Streetwise Professor

Reading this article about Fannie Mae and Freddie Mac reminds me of a horror film cliche: the return of the monster from the dead.  Godzilla.  Frankenstein.  Dracula:

In the last six weeks alone, the Obama administration has essentially transformed Fannie Mae and Freddie Mac into arms of the federal government. Regulators have ordered the companies to oversee a vast new mortgage modification program, to buy greater numbers of loans, to refinance millions of at-risk homeowners and to loosen internal policies so they can work with more questionable borrowers.

These are companies that should have been euthanized.  No, let me correct that.  They should have been terminated with extreme prejudice.  Instead they are being revived, and pushed into doing the kinds of things that created the financial crisis in the first place.  (Not that I am putting the entire onus of the financial crisis on F&F, just that buying huge quantities of loans, loosening standards to permit working with questionable borrowers, etc. were the kinds of banking practice that lay at the root of the crisis.)  As I said in Neo Soviet Economics, the housing market and housing finance need to contract.  Substantially.  But instead, driven by political considerations, we are reinforcing failure, and repeating the mistakes that got us here in the first place.  

Not that this should be a surprise.  These programs and practices arose in the first place in large part because there was political support for them.  The main political supporters have increased in power, and the opponents have declined in power.  So, here we go again.

And the usual suspects are there, front and center:

Moreover, the takeover has provided legislators with a long-sought ability to influence the mortgage marketplace directly and pursue social goals like low-income housing.

“There is a commitment to restructure these companies, and we are going to want to retain a hand in the things that matter, like affordable housing and making sure that the housing economy doesn’t become a threat to the entire economy again,” said Representative  Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee. “Some of what these companies did will be returned to the private sector, and some of it is going to remain with a public entity.”

I like the way good ol’ Barney includes two mutually incompatible goals in the same clause: “affordable housing and making sure the housing economy doesn’t become a threat to the entire economy.”  Given that the policies intended to make “housing affordable” also made a great contribution to the threat to the entire economy, just how does one do that?  (And, by the way, these affordable housing policies induced people to buy houses they couldn’t afford and now need government assistance–from F&F–to stay in.  What a country!)  Somebody once said that genius is the ability to hold two mutually incompatible thoughts in mind at the same time.  By that standard, Barney Frank is Einstein.  (Anybody know who uttered that quote?)

Warnings about the extremely dangerous implications of politicized lending are starting to be voiced, but by the politically marginal:

Most important, by taking over the companies, lawmakers have gained a lever over the housing market and national economy that many — particularly Democrats — are loath to discard, legislators say.

“Once government gets a new tool, it’s virtually impossible to take it away,” said Representative Scott Garrett, a Republican of New Jersey and member of the Financial Services banking subcommittee. “And Fannie and Freddie are now tools of the government.”

. . . .

Republican lawmakers — many of whom believe the federal government should not be involved in the mortgage business at all — have signaled they will try to end the government’s involvement with Fannie and Freddie, even as they acknowledge that effort is likely to fail.

And lawmakers of all stripes are quietly voicing worries that government involvement in the mortgage industry could lead to the very problems that caused the current crisis.

“When you use mortgage companies for political purposes, such as helping low-income borrowers or expanding homeownership, you make bad economic decisions,” said Mr. Garrett, the Republican congressman. “And bad economic decisions are why we’re in this trouble right now.”

Damn right.  Not that it matters.  Not with Barney-the-dinosaur (but not the purple one) in charge.

The expansion of government authority over other financial institutions, such as Citi, and perhaps other large banks, will only exacerbate these problems.  Look to the UK, and you see the government making Northern Rock dance to its tune, and like Fannie and Freddie, return to the bad habits that put it in government hands in the first place.  

What’s more, this politicization of these large financial institutions makes their continued reliance on the government inevitable.  Soft budget constraints are addictive.  More bad loans will pile up, making these firms even less able to survive in the marketplace without government assistance.  Such assistance is like a Roach Motel–you can get in, but you can’t get out.  

But to Barney and the gang, this probably looks like a feature, not a bug.

The Guardian has an extended article on a subject currently being debated on another thread: Kremlin infighting:

Russia’s financial crisis is beginning to destabilise the delicate Kremlin power balance, with a struggle between rival clans eroding  Vladimir Putin‘s authority and aggravating his relationship with his protege, President Dmitry Medvedev.

There are growing signs that a powerful group of military and security officials grouped around Putin are locking horns with economic liberals headed by Medvedev as the two groups fight for control of rapidly evaporating state finances.

Medvedev marked the first anniversary of his election victory yesterday, but the triumphalism has long since dissipated.

Russia has been hit hard by the global crisis, with the stockmarket down almost 80% from its peak, and the rouble sliding fast. Russia’s top 10 billionaires alone lost an estimated $150bn last year.

The sudden evaporation of Russia’s newfound wealth has set the two Kremlin cliques on a collision course and put Putin – now prime minister – in an awkward position. As a former KGB agent he is heavily identified with the security group, known as the siloviki, but he also has strong personal loyalty to a small clique of liberals from his home town of St Petersburg.

Experts say Putin is losing status as he attempts to contain conflict between the factions. Cracks are appearing in his relationship with Medvedev.

“Putin used to act as an arbiter standing above the two main clans – the siloviki and the rational economists,” said Dmitry Oreshkin, a leading political analyst. “Now he’s been dragged down into the fight and he’s under fire from both sides. The siloviki say he’s a weakling incapable of imposing his will and showing the economists their place, while the economists in turn are consolidating around Medvedev.”

Medvedev, handpicked by Putin from among loyal acolytes as a successor, has begun to issue muffled criticism of his mentor, leading some to believe that he may be enjoying the trappings of power and be prepared to flex his political muscle.

At a recent meeting with economic officials Medvedev said responses to the financial crisis – set by Putin as head of government – were “unacceptably slow” and instead of action on promised reforms there had been only “talking and talking”.

Last month Igor Yurgens, director of the Institute of Contemporary Development, a new thinktank created by Medvedev, criticised Putin for restricting press freedom and stressed that “the most honest and independent opinions on Russia’s problems are coming from the liberal wing, rather than from the so-called statist patriots”.

“Medvedev has got the whiff of power in his nose and he likes it,” said Mikhail Delyagin, an analyst and former government adviser on economic policy. “He’s given tacit approval for his administration to engage in an information war with Putin’s apparatus.”

The man at the centre of the Kremlin power struggle is the finance minister, Alexei Kudrin, who has warned the siloviki and the private corporations in which they have strong interests that the state is limiting financial rescue packages for big business.

“The siloviki have been used to sharing out the spoils of the state,” said Delyagin. “They want to get rid of Kudrin because he holds the purse strings and he’s not giving them any cash.”

An $18m corruption investigation into the finance minister’s deputy was renewed three weeks ago in a thinly veiled attack on his boss by the siloviki. For Putin, the problem is that Kudrin – who yesterday admitted mistakes in handling the financial crisis – is one of his deputies and an old ally from his St Petersburg days. [Emphasis mine.]

In some respects, we are back in the old days, practicing Kremlinology.  We don’t know for certain what is going on under the carpets, as it were.  But there is no doubting that there are factions, and that the disputes between them are becoming increasingly public.  Objectively, the conditions are ripe for conflict; an opaque state, heavy with representation from the security services, with awesome power and little accountability, built on dividing the spoils from natural resource rents facing a stunning drop in those rents.  Cooperation in these rent sharing arrangements is most likely when time horizons are long, but such time horizons are sharply truncated when economic collapse is a realistic prospect.  This encourages conflict, and a devil-take-the-hindmost approach.  The very prospect for such conflict can, moreover, precipitate the collapse.  Put differently, there is a positive feedback mechanism in such systems that makes them acutely vulnerable to precipitous collapse.

Not that this should put cheer in anybody’s heart.  As Oreshkin says (in something I quoted in yesterday’s post), the likely outcome of such a development is “armed pluralism.” A very chilling euphemism, that.

And admits mistakes were made:

The Russian government overspent its vast oil revenues in recent years, fueling inflation, and did not do enough to reduce the economy’s reliance on oil, Finance Minister Alexei Kudrin said in an exclusive CNN interview.

“Of course, I too bear the responsibility for not managing to diversify the economy as much as we wanted,” Kudrin said. “We were spending more money than we could afford, which is why we had a rapid strengthening of the national currency [and] a high inflation rate.

“I think the government should have been more conservative in its financial policy and save more money that it received from the high global oil prices,” he said.

It is interesting, though, to look carefully at what mistakes Kudrin identifies.  This interview is really a shot at  Vladimir Yakunin and Yuri Luzhkov.  Those fierce Kudrin critics have argued that the Finance Minister was too stingy, and that rather than banking oil revenues, the government should have spent more on infrastructure, construction, etc.  Kudrin in effect responds that his only mistake was that he spent too much.  

An interesting glimpse at the infighting and recriminations currently going on between various factions in Putin’s Russia.

Speaking of Yakunin, and infighting, his Russian Railways is cutting back on infrastructure spending:

Plans to develop Russia’s railway system have been put into question as the government focuses on measures to combat the economic crisis, the head of the rail monopoly said on Monday, Interfax reported.

‘We are talking about the 100 billion roubles ($2.80 billion) meant for the development of infrastructure. This sum is now in question,’ the head of state-owned Russian Railways, Vladimir Yakunin, was quoted as sayingLast year, at the cusp of almost a decade of growth and high global oil prices, Russia laid out ambitious plans to overhaul its Soviet-era infrastructure over the coming decade.

The global financial crisis, however, is forcing the government to shelve many of these projects and spend its cash pile to prop up banks, support the value of the rouble and finance the social sphere.

And Yakunin is not happy about it.  And who does he blame?  That’s an easy one:

In the United States and parts of Europe, governments have taken a different approach, boosting infrastructure spending in an effort to create jobs and kick start the stalling economies. [In other words, the US is spending money it doesn’t have to build a lot of infrastructure it doesn’t need, and Russia doesn’t have the money to build the infrastructure it needs.  There are many ways to be screwed.]

Yakunin indicated that he would support this approach, but that bankers and financial experts are advising against it.

‘The approach of these financial experts is puzzling to us. Investment in infrastructure cannot cause inflation. It should be viewed as an instrument to avert the crisis, as a way of creating GDP growth, new jobs and a basis for future growth,’ he said, the news agency reported.

For “financial experts” insert “Kudrin.”  Note that Kudrin is supporting a more conservative government spending program that limits the deficit to 8 percent of GDP in order to prevent greater inflation.  Yakunin’s specific mention of inflation is clearly a direct response to, and attack on, Kudrin.  

Putin has come down on Kudrin’s side and against Yakunin’s in one area, at least for now: exchange controls.  Putin has come out publicly opposing them, and praised Kudrin’s exchange rate policy.  This is a slap at Yakunin, who openly advocated these controls.

But what’s interesting about this is that the disputes are becoming increasingly public.  The strains on the power vertical are showing.  And that bodes ill for Russia’s stability.  Along these lines, a Russian commentor, Dmitry Oreshkin, channels SWP too:

or most countries of the world, the global crisis is strictly economic. But Russia is experiencing two crises simultaneously — economic and political.  

Economic downturns, including the current one, come and go, but Russia’s political crisis will never go away. This is because Russia’s political model has always been deeply grounded in the myth of monism: one monolithic state, one party, one ideology, one national leader and one people. Those who lived during the Soviet period remember the ubiquitous overblown slogans of “the unity of all Soviet nationalities” or “the unified Soviet nation.”

Russia under Vladimir Putin’s leadership is doomed by historical inertia and tradition to continue the Soviet monistic model. United Russia is Putin’s modern version of the Soviet Union’s “United U.S.S.R.” — that is, the Communist Party. Nonetheless, United Russia is not as unified as Putin would like. There is the United Russia faction loyal to State Duma Speaker Boris Gryzlov, and there is the one loyal to Mayor Yury Luzhkov. Luzhkov rigidly controls the party’s membership in Moscow and won’t let any federal functionaries get within a mile of holding power.  

. . . .  

Putin could have continued propping up his Potemkin power vertical and his Potemkin democracy for many more years if the petrodollars kept pouring in. That money was crucial to keep Putin’s “circus lions” — that is, the various elite surrounding him — well-fed and docile. But now the money is running out, and it is frightening to consider the consequences. It is well-known that even the best-trained circus lions have been known to turn on their trainers unexpectedly, even when they are well-fed. Just think of what could happen if those lions are hungry — and angry. We have already heard the first menacing roars from Putin’s lions. They are gritting their teeth and salivating at the mouth. I am sure that Putin sees and hears all of this.  

Putin’s Potemkin village is about to fall apart at the seams, but this is nothing to rejoice over. The only pluralism we will see as the result of this collapse will be “armed pluralism” — that is, widespread protests and violence on the streets. The government will respond by further strengthening its autocratic rule.  

There is an outside chance that the collapse of Putin’s model might end with a whimper, but it all likelihood it will end with a huge explosion — like the lid blowing off an overheated pressure cooker.  

That’s what I’ve meant by brittleness; the system appears strong, but is subject to complete collapse if the necessary condition for its continuance–copious quantities of red meat for the lions–disappears.   The Kudrin vs. Yakunin spat in the press is probably a tame and censored version of what is going on out of the public eye, but could be a harbinger of turmoil and conflict to come.

Via LR, this article by Susan Richards describes a study prepared by my friend Sergei Guriev and two co-authors:

The findings are stark. When Russian attitudes to democracy and the market place are compared with those of other countries, Russians come out as among the least enthusiastic  in the world, a good deal less keen even than the people of Belarus.  
. . . .
The obvious response to these findings is that attitudes will change over time, as people get richer. But this study appears not to bear out these hopes. For where you might have expected young Russians to like the West more than their parents, in fact, the opposite is true. The youngest respondents (20-year-olds) showed the same degree of dislike of the US as their grandparents, while the 35-45 year olds were less hostile to the US.
. . . .  

The authors point to the fact that Russians have made a false connection between positive economic outcomes and the reversal of market and democratic freedoms, and adjusted their beliefs accordingly. They have come to associate market reforms with poverty and unemployment.
. . . .

One interpretation of the attitudes Sergei and his colleagues document are the result of (a) fallacious  post hoc ergo propter hoc reasoning (incomes plummeted during the brief period of “democracy” and rose during the restoration of a “power vertical” but there was no real causal connection), and (b) relentless propaganda (note that the attitudes of senior citizens formed in the Soviet days match those of 20 year olds who grew up during the period when Putin began to dominate the information space, especially television).  But the report’s authors note that there is a historical component too:

The authors of the report conclude that these attitudes are unlikely to change. They remind us that ever since the 15thc the Russians have seen themselves as the standard-bearers for an alternative kind of civilisation, under the banner of Orthodoxy.  They observe that it was this belief that fuelled the sharp divide that emerged in the 19^th  century between the Westernisers and the Slavophiles, who argued that Russia must resist the temptation of following the path of European development, in favour of a spiritually superior Russian path.

How alarmed should we be by these findings? It is tempting to quibble that the Russian people had, and still have, no idea what they are talking about when they reject democracy so glibly. After all, they have had no experience of it. At the time when they were most enthusiastic about it, in those final days of Soviet power, what they were invoking was not so much a political option as a magical spell which they trusted would, when pronounced, yield ‘liberation’.

Still, the authors’ conclusions should not be dismissed. This would risk echoing the mistake the market fundamentalists made when, believing in ‘the end of history’ they imposed on the rest of the world a model a set of political values which was the hard-won product of Europe’s particular history.

The attitudes in this report certainly reflect forces deeply rooted in Russian consciousness. These go back, indeed, far further than the 15thc, to the basic facts of Russia’s unpropitious position on the map. The underlying culture of its people has been conditioned by a wretched climate, unreliable rainfall, (mostly) poor soil and a short growing season.     The   experience of surviving in these difficult conditions forged a deep-rooted mentality very different from the European one out of which liberal democracy developed. Russia may no longer be a peasant society. But the high premium on the solidarity of the group over individuality and   initiative so characteristic of peasant societies has not changed.  

A glance at the map reinforces the findings of this report in another important respect too. Russia is a vast land which is not on the crossroads to anywhere, it reminds us. The suspicion of ‘foreign’ ideas echoed in this report is deeply rooted in that geography. It will take far more than a decade or two of exposure to foreign travel and a global market place to change it.

I do have one quibble with Richards’s blanket characterization of “market fundamentalists” who embraced an “end of history” vision when the USSR collapsed.  I yield to few in my preference for the market or individual liberty, but I always thought that Fukayama’s “end of history” stuff was bilge, not least because it was based on crypto-Hegelian bilge.  I was–and am–far more sympathetic to Huntington’s civilizational approach, which is quite consistent with the views expressed above.  

There are certainly some economists, including some market enthusiasts, who paid and pay insufficient attention to these historical and civilizational continuities.  These folks pay insufficient attention to the institutional architecture of a functioning market economy.  (And by institutions I mean not just formal ones, but beliefs and values.)  Those economists who take institutions seriously realized–and realize–that the historical inheritance passed to modern Russians by Orthodox and peasant culture, the Russian empire, and the USSR, and hell, the Mongol Yoke, poses serious challenges to a successful transition to market economics (as opposed to crony capitalism), individual liberty, and pluralistic politics.  

Richards’s discussion of the peasant mindset is of interest.  This was, to go all Marxist on you, the product of a particular structure of productive relations that no longer exist.  However, these relations, and this mindset, persisted, far later in Russia than anywhere else in Europe.  That, plus the abrupt and violent destruction of this way of life in the 1920s and 1930s which left deep scars, and the forced (and dishonest) communitarianism/egalitarianism of Soviet times, arguably combined to make Russia highly unfavorable soil for the development of individual-oriented economic and political relations.  

[This peasant utopia was highly romanticized by the Slavophiles, and by other Russians in the post-Napoleonic period seeking something distinctly Russian.  (With an emphasis on “highly.”  Read the description of peasant life and culture in Orlando Figes’s A People’s Tragedy for a less idyllic view.)  But it indeed has left its imprint on modern Russia.]  

The marginal role of liberal parties, such as the Kadets 1905-1917, and more recently яблоко provide further room for doubt that liberal, individualist ideas will have a decisive influence on Russia public life any time soon.  

These factors help explain why Putinist propaganda has been successful.  The propagandists are not stupid.  They know what sells in Russia.  They know what strikes a chord.  

I would also suggest, though, that Richards ignores some other important historical legacies, most notably relentless statism and the role of the state in atomizing society, and its active undermining of any incipient liberal tendencies and movements towards civil society.  The “solidarity of the group” in modern Russia is seldom that of spontaneous Burkean “little platoons” forming a dense network of volunteerist groups.  Instead, it is solidarity built on the hub-and-spoke model, with the state at the hub.  The state exploits vestigial cultural longings for communal solidarity by identifying the state with those longings, and cynically and relentlessly marginalizing–and at times destroying–any potential competitor for those attachments.  

I’ve been thinking about these kind of issues and how they relate off-and-on for awhile.  I’m at risk of straying into Michel’s turf, but today’s widespread Russian nationalism–chauvinism, in fact–is something of a puzzle.  (I am talking here about the attitudes of the multitudes, not the intellectuals.)  It is my understanding that historically, peasants had little national, Russian, consciousness.  Their world was defined by the mir. They had some personal attachment to the Tsar, but did not identify themselves as Russians.   They considered themselves part of a locality and the commune, and were attached to the land–both legally (in the days of serfdom) but more important emotionally.  

Collectivization, urbanization, and industrialization shattered those deep ties to the land and to the communal life, and must have left a deep psychological void.  What to fill it? Allegiance to the state, as a sort of commune writ large is one possibility.  In this interpretation, attachment to the state, and Russian chauvinism, was in a sense  a form of transference.  The Bolsheviks and Stalin broke–crushed–the traditional peasant society, and those who survived replaced their communal allegiance with allegiance to the state.  

Just a hypothesis–or random musings, really.  But it seems to help explain some regularities in Russian behavior that are otherwise alien to Westerners.  

Another cheery article, this one by Aleksandr Golts, argues that the attitudes documented in Sergei’s study, and carefully exploited by Putin, will make any rapprochement between the US and Russia highly unlikely, not matter how desperately Obama or Biden or Hillary or Foggy Bottom want it:

The problem is that Putin doesn’t really need [to reset relations with the US]. We [Russia] are in the midst of a crisis. Good relations with the United States and with the West as a whole won’t help — there is no money in it. And you can’t put hungry people to work with fairy tales about getting up off your knees and about how “Washington has been forced to acknowledge Russia’s international authority.”

No, for this you need stronger measures. For instance, a national mobilization against an insidious enemy who is preparing an imminent attack. And we aren’t talking about China. So what good are Washington’s intentions to delay the missile-defense shield or to postpone practically indefinitely NATO membership for Georgia and Ukraine? Moscow will immediately throw up some new conditions and complaints. For example, the Kremlin might call for overall limits on the military forces of all NATO countries so that they do not exceed the forces of the Russian Federation. Or the Kremlin might insist that any future NATO expansion be done only with Moscow’s consent.

An unwillingness to comply with any of these demands will be interpreted as proof that NATO is preparing aggression against Russia. The survival of the Putin regime does not depend on cooperation with the West but with a “managed” chronic conflict. Everyone who is reciting the “hit-the-restart-button” line should give some thought to how compatible the two machines that are set to be restarted actually are.

So, the civilizational differences, combined with the current regime’s political needs, makes the prospects for any rapprochement between the US (and Europe, but they have their own issues) and Russia exceedingly dim.  Indeed, Putin has learned to manipulate the sense of civilizational difference and the chauvinistic feelings of Russians to bolster his political position.  His interest in a detente is minimal.  Hence, I agree with Golts: Methinks that Hillary, Biden, and Obama are wasting their time hoping for any thaw, regardless of how much they try to achieve one.

No, this is not a post about Russia.  It is about the US and the UK.  And yes, the title is hyperbole.  I am not suggesting that the current statist trajectory is communist or even socialist, or will be accompanied by the repressive horrors of the Soviet state.

But there is an important lesson in Soviet experience (and in Japanese experience in the 1990s) that we are at great risk of ignoring, to our peril.  That is that the economy of the  USSR became ossified in large part because the Soviet state tried to shield vast portions of its economy from change.  “Soft budget constraints” subsidized failing firms and failing industries, preventing their contraction and the flow of resources to higher value uses.  The Soviets tried to shelter their incumbents from the gale of creative destruction, and in so doing, made the collapse of its economy all the more devastating.  

The Japanese did much the same in the lost years of the 1990s, with the government pressuring failing banks to prop up failing industrial and commercial firms.  This also delayed with the adjustment of the economy to changed economic circumstances, and effectively froze into place the inefficiencies that had created the economic problems in the first place.

We are at great risk of repeating these errors today.  There are industries and firms–for instance, automobiles in general, General Motors, Ford, etc. in particular–that should contract.  Similarly, the housing boom (or bubble, call it what you will) fed by unduly expansive credit in the 2000s led to a dramatic expansion in the flow of resources into the construction and housing sectors, and this industry should also contract substantially.  Ditto housing finance, and a good portion of the financial sector.  

But instead of undertaking actions that would facilitate the efficient flow of resources out of these firms and sector to those where they can be employed more effectively, governments in the US and UK (and elsewhere) are looking for ways to delay the necessary adjustments.  The auto bailouts–with billions spent and billions more likely to be spent–are only the most egregious example of this.  The various plans regarding support for those who borrowed too much to purchase homes threatens to have the same effect.  A particularly egregious example is the proposal to reinvigorate Freddie and Fannie to support substantial real estate lending.  These institutions should be euthanized, not revived.  Similarly, the failure to address banking problems head on perpetuates the survival of firms deemed too big to fail, but which are just too big period.  In the UK, the government is pressuring Northern Rock to begin real estate lending under the very same kind of terms that fed an over-expansion in the housing sector.  The Japanese example, and the British example with respect to Northern Rock, provide serious grounds to conclude that increasing government power over the banking sector will be exercised to support incumbent firms and incumbent industries that should contract, and perhaps perish.  Soft budget constraints are proliferating.

This is not surprising.  It is exactly what one would predict on the basis of Chicago School analysis of regulation, or of Mancur Olson’s work.  Incumbents have a decided comparative advantage in influencing the government.  With a massive expansion in the scale of government spending (on budget and off) it is inevitable that incumbents, including losing incumbents, will benefit disproportionately.  Indeed, a Stigler-Peltzman-type analysis predicts that loser industries–industries that should contract–receive extraordinary support.  This cements inefficiencies, rather than facilitating the process of eliminating them.  

Surprising or no, it bodes ill for the future.  There is an adage in the military: don’t reinforce failure.  Similarly, good traders know when to abandon a losing trade.  To perpetuate inefficient resource allocations, to impede the flow of resources to higher value uses, to protect inefficient incumbents, is to commit the error that good strategists and good traders avoid.  It will not build a foundation for future prosperity.  It will only sap efficiency today, defer–but not eliminate–the adjustment that will inevitably come, and make that adjustment far costlier, abrupt, and disruptive than it would otherwise be.  

Russia, and the rest of the former-USSR, learned that the hard way.  So did Japan.  Sadly, it seems that we are hell-bent on repeating their experiences, rather than avoiding them.

In another example of the cascade of oxymorons emanating from the US government, Michael Giberson (spelled it right that time, Mike!) at Knowledge Problem reports the following from the WaPo:

Asked about that, Office of Management and Budget Director Peter Orszag said Mr. Obama took care of [the decline in charitable giving likely to result from reduced tax deductions] by giving charities government money to make up part of the difference.

“Contained in the recovery act, there’s $100 million to support nonprofits and charities as we get through this period of economic difficulty,” he said.

Michael points out that $100 million is probably a drop in the bucket compared to the likely decline in charitable contributions that will result from Obama’s tax policy.  But that’s not what pops my cork.  

What gets me is that Orszag’s justification is another example of the administration’s desire to preempt an ever-widening range of individual decisions, from health care to the car I can drive to you name it.  Further evidence of its intent to shift the locus of decision making in all aspects of our live to our betters in the government.  

Quite frankly, my dear, I don’t give a damn whether the dollar amount flowing to charities in aggregate rises because of the government’s beneficence.  I do care about its arrogating the decision regarding the charities I support–or don’t.  I want to be free to choose the charities I support.

In other words, it’s not just the dollars.  It’s who gets to decide where the dollars go.  Mr. Orszag’s cavalier dismissal of that distinction (with him, it’s all about the money) reveals a great deal about the dominant mindset in Washington today.

What’s more, this shift in the power of decision will contribute to the rise of what the Adam Smith Institute calls fake charities: charities that are in effect front organizations for government.  Charities are important for many reasons, not the least of which is that they are an alternative to the government.  They are a pillar of civil society that is at least somewhat independent of the state.  Increasing dependence of charities on the government undermines civil society and cedes control over an ever widening swath of our lives to the state.  Moreover, it means that the survival of charities will depend on their ability to lobby and influence legislators and bureaucrats, rather than on their ability to convince people that they are doing something worthwhile–by doing something worthwhile.  The market for charitable giving is far from perfect, due to free riding and all that, but over-reliance on government support undermines that market, rather than strengthens it.  

In the present scheme of things, this is not a big deal on its own.  It is important more for what it says about the country’s current journey.  Hayek gave us a famously succinct description of the destination.