November 2008 - Posts
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.
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.
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.
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.”