Constitutional Neglect and Government Precipitation of Economic Crises

G. Stolyarov II
 
Issue CLXXXVIII 
March 3, 2009
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A sample image This is the transcript of a speech that won $2000 at the 2009 Edward Everett Oratory Competition at Hillsdale College.

            The year is 1887, and multiple major droughts have struck Texas. Congress passes a bill giving $10,000 in federal aid to Texas farmers to enable them to buy seeds. But upon reaching President Grover Cleveland, the bill is vetoed – on principle.[1] Cleveland writes to Congress, “I can find no warrant for such an appropriation in the Constitution, and I do not believe that the power and duty of the General Government ought to be extended to the relief of individual suffering which is in no manner properly related to the public service or benefit…  Federal aid in such cases encourages the expectation of paternal care on the part of the government… while it prevents the indulgence among our people of that kindly sentiment and conduct which strengthen the bond of a common brotherhood.”[2]

            Now fast-forward to 2008. The U. S. Treasury and Federal Reserve are spending trillions to bail out banks, homeowners who lived beyond their means, automobile companies, and anything that makes sufficient political donations. According to Barry Ritholtz, author of the book Bailout Nation, the cost of the 2008 bailouts is already over 4.6 trillion dollars – exceeding the combined costs of the Louisiana Purchase, the New Deal, the Marshall Plan, the Korean, Vietnam, and Iraq Wars, the 1989 Savings and Loan Bailout, and NASA’s all-time budget.[3] The bailouts received unreserved support from both Barack Obama and John McCain, showing just how little constitutional adherence remains in our most prominent politicians. Grover Cleveland, who refused to spend $10,000 of taxpayer money to relieve a dire crisis for farmers, would have been outraged. Clearly, if the Constitution did not authorize a comparatively tiny appropriation, it cannot justify one of unprecedented enormity. It is unambiguously unconstitutional for the U. S. government to attempt to remedy economic crises. Moreover, the American Founders overwhelmingly opposed such intervention. Indeed, government meddling is the cause of virtually all economic crises, and politicians can only exacerbate the present crisis by offering more of the same.

              The Constitution nowhere authorizes any federal intervention aimed at resolving economic crises or propping up failing institutions. Article I, Section VIII, enumerates Congress’s powers. Conspicuously absent is any clause stating that “Congress shall have power to distribute taxpayer funds to individuals and firms that made reckless investments, mortgages, or production decisions.” Even the dangerously open-ended Interstate Commerce Clause cannot justify bailouts by the most elaborate rhetorical gymnastics. If giving the savings of prudent, industrious individuals to financial institutions that have squandered trillions is regulation of interstate commerce, then a plain robber’s redistribution of your hard-earned money to himself is just his way of regulating inter-house commerce. Nor are bailouts and the onerous controls accompanying them a “necessary and proper” means to any of Congress’s enumerated powers. It is not even in the “general welfare” for the savings of most to be wiped out by rampant forthcoming inflation in order to pad the wallets of failed bankers and hedge fund managers. Moreover, the executive and judicial branches of government are nowhere authorized to engage in such unabashed redistribution of wealth. The crucial but neglected Tenth Amendment states in no uncertain terms that “[t]he powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” Or in terms our esteemed politicians might be more intellectually suited to understand, “If it’s not stated in the Constitution, you can’t do it!”

              The American Founders would have seen the recent bailouts as a near-fatal blow to the United States’ integrity as a country with any semblance of individual rights, rule of law, and limited government. Benjamin Franklin warned that “[w]hen the people find that they can vote themselves money, that will herald the end of the republic.”[4] We are witnessing the spectacle of people who imprudently took out variable-rate subprime mortgages pressuring their representatives to give them money earned by the rest of us. Thomas Jefferson, in his First Inaugural Address, staunchly opposed any government intervention for the purpose of economic stabilization. He asked: “what more is necessary to make us a happy and a prosperous people? …a wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned.”[5]

Today, the opposite of Jefferson’s vision prevails: a government that inserts itself into virtually all economic and non-economic areas, whose accelerating debt exceeds 10 trillion dollars, and whose 2006 spending was a colossal 36.1 percent of the Gross Domestic Product.[6] In his “Opinion on the Constitutionality of a National Bank,” Jefferson argued that “[t]o take a single step beyond the boundaries thus specially drawn around the powers of  Congress [by the Tenth Amendment], is to take possession of a boundless field of power, not longer susceptible of any definition.”[7] James Madison likewise warned that “If Congress can do whatever in their discretion can be done by money, and will promote the General Welfare, the Government is no longer a limited one, possessing enumerated powers, but an indefinite one, subject to particular exceptions.”[8] Today, we see the culmination of the dangerous trend that Franklin, Jefferson, and Madison fought. The constitutionally unauthorized First Bank of the United States set the first of many precedents for the 1913 formation of the Federal Reserve. Since then, the dollar lost over 95 percent of its value and continues to be debased by enormous money supply augmentations.[9] Meanwhile, the Fed and a myriad of costly, wasteful government subsidies, prohibitions, and controls precipitated eight recessions and one depression.[10]

 Indeed, illustrious economists have shown that government intervention is the cause, not the cure, of economic crises. In a free market, there will always be some businesses that flourish and others that fail. This is the natural dynamic of competition, by which competent firms that serve consumers most effectively gain an increased share of resources, while incompetent firms lose market share and must reform or perish. But the systemic booms and busts of the twentieth and early twenty-first centuries – where virtually all businesses either prosper or suffer in unison – were due to government meddling. In the 1930s, economists Ludwig von Mises and Friedrich Hayek formulated the Austrian Business Cycle Theory, which explains how artificial credit expansion by government central banks results in an unsustainable boom due to capital malinvestment.[11]

 To illustrate this insight, Mises used the analogy of a master builder, who has a stock of bricks at his disposal. However, false signals lead the master builder to believe that he has more bricks than actually exist. In real economies, the central bank sends such false signals by artificially lowering the rate of interest below what it would have been on the free market – as Alan Greenspan did prior to the high-tech bubble of the 1990s and the housing bubble of the 2000s, and as Ben Bernanke is doing today.[12]

 So what will our master builder do? He will try to construct a much larger and more ambitious building than his resources allow. The sooner he discovers the misinformation, the more effectively he can revise his plans and correct his errors. This is the function of a recession. Far from an evil, recessions are highly desirable corrections of a systemic depletion and misallocation of the economy’s capital stock. But in staving off the recession through even more easy credit, the central bank perpetuates the illusion that materials exist for many more projects than are sustainable, while fueling increasingly rampant inflation. Eventually, the master builder simply runs out of bricks, and one cannot construct a building from paper. Then we pay a severe price for delaying the inevitable; all the bailouts, credit expansions, and government interventions pave the way for economic collapse of unprecedented proportions.

 The Founders and Grover Cleveland were right to counsel the U. S. government to stay strictly within the letter of the Constitution. The Constitution, they understood, is no mere set of arbitrary constraints. Absolute, immutable economic law – subject to no whims of politicians or majorities – justifies these constraints, as the later work of the Austrian economists confirms. The Constitution should be followed because, under a strict interpretation, it enables tremendous, uninterrupted liberty, prosperity, and progress. Today, the recommendation of the Constitution, the Founders, and sound economics cannot be clearer; it is laissez-faire. Enough of bailouts, redistribution, inflation, and onerous economic controls! To paraphrase Jefferson, “Let no more be heard of confidence in [Paulson, Geithner, and Bernanke], but bind [them] down from mischief by the chains of the Constitution!”[13]

References Used

“Government Spending.” Wikipedia, the Free Encyclopedia. Available at http://en.wikipedia.org/wiki/Government_spending. Accessed 28 December 2008.

“Grover Cleveland.” Wikipedia, the Free Encyclopedia. Available at http://en.wikipedia.org/wiki/Grover_Cleveland. Accessed 28 December 2008.

Cleveland, Grover. (1887). “Veto Message.” Available at  http://governmentprinciples.wordpress.com/grover-cleveland-veto-message/. Accessed 28 December 2008.

“First Bank of the United States.” Wikipedia, the Free Encyclopedia. Available at http://en.wikipedia.org/wiki/First_bank_of_the_united_states. Accessed 28 December 2008.

Jefferson, Thomas. (1791). “Opinion on the Constitutionality of a National Bank.” Available at http://avalon.law.yale.edu/18th_century/bank-tj.asp. Accessed 28 December 2008.

Jefferson, Thomas. (1798). “Draft of the Kentucky Resolutions.” Available at http://avalon.law.yale.edu/18th_century/jeffken.asp. Accessed 28 December 2008. 

Jefferson, Thomas. (1801). “First Inaugural Address.” Available at http://avalon.law.yale.edu/19th_century/jefinau1.asp. Accessed 28 December 2008.  

“List of Recessions in the United States.” (2008). Wikipedia, the Free Encyclopedia. Available at http://en.wikipedia.org/wiki/List_of_recessions. Accessed 28 December 2008.

Madison, James. (1792). Letter to Edmund Pendleton. Available at http://www.familytales.org/dbDisplay.php?id=ltr_mad1713. Accessed 28 December 2008.

Meredith, Wade.  (2008). “The 2008 Bailout vs. Other Large Government Projects.” VoltageCreative.com. Available at http://voltagecreative.com/blog/wp-content/uploads/2008/11/bailout-pie.png. Accessed 28 December 2008.

Mises, Ludwig von. (1949). Human Action. Chapter XX. Available at http://www.econlib.org/library/Mises/HmA/msHmA20.html. Accessed 28 December 2008.

Murphy, Robert P. (2008). “Did the Fed Cause the Housing Bubble?” The Ludwig von Mises Institute. Available at http://mises.org/story/2936. Accessed 28 December 2008.

Petrie, John. “The Greatest Benjamin Franklin Quotes.” Available at http://jpetrie.myweb.uga.edu/poor_richard.html. Accessed 28 December 2008.

Ritholz, Barry. (2008). Cited in “Bailout costs more than Marshall Plan, Louisiana Purchase, moonshot, S&L bailout, Korean War, New Deal, Iraq war, Vietnam war, and NASA’s lifetime budget — *combined*!” by Cory Doctorow. Available at http://www.boingboing.net/2008/11/25/bailout-costs-more-t.html. Accessed 28 December 2008.

“The Shrinking Value of the Dollar.” (2008). Information Please Database. Available at http://www.infoplease.com/ipa/A0001519.html. Accessed 28 December 2008.


[1]“Grover Cleveland.” Wikipedia, The Free Encyclopedia

[2] Cleveland 1887

[3] Ritholz 2008

[4] Petrie, John. “The Greatest Benjamin Franklin Quotes.”

[5] Jefferson 1801.

[6] “Government Spending.” Wikipedia, the Free Encyclopedia.

[7] Jefferson 1791.

[8] Madison 1792.

[9] “The Shrinking Value of the Dollar.” 2008. Information Please Database.

[10] “List of Recessions in the United States.” 2008. Wikipedia, the Free Encyclopedia.

[11] Mises 1949, Chapter XX.

[12] Murphy 2008.

[13] Jefferson 1798.



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