THE BEAR'S LAIR Populist before it was capitalist
By Martin Hutchinson
The United States is often held out as the world's principal beacon of
free-market principles. To the extent that it backslides, there is thought to
be little hope for such principles in other countries. Yet as last week's
housing finance debate demonstrated again, the United States was populist
before it was capitalist, and free-market principles often have a tougher
battle here than in
supposedly socialist Europe, let alone the supposedly state-directed economies
of east Asia.
It began with the American Revolution. As is obvious to historians who are not
also myth-makers, this was not instituted by a group of dedicated capitalists.
In particular, to get sufficient support among the working folk who were needed
to man the Continental Army, the governing ethos of the revolution was heavily
populist and anti-aristocratic. Washington may have been as rich as Lord
Fairfax, if not richer, but politics demanded that he exploit the impoverished
masses' resentment of his lordship. As for Thomas Jefferson, he was a classic
upper-class radical; as the Irish poet Thomas Moore (1779-1852) wrote of him:
The
Patriot, fresh from Freedom's councils come
Now pleased retires to lash his slaves at home
Or woo, perhaps, some black Aspasia's charms,
And dream of freedom in his bondsmaid's arms.*
Property
rights in slaves were questioned by the Founding Fathers far less than they
were in England - Lord Mansfield's decision prohibiting slavery within
metropolitan Britain had already been issued in 1772.
However, feeding popular prejudice required that the property rights of
landowners in general must be sharply restricted compared with their position
in England. Whereas in England landowners owned both the game on their land and
the fish in the streams running through their land, in the United States, as R
J Smith of the Center for Private Conservation has ably pointed out, rights of
landowners were much more restrictive, so hunting and fishing by the populace
at large were allowed without restrictions. The result was a classic "tragedy
of the commons", wiping out buffalo herds and east coast salmon alike.
Capitalism defines and protects property rights; populism allows unrestricted
access, thereby destroying the amenity concerned.
The priority of populism over property rights continued throughout the 19th
century, with Abraham Lincoln being a major exemplar and the much reviled James
Buchanan a feeble resister of the tendency. To a certain extent, this
paralleled developments in Britain: the 19th century Whigs who proclaimed their
devotion to free markets were in practice more than happy to violate property
rights when they got in the way of one of their schemes. The previous
generation's leaders, William Pitt and Robert, Lord Liverpool, were far more
conscious that capitalism requires well-defined property rights to work
properly, and that free markets without well established property rights are a
mass of illicit rent seeking.
However, the US political system was more prone to rent seeking and violation
of property rights than its British equivalent. To be fair, property rights
themselves were often disputed in the wilderness; the Yazoo land scandal of the
1790s created property rights in a vast area of land, regardless of prior
occupation by Indians or others, simply by the action of the corrupt Georgia
legislature, a transaction upheld by the Supreme Court in the 1810 "Fletcher v
Peck" judgment. In Mark Twain's 1873 The Gilded Age, the Hawkins
family's 75,000 acres (30,300 hectares) of Tennessee land only acquires value
when a corrupt senator agrees to sponsor legislation founding a federal college
on the land. Even in 1810 or 1873, when free-market capitalism was
theoretically unchallenged, political favors were able to trump property
rights, which had value only when some legislative body smiled on them.
When the Progressives took over economic policy after 1900, property rights had
an even harder time. Theodore Roosevelt, nominally a Republican, indulged in
class-warfare rhetoric against Wall Street and business interests more
ferociously than any successor except his cousin. He also forcibly
nationalized, in the name of environmentalism, vast acreages of the west with
scant regard for the property rights of existing landowners.
Since the retirement of the "Four Horsemen" Supreme Court judges [2] who
thwarted much of the first New Deal meddling, the Supreme Court has also been
an unreliable supporter of property rights. In a previous column, published at
the time, I wrote about the case of Kelo v New London (2005), where the Supreme
Court allowed the city of New London to take Suzanne Kelo's property for
redevelopment, even though the proposed redevelopment was a private-sector one.
Thus even the limited protections for property in the US Constitution are
eroded when political interests are at stake.
However, it is in the area of housing policy that US populism has most clearly
trumped any reasonable version of the free market. Herbert Hoover, no great
respecter of property rights or the free market himself, devised as secretary
of commerce an "Own your own home" campaign that contributed markedly to the
excess housing investment of the late 1920s and the subsequent downturn. Once
the Great Depression hit, he formed the Federal Home Loan Banks in 1932,
government agencies set up to make housing loans, to which Franklin Roosevelt
added the Federal Housing Administration in 1934. Fannie Mae itself,
guaranteeing home loans, was created by Roosevelt in 1938, while Freddie Mac
was a creation of the Lyndon Johnson administration.
The entry of the federal government into the business of guaranteeing home
loans was thus mostly a child of the Great Depression and of the pathological
market conditions (50% delinquency rates) of that unhappy period. However, the
downturn had been exacerbated by Hoover's artificial encouragement of the
housing market in the 1920s. In any case, the popularity of housing finance and
home ownership in general was such that there was no great constituency for
returning to a system without government guarantees, even in the 1950s when
such a return would have been easy.
Even after the disaster of 2008, and the US$149 billion (and counting) taxpayer
contributions to Fannie Mae and Freddie Mac, it is by no means certain that
housing finance will revert to a private-sector solution. The principal theme
of last week's housing finance conference was how to reconstitute the state
supported system, not how to abolish it. Only House Financial Services
Committee chairman Barney Frank has now retreated from his previous support of
Fannie Mae and Freddie Mac, saying that if there is to be public support for
housing finance, it should be open and on-budget, rather than through the
Fannie Mae and Freddie Mac system of hidden and unacknowledged guarantees.
However, Frank's support for genuine reform by no means guarantees that it will
happen, when so many lobbyists are opposed to it.
Needless to say, housing finance over the last couple of decades has been a
prime example of what goes wrong when free-market principles are subverted, and
the price mechanism is made to serve statist ends. The previous direct system
of housing finance, exemplified by Jimmy Stewart in the 1946 movie It's a
Wonderful Life, was superseded by a system of guarantees and
securitization that was nevertheless more expensive for the customer - albeit
highly profitable both for Wall Street and for the shadowy netherworld of
mortgage origination.
In summary, the US political tradition is not particularly friendly to the free
market. To the extent it allows a free market, it facilitates a bastardized
version of the market in which, as in Twain's Gilded Age, political pull
is far more profitable than ownership. Thus among the most profitable companies
in the last few years have been producers of corn, and manufacturers of ethanol
by a process neither economical nor useful to the objective of slowing global
warming, its supposed goal. Indeed the global warming problem has been used,
not to produce market-friendly solutions to the modest but probably real
problem of man-caused carbon dioxide emissions, but to construct ever more
byzantine schemes for government control over large parts of the economy, with
massive rents extracted therefrom.
As suggested above, the tendency for populism to trump market principle is
difficult to eradicate. It is both embedded in the national culture and
exacerbated by the peculiar US political system, which turns individual House
representatives and senators into political entrepreneurs, financed by campaign
donations from vested interests.
All societies have their disadvantages, and the US economy has survived pretty
well even with its excessive populism. But Americans who sneer at continental
Europe's big government and high taxes should remember: Germany, for example,
has a more sensible housing finance system, less of its capital diverted to
housing investment, and a healthcare system that provides high-quality care
while tying up far fewer resources than the US one. It is thus not surprising
that some of the time, as at present, Germany's economic performance surpasses
that of the United States.
Notes:
1. To Thomas Hume, Esq, MD
2. The "Four Horsemen": so named by the press; four conservative Supreme Court
members during the 1932-1937 terms - Justices Pierce Butler, James Clark
McReynolds, George Sutherland, and Willis Van Devanter.
Martin Hutchinson is the author of Great Conservatives (Academica
Press, 2005) - details can be found at www.greatconservatives.com.
(Republished with permission from PrudentBear.com.
Copyright 2005-10 David W Tice & Associates.)
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