by Fergus Hodgson
Director of Fiscal Policy Studies
Introducing the Economic Freedom Amendment
Explicit socialism in the United States is no mere hypothetical threat. Since the 2008 bailout, the federal government has acquired equity in at least 707 institutions — including majority holdings in AIG and Ally Financial, the financing company associated with General Motors Corp.
As Aaron Jack has published in the Federalist Society’s Engage, the nationalization of private industry in this manner has been contrary to the founding principles of the United States and established corporate law precedent.
"[T]he federal government suspended the rule of law in its efforts to stabilize the country’s financial system… the equivalent to the implementation of economic martial law," said the Kansas Securities Commissioner. To make matters worse, the federal government has "sovereign immunity." That means disenfranchised stockholders have no recourse to sue for breach of fiduciary duty or conflicts of interest.
Beyond the illegality, though, such policies were disastrous economically. Most importantly, they have generated regime uncertainty, which has dissuaded investment and made planning more difficult. They have also generated a plethora of regulatory moral hazard problems, where politics takes priority over sound business judgment. Consider when GM executives decided to switch their palladium purchases away from Montana to lower-cost Russian and South African suppliers. The state’s senators intervened and persuaded them to reverse their decision.
The palladium example is typical of counterproductive behavior associated with government ownership that perverts free enterprise and creates an uneven playing field. Government-owned operations are likely to receive preferential treatment when new laws are written, and this preferential treatment has also occurred in the enforcement realm. During GM’s restructuring, for example, the IRS allowed operating losses to be carried forward in a manner against normal accounting practices. This amounted to a $45 billion tax break.
Now that federal officials, particularly those in the Treasury Department, have set a precedent of ownership, even smaller crises are likely to trigger similar actions. Unfortunately, efforts in Congress to prevent further purchases of private companies have proved fruitless.
That is why state legislators should take action to prevent meddling in their state. The Economic Freedom Amendment, as promoted in the Engage article, is one such solution which I encourage legislators to consider.
Any transfer to the United States, or any entity controlled by the United States, of any ownership interest in any entity formed pursuant to the laws of this state shall be prohibited, provided, the foregoing prohibition shall not apply to any investments through pension funds operated by the United States or any entity controlled by the United States.
Image of the week
A reader emailed me this morning to let me know that Social Security was not a scam after all. I called it a lie and a Ponzi scheme in last week’s newsletter and today’s updated column on the matter.
Social Security is a Ponzi scheme. Without assets set aside from the Social Security taxes — federal officials spend the revenues as they come in — recipients need new entrants or taxpayers to fund the payments. For all intents and purposes, there is no "trust fund."
The fact that Social Security participation is mandatory for almost everyone makes the program even worse, and this cartoon is a classic.
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