Sunday, January 10, 2010

Historic German economic failures seen as successes

So the attempts to imitate them were failures too

In the case of the Third Reich, the widely held perception even now is that whatever else may be said about his regime, Hitler managed to bring about a dramatic revival of the German economy. After 1933 Hitler and his finance minister Hjalmar Schacht stabilized the economy and managed to solve the huge unemployment crisis that had destroyed the Weimar Republic’s legitimacy. This was partly due to Schacht’s imaginative monetary policy and partly to massive public works programs, such as the autobahnen. There was a sharp move away from free markets to a much more interventionist economy that worked better than what had gone before. During World War II this economy was able to achieve great success in terms of war production, notably under Hitler’s armaments minister, Albert Speer.

Obviously there is some truth in this account, or else it would not be credible. There was indeed a sharp move in the direction of a more state-controlled economy. In fact few people realize just how interventionist—even socialist—the policies of the Nazi state were (although the full name of the party should give some indication of this). However, the picture overall is mostly wrong. Adam Tooze conclusively debunked this account in his masterful work, The Wages of Destruction: The Making and Breaking of the Nazi Economy. Tooze shows that the public works programs had little effect on unemployment and wasted resources; that the 1930s saw constant financial and foreign-exchange crises for the Reich; that by 1939 the condition of the German economy was desperate and that this was in fact a major factor in Hitler’s increasingly aggressive policy; that the supposed success of Speer simply did not happen; and that overall the regime was so crippled by its economic incompetence that it is nothing short of a miracle that it had as much military success as it did.

Fortunately, while Nazi Germany’s economic policy and its supposed success had some influence in the 1930s (not least among some New Dealers), it had none after 1945. However, an earlier episode in German economic history had much greater consequences and influence—both entirely malign. When war broke out in July 1914 the German government and High Command planned and hoped for a short and decisive war. Things of course did not work out that way and by the fall of 1916 it was clear that this strategy had failed, while the British blockade grew ever more stringent. In the face of impending defeat, the German Empire’s government was effectively taken over by the military in the person of the army’s quartermaster general (and effective chief of staff) Erich Ludendorf. His thinking and policy were set out in his 1935 work and apologia, Der Totale Krieg (The Total War).

Ludendorf argued, first, that all the human and physical resources of a nation made up its military capacity, or Wehrkraft. To ensure victory and survival in the zero-sum game of nations, all these resources had to be controlled and directed to a single purpose. Who was to do this? The answer for him was simple: Since the goal was victory in conflict, it had to be the military. What this meant in practice was a form of planned economy in which all economic activity was directed by the general staff through a series of planning boards and detailed regulations and targets.

The main point was to remove the profit motive—Ludendorf never tired of ranting against unpatriotic profit seekers and selfish individualists—and replace it with structured command relations. In one sense the aim was to transform the entire economy and society into an army, with the typical command-and-control structure of the modern military. In another sense the goal was to turn German industry into one giant corporation by a process of planning and cartelization. One important aspect of the regime created by Ludendorf, just as for Nazi Germany, was a close alliance between the military, the political and bureaucratic classes, and the managerial elite of large corporations, or at least some of them.

Ludendorf’s policy was a disaster. Production actually declined or was wasted, and the financial methods led to severe inflation, which of course became even worse after the war. The policy also led to increasing resistance from the population, as his ever-more-furious outbursts revealed. Eventually the increasingly desperate situation led to the gamble of the huge spring offensive of 1918. Its failure meant the war was definitively lost.

However, the policy of Germany after 1916 was not seen at the time or for long after as the enormous mistake that it was, even from the High Command’s point of view. Instead it was thought to have been a huge success. Strangely this view became even more widespread after 1918—not least among the victorious powers. A myth took hold: that the organization of the economy under Ludendorf was a model for other nations in peacetime.

This belief had disastrous consequences. It certainly did in Germany itself since it provided much of the basis for the economic policies of the Third Reich, as well as providing yet another justification for slave labor and the systematic plunder of subject populations. In milder form this received view had a major impact in both Great Britain and the United States during the interwar years.

However, its most significant effect was felt in the east. When the Bolsheviks came to power in 1917 they had no real idea of what socialism would look like. Their initial effort, so-called war communism, proved utterly catastrophic and was reversed with the introduction of the New Economic Policy in 1921. What followed was a huge debate as to what kind of model to adopt. The “center” argument that eventually triumphed under Stalin was to adopt the supposedly successful model of the World War I German war economy. So the Soviet economy was in many ways the product of a mistaken idea about Germany’s war economy and how it had worked.

Misunderstandings of what is actually happening in economic affairs do not only have immediate consequences. When they shape the politicians’ and public’s view of history, their effects can be immense, sometimes comically, but more often tragically.



Walmart: The research

Economists Jerry Hausman and Ephraim Leibtag argue that we systematically overstate the rate of price inflation because we don’t account for Walmart’s and other big-box companies’ impact correctly. Walmart claims to save consumers $2,500 per capita per year. This is probably an overestimate, but studies I have done with Charles Courtemanche of the University of North Carolina-Greensboro do suggest that Walmart increases our options.

Critics claim that Walmart can deliver low prices because it destroys jobs, lowers labor standards, and squeezes suppliers. The data, however, do not support the first two, while the third is misleading. Retail labor market studies by University of Missouri economist Emek Basker show that Walmart modestly increases retail employment. Critics are quick to counter by questioning the quality of those jobs, correctly noting that Walmart pays less than its unionized competitors. However, this should be qualified. Union pay scales restrict the labor pool from which unionized stores can hire: If the union contract specifies minimum compensation of $12 per hour, then people whose labor cannot produce at least that much in revenue will not be hired. Since Walmart is an open shop, it has no such artificial floor for the productivity of the people it can hire. Those who would not be employable under union conditions are made better off despite the illusion of exploitation.

The company’s critics correctly point out that the last several decades have seen a large gap open between manufacturing and retail wages. But these data must be interpreted with caution because immigration and changing labor participation have altered the distribution of the workforce. People who are today earning Walmart’s “Every Day Low Wages,” as the critics call them, might not have participated in the labor force several decades ago and their wages would not have appeared in the official data.

Supposedly, Walmart drives small local mom-and-pop retailers out of business, spreading economic havoc and weakening a community’s social fabric. In a paper published in Economic Inquiry, West Virginia University economists Andrea M. Dean and Russell S. Sobel fail to detect a statistically significant effect of Walmart on self-employment, the number of small businesses, or bankruptcy among small businesses. It is true that Walmart causes some businesses to close, particularly in sectors that directly compete with the company. However, these businesses can be replaced by businesses in other sectors. In a summary of their research that appeared in the Spring 2008 Regulation magazine, Dean and Sobel offer the example of Main Street in Morgantown, West Virginia, which was decimated by Walmart but which soon recovered as clothiers and electronics stores were replaced by small businesses in other industries.

They also discuss the obvious objection that perhaps Walmart’s wake leaves a swath of low-value, low-wage businesses. They show, however, that Walmart penetration does not appear to reduce the values of small businesses. Stacy Mitchell, author of The Big-Box Swindle, argues that Dean and Sobel’s result relies on an incorrect interpretation of Census data. For their part, Dean and Sobel say Mitchell misunderstands the data. If they are correct, the effects of Walmart’s penetration are consistent with what economists believe about technology and economic growth as well as with Joseph Schumpeter’s well-known concept of “creative destruction.” Walmart’s expansion allows people to produce more with fewer resources and less labor, which frees those resources and that labor to move into other occupations.

Walmart also allegedly uses its raw bargaining strength to extract concessions from suppliers. It is usually able to get lower prices, but it also provides something of great value in return: access to its supply chain and logistical support. While anecdotes of Walmart’s hard bargaining abound, a 2001 Journal of Retailing study by Paul N. Bloom and Vanessa G. Perry found that while dealing with Walmart can hurt financial performance for companies that do only a small share of business with the company, “large-share suppliers to Wal-Mart perform better than their large-share counterparts reporting retailers other than Wal-Mart as their primary customers.” Bloom and Perry note that Walmart offers access to broad markets and that companies taking advantage of this prosper as a result.


Another common refrain is that Walmart and other large retailers obtain their goods from third-world “sweatshops.” In an important 2006 study published in the Journal of Labor Research, economists Benjamin Powell and David Skarbek showed that “sweatshop” labor paid better than the alternatives. In a June 4, 2008, article for the Library of Economics and Liberty, Powell summarizes this research and points out that criticisms of “sweatshop wages” (like those aimed at a factory in Honduras making clothes for Kathie Lee Gifford in 1996) invariably compare the wages and working conditions to American rather than Honduran working conditions—a comparison he calls “irrelevant” because of restrictions on international labor mobility. Sweatshops are a blessing, not a burden. As Powell points out, sweatshop wages more than double the average in some countries. Unfortunately, boycotts and legislation will not improve working conditions around the world.



To Solve Budget Woes, California Should Expand Privatization Idea

California Governor Arnold Schwarzenegger delivered his final State of the State Address this week amid the harshest economic downturn since the Great Depression. With less than one year to go before he is termed out of office, Schwarzenegger and the state that elected him face monumental challenges. The address was lean on any innovative ideas that could pull the Golden State out of its fiscal nosedive. But the Governor unveiled two banner proposals, the first his plan for a constitutional amendment to mandate greater spending on universities than prisons, the second his plan to privatize prisons.

According to the Governor, 30 years ago 10 percent of the state’s general fund was allocated to higher education, 3 percent to prisons. Now, prisons receive almost 11 percent of the budget, and higher education 7.5 percent. “Spending 45 percent more on prisons than universities is no way to proceed into the future,” explained Schwarzenegger. “What does it say about a state that focuses more on prison uniforms than caps and gowns? It simply is not healthy.” Schwarzenegger boldly vowed, “…never again do we spend a greater percentage of our money on prisons than on higher education.”

State Senator George Runner disputes these numbers, reporting that in the most recent budget, the state spent 7.3 percent of the general fund on prisons and 9.7 percent on higher education. The Governor’s staff then admitted that excluded from the numbers in his speech was state spending on community colleges. Most community college students and teachers would consider themselves part of higher education in California.

But even going with the Governor’s numbers, in order to invert the current ratio of greater spending on prisons than higher education, the state must either increase spending on education—an impossibility considering a $20 billion budget shortfall—or decrease spending on prisons. The Governor proposed privatizing prisons to cut costs and thereby meet his goal to spend more on education than incarceration.

Schwarzenegger reasoned, “California spends $50,000 per prisoner. By comparison to the ten largest states, they spend $32,000 only. They spend less and yet you do not see federal judges taking over their prison health care system. Why do we have to spend so much more than they do?”

California’s prison system has been a chronic headache for Schwarzenegger and the legislature, making headlines as the federal judiciary took over the prisons and ordered the state to rectify prison overcrowding. Last year a federal judge ruled the state must release almost a quarter of the state’s prisoners. By privatizing the prison system, Schwarzenegger believes the state will save billions of dollars. He encouraged the legislature to “find more cost-effective ways to run our prison system and allow private prisons to compete with public prisons. Competition and choice are always good.”

Such talk of competition and choice is exactly what will help pull California’s government out of its budget plight. But privatizing prisons is only half of the equation. If competition leads to lower costs in the prison system, why not privatize a whole slew of other similarly poorly-run government programs?

Like most areas in the public sector where government encroaches, the death of competition leads to poor quality at high costs. The state’s education system could certainly use some privatization and competition to spur long-overdue reform. Many parents pay double for their children’s education: they pay exorbitant taxes on a failing school system and pay for tuition to a private school that will actually provide a quality education. If competition will save prisons money, school choice will save taxpayers money.

The Governor’s restrictive constitutional amendment plan (requiring an emergency declaration or two-thirds vote in the legislature to suspend) will leave the state no choice in prioritizing public safety, which should be the first obligation of government.

From a proper-role-of-government perspective, the problem with Schwarzenegger’s proposal is that he intends to privatize the one area of society for which government is responsible: the execution of justice. Running the prison system can certainly be contracted out and save the state money. But since the chief responsibility of government is public safety—not education—the Governor is incorrect in altering the constitution to mandate greater spending on higher education. Yes, any society should place a high priority on ensuring its children are equipped to be successful. But the state should encourage families to provide the best education for their children by creating the least burdensome tax and regulation system.

But setting aside the misguided belief that government should provide education over public safety, Schwarzenegger’s plan to inject privatization and competition into mismanaged government programs is an idea long past due. Too bad Governor Schwarzenegger waited until his last year in office to embrace the free market principles he once trumpeted.



The Gitmo Obsession

by Charles Krauthammer

On Wednesday, Nigerian would-be bomber Umar Farouk Abdulmutallab was indicted by a Michigan grand jury for attempted murder and sundry other criminal charges. The previous day, the State Department announced that his visa had been revoked. The system worked.

Well, it did for Abdulmutallab. What he lost in flying privileges he gained in Miranda rights. He was singing quite freely when seized after trying to bring down Northwest Flight 253 over Detroit. But the Obama administration decided to give him a lawyer and the right to remain silent. We are now forced to purchase information from this attempted terrorist in the coin of leniency. Absurdly, Abdulmutallab is now in control.

And this is no ordinary information. He was trained by al-Qaeda in Yemen, and just days after he was lawyered up and shut up, the U.S. was forced to close its embassy in Yemen because of active threats from the same people who had trained and sent Abdulmutallab.

This is nuts. Even if you wanted ultimately to try him as an ordinary criminal, he could have been detained in military custody -- and thus subject to military interrogation -- without prejudicing his ultimate disposition. After all, every Guantanamo detainee was first treated as an enemy combatant and presumably interrogated. But some (most notoriously Khalid Sheik Mohammed) are going to civilian trial. That determination can be made later.

John Brennan, President Obama's counterterrorism adviser, professes an inability to see any "downsides" to treating Abdulmutallab as an ordinary criminal -- with a right to remain silent -- a view with which 71 percent of likely voters sensibly disagree.

The administration likes to defend itself by invoking a Bush precedent: Wasn't the shoe bomber treated the same way? Yes. And it was a mistake, but in the context of the time understandable. That context does not remotely exist today.

Richard Reid struck three months after 9/11. The current anti-terror apparatus was not in place. Remember: This was barely a month after President Bush authorized the creation of military commissions and before that system had been even set up. Moreover, the Pentagon at the time was preoccupied with the Afghan campaign that brought down the Taliban in two months. The last major Taliban city, Kandahar, fell just two weeks before Reid tried to ignite his shoe on an airplane.

To be sure, after a few initial misguided statements, Obama did get somewhat serious about the Christmas Day attack. First, he instituted high-level special screening for passengers from 14 countries, the vast majority of which are Muslim with significant Islamist elements. This is the first rational step away from today's idiotic random screening and toward, yes, a measure of profiling -- i.e., focusing on the population most overwhelmingly likely to be harboring a suicide bomber.

Obama also sensibly suspended all transfers of Yemenis from Guantanamo. Nonetheless, Obama insisted on repeating his determination to close the prison, invoking his usual rationale of eliminating a rallying cry and recruiting tool for al-Qaeda. Imagine that Guantanamo were to disappear tomorrow, swallowed in a giant tsunami. Do you think there'd be any less recruiting for al-Qaeda in Yemen, Saudi Arabia, Pakistan, London?

Jihadism's list of grievances against the West is not only self-replenishing but endlessly creative. Osama bin Laden's 1998 fatwa commanding universal jihad against America cited as its two top grievances our stationing of troops in Saudi Arabia and Iraqi suffering under anti-Saddam sanctions. Today, there are virtually no U.S. troops in Saudi Arabia. And the sanctions regime against Iraq was abolished years ago. Has al-Qaeda stopped recruiting? Ayman al-Zawahiri often invokes Andalusia in his speeches. For those not steeped in the multivolume lexicon of Islamist grievances, Andalusia refers to Iberia, lost by Islam to Christendom -- in 1492.

This is a fanatical religious sect dedicated to establishing the most oppressive medieval theocracy and therefore committed to unending war with America not just because it is infidel but because it represents modernity with its individual liberty, social equality (especially for women) and profound tolerance (religious, sexual, philosophical). You going to change that by evacuating Guantanamo?

Nevertheless, Obama will not change his determination to close Guantanamo. He is too politically committed. The only hope is that perhaps now he is offering his "recruiting" rationale out of political expediency rather than real belief. With suicide bombers in the air, cynicism is far less dangerous to the country than naivete.



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The Big Lie of the late 20th century was that Nazism was Rightist. It was in fact typical of the Leftism of its day. It was only to the Right of Stalin's Communism. The very word "Nazi" is a German abbreviation for "National Socialist" (Nationalsozialist) and the full name of Hitler's political party (translated) was "The National Socialist German Workers' Party" (In German: Nationalsozialistische Deutsche Arbeiterpartei)


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