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Sunday, July 25, 2004

The Economics of Liberal Values - Part Two

Liberal politicians are again playing the “caring” card.  They casually announce that a liberal-socialist President will create millions of new jobs, compel American corporations to cease employing people overseas, and make the nation energy-independent, all while sharply reducing corporations’ profitability with tax increases and costly environmental regulations.

On the one hand, liberals declare that people who believe in the values prevailing in 1776 are heartless and mean-spirited, whenever they question the effectiveness and the advisability of continually adding very large welfare entitlements programs to the Federal budget.  In effect, liberals’ prescription for treating a drug addict would be to give the addict ever-increasing doses of narcotics, because they “care” about his suffering.

On the other hand, liberals speak of these new socialist, welfare-state entitlements as if there were no real, even insurmountable, problems in implementing them.  As noted in previous postings, liberal-socialists view the economy as a sort of board game in which they can arrange passive pieces in any way they choose in order to create social justice, the equal distribution of wealth and income.  The real world is not so simple.

The Great Economic Pipe Dream

The dictionary defines pipe dream as the hallucinations induced by smoking opium. Americans? belief that a President can and should prevent or end a recession, that a President can create jobs, is a pipe dream.  Nonetheless, most people assume that Presidents can manage the economy as if it were a large corporation.  Why is this so?

The answer lies, first, in the 180-degree distortion of public understanding wrought by the Depression and Franklin Roosevelt’s hundreds of state-planning programs.  Americans, indeed all Western nations, were enthralled with the socialistic state-planning in Fascist Italy and Communist Russia in the 1920s and 1930s.  As one journalist put it after a trip to the Soviet Union, “I have seen the future and it works.” 

President Roosevelt pledged to cure the Depression with state-planning.  The actuality was that he failed to do so (the Depression was ended only by mobilization in 1940 for a probable war against Germany and Japan).  But generations of school kids since the 1930s have been taught that Federal fiscal and monetary policies infallibly do their theoretical job (even Roosevelt said that fiscal policy,in theory, was the simplest thing in the world, but in practice it had been a disaster).

Second, the public are confused about the true nature of a society?s economic wealth and its source.  Money in a paycheck or a welfare envelope is not the same thing as real wealth.  The nation’s wealth is exactly the amount of useful goods and services it produces, and nothing more.  Increasing people’s money income, with deficit financing and welfare programs, when there is no increase in production, is simply inflationary.  Your bigger pay check is eaten up by higher prices for the same goods.

And, third, the answer lies in human tendencies to assume a cause-and-effect relationship between two events when one follows the other.  Presidents and members of Congress are happy to accept citizens? applause when the economy is booming.  The opposition party is quick to blame the administration in power when the economy turns down. 

The Depression, World War II, and Cold War defense spending have been the principal sources of confusion about cause-and-effect.  Before then, massive Federal spending programs were unknown except for the five years of the Civil War and the couple of years of our involvement in World War I.  In each of those cases, the Federal government quickly and sharply cut back spending and the size of military forces immediately after the end of hostilities.  Businessmen and political leaders then still clearly understood that economic activity and prosperity were entirely an individual matter in which the government should have no direct participation.

The fact is that the best that a political administration can do to help the economy is to step aside and give as free rein as possible to individuals and private businesses.  Fortunately for President Clinton, he followed Treasury Secretary Rubin’s advice to keep a light hand on economic controls, after the collapse of his disastrous essay at creating a Canadian-style, socialized medical care system.

Federal spending programs to boost the economy are almost inevitably too late and simply add inflationary pressures to the economy.  The only Federal policies that actually have increased real wealth via increased production, without inflation, have been significant reductions in marginal income tax rates, which is a form of stepping aside to permit individuals to do their thing.  Ironically, the first administration to take this route was that of Democrat John F. Kennedy.

Reductions in tax rates are not inflationary, because the greater amount of your money that the Feds permit you to keep came from already-existing production of goods and services.  Liberal panaceas, such as higher minimum wages and higher welfare payments, put more money into consumers hands before production can be increased, thus adding to inflationary demand.  Prices, in that case, rise before production increases.

Social Costs of Inflation

Liberals aiming to accelerate the rate of growth in Medicare, Medicaid, prescription drug benefits, and other welfare programs argue that it is unfair to people who can least protect themselves not to do so. 

Most people will agree that ours should be a benevolent society that helps victims of misfortune.  Before the New Deal’s 1935 Social Security program, widows, orphans, the sick, and otherwise unfortunate people had been very effectively cared for by churches, synagogues, immigrant societies, and the tens of thousands of local branches of self-help organizations like the Elks, Loyal Order of the Moose, Woodmen of the World, and several hundred other organizations of similar nature.  One purpose of Social Security expressed by New Deal planners was to kill off these independent self-help societies and to force everyone into the arms of Big Brother.  This was done by making Social Security taxes mandatory and sucking the economic life blood from independent and private groups.

The question is whether out-of-control entitlements programs like Social Security really work effectively and ??promote the general Welfare, and secure the Blessings of Liberty to ourselves and our posterity?? in accord with the Constitution?s preamble.  After all, the world’s first welfare-state was introduced by the German Empire’s Otto von Bismarck.  He wanted, Bismarck told the Reichstag, to be able to herd the German people like cattle.  People who are dependent on the National State for their financial security, he said, are in no position to resist its despotisms.

Our War of Independence in 1776 was fought for precisely that reason, to oppose Parliament’s imposing heavy taxes and thereby infringing our property rights.  English and American individualism was the product of private property rights available only in England and North America.  Of Magna Carta’s sixty-three articles, forty-seven enunciate private property rights and limitations upon the king’s prerogative to impose taxes arbitrarily. 

Americans understood in 1776, as Samuel Adams wrote to the Committees of Correspondence in the other colonies, that private property rights were the only bulwark against despotism.  If the people can deny money to the sovereign, they can stop his usurpations. 

The New Deal reversed 325 years of American tradition by socializing wealth and reducing the American people to dependence on the Federal government.  It was the opposite of what was intended by the delegates who crafted the Constitution during the hot summer of 1787 in Philadelphia.  The New Deal’s liberal-socialism, as well as today’s, does not support the Constitution’s intention to ??promote the general Welfare, and secure the Blessings of Liberty to ourselves and our posterity??

Let’s suppose, however, that we have decided to be happy in the clutches of Big Brother.  History proves incontrovertibly that his socialistic programs cannot succeed over the long run.

Unfortunately, entitlement spending grows much faster than the Gross Domestic Product and government tax revenues.  Medicare and Medicaid have been rising as much as 10% a year, four times as fast as President Clinton?s most optimistic projections for economic growth, when the illusory boom was in full eruption.  At that time, Democratic Senators Bob Kerrey and Patrick Moynihan estimated that, within seventeen years, growth of entitlements spending and interest on the debt would consume the entire Federal budget, leaving nothing even for national defense.

Only three avenues are open to finance that excess growth ? cutting other expenses, raising taxes directly, or allowing inflation to raise nominal incomes and tax revenues.  Cutting expenses an offsetting amount is not feasible, because entitlements spending is such a large and growing part of the Federal budget that almost every other Federal activity would eventually have to be terminated.  Tax rate increases raise production costs, make business less competitive internationally, and force additional losses of domestic jobs, which then further reduces tax revenues.  It was the inflationary route that Congress chose from the late 1960s until 1980.

When he introduced entitlements programs, President Johnson opted for ?guns and butter,? to fight both the Vietnam War and the War on Poverty without raising taxes.  Ballooning increases in Treasury debt to fund entitlements pushed up the inflation rate; that is, total money in the economy rose faster than the supply of goods and services that were being produced.  President Nixon briefly tried price controls, but neither he nor President Carter did anything to rein in the politically-untouchable and accelerating growth of entitlements spending.  Between 1960 and 1980 the Consumer Price Index jumped 184%, at an accelerating annual rate that had hit 13.5% by 1980. 

Many of us lived through OPEC oil price increases month after month, interest rates over 20%, food costs jumping every week, long gasoline lines, and the real likelihood that institutions with our life?s savings would be forced into bankruptcy because of spiraling inflation that made it impossible for them to retain low-interest-rate deposit accounts or to fund withdrawals by selling mortgage assets at prices hammered down by high interest rates.  Despite much-publicized criminal activity by a small number of loan executives, it was 1965-1980 inflation that destroyed savings-and-loans?s traditional business and produced the staggeringly costly, down-the-drain bailout.

Terrifying as those experiences were, far worse was inflation?s corrosive effect on society that left us vulnerable to today?s racial and economic bitterness.  In the 1970s, preoccupied with the struggle to keep our kids in college and pay our sky-rocketing bills, we didn?t notice at first that the Great Society was being paid for by the loss in value of our savings and our wages.  The phenomenon of ?bracket creep? pushed us into higher tax brackets as our nominal incomes increased.  Congress, of course, was gratified by this automatic, inflation-driven tax increase mechanism that allowed them to avoid facing the necessity to pass new tax legislation or to cut entitlements spending.

In effect, inflation took something out of everybody?s savings or pension account each month to pay for the shortfall between what the economy produced and what the government was spending.  Retirement savings that had been worth $50,000 in 1960 were by 1980 worth only $27,174 in real purchasing power. 

This colossal loss in real national wealth was paid for largely by women leaving their homes to become second wage-earners.  Between 1960 and 1980, the number of women in the labor force increased 96%, compared to only a 33% increase in the number of men.  By 1980, women accounted for 43% of the entire full-time working population.  Clearly the forced separation of so many mothers from their children is related to the explosion of drug addiction and crime among today?s children and young adults. 

Today we face a reprise of President Johnson’s Vietnam War and Great Society inflation blow-out.  Liberals think that the UN and the World Criminal Court will suffice to stop terrorism, so that they can afford to impose a whole new round of Great Society handouts.  Somehow the costs of the war on terror and a Canadian-style National Health Care bureaucracy are to be financed by tax increases only on “the wealthy.”  Liberals ignore the fact that the top 10% of tax-payers already pay more than 60% of all taxes.  They ignore the demographic fact that, as President Clinton’s Baby Boomer generation retires over the next few years, there will soon be only about two people working to pay the welfare-state entitlements of each Boomer.  Nor do they allow for the much greater life expectancy of these Boomers.

The tax burden on our children will, in the next decades, become total confiscation of all their income.  They will have become Lenin’s New Soviet Man, working selflessly for the collectivized National State.

Liberals, of course, will be happy.  We will at last have a fully socialized political state in which everyone and everything is under the planning and regulatory control of liberal intellectuals.

Posted by Thomas E. Brewton on 07/25 at 05:24 PM
Economics • (0) Comments
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