Ron Morley's Freedom Blog

This is the place where I do my little bit to explain the evils of the State.

November 2008 - Posts

Why the State Loves Keynseian Economics

In this time of economic turmoil it seems as though the majority of economists have become disciples of John Maynard Keynes. Turn on virtually any news broadcast covering the financial crisis which the State's economic mismanagement has thrust upon us and, most of the time, the “economic experts” the media turns to for explanations of what is going on, and for suggestions of what needs to be done to turn things around, turn out to do little but spout the same mistaken Keynesian economic ideas that Franklin Delano Roosevelt relied upon to justify his “New Deal.” According to most of the economists that the general public will have opportunity to listen too, men such as Robert Reich, Robert Rubin, Lawrence Summers, Henry Paulson, Chris Farrell, and others, there are two things which will pull America out of the financial disaster that we are supposedly heading for: an increase in consumer spending, and a large Federal government financial stimulus package. The fact that both history and economics tells us these steps are counter-productive, indeed will act to extend the length and depth of the economic troubles, does not appear to matter to these people.

In spite of the evidence, compiled by Murray Rothbard and others, that Keynes' preferred policy, called “pump priming” acts to prolong economic downturns and make them worse than they need to be, these policies continue to be number one on the State's list of tools to be used when faced with an economic downturn. There are a several reasons for this state of affairs. Passing so-called “economic stimulus” packages appeals to short-sighted legislators because they are seen to be “doing something” about the worsening economy. This action also allows the power-hungry Congresscritters, and members of the executive branch of the government, to extend the power of the State by attaching various rules and regulations to the money they thus make available: rules that must be obeyed by anyone wishing to avail themselves of this Federal largess.

However, the truth of the matter is that State intervention in the economy is always counter-productive, and rarely moreso than during an economic downturn. The reasons are fairly simple, though many people fail to understand them. The effects of the Federal government's interventions begin with one simple thing: any money spent by the Federal government, which adds to the government's deficit, is money that is no longer available to the private sector. The Federal government must cover its deficits by borrowing money from some source and, of necessity, the loans to the State compete against demand for the same funds from the private sector. However, most people do not recognize the truth of this situation, and its affect on their lives, and so they simply accept the loudly and oft-repeated claims that only the Federal government is capable of “making a large enough impact on the economy” to be useful. It's as if the economy is some large machine that will automatically respond positively to the government's attempts at percussive maintainence.

It is amazing that otherwise intelligent people do not seem to understand why the government's “economic stimulus” packages do not work as advertised. They seem to think that, because it is the Federal government which is borrowing money so as to be able to increase its deficit spending, the law of supply and demand is somehow bypassed. They do not, or choose not, to understand that every dollar borrowed by the State is a dollar that is no longer available to entrepreneurs in the private sector. Also not comprehended is that the increased demand for dollars in the loan market drives up the price of those dollars, I.e., interest rates increase, which increases the economic burden that must be borne by private sector borrowers. The higher interest rates also ensure that some potential borrowers, business people who might have created private sector jobs, are unable to afford to take out loans, reducing the amount of economic growth.

Some people will say that when the Federal Reserve acts to increase the money supply, as it has done recently to the tune of several trillions of dollars, that it offsets the increased demand for dollars by the Federal government and the overall effect on the private sector is neutral. This is simply not the case as the Federal Reserve's actions simply increase the rate of inflation within the economy. By flooding the economy with dollars the Fed simply makes each of those dollars is worth less than its predecessor. The increased inflation offsets any possible affect the increased supply of dollars may have had on overall demand. There is also the increased danger of the government's artificial expansion of the money supply triggering a hyper-inflationary spiral such as is now occurring in Zimbabwe. The simply truth is that government action cannot repeal the basic laws of economics.

The Federal government, of course, is all in favor of government-based economic stimulation. After all, from its point of view, it's all good. It is able to expand and extend the reach of its power. It lessens the economic power of the private sector, further enhancing the State's power. And, perhaps most important, the majority of the jobs which are created by the economic stimulus are directly connected to State spending and, therefore, the citizens holding those jobs are made yet more dependent on the State for their livelihoods. From the State's point of view this is all good and, if the economic crisis is lengthened, its power is only increased. In short, no matter how it is sugar-coated, the policies of John Maynard Keynes are essentially ways of increasing the power of the central government at the expense of individual freedom.

Facts, distortions, and the coming auto company bailout


The debate continues, among the economically illiterate lawmakers in Washington, D.C. About whether or not the Federal government should make some $25 billion available to the Detroit automakers to, supposedly, enable them to remain in business. As part of the theater surrounding this debate the Senate Finance Committee held a hearing today, 11/18/2008, at which the various Senators on the panel questioned executives of the GM, Ford, and Chrysler. During this process Connecticut Senator Chris Dodd, a supporter of wasting the taxpayer's money, trotted out what has become an all to familiar litany of Detroit's supposed sins and bad business decisions.

These bad business decisions include: not building cars that American want to buy; not “looking to the future” for their supposed failure to develop high mileage autos; resisting the imposition of Federal regulations such as higher CAFE mileage requirements, air bags, and ABS; and, of course, paying their executives “too much.” These canards have been repeated so frequently that they have become part of American folklore and few people stop to think about the truthfulness of the statements. On the whole the wide-spread acceptance of these so-called “facts” is further proof that Joseph Goebbels was correct; repeat a big enough lie often enough and people come to accept it as the truth.

Few of the charges against the Detroit automakers hold water when one really looks at them. Take the oft-repeated assertion that Detroit has failed to “build cars that Americans want to buy.” Until gasoline prices spiked this last summer that statement was, on its face, untrue. If Americans did not want to buy SUVs and large fuel-inefficient pickup trucks, why were so many of them being sold? And they were being sold not only by the Big Three. Honda, Toyota, Nissan, and other companies were also busily cranking out this type of vehicle by the tens and hundreds of thousands. And guess what? The fuel efficient cars that Americans supposedly wanted so badly to purchase sat on dealer's lots. Even Toyota's ballyhooed Prius failed to set sales records because Americans wanted to, and did, purchase larger vehicles that they perceived as being better able to meet their day to day transportation requirements.

Only when gasoline prices went above $4 per gallon did Americans suddenly begin to demand that large numbers of small, fuel-efficient vehicles be available for them to purchase. Guess what? It's not possible for the automakers to instantly re-tool their production facilities and begin turning out the much larger numbers, of the now popular small cars, required to meet all of the market's demand. It's unfortunate that the State-inspired housing bubble burst at the same time that Detroit, and other automakers, faced large re-tooling costs, but that is not a sign that the management of the Detroit car companies are incompetent. One has only to look at the inventories of Honda, Toyota, Nissan, etc. to see that those companies also have large numbers of unsold SUVs and pickups on their books.

The main reason that Detroit companies are facing dissolution and the foreign companies are not, does not lie entirely with management incompetence, but with the cost structures of the companies. And here is where Detroit has problems that cannot be resolved short of allowing the Big Three to go bankrupt if necessary. The simple fact is that Detroit's labor casts are far out of line with what the auto market will support. The inflated wages demanded, and won, by the UAW over the last fifty years of contract negotiations are no longer supportable in a global automobile marketplace. Detroit's labor costs are two to three times that of their foreign competitors and American workers are no longer productive enough, nor are profit margins high enough, to allow that state of affairs to continue.

Of course, it's much more palatable for our so-called “leaders” in Washington, D.C. to upbraid the management of the Detroit automakers, and they are not blameless in this mess, than it is for them to tell the American people the truth about UAW wage rates. Given UAW President Ron Gettelfinger's statements in the last several days that “it would be unfair” to ask “the workers” to make any more sacrifices to keep the American auto industry intact, it is unlikely that any of our lawmakers will make wage and benefit concessions any part of the new regulatory regime that the Detroit manufacturers will face when the bailout is finally approved, as it will be when Barak Obama assumes power at the latest. Rather, the State will require that the Detroit companies manufacture small fuel-efficient vehicles, which are already going back out of style with the reduction of fuel prices in the last few weeks. There will be more regulations regarding such things as executive pay and benefits, research and development efforts, and whatever else any given lawmaker's favorite hobby-horse is. None of that will help Detroit's balance sheets at all.

Until the Big Three are allowed to go bankrupt, as it appears certain they will so long as the State is kept from “rescuing” them, they will continue to be uncompetitive, primarily, because of their labor costs. If nothing else is accepted as an argument against a Federal bailout of the Detroit automakers it is this: until the industry's cost structure is brought into line with the realities of global competition any money which the taxpayers of the United States give to the Detroit companies will simply be wasted. This is because the “loans” would only put off the inevitable day of reckoning and will end up being a classic case of throwing good money after bad. Of course, once the Obama regime makes the bailout a fact, further losses will be used as a reason for sending yet further money to the companies, since it will be seen as senseless to have wasted the $25 billion currently being discussed. Lawmakers will find it easier to continue shoveling money into the pockets of overpaid U.S. autoworkers than they will to either stand up to the UAW and insist that it lower its wage demands, or to admit that the initial bailout made no economic sense in the first place. It will be easier to continue to heap opprobrium on the management of the car companies and to increase the control the Federal government will exercise over yet another section of the American economy than it will be for of leaders to admit that they were wrong and the marketplace was right.

Paulson Declares victory, sets stage for next economic crisis


The latest word from Treasury Secretary Henry Paulson is that he believes “we have stabilized the major financial firms” and that he does not anticipate any more failures of large companies. He has effectively declared victory in the so-called economic crisis that this nation is facing, a crisis largely the result of the overextension of credit. So what is his next goal? Why, to make sure that consumers begin borrowing again, because the economy needs to get moving again. So, he's decided that the $700 billion which were supposed to be used for the purchase of so-called “toxic mortgage-based assets” from troubled banks, will instead be used to encourage banks and other financial institutions to begin making more loans to consumers. In other words, he wants to start another round of loaning money to people who cannot afford to borrow it, simply to avoid something loosely defined as “turmoil in the markets”; which is evidently something to fear, at least for the entrenched political/economic power brokers in Washington, D.C. and on Wall Street.

We are being told that consumers must start spending in order to prevent the economy from falling into a depression. The truth of the matter is that the Federal government has made such a hash of the marketplace that it is impossible for anyone to be able to predict what is apt to happen next. And that is why banks are being so reluctant to resume their practice of lending to those on the fringe of economic viability as they don't want to pile up a bunch of potentially bad loans. Unlike the mortgage crisis, in which the banks are at least able to take possession of a physical asset, the house, of someone who defaults on their mortgage, they cannot do that with credit card-based debt. Those loans are what are known as unsecured loans, there are no assets at risk for the borrower should she default on her credit card payments. When a bank has to write off a credit card account as non-performing they have no way of recovering any of the money which they loaned the consumer. They cannot seize the flat screen TVs, the vacations, the PCs, etc.. that were purchased with the now worthless credit card.

Once again, the Federal government is acting in a way which will simply exacerbate the current economic difficulties that we find ourselves in. Rather than allow the market to take its natural course, go through a period of re-adjustment (known as a recession), and emerge with assets better distributed, to companies and individuals better able to use them than were the previous owners, the Feds insist that all troubles must be resolved in an extraordinarily short period of time. Thus, the State will put in place some sort of “program” to encourage the accumulation of yet more consumer debt, at a time when the economy cannot afford it. Rather than encourage savings, which will act in the long-term as an economic stimulus by providing a solid foundation for the economy to grow on, the State insists that “market turmoil” can only be avoided if consumers act now to continue to pile up their credit card debt. I would not be surprised to see Secretary Paulson propose that interest on credit card debt be made deductible from Federal income taxes, in the same way that mortgage interest payments are. After all, if such encouragement works for overly stimulating the housing market, there's no reason why it shouldn't work for credit cards. Remember, the goal of the State is to avoid “market turmoil” which could result in those currently feeding at the public trough being displaced. Thus, it is imperative, in the eyes of the State, that consumers continue to spend themselves into such debt that they will forever be in thrall to the banks, even if that enslavement results in yet another financial crisis in the near future.

Yet another Federal "bailout" in the works


The Federal government is about to stage yet another “bail-out” of a business which is “too important to fail.” This time the target will be Detroit's Big Three automakers, beginning with General Motors. We are hearing the now familiar drumbeat of predictions of horrible economic repercussions if any of the U.S.-based automakers are allowed to fail. The American people are being told that millions of jobs are at risk of disappearing and that it is essential to our economy that there be a U.S. automobile industry. Finally, we are being told that allowing these companies to go through the traditional and legal process of seeking chapter eleven bankruptcy protection is inappropriate given the turmoil our economy would supposedly be thrown into should one or more of General Motors, Ford, or Chrysler to go out of business.

President-elect Barak Obama has stated that he is in favor of “loaning” the Detroit automakers at least $25 billion. Nancy Pelosi, the Speaker of the House, is in favor of calling a lame-duck session of Congress specifically to consider just how much more taxpayer money is to be given to yet another set of special interests. President Bush has said that he would consider signing a bill giving the obviously incompetent management of a major industry more money. Michigan Senator Carl Levin is proposing that the Paulson Wall Street bail-out bill be amended in order to allow the automakers access to their share of the $700 billion that was originally intended to go solely to Wall Streeters.. Finally, the leaders of the United Auto Workers is campaigning hard for government assistance in order to save high paid manufacturing jobs, which are supposedly fundamental to our nation's economy.

None of this makes any economic sense, though it makes a lot of sense when one considers the politics of the situation. Once again, a set of special interests is to be allowed to feed at the public trough because they were incompetent and drove their companies into financial ruin. Incompetence, greed, and unwillingness to change are going to be rewarded on a scale that would have been unthinkable prior to September of this year. And, again, the Constitution is to be ignored; apparently it no longer matters what the Constitution says if the “emergency” is grave enough – the power of the State to deal with the situation is to be expanded at all costs, and issues of Constitutionality are simply ignored in the rush to feed Leviathan's ever-increasing appetite for power.

The incompetence is present in management, labor, and government. Management has had over thirty years in which to take steps to manufacture small, high quality, fuel-efficient vehicles, yet it has failed to do so, repeatedly. Likewise, the UAW has done its best to maintain pay rates that are simply unsustainable in the face of more efficient, less costly overseas labor. The Federal government is also not blameless in this as its ever-growing list of regulations governing everything from safety, to fuel efficiency, to the type of materials that may be used in the interior of vehicles has helped drive up Detroit's cost to a level that has made an entire industry uncompetitive on a global scale. Yet, all three of these groups are about to be rewarded for their incompetence and, worse, the bail-out will do no good as it will not address the underlying problems of the industry, though the parties involved will loudly trumpet the minor changes that will be made as major breakthroughs that will save the businesses, and the jobs, and will result in the Statist Utopia that the Federal government has been promising ever since the implementation of the New Deal in the 1930s.

What is going unsaid in all of this is that the bailout is going to be done by the upcoming Obama regime in partial repayment of its political debt to the United Auto Workers for its support during the recent presidential election campaign. It is more important to Barak Obama and the rest of the “Social Justice” wing of the Big State Party, known colloquially as the Democratic Party, to pay their political debt than it is to allow the market to function as it should. Rather than allowing these inefficient companies to go bankrupt and make their assets available to other business that could make better uses of them, yet another large chunk of the American economy will be nationalized. Another sector will be taken over by State bureaucrats who will dictate the details of its operation in a manner reminiscent of the central planning done in the former Soviet Union. The State will gain yet more power over the lives of its subjects and the Constitution will fade further into the background, a document supposedly revered by our political leaders, but, in reality a piece of paper that is increasingly viewed by them as an impediment to the further expansion of Leviathan's power and reach. It is particularly ironic that the Federal takeover will be done almost immediately following Senator Barak Obama swears to “preserve, protect, and defend the Constitution.”