Magical Thinking in Liberal Land

Like fairy tales? If so, I’ve got some doozies for you. See if any of these ring a bell:

* The wealthy in America don’t pay “their fair share.”

* “If you like your health care plan, you’ll be able to keep your health care plan.”

* A dollar of government “stimulus” spending will cascade into multiple dollars of private income.

These are not your garden-variety fairy tales, however. Instead of being told to — and believed by — children, these and countless similar fables are told by — and believed in — by politicians of the genus liberalis. Grownups holding the reins of power actually believe these and similar notions, regardless of any historical or economic proof to the contrary.

Why? Why do people believe in things like ESP, alien abduction, or the economic sustainability of Medicare?

It’s easy for people who consider themselves “rational,” those who luxuriate in things like facts and proofs, to look down on those who cling to this type of magical thinking. But in his book, The 7 Laws of Magical Thinking: How Irrational Beliefs Keep Us Happy, Healthy, and Sane, psychologist Matthew Hutson reminds us that belief in preposterous things is an ancient and species-wide condition, and therefore must have conferred some evolutionary benefit to our ancestors. In other words, believing in stupid things may make sense — at least some of the time:

Once you’ve accepted that the brain constructs reality and that the brain has evolved like any other organ to help its owner survive and reproduce, it follows that the brain constructs reality in the most useful way possible for its owner. The key word here is useful, which is not to say accurate. The brain doesn’t care so much what’s really out there, it just needs to stay alive and be replicated, which might involve telling us a white lie now and then.

In light of Hutson’s entertaining insight, liberal magical thinking on economic matters begins to make at least some sense. Liberal politicians believe and say these things because it helps them get elected; people like to be given free stuff, and they like to get it from the rich (those bastards!). Marxist and Keynesian economic prescriptions are always and everywhere disastrous wealth killers — but that is not the point. The only jobs they create are those of liberal politicians, but that is quite their purpose, after all. Magical economic thinking is a survival mechanism, and a very effective one for the likes of Franklin Roosevelt, Lyndon Johnson, and Barack Obama.

The liberal brain couldn’t care less whether liberal ideas work in the real world — the real world has nothing to do with it. It has everything to do with telling the masses what they want to hear in exchange for wealth and power.

Libertarians and conservatives rejoice in charts and graphs and history; liberals in wishes, fear, and fables. A peak into the balance sheets of the the West gives a sense of which side is better armed for the long, Darwinian struggle ahead.

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Vampire Capitalism? Please

GST Steel would have failed much earlier without Bain.

This week the Obama campaign debuted its attack on Bain Capital, the private-equity firm Mitt Romney founded. Its two-minute ad purports to tell the story of GS Technologies, a Kansas City-based Bain investment that went bankrupt in 2001.

To hear the Obama campaign, this is a tale of greed: GST was a healthy, happy, quality steelmaker until Bain plundered its worth and stripped its 750 workers of their due. "It was like a vampire," laments one former employee in the ad. "They came in and sucked the life out of us."

GST is a tragic tale, though in a different way. The real story of GST is that of a private-equity firm trying to spark some life into a uncompetitive, over-unionized industry. Bain's crime here—if that's what you call it—was giving a dying steel plant an unexpected eight-year lease on life.

When Bain bought the Kansas City mill in 1993, steel was a scene of carnage. Global players were pouring out cheap products, and America's high-cost steel plants couldn't compete. The industry had lost 200,000 jobs in preceding years. In 1992 alone, the six largest U.S. steel mills had lost a combined $3 billion. Armco, the company Bain would buy the plant from, would lose $641 million in 1993.

The Kansas City plant was itself dying. At its 1970 height it employed 4,500; by the late 1980s it was down to 1,000. A year before acquisition, Armco had laid off another 75. Its equipment was old; it faced fierce competition at home and abroad.

B.C. Huselton, a vice president of the business at the time, tells me that in 1990 the Armco CEO held a meeting. "He told us, 'Look, we either try to sell it, or we've got to shut it down.'" Armco had shut down another Kansas City facility, Union Wire Rope, only a few years before.

The Kansas City plant had two product lines—high-carbon rods and grinding media (used in mining)—that it felt could give it a competitive edge. But it needed investment, and Armco was tapped out. Bain nonetheless saw some potential and in 1993 joined other investors to acquire it for $80 million. Management renamed it GS Technologies (which would become part of a larger GS Industries) and poured an additional $100 million into modernization.

The strategy worked for a time. The market firmed up and GSI became a U.S. leader in steel rods. In 1994 it felt confident enough to distribute a dividend to investors. In both 1996 and 1997, GSI would realize $1 billion in revenue.

And then came the tsunami. The late 1990s saw a new outpouring of cheap steel from elsewhere around the globe. The Asian financial crisis walloped the mining industry, cutting demand for GST products. The price of GST's electricity and natural gas skyrocketed. The union dug in, refusing to make concessions. By April 1997, it was on strike, shooting bottle rockets at guards. Labor costs spiked, and by 1999 GSI was reporting $53 million in net losses.

In 2001 it would become one of 31 steel companies that went bankrupt from 1993 to 2003. (Mr. Romney left Bain in 1999.) The steel crash was the economic drama du jour, with Congress railing about "dumping."

At the time, GST's union blamed the company's bankruptcy on the political class, for failing to hamstring imports. "We can't compete against the steel imports that are being sold under cost," said the president of GST's union in 2001. "Our pleas fell on deaf ears in the political arena." The Bush administration would ultimately slap on giant tariffs.

The bankruptcies were led by unionized companies that, like airlines and textiles and Detroit, had negotiated pay and benefits that helped drive their employers under. GST's pension benefits would get passed on to the federal Pension Benefit Guaranty Corp., which in 2002 received $7.5 billion in claims from the steel industry alone. The PBGC covered GST's basic pension payouts.

The Obama ad doesn't note that the broader company, GS Industries, employed 3,500 and that the Kansas City plant (with 750 workers) was the only one shuttered. Other plants were bought and operate today. Nor does it mention Bain's other steel investment in the early 1990s, in an Indiana start-up called Steel Dynamics. The firm touts innovative technology and a nonunion workforce. It today reports $6.3 billion in revenue—25 times what it claimed in its 1996 IPO—and employs 6,000.

A private-equity firm looking to quickly strip value from a company—to "suck" the life out of it—does not do so by investing $100 million in modernization and holding on for eight years, through bankruptcy. Bain has surely made its share of mistakes, and one may well have been trying to resuscitate a traditional steel firm in the grip of industry upheaval. The irony, says Mr. Huselton, is that this plant "wouldn't even be in today's news, if it hadn't been the opportunity that came with Bain. Those jobs would have been gone in 1993."

That's a more revealing story—of the pressures of a global market, the dangers of an inflexible workforce, and the opportunities that come with private equity and risk-taking. It's just not one Team Obama wants to tell.

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Vulture Capitalism? Try Obama's Version

A profit-driven economy is preferable to one run by political favoritism

President Obama is no fan of Mitt Romney-style "vulture" capitalism. So what's his alternative?

All those Republicans grousing about the president's attacks on private equity might instead be seizing on this beautiful point of contrast. Mr. Obama, after all, is no mere mortal president. Even as he's been busy with the day job, he's found time to moonlight as CEO-in-Chief of half the nation's industry. Detroit, the energy sector, health care—he's all over these guys like a cheap spreadsheet.

Like Mr. Romney, Mr. Obama has presided over bankruptcies, layoffs, lost pensions, run-ups in debt. Yet unlike Mr. Romney, Mr. Obama's C-suite required billions in taxpayer dollars and subsidies, as well as mandates, regulations, union payoffs and moral hazard. Don't like "vulture" capitalism? Check out the form the president's had on offer these past three years: "crony" capitalism.

The case study is the solar-panel maker Solyndra, which was part of a green-energy sector that even by 2009 was flailing. The president took one look at the industry's utter lack of both profits and sellable products, and yelled "that's my baby!" The stimulus bill shipped tens of billions of dollars to the Energy Department to pour into green companies via grants and loans. It promised five million jobs.

The Energy Department's nuclear physicists were admittedly a bit flummoxed by the whole P&L thing, but they got their venture-capitalism groove on and in 2009 handed Solyndra a $535 million loan guarantee. Even prior to disbursement, government accountants were warning that Solyndra was a lemon, but the White House didn't worry. After all, the IRS had only recently and conveniently tripled the tax credit (to 30%) for buyers of Solyndra products, which the government figured would help grease their start-up's skids.

Unfortunately, the physicist-CFOs overlooked that whole "global energy market" factor—easy mistake! Foreign competitors were already piling into Solyndra's niche. Unable to compete, the firm went bankrupt last year. And, oh, the carnage! It was kind of like . . . GST Steel! Only worse. Solyndra laid off 1,100 employees. It provided no severance, not even back pay due for vacation credits. But a bankruptcy judge would later approve $370,000 in bonuses for 20 employees.

Mr. Obama railed against the high-dollar Silicon Valley investors who lined up in front of government to "suck" the remaining "life" out of the bankrupt firm, even as employees were left to . . . Oh, wait. He said no such thing. He was probably too busy doing damage control on his other government-subsidized energy bankruptcies, from Beacon to Ener1. Or running down the latest report of a government-funded, instantaneously combusting electric car. (Karma, anyone? Now at the low, low price of $103,000. Fire extinguisher included.)

Speaking of cars, Detroit is the business venture Mr. Obama's team has been most flogging as a success. True, General Motors and Chrysler are still turning their lights on, though they'd have arguably been doing the same had they been left to go through normal, orderly bankruptcies like those that helped the steel and airline industries restructure to become more competitive.

To get to the same place, Mr. Obama's crony capitalism handed $82 billion in taxpayer dollars to the two firms. That bailout money went to make sure the unions that helped drive GM to bankruptcy (and helped elect Mr. Obama) did not have to give up pay or pension benefits for current workers. They were instead rewarded with a share of the new firm. The UAW at GM meanwhile used the government-run bankruptcy to bar some 2,500 nonunion workers who had been laid off from transferring to other plants. How truly vulture-like.

Contract law was shredded, as unions were given preference over other creditors, such as pension funds for retired teachers and police officers. Congressmen used political sway to keep open their weak auto dealerships, forcing layoffs at stronger ones (vulture . . . vulture . . . vulture). Political masters obliged the industry to pour resources into unpopular green cars. The political masters were obliged to offer $10,000 tax credits to convince Americans to buy them. (They still won't.) And the message to every big industry? Go ahead, run your business into the ground. The Capitalist-in-Chief has your back (especially if you are unionized).

So, take your pick. Mr. Obama's knock on free enterprise is that it is driven by "profit," and that this experience makes Mr. Romney too heartless to be president. The alternative is an Obama capitalism that is driven by political favoritism, government subsidies, mandates, and billions in taxpayer underwriting—and that really is a path to bankruptcies and layoffs. If the president wants to put all 3,545 green stimulus jobs he's created up against Bain's record, he should feel free.

Mr. Romney could make the comparison himself. Ronald Reagan ran against Jimmy Carter's own industrial policy, and to great success. Viewed in isolation, "vulture" capitalism has some PR downsides. Viewed against the alternative, it's a flat-out winner.

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ELSEWHERE

Senate panel cuts Pakistan aid over conviction: "A Senate panel expressed its outrage Thursday over Pakistan's conviction of a doctor who helped the United States track down Osama bin Laden, voting to cut aid to Islamabad by $33 million -- $1 million for every year of the physician's 33-year sentence for high treason. The punitive move came on top of deep reductions the Appropriations Committee already had made to President Obama's budget request for Pakistan, a reflection of the growing congressional anger over its cooperation in combatting terrorism."

The business of government: "It is not the business of government to make men virtuous or religious, or to preserve the fool from the consequences of his own folly. Government should be repressive no further than is necessary to secure liberty by protecting the equal rights of each from aggression on the part of others, and the moment governmental prohibitions extend beyond this line they are in danger of defeating the very ends they are intended to serve."

High time to end corporate taxes: "In the latest installment of the long-running serial 'Super Rich Guy Calls for Higher Taxes,' hedge fund billionaire Tom Steyer made a $20 million donation last week to an initiative to raise California's corporate tax rate. Steyer thinks local businesses aren't paying nearly enough into the state's coffers. ... Corporate taxes are inefficient. They're unfair. They smother economic growth. They exact a heavy cost on the middle class. And, here's the real kicker, the corporate income tax is such a drag on investment and economic growth there is good reason to believe that getting rid of it would actually raise total revenue to the government." [NOTE: There is no double taxation of dividends in Australia]

Should the bank’s loss be the law’s gain?: "The great thing about laws is that they protect us when we are unwilling and unable to do so on our own. Laws are great because they make sure no harm is done. So when it came to our attention that JP Morgan Chase just lost $2 billion because of risky investments and hedging, it may have seemed that what was needed was more and better laws, not personal responsibility. Of course this isn't true."

The moral case for organ markets: "There’s nothing wrong with putting a high value on equality. But if your vision of equality includes letting thousands of people die so we can be confident the poor aren’t being exploited by entering into voluntary transactions in which they’re paid for one of their kidneys, I’d argue that you’re putting far too much emphasis on equality. It’s true that we’re all equal when we’re dead. That doesn’t mean it’s a desirable outcome."

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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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