The View From 1776

Democrat/Socialists blame Republicans for foreclosing the American dream, the expectation that things will be better for our children than they were for us.  Their explanation is that presidents Ronald Reagan and George W. Bush took income away from the middle class and from low-income citizens and gave it to “the rich” via tax cuts.

The incoming Obama administration vows to change that.

Implicit in this picture is the presumption that people’s lives can be improved only by new or expanded Federal welfare programs.  The dream has faded, in this picture, because Republicans haven’t spent enough on the nanny-state.

This is an example of the static analysis that characterizes socialist economic doctrine.  The economy, in that view, is analogous to a chess board with a fixed number of squares and a fixed number of pieces, each with unchanging characteristics.  Liberal-progressive planners unrealistically presume that they can control the game’s outcome simply by repositioning pieces on the static playing board.

The main element of such state-planning involves mechanisms for income redistribution.  Democrat-Socialists sincerely believe that the American dream was crafted, not by the ingenuity and hard work of individuals in the trenches and by managers and entrepreneurs, but by the state-planning instituted in the 1930s New Deal.

Moreover, in Democrat/Socialists’ Marxian theory, the only source of value is physical labor.  Thus, business managers’ salaries and investors’ so-called unearned income - dividends and interest on invested funds - constitute stealing what rightfully belongs to the workers.  For Democrat/Socialists, such income not taken by taxes is in undeserving hands.

Real-world economic analysis, unlike the static analysis of liberal-progressive-socialist economics, reflects the economy’s dynamism.  Capable management and risk-taking entrepreneurs, funded by savings from the middle class and the rich, introduce more efficient production methods and entirely new technologies.  Such actions engender higher labor productivity, which causes the economy to grow and fosters the creation of new jobs, as well as higher wages and salaries.

If, however, entrepreneurs and business managers are to take risks and to invest private funds in new and more productive assets, they must be able to foresee the likelihood of profits commensurate with the risks.  It is this, the role of such expectations, that gets short shrift in liberal-progressive-socialist economic theory.  Completely ignored is the paralyzing effect of uncertainties about future inflation, taxation, and increases in regulatory red tape.  Metaphorically speaking, people are hesitant to set out on a long journey when there is a possibility of life-threatening storms and terrorists’ roadside bombs along the way.

In the business world, those storms and roadside bombs are the prospect of higher taxes, increased regulation that adds to production costs, and the inflation that ensues.  To an unquantifiable extent, they limit future profits and reduce the incentives for innovation and risk-taking.

Consequently, increased nanny-state benefits don’t increase the prospects for the American dream of a better life in the future.  When the Federal government deliberately and repeatedly (sadly under Republicans, as well as Democrat/Socialists) resorts to deficit spending necessary for the expansion of the nanny-state, inflation confiscates a significant portion of nanny-state benefits and of the increased wages and salaries earned by workers and managers.

In that regard, read Inflation-Targeting—More Monetary Manipulation and Unending Inflation on the Mises.org website.

The current perception that the future is less bright for our children than it was in the 1950s is correct, because our inflation-driven costs of living are continually increasing, usually at a faster pace than our wages and salaries.  Inflation increases business costs, cut profits, and thereby reduces the wherewithal to pay higher wages and salaries.  Inflation also discourages long-term productive investments that would lead to creation of more jobs.

The New New Deal to which Democrat/Socialists now aspire will continue what Franklin Roosevelt’s New Deal started: deliberate inflation to fund expansion of the nanny-state.

As I wrote in How FDR Destroyed the Dollar,

Until 1933, the U. S. dollar was the among the strongest and most stable currencies in the world.  With the stroke of a pen, President Franklin Roosevelt torpedoed it.  We are still plagued with the resulting inflation.

An earlier New New Deal, President Lyndon Johnson’s Great Society, produced the stagflation of the 1970s.  Inflation in that period reduced the purchasing power of people’s life savings more than fifty percent.

In Ben Bernanke and the “Barbarous Relic" I wrote:

...central banks, from their inception, have tended to succumb to pressures to create fiat money faster than the increase in underlying assets produced by their economies. 

Governments pressure central banks to ‘create’ money by purchasing government debt, thereby avoiding the need to raise taxes to fund welfare-state hand-outs.  Commercial banks support the resulting excess credit creation, because it provides them more funds to lend at a profit.

The result is a false sense of economic well-being such as [what prevailed in March, 2006, an] economy in which our massive trade deficit [was] financed by the explosion of so-called home equity (based on the inflated market price) loans on private homes.

Inflation deliberately imposed by Franklin Roosevelt in the 1930s has pushed today’s CPI to more than ten times that of the pre-FDR era.  The American dream is guaranteed to fade so long as our government is wedded to ever-increasing inflation to fund Federal deficit spending.