February 28, 2013


           Both political parties widely mischaracterize the foundations of the two economic systems of capitalism and socialism.  In the our modern society the average citizen who is pro capitalism would say that they haven’t seen pure capitalism for multiple decades, but in all reality we haven’t had pure capitalism or capitalism without any government intervention ever.  When capitalism was at its founding roots with little to no force included we find that there were major consequences for many people and large chunks of the society do to the lack of protective property rights.  For this reason the majority of America supported regulated capitalism where force (government) enforced protected property rights and embraced the lack of predation on society in order to have the nation prosper. 
            Unlike the interventionist type of government we have now, in the 1800s the force for the most part stayed out of the economy.  For this reason, many of the tycoons we know about today made a fortune by monopolizing a corner of the economy or running cartels.  On the flip side, this unregulated capitalism also led to unintended consequences whether it be bubbles, financial issues or destitution; we don’t see these issues as frequently in our modern century where force intervenes into the economy.  For many of these reasons we have seen multiple reforms in the government/economy through mainly public pressure that resulted in a regulated free-market economy.  This monumental reform that started in the early to mid 1900’s helped to break up the massive monopolies comprised by the tycoons of the economy who were making fortunes off of over charging the masses or whole society.  The momentum behind the wave of regulatory agencies that grew out of the great depression was from the enactment of the Federal Reserve and income tax that the congress created at the beginning of the century.  Where I think the two parties did come together a little bit on regulated capitalism is in the twentieth century; both parties helped sign legislations that promoted government regulated agencies to oversee common things such as food, business centers, ecosystems and medicine production.  Although capitalism in this country is still based on the foundation of private ownership and fluctuating prices through free markets; our current system is layered with rules and regulations to help alleviate people from abusing the system by protecting property rights and implementing regulations.
            There will always be critics who think the government uses too much force, or intervenes in too many areas of the economy/market; especially when you hear people talk about Obama, I hear some people say that they think he is implementing a system more like socialism rather than capitalism.  But in my opinion wouldn’t you call that regulated capitalism or interventionism, in which I believe we need in our economy in order to have a more efficient country.  Obama’s health care reform is obviously a hot topic that people like to critique, but it’s plain and simple that a plan of this magnitude will have to have more government involvement in order to deliver his vision of nationalized health care for better or for worse.  In my opinion it doesn’t seem too far from what we have experienced in the past decades as far as someone or somebody touching the force to regulate our health care and in this case I believe it is/was the insurance companies.  Furthermore, these companies (insurance corps.) failed to use the force adequately and failed to keep our medical cost down as wells as available so the government had to step in; again I’m not implying that Obama’s new plan is a good idea, just simply that either way force was involved and somebody behind the scenes was using the long arm of the government to regulate healthcare.  Ultimately, when we are dissatisfied as a country with a particular system/issue we partake in public pressure that leads to more government intervention.
            What we have today in our current political system is regulated capitalism or what we like to call interventionism, and anybody who has read up on socialism or understands socialism should see that we are not a socialist nation.  Although, I will agree that continued intervention by the government can, but not always or certainly lead to socialism.  We have to understand that if we were a socialist country then the government would control all the production factors such as industry rights and property rights.  Furthermore, as a society we would earn less income because the force would determine what are nationalized wage would be; I do see minimum wage acting in this way a little bit but the government still doesn’t own all of our factors of production which is very important.  We have to keep in mind that we can’t be a socialist nation yet because many of us work in the private business sector, even though there are some people who do work for the government but not all!  To expand on our incomes or wages, the government doesn’t set them; we set our wages by our ability to display our skills and how we can convince a company to pay us more for our services not the government.   Keep in mind we don’t only convince the business, we also convince the customers because they are two in one.  Concluding, if you have money then you can buy things and the things you buy can and are protected by the government through protected property rights in which helps us prosper, if the government didn’t do this then we wouldn’t prosper and we would be closer to socialism.  This is the fine line between capitalism, interventionism and socialism.
            As you can see the concepts between capitalism and socialism can be unclear and a little difficult to differentiate, for this reason continued battle/arguments between these two social issues will only continue to intensify and be magnified.  The U.S. government continues to borrow money to cover our living cost in order for us to reduce our social cost.  For example the cost of our government programs such as Medicaid, Medicare and Social Security.  The increase in costs for these government programs will only lead to greater pressure on our society to make tough choices; Choices like whether we should/have to pay more than the previous generation just to support the needy, underprivileged and elderly senior citizens thus creating unjust effects on intergenerational groups (intergenerationally unjust) .  If we (government) were to decide not to support these programs then the benefits these groups receive would diminish rapidly.  On one side of the argument we are kind of socialist through our actions to transfer wealth from one group to another; but on the other hand we are very capitalistic by are individualistic behaviors that lead to reduce safety nets for the needy, underprivileged and elderly.  Ultimately, the result of our government regulation and individual actions lead our nation to stand somewhere between true capitalism and pure socialism.  I think right now our country lands somewhere between these two social systems, a system we can identify as interventionism.  But as we grow and the government continues to intervene we could end up much closer to true socialism than we could have ever predicted.  Yet, I believe in order for us to prosper and continue growth in our standard of living government must intervene a little bit to protect our property rights and continue our system of interventionism with precaution to socialism through overuse of force.  By precaution to socialism through overuse of force I mean government intervention can/does have a domino effect so even if the government stopped using force right now we would still see and feel the effects of government policies through force that were implemented days, years, decades and centuries ago.  This effects still leaves us with a regulated form of capitalism or interventionism that can creep closer to socialism.  

The Logical Conclusion

                In their 2012 book, Days of Destruction, Days of Revolt, Pulitzer prize winning journalist Chris Hedges and journalist/cartoonist Joe Sacco chronicle their exploration of what the writers have dubbed "sacrifice zones"; areas in America that the writers  claim "have been offered up for exploitation in the name of profit, progress, and technological advancement." Through research and numerous interviews with locals, Hedges and Sacco attempt to tell the story of how incredibly poor communities like Camden, New Jersey (dilapidated manufacturing town) and Welch, West Virginia (largely abandoned mining town) went from thriving centers of commerce in the 40's and 50's to the crime and poverty ridden sinkholes they are today.
                Through the interviews, several common threads can be seen in the story of each town's decline. The town is built around a particular company that provides the majority of the town's jobs, which are often unskilled labor. In the 1940's and 50's, the workers at these companies unionize, resulting in higher pay and greater benefits which leads to a resulting boom in the town's prosperity. Finally, in the 60's and 70's, the company either closes or moves to a new location, resulting in the majority of the population being laid off. Those who can afford it move to a new town, while those who remain sink further and further into poverty, until the modern-day town is a shell of its former self.

                The writers are quick to blame the devastation on corporate greed, going as far as to likening the companies to vultures and parasites that consume a community's natural resources before moving on to new victims, leaving pollution and poverty in their wake. I, however, find it hard to believe that there could have been any other outcome for these towns. By unionizing, each town's residents forced their respective companies to pay higher wages and offer greater benefits to the workers, which result in higher operating costs that the company had not considered when choosing that town as its location. Since there was no corresponding increase in company profits, it is no surprise that the companies eventually  had to resort to moving to a new location, either in America or overseas, where people are willing to work for less. While the unions achieved short-term benefits for their members, in the long term they only succeeded in negotiating themselves out of their jobs.  Those who support greater union action in America, while simultaneously lamenting the ever-increasing amount of American jobs being outsourced, display a logical disconnect that I wound find laughable were it not so prevalent. 

The Fed

Class readings and discussion in Austrian Economics have caused reflection on the mission of government, specifically the Federal Reserve. This organization is charged with limiting unemployment and maintaining stable interest rates. Recently, to achieve these goals, the Fed has conducted a policy of ‘quantitative easing’, increasing the money supply, in order to drive interest rates to an artificially low level and potentially decrease unemployment. Mises juggles the costs of having a “sound currency with unemployment, or inflation with full employment” (Mises, 72). He characterizes this policy as one of last resort considered only by those who view inflation to be a lesser evil than unemployment. In actuality inflation is not a cure for unemployment in the long run, rather it is in the short run that we face a trade off between inflation and unemployment (Mankiw).

It seems quite curios that such an esteemed agency is devoted to controlling two mutually exclusive endeavors. It seems that the pursuit of one will invariably be a detriment to the other. More troubling is the fact that the government is able to continue policies of stealth taxation by increasing the money supply. These are policies of an interventionist government. These are policies of a government that has clearly chosen inflation as the lesser evil to unemployment. Intervention in these areas will inevitably lead to conditions less favorable than prior. Mises indicates that the government control of “prices, wage rates, and interest rates” is clearly socialism. When reflecting on this, the purpose of the Federal Reserve became quite troubling. Certainly the country could carry on without such an entity. Some institutions such as banks might struggle in a world without the Fed, but such a world would truly be freer. This freedom would allow some institutions to make mistakes and fail. The freedom to fail is a necessary condition for capitalism to flourish. 

"When your outgo exceeds your income, your upkeep becomes your downfall"

I came across a video titled “Epic debate featuring faceoff  between Peter Schiff and John Mauldin”, which can be viewed here:

The video is of the Cambridge House International panel discussion on “Creating and Preserving Wealth”, moderated by Al Korelin.

The video is roughly half-an-hour in length, and I definitely recommend watching it. If you don’t have thirty minutes to watch this video, perhaps this review will be sufficient for you.

The discussion features economists Grant Williams, John Mauldin, Peter Schiff, and Rick Rule.

The moderator, Al Korelin, begins by referring to the February 18, 2013 edition of Barron’s magazine, which is, for comic relief, pictured here:

Then he begins the discussion by asking Grant Williams “…creating and preserving wealth; what do you have to say about it?”

In response to this vague question, Williams begins by stating that now is a very important time to be preserving wealth, and that we are in “an unstable place”. He noted that governments are going broke all over the world, and they are doing everything they can to stay afloat. He said that the issue lies in the fact that “Governments don’t produce anything; they are merely a confiscatory mechanism to take money away from people who produce it”.

If a business is running a deficit, and has no additional means by which to cut expenses, they must increase their revenues, in order to save themselves from going broke.

If a government is running a deficit, and will not reduce expenditures, then they must also increase their revenues; but, a government cannot reduce its deficit by increasing production to generate revenue (remember, “Governments don’t produce anything”), as a business would have to, to avoid going out of business. But a government will not go out of business until the people no longer have any money to feed the bottomless pit. Margaret Thatcher said “The problem with socialism is that you eventually run out of other people's money.”[1]

While we are not now a socialist nation, it should be recognized we could easily become one if the bottomless pit opens up much wider…

Grant Williams also said that he believes the situation that we have been in since 2008 is not going to get any better, and that people should be investing in “real assets, that cannot be printed by governments”, such as gold, real estate, farms, and things that produce a cash flow.

After Williams, Peter Schiff was the next speaker. He began by establishing the importance of understanding what real wealth is. He said “It’s important for people to really understand - paper money isn’t wealth. It can represent a claim on wealth, but I think right now those claims are very tenuous, especially, you know, when you have a currency war that’s going on.”

He then brought up a sad truth. He said that “The funny thing about a currency war is it’s different from a conventional war, in that the object is to kill yourself.” As the value of the dollar is slipping away, the government is fighting the tide by simply printing more money. But in the end, this is a suicide mission, as Schiff pointed out.

But John Mauldin, one of the other economists on the panel disagrees with this view, and things start to heat up between him and Peter Schiff. Mauldin said that within six months to a year that we would know more about the direction of the dollar, appearing to be on the fence, but then within a minute, he said that because of the vast amount of oil reserves that we are going to start utilizing in the US, that by 2020, we will be shipping oil out, not in, and that we would have a positive trade surplus within “ten, twelve years”.

Then Mauldin continued making his case by declaring “When we stop shipping dollars out of the world and the world is still a dollar economy, and it will be, the value of the dollar is going to become remarkably strong, and the Fed could print trillions of dollars, and the value of the dollar would still be strong…the Fed will be able to print more money than seems rational, and we’ll actually get away with it, which I’m not terribly happy with, but we could see a very strong dollar simply because of the really lucky thing that we’ve got lots of oil.”

If you accept that the definition of inflation is “an increase in the money supply”, then you will find it very hard to understand how huge increases in the money supply could ever result in a “Very strong dollar”. But it seems Mauldin might think the strength of money has nothing to do with the size of the money supply, and that the strength of the dollar in the future will be an inevitable result of all the oil we have, regardless of monetary policies. (This doesn’t make your case for printing lots of money very strong).

Next, Mauldin goes on to say “The equations, the way they work, says [sic] that GDP – we’re getting into wonky stuff – but GDP is equal to consumption, plus savings and investment, plus government spending, plus net exports. When you reduce one of those numbers, you’re going to reduce the GDP.”

Quickly, Peter Schiff replies “But if you reduce the government, the other part can come up and I’d rather have the business investing and spending, than the government just flushing it down the toilet”

Once the excitement died down a little, Rick Rule took his turn to speak and joked that he would actually answer the question regarding “Creating and Preserving Wealth”, rather than use the question as a platform from which to his views about global macro.

Rule did not have much time to speak, but emphasized that “you have to create more wealth than you spend; it’s pretty simple.” He then shared a poem that he said his father taught him: “When your outgo exceeds your income, your upkeep becomes your downfall”. He then went on to speculate that “60-70 percent of the [securities?] market is heading towards its intrinsic value: zero.” Indicating that there are definitely bubbles that need to burst before the economy can ever truly recover. The other part that I found most important of what Rule had to say was “You have to be willing to say no to asymmetric propositions that are not in your favor”, and I think that this is a critical rule, especially to anyone who is alive, and is the reason that free markets work.

Before this post takes longer to read than it would to watch the video, I would like to conclude with a couple of thoughts and observations.

First of all, Peter Schiff believes we are in a currency war, and that the goal of a currency war is to kill yourself. That certainly does not imply an optimistic outlook for the future of the US dollar, for Schiff also said that we were going to win the currency war, “which means if you have dollars, if you earn dollars, you lose.” Regardless of if Schiff is right in this case, the recommendation that all of the panel members made to “invest in real assets that cannot be created or printed by governments” is a surefire way to ensure your wealth (assuming the bottomless pit doesn't try to swallow your real assets too). Clearly individuals should recognize what wealth really is if they want to avoid getting sucked into the bottomless pit along with their paper dollars.

Secondly, it appears that there is a lot of confusion about what the real ‘state of the economy’ is. It seems that the Austrians are quite worried about the prosperity of the future, while most other economists like John Mauldin, and apparently much of the public seem to believe that the power of the printing press can overcome any foe that comes its way (or we can make all sorts of claims about what our monetary policy should be, but believe it to be inconsequential because we have oil reserves). It seems to me that reasonable economists believe that sound money, savings and investment must be the foundation of a strong economy, but other economists seem to be born out of a system of belief that says you can get something for nothing!

Fiat lux = Let there be light (and there was, and it was good)
Fiat money = Let there be money (and there was, but without value since 1972™).

In my opinion, if you believe that our economy can keep growing while government debt continues to grow (while having to take away from the growth of the private sector since it comes from nowhere else), and that if this can somehow be magically facilitated via the use of a printing press,then you are either living in denial, or Candyland!

You will never be able to get something for nothing. 

[1] http://www.goodreads.com/quotes/138248-the-problem-with-socialism-is-that-you-eventually-run-out

Economic Freedom = Economic Progress

People who contend that the United States needs to enact more social welfare programs have lost sight of what the United States is all about in the first place, freedom.  The United States has always promised freedom to all of its citizens, and the result of this freedom the United States has enjoyed an average standard of living that is quite high.  I think one significant contributing factor to this high standard of living is the United States ability to attract genius from abroad.  That is the best and brightest of the world want to come to the United States because the freedom here will allow them to reap the rewards of their genius.
As the United States begins to enact more redistribution policies it is suffocating economic freedom.  While many believe that these redistribution policies are the right thing to do they have probably lost sight of the fact that when there is a strong incentive to produce more, and save more capital everyone is better off.  When these redistribution policies are enacted the motivation for people to move here from other countries is lowered, and in some case the incentives to conduct business in the United States are so low that people actually leave the United States and conduct their business elsewhere.
If the United States wants to see continued economic prosperity then we need to stop passing policies that violate the economic freedom of individuals.  It is only once these policies have been stopped that the United States can have any hope of seeing the same economic progress it once did.

February 27, 2013

Big Banking and the Taxpayer

     I would like to discuss a recent editorial article published on Bloomberg entitled: "Why Should Taxpayers Give Big Banks $83 Billion a Year?"


     To summarize, this article makes the claim that the largest banks in the United States are largely unprofitable, and rely on heavy government subsidies to garner their reported "profits". Corporate welfare is a practice many of us are familiar with, but what shocked me about this article was the numbers attached to it. According to the editorial, two researchers from the IMF and the University of Mainz tried to determine how much the subsidies lower the borrowing costs of banks, and found the number to be 0.8% (applicable to all liabilities). You're probably with me in thinking this number initially sounds very small, but when "multiplied by the total liabilities of the 10 largest U.S. banks by assets, it amounts to a taxpayer subsidy of $83 billion a year." Of this subsidy, the top five banks account for $64B. "In other words, the banks occupying the commanding heights of the U.S. financial industry -- with almost $9 trillion in assets, more than half the size of the U.S. economy -- would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders."

     In discussions about business, it is common to hear the words "too big to fail." If the information in this article is true, that statement is fundamentally false, as these banks would not be able to report these profits without the subsidy. I believe "big enough for government insurance" would be a more accurate statement. As the article pointed out, neither the shareholders or executives see incentives to change this subsidy, and fund lobbying campaigns year after year. I believe this is a clear-cut example of the vicious cycle of interventionism, as these banks likely would not have grown to the size they are without corporate welfare in the first place, but are so huge now that not bailing them out would be disastrous (and they will be the first ones to argue the latter statement). The obvious results of this are wasteful business practices and lack of adaptation to real markets. I agree with all the 'fixes' suggested in this article, but most notably I think that creditors, shareholders, and executives should be able to take hits, just as people in any other competitive business can. The influence of the business on the economy as a whole should not be a factor, as the costs of failure will only be short-term, and any further subsidy is simply delaying the inevitable. The way these large banks, and any other subsidized corporations operate is fundamentally unnatural. One of the core tenants of both Austrian and neo-classical economics is freedom, and this includes the freedom to make profits and the freedom to fail. 

Minimum Wage

Recently there has been a lot of talk about minimum wage. This was mostly sparked by the president saying he wanted to increase the minimum wage to 9.00 dollars. Now to every American that doesn't understand economics or understand how employment works this ides might seem to make sense. Why wouldn't we try to make our lower class hard workers get more money for there hours?

While reading Why Unions Want a Higher Minimum Wage the article states many things that this policy promotes in our economy. The first one is the negotiations of wage talks pressure employers and unions to hammer out new contracts. Helping the unions gain more years under contract with the employers which is beneficial. Second the increase in the minimum wage  restricts businesses ability to hire low skilled workers who would be willing to work for less then the minimum wage rate. This in turn lowers competition against these union workers. Union workers see an increase in employment and income while non union members see a drop in jobs and income. The unions only concern is that the union members have gained higher wages and reduced the overall competition. The conclusion is even though the wage increase have evidence to have an negative effect on employment it is still being backed by Democrats.

So how do we understand this as  human action? Obviously it is one political party looking out for the individuals that have backed them. Is this what we want in our society? If we want to live in a free society this is not what we want. Freedom in society means that a man depends as much upon other people as other people upon him. With these unions and minimum wage policies it is almost guaranteeing an uneven playing field. Looking back on history in a more free society and capitalistic economy employers will pay there workers the wages they deserve or this company will ultimately not have anyone to run the organization or company.   Mr. Ford paid higher wages than any other industrialists or factories because we wanted people to want to come and work for him. This is a trend we are seeing in our society that it is the duty of the government to support, subsidize, and give privileges to special groups. Unions are just another pressure group who want to attain for themselves a special privilege at the expense of everyone else. I believe this is not the right policy we should be putting into place and we should be working on getting away from politicians who are only looking out for there district and pressure groups who are trying to gain special interest over other groups. Movement to Capitalist society where the ultimate bosses are the consumers.

February 24, 2013

Sequester Cuts

Sequester Cuts

It is not only easy, but also necessary, for politicians to demagogue and create a false emergency in order to spur on their policies for political gain. They always seem to manufacture one emergency after another as an excuse to either increase spending levels, or, less desirable, keep those levels the same. Rahm Emanuel, in his position as chief of staff to President Barrack Obama, famously once said, “Never allow a crisis to go to waste.”  This, sadly, seems to be the case with sequester. Austrian Economists believe that government spending does not lead to economic growth, but instead stifles that growth.  
            Suzan Davis writes about how sequester may have serious effects on a struggling economy, in her article entitled, “Sequester: 'Collateral damage' of budget war may be huge.”  In her article, Davis states that the sequester law might endanger economic growth, increase unemployment, and hurt the United States military effectiveness. Larry Kudlow in his article, “The Pro-Growth Sequester,” correctly points out that the sequester law only makes up about one quarter of one percent of the nation’s GDP.  Davis points to the White House’s warnings of devastating consequences and hundreds of thousands of federal employees being affected by the draconian cuts. How can this be? Government does not use regular accounting methods like most Americans, instead using base line budgeting, which automatically includes increases to every department’s budget each year. Kudlow states that “the sequester would slow the growth of spending. They're not real cuts in the level of spending.”
            The classical definition of insanity is doing the same thing over and over again, expecting different results. Throughout history, Keynesians state that to reduce unemployment the nation needs to spend more money. The same argument is always used for recovering from a recession. They purposely ignore that each time government has reduced spending levels and forced the size of government to shrink, there has been a boom in the private sector. It happened during the Coolidge, Reagan, and Clinton administrations.  
For anyone to state that if government reduces it’s spending and adopts austerity measures the economy will tank is a baseless argument without any concrete facts to support their argument. Friedrich V. Hayek once said that, “Emergencies have always been the pretext on which the safeguards of individual liberty have been eroded.” That statement held true then and it does today. For politicians to create emergencies as a pretense to gather more power is an abuse of the offices they hold and should be exposed for the charlatans that they are.