The rain was heavy for parts of last weekend in the Washington, D.C. area. Seeing it coming down in sheets, it got me thinking about how people used to live. How awful it must have been in the days of primitive construction. Everything must have always been damp, moldy, buggy, and surely worse than that.
Surely is operative here, and was confirmed in The Triumph of Economic Freedom: Debunking the Seven Great Myths of Capitalism, a new book co-authored by former U.S. Senator Phil Gramm (R-TX) and George Mason University economics professor Donald Boudreaux. Gramm and Boudreaux brought harsh coloring to what was merely imagined.
In their chapter addressing the popular notion that the Industrial Revolution impoverished workers, they cite (among others) historian and philosopher Arnold Toynbee’s description of it as “a period as disastrous and as terrible as any through which a nation ever passed.” Philosopher Bertrand Russell asserted that the Industrial Revolution “caused unspeakable misery in both England and America.”
Where it becomes both comical and sad, Gramm and Boudreaux relay that noted class warrior Thomas Piketty uses the poetry of Thomas Hood and the fiction of Charles Dickens as “’evidence’” of the Industrial Revolution’s brutality. As Piketty sees it, the cruelty of commercial progress “’did not spring from the imagination of their authors.’”
Gramm and Boudreaux reject the consensus. They write that “by every available economic measure,” the Industrial Revolution marked the “beginning of a golden age of material well-being – especially for workers.” It had to be. The movement of people is easily the purest market signal of all. Migration is an expression of a desire to live better by working better. The rural situation individuals left had to have been awful, and the authors indicate that it was.
Which explains how this review began: the authors address the actual living conditions of the “thatched roof” variety that some choose to romanticize to this day. Rain vivifies the brutality of it particularly well. Gramm and Boudreaux cite historians Frances and Joseph Gies, who write that pre-industrial dwellings “had formidable drawbacks; they rotted from alternations of wet and dry, harbored a menagerie of mice, rats, hornets, wasps, spiders and birds; and above all they caught fire.” Which requires a pause, now and in the future.
Think about the “thatched roof” scenario if it’s raining now, or when it next rains, snows, or when it’s hot. How difficult life once was. Keep all of this in mind as the simplistic claim “we’re raising a soft generation,” an “anxious generation,” or surely something else that appeals to those invested in the laughable notion that everything's getting worse. Think about the conditions in which kids once had to be raised, and that parents endured. “Raising a soft generation” is stupendous progress to the mildly sentient, as is “anxious” and any other alleged pejorative that modern handwringers ride to notoriety.
The crucial point here is that per Gramm and Boudreaux, “the average dwelling changed little until the beginning of the industrial revolution.” Which explains yet again the migration of people to the exponentially better opportunities that revealed themselves in cities where production was on the rise. Boudreaux would likely agree that the Industrial Revolution by its very name signaled an escape from the autarky that by its own very name associates with poverty more closely than any other word.
Equally important, the labor division that the Industrial Revolution implied resulted in “higher pay, shorter hours, better working conditions, and even more fresh air.” The more hands and machines working together, the much greater the productivity. Eventually the previous truth resulted in more and more children being freed from daily work in favor of schooling. Those “soft generations” revealing themselves yet again…
Moving to the next chapter on some of the myths about “progressive era regulation,” it was perhaps inevitable that government would insert itself into the prosperity that labor division rendered inevitable, which helps explain the regulation that followed. John D. Rockefeller looms large in this chapter. Gramm and Boudreaux note that amid Rockefeller’s mass production of kerosene from 1870-1885 alone, prices of it “dropped by 69 percent." In other words, Rockefeller quite literally lit up formerly dark nights and brought heat to cold winters at prices that enabled greater and greater usage among common people.
Oil was no different. The authors cite trustbuster Senator George Edmunds (R-VT) as admitting that the so-called “oil trust certainly has reduced the price of oil immensely.” And while Rockefeller’s Standard Oil is to this day described as a monopoly, Gramm and Boudreaux report that Standard’s market share was 88 percent in 1890, but 64 percent by 1911.
From this we can conclude two things that the authors would likely agree with: to this day the most valuable corporations are the ones most expert at bringing prices down. There’s exponentially more money to be made selling to many more people at falling prices than there’s made selling to much fewer people at higher prices. Much more important is that monopoly is a beautiful thing. Think about it. It reveals the discovery of a market that existing businesses have completely missed.
That competition eventually erodes monopolistic conditions is not just a statement of the obvious, but also a case for more monopolies. As in the profits achieved through the discovery of a heretofore unknown market are what attract the investment necessary to infuse a singularly populated market with competition. The authors vivify these truths through Standard Oil, and in the process explode the myth that industrial advance required antitrust and other forms of regulation as mitigation of what was undeniably positive.
Upton Sinclair’s The Jungle is much discussed in Chapter Two. In the words of Gramm and Boudreaux, Sinclair’s book “stirred the public to believe that large producers left unregulated by the government were a menace to both consumers and workers.” The assertion that Sinclair’s book had vast influence brings up a slight quibble with the authors, though one they might agree with.
How much of an impact did The Jungle really have? Per David Von Drehle’s 2023 book, The Book of Charlie (my review here), as of 1900 only 6 percent of Americans could lay claim to the designation of high school graduate. That’s not to say that schooling was necessary for literacy, but it’s just hard to imagine that an avowed socialist agitating for government control (how the authors described Sinclair) could have reached many people.
Again, the speculation here is that Gramm and Boudreaux would agree. This is based on their citing of a statistic indicating that the best known packinghouses were visited to the tune of 2 million per year, plus they cite a statistic from economist Gary Libecap that between 1890 and 1910, meatpacking was always either the first or second highest valued sector in the U.S. Corporate valuations indicate that Sinclair in no substantive way reached the masses with his critical portrait of packinghouses, but did succeed in reaching the relatively few with the means to not just buy a book, but who also possessed the time to read it.
Which is a call for optimism today too. Ludwig von Mises made clear in his classic book Socialism that wealth begets myriad individuals to demagogue it. It’s just a comment that if you lack any knowledge about the prosperity (or lack thereof) of a country, one of the most accurate clues would come care of the number of books promoting the horrors of big business, the goodness of socialism, or both. If there’s lots of them, along with lots of politicians gaining fame from attacks on the rich, that’s a near certain indicator of substantial prosperity. Put another way, if Gramm were president (he ran in 1996) and Boudreaux vice president, the U.S. would be thick with AOC, Sanders, and Warren types. Yes, the U.S. economy would be booming.
What’s important is that in the book’s first two chapters, Gramm and Boudreaux are making a case for prosperity born of the freedom to innovate. From this comes greater access to market goods at lower and lower prices. They laud Jimmy Carter and Ted Kennedy (yes, that Ted Kennedy) as instrumental in the reversal of the regulatory state that was an effect of the Industrial Revolution. Traveling back in time to the 1970s, air travel was something most Americans were innocent of. Air travel was an industry sector created to move mail around the country, and that had its routes centrally planned by the Civil Aeronautics Board. The effect was expensive air travel that few could afford.
Fast forward to the present, and air travel is the rule for pretty much all Americans. Gramm is from Texas, Boudreaux from Louisiana, and one guesses from their geographical origins that each knows more than a few people who travel cheaply and regularly in the fall to college football games. Packed college football stadiums are to some degree a consequence of the deregulation that Gramm and Boudreaux describe and cheer in their book.
Which brings us to Chapter Three. It’s titled “The Myth That the Great Depression Was a Failure of Capitalism.” There’s no argument with the authors’ assertion about capitalism not factoring in what was by its description (“Great Depression”) government error, but there was much disagreement with their analysis. Up front, your reviewer is not an economist. The authors are. Second, most will agree with the authors’ assessment, one that is to some degree conventional wisdom among right-of-center economists. But that’s why it’s hopefully worth reading an analysis that rejects conventional wisdom. Figure that truth of any kind is never arrived at by the counting of heads, including very smart heads.
Gramm and Boudreaux start with what’s easy to agree with, that the 1929 stock market crash didn’t cause the Depression. Markets are a look ahead, which means investors saw something economically troubling ahead and corrected to reflect an unknown becoming a known. The authors don’t point to the Smoot-Hawley tariff as the newly arriving known. There’s disagreement there, since it was in late October of 1929 when it became apparent that President Hoover would sign the execrable tariff deal in 1930. Markets don’t wait to price knowns, whether good or bad. Still, if the authors and others disagree about the market impact of Smoot-Hawley, that won’t be debated here.
What will be debated is their assertion that the real driver of the crash was that “American industrial production had begun to decline two months earlier, in August 1929, which is the official start (as reckoned by the National Bureau of Economic Research) of the formally defined initial recession.” They follow the latter with a quote of Marquette University economist Gene Smiley, who contends that the “initial downturn in economic activity was a primary determinant of the ending of the 1928-29 stock market bubble.” That’s what will be challenged here. If we ignore that “bubbles” are an impossibility as is when it’s remembered that there’s always a buyer and a seller in any transaction, we can’t ignore that it couldn’t have been two-months-old news that sparked the correction in October. Markets are once again looking ahead while relentlessly pricing all known information, which means it couldn’t have been the pricing of industrial production information from two months earlier that sparked a correction two months later.
Moving on to what happened during the downturn, to do so requires a little bit of pre-commentary to help clarify the disagreement with their analysis. For background, it’s notable that in 2023 alone, $50 billion worth of investment found its way to U.S.-based AI, and AI-adjacent business concepts. This investment surge took place amid 525 basis points worth of increases in the Fed funds rate.
It’s a reminder that capital finds production, and without regard to what central banks are doing. And the capital inflows are global. This isn’t a modern concept. In the decades and centuries preceding the Great Depression, along with the decade (the 1930s) that most defined the U.S.'s Depression, China was growing by leaps and bounds, and its growth was most prominently an effect of capital allocated by Jews with origins in Baghdad, and who were headquartered in India for substantial timeframes during which they were financing growth in China. They didn’t even speak Chinese. Where there’s talent there’s always capital. A statement of the obvious to readers interested in a book Gramm and Boudreaux? Most certainly, but that’s why some of the analysis in the chapter didn’t ring true.
It's important to add for clarity that where there’s talent there’s always trusted money. And the money is there not because of central bankers, but because production is itself money. Per Adam Smith, “the sole use of money is to circulate consumable goods.” We produce to trade, and money is always where there’s production as though – yes – placed there by an “invisible hand.” That’s why the dollar liquefies trade as you’re reading this not just in Caracas and Teheran, but also in Pyongyang. The Fed didn’t place so-called “money supply” in those cities, but the existence of market goods ensures it. What’s true now was also true of the former Soviet Union. Illegal though the dollar was, it facilitated transactions there before the Soviet Union’s demise, after, and does to this day.
Which brings us to money in circulation in the U.S. It’s not planned in amounts any more than the amount of dollars circulating in Buenos Aires or Beirut is planned, rather it’s an effect or production. That’s why there’s copious amounts of money in Palo Alto, but relatively small amounts in El Monte, CA, or copious amounts in Chicago, but very little in Cairo, IL. The booming growth in Palo Alto isn’t an effect of a generous or “easy” Fed (money is so tight in Palo Alto that just about all capital for businesses is equity capital, as opposed to loans), instead it’s an effect of the remarkable innovation that takes place there that is a magnet for global capital. On the other side of the world, it's a known quantity that China's technological advance is largely an effect of capital produced right here in the United States. Money is a consequence, never an instigator, which is why no one need ever worry about so-called “money supply.” Where there’s production there’s always money. As Mises himself put it in The Theory of Money and Credit, “No individual, and no nation need fear at any time to have less money than it needs.” Precisely. If Jeff Bezos moves to impoverished West Virginia to start a business next week, capital flows into the Mountain State will be staggeringly large, and that’s true even if Bezos arrives penniless.
Why all the throat clearing? It’s hopefully useful ahead of Gramm and Boudreaux’s commentary about what the government did, or didn’t do, as the economy began to contract. They write that “when the Great Depression came, the Federal Reserve stood by, allowing one-third of banks in the country to go out of business, and the money supply to fall faster than prices.” What they assert is accepted wisdom, but is it true? The view here is that it’s not.
For one, the Fed was never intended to just bail out banks, rather it was expected to lend to solvent banks. This is an important distinction, and more than anything a reminder of the Fed’s superfluous nature as a lender of last resort. That’s because solvent banks have generally avoided going to the Fed for a distressed loan of any kind. To do so is an admission of bankruptcy that feeds on itself to the bank’s detriment. The reputational harm of going to the Fed for a loan is massive, and realistically existential.
The good news then and now is that there are endless non-Fed sources of credit ready and willing to lend to solvent banks. The authors themselves point out that before the Fed’s creation, “With no formal lender of last resort in place in 1907, bank clearinghouse associations in large banking centers acted as nongovernment ‘quasi-central banking’ institutions, as they had done in past panics.”
Assuming their analysis of the Fed’s inaction is true, and worse, was a negative for banks, then it’s only logical that market-driven sources of capital (including clearinghouses) would have filled in where the Fed allegedly didn’t. Or not, and this too is crucial. Markets work brilliantly because businesses are routinely allowed to fail if they no longer rate capital. Banks are no different, nor should they be. Just the same, for the authors to imply that the Fed is or was the only entity capable of propping up banks is like saying that without Social Security no one would have retirement accounts, that without the U.S. Postal Service no one would get packages, or much more pertinent, that without banks there would be no credit. Quite the opposite with banks. By the early part of the 20th century, most credit was business-to-business as is, and well outside the traditional banking system.
The authors cite Milton Friedman and Anna Schwartz, and their lament that “the money stock” fell 2.6 percent from August of 1929 to October of 1930, but money circulates most when there’s production to move around. That the so-called “money stock” would decline amid a substantial downturn is logical, as opposed to alarming.
It’s as though the authors want to acknowledge a very real downturn, and the government’s role in it, only for them to expect that money will continue to circulate as before, and as though nothing has happened. No, money in circulation is an effect of economic activity, which is once again why there’s lots in Chicago and very little in Cairo, IL. But assuming a decline in the so-called “money stock,” why didn’t private and global sources of credit fill in for an allegedly absent Fed, and in the process attain great reward for meeting a glaring market need? If the answer is that the whole world was on fire, then wasn’t the decline in the so-called “money stock” once again a loud market signal that demanded inaction by government? And if a lack of government action is seen by readers or the authors as unsophisticated, do they or readers really believe the Fed could have altered reality? Much more important, should the Fed make it its mission to alter reality by suffocating market signals?
Thinking more about “money stock” or so-called “money supply,” in a book about economic freedom that asserts via Lord Macaulay at the outset that politicians should observe “strict economy in every department of the state,” the authors are making a surprising case for government to fix what they assert that government broke. As the authors note, President Hoover combined tax increases with massive increases in the federal spending burden, he leaned on top employers like Ford to not reduce wages such that the market for unemployed workers couldn’t clear, after which FDR doubled down on Hoover’s errors with a dollar devaluation (the authors don’t mention it, but the view here is that the devaluation was significant), massive new regulation of farming activity when farming still represented a lot of U.S. output, even bigger increases in the federal spending footprint, an undistributed profits tax of up to 74% on corporations that had the temerity to sit on earnings ahead of putting them to work, etc. etc.
Policy under Hoover and Roosevelt was awful, period. About the previous truth, the authors are clear. And there’s no argument with them there. Where there’s argument is in their belief not just that the Fed was the principal cause of the Great Depression, but that having allegedly caused it, the Fed could have somehow ended it. No chance. Boudreaux knows more than anyone that governments have no resources. To then suggest that the Fed could keep so-called “money supply” artificially low in the “closed economy” that was and is the world economy is impossible to countenance, as is the notion that the Fed possessed the power to overcome the monstrous economic policy errors overseen by Hoover and Roosevelt that were reflected in declining amounts of production, and by extension, declining amounts of money in circulation. In short, you don’t fix central planning with central planning.
The authors are particularly and rightly critical of President Hoover for his “successful jawboning of Henry Ford and other corporate leaders to extract promises not to cut wage rates,” but two pages before they cite as valid Allan Meltzer’s assertion that “’if the Federal Reserve had prevented the decline in money, falling prices would have raised real balances [i.e., raised households’ and businesses’ purchasing power], created an excess supply of money, stimulated spending, and limited or ended the decline when the economy began to recover in spring 1930.” Why was it ok for wages to match market realities, but not market prices?
It's a long way of once again agreeing with the authors about the many policy errors made by Hoover and Roosevelt, all the while disagreeing with their focus on the Fed as the primary cause of the Great Depression. It can’t be said enough that declining money in circulation is an effect of reduced production, not a tight Fed. We know this from now and then simply because capital then and now moves around the world to its highest use. Boudreaux knows this particularly well given his decades worth of commentary about how so-called “trade deficits” are as old as the U.S. is. It’s true, and it’s just a reminder that for most of the U.S.’s existence, it has been a major destination for global capital. Applied to the 1930s, it wasn’t a tight Fed holding the economy down, it was bad policy that restrained the recovery in a way that repelled capital from around the world. Shrinkage in so-called “money stock” or “money supply” wasn’t the cause of the downturn, it was the effect. Not so, according to Gramm and Boudreaux.
The authors are up front that they agree with Friedman, Schwartz and Meltzer about the Fed’s “catastrophic failure to act as lender of last resort, the primary function Congress had created the Fed to perform.” As opposed to money being a natural effect of production a la Mises, Smith, and, at risk of insulting those listed, your reviewer (see The Money Confusion), they write of money creation by central banks as the economic instigator, accelerant, or both. In their words, and in a description of a near-term recovery under FDR, they write of how an increase of so-called “money supply” provided “much-needed fuel for increased economic activity.” None of this rang true, particularly from Boudreaux. The idea that a market economy requires creations of government to "supply" exchange media in proper quantities is difficult to take seriously.
From there, and if we ignore that the Fed was never expected to lend to just any bank, why didn’t private sources of credit fill in for the Fed? From this are we to conclude that “market failure” caused the Great Depression?
Considering so-called “money supply” some more, Gramm and Boudreaux’s analysis suggests money doesn’t go where it’s treated best or where there’s production, but instead that central bankers can just create it and that the creation of it will immediately restart the economy as though the latter is an engine. That simply cannot be. And if anyone doubts this, they need only contemplate how long millions or billions deposited in west Baltimore’s banks would circulate in west Baltimore. To say that 99.99% of the money would never touch a hand of any local is a blinding glimpse of the obvious, so why wouldn’t what’s true for west Baltimore apply to a nation enduring truly mindless economic policy?
Of greatest importance, why are two free-market champions fairly explicitly calling for government intervention of the bank bailout variety in a book not just about economic freedom, but that routinely notes the government’s role in economic troubles? Governments are rightly described within The Triumph of Economic Freedom as the cause of economic downturns, but when the bitter fruits of bad policy infect banks, the authors are clear that the government must step in to save financial institutions. Why? Why not leave it up to market-based sources of credit when it comes to choosing to save them, or not?
Closer to chapter’s end, they cite Friedman biographer Jennifer Burns’s assertion about the Great Depression, that “what appeared to be a failure of market was in fact a failure of men.” Yes, so true. Policy failure. Despite this, Friedman, Schwartz, Meltzer, Gramm, Boudreaux, and countless other economists contend that the men from the same government that oversaw policy failure could have sidestepped a lot of it if only the men at the Federal Reserve had stepped on the market’s message? That’s hard to take seriously no matter what passes as conventional wisdom among real economists. And it also arguably misses the point.
Whether the Fed as the all-powerful entity capable of propping up the economy is true or not, since when are bailouts and central planning of monetary aggregates part of the free-market playbook? Boudreaux has a long association with the libertarian Cato Institute, as does Gramm. It rates mention as a way of wondering if the view inside Cato has evolved such that a little or a lot of central planning has suddenly acquired good attributes at 1000 Massachusetts Avenue; that for an economy to continue growing during difficult stretches, central bankers must plan so-called “money supply” all the while being on the ready to liquefy or bail out banks if and when the central bank’s planning of the aggregates fails, or policy fails more broadly. Getting right to the point, do Gramm and Boudreaux believe government intervention in declining economies is necessary to keep them free and growing (they cite Ben Bernanke’s assertion of just that in glowing fashion, describing a famous speech he gave about the alleged causes of the Great Depression as "extraordinary"), and do they believe bank bailouts are a necessary part of this playbook? Their book indicates that they very much do, and it’s not just Chapter Three that informs this assertion. Chapter Five similarly indicates that Gramm and Boudreaux don’t just favor government intervention and bank bailouts during slow economic periods, but that they also view the mix of interventionist policies as essential. As someone who lunches near weekly with Cato Institute co-founder Ed Crane, these are views he decidedly does not share.
In between Chapters Three and Five, Gramm and Boudreaux address the myth about trade “hollowing out American manufacturing.” Quite the opposite. As they note, a big problem with the analysis involves a “a failure to distinguish manufacturing output from manufacturing employment.” It’s an important distinction exactly because it speaks to the beauty of cooperation among humans and machines.
As machines and global hands joined in the production of food, more and more Americans were freed from the production part. This is called progress. The authors write that while 75% of Americans worked on farms in 1800, 33 percent did in 1900, and 1.6 percent by 2000. In the words of Gramm and Boudreaux, “jobs weren’t stolen, they were abandoned for better opportunities off of the farm."
Factories are no different. As production processes become more sophisticated, and globalized, fewer U.S. hands are required to produce exponentially more. It’s beautiful. Yes, trade and advances in production techniques freed more and more Americans from factories. Paraphrasing the authors only slightly, “factory jobs weren’t stolen, they were abandoned for better opportunities outside of factories.”
There was one notable disagreement in the chapter. Gramm and Boudreaux write, “Protectionists pretend that, starting in the late 1970s, increased trade ended the postwar golden age of American manufacturing, but they leave out the fact that the destruction of war and the explosion of trade in the immediate postwar period produced this ‘golden age’ in the first place.” This didn’t read right. It didn’t because there was no post-war golden age. Boudreaux in particular knows why, and it’s explained by his and Gramm’s comment that manufacturing romantics like Oren Cass fail to distinguish between manufacturing employment and manufacturing output.
Considering the so-called post-WWII “golden age,” stop and think about the “unseen” (Boudreaux is a big fan of Frederic Bastiat) economic burden for the U.S. of a world on its back economically. As Boudreaux once said off air during a taping of The Bill Walton Show, Jeff Bezos’s billions don’t mean much without global production to exchange the billions for. That Americans were somewhat uniquely situated to immediately start producing after WWII wasn’t a feature of the postwar U.S. economy, but a major bug. As Mises wrote in Liberalism, “War only destroys. It cannot create.” The postwar U.S. economy was a fraction of its potential self as are all country economies to the extent that millions are dead or not working.
About what’s been written, the belief here is that the authors would once again agree. As they write a page later, when the U.S. economy is growing “it becomes an irresistible magnet for the world’s talent and capital.” That’s the crucial point that protectionists can’t grasp, and that Trump apologists choose to ignore: it wasn’t trade or “globalism” that created the so-called “Trump voter” who was allegedly victimized by trade and globalism, rather it was that the U.S. economy wasn't even more open to trade and globalism. That’s because the division of labor is economic growth personified. And economic growth is a magnet for capital without which there are no companies and jobs, along with the talent that similarly attracts capital that associates with companies and jobs.
The simple, undeniable truth is that American workers were not happier or better off after World War II. What a sick myth to presume that they were, that millions had to die and that millions more had to be reduced to abject poverty for Americans to be economically sound. It’s nonsense, and worse, it’s dangerous. Without knowing Gramm (other than being sat next to him at an AEI dinner long ago), I know Boudreaux reasonably well. The view here is that in a chapter meant to discredit the myth about trade hollowing out manufacturing, they weren’t aggressive enough in pointing out that there was no golden age, that in truth Americans were desperate to escape the factories that a stupid a war (a redundancy of the first order) kept them in longer than they would have liked.
Promoters of free trade have no need to apologize, period. Trade loves workers more than any other economic concept in existence precisely because it frees individuals to specialize. While there are arguments for Donald Trump, the trade argument is baseless. There’s no need to give an inch, and the view here is that the authors did in paying even slight lip service to the post-WWII “golden age” myth. Quoting the authors once again, when the U.S. economy is growing “it becomes an irresistible magnet for the world’s talent and capital.” Truer words are rarely written, after which production among as many hands and machines as possible is the path to stupendous growth that builds on its brilliant self.
Chapter Five is titled "The Financial Crisis Myth: Deregulation Caused the Financial Crisis." There’s no argument with what the authors deem a myth about “deregulation,” but the chapter was a disappointment just the same. And it was because it revealed a more interventionist side to the authors that first became apparent in Chapter Three.
As the chapter begins, they write that with the “global economy in a recession,” the “Federal Reserve Bank expanded the money supply, thus injecting liquidity into the financial system, and the Treasury proposed that Congress adopt a financial bailout, which it did by providing aid in the form of loans to both troubled financial institutions and some nonfinancial businesses.” The authors are quoted in full as clarification for the meaning behind what they wrote in Chapter Three about a role they’re willing to arrogate to the government in times of trouble. While governments are the obvious cause of economic problems as Chapters Three and Five make plain, they believe government should also be empowered to intervene in the problems of its own making.
This belief in intervention exists as the major source of disagreement with the authors given my own belief that the bailouts were the crisis. It’s that simple. Again, it’s not conventional wisdom, but the crisis is always in government actors stepping on market signals. That’s why there’s so little agreement with Chapter Three’s routine assertion that the Great Depression could be laid at the door of the Federal Reserve, and it's alleged inaction. Chapter Five was once again no different in the interventionist sense, which made it very difficult to nod along to Gramm and Boudreaux’s explanation of 2008.
In their words, “Simply said, the financial crisis was caused by a lot of banks making a lot of loans to a lot of people who either could not or would not pay the money back.” Except that as Blackstone co-founder Stephen Schwarzmann observed in his memoirs (my review here), Whatever It Takes, north of 90 percent of the mortgages completed from 2003-2007 performed. No doubt banks need much more than 90 percent of their loans to perform, but it’s just a comment that unpaid loans as the so-called “crisis” isn’t as compelling as most would like to believe. Once again, the crisis was the government's intervention in errors made, not in the errors made. In other words, the crisis was a lack of markets when markets were most needed.
To which Gramm and Boudreaux would perhaps not unreasonably reply that what I’ve written is true so long as actual markets are at work. They might claim they weren't at work. They write of how “Fannie’s and Freddie’s minimum quota for ‘affordable housing’ loans was raised to 40 percent in 1996 and to 42 percent in 1997; then, in 2000, HUD ordered the quota raised even further, to 50-55 percent.” They write about how Community Reinvestment Act lending toward home ownership “totaled $8.8 billion” from the 1977 to 1991, but that “from 1992 through the first half of 2007, the enormous sum of $4.5 trillion was committed – an increase of more than 51,000!” This, and much more from their book, would be Gramm and Boudreaux’s evidence that a lack of markets informed what was happening in housing in the 2000s. That’s true, but it if anything supports my point that the crisis was one of bailouts, not the federal government’s surely errant subsidization of home ownership.
That’s because markets are once again a look ahead. They never price in the present. And with government meddling in housing in all manner of ways, U.S. equities continued to reach new highs. They did this despite markets existing to price all known information. There’s my disagreement with the authors, or at least part of it. There's no arguing with them that errors were made by government, banks, and people who were borrowing what they couldn’t afford to pay back. At the same time, these errors were all the time being priced, yet without markets collapsing. Unless markets are stupid, and the authors would agree they're the opposite of stupid, there's little to support their case for a crisis being an effect of what had been priced all along.
The financial crack-up is what followed. It was intervention. It was George W. Bush concluding that “the market is not functioning properly,” only for Bush, Bernanke, Henry Paulson, and others to act. And in acting, they substituted their narrow knowledge for that of the marketplace.
It all speaks to another quibble with Chapter Five. Agreeing yet again that deregulation, and specifically legislation (Gramm-Leach-Bliley) tied to Gramm had nothing to do with the “crisis,” it’s just the same hard to agree with numerous mentions of Bill Clinton and Barack Obama and their errors, but no mentions of George W. Bush?! Actually, there’s one mention of Bush in Chapter Five, but it was a defense of the 43rd president, that his alleged “deregulation” didn’t cause the so-called “financial crisis.”
Even if the authors disagree with this review, that Bush’s bailouts weren’t in fact the crisis, the view here is that Bush rates prominent mention in any story about the rush to housing in the 2000s. And very little of it good. He followed Clinton into the White House with calls for an “ownership society.” As readers can probably imagine, the vision included increased home ownership care of the taxpayer. In Bush’s words, “We want everybody in America to own their own home.”
In 2003, Bush giddily signed the American Dream Downpayment Act, which would subsidize first-time homebuyers primarily from low-income groups. The rhetorically free-market Bush administration backed up the legislation by leaning on lenders to make sure they weren’t overly intrusive when it came to asking subprime borrowers for full documentation when it came to securing loans. After which the Bush HUD, much like the Clinton HUD, pressured Fannie Mae and Freddie Mac to support subprime lending. Meet the new boss, same as the old boss…? Don’t worry, it gets worse.
In a speech about his Blueprint for the American Dream, Bush oddly tied home ownership to the warring in the Middle East. In his own words, “Let me first talk about how to make sure America is secure from a group of killers. You know what they hate? They hate that somebody can go buy a home.” Yes, you read that right. It's all in a book I co-authored with Jack Ryan called Bringing Adam Smith Into the American Home: A Case Against Home Ownership. Having made a jejune case that it was “in our national interest that more people own their home,” Bush ultimately defended tax credits and grants as a necessary part of the War on Terror.
There was more disagreement with the authors’ analysis, including their assertion that the Fed’s low rates were a driver of home ownership. The view ignores how housing well outperformed the stock market in the 1970s when the Fed was aggressively raising its funds rate. But the main disagreement with them is not in their correct dismissal of deregulation as the cause of the carnage, but in their ongoing support of government intervention, including bailouts.
They write on p. 133 that “the subprime bailout occurred because the U.S. financial sector was – and always will be – too important to be allowed to fail.” If that’s not an explicit statement in favor of government bailouts every time problems arise in the financial sector, it’s hard to know what would be. And it’s not just bailouts. Comparing 2008’s aftermath to the 1982 recession, they write that “by way of comparison, the financial crisis recovery has benefited from the most expansionary monetary policy to that point in the peacetime history of the United States.” It implies that governments can stimulate economic growth. No!
Gramm and Boudreaux end the chapter with a knock on Barack Obama, that “the Obama program represented the most dramatic change in U.S. economic policy in over three quarters of a century.” No fan of Obama, the analysis implied that Obama was the post-2008 problem, yet no mentions of George W. Bush and his many errors? This will be chalked up to a presumption of ties between Gramm and Bush, which had me thinking the omission of Bush in Chapter Five was agony for Boudreaux.
The chapter on inequality opens with a great quote from Will and Ariel Durant that “Freedom and equality are sworn and everlasting enemies, and when one prevails the other dies.” They couldn’t have put it better, but the quote explains disappointment with the chapter.
Inequality is a feature of a free society, not a bug. The more inequality, the greater the freedom. Paraphrasing my review (not found on Google, unfortunately) of Boudreaux’s 2007 book, Globalization, “rising wealth inequality signals shrinking lifestyle inequality.” As wealth inequality grows, life is getting better and better. There’s quite simply no need to apologize for inequality. And to some degree the authors don’t. Toward chapter’s end, they acknowledge the meaning of Bill Gates, Warren Buffett, FedEx founder Fred Smith, and others to progress.
Despite that, they largely made their inequality chapter not about rising inequality signaling soaring living standards, and instead focused on statistics. They wrote of how “the Census Bureau does not count two-thirds of all transfer payments as income,” the explicit point being that when we factor in the federal government’s role in shrinking economic freedom through excessive taxes and subsequent redistribution of taxes collected, inequality isn’t nearly as bad as the statistics show. To prove my own analysis in the previous sentence isn’t imagined, the authors add that “the Census Bureau neither reduces household income by the amount of taxes paid nor increases household income by the amount of refundable tax credits received.” Again, the Census Bureau’s measure of what’s not bad in the first place is allegedly mitigated by taxation and wealth redistribution that the Bureau fails to report. The view here is that the statistics weakened what should have been a much more uplifting chapter.
The penultimate chapter is about poverty as a failure of American capitalism, and why that’s a myth. There’s no disagreement here, but there is disagreement with the presentation a la Chapter Six. As an example, they write that “74 percent of the ownership of Corporate America is held by pension funds, 401(k)s, IRAs, and life insurance companies that fund death benefits and annuities.” It read as another attempt to reveal how much more equal the U.S. is than it actually is. As the authors likely know, the top 10 percent of earners own over 85% of public equities. And this is a good thing. It’s something that must be advertised. If so, maybe progress can be made in reducing the tax burden on the rich. There are no companies and no jobs without investment, and the rich provide most of it. Reduce their burden. The more unequal that society is in a wealth sense, the more money that can be put to work improving it.
Inequality is poverty’s foremost enemy, not statistics and Census figures. As Gramm and Boudreaux write toward book’s end, poverty in the U.S. is continually being redefined in ways that support their contention that capitalism isn’t the enemy of the poor. It’s so true! In their words, “the ends today’s Americans are trying to make meet are significantly larger than the ends people were trying to make meet in the 1960s.” Yes! And this is an effect of fortunes made by democratizing access to so much that was formerly out of reach for most Americans. Life without inequality would be so cruel. Let's celebrate it, not shrink it with statistics.
Phil Gramm and Donald Boudreaux surely don't need me to say that they are rightly revered as economists, and much more importantly, as economists uniquely capable of bringing the ideas of economic liberty to a wider audience. Which speaks to the good, but also the disappointing in the book. They’re so right about the genius of economic freedom, so why bury it in so many numbers? And why diminish the genius of economic freedom with the routine assertion that government must always be nearby to centrally plan so-called “money supply,” fund bank bailouts, plus goose individual bank accounts so that prices don’t decline? The calls for government intervention along with critiques of an alleged lack of government intervention once again didn’t read right, and will have this reviewer wondering if substantial parts of the genius of Gramm and Boudreaux's book was lost in their collaboration.
They assert in the book’s Acknowledgements that “along the way, there naturally arose a handful of minor disagreements,” but that they arose on “inessential matters.” Not privy to the book’s creation, the near total lack of disagreement between the authors was hard to believe given the book’s occasional embrace of government’s muscular role in the economy, along with a parallel belief that a muscular government role is necessary every time government errors bring on economic decline.
