the United States, it has tended to suggest the class of capitalists and entrepreneurs that makes its living by buying and selling on the (more or less) free market. The mechanism of this exploitation would involve the classical Marxist conceptual apparatus of the labor theory of value, the appropriation of surplus value by the employer, and so on.

On the Continent, however, the term "bourgeoisie" has no such necessary connection with the market. It can just as easily mean the class of "civil servants" and rentiers off the public debt as the class of businessmen involved in the process of social production.[1] That these former classes and their allies are engaged in the systematic exploitation of society was a commonplace of 19th-century social thought, somehow mysteriously lost sight of as these same classes have risen to greater prominence in the English-speaking nations.

Tocqueville, for instance, in his Recollections, states of "the middle-class," which historians tell us came to power in 1830 under the "bourgeois monarchy" of Louis Philippe: "It entrenched itself in every vacant place, prodigiously augmented the number of places and accustomed itself to live almost as much upon the Treasury as upon its own industry."[2] Similar statements can be found in many later writers, such as Gustave Le Bon and Hippolyte Taine.

Now, the reader is invited to consider the following longish quotation (the description is of France in the third quarter of the 19th century):

This executive power, with its enormous bureaucracy and military organization, with its ingenious state machinery, embracing wide strata, with a host of officials numbering half a million, besides an army of another half million, this appalling parasitic body, which enmeshes the body of French society like a net and chokes all its pores, sprang up in the days of the absolute monarchy. The Legitimist monarchy and the July monarchy added nothing but a greater division of labor, growing in the same measure as the division of labor within bourgeois society created new groups of interests, and therefore new material for state administration. Every common interest was straightway severed from society, counterposed to it as a higher general interest, snatched from the activity of society's members themselves and made an object of government activity, from a bridge, a schoolhouse and the communal property of a village community to the railways, the national wealth and the national university of France…. All revolutions perfected this machine instead of smashing it. The parties that contended in turn for domination regarded the possession of this huge state edifice as the principal spoils of the victor … under the second Bonaparte [Napoleon III] … the state [seems] to have made itself completely independent. As against civil society, the state machine has consolidated its position … thoroughly.[3]

This long quotation is from Marx's pamphlet, The Eighteenth Brumaire of Louis Bonaparte, dealing with Louis Napoleon's coup d'état of December 1851. I think the contrast between the viewpoint presented here and the more customary Marxist view of the state as a weapon to enforce extrapolitical, economic exploitation — of the state as merely "the executive committee of the ruling class" — is evident. And this statement by no means stands alone in the corpus of Marxism: In The Civil War in France, Marx touches on the same perspective, when he speaks, for instance, of the Paris Commune's aiming at restoring "to the social body all the forces hitherto absorbed by the State parasite feeding upon, and clogging the free movement of society."[4] And Engels, in his 1891 preface to The Civil War in France, expresses himself in absolutely unambiguous terms:

Society had created its own organs to look after its common interests…. But these organs, at whose head was the state power, had in the course of time, in pursuance of their own special interests, transformed themselves from the servants of society into the masters of society…. Nowhere do "politicians" form a more separate and powerful section of the nation than precisely in North America [i.e., the United States]. There, each of the two major parties which alternately succeed each other in power is itself in turn controlled by people who make a business of politics…. It is in America that we see best how there takes place this process of the state power making itself independent in relation to society … we find two great gangs of political speculators, who alternately take possession of the state power and exploit it by the most corrupt means and for the most corrupt ends — the nation is powerless against these two great cartels of politicians who are ostensibly its servants, but in reality dominate and plunder it.[5]

We may in passing take note of the beautiful irony of the fact that, unlike a libertarian analysis of the period of American history under discussion, Engels's analysis here completely ignores the massive use of state power by segments of the capitalist class, and limits itself to the exploitative activities of those directly in control of the state apparatus. Why Engels should care to whitewash the capitalists in this way, I really cannot say.

It seems, therefore, that there are two theories of the state (as well as, correspondingly, two theories of exploitation) within Marxism. There is the customarily discussed and very familiar one, of the state as the instrument of the ruling class (and the concomitant theory which locates exploitation within the production process). And there is the theory of the state which pits it against "society" and "nation" (two surprising and significant terms to find in this context in writers who were supremely conscious of the class divisions within society and the nation). Moreover, it would seem suggestive that it is the second theory that predominates in those writings of Marx which, because of their nuanced and sophisticated treatment of concrete and immediate political reality, many commentators have found to be the best expositions of the Marxist historical analysis.

Now, although it would be difficult to demonstrate, it appears highly probable that the second theory of the state (linking it with parasitism and exploitation) must surely have been influenced by the classical-liberal writers. The view that exploitation of and parasitism upon society were attributes of the nonmarket classes, of the classes that stood outside of the production process, was a very widespread one in the early and middle 19th century. It is the basis of Saint-Simon's famous Parable (itself a residue from earlier liberal influences on that writer). It is the real meaning, it seems to me, of the celebrated typology of "military" vs. "industrial" societies — a typology founded on the distinction between market and nonmarket forces. (This dichotomy was employed by both Auguste Comte and Herbert Spencer — often considered the founders of sociology — and in different terms, and earlier, by Benjamin Constant.[6])

The degree to which one finds the concepts of classes and class conflict used in this sense in 18th- and 19th-century liberalism, once one looks for it, is astonishing. To take two examples: this is clearly what Tom Paine is talking about in The Rights of Man, when he speaks of governments making war in order to increase expenditures; and what William Cobbett is getting at when he terms gold the poor man's money, since inflation is a device utilized by certain knowledgeable and influential financial circles.

These concepts, in particular, permeate the writings of Richard Cobden and John Bright, who conceived of themselves as waging a struggle on behalf of the producing classes of Britain against the aristocracy, which supported expansive government. Of the Anti-Corn Law agitation, Bright said: "I doubt that it can have any other character [than that of] … a war of classes. I believe this to be a movement of the commercial and industrial classes against the Lords and the great proprietors of the soil."[7] The "tax-eating" vs. the "tax-paying" class was a contrast which Bright especially was fond of using. Both men saw class-conflict everywhere in the Britain — and Ireland — of their time: in protectionism and monopolization of land, of course, but also in such policies as heavy taxes on newsprint, Church tithes, and limitation of the franchise, and most particularly in expenditures for war preparation and in a belligerent foreign policy and imperialism. As Bright put it:

The more you examine the matter the more you will come to the conclusion which I have arrived at, that this foreign policy, this regard for "the liberties of Europe," this care at one time for "the Protestant interests," this excessive love for the "balance of power," is neither more nor less than a gigantic system of out-door relief for the aristocracy of Great Britain."[8]

Later in the century, Bright identified other classes as the promoters of imperialism. In the case of the British occupation of Egypt in 1882, Bright (who resigned from the cabinet on account of it) believed that the City of London (i.e., financial interests) were at work, and, according to his biographer, "he did not think that we ought to involve ourselves in a series of wars to collect the debts of bondholders or find new lands for commercial exploitation."[9] He agreed with his friend Goldwin Smith, the classical-liberal historian and anti-imperialist, who wrote him that it was simply a "stock-jobbers' war."[10] This was long after Cobden had died, but the latter would doubtless have agreed. He once wrote: "We shall offer no excuses for so frequently resolving questions of state policy into matters of pecuniary calculation. Nearly all the revolutions and great changes in the modern world have a financial origin."[11]

Reading passages such as these, one wonders how the contemporary social scientist — bereft of the libertarian theory of class conflict — would have to interpret such views. The analysis would have to be that there are "unexpected Marxian elements" present even in the thought of leading liberals. Or, more probably, in view of the Manchesterites having looked askance at the influence of financial interest on government policy, there would be an analysis along the lines of "early petty-bourgeois proto-Fascism"!

In this connection we should consider the changeover of certain French liberals — such as Charles Dunoyer — from Anglomania to Anglophobia. This transformation, mentioned by Professor Liggio, is very interesting when counterposed to the Manchester School's perception of British society, foreign policy, and imperialism. Cobden and Bright were harping critics of the status quo in Britain and Ireland, constant naggers, especially of those who ran the foreign affairs of the country. (Bright has the great line: "What are we to say of a nation which lives under the perpetual delusion that it is about to be attacked?"[12])

Contemporary conservative poseurs would unquestionably agree with the founder of their breed, Benjamin Disraeli, that the men of Manchester were simply not fun-people. Rather, they were incessant complainers who found themselves unable just to sit back and enjoy the fantasies and tinsel-symbols of British world power (the ability to enjoy society as it is, a well-known American conservative publicist informs us, is a chief hallmark of the conservative mind). Cobden, Bright and their allies were, on the contrary, engaged in a deadly serious, ongoing, and deeply radical critique of British society and Britain's world-role. The following, for instance, is a typical example of Cobden's attitude toward that role:

The peace party … will never rouse the conscience of the people so long as they allow them to indulge the comforting delusion that they have been a peace-loving people. We have been the most combative and aggressive community that has existed since the days of the Roman dominion. Since the Revolution of 1688 we have expended more than 15 hundred millions of money upon wars, not one of which has been upon our own shores, or in defense of our hearths and homes.[13]

Cobden speaks of "our insatiable love of territorial aggrandizement," of the fact that "in the insolence of our might, and without waiting for the assaults of envious enemies, we have sallied forth in search of conquest or rapine, and carried bloodshed into every quarter of the globe."[14] In a pamphlet with the really beautiful title, "How Wars Are Got Up in India," (as Paul Goodman said of Wilhelm Reich's The Function of the Orgasm, it is a classic even by virtue of its title alone), Cobden warns that England must make "timely atonement and reparation" and "put an end to the deeds of violence and injustice which have marked every step of our progress in India," or else face the inevitable providential "punishment for imperial crimes."[15]

There would be those, one supposes, who would want to speak of a certain "masochism" and "self-flagellation" in these descriptions of the policies pursued by the ruling class of his own country; but that would be peculiarly out of place with such a vigorous and enormously vital personality as Richard Cobden.

(There is, incidentally, a direct line of analysis of the evils and the class-character of imperialism, running from Cobden and Bright through J.A. Hobson — who wrote an interesting exposition of Cobden's foreign policy views, Richard Cobden: International Man — to Lenin, who, as is well known, was heavily influenced by Hobson; and this genealogy of ideas certainly merits being closely examined by some libertarian scholar.)

"What are we to say of a nation which lives under the perpetual delusion that it is about to be attacked?"
– John Bright

Now, Hayek says somewhere that a writer's attitude toward England can be taken as highly indicative of his liberalism: if he was pro-English, it is likely that he was friendly to liberalism and the open society; if anti-English, then the reverse. But in light of the "anti-English" attitude of the Manchesterites, one would have to qualify this in an important respect — i.e., there would be a basis for "Anglophobia," grounded, not in opposition to the relative liberalism of England, but to its persisting aristocratic and imperialistic government throughout the 19th century.

Thus, I think that Professor Liggio has performed a very valuable service in directing attention to a formative place and period of the classical-liberal exploitation theory: France during the Restoration and the July Monarchy, and particularly to the thought of Charles Comte and Dunoyer. (Of Charles Comte, a writer as knowledgeable in the history of sociology as Stanislav Andreski has said that he is "one of the great founders of sociology, unjustly overshadowed by his namesake Auguste."[16])

The period was one of great richness of political and sociological speculation, well reflected in the paper we have just heard. The three great currents of modern political thought — the primary colors from which virtually every political position thereafter may be composed — are already clearly delineated: conservatism and the various schools of socialism, with their frequently overlapping critiques of the emerging capitalist order, and individualist liberalism, equidistant from both of the first two. (The influence of theocratic conservatives like de Maistre on the thinking of Saint-Simon, and of the Saint-Simonians and Auguste Comte, is well known.)

A number of Professor Liggio's points regarding the interconnections among these three currents are very illuminating and stimulating: for instance, in regards to the inner, political meaning of Say's law of markets, and the significance of the facts that the Saint-Simonian "pope," Enfantin, supported Ricardo as against Say on this subject; or Dunoyer's attack on Saint-Simon's intellectual authoritarianism on grounds that are usually associated with Mill's On Liberty, which, of course, came substantially later. A few remarks are in order concerning another topic, viz., Dunoyer's argument with Benjamin Constant on the "enervating" effects of a developing and increasingly sophisticated civilization.

What is involved here in Constant's thought is a confrontation among the ideas of liberalism, romanticism, and utilitarianism. Briefly, Constant's view (not exclusively, but most of the time) is this: the predominance of the commercial or industrial spirit over the military spirit or the spirit of conquest implies a relatively prosperous state of society, that is to say, a state where pleasure and creature comforts will be augmented and more widely distributed than ever before.

In fact, this is presumably the utilitarian ideal. Now, such a state will in the long run tend to militate against the free society, because the defense of freedom will frequently require sacrifices on the part of the individual, sometimes even the risk of losing one's life against an armed tyrant. But the willingness to sacrifice one's pleasures or to risk one's life for a superindividual cause is a trait associated with earlier and more primitive forms of society. Thus, there is a certain inner contradiction in the free society, which can only be compensated for by bringing into play antiutilitarian forces, such as religious faith (this was practically a lifelong study of Constant's).[17]

Constant's "critique'' of civilization also has a nonpolitical aspect: he tended to identify civilization with sophisticated intellectuality, with the spirit of the 18th century and the Enlightenment. This was the milieu in which he was reared, and like many intellectuals, especially those touched by Rousseau's Romanticism, he was sick of it, and sick of the part of himself that reflected that spirit. It had the effect, he thought, of excluding spontaneous feelings, real warmth of affection and human closeness, substituting a shallow brilliance and perfection of outward, artificial social graces. Heroism and poetry were annihilated by Voltairean irony and skepticism, he believed, and were more likely to be found in earlier and more primitive societies — he was a great lover of ancient Greece — than in more complex ones.

Tocqueville, incidentally, built on both of these notions of Constant's — the problem of the compatibility of utilitarianism and the free society, and the mediocrity of modern life — and helped to spread them.[18] The second idea, particularly, has become very widely shared; it is, for example, the kernel of Max Weber's concept of the increasing routinization and bureaucratization of the modern world; and Irving Kristol seems to be making a reputation for himself by bringing a few of Constant's and Tocqueville's ideas somewhat up to date and presenting them to those who have never read Democracy in America.

Lastly, Professor Liggio performs a great scholarly service by continuing to mine the rich vein of classical-liberal social theory, in so many respects so disgracefully neglected by establishment academics. We ourselves having witnessed the shabby treatment meted out to the great Mises — based on the almost universal assumption that a Galbraith, a Harold Laski, or even a Walter Lippmann was a more significant social philosopher — have some idea why the establishment should act as if Saint-Simon or Auguste Comte had infinitely more to tell us about how society works than did Charles Comte, Benjamin Constant, or Jean-Baptiste Say. The kind of work represented by Professor Liggio's paper will help redress the balance.

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