Chapter 9 and Epilogue of Toomey's Road to Prosperity

Partial review of The Road to Prosperity: How to Grow Our Economy and Revive the American Dream, by Patrick J. Toomey and Nachama Soloveichik. NY: Wiley, 2009.

A few years ago I wrote a lengthy multi-part review of Rick Santorum’s book. I’d like to do something similar for Toomey’s Road to Prosperity. Each post will discuss one or more chapters of the book with a post at the end with a linked list of all the entries and some final thoughts.

Chapter 9 is "The 2009 Lurch Left" (pp. 195-214), followed by the Epilogue (215-216).

People have forgotten that the economy has swings and expect a quick government intervention and fix. "This substitution o fcentralized, politically driven economic controls in place of personal and economic freedom invariably diminishes prosperity." (196).

Bailouts

We should not have bailed out banks, car companies, and mortgage companies. Toomey says that the lack of lending by banks was not due to an unwillingness to lend but because there was little demand for loans. Few banks had toxic assets that needed to be bought out (198). Insolvent companies should have gone into bankruptcy.

Mark to Market Accounting

The Financial Accounting Standards Board (FASB) is letting companies to decide how to value their assets. Toomey advocates splitting this into two reporting methods, using mark to market for financial reporting and a more conservative method for capital adequacy. No, I don't know what this means either.

Bankruptcy

Toomey thinks banks should have gone into bankruptcy instead of being bailed out. He thinks that a bankruptcy would have lost money for stockholders but made deposits would have been guaranteed by the government. Debt holders would have taken a loss. I disagree with him on deposits -- that only guarantees certain kinds of deposits and only for a certain amount. He suggests expedited bankruptcy for banks. A little later he says "The guarantees of deposits, Fannie Mae and Freddie Mac securities, hundreds of billions in mortgage-backed securities, even automotive warranties collectively impose the biggest increase in contingent liabilities on the American taxpayer in history. (202)" Moving on the state government, Toomey says that most states run deficits and over promised pension and retiree health care programs which are unfunded. By bailing out the states just exacerbates the problem and undercuts political accountability.

Tighten the Federal Belt

"Obsolete programs, earmarks, subsidies, price supports, and bailouts and handouts to corporations and state and local governments are all excellent candidates for significant reduction and, in many cases, outright eliminations. (205)" Another option is across the board spending cuts. While he himself does not list specific programs he would cut he says groups such as the Heritage Foundation, Cato Institute, Citizens Against Government Waste, and National Taxpayers Union have specific lists that we should look at. I looked at one of these, the Cato Institute. It's spending cuts site is www.downsizinggovernment.org. It advocates closing down the department of education, replacing medicare and medicaid with vouchers and tax credits, ending minority business support, ending head start, and sending research subsidies for the department of energy.

Tax Hikes

Toomey rattles off a list of tax hikes he thinks the Obama administration will implement and then says it amounts to class warfare.

Cut Taxes Instead

Toomey points out that the stimulus bill costs $787 billion and total corporate incomes taxes each year are about $300 billion. He suggests that instead of the stimulus we eliminate corporate incomes taxes and this would attract a "a flood of new capital investment" (206). Or he says we could have reduced both employee and employer payroll taxes by half for two years. I'm not sure this would have provided any comfort to the unemployed. He thinks we should eliminate corporate gains taxes entirely, extend 2003 tax cuts permanently, and lower top corporate income tax rate to 25%.

Government-dictated Industrial Policy Will Fail

He cites the former Soviet Union, Cuba, and North Korea as examples of how government controlled economies fail, and goes on to say that Obama has stepped-up central planning. In discussing the government bailout of GM he says Obama suggested the company make more small fuel-efficient cars, though Toomey says those cars are not what the American public wants to drive. Other examples of government control are expanded health insurance, energy production, and carbon emissions. He says "Only the unordered, spontaneous activity of people in a market, responding to that great aggregator of all information -- the price mechanism -- can allocate resources where they are truly needed and valued. (209)." I'm not sure who would bear the costs of research & development in that case as that is a front-loaded expense that does not always (or even often) lead to profit.

Denying Worker's Freedom

Toomey thinks the reason unions are in decline is that the higher costs of labor from less flexibile work rules reduces productivity and therefore makes union shops less competitive. The Employee Free Choice Act, which allows a union to gather signatures from 50% of workers in a company in lieu of a one-time ballot, would, in his view, allow unions to intimidate works. As a former elected union official I would like to point out that it is just as easy for corporate management to intimidate workers not to vote in secret ballot elections. The bill also imposes binding arbitration in contract disputes. In my view, without binding arbitration companies will just walk away and ignore an arbitor's findings. He says that workers are wary of joining unions after seeing what happened to steelworkers and automobile workers. I think it is less what the unions did than outsourcing of jobs and unfair trade practices.

Slouching Towards Protectionism

Toomey thinks Obama has instituted "buy American" legislation and that other countries have followed suit which means prices are higher in the U.S. He re-states earlier views that free trade agreements benefit the US because we sell more goods to other countries that way, and American consumers get lower priced goods here.

Cap and Trade

Toomey is very much against cap and trade legislation. He thinks it will put the US at a trade disadvantage as China and India are unlikely to institute similar laws and European countries will evade them. Businesses would have little choice but to pass those increased costs along to consumers. He also thinks it would have minimal effect on the global climate. Instead he suggests increasing the use of nuclear power which he calls "safe, clean, economically competitive to alternatives, and available to be significantly scaled up" (213), though we would need some technological breakthroughs. The word safe is relative, depending on how close to a plant you live, and there is still the worrisome problem of what to do with nuclear waste, especially given his general dislike of government intervention. We would be dependent on the nuclear industry to provide adequate storage for nuclear waste and this makes me a tad nervous.

Conclusions

Recent government actions are similar to those instituted by presidents Hoover and Roosevelt, but he thinks it is not too late to change course.

Book Epilogue

He again reiterates his basic economic policies: property rights, free markets, low taxes and government spending, and a stable currency. Among the items he notes as signs that voters have taken note of government encroachment of these policies is an increase in sales of Ayn Rand's Atlas Shrugged. He hopes his book will persuade people to defend the principles he espouses.