Archive for the ‘Economics’ Category

It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science’. But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.” – Murray Rothbard

You’re scheming on a thing that’s a mirage, I’m tryin’ to tell ya now: it’s sabotage.” – Beastie Boys

Mars is heaven.” – Ray Bradbury

The Top Five Economic Fallacies in America

  1. Wealth Destruction Equals Wealth Creation.

This is perhaps the most insane, and yet the most prevalent, fallacy of all. Looking at the sentence above, you may be thinking “how can anyone believe that?” And yet this principle is taught in schools in every corner of the country and has been enshrined in higher education and economic and monetary policy. Alan Greenspan, the so-called Maestro, recently advocated the demolition of houses as a way to bolster the housing market. During the Great Depression, the “progressive” American government confiscated and destroyed food (including livestock), in order to drive the prices of food higher. It is generally held indisputable that war stimulates economic growth.

These ideas and practices are not only logically flawed, but fraught with moral peril. War does not create anything, it destroys. It destroys lives, and it destroys property and wealth. Peace is always preferable to war. War interferes with the progress, production and trade that might otherwise have taken place. This cold and dangerous idea points to post-war rebuilding as evidence of its validity, but its proponents ignore that the rebuilding consumes wealth that might have been spent elsewhere. If a house is destroyed by a bomb, and then rebuilt, you have one house. If the house had never been bombed, you could have had two houses.

To slaughter millions of animals without the justification of feeding hungry mouths (when there were many hungry mouths), to deliberately destroy grain and produce, goes beyond a mere moral hazard. It is true that higher food prices benefit the producers of food, in the short term. But one cannot escape the truth that there are more people who consume food than produce it, and so such a policy inflicts damage on the larger group to support and benefit the smaller group (which is virtually always the case with government economic intervention). Furthermore, the higher prices that the population then had to pay for food was wealth that could have been used in other ways which would have benefited the economy just as well. Many believe to this day that these kinds of policies got America out of the Depression, but it is worth noting that the Depression endured for ten years after such policies began.

Then there is the Maestro. I cannot fathom how such a man can believe such nonsense, unless he is insane, senile, or actually an alien in disguise. It is true that the housing market suffered a decline in part because of a glut of supply. During the housing boom, certain policies and maneuvering encouraged and overstimulated the housing market, and so we built more than we could afford. This resulted in all sorts of problems, but at least we got houses out of it! Houses are physical structures that have intrinsic value, even if what they can net on the market has fallen. An empty lot is never worth more than a lot with a house on it. If we destroy the houses, we would have gained nothing from our frenzied glut on debt and borrowing. How is this a good thing?

Let’s imagine that the government took Mr. Greenspan’s advice and bought up these houses in order to destroy them. Here is how it would go:

First, the government would have to actually buy the houses. Where the money would come from is anyone’s guess.

Since the goal is to reduce the supply of houses, it would be best to buy as many as possible, but since the government could never buy all of them, some criteria would have to be established. Obviously, the first to be bought would be the ones already owned by the bank, so most likely the group to benefit the most from this policy would be the bankers. Next in line would be houses that are underwater, in foreclosure proceedings, or close to it. This group would consist of a large number of people who made irresponsible financial decisions, and also people who were trying to flip property and got caught in a mess they didn’t see coming. Even in this situation, the bankers are still the single largest beneficiary, because they would have ended up with the burden of these houses, had the government not intervened. In other words, this would just be another bailout. Also, it should be noted that there would likely be people who would take advantage of the situation to get rid of a house that they didn’t want for one reason or another but probably could have kept above water on their own. Putting that aside, however, we’ve arrived at the point where the government has a bunch of houses.

Now the government owns a boatload of houses and needs to destroy them. One cannot simply pour some kerosene on a house, or whole blocks of houses, and light a match. Demolition crews would have to be brought in, with equipment. Debris would have be removed and properly disposed of. The lot would have to be cleared, and then maintained afterward because you couldn’t have all these lots going to seed in residential neighborhoods. All of this would cost money and resources, not to mention the loss of local property tax revenue. Also, all of these displaced people would have to live somewhere and since they can’t live in houses, they would have to live in apartments and would thus drive rental prices through the roof.

  1. Government Can Create Prosperity

Listening to election propaganda, it is clear that this isn’t just a widespread economic belief; it is written on the stone tablet. From their podiums and carefully financed advertisements, candidates promise two things: to create more jobs, and to better redistribute the wealth. The first one is impossible, the second one just improbable.

My initial response to this idea is simplistic. If government can create prosperity, why hasn’t it? If government can create jobs, out of thin air, why is anyone unemployed? Is it just because, up until now, the system has been inefficient, corrupt, rigged, unfair, and controlled by evil forces? This is certainly what every crop of new candidates wishes us to believe. It may even be true but, if it is, why should we expect it to suddenly change? Are we to believe that this time we’ll elect a new bunch of people and it will be suddenly completely different, even though it never has been in the past? Just in the short history of our country, a dozen generations have lived and died in the shadow of an expanding government, which glutted itself on their belief that this time it would be different.

Maybe the truth is that government can’t do the things it says it can. Maybe politicians are born liars. Maybe they’re just hopelessly wrong. Maybe the answer is not in government at all.

Fundamentally, government is incapable of creating prosperity, or anything else. By its very nature, it can only confiscate, consume, and redistribute. There are some that honestly believe that the government can create jobs by, as an example, creating infrastructure. This is essentially based on the same fallacy as destroying houses. In order to pay for workers and materials to build, say, a public fountain, the government must confiscate that wealth from productive citizens in the form of taxes. It may borrow the money, but that debt will have to be paid by future taxpayers, so it amounts to the same thing. It may print the money, and it does, but that devalues the currency and leads to inflation, a subject I will touch more upon later. In any case, the money spent by the state on such projects could have been spent elsewhere by private individuals if it had not been taken from them. It is easy to see the “productivity” of government-hired workers digging a ditch. The fallacy comes from failing to see what might have been done with the funds if they had never been in government hands to begin with.

Some will say that government is a better conduit of this wealth than private forces, but I ask for justification for such an absurd notion. What has the government done to merit this unshakable faith? If the productive citizen is allowed to keep his capital, what harm would it do? Is he using it to buy drugs from terrorists? Is he trading in slave children? Much more likely, he is investing it in enterprise that will result in a net gain of more capital and more jobs. Still, it is assumed that the money is better placed in the hands of government, despite its proven record of failure, inefficiency, ineffectiveness, and corruption. The political class has a compelling interest to do everything it can to foster these beliefs.

You may be thinking that this is just the principle of trickle-down economics, an idea that has been vilified by the left as benefiting the rich at the expense of the poor. Please see section five.

In short, despite what candidates promise and politicians claim, the government cannot create jobs. Jobs are created by entrepreneurs, and they do so in spite of government, not because of it. Government does not and will not make this country great. That is for people to do.

  1. Spending is Good, Saving is Bad

If spending is the cure, how did we get so sick? Spending certainly was not curtailed in the years preceding the bust of 2008. In fact, government has been growing steadily since before living memory and exponentially since at least 2000. All government growth is facilitated by government spending. So again, if spending is what will solve our economic woes, how did we get in this mess at all?

Government spending is a primary cause of our troubles, so it cannot be a cure. Rather, it is the drug that continues to feed our addiction. The recent crash should have been the cure, because it should have forced us to give up the drug. Instead, government removes the correcting forces of the free market by shoring up badly run banks and businesses and using artificially low interest rates to encourage more borrowing and spending and to discourage saving. Saving is treated as poison by seemingly otherwise intelligent individuals. When people save instead of spend, it is said that there is less money to go around, which will hurt retailers and businesses and thus cost jobs. This is especially true of the wealthy. It is thought that, if not taxed, the capital in their possession will stagnate somewhere and not contribute to the economy. Thus the government tries to discourage saving with taxation, inflation, and low or non-existence interest rates.

This is patently absurd. Do people honestly think that wealth is accumulated in the form of gold coins and piled in private vaults, which the owners swim in like Scrooge McDuck? Whether the owner is wealthy or just middle-class, they are more likely keeping their savings in a bank. What does that mean? It means that banks have more money to lend (something the government has tried and failed to encourage). These savings fund everything from mortgages to commercial investments. This encourages businesses to grow and, ding-ding-ding, create jobs. In addition, since most savers want their money to grow, they invest it (another way to encourage economic growth) or put it in interest-bearing accounts, which accumulates more wealth, which will translate into more spending at some future point, not to mention less people living off the dole in their dotage.

In the years leading up to the crash, the government not only glutted itself on excess spending, but actively encouraged its citizens to spend rather than save. Today, these same policies continue and it is said, with a straight face, that they will somehow cure our troubles. The belief that government spending is the cure is the primary reason that gold standards were removed from currencies around the world. Mainstream economist argued that the restraint of the gold standard had to be removed to allow governments to realize their just and proper role in stimulating the economy when needed. This principle ignores the historical evidence that increased government spending has never translated into prolonged prosperity, and it ignores the deleterious and insidious effects of inflation.

  1. Inflation is Inherent

Most people accept inflation as a fact of life, or as a mysterious phenomenon that just happens. However, in the 97 years before the establishment of the Federal Reserve the U.S. dollar gained in value by almost 90%. In the 97 years since, the dollar has lost 95% of its value. Is this a coincidence? Inflation, of this sort, is not some inevitable component of the market. It is currency manipulation driven by the desire to expand the scope and reach of government. It is deliberate debasement; it is sabotage.

It is also no coincidence that inflation skyrocketed after all ties between the dollar and gold were removed in 1971. There are plenty of arguments for and against a gold standard, and I do not intend to delve into that debate here. However, historically, governments have removed commodity backing of their currency when they wished to facilitate deficit spending. The British temporarily went off the gold standard during the Napoleonic Wars, as did the US government during the Civil War. The permanent removal of the gold standard, world wide, began during World War I. Now the dollar is not redeemable in anything but itself. It is a mere symbol. Now there are no limits on the volume of currency that can be printed and the result has been both an unchecked expansion of government and a long period of inflation.

Not only is inflation not inevitable, it is also not harmless. Just as earlier governments left the gold standard to enable wartime spending, today our government, unhindered by any standard, has been involved in perpetual “military operations” since before I was born. Inflation is a hidden tax in two ways. One, it facilitates excessive government borrowing which will have to be repaid by future tax increases. This happens because inflation benefits the borrower over a loaner, because the money paid back will have less worth than when it was borrowed. Two, it is a transfer of wealth from the lower class to the bankers and political class. This is because, once the paper money is printed, the value of the dollar decreases over time. The initial recipients of the dollar, the banks and the US treasury, have a higher buying power than the last recipients of the dollar. John Keynes, the champion of deficit spending and father of government economic intervention, said: “By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

  1. Tax Cuts are a Public Cost

This is another fallacy that has become part of the general public’s mental schema of economics. We are told that Bush tax cuts to the wealthy “cost” the US government some astronomical, so-large-it-has-no-real-meaning, number.

Anyone who values liberty should cringe at this turn of phrase. It implies explicitly that all capital belongs to the government, since the earnings that people are allowed to keep are a “cost” to government. After all, if a tax cut by 5.4% is a cost to government, then the current “tax break” of 70% (roughly the amount of my income the federal government allows to me to keep) is a cost to government. Positing that tax cuts are an expense to the public implies that the money belongs to the public in the first place, that they have a right to it. They don’t. Natural rights are to your life and liberty and that’s about it. You don’t have a right to things that don’t belong to you. You do have a right to the things that do belong to you, things you produced or earned, because they are an extension of yourself. They represent your time, energy, effort…in essence your life, as well as your liberty to engage in capital exchange. In fact, all rights are based on property rights, because it is asserted that you have an inalienable ownership of yourself. Thus, to have a right to something that represents someone else’s life and liberty, is a contradiction in terms. It isn’t necessary to think of justifications for people to keep their money. It’s already theirs.

Not only is this principle profoundly hostile to liberty, it is mathematically wrong.

And now we get to trickle down economics.

Mathematically speaking, “trickle down” has to work. There’s no way that it can’t! As pointed out earlier, any person who has disposable income uses it in some way, either by spending, investing, or saving. For reasons I’ve already covered, these activities lead to economic growth. Unless money is being hoarded under a mattress, buried under the ocean, or shot out into space, there is no way for it not to have an economic impact. In fact, if rich people were somehow withholding their funds from the economy from which we all benefit, we wouldn’t have inflation! It would be impossible! In fact, we would have insane deflation.

You may be thinking that this same principle would apply to government. In other words, if economic impact is a given, then the same would happen if government took the money and used it.

        1. If this is true, why introduce the factor of government at all?
        2. If it is assumed that government is better at this than private individuals, that it more efficient and effective with money, I invite examples of these miracles of bureaucracy.

Private individuals, motivated by personal gain and without the manipulation of government, save their money, or they invest it where they think the balance of risk and reward is best. They spend it on products and services that best meet their needs. All of this behavior rewards the most efficient and effective producers.

Government, on the other hand, largely allocates money based on personal and political agendas, ambitions, shifting and conflicting policies, and the influence of special interest, all the while paying the salary of the army of bureaucrats it takes to confiscate and allocate the funds.

It has been said that “trickle down ” does not work because periods of high taxation have corresponded with high economic growth. An example would be the Eisenhower period, where the highest tax bracket paid 90%.

        1. Anyone who thinks that 90% is fair needs to have their head examined.
        2. No one paid 90%. I mean, get real. We’re talking about a bracket that was so small in terms of population it could scarcely be said to exist, and IRS tracking was still in its infancy anyway.
        3. You know what else we had during the Eisenhower administration? Smaller government.
        4. You know what else? Manufacturing jobs, jobs that are long gone thanks to the burden of government regulations and taxation.

Finally, the phrase “trickle-down economics” refers to a government policy of a particular kind of economic planning that therefore cannot be equated with a true free market situation. It is hardly reasonable to expect such a policy, or any policy, to work as touted, when at the same time the government is expanding its economic reach, engaging in endless and expensive military adventures abroad financed by deficits, and printing and borrowing money like no tomorrow.

Epilogue: Capitalism is NOT the problem

On talk shows, in blog posts, in bestsellers and documentaries, in rhetoric being shouted and whispered in classrooms and coffee houses across the land, across the world, capitalism is being denigrated as the root of all our evils. For all the emotional sensationalism, only one response is necessary.

What is the alternative?

The answer seems to be a sort of controlled capitalism, where people are free to earn money so long as it’s not too much and so long as they surrender much of it to the state, and where regulations of the best intentions protect the little man from being trampled. This is probably a good estimate of the general idea supported by most people who complain about capitalism. Then there are those who advocate for outright state control but, thankfully, those are few and far between.

Or are they?

Controlled capitalism is just another way to say fascism. Today, you may more likely hear the word “corporatism”, because fascism has become such a pejorative that it has lost its original meaning: a form of government economic control where the means of production are privately owned but controlled by a central government. It is a system where the central economic planners in government pick the winners and losers based on lobbying influence. The winners take home the loot and the losers go out of business.

This is not capitalism. Bailouts are not capitalism. Capitalism is a system of investment and individual growth; it is a system of free enterprise, free association, and free choices. To blame recent economic hardship on capitalism and free markets is irrational, because we have not had any such thing in this country in a long time. In a free market, we would not have crop quotas meant to control the price of food. My soda could have natural sugar in it. It does not because corn is cheaper. Corn is cheaper because it is heavily subsidized by government and because of high tariffs on sugar. Both instruments were put in place to protect domestic growers of these crops, a small fraction of the population, at the expense of everyone else. I repeat, this is not capitalism.

It has been claimed that a lack of regulation allowed the crash. This is indeed mystifying. All businesses must devote a significant portion of their resources to tax and regulation compliance. Small businesses are especially hurt, spending several thousand dollars a year, per employee, on tax and regulatory compliance. Larger corporations certainly pay more but, due to their size, are more insulated from the cost, giving them an advantage that is the direct result of government impact. Banks are even more regulated than other sectors with at least 12% of their spending going toward compliance. Every year brings new rules and regulations. It is not in the nature of government to shrink. Assertions that passed administrations allowed businesses of any kind to “run wild” is empty demagoguery and it is intellectually dishonest.

We have not yet even touched upon the role the central bankers play in the boom and bust cycles of the US economy. I’ve already discussed how the currency is devalued, but the Federal Reserve has other tools at its disposal. The purpose of the Federal Reserve is also to back banks. It does this by guaranteeing their deposits, and by providing them with low interest loans. In ye olden times, a bank would have felt compelled to keep a good percentage of its funds on hand so that it would be able to satisfy demand for withdrawals. This meant that the bank had less money to lend out, which in turn meant it had to be more careful with those funds. Now, thanks to the omnipresent Fed, banks are encouraged, practically required, to lend more money and take greater risks. This behavior is further rewarded when the risk of failure is removed via bailouts and government guarantees. Politicians have a lot of nerve claiming that Wall Street “ran wild”, when ultimately they are the ones who pumped the system with stimulants. By providing easy credit from the Fed, guarantees for any kind of loan, and through social-engineering policies that encouraged risky mortgages, our political class is directly responsible for the housing bubble and for the crash that followed. As Henry Hazlitt wrote way back in 1946:

Government-guaranteed home mortgages, especially when a negligible down payment or no down payment is required, inevitably means more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to “buy” houses they cannot really afford. They tend eventually to bring about an oversupply of houses…temporarily overstimulate building, raise the cost of building for everybody and may mislead the building industry into an eventually costly overexpansion. In brief, in the long run they do not increase overall national production but encourage malinvestment.”

Despite this warning, government went right on its merry way, and even today, after everything that’s happened, politicians will continue to say “Well…home ownership is very important.”

Capitalism would reward effort and ingenuity with gain, but instead such things are punished with a higher tax rate and a myriad of regulations, fees, and penalties that favor the established and discourage the newcomers. Capitalism would punish ineptitude and misbehavior with loss, but instead the reckless are bailed out by government, leaving no incentive to change their ways. In true capitalism, there would be no such thing as “too big to fail”.

Now, you may be thinking that allowing so many banks to fail would have hurt everybody, and that is certainly true. First, the situation would not have gotten to that point without the meddling of government. Second, some pain would be necessary to correct the mistakes, to wean us off the drug of spending and debt. Such suffering would be far less, and far shorter, than what is still waiting for us as the policies that caused the problems in the first place are continued and even accelerated.

I am disappointed to see Americans protesting on Wall St., angered by the system created and perpetuated by their own government. I am saddened by the ease with which they were convinced by Washington that bailouts and corporate welfare were necessary and in everyone’s best interest, and that they, the elected, were helpless to stop it.

The situation we find ourselves in bears little resemblance to capitalism, and therefore capitalism should not bear the blame for our hardships. More than this, in addition to all else I’ve said here, capitalism is an economic theory of freedom. All alternatives to it involve government control and government force. Simply put, no matter what your motivation, if you oppose capitalism, you oppose liberty. Period. You can try to squirm out of it, but that is the plain and simple truth.

 

End transmission.