Government distorts the market
My guest writer today on the Rickety blog is my uncle Paul. Your comments are welcome.
A Productive Economy
Money for services and service jobs arises out of a productive economy — not vice versa. Moreover, service jobs are useful to the economy only if the service furnishes increased value to the products we make to sell in our markets and foreign markets. That truism leads to the distinction between government and private services.
More Government Than We Need
We need to purchase some government service. The difficulty is we purchase more government services than we need because of political power rather than market demand. Our private economy is self-regulating when the producers and their labor must compete in a free market. Government service jobs do not. If a company cannot manufacture a competitive product it will not survive economically. Government service jobs are creatures of political power, therefore are regulated by political force. The role of government in this instance is to keep the market honest.
Contrary to popular assertions by politicians, free market forces did not cause the monetary breakdown we are experiencing. Introducing government into the market always distorts market value by addling costs. It was distortion of the market through congressional action that set the scene for failure. If left to its own devices, the market would drive out inefficient money houses. Moreover, government bailouts created larger monopolies on the premise that money entities are “…really are too big to (let) fail.” Government further degrades the market by choosing who receives the bailout monies. Monopolies are anti market and detrimental to free trade. For example:
Out of necessity to build lending capital, a normal market will pay higher interest to attract capital and replenish their funds. Because banking is a percentage game, banks live on revenue from a percentage of the money it lends. The bailout does just the opposite by propping up inefficient markets in an attempt to shore up prices and continue bloated valuation. Self-serving politicians rationalize their poor decisions by declaring the entities are “too big to fail.”
Keep Government Out of the Market
Keeping government out of the market allows housing and other goods to seek their value furnishing prices that are cheaper for average citizens. Investors collect more interest from the increased sales that fills government tax coffers and furnishes investment capital facilitating new business. Furthermore, by its action, government loses money from the treasury exacerbating the predicament because taxes collected from artificially imposed low interest rates to savers maintains unsustainable prices and moves the day of reckoning farther into the future. It is worth repeating that purchases of expanded services arise out of healthy income from production and not vice versa. We cannot exist as a great nation on a service economy. The production of goods makes the national worth greater by adding value through work thereby creating greater money reserves that fund new economic activity.
Work
Note that the operative word is work. The notion that a nation or anyone else can create wealth by spending money we don’t have is baseless and will result in a catastrophic occurrence of the economy. If deficit spending were the antidote we all ought to go out and get many more credit cards. There is no easy way or quick fixes. We must allow a resettling of the economy to sustainable levels that reflect worth before we can recover. And we must go back to work. Bear in mind the words of politicians who admit they don’t have a clue about what they are doing or what the results may be. They, out of ignorance, say all they know to do is borrow big and spend! Spend!
Make Work Jobs
Credit: Steve Wampler
Because government by definition does not produce new products for sale in foreign markets and our own, government diminishes wealth through taxation that could have been used by entrepreneurs for new investment in production. Moreover, government collecting taxes to employ people in “make work jobs” simply takes money from the investment pool and transfers funds to the non-productive parts of our service economy.
An argument may legitimately be made that a service such as building a new highway to facilitate movement of commerce is a vehicle-service that adds value to the local product. In general, commerce that idly sits in traffic costs us money and wastes our resources. However, if concocting an artificially imposed “good” — as perceived by a few with political power — wastes capacity, then we are purchasing too much service not regulated by market forces. In this case we are purchasing services by political fiat and are inefficient and wasteful. Jon Entine has said:
Political pressure to be “socially responsible” distorts the market decisions of government-related enterprises, leading to risky investments. (Reason Online Feb. 2009 The Next Catastrophe)
Deflation and Conventional Wisdom
Conventional wisdom declares deflation to be wrong for the country. In my view, that depends upon which social class it involves; money classes such as investors, bankers, “rich people” — you get the idea; or poor and middle class people. Deflation is deleterious for the money people who imprudently made bad investments but it is good for the poor and middle class. Here is why:
Deflation forces lower costs to manufacture goods in the U.S. allowing more jobs to be created. Housing costs are less, allowing more people to become homeowners. Deflation makes our products cheaper to make and more home produced products can be sold in our markets and world markets. Deflation makes foreign products more expensive to import into our markets. Market forces will cause manufacturers to come home provided we remove tax incentives that encourage manufacturing off shore.
Never too big to let fail
Destruction of Our Collective Mettle
Failure makes one stronger. Trying over and over until one succeeds both educates and hardens the striver. Forcing us to work out our own enigma causes us to devise fresh ideas and new inventions for survival that makes real jobs that last into the future. Waiting for someone else or the government to do it for you keeps you weak and dependent — and disappointed. Most of the stimulus package works against the poor and middle class. Here is why: stimulus promoters pronounce, “Financial institutions are too big to let fail,” and created larger monopolies, the package props up the real estate market warping the true worth of property, the package prevents deflation (normal market correction), supports public employee unions that inflate prices for public service through political pressure, and promotes further public employee union organizing, faux stimulus diminishes capital formation through artificially low interest rates.
Waiting for Government
Currently, commerce is stagnant while everyone puts off the inevitable. They wait to see if the government will continue false valuation of an unsustainable economic plight. Meanwhile producers are taking advantage by culling excess labor and non-performing assets conjunctive to restructuring their tax position. Here is an example from the Tacoma News Tribune:
Much of the quarterly loss comes as Weyerhaeuser wrote down the value of its mills, land and products to reflect their current value.
Full Employment Economy Creates Wealth
Many argue about which set of events propelled us out of the 30’s depression. Most agree World War II ended the great depression. Others religiously propound the gospel of Franklin Delano Roosevelt’s New Deal. I am old enough to remember WW ll and posit the reason for recovery came from work. During WW II everyone worked that were physically able and those who weren’t worked at something to contribute to the war effort. We saved and bought war bonds. Even children bought Victory stamps to be pasted one by one into books of stamps. Thousands were employed in the armed forces. Women came into the factories to work. In pursuit of the war effort we built manufacturing capacity by making products for war. That heightened capacity served us well in our economy after the war. It was an all hands work economy that created wealth for the future that was the envy of the world. All the while we intended to pay off the debt and we did.
Wealth Is Not Finite
There is no circa sixties easy way out. Wealth is not finite. Economies grow by adding work to the product. No government can grow an economy by taking the work of others and through political extortion give it to those that don’t earn it. Can you say we plan to pay off the enormous debt being incurred by the so-called stimulus plan?
Photo Credits
Capitol Hill: Wally Gobetz
Money Grab: Steve Wampler
This post has been linked for the HOT5 Daily 2/8/2009, at The Unreligious Right
Great post! I really enjoy reading your blog. Keep up the good work.
I recently started a new blog that will be highlighting the dangerous advances of the secular progressive movement (pro-gay “rights”, pro-abortion, anti-religious freedoms, etc).
We’re looking to build a solid group of conservatives (especially fellow members of DNA) who’ll frequent our site regularly and contribute to some good discussions. The site gets updated daily with breaking news, so you’ll want to check back often, or you can just sign up for our News Feed.
If you’ll add us to your blogroll we’ll gladly add you to ours. Our blog is called Religion and Morality.
Thanks!
Good one Paul. Here is another way of saying what I think you are saying. Dale
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THE TEN PILLARS OF ECONOMIC WISDOM
1. Nothing in our material world can come from nowhere or go nowhere, nor can it be free: everything in our economic life has a source, a destination and a cost that must be paid.
2. Government is never a source of goods. Everything produced is produced by the people, and everything that government gives to the people, it must first take from the people.
3. The only valuable money that government has to spend is that money taxed or borrowed out of the people’s earnings. When government decides to spend more than it has thus received, that extra unearned money is crated out of thin air, through the banks, and, when spent, takes on value only by reducing the value of all money, savings and insurance.
4. In our modern exchange economy, all payroll and employment come from customers, and the only worthwhile job security is customer security: if there are no customers, there can be no payroll and no jobs.
5. Customer security can be achieved by the worker only when he cooperates with management in doing the things that win and hold customers. Job security, therefore, is a partnership problem that can be solved only in a spirit of understanding and cooperation.
6. Because wages are the principal cost of everything, widespread wage increases, without corresponding increases in production, simply increase the cost of everybody’s living.
7. The greatest good for the greatest number means, in its material sense, the greatest goods for the greatest number, which in turn means the greatest productivity per worker.
8. All productivity is based on three factors: (1) natural resources whose form, place and condition are changed by the expenditure of (2) human energy (both muscular and mental), with the aid of (3) tools.
9. Tools are the only one of these three factors that man can increase without limit, and tools come into being in a free society only when there is a reward for the temporary self-denial that people must practice in order to channel part of their earnings away from purchases that produce immediate comfort and pleasure, and into new tools of production. Proper payment for the use of tools is essential to their creation.
10. The productivity of the tools–that is, the efficiency of the human energy applied in connection with their use–has always been highest in a competitive society in which the economic decisions are made by millions of progress-seeking individuals, rather than in a state-planned society in which those decisions are made by a handful of all-powerful people, regardless of how well-meaning, unselfish, sincere and intelligent those people may be.
How We Live by Fred G. Clark and Richard S. Rimanoczy
The American Economic Foundation Copyright 1944, 1960, 1967, 1969, 1975, 1976
Perhaps this applies?
“The government consists of a gang of men exactly like you and me. They have, taking one with another, no special talent for the business of government; they have only a talent for getting and holding office.”
-H.L. Mencken
Governement is not the only responsible, it´s more the way companies are ruled. All western countries are affected by this crisis and we can see layoffs everywhere. Therefore it should all these big companies that instead of giving money to their shareholders, they should try to keep their workforces. Small companies are find since their adaptation to the crisis was more easy to set.
good post – olivia
Olivia,
You need to seperate the two entities, government and markets in your analysis. They are two different things.
Sure, financial institutions created the current crisis primarily because they sold bundled sub prime loans as a package that institutions here and in the world bought as part of their portfolios. When the bubble burst the stocks lost their value seeking true worth.
Government interference in the market and lack of enforcement allowed it to happen. Government encouraged lending for sub prime loans by pressuring lending institutions to lend money for overvalued homes to people that couldn’t afford them using variable mortgage plans that increased payments through escalation clauses.
See conversations about Freddie Mack and Fanny Mae.
Governments role here was to keep the operation fair but not to actively press sub prime loans on otherwise rational markets. Markets roared with activity in get rich schemes that were bound to collapse. Result – markets correct. That is what they are doing now very slowly waiting for government to make their bad decisions better.
It goes without saying that we have been building to a crisis for many years now living on credit and inflated valuation. Correction was coming anyway.
By the way, markets are business creatures and not social programs. If you want social programs treat them separately in government budgets by legislation – if you can afford it. Remember services come out of production and not vice-versa.
Thanks for your thoughts.
Paul
Paul,
You mentioned in your article that full employment is the solution. How do we get there? Does government step aside and refrain from bailouts and stimulus packages? Does government help the unemployed until jobs pick up? It would seem the quickest way out is to let bankruptcy and foreclosure take their course, along with deflation. Is this correct?
Rickety,
Full employment builds in ways by human endeavor: By individuals acting on their own initiative.
Note that in this recession, along with ordinary labor, professional (educated), managers as well as financial folk and others are caught in the layoffs. Many of them have built reserves of money over the years. The United States is still an economic giant with great worth. It remains to be seen if it continues that way.
Sooner than later all of those without jobs will run through their unemployment benefits and other means of support. Some will look for work, and many will wait for the government to solve the economic situation. Soon they will realize that nothing is going to bail them out and they know that the only real bailout is within them. From that point they begin to grow and become stronger.
Then innovation and hard work builds. Those with the skills will devise new products they can make and sell. These are real jobs that persist so long as they are marketable. Many will start businesses that employ workers to manufacture and sell the new products. To survive many people will work at “jobs Americans won’t do.” I have always cringed at that statement used as an excuse for importing workers. The notion that we are so rich there are jobs we won’t do is insulting to me.
As a young man, working the bottomland farms along the Missouri River, I remember picking up potatoes on a long line of workers. We labored in the hot sun filling gunnysacks with potatoes plowed up by tractors in long lines down the rows that extended across the farm. There were probably a hundred workers on a line divided into work areas equivalent to the apportionment of potatoes the field boss thought we could manage. Working the farms was a gateway job that generated money to live on and to improve my situation. I was proud of my work and was happy to get it. The idea that we have some people who won’t take “jobs Americans won’t do” all the while living off taxes paid by other Americans struggling to survive in their lives is anathema to me.
I think we are going to have to let bankruptcy and foreclosures take place despite government interference. Recovery will just take longer and put our progeny further in debt by rewarding the incompetent investors. Be assured, in the absence of government bailout, those holding bad investments will clear them out as quickly as they can at bargain prices so they can begin making money again.
Unemployment copmpensation mind you, really is a social program imposed upon producers by government. Without going into the laws governing unemployment, which is a subject worthy of a white paper, worker’s comp is generally paid for by the employer. Workers get reduced pay for unemployment insurance. Producers must add insurance-costs to their product to cover the expense. Otherwise they go out of business.
Markets are dispassionate and have no social conscience – which is the job. Social programs are a function of government controlled by voters. None of it is free. Someone pays. Unfortunately, it is the individual worker. Sometime, check your pay stubs, utility bills, telephone bills and other devices to see surcharges levied on those services. I make no judgement. Just understand who pays.
It is up to the voters that elect the congressmen to represent them to decide how many services they can afford. Unfortunately, largely professionals now make up the legislative body and hold allegiance to special interests chasing your paid taxes. Increasingly, they don’t listen to ordinary Americans.
Regards,
Paul
Paul,
Thanks for answering my questions. You gave a very clear explanation. It sounds like we are on the same page. Workers would just have to plan for unemployment and rely on themselves and family to help. That is what I did the last time I was unemployed. I didn’t receive any unemployment benefits. I noticed that the stock market voted on the stimulus plan today with a loss of 298 points. A fairly accurate assessment I would say.
Paul
That was your usual insightful and reasoned approach. The collectivist solution has never worked throughout history. Our tax dollars must not be ‘outsourced’ to pre-determined winners and losers as designated by compromised politicians in D.C. Our nation has been inundated by government petitioners who only survive by pleading for bailouts from cradle to grave. What is frightening is that the shame of government servitude and class dependency is not limited to the poor. Wall Street has become a major player in this ponzi scheme. When the responsible, hard working, independent and honest middle class join the ranks of the tax takers the market economy and our republic will be history.
Bob or Paul,
With all these bailout and stimulus packages what do you think will be the effect on the economy? Will we have deflation or just disinflation or really big inflation or a combination? If a combination, then in what order? Also, what will be the best way to protect our families financially?
Rickety,
My educated guess will be a sharp increase in the inflation rate resulting from the stimulus package. The private sector unable to pay for the massive new and expanded government programs/services [it] will become uncompetitive in the marketplace. Our dollar will be de-valued; already our money is being printed at record levels.
In 6 months our inflation rate will be near double-digit.
Bob,
It does seem that inflation can’t be avoided. Interesting that the Fed is saying that inflation won’t be a problem for two years. I think that you will be closer to the mark.
Paul,
I agree that the government spending money they don’t have is a bad idea. I think a question on all of our minds is: if it hurts our economy, why do they keep on spending? Are there any benefits to government spending taxpayers dollars to fund new products that could end up expanding our economy? If there are, do the benefits outweigh the risks and consequences of failure?
Jake,
Give me an example of some?
Jake,
I forgot to respond to why they keep spending. In many cases legislators simply cannot help themselves. They know it is wrong and they continue anyway.
The answer is greed, control and power. Consider how much money was spent during the last election. Powerful people exerting their money and influence to control government to their advantage.
One of the reasons I am an Independent is that I will not excuse or defend slimy behavior for the sake of party unity. That and I have never been much of a joiner preferring to make my own way. I am astonished at some of the smartest people I talk to who will defend the most outrageous notion for fear of criticism from the political group.
Paul,
My question could be dependent on cases, so I will give a few different examples.
1.) The government funds a program to develop new technologies. Example: Through NASA.
2.) Government spending in a specific market area promotes progress. Example: Radar, communications, advances in war technologies.
3.) Government funding other research. Example: ARPANET – led to the Internet, grants at various universities.
I will agree most of these methods are a lot more inefficient than commercial alternatives. All you have to do is read through some of the work at the various universities and you realize there are a lot of grants funding absolutely bogus research.
Perhaps I can rephrase question, as there are many abundant examples of benefits in most industry from government money somewhere.
Where would our economy be without these technologies (and markets) that were created directly or indirectly from government funding? Would these technologies have emerged without government spending? Does that equate to work being done as mentioned in your post?
Perhaps the most recent example. Is it wise and ultimately beneficial to our economy for the government to fund and promote research as they did solar technology in the recent stimulus bill?
Jake,
Some federal expenditures can be justified solely on the basis of it is a legitimate federal activity. For example, military projects. I’m thinking of the Apollo project and development of the Internet. However I do not believe that most federal expenditures are justified just because they bring benefits to society. The money thus saved can be used to pay down debt and release billions that otherwise is wasted on interest payments. This would lead to such a reduction in the tax burden that a large increase in prosperity would be unleased which would be of far more benefit to society and create many more research opportunities.
O.K. Jake. Good!
Now we have something to compare to and talk about. I anticipated you might use technological advances as an example – or medical.
Collecting taxes for the benefit of a group is really a moral argument. One man’s benefit is another man’s crisis because it is certain the group action of collecting taxes will damage some individual’s economic status. If carried to a limit the damage would include endangering his life. If that is true, then morality is a tradeoff between damaging a group of Americans to facilitate a “common good” such as NASA, war, food stamps, law enforcement among many government services.
How do we evaluate the tradeoff and where do we draw the measurement. Most can win an argument if based on the extremes – extremely rich or extremely poor for example. Please note that promoters of social program favor using children as their main battle arm. They beat their opponents into submission using children as a bludgeon. Others wishing more grants for jobs or university inquiry might use Space or NASA for instance. Where is the line between extremes?
I posit the line is the place dividing the group into those who are self-sufficient and those failing to keep up and who may need help to survive. Any collection of new taxes causes the line to move toward enveloping more of those who are just surviving until they fall into the needy group. Envision the edge of a cliff. New taxes push more people off the cliff.
Moreover, in my article on this blog, I said services must add value to the product. Otherwise spending money for the service is a waste of money. In your comments about university grants, funding bogus projects is a waste of money and a burden on society. Your moral decision is, do you fund bogus research or push more of your citizens off the cliff.
Bio-fuels are part of the stimulus package you mentioned. We already know something about ethanol. It is a fiasco. Ethanol uses food grains in a world of hunger. I think the Mexicans spoke out loud and clear their opinion about using corn for fuel. So here we have a food product sponsored by government consuming corn that is subsidized by payment of tax revenues to farmers in corn states. A purely politically generated need that drives up costs for tortillas that is a staple for some.
How many people has ethanol driven off the edge of the cliff?
In addition to taxes you pay, check how much more you pay to burn ethanol in your vehicle.
Your question, would those things (technologies) have emerged through private enterprise? Some would and did. If the product is economically viable, someone will produce it. Some programs are simply too big to emerge without government activity. War is a simplistic example. Police, fire protection, defense are examples of security for the greater good. How much of those services we purchase, and are they efficient is a question for those they serve. But always, they need to be evaluated against how many more functioning citizens are thrown over the cliff.
Medical research is another example. Because we paid for the research, should we not have possession of the patents and be freely used by any citizen?
My answer to your question is yes. We do need to purchase some government services as I stated in the earlier article. However, we purchase many more services than we need.
I am reminded of a social service example; a pet social service project was given as an example. The result was much ballyhooed as a success. One woman on public assistance graduated from college at public expense. The public good was she is now ready to be a tax-paying citizen. Sounds really good until one considers how many functioning citizens were pushed off the edge paying taxes and who now need help.
Moreover, can you say putting a man on the moon added value to the national product?
Paul,
Not all military projects are justified. However, I believe the Apollo project was really a military project as far as I can tell. That is the way that I would justify it.
“The American response to these Soviet [space] achievements was to greatly accelerate previously languishing space and missile projects. Military efforts were initiated to develop and produce mass quantities of intercontinental ballistic missiles (ICBMs) that would bridge the so-called missile gap and enable a policy of deterrence to nuclear war with the Soviets known as Mutually Assured Destruction or MAD. These newly-developed missiles were made available to civilians of the newly formed NASA space agency for various projects which would demonstrate the payload, guidance accuracy and reliabilities of American ICBMs to the Soviets. While NASA stressed peaceful and scientific uses for these rockets, their use in various lunar exploration efforts also had secondary goal of realistic, goal-oriented testing of the missiles themselves and development of associated infrastructure just as the Soviets were doing with their R-7. The tight schedules and lofty goals selected by NASA for lunar exploration also had an undeniable element of generating counter-propaganda to show to other countries that American technological prowess was the equal and even superior to that of the Soviets.” (Wikipedia)
Rick,
You selected a task that is clearly a function of the Federal Government – National defense – a constitutional duty.
In this case the question becomes, are we purchasing too many services and do those services add value to the national product. We are all familiar with constituent-projects pushed by Congress on the Pentagon that the military didn’t request and don’t want. Blatant expenses that serve one goal and that is to assure election of the politician pushing it. One might ask why the rest of Congress goes along with the misappropriation of public monies. The answer is they are pushing their own brand of reelection fever.
This is just one example. Where is the public good?
Paul,
In writing an essay on the American Recovery and Reinvestment Act of 2009, I argued that it should not have passed because it will ultimately hurt the economy. I used some of the ideas you present here — thanks!
But another question.
You suggest here that what got the United States out of the depression was work. I agree. But, it seems the legislation coming out of Washington is more along the lines of “we have to do something” rather than “this is what needs to be done”. They are as if they are blind desperately flailing to try and score one hit against their opponent. Now the questions.
What specifically should the government do in times of economic recessions and depressions to mitigate them?
If the only solution is hard work, how do you suggest that the government encourage its citizens to work harder?
Jake
Lets see, I got lost there somewhere.
The premise is faulty; namely, the Federal Government is to dictate how hard it’s citizens work or not work. Let our people decide for themselves. If one doesn’t work they don’t eat. Working harder produces more for themselves and their progeny. Tough times produce hardy people that figure out ways to imagine and bring to fruition products and services that produce real wealth. False work created from taking the wealth of productive citizens and given to slothful folks does neither any good. we end up with dependent people that weaken the collective mettle of our country. In economics, one must be able to seperate economics from social good or economics fail. Social good falls to the community for resolution.
Our country was founded as a federal system with specific duties assigned to the Federal Government. Everything else is left to the States. Currently, we have a federal government as an integral co-owner of financial markets, automobile manufacturing, and desiring a Federal health care system.
Comcomitant to to Federal interference is control that dictates how much people may earn, who gets privledges, and things like what will be manufactured. What if they are wrong. Not allowing the market to decide which products to build leads to forcing the product on our people whether they want it or not. Privledged groups receive special favors. Look at today’s budget ear-marking by our legislators.
Lets take an example. In tough financial times like today (brought on by government and an insatiable demand for services) many who have lost their jobs if left to their own devices and necessity for income will begin to think of ways to earn a living. Soon, they will devise new products they can sell that generates real jobs for others to work at. As long as the product is viable there will continue to be good jobs. Federal money used for make work jobs, taken from people who pay the taxes only transfers wealth that could be used for investment in new products and is temporary.
Every one is looking for an easy way out of this mess. Spending money from future income is a pallative for weak people and leaves our descendents with a broken country. There is no easy way a paternalist Federal government can make it go away. One becomes enslaved by their weakness.
An economy grows by adding value to its products through work. Real work.
Paul,
I am going to jump in here and say a few words. I think the key here is what you wrote in your comment: “Our country was founded as a federal system with specific duties assigned to the Federal Government. Everything else is left to the States.” What is interesting to me is that a few months ago I could not have told you that your statement was basically the 10th amendment. The reason that I recognized it right away was this is what a whole lot of people have been pointing out recently. It is good that you have always recognized it.
We spent 700 BILLION dollars on corporate welfare! When that money could have been spent on unemployment, after all they claim worry over market forced job loss.
We all know what 700 Billion dollars can do. We could have started with distributing $40,000 to every student enrolled in college, as they are our future.
In could have also been distributed to 17.5 million of unemployed Americans at the same $40.000.
Here we have a Democrat controlled congress that has not lowered the spending platform making it no different than the Republican controlled congress.
We have businesses that made reckless decisions by way of gambling billions of dollars on the market. To then lose the bet. Congress solves this dilemma by purchasing their risky debt with money that belongs to the American people with no vote.
We cry credit crunch, when the American people are a non capped credit card for our members of Congress, the Senate and the Presidential Administration.
Let us not forget that our presidential candidates at the time were in receipt of thousands of dollars from Wall Street lobbyists. Our current Administration went in for the cash grab as well, in fact on more than one occasion.
Ironically, the government not only oversees an exorbitant amount of cash, it contracts the work out to the very same companies that made the imprudent business decisions in the first place. Thus has resulted in the expenditure of more money, with no accountability being held.
In ending I simply used college funding and unemployment as examples.
The bailout went forth with no major consequences!
Solcialism never works. There is no mechanism that create value. In other words, with capitalism the entreupreneaur can grow the pie so their is more for everyone to eat and a larger profit for taking the risk of making the pie bigger.
With solcialism the pie is fixed and never gets bigger. The pie is devided up until their is no more to give and someone comes up short. It our current situation with healthcare, that would be the sick and the old…
I was raised in socialist England and no matter how hard I worked it was hard to get ahead. Most people eventually gave up and worked the minimum. When I emigrated to the U.S. in 1980 I was amazed that hard work actually improved your lot and I readily adapted. Unfortunately over the years the U.S. is becoming more like I remember England.
The problem with socialism is that when you are born into it you don’t know any better.
The presentation here is incomplete without a caveat as an added thought.
The market always wins in the end despite all the desperate strategies used by the administration and Congress to avoid dealing with the financial mess we got ourselves into.
We have had TARP and a stimulus as well as other financial gimmicks all on borrowed money in an attempt to ward off a reckoning by the market.
However, when we borrow to the limit of credulity and when no one is willing to give us credit, then the end is in sight. First our nation’s credit rating begins to decline until we fall to a junk bond rate. Interest on money costs more to borrow and more until no will lend to us at all. Then the market extracts payment.
Assets are liquidated to pay creditors and the U.S. is broken up and sold off until only junk is left.
Like you I have observed that “the market always wins in the end.” The part that I have never really understood is why we have so many politicians that act like they don’t believe it? I have always found this to quite incredible. Congress is not full of stupid men and women but they sure do act that way.
Predictably, we are seeing the results of the failed stimulus plan enacted by Congress and the Obama Administration.
I say predictably because the stimulus violated most of the precepts contained in this exposition. I say again that the market will out. Defying the Market postpones judgement. However waiting is a bitter palliative while the administration pursues policies that brought us to where we are now pouring borrowed money helter-skelter into political payoffs for their friends and supporters.
We forget that it was the government backed many of these bank loans in the first place. I ask you if you believe if the government had stayed out of the market in the first place if the banks would had ever given these loans with out the government backing them, the answer I believe is no. So the problem was not the free market, but the governments policy. But we say we need more government regulation because the market fail, when the truth is the governments policies failed.
Michael-Traverse City Hotels in his recent post here asks and then answers his own question about the interference of Government into the market and the consequences. He says, “…the truth is the government’s policies failed.”
Michael is correct of course. Interjecting government into the market distorts the outcome.
I have become more convinced that the only roll for government is one of enforcement against thieves. The notion that government through its tax policies and rewards systems creates a healthy economy evolves to simply cost shifting the results of their action to ordinary Americans who end up with the bill.
Secondly, using the economy as a means to a real or imagined social good simply gives us a bad economic system and bad social policy.
Couple all of that with politicians and we have the makings of a failed system.
As a for instance consider this:
Simplistically, the financial situation that set up current failure evolved from a purported government policy to get everyone into a home whether they could afford one or not. A construct was made where Government created the shaky loan scenario followed by a big push to house anyone in the nation willing to take on a loan. From there, the money door was flung wide open. Contracts were bundled under the umbrella of government guaranteed securities that were sold, bundled again, and sold anew. A false economic boom was born.
Politicians created all of this. It was a house of cards waiting for an economic downturn and a resettling of the market attempting to find its real value.
Politicians who created the mess have now presented us with a new “overhaul of financial regulations.” Under the regulation, the administration’s vision takes a narrower view of who should own a home and what the government should do to support them.
To begin with, this is the same failed policy with a new twist. The government is now going to determine who may own a home and if they are lucky enough to get a boost from government. One might ask, who is the Government to dictate whether you may own a house in the first place, and who are they to deliberately distort the cost of your purchase by interjecting themselves into the sale?
If the government role is one of enforcement against thieves then government would be a lot smaller. Also, many problems that arise now because of lack of enforcement of existing laws would disappear and would additionally reduce government spending.
Would you carry “enforcement only” down to the state, county and city level? Or would government entities still supply water, collect garbage, and run schools?
I would imagine it wouldn’t matter on a state or local level because you would always have the option to move but still remain within the U.S. When the Federal Government gets involved with social issues then the move option doesn’t work unless you want to leave the country, which for me is not an option I want to exercise.
There are levels of government, Federal, State, and local all formed by necessity and the Constitution. Laws are useless and unnecessary without enforcement.
Utilities are properly a function of local government as they should be. Under our Federal system States are sovereign and grant the authority to local government to form utility districts. The Federal government has no role to play there.
My observation is that communities use a variety of ways to satisfy their utility needs. Some examples are to float bonds to pay for public utilities, letting contracts for service, and interlocal agreements to form consortiums.
Think about this question:
Which has produced more jobs, 600 Billion dollars total spent over the span of the Iraq war or 863+ Billion borrowed dollars spent by the Aministration in a few short months purportedly to produce jobs.
Moral judgements such as war, social good, and others are not relative because market economies have no social conscience.
I would think the Iraq war has produced more jobs. But jobs created are not the sole measure of the success or failure of an endeavor.
What do you believe the measure of success ought to be?
If you want to generate jobs you might not want to start a war to do it, even if it keeps many people in employment. Maybe the government could just get out of the way and let market forces operate.
Sometimes government has to cut jobs to reduce debt. Therefore the measure of success in this instance would be dollars saved and debt reduced. Of course one could argue in the long run more jobs will be generated because government has shrunk, freeing up more people for private sector employment (which currently isn’t a problem but will be in the future).
You had a point though, so explain.
If your country and economic system is threatened, isn’t it a market decision as well as a security decision to wage war?
What if the US had kept all of the Iraqi oil, then paid for the cost of maintaining troops and the war, and began selling Iraqi oil on the market. Would that not have increased our national wealth and job creation? Empires have been built on wars.
Consider these jobs and industrial creations:
What about the attendant jobs created providing education, veteran’s health care, war materials, maintenance at military depots, et al.
Is that not a market?
The following URL lists the top number of troops in Iraq at 170,000:
http://www.huffingtonpost.com/2008/04/07/a-timeline-of-iraq-war-tr_n_95534.html
Reporting new jobs created by the stimulus, to date, and accounting for them have been obfuscated beyond any objective numbers for stimulus produced jobs. See the following for one report:
http://abcnews.go.com/blogs/politics/2010/01/farewell-saved-or-created-obama-administration-changes-the-counting-of-stimulus-jobs/
Closer to the truth would be that stimulus money for jobs has been directed into entities like public employee unions and others that will promote the political power of the Administration and its party.
I agree that the stimulus was a sham. I don’t agree with the Iraq and Afghanistan wars.
That is the point
Mixing economics decisions with political decisions results in faulty outcomes.
Take notice of the national polity and its arguments about the economy and how to finance it. Currently, the discussion is about tax cuts of the Bush administration soon to expire.
President Obama and most Democrats argue to allow tax cuts achieved by President Bush to expire. Doing so effectively raises taxes. Moreover, the Obama/Democrats argue variously to exempt those who earn less than $250,000 to no exemption at all. The opposing argument is we shouldn’t raise taxes because it will kill job creation and inhibit economic growth.
The part that interests me in the discussion is the depiction of the pool of money (national wealth) everyone wants to divide and compete for. The conversation turns on the notion there is a finite amount of money to split up. Out of that notion arises competition for resources and portions. The competitor with least scruples seeks advantage by generating class warfare between those arbitrarily called rich and a class loosely defined poor. Bear in mind, social warfare separates us into groups more easily attacked. Once classified as rich, those who have more money can then be accused of getting their wealth through nefarious means. Rationalizing, it is then moral to take it away from them. And, they build the political power to do it by electing politicians to accomplish their goals using the law.
Undoubtedly, you have heard a conversation where someone is reducing their work hours, or declining work at a second job, or a family member isn’t working when they might want to, because to do so pushes them too high on the tax curve and into another tax bracket.
Earlier, I wrote here that wealth isn’t finite. We can add our work to the national product and gain more wealth for everyone. Discouraging work through taxation, social extortion, and like contrivances, cripple the generation of National wealth that benefits all of us.
We are better off economically as a nation when everyone works at productive work for as long as they want to. The only thing class warfare gets us is anger, division, and stunting of our national growth.
Traditionally, Americans work hard creating their own wealth, save their money, and progress on the job. They didn’t scheme to divide the work of others. Each did their part and the nation prospered.
What day was it when “we the people” began coveting the earnings of another man.
Those who track carefully where their money goes already know that taxation on income discourages productivity. Those who have argued against this I have found are usually so debt ridden they have to work more hours and don’t like to admit that much of their extra labor is going out in taxes. Or they don’t use a budget and do not realize that the government is taking a high percentage of their earnings.
One solution is actually to have more people being taxed at lower incomes so that everyone feels the burden, or put another way, so that everyone shares in the load and makes it lighter for all.
Another solution is a flat tax. Another is a national sales tax and no federal income tax. About anything would be better than the system we now have.
Here is a link to a real life demonstration about how a market works:
http://www.washingtonpost.com/wp-dyn/content/article/2010/10/26/AR2010102607091.html
What do we learn?
First, we learn how a market generates tangible jobs that yield products to sell here and abroad. Seventy percent of the products will be sold in markets other than the United States.
Then we reinforce the truism that for an economy to grow we add work to a product (the vehicle) that increases national wealth. Witness that rather than have unemployed people collecting unemployment payments or public assistance, they are earning money and paying taxes. Moreover, some of the jobs employ manual labor furnishing work for less skilled workers. Getting work for unskilled workers is our greatest challenge to a healthy economy.
On the down side, we miss the opportunity to design, manufacture, and finance production of the vehicles – descriptive of a third world country when manufacture of the constituent parts generates new wealth. Furthermore, capitol derived from sales return to the country of origin producing money for their new investments.
Finally, labor unions must compete with their employers in the market place. Demanding too much money leads to destruction of their jobs as the producer looks elsewhere for his employees. Notice that BMW did not go to Michigan, auto capitol of the United States, for workers to assemble their products.
The line “…helps mute the effects of currency fluctuations between the two countries.” is telling. BMW has figured out that the dollar will be worth less against the mark for some time. Also being close to your market helps.
It seems that the workers were uniformly grateful for a job. There is nothing like happy workers to keep quality and productivity high. And that’s a switch to have the U.S. be one of the lower cost wage countries.
Excellent post. I’m the photographer who created the “money grab” image used in the middle of the post (that’s my arm grabbing the $20 bill ;-). I created it after hearing about the government bailouts and “stimulus” package. I’m glad you put it to good use, and thanks for the attribution!
Regards,
Steve
It is a great photograph. Thanks for letting me use it. I should change the caption so that it shows your name.
Thinking about the state of the nation’s economy and mettle it depends upon:
A reef beneath the water’s surface belies quick solutions to the atrophy of the nation’s collective mettle. The reef we founder on is increasing dependence upon government for our wherewithal to live.
Absent from the debate about the national debt, jobs, and our budget going forward, is how we employ the jetsam of an unemployable labor resource.
If we are ever to redirect our nation to creating wealth and self-sufficiency again, the answer won’t lie with politicians and governmental leadership. The reformation must come from the people.
Our nation became strong and wealthy won by the strength of individuals adding their labor pursuing a better life for themselves and their families. And we all hardened the national collective mettle by our experience – but we have become soft over the years. Too many years have passed when we demanded Government provide more services than we have earned, and to guarantee us protection from an individual liability to life. Many of our citizens are so ill conditioned they couldn’t give an honest day’s work If they had the inclination to work.
Picture too many people who assume a right to bear children and demand their fellow citizens pay to deliver them. Following birth they demand free housing and child support as well. Finally, with no regard for their neighbors, some demand subsidized child care.
At a time when we need an educated workforce more than ever to innovate and design new products for other citizens to manufacture, we tolerate a bloated educational system whose greatest distinction is the numbers of students that either drop out of school or fail to graduate.
Bear in mind that government does not produce jobs. Government purchases services by taking money out of the goods producing economy and spends it on services. Services purchased for the sole sake of creating a job weakens an economy. Witness that services purchased must pass the test of adding value to the National financial worth.