June 19, 2019

Here Comes Another Recession Wrongly Blamed on Capitalism

recession-comingThe stock markets sold off on Friday, and financial media headlines were dominated by an inverted yield curve, a key recession indicator for the past several decades. Was the selloff just a pullback as equity prices consolidate before heading for new highs? Or is this the top of a dead cat bounce after the December market meltdown?

Economic indicators are somewhat mixed. Unemployment remains low at 3.8 percent, although it is always important to consider what kinds of jobs people are doing, what they are producing, and why. Unemployment is always low just before a bubble pops, as monetary inflation leads to unsustainable expansion.

Meanwhile, February saw a nearly subterranean jobs report, and December’s much-ballyhooed number was revised downward from 312,000 jobs to just 227,000. Holiday retail sales, reported as “heating up” during December, ended up declining by 1.2 percent, the biggest drop since 2009.

That a recession is coming is a certainty. The question is when. And whether it hits in 2019 or 2020, you can bet it will take center stage in the political arena, with Democratic presidential hopefuls climbing over each other to blame President Trump and the Republicans. The GOP will find it hard to fight back after taking full ownership of the tail end of this ten-year, inflation-fueled bubble.

As ridiculous as we free-market types always find it, a recession during a Republican presidential administration is always characterized by our opponents as an indictment of capitalism, even though the business cycle is driven much more by monetary policy than anything presidents of either party do. And the Federal Reserve is not a capitalist institution. It’s an economic central planner Karl Marx considered a vital part of moving society towards communism.

Read the rest at Foundation for Economic Freedom…

Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? Part One and A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

Just like modern “progressives,” the big government Federalists meant well

mobocracyIt’s true Federalists like Madison (at the time) and Hamilton proposed a much stronger federal government than the 1788 constitutional convention authorized, but many people wrongly argue they were motivated by purely tyrannical intentions. On the contrary, their main motivation was the belief a stronger central government would protect the individual from the democratic mobocracies they believed the states were already becoming.

While there is certainly an argument their concerns were exaggerated at the time, one need look no further than NY, CA, MA or any number of “blue states” (and many red ones, too) for proof their concerns were valid. 

The flaw in their thinking was that a more powerful central government would ever protect individual rights from government power. Everything they wanted and more has come in through the back door over the past 231 years. Hamilton’s central bank and Madison’s federal government veto over state laws (but by SCOTUS, instead of Congress, as Madison proposed) are just two examples. We can see their strong central government turned out precisely the opposite of what they intended.

Power corrupts, absolute power corrupts absolutely, and absolute power over hundreds of millions of people, concentrated in one city, is absolutely terrifying.

Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? Part One and A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

Trolling Bernie Sanders Part 1

I know. It’s a little like when Kramer was beating up those ten and twelve-year-old kids at his karate school on Seinfeld. But it’s just too hard to resist trolling the commie con man, if for no other reason than to expose him to his confused supporters. So, by popular demand, some highlights from my past few months trolling Bernie.

IMG_0798 IMG_0812 IMG_0814   IMG_0873 IMG_0901   IMG_0785 IMG_0796

Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? Part One and A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

What’s so important about replacing Obama with Romney?

TAMPA, April 25, 2012 – Now that the Republican Party and the media have decided, in quite Orwellian fashion, that Mitt Romney has won the nomination (even though he hasn’t); the party has ramped up its campaign to unite behind the Republican candidate. Regardless of those “minor differences” supporters of other candidates may have had, nothing is more important than defeating Barack Obama in November. There is only one question that no one is asking.

Why?

The first answer provided by many Republicans is “Obama is a socialist.”

I don’t read minds, so I can’t speculate as to what President Obama thinks. He may silently recite Saul Alinsky while he signs executive orders. He may be wearing Karl Marx Underoos when he reads from his teleprompter. I don’t know (and don’t want to know). We can only judge him on what he’s done. So far, he hasn’t done anything substantively more socialist than George W. Bush.

Continue at Communities@Washington Times…

What is Greed?

Whether you are liberal, conservative, libertarian, or none of the above, it is hard not to feel some sympathy for the “Occupiers.” Even if do not agree with them on every issue, there is something very American about a grassroots movement to “fight the man” and protest the existing order. After all, that is how the united States of America were born. As with the Tea Party, it is refreshing to see a group of Americans objecting to something about the sad state of our republic, rather than indifferently accepting each new depridation like sheep awaiting the slaughter.

It is in this spirit that I take issue with one of the central themes of the OWS movement: the fight against “greed.” Here is one area where I believe that the Occupiers are chasing a phantom. Greed is the government’s favorite hobgoblin. Any politician with a bad record, skeleton’s in his closet, or some other threat to his phoney baloney job can invoke this loosely defined vice and count on some level of support in his time of need (for votes). But what is greed and how can one fight it?

That is two questions and one cannot answer the second before resolving the first. I believe that if you asked any 10 people at random for their definition of greed, you would get 10 different answers. The first answer is usually “a desire to have more than one needs.” However, this doesn’t hold up very well. It is obvious that all people desire more than they need. Without accumulating more wealth than what is minimally needed for survival, no human being can read or write a book, create a work of art, or perform an act of charity. In fact, none of what we commonly call “culture” would be possible if human beings did not accumulate the excess wealth that affords them the leisure time to create art, literature, charitable organizations, or the other blessings of society.

To this objection, proponents of the “more than one needs” definition will immediately clarify. “No, I meant desiring far more than one needs.” This clarification is just as problematic. How much is too much? Who sets the limit? At what point has one changed from being a hard worker to being “greedy?” Does that limit change from person to person? Is there a greed-o-meter out there that can set a dollar amount?

If one accepts this definition of greed, the solution to the problem is even murkier than the definition itself. Exactly what is to be done about the fact that “the 1% cares only about profits and not about the  rest of society?” Should businesses take specific actions to cut their profits? What are those actions? The great majority of all new businesses fail within their first year, even when their sole motivation is profit. How is an entrepreneur to know for sure that his business will succeed at all, much less make “excessive” profits? What action can he take to counteract this? Should he cease to innovate, improve efficiencies, lower costs for consumers, improve the quality and features  of his products, or employ people? These are the things that entrepreneurs do to make profits. Specifically which one is “bad” for the 99%?

To be fair, many of the comments on the OWS Demands page are more specific. As I’ve said before, they are definitely in the ball park when they finger the financial sector. However, comments like this one indicate that they haven’t yet found their seats:

“The moneyed elite of our society has changed from being apart of the team that built an economy that raised the lives of all men with ample profits for themselves to a Gambler, who only wants to keep score through the accumulation of money, ever screaming for more profits for themselves at the expense of the people they pretend to serve.”

This is a popular theme and not just among OWS supporters. The accusation that economic players in the financial sector took excessive risks that harmed people other than themselves is almost universally accepted, even by conservatives. Remember George W. Bush’s famous pronouncement, “Wall Street got drunk.”

However, the statement that the “gamblers” make “profits for themselves at the expense of the people they pretend to serve” just doesn’t compute. Wall Street did take excessive risks during the boom that predeceded the bust. They did indeed take those risks in the hope of making greater profits. However, those profits would not have been made at the expense of the people they serve. The people they serve would have made those profits, too, on their own money. They voluntarily gave their money to the financial sector in the hopes that the “gamblers” would win them a return on their investment. Had all gone well, the 99% would have realized a huge return. It is fashionable to claim that financiers make money for producing nothing, but this isn’t true. They make money from their ability to make sound investments and the willingness of other people to pay them to do if for them.

So what can be done about this problem? How do politicians or their constituents, who know nothing about investing (which is the whole reason that they give their money to financiers in the first place), make rules for how much risk investors are allowed to take? Do those rules apply to their own investments? Without some risk, there are no new businesses, no new jobs, no economic growth. How much risk is too much and who decides? The investors themselves or people who know nothing about investing? If investors are not allowed to take whatever risks they deem prudent and the result is that the economy in America dies, will the 99% take responsibility for that? We know that the politicians won’t.

All of these seemingly insoluble dilemmas spring from the initial premise about greed. As long as greed is defined in terms of how much wealth one desires to accumulate, the conclusions that one draws from that premise will always be absurd. The amount of wealth one accumulates or desires to accumulate is immaterial. Instead, it is the means by which one wishes to acquire it that is vital.

If you change your definition of greed from “desiring more than one needs” to “desiring more than one has earned,” then all of the contradictions and ambiguities disappear. Of course, we are immediately begging the question of how to define “earned,” but that is a simple matter. One has earned wealth if one has acquired it without initiating the use of force against anyone else. Under this definition, money given to someone as a charitable contribution qualifies as earned just as profits made from selling products do. In this scenario, the amount of wealth one is able to accumulate has a natural limit – the amount that others are willing to pay for one’s goods or services. This eliminates those troublesome questions about how much is too much in terms of profit.

To be greedy, then, is not the desire to accumulate more wealth than one needs, but the desire to accumulate more than others are willing to pay you for your services. For in order to do that, you must forcibly take the money that they would not willingly give. There is only one institution in all of society that can facilitate this legally: government.

Thus, if Person A accumulates $1 million by selling 100,000 units of his product at $10 per unit, he is not being greedy. He has made an equitable exchange with his fellow human beings: $1 million in products for $1 million in money. In this scenario, he and the 99% are square. Each has benefitted equally from the exchange. We know that he has earned his $1 million because the consumers set the price of his products with their voluntary decision to buy.

Now consider Person B, who wishes to accumulate that same $1 million through government employment, subsidies or privileges. No one voluntarily buys his product. The fact that the government has to either subsidize Person B or protect him from competition means that he is trying to sell something that people would not otherwise buy at his asking price. At best, Person B has sold something at a higher price than people are willing to pay. At worst he has sold something that his fellow humans don’t want at all, but are forced to purchase by the government.

Either way, Person B is greedy – he wishes to accumulate wealth beyond what people are willing to pay him voluntarily. In other words, he is willing to commit armed theft against his neighbors. As you can see, Person B may be far more greedy in his desire for even $50,000 than Person A is in his desire for $100 million, if Person B plans to obtain it by force and Person A means to obtain it through voluntary exchange.

OWS is right to want to stamp out greed, but they aren’t defining it correctly. Since Woodrow Wilson, progressives have been making the same fundamental error in failing to distinguish between legitimately acquired wealth and wealth acquired through government force. It is the latter that OWS should look to stamp out, rather than indiscriminately condemning anyone who becomes wealthy. The most effective way to fight greed by its true definition is to take the Occupation to Washington, D.C., where the power that the greedy utilize resides.

Imagine a world in which every individual has an equal chance to be a millionaire, but only if he offers his fellow individuals $1 million in benefits, with the 99% deciding for themselves how much they are willing to pay. That is a world without greed. That is what we used to call “freedom.”

Why a Debt Default Would Be Wonderful

While it is likely the two parties in Congress will reach a deal before the August 2 deadline, I can’t help reflecting on how wonderful it would be if they didn’t. While Congressman Ron Paul has correctly pointed out the government has already defaulted at least three different times in its history, and continues to default every time it prints new money, it is not quite the same as an “on-the-books” failure to make a timely payment. That is exactly what America needs.

Politicians, mainstream economists, and the media tell us a U.S. government debt default would be catastrophic. Treasury bonds would be downgraded, interest rates would soar, and the massive government spending that has supposedly fueled the present (jobless) recovery would be severely curtailed, plunging the U.S. and possibly the world back into a deep recession.

Perhaps that is true. Nevertheless, a debt default by the federal government would still be a blessing, for several reasons.

First, one must remember that all government spending represents a redistribution of wealth (what we regular folks call “stealing”). The government forcibly confiscates money from those who have earned it and spends it for the benefit of someone else. The most insidious way the government does this is by borrowing. When it borrows, it is confiscating money from people in the future – some of whom are not yet even born – to hand out to special interest supporters today. To the extent it would prevent or decrease this, a default would result in a more just society.

However, even if one doesn’t care about justice or property rights, a default would help correct the malinvestment that has caused this crisis in the first place. As I’ve said before, the entire U.S. economy is really one, huge bubble of misallocated resources, caused by a century of government intervention. The government’s backing of mortgages, together with monetary inflation by the Federal Reserve, were the primary causes of the housing bubble. This same dynamic exists in almost every sector of the economy.

The government also backs student loans for college. Just like it did to the housing industry, this government guarantee has inflated prices in higher education far beyond what could be supported by real demand. That in turn has led to the creation of millions of jobs in the education sector that only exist because the government subsidizes them. When the government funds are no longer there, the price of education will plummet, just as housing prices did, and all of those people will be out of work.

Healthcare is another sector with all of the same intervention-related problems. Government subsidies create artificial demand, inflating the price and misallocating resources to the healthcare sector. The healthcare industry is not forced to innovate in terms of delivering its services in more efficient ways because customers are forced to buy its products,

If you doubt this, just withhold the Medicare portion of your payroll taxes and see what happens.

This also creates jobs in the healthcare sector which are not supported by natural market forces. When the government can no longer subsidize them, those jobs will go away, just as they did in housing and education.

Banking, research, agriculture, energy, automobile manufacturing – there is not one sector where government is not overriding the voluntary transactions market participants would otherwise engage in. Wherever the government is spending taxpayer money, it is overriding a previous choice by taxpayers not to purchase that product. As F.A. Hayek observed in The Road to Serfdom, the government has never and can never make better choices than millions of market participants acting in their own self-interest. They simply lack the information necessary to do so.

Therefore, wherever the government is spending money to try to boost some aggregate statistic, it is making a problem bigger. If government spending is creating jobs, they are not real jobs. A real job is a voluntary contract between a buyer of services (an employer) and a seller of services (an employee). If that job is created because of government spending, a third party is introduced into the transaction who is not acting voluntarily.

Government-created jobs force taxpayers to purchase services from employees because it is not profitable for the employers in that sector to purchase them. Forcing taxpayers to purchase them doesn’t make those jobs any more profitable. It just depletes the capital available to create profitable jobs elsewhere.

The prospect of tens of millions more people unemployed may seem frightening, but that day is coming regardless of what politicians do. Economic laws are like the laws of nature. They will assert themselves in the end. Any job that requires the government to borrow more money to subsidize it is also a job that depends upon the lenders continuing to lend. As we have seen in recent Treasury bond auctions, those days are coming to an end. Raising the statutory debt ceiling only allows more phony jobs to be created, setting up more employees for the painful correction.

The most important reason a debt default will be beneficial is a philosophic one. It will force a complete paradigm shift in the way Americans think about the role of government. For a century, there has been no area of life that some special interest has not appealed to government to manage or subsidize. From the way we conduct commerce to the way we make personal decisions on food or healthcare to the way we coexist with our neighbors in other countries, nothing has been off-limits.

Complacency about our liberty has been one reason. The other has been the perception of infinite financial resources. The great wealth the United States generated in freer days provided a tax base and borrowing collateral that has always been perceived as unlimited. A debt default would shatter that foolish perception.

The default would be a bucket of cold water in the faces of a drowsy and compliant populace. It would wake people up to the reality Thomas Paine was aware of over 200 years ago, when he wrote that government “is at best, a necessary evil.” People would realize the government doesn’t “have our back,” other than to stick a gun in it to loot our liberty and wealth. We would no longer hear that horrid refrain from media pundits after some new government incursion or heist: “Well, the government had to do something.”

Instead, we would hear the resigned chorus, “Well, the government couldn’t do anything.” And perhaps, in some glorious, enlightened future, we’ll hear “The government shouldn’t do anything.”

Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? Part One and A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

The Three P’s: Things Government Cannot and Should Not Do

declarationIn this late stage of America’s devolution from constitutional republic to social democracy, one is hard pressed to find meaningful debate about the role of government. Despite a 24/7 news cycle and endless political commentary on talk radio, most Americans have not once in their lives heard the question, “What is the purpose of government?” Certainly, we hear that “the government should do this” or “the government should not do that” in regard to particular issues, but nowhere will you hear a meaningful discussion about the overall mission of government. Indeed, answering this question might not be all that beneficial to our chattering classes, because once it is answered, there is little need for hours and hours of more talk. Clarifying the role of government makes the answers to most political questions rather simple and unambiguous. It is hard not to suspect that many of our politicians avoid this subject intentionally.

If America is truly the “land of the free,” then there can be only one answer to this question. The purpose of government is to defend its constituents against aggression. Period. Since “liberty” and “the non-aggression principle” are one and the same, it is impossible for government to have any other purpose, or any additional role.

As government is by definition the societal use of force, any action of government other than defense against aggression must itself be aggression.  To induce human action through aggression is coercion. When coercion is practiced by government, it is called tyranny.

Freedom is the ability to exercise one’s will in the absence of coercion.  Therefore, freedom is impossible once government is allowed to perform any function other than defense.  If freedom is exercising one’s will in the absence of coercion, one cannot be free while being coerced. Two plus two cannot equal five.

That leaves a multitude of actions that government must be prohibited from engaging in. They generally fall into three categories, which I like to call “the Three P’s.” The Three P’s are to prevent, to promote, and to provide.  There is no way for government to engage in any of these three activities without destroying the liberty that it supposedly exists to defend.  Yet, this is 99 percent of what government in modern America does.

Most Americans look to government to prevent crime.  Once a particularly heinous crime is reported in the media, there are universal outcries about the failure of government to prevent it.  Almost no one stops to think about what it really means for government to “prevent crime.”  By definition, to prevent something is to act before it happens.  Since all government action represents the use of force, government can only prevent crime by initiating force against people who have committed no crime.  Force must always be initiated by someone.  The initiating party is the aggressor.  There is no other possibility.

This is not merely a theoretical or academic argument.  Think for a moment about the results of government’s various “crime prevention” efforts.  Gun control disarms the victims of crimes while empowering violent criminals who don’t care about gun control laws.  Economic regulations which attempt to prevent fraud insulate protected corporations from competition, emboldening them to commit more fraud.  Worst of all, the War on Terror, the ultimate government crime prevention program, has harassed millions of American citizens while allowing terrorists to walk onto planes with explosives in their shoes, underwear (and who knows where else), and has laid waste to an entire nation in order to determine that the “weapons of mass destruction” it supposedly possessed did not in fact exist.

In addition to preventing crime (including terrorism), that war also claims to undertake another of the Three P’s: to “promote.”  Once it became clear that there were no weapons of mass destruction in Iraq, a new rationalization was needed for our brutal invasion of that country.  That new reason turned out to be our missionary desire to “promote democracy.”  Without getting into the erroneous perception that “democracy” and “freedom” are synonymous, it should be quite clear after seven years of uninterrupted martial law in Iraq that our government has failed to achieve either democracy or freedom.  Only government can be capable of missing the irony of ordering people at gunpoint to be free.  While it might play for some good laughs in a Peter Sellers or Monty Python movie, it is really quite horrifying when one considers that our government takes this position in all seriousness.

It is not only in foreign policy that government reaps disastrous results when trying to “promote.”  Consider its attempts to promote “clean energy.”  One need look no farther than the ethanol fiasco or “Climategate” to see the results government gets in promoting respect for the environment.

The same underlying reason accounts for the similarity of results when government tries to “promote” or to “prevent.”  In both cases, force is initiated against individuals who have committed no aggression themselves.  In order for government to “promote” anything, it must act.  When government acts in the absence of aggression, it commits aggression.  By committing aggression against and therefore overriding the decisions of millions of individuals, government causes innumerable unintended consequences.  All of them can be traced to the initiation of force.

The third of the Three P’s is by far the most destructive when undertaken by government: to provide.  The illusion that government can “provide” anything springs from a loss of recognition of what government is.  Government is the use of force, not by an individual, but by all of society.  As it is a destructive force, rather than a creative one, it can produce nothing.  Therefore, it can only provide something to one citizen that it has forcefully seized from another.  This holds true whether it is attempting to provide healthcare, education, housing, or any other form of property.

The fact that human beings spend the majority of their time on earth laboring to fulfill their wants or needs makes this the most costly of the Three P’s.  While warfare represents violent aggression against millions of people, government’s usurpation of human labor initiates violence against everyone.  While the cost of warfare in human lives cannot be expressed in dollars and cents, there is at least a limit to the amount of lives it can affect and the length of time it will go on (despite government’s best efforts to make it universal and indefinite).  However, once government has claimed a right to the labor of its constituents, no one is spared and the subjugation never ends.

While the active wars in Iraq and Afghanistan amount to less than $200 billion per year (as if those amounts were not staggering themselves), the U.S. government spends trillions of dollars each year attempting to provide its citizens with healthcare, retirement benefits, education, housing, and other necessities.  Government’s results in all of these areas are the same: disastrous.  The healthcare, education, and housing provided by government are more expensive, of lower quality, and in shorter supply than would be the case if government did not attempt to provide them.  Aggression cannot create prosperity any more than it can create freedom.

Thomas Paine wrote that “government is at best a necessary evil.”  He understood clearly what government is: an institution of violence.  As individuals, we understand that the need may arise to commit violence against another human being, but only justifiably for one reason: to defend our lives against aggression.  Should we be faced with that unfortunate choice, we may be justified in resorting to violence but afterwards regret that the need to do so arose. Most importantly, no sane person claims a right to initiate violence under any other circumstances.  As we do not possess this power as individuals, we cannot delegate this power to government.  Any legitimate power possessed by government must derive from the individuals who constitute it.

To put it most succinctly, government must always be limited to a negative power.  It is the societal extension of the individual right of self defense.  As individuals cannot use force to prevent, promote, or provide, government cannot either.  Individuals have no right to force one another to do anything, even if they believe that it is in the victims’ best interests.  So, whenever the question arises of whether government should involve itself in some new aspect of its citizens’ lives, remember the Three P’s.  If the new program represents any of them, it is time for each individual to exercise his most basic right in respect to his government: the Fourth P, to prohibit.

Tom Mullen is the author of A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

>The Crusade Against Greed: Government’s Scapegoat

>Despite the fact that this economic crisis is unfolding exactly the way that the Austrian economists predicted it would, along with the impending police state that Hayek predicted over 60 years ago, the American people show absolutely no sign of figuring out the CAUSE of this crisis. The most discouraging aspect of the whole debacle is the propensity of the American people to take the government bait by blaming this financial and economic collapse on “greed.” This plays right into the government’s hands.

As platitudes go, those warning against greed are the ones that people should be most suspicious of. Anyone that seems overly interested in making you feel guilty about accumulating too much property probably has an interest in acquiring what you leave behind. If nothing else, the fact that both Republicans and Democrats are vilifying greed should make people think twice about whether they may be burning the wrong witch when they seek to blame greed for our present troubles.

Webster’s defines greed as “a selfish and excessive desire for more of something (as money) than is needed.”[1] Any student of economics should be suspicious of this vice. While “selfish and excessive” certainly conjures up distasteful emotions, those are little more than prejudicial adjectives accompanying the real substance of the definition: desire for more of something than is needed. Does this mean that anyone with a savings account is greedy?

While one could counter that some savings are actually “needed,” a moment’s reflection should have one questioning what the real motivation for vilifying greed might be. Who do we find denouncing greed the most vehemently? The rich and powerful. Does this bother anyone besides me?

Let me be clear. Greed had nothing to do with causing this financial crisis, no matter how many times you are told that it did by the media and politicians looking for votes. In economics, the goal of every market participant is to acquire “more than is needed.” If the truth be told, acquiring more than is needed is what Jefferson really meant when he talked about the “Pursuit of Happiness.” Property – the fruits of your labor – is the means by which you sustain your existence and provide opportunity for intellectual and spiritual enrichment. Those who must work every waking hour just to provide the basic necessities of life have time for neither quiet meditation nor for reading Dostoevsky. By acquiring more than you need, you create leisure time to pursue your other interests and enable yourself to provide for your children or to give to charity. In this life on earth, acquiring more than you need is the means to happiness and security for yourself and those that you love. It is also your unalienable right, as our founders repeatedly told us.

The whole point of participating in a free market is to acquire as much property as you possibly can. Not only is there nothing wrong with this, it is actually vital to the health of the market. With every participant acting in their rational self interest to maximize their wealth, the minds of all participants are leveraged and society as a whole reaps enormous benefits.

One of the key mistakes that critics of free market capitalism make is failing to understand that there is only one way to acquire great value in that system: to offer great value in return. Listening to the proponents of socialism, one might be led to believe that one can only gain at another’s expense. This is not true. In a laissez faire capitalist system, economic agents trade to their mutual benefit. Every exchange is perceived by both parties to be an EQUAL exchange, or it does not occur. That is the nature of VOLUNTARY exchange. No one deliberately causes themselves harm. While they may not always trade wisely, more often than not they do, and in every case they make an exchange that they believe is in their best interests. One can only consume great wealth by producing great wealth.[2]

Thus, it should be clear that there is no such thing as acquiring “too much” in a free market. Only by supplying enormous value can any economic agent acquire enormous value. Acquiring property in a voluntary trade by offering equal value in return is the essence of “earning.” In a free market, all transactions are voluntary. Therefore, all wealth must be earned.

A second reason for wrongly perceiving a threat from greed in a free market is the failure to acknowledge the role played by risk. There is always some amount of wealth that can be acquired with very little risk. However, in order to achieve greater amounts of wealth, economic agents must accept greater amounts of risk. Risk acts as a counterbalance to what is commonly referred to as greed. If an economic agent seeks to acquire value far beyond the value he is offering in return, he can only do so by taking inordinate risk, and will virtually always fail. While the attempt to acquire value with this type of speculation might not be admirable, others certainly have no right to forcefully stop him from doing so. The risk is his, as are the gains or losses he realizes as a result. In a free market, there is no moral or economic justification for attacking “the speculator.”

That brings us to our present crisis and its real cause. It was not greed – the desire to accumulate more than one needs – that caused the crisis. What caused the crisis was government removing the risk of lending to sub-prime borrowers by guaranteeing mortgages through Fannie Mae and Freddie Mac. With no fear of losing their investment, lenders had no reason not to take inordinate risk in lending to sub-prime borrowers. In fact, Fannie Mae CEO Daniel Mudd told the New York Times that he was actually pressured by the government to continue increasing the risk that Fannie was exposed to. According to Times reporter Charles Duhigg,

“Capitol Hill bore down on Mr. Mudd as well. The same year he took the top position, regulators sharply increased Fannie’s affordable-housing goals. Democratic lawmakers demanded that the company buy more loans that had been made to low-income and minority homebuyers.”[3]

Whatever the true intentions behind creating these government-sponsored enterprises (GSE’s), they violated moral and economic law with predictable – and predicted – results. This intervention into the market and suspension of market forces was the direct cause of the sub-prime crisis, not greed.

This was more than just a bone-headed mistake by government. It was a crime. Governments are instituted to secure individual rights, including property rights. Instead of protecting the property of its citizens, government stole it to guaranty sub-prime loans. Now that its ill-advised program has failed, government is looking for a scapegoat. Enter “the greedy financier,” and the real culprit walks.

None of this is meant to absolve the lenders, who knowingly made loans to people who could not pay them back. However, the guilt should be shared equally between the lenders, the borrowers, and the government. It was not greed that they were guilty of, it was stealing. They stole money from the taxpayers to make the loans possible. All three parties benefitted by passing risk onto taxpayers without their consent. The problem was not the desire for too much wealth. It was the desire for wealth that they did not earn.

This is an important distinction, because we will soon be subject to a government “solution” to this supposed problem of excessive greed. Blaming greed for the crisis plays right into the government’s hands, as it allows government to respond with measures that will limit the amount of money that can be earned, even legitimately. Already we are hearing calls for more regulation. This amounts to a further violation of our rights and will continue the destruction of our markets. On the other hand, if we recognize the true cause of the crisis, we can demand less regulation and an end to government intervention into the marketplace, which is what our markets actually need. One cannot prescribe the medicine until one has accurately diagnosed the disease. Don’t let the government off the hook by buying into their crusade against greed. Instead of free markets, let’s punish the truly guilty for once.

[1] http://www.merriam-webster.com/dictionary/greed
[2] It should be noted that this applies to truly free markets. In the U.S. mixed economy, government privilege allows some to accumulate great wealth because of that privilege, rather than any great value they offer the marketplace in return. Of course, the solution to this is to eliminate government privilege, not restrict the market further.
[3] Duhigg, Charles “The Reckoning: Pressured to Take More Risk, Fannie Reached Tipping Point” The New York Times Oct. 4, 2008 http://www.nytimes.com/2008/10/05/business/05fannie.html?pagewanted=1&sq=mudd&st=cse&scp=1

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>The Bursting of the Socialism Bubble

>In the midst of what “debate” there has been about the eventual bailout of the financial sector, it is clear that even most of those opposed to the bailout do not understand what is happening. The unfortunate aspect of some of the commentary is that there is a faction arguing that without the bailout, the stock market will not crash. Thus, the debate is shifted to “which course of action can best protect stock market values?” They cannot be protected. The government argues that the credit squeeze could result in unemployment, while the other side argues that unemployment will not necessarily result if the bailout is not passed. Another position blames the crisis on too little regulation. All of these positions are wrong. There will be a painful adjustment in the stock market and massive unemployment, whether the government bails out the financials or not. The only question is how long it will last. That is reality when any bubble deflates.

The most unfortunate result of all of this misunderstanding would be for the American people to reverse their position and support the bailout just because there are severe market losses if it does not pass. Their initial instinct was correct, whether for the right reasons or not. The losses that these companies suffered due to massive malinvestment are real, and that must eventually be reflected in the value of their stocks.

Similarly, it will be unfortunate if the American people are convinced that more regulation is needed to prevent this from happening again. More regulation will not prevent a problem that was in part caused by too much regulation.

We have heard about the “tech bubble,” the “housing bubble,” and even the “dollar bubble.” All of these are real. The dollar bubble is about to burst, with global catastrophic consequences, but even that is not the biggest bubble that is out there. The biggest bubble, which has been building literally for the past century, is what I will call “the socialism bubble.”

What is the socialism bubble? Let’s define “bubble” first. The term “bubble” is used in economics to describe a large misallocation of resources (malinvestment). Anyone with even a passing familiarity with economics knows the basics: the central bank artificially infuses money and credit into the economy, that money flows toward projects that appear to be profitable under the artificially created conditions, but aren’t, and those projects ultimately fail, causing the bursting of the bubble. The worst part of the bursting of a bubble is that the greatest misallocation of resources has been human resources, and those people now have to find new jobs. They have to be reemployed elsewhere, in more profitable ventures, just like the capital goods that were misallocated to the projects. That is why unemployment accompanies recessions.

Like any other bubble, the socialism bubble is also a misallocation of resources. It has just taken longer to form and is much huger in scope. The principles behind it are the same, however. It represents government intervening into the economy to create artificial conditions that misallocate resources. Under these artificial conditions, the entire economy appears to be profitable, but isn’t. When the inevitable bubble bursts, all of the resources, including human resources, that were misallocated, become unemployed. We are about to experience the massive correction following this socialism bubble.

How did it happen? One must look back to before it started to understand it completely. It started at the turn of the last century. The United States of the 19th century had the closest thing to laissez faire capitalism ever achieved in history, arguably followed next by Great Britain. The defining principle of laissez faire capitalism is VOLUNTARY EXCHANGE. With everyone acting in their rational self interest, the minds of all participants were leveraged by the system to consistently produce optimal results.

In the laissez faire marketplace of the 19th century, wages generally declined over time. A pitiable lack of understanding of economics caused social reformers to condemn the free market for this.[1] They ignored the fact that the general price level fell faster than wages, making workers richer in real terms. They attempted to improve on the results that laissez faire capitalism had produced with government policy.

However, there is only one alternative to voluntary exchange: INVOLUNTARY EXCHANGE. Government economic policies FORCE economic agents to make choices that they otherwise would not make. No matter how one tries to euphemize socialism, that is what it is. By attacking voluntary exchange, socialism attacks the mechanism that creates wealth. That is the true root of the problem.

One way in which this manifests itself is in the cost of production. Government cannot come to a company that makes automobiles and force them to pay their employees more, provide them healthcare or pensions, pile one regulation on top of the next in terms of how the company operates its business, and then expect the company’s cost of making that automobile not to rise. As the cost of production rises, the company must find a way to keep the cost of producing their product below the market retail price. They might decide to manufacture SUV’s, which have larger margins, even though a spike in gasoline prices could put them out of business. See General Motors. The truth is that none of the American auto manufacturers are able to produce an automobile that is competitive in the market. Government will come up with a host of villains to blame for this, but look at the balance sheets of the Big Three and you will see why they are not viable. Concessions to labor unions (mandated by government) have made it too expensive for them to operate.

Similar government intervention is behind virtually all of America’s loss of manufacturing infrastructure. It is simply not economically viable to manufacture anything in the United States anymore. This is not a natural result of free markets. As previously noted, wages and other costs of production fell under the laissez faire system. Falling prices are a natural result of economic growth and innovation. Only the artificial conditions created by government intervention – the use of force to coerce economic agents – have made it more expensive to make things in America.

The cost of production is not the only pressure that socialism has put on the American economy. The welfare programs currently consume 11% of GDP. Keynesians would say that this is ok, because the recipients spend that money and increase demand. Hopefully, the coming calamity will discredit this economic school of charlatans once and for all. Wealth is created by production, not consumption. This redistribution destroys voluntary savings and ultimately capital. It also eliminates the other conditions that accompany a period of voluntary savings that facilitate natural expansion of the productive structure.

In any case, increasing socialism has put artificial pressures on the American economy for almost a century, and those pressures have accumulated to make America profoundly less productive. Like the communist countries, we have lived in a dream world in which government could use coercion to change economic reality. We have pretended that a business venture can spend more than it takes in and continue to survive. For a time, the free market aspects of America’s “mixed economy” allowed her to overcome these negative pressures, but that time has passed. Economic reality is about to assert itself in devastating fashion.

For at least two decades now, America has been producing far less than she consumes. All things being equal, this would not have gone on for long. However, all things have not been equal. The United States has a central bank, and the privilege of printing the world’s reserve currency. This is why the socialism bubble has been become so enormous.

Instead of a drop in consumption and a rise in unemployment[2] as its manufacturing sector migrated overseas, America went right on consuming, and those employees found new jobs in the “service economy.” With the Federal Reserve providing an unlimited supply of fiat currency, and with the ability to ultimately export that inflation overseas by importing foreign goods in exchange for U.S. dollars, America has been able to maintain the same standard of living as it enjoyed in its productive days. As long as foreigners accepted U.S. dollars, the dream world could persist. The bubble continued to inflate.

The ominous part of this is that today a large percentage of the American labor force is now misallocated by this bubble. There are tens of millions of American workers that are employed in ventures that will cease to exist once the socialism bubble bursts. We have seen the beginning of this with the failures of large retailers and restaurant chains, but that is only the tip of the iceberg. Worse yet, unlike previous recessions, there are no manufacturing jobs for these displaced workers to redeploy to. The productive structure must be rebuilt, and that doesn’t happen overnight.

Therefore, Americans must realize that a stock market crash[3] and mass unemployment are inevitable, whether government intervenes or not. The only question now is how long those undesirable conditions will last. There is no “solution,” government or otherwise, that will allow us to avoid this correction. If the government does not intervene, the stock markets will crash faster and the layoffs will begin sooner, but the total period of adjustment will be far shorter. If the government intervenes, no matter how they do it (including by allowing the Federal Reserve to massively inflate the currency), the adjustment period will be stretched out, with continued new malinvestment even as liquidation of current malinvestment occurs. That was the story of the Great Depression.

The only course of action that can speed up the recovery is a return to the laissez faire capitalism that made America great in the first place. This would include eliminating unnecessary regulation, abolishing the central bank and restoring sound money, eliminating minimum wages and other artificial price controls, capping and eventually phasing out the entitlement programs, eliminating other massive government spending like military welfare for other countries and unnecessary war, and restoring protections of property rights. In other words, Freedom. Don’t you think it’s time we tried it again?

[1] The lack of understanding of “real wages” was certainly not the only misconception of the social reformers, but it was a major misconception and representative of others.
[2] The European mixed economies have already experienced this adjustment, debased their currencies, regrouped under the European Union and an new currency, and are presently pursuing the same failed ideology to destroy this new economy as well.
[3] It is conceivable that the Federal Reserve could inflate the currency so much that the stock market remains at $11,000. However, if $11,000 only buys 10 loaves of bread at that point, it would still represent the same devaluation as a crash.

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>Be Careful What You Fight For

>There is one positive consequence of the economic collapse that is occurring, and the futile attempt by the government to stop it with money stolen from its constituents: the American public has woken up. Despite the best efforts of the major media outlets to spin this the way the government would like, it is apparent that mainstream America is mighty angry that they are being fleeced to prop up the financial system. I hope that anger does not fade with the passage of time – at least not until after November 4th. While wholesale changes are unlikely, it would be nice to see a few incumbents packing after this election and replaced by non-Republicrats. It would be an encouraging sign of things to come.

However, as good as it is to finally see some outrage over the destruction of our Republic, there is still a long way to go. Listening closely to the cries of anger, it is apparent that the majority of Americans still haven’t found their way to actually demanding their freedom. While they are angry, it seems that government has successfully channeled their anger in the wrong direction. Generally, Americans are mad at Wall Street, and are blaming this crisis on “greed.” To the extent that they fault government, they are blaming the crisis on “not enough regulation on Wall Street” and even (ugh) “too much laissez faire capitalism.” This of course plays right into the government’s hands, because the answer to “too much laissez faire capitalism” is more government intervention into the marketplace – which was the REAL cause of this problem in the first place.

If anything, the number one clue that it was not free enterprise that caused this debacle is that the government says it was. By now, every American should know to listen carefully to everything that the Bush Administration says and assume that exactly the opposite is true. However, decades of conditioning to mistrust the free market is paying off for the government, at least for the time being. They have turned this into a class war, instead of an ideological one. They have Americans indiscriminately resenting the wealthy, whether they earned their money legitimately or not. They have Americans condemning corporations, whether they achieved their place in the market legitimately or not. While Americans are mad at their government, they have been convinced, for the moment, that government’s failure was not protecting the average American from the evils of capitalism.

Of course, the truth is that this crisis was a failure of socialism, not capitalism. It was the socialist idea that every American was entitled to a house, and that taxpayers must pay for them, that led to the creation of Fannie Mae and Freddie Mac. Those companies guaranteed mortgages to people that would not have received them in a free market. Only the ability of the government to forcibly collect taxes to back those mortgages allowed the lenders to offer them. If there was any doubt that the government was backing Fannie and Freddie with taxpayer money, that doubt was removed when the government took over the companies when their inevitable failure occurred.

Even with the GSE’s in place, it took another socialist institution, the Federal Reserve, to supply the imaginary money needed to lend to all of those “sub-prime” borrowers. Without the imaginary “liquidity” provided by the Fed, the loans could never have been made and the home prices could never have been bid up so far. The Fed merely blew up another bubble, as it has been doing since the day it opened its doors in 1913.

What these interventions into the marketplace do is create artificial demand. Everyone knows that an increase in demand, while supply remains equal (or when the increase in demand outpaces an increase in supply), results in an increase in price levels. However, demand is not merely the desire to purchase a product, but also the ability to do so. If demand were merely the desire to have something, there would be unlimited demand for all products and services, taking most of the challenge out of running a successful business! The Fed and Fannie Mae certainly didn’t increase the number of people who desired to have a house, but it dramatically increased their purchasing power. In fact, the combination of easy money and credit by the Fed and the incentive for lax lending standards represented a massive increase in demand over the entire housing market, with the predictable dramatic increase in home prices. None of this represents free market forces at work. It is textbook socialist central planning and wealth redistribution.

That brings us to the government “solution,” and what Americans should really be mad about. Our government is now going to forcibly extort trillions of dollars from us in a misguided attempt to maintain the artificial conditions it created in the market. It won’t work. They have tried it many times, and it has never worked. The artificial demand drove prices far above their natural level, and natural market forces are now pushing them back down. Borrowers were lent money that they were never going to be able to pay back. What is worse, a large percentage took the artificial equity caused by the rise in price of their homes in home equity loans and spent it. That money is gone, and the borrowers can’t pay it back. Government taking possession of the mortgages isn’t going to change that. Those borrowers are still going to default, and the home prices are eventually going to go where they naturally must go. Economic forces are like forces of nature. In the end they cannot be stopped.

This intervention is practically identical to the interventions attempted during the Roosevelt administration in the 1930’s, which turned a severe 2-year recession into a crushing, 10-year depression. This bailout will have devastatingly similar results. It doesn’t matter whether a CEO gets away with a $10 million dollar bonus or not. What matters is tens of millions of Americans unemployed for a very, very long time. THAT will be the result of government’s attempts to maintain the artificial conditions in the economy that GOVERNMENT created in the first place.

Since the Austrian economists predicted all of this, while the Keynesians did not, it might pay to listen to what the Austrians suggest as a solution to these government-created crises. While their first advice was always not to create the problems in the first place, they certainly were clear about what to do when the inevitable bubble bursts occurred. Not surprisingly, they advised us to do EXACTLY THE OPPOSITE of what the government proposes. The cure for the recession, according to the Austrians, was to EASE regulation on business, especially in the labor market, and allow the quickest, smoothest reallocation of resources (including human resources) that was possible. As government intervention had created the problem, more government intervention was not going to solve it. In fact, any intervention could only make it worse, no matter what form it took. That is because the wealth creating mechanism of capitalism depends upon the participants making their decisions voluntarily, and government intervention represents forcing people to make different choices. This is really what most Americans are demanding from their government right now – for government to force market participants to choose differently than they otherwise would. Be careful what you fight for, Mr. and Mrs. America, you will probably get even more than you asked for.

I do have hope, however. Sooner or later, Americans will figure this out. At least they’re screaming about something now, which is a lot better than the docile slumber they’ve exhibited over the past several decades as we’ve marched toward oblivion. The government would much rather have them keep on sleeping than to have to divert their anger towards scapegoats and imaginary boogeymen. They will succeed in doing just that this time, but their system is nearing its end. The inevitable economic debacle will occur, and hopefully that will be the final straw. Americans have put their faith in government control and central planning of their lives for almost a century, and it has consistently let them down. Perhaps this last calamity will finally make them see the socialist lie for what it is. Then, they will finally stop walking down the road to serfdom.

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