We detour a tad with this sketch. Our intent has been to highlight near-to-intermediate term FI strategy (2 – 4 weeks) - spreads within or between the US, UK and E-Z. However, we have offered very little of that recently. There are major wildcards, at least to us and every one birthed in Brussels; with but few exceptions we have been on the sidelines.
With this piece we switch gears and look instead to a potentially profound change within our electorate, an awakening of sorts and the implications for the US economy.
Let us begin by borrowing from Stephen Moore, a member of the WSJ’s editorial board and his Aug/1 sketch on Milton Friedman. “In the early 1990s, Friedman visited poverty-stricken Mexico City for a Cato Institute forum. I remember the swirling controversy ginned up by the media and Mexico's intelligentsia: How dare this apostle of free-market economics be given a public forum to speak to Mexican citizens about his ‘outdated’ ideas? Yet when Milton arrived in Mexico he received a hero's welcome as thousands of business owners, students and citizen activists hungry for his message encircled him everywhere he went, much like crowds for a modern rock star.”
Yes, Friedman, Hayek and some others are indeed rock stars to those of us who understand that the only way for the masses to do well is to embrace capitalism and free trade, to those of us who understand that during the period between 1980 and 2000, that time that Harvard’s Andrei Shleifer describes in The Age of Milton Friedman as an era “that witnessed remarkable progress of mankind..when the world embraced free-market policies, living standards rose sharply while life expectancy, educational attainment and democracy improved and absolute poverty decline,” that well over 200 million were liberated from poverty thanks to the rediscovery of the free market.
How could this be? In the early 60’s when Galbraith was ambassador to India and found that Friedman was about to lecture there, the almost always wrong but still witty Galbraith wrote, “I can think of nowhere your free-market ideas can do less harm than in India.” And yet India embraced Friedmanism in the 90’s and we all know the result.
What is it exactly that is working here? To understand, let us look to Friedrich Hayek.
From Hayek’s The Road to Serfdom: “Nothing distinguishes more clearly conditions in a free country from those in a country under arbitrary government than the observance in the former of the great principles known as the Rule of Law. Stripped of all technicalities, this means that government in all its actions is bound by rules fixed and announced beforehand—rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge.”
This single paragraph explains the failure of Obama’s experiment.
From a recent piece by John Taylor we learn that, “Hayek traced this idea through the ages—first to Aristotle, then to Cicero, about whom Hayek wrote: ‘No other author shows more clearly . . . that freedom is dependent upon certain attributes of the law, its generality and certainty, and the restrictions it places on the discretion of authority.’ Hayek also cited John Locke, who wrote that the purpose of the law was ‘not to abolish or restrain, but to preserve and enlarge freedom. . . . Where there is no law, there is no freedom.’ Finally, Hayek pointed to James Madison and other American statesmen who put these ideas into practice in a new nation. These thinkers distrusted government officials as protectors of freedom; the rule of law, they believed, was more reliable.”
Key, our view, is to realize that there is a morality to capitalism, to free markets that is lacking in a system of economic planning. It takes some reflection to understand why the politics of government gifting to certain segments of society while penalizing others always proves corrosive (except for tyrants) and that a rule-based system of free exchange founded on the rule of law, does not.
Indeed, we need not wonder why the US economy did so well in the 80’s and 90’s – flagrant government interventionism was abolished and so was gimmick-based central bank policy. We moved back to our founding principles – a rule-based framework. The boundaries were set. Stimulus programs were out and permanent tax reform was in. And potential employers did not have to worry about a shotgun approach to regulations that might for example greatly increase their costs / employee, two years ahead (obamacare). They knew up front and could go about the planning exercise confident the rule book would not change mid game.
Now, in the hands of a radical who, granted, may not be an outright socialist (gov’t ownership) but is clearly a statist (gov’t control), one with a peculiar distaste for the almost everything the Founders championed, we are beginning to make the worst of Europe look mild in comparison.
This brings us to the choice of Ryan as Romney’s vp candidate. Ryan is well versed in those principles that Hayek, Von Misses and Friedman championed but unlike many others including Romney, Ryan has actually shown the ability to articulate these dynamics to the masses. It is not an easy sell; gov’t largess seems on the surface to be the soft and fuzzy, easy way out. We think Ryan can convince just enough that this is bunk, to get the job done in November. If we are right, we will witness the firing of the American engine which has sat idle past years.
Robert Craven
Addendum: Glenn Hubbard, Columbia Business School dean and Romney adviser, recently laid out the specifics of Romney’s economic plan, as summarized in a Kudlow article: “The plan would lower the spending share of GDP to 20 percent from 24 percent by 2016, which is probably the largest proposed spending cut ever. The cumulative net savings of that cut could be a whopping $1.8 trillion, which not only would finance huge deficit reduction, but also would help pay for Romney’s pro-growth tax reform: a supply-side, across-the-board 20 percent personal-tax-rate reduction, a limit or end to various tax deductions for upper-income payers, and a dramatically reduced corporate tax rate, from 35 percent to 25 percent -- perhaps the most powerful growth stimulant of all. Rounding out the economic program is a regulatory rollback, entitlement, trade, education, and energy reform, and a sound monetary policy (replacing Bernanke at the Fed).”
With this piece we switch gears and look instead to a potentially profound change within our electorate, an awakening of sorts and the implications for the US economy.
Let us begin by borrowing from Stephen Moore, a member of the WSJ’s editorial board and his Aug/1 sketch on Milton Friedman. “In the early 1990s, Friedman visited poverty-stricken Mexico City for a Cato Institute forum. I remember the swirling controversy ginned up by the media and Mexico's intelligentsia: How dare this apostle of free-market economics be given a public forum to speak to Mexican citizens about his ‘outdated’ ideas? Yet when Milton arrived in Mexico he received a hero's welcome as thousands of business owners, students and citizen activists hungry for his message encircled him everywhere he went, much like crowds for a modern rock star.”
Yes, Friedman, Hayek and some others are indeed rock stars to those of us who understand that the only way for the masses to do well is to embrace capitalism and free trade, to those of us who understand that during the period between 1980 and 2000, that time that Harvard’s Andrei Shleifer describes in The Age of Milton Friedman as an era “that witnessed remarkable progress of mankind..when the world embraced free-market policies, living standards rose sharply while life expectancy, educational attainment and democracy improved and absolute poverty decline,” that well over 200 million were liberated from poverty thanks to the rediscovery of the free market.
How could this be? In the early 60’s when Galbraith was ambassador to India and found that Friedman was about to lecture there, the almost always wrong but still witty Galbraith wrote, “I can think of nowhere your free-market ideas can do less harm than in India.” And yet India embraced Friedmanism in the 90’s and we all know the result.
What is it exactly that is working here? To understand, let us look to Friedrich Hayek.
From Hayek’s The Road to Serfdom: “Nothing distinguishes more clearly conditions in a free country from those in a country under arbitrary government than the observance in the former of the great principles known as the Rule of Law. Stripped of all technicalities, this means that government in all its actions is bound by rules fixed and announced beforehand—rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge.”
This single paragraph explains the failure of Obama’s experiment.
From a recent piece by John Taylor we learn that, “Hayek traced this idea through the ages—first to Aristotle, then to Cicero, about whom Hayek wrote: ‘No other author shows more clearly . . . that freedom is dependent upon certain attributes of the law, its generality and certainty, and the restrictions it places on the discretion of authority.’ Hayek also cited John Locke, who wrote that the purpose of the law was ‘not to abolish or restrain, but to preserve and enlarge freedom. . . . Where there is no law, there is no freedom.’ Finally, Hayek pointed to James Madison and other American statesmen who put these ideas into practice in a new nation. These thinkers distrusted government officials as protectors of freedom; the rule of law, they believed, was more reliable.”
Key, our view, is to realize that there is a morality to capitalism, to free markets that is lacking in a system of economic planning. It takes some reflection to understand why the politics of government gifting to certain segments of society while penalizing others always proves corrosive (except for tyrants) and that a rule-based system of free exchange founded on the rule of law, does not.
Indeed, we need not wonder why the US economy did so well in the 80’s and 90’s – flagrant government interventionism was abolished and so was gimmick-based central bank policy. We moved back to our founding principles – a rule-based framework. The boundaries were set. Stimulus programs were out and permanent tax reform was in. And potential employers did not have to worry about a shotgun approach to regulations that might for example greatly increase their costs / employee, two years ahead (obamacare). They knew up front and could go about the planning exercise confident the rule book would not change mid game.
Now, in the hands of a radical who, granted, may not be an outright socialist (gov’t ownership) but is clearly a statist (gov’t control), one with a peculiar distaste for the almost everything the Founders championed, we are beginning to make the worst of Europe look mild in comparison.
This brings us to the choice of Ryan as Romney’s vp candidate. Ryan is well versed in those principles that Hayek, Von Misses and Friedman championed but unlike many others including Romney, Ryan has actually shown the ability to articulate these dynamics to the masses. It is not an easy sell; gov’t largess seems on the surface to be the soft and fuzzy, easy way out. We think Ryan can convince just enough that this is bunk, to get the job done in November. If we are right, we will witness the firing of the American engine which has sat idle past years.
Robert Craven
Addendum: Glenn Hubbard, Columbia Business School dean and Romney adviser, recently laid out the specifics of Romney’s economic plan, as summarized in a Kudlow article: “The plan would lower the spending share of GDP to 20 percent from 24 percent by 2016, which is probably the largest proposed spending cut ever. The cumulative net savings of that cut could be a whopping $1.8 trillion, which not only would finance huge deficit reduction, but also would help pay for Romney’s pro-growth tax reform: a supply-side, across-the-board 20 percent personal-tax-rate reduction, a limit or end to various tax deductions for upper-income payers, and a dramatically reduced corporate tax rate, from 35 percent to 25 percent -- perhaps the most powerful growth stimulant of all. Rounding out the economic program is a regulatory rollback, entitlement, trade, education, and energy reform, and a sound monetary policy (replacing Bernanke at the Fed).”
