What To Do: For Yourself and Family

I hope that as a result of AR’s writing, listening to Yaron Brook, and happening across my comments a question will cross your mind, “What should I do?” There are actually two levels to this question, the personal and the public. By “public” I mean what is normally considered activism. But you rarely see people talk about what to do personally.

Part of my answer to the question of what to do for yourself is: Live your life. Work for happiness. Enjoy yourself. While a rational man never ignores the fact that he lives a life across decades, he is only alive in the present. Don’t forget to enjoy the values you can today, especially those you have achieved.

Then there is the consideration of what to do regarding forthcoming crises. One thing to consider is what will happen to the assets that you have, e.g., your home, your investments, etc. Are any loans subject to being called? How stable are the interest rates? How safe is your income? How liquid are your assets? And so on. Don’t put your head in the sand!

For more extreme situations, in a way there is less you can do.

You hear of people buying guns and canned food. Any of that might be of use in a situation that is brief, but afterwards, even if you are set for a couple years, what do you do then. What you would need is a long-term solution, which ultimately means being in a safe community.

One then tends to think of Galt’s Gulch. I do. Remember that it was a private estate and people came by invitation only. It was defended. The rest of the country, by contrast, collapsed.

The idea of Galt’s Gulch was that people who understood Galt’s message wanted to be together to the extent possible for enjoyment and safety.

Today, a few Objectivists get together on occasion, briefly. Many say they want to, but don’t. Few do business with each other. In a way, there is no community. I am aware of no efforts to seriously consider a way for us to survive a crises (it should be relatively secret). On our current road, we will suffer to the same extent as the rest of the population, even though we understand what is happening and know that it will end in disaster!

That doesn’t seem like the rational thing to do.

Perspective and Time-Frames

When I have read other claims of coming doom in the past I have always rejected them. They seemed to me to regard the economy much like a mechanical clock, with certain elements of the economy as having overwhelming power. Those claims that our economy was going to collapse within a certain time-frame never came true. Some of these claims were made by rank amateurs, but some weren’t. A certain historian has recently argued again for a coming collapse, and I have the same regard for him. The great economist Henry Hazlitt wrote in 1983 (The Inflation Crisis, and How to Resolve it) that the U.S. economy would drive itself into hyperinflation, but again, didn’t happen.

It is obviously possible to foresee limited crises in the near future as Ludwig von Mises did in the 1920s and famously Peter Schiff did preceding the recent financial crisis. But here I am talking about even a larger failure than the mortgage-backed securities mess.

So, why am I willing to now put myself out on this limb after I have shown such good sense before? Two reasons: The first is our current situation.

Remember the tech-stock bust of 2002? Do you realize that the next bust was about five years later, beginning in 2007? Remember that 2004 through 2006 were decent years. If the bottom was in 2008, then we are now five years in and there is not actually a recovery. We have rehired very few of the people who lost their job in the crash, and most of them are not in jobs with the same level of productivity. Businesses are profitable still because of cost cutting, and are doing little new investment. We are stagnating.

We aren’t stagnating because of government spending but because of the continued, increasing attack on business and banking through rapidly expanding regulation. After about a century of increasing and improving regulation which limited our growth but didn’t seem to have a visible result, the government is finally beginning to make an obvious mark on our economy.

Reason two: the numbers regarding our future problems are too large. They are large enough to be killing. And, as I explained in my last post, large enough that our economy cannot possibly meet the requirement, with or without the entitlements, with or without a reduction in spending.

One additional reason, which I do not see mentioned anywhere, is that our economy is very dependent upon its technology. No country of our size or complexity has ever faced major problems. The most advanced economy that has faced extreme issues is Greece, and it was not particularly industrialized, and is not at all dependent upon technology. Today, it has massive unemployment and is now considered a “developing” country. It is a good thing that it has a relative small population. Greece still lives much closer to the land than most countries in Europe.

We don’t.

From today’s vantage point, I consider it possible that in a couple years all of Dodd-Frank and the other new regulations will finally be in place and business will find a way to survive. We could see a period of small, but moderately stable growth. There will be lots of possible threats to our economy, mostly from outside. Some examples include: Another terrorist attack. The Chinese personality split, i.e., communist/capitalist, could come apart. (That connection is so explicitly M1 in so many ways.) Japan’s attempt to “ease” their way out of stagnation, after a couple decades of various kinds of “easing” failed, could surely lead to a worse case. The economy in Europe will fracture again. Islam could completely take over much of the oil supply. The list is nearly endless.

But even if we are able to accommodate the regulations, at some point things will come apart from our increasing debt load and the growing demands of the entitlement programs and/or our aging population.

We could go through a couple more financial crisis as we saw in the last decade. I predict that each one will be more severe, and depending upon how vindictive the politicians are, move difficult from which to recover. And each time capitalism, businesses, and bankers will be blamed. That scenario would be more like a death spiral.

All of that that means that we have even more reason to work now to reverse the entire process. As Yaron Brook has said, not being involved, not being active is no longer a rational option. Don’t act now and you will necessarily live to see the big mess. Certainly your children will.

Will that collapse correspond with the rise of an M2 religious dictatorship I don’t know. We will certainly be ripe for it.

Personal Responsibility

Recently, Don Watkins, in a blog posting (I can’t find the specific post for some reason, but it was on http://capitalism.aynrand.org/, which is very good), referenced an article arguing that anyone who tries can succeed, at least to some level. This article was written recently and not one hundred years ago. Now, I don’t disagree with its basic sentiment. I especially agree that one should take responsibility for one’s welfare and future. Further, I emphatically agree that we live in a world where it is possible to make our own way, metaphysically speaking. But, as I read the article, I kept wanting to ask the author if he’d been paying any attention to what has been happening in our economy and culture now, and for the last one hundred years.

I know why Dr. Watkins referred to the article. It is rare to find anyone who is willing to say anything good about personal responsibility today. Any such sentiment needs to be encouraged. But, in fact the article is wrong in its application to today’s America. Personal responsibility is not encouraged. Personal success is often disparaged (not by business people, but certainly within the culture). Most important, the government has been actively attacking personal success and making it more difficult for a long time.

I think that it is difficult to succeed today and becoming more so. I think that the article should have had some important provisos. I mean, haven’t we been saying that it matters what the government does? Haven’t we been arguing that man needs to have certain conditions to succeed and that the U.S. government has been moving away from those conditions.

Now, in order to make sense of the issue of personal responsibility in our context certain basic notions have to be made plain. Most important, and thus first, is that if man’s life is the standard of value, the actions by individuals based upon their own understandings and judgment is the only way in which human survival is achieved and prosperity or progress, in any rational sense, occurs. It isn’t the action, or the amount of effort, or the “work” done that is the cause of success, but the use of reason and the resulting ideas, and their correspondence with the real world. Nor does good reasoning guarantee success. A rational man can fail, even in a rational or free environment.

But, we are not living within a rational environment. We are living within an advanced welfare state with millions of regulations, probably a million regulators, and an endless number of imposed government costs of doing business. In business after business, the risk of failing to meet some idiotic government regulation or expense has become greater and greater. Starting a business was always risky. Small businesses have always failed at very high rates.

And then there is the issue of what our personal responsibility is.

Some guy on facebook told me that people on Social Security were deadbeats, and we shouldn’t care what happens to them. But after nearly one hundred years of regulation of the financial sector, the chances that most Americans can save sufficiently for retiring, at nearly any age (not to mention the costs of health care after fifty plus years of government interference in the medical industry), is nearing zero (see my blog post). Many people, if not most, who are dependant upon government retirement money are victims.

Most importantly, the facebook guy had the cause and effect backwards. While it is true that there are some people who duck personal responsibility, at least in America that percentage is a minority. It is also true that some people are misled by the claim that their forced savings by the Social Security tax, for example, does lead to some level of personal protection at retirement. Neither type of group explains the large numbers of people who end up dependent upon Social Security.

What does explain those figures is the consequences of government actions in the economy. Just to point the finger at one element (out of a list of hundreds), look at the disconnection between savings and capital entailed in the policies of the Federal Reserve Board. The Fed thinks that the economy works best with an annual increase of price levels at two percent. This means that in just ten years, a dollar loses well over twenty percent of its purchasing power. At the same time, the Fed has driven interest rates down to very low levels. The interest rate offered by the standard savings account will not allow the saver to keep up with price inflation, especially after income taxes. To try to make ones savings work and grow, people have been forced to become investment professionals. However, the Fed’s policies have resulted in asset booms that have in fact left Americans with considerably less wealth.

The facebook guy is blaming the victim for the consequences of government actions.

Ayn Rand didn’t write about this issue directly. But she was asked about it. One response is on point. She was asked about unemployment insurance. The questioner clearly expected that Miss Rand would condemn the person taking the government money, but she didn’t. She said, “Government controls create unemployment. No matter what happens to your employer, if you are out of work today, why should you protect him and starve? There cannot be individual responsibility for something that is the government’s fault. In any situation where the government creates a hardship that pushes you into a position of martyrdom, you are morally justified to take advantage of whatever money is offered to you, provided you don’t spread the kind of ideas that created the trouble.” (Ayn Rand Answers, p. 124) (Note that Ayn Rand kept her wealth earned from her writing in savings accounts.)

Fundamentally, we are not individually responsible for the consequences of government actions. Nor can we hold other individuals responsible by demanding that they suffer when they are victims. In a society that is attacking the innocent, we are now in a lifeboat context, and the rules of morality apply differently. Condemning the victim, the innocent, is joining the government. It is corrupt. It is evading the cause. It makes finding the correct solution nearly impossible.

If we tell someone who can’t find a job because of government interference, say minimum wage laws or restrictions starting a new business, that he isn’t taking personal responsibility, we are doing the liberal’s job. We need to be telling him that he, too, is a victim. If he is to have a future he needs to live within capitalism.

If we then tell someone who wasn’t able to save for retirement and sees the cost of living and their medical expenses rising beyond reach that they didn’t take personal responsibility, we are doing the liberal’s job. We need to be telling him that he, too, is a victim. That if he is to be able to live, and even enjoy his old age, he needs to live within capitalism.

If we then tell someone who is poor and uneducated that they are failing to take personal responsibility, just because they are poor and uneducated, we are doing the liberal’s job. We need to be telling him that if he does not want to remain poor and if he wants an education of any kind, he needs to live within capitalism.

The only other option besides capitalism is a declining economy and ultimately depression and perhaps the collapse of civilization.

Let’s keep the cause and effect clear. Let’s not advocate policies that will further harm the victims. For example, declaring that we must first stop the entitlement programs before we have a functioning economy (meaning one that can create wealth) only means that we are telling people that they will have to suffer without hope. Yes, there will be some suffering in any event. But telling anyone that will have to suffer is only justified if we are moving toward capitalism, which means a free economy. So first we have to liberate the economy. Then we can cut the entitlements. But if we don’t begin with freeing the economy, we will only add suffering without the possibility of a prosperous future.

My Predictions

Although I originally began this blog with the idea of keeping track of inflation and potential results for prices and prosperity in general, I haven’t engaged in prediction. My focus has been on commentary. We are, however, at a point that offers some interesting prospects for the future and I though it might be interesting and possibly helpful to suggest a possible set of outcomes.

Specifically, at this point in late 2012 the governments in the major economies have either implemented or are poised to implement some massive monetary flooding, which they call “easing.” The U.S. Federal Reserve officials have announced an open ended $40B a month scheme that will continue until either employment begins increasing or the end of time, whichever comes first. In Europe, the European Central Bank is ready to create unlimited amounts of money, claiming that it has to reduce the spread in government bond prices (between Spain and Italy, who have had to pay high interest rates, and Germany’s very low rates). China is expected to begin more “easing” in that it is currently seeing a much deeper and more significant drop in economic activity than the government seemed to expect. Apparently they thought that they were a separate, insulated entity. In response, just as any Western mixed economy government would do, the Chinese are moving toward spending newly made-up money. Japan has just begun its own easing program and England began theirs a few months ago. There is a great orgy of money creation in progress.

Those countries with “strong” currencies are also involved. They really don’t want to see their competitive position undercut by having other currencies diving in comparative cost, making their own products much more expensive on the world market. One example is that Switzerland’s central bank been buying euros for several months to keep their currency in line. As has been said by others, there is something akin to the arms race growing where every country inflates their currency in competition with the others. This process could also lead to protectionism, with higher tariffs and import controls.

As long as our economic problems are seen as the consequences of low consumption or low demand (and demand is seen as just money and not production related), we can always expect that the government response will be to create more money. There is some fear of the new money increasing consumer prices beyond a certain level (generally at an annual rate of 2% - some poison is good for you apparently). This concern is an interesting hold over from a point where government economists had a closer contact with reality. But there is little concern about the prospects for unacceptable levels of price inflation. It is the case that the upward pressure on prices from constant increases in the money supply tends to be less when production levels are low.

Consequently, we can expect that we will soon see a lot more money being created and put into the larger, more industrialized economies and interest rate will remain extremely low.

The amount of money that actually comes into the U.S. economy is a question for which I have no good answer. There is certainly some, but not as much as you might think when you hear the Fed brag about its easing. The money created by the Fed for QE1 and QE2 is mostly still sitting at the Fed in the deposit accounts for member banks receiving 0.25% a year.

 

The money supply has continued to grow, but the pace is not as fast as one might expect.

 

You can see in the graph that the average dollar amount of growth every year has been somewhat consistent. That means that the percentage rate of growth is falling. To just keep the constant percentage rate, this graph would need to show a much larger constantly increasing dollar amount, as the total grew each year.

As a result, consumer prices have moved upward modestly in the last few years (by comparison) and asset prices are mixed (housing downward and equities upward, but less than the CPI). Only bond prices have moved upward, as the Fed has moved to force down long-term interest rates as well as short-term. Long-term rates are very low, especially considering the need for capital in our economy. There is no connection today between savings, investment, interest rates, and the capital markets.

In these conditions, I wonder what the Fed believes that more “quantitative easing” or lower interest rates, could achieve. They talk about lowering unemployment as if the problem is that jobs are not being created for of financial reasons. Here we have an excellent example of theoretical, rationalist thinking that doesn’t consider even the possibility of looking at the real world. At present, there is no connection between the interest rate (including the supply of money) and investment/growth decisions. For a business, the difference between 3% and 2.5% on a long-term, profitable investment is insignificant. The real question for businesses is whether the project could be profitable. Some companies have invested when they have cash on hand. Many are considering a merger or acquisition, which doesn’t add to our productive capacity (although it might improve efficiency). But U.S. companies see no justification in future profitability to make the investment needed to put over two million people to work. The Fed and the Government, and Romney and the Republicans just don’t see that.

Another upcoming set of events in the U.S that could have a negative impact on our economy is the end of the Bush tax cuts and the spending cuts required by law. These events, both scheduled for January 1, 2013, won’t improve the capital and investment situation, although the rate of growth of government debt will slow some. At least in the short-term, if the tax cuts do end and the rate of spending slows, the immediate result will be a drag on the U.S. economy.

I am not convinced that the supposed mandatory cuts in spending are particularly important economically. Some people try to make this situation seem cataclysmic by quoting a cut of over a trillion dollars. That is fraud, since that is a ten-year number. As is always the case with government cuts, they are loaded mostly into the latter years. I think that the 2013 number is closer to $69B, which is for the full year. When you are talking about a multi-trillion budget and a deficit of over a trillion dollars, sixty-nine billion is an accounting error.

But saying “cuts” is intended to be misleading. The Congress didn’t pass a cut in spending. They authorized a reduction in the expected growth of spending. It was a cut from what they thought current laws would require the government would spend. There is not going to be a cut in spending. Let me repeat: These are not cuts in spending but small reductions in the growth of spending. Even so, there may be some companies that will feel an impact in their expected revenue from government contracts. But, economically, compared to the total level of spending and the prospect of more “easing”, big deal.

Combined, the tax cut, possible cuts in the growth of spending, and the Fed’s money flood, mean that there will be less money in people’s pocketbooks, but more, potentially, in the banking system. Remember that the way the Fed’s money gets into the economy is via bank loans. If the banks continue to maintain their stricter standards there is not going to be a significant increase in bank loans. In fact, the current trend is for lower corporate profits, meaning that businesses will be less credit worthy than before (and stock prices should decline, instead of booming). In addition, ever since the beginning of the “Great Recession,” bank regulators have been constantly checking on the “quality” of bank loans. Unless regulators are willing to loosen the strings, banks aren’t taking any riskier loans. I don’t see much of the Fed’s new money getting into the economy. That is not to say that there won’t be an effect. As in the past, there is a tendency to some money to find its way into assets.

In addition, the final Dodd-Frank regulations have yet to appear and the costly ObamaCare provisions are coming into effect. All businesses, but especially banks, are legitimately confident that their costs will increase significantly and their range of action considerably curtailed. Startup businesses have declined. dramatically. For the economic/cultural pessimist, there is much support in the U.S.

In Europe, the central bank is being pushed into acting because the market for Spanish and Italian government bonds demands much higher returns to compensate for higher risk. Personally, I think that there is no uncertainty. Neither Spain nor Italy will be able to repay their bonds in the coming years. (I equate being given worthless money with not being paid.). So the higher rates are certainly justified. But enough of the euro country governments don’t like that. The higher rates mean that Spain and Italy would have to face their insolvency soon, which would be a big problem for the other euro government countries. So the euro block is pushing the central bank to create money to avoid reality. In this case the money will go directly into government spending and will have very negative consequences. Not the least consequence will be a lessening of the pressure on Spain and Italy to solve their problems. (Spain is expected to need the euro bank bailout. No one is currently talking about Italy, but its economy is heading the same direction.) By creating money to buy government bonds the European Central Bank is defaulting on the loans by directly creating inflation and thus reducing the purchasing power of the money that bought the bonds. Everyone in Europe is ignoring that fact. In addition, there will be a lot of upward pressure on prices and everyone will feel the cost. But, most of all, the importance of freeing their economies and being fiscally responsible can be evaded. The ultimate result will be greater disasters.

I expect that China’s new money will be similar to earlier efforts, which went primarily into government owned and controlled businesses, shrinking the portion of the economy that is private. It may also be more of a “consumption” orientation, which will mean less of a push in industrialization, and a move toward Western ideas of a consumer driven economy. That government decision would necessarily reduce the growth rate even without the normal consequences of asset booms and busts.

If more “easing” won’t help solve the unemployment problem (who cares about actual production?) and thus won’t help with economic activity, what will it do?

Well, the U.S. economy isn’t going to grow much, if at all. In fact, it could contract. If the new money just sits at the Fed as before, we needn’t worry about hyperinflation. The money supply will grow, but not significantly faster than before, although those numbers should be watched carefully.

I heard someone point out that since the first “easing” the Dow has risen 4000 points and since the second “easing” nearly 3000. I am sure that the Dow and other indexes will raise some more. The Dow has already gone up a few hundred points since the Fed announcement. What would a push by the Fed be without a serious increase in asset prices? Commodity prices could also rise. Some are saying that industrial commodities, such as copper, will not because industrial production is tending to fall. But the money being created will go somewhere. You just need to keep an eye out to see where that is.

So, if you want to put your money somewhere, based upon recent history, there you are! Just be careful about your timing and don’t lose perspective about the causes of the asset price rise and its duration. Be ready to short.

Of course, economic events are really harder to predict than that, especially in a controlled economy. Something will happen that we don’t foresee and things will happen differently than we expect. One thing we do know, whatever happens, it’s unlikely to be good.

Long-term, the consequence of all of this “easing” is to probably bring the day of reckoning closer, possibly by years. With unemployment staying down, Social Security and Medicare spending will continue to widen the gap between tax income and spending. The demands upon the Treasury will increase, meaning more debt. The low levels of production will mean that wealth is not being created and our personal wealth and standard of living will continue to fall.

I think that money can be made from the chaos and misallocation of resources. You just have to pick your method based upon the circumstances and pay attention to the situation.


P.S. I just listened to Yaron Brook on the Mike Slater show (via a notification from Lassiez-Faire). He says so much of what I just mentioned. I really did work it out before. But he says it well.

The Immediate Important Lesson From Europe

We can learn many lessons from what is happening in Europe and what will be happening over the next decade or two. We will see in very explicit detail that democracy is at root a destructive system as it attempts to consume very productive asset it can get its hands on. We shall see that borrowing to spend and consume is inherently a dead-end. We shall see again that government controls do not stop destructive behavior and that few know what good behavior is then. Etc.

But we are now witnessing something that I didn’t expect. We are seeing how not to achieve a turn around in an economy. “Austerity” is a failed program.

Okay, first let’s consider what “austerity” is. It is not actually austerity. The term was first picked up from the context of an over-indebted person. If he wanted to get out of his situation, without going back on his word to pay those people who lent him money, he had to reduce his spending and pay off his debts. Then he would be financially healthy and could begin building wealth.

So, the idea went, governments could reduce their spending, too. Except they failed to remember two different aspects of the individual’s context: first, that the individual had to continue to work, i.e., produce. Production is still the key. Second, they failed to remember that the individual had to spend less than his income. Governments regard “austerity” as merely spending less than they were or perhaps spending less than they were planning, although still increasing their spending. I haven’t seen any of the European governments talking about a budget surplus and paying off their debt.

But, the most important lesson to be learned is the first: Production is the key. What I mean is that just spending less in those countries has no positive effect on the economy, only less of a negative effect. What has a positive effect is the creation of goods and services, i.e., production. Those countries aren’t producing more. Actually, since they have grown the government so much, less spending translates immediately into less purchases and a constriction of business. Business has been forced to depend upon government spending. When that spending disappears, businesses do less business, are less profitable and tend to fail. That is what we are seeing across Europe, especially in the countries with the worst situations.

Those economies haven’t gotten to where they are because of the government spending by itself. The major cause of the poor performance of those economies is government controls. Controls limit what businessmen can do and their ability to produce. Government controls are the lid on man’s productive capacity.

As long as the government controls the economy, and the European Union has a staggering level of controls, those economies are going to suffer. In fact, what we see today is the simultaneous reduction of government spending with the increase in numbers and degree of control. We see tighter and tighter restrictions being placed on business and finance, further weakening their ability to produce while the governments are trying to at least slow the rate of their indebtedness. It won’t work.

This is a lesson for us all. We need to realize that as bad as the debt situation is, and as bad as it can get, and that by itself debt can destroy our economy, that it is not the primary issue and should not be our primary target. At least it shouldn’t be.

We must also recognize that if we only talk about debt and the need to reduce spending as our immediate objective we will not succeed in moving any society towards our viewpoint. They see what “austerity” achieves. No one should want any part of that, including us.

No, our focus should be on production. Our campaign should be to unleash the productive abilities of the United States, to reverse governmental economic controls. to free our businessmen. Freedom. That should be our program.

I do not want for a minute for you to think that I am the originator of this insight. As in most all of my understanding of the world, I learned this from Ayn Rand. She did not write about this issue, but she was asked about it more than once in public forums. It is to our benefit that we can read today what she said in response to those questions in Ayn Rand Answers, pages 46-50. Also look at her answer regarding unemployment benefits on page 124. She isn’t in favor of government spending or any activity that isn’t directly protecting individual rights. She wants to stop inappropriate government spending. But she recognizes that what must be done first is to free the economy. Without that first step, and giving it the time to begin producing (probably shorter than we might think), we will see our economy contract just as the European economies are.

My position in this article isn’t new, but I hadn’t realized until recently that the European “austerity” program was exactly that being proposed by my critics. These are the people who argue that the US government spending had to be stopped as soon as possible. The immediate target of these proponents of “austerity” was Social Security and unemployment benefits. I responded that what would happen is just a lot of misery and the destruction of legitimate business, which is just what is happening in Europe, especially Greece and Spain. If “austerity” were begun in the US today, the results might not be as bad. But no good would be achieved as long as government controls were kept in place.

The only direct, economic destructive element of government spending is that it soaks up savings, which is needed for business investment. But the economy can find capital when it has potential profits in sight. We would learn that finding capital would not be an issue. Today, the drag on the US economy isn’t a lack of capital. Banks will tell you that they have plenty to lend. Businesses have plenty of money to invest if they chose. (I am not really conflating fiat money with capital.) Companies could find capital today if they were confident in the future. With all of the proposed additional controls and the fear of BO’s plans for our future, they are wise to avoid the crazy risk inherent in our political situation. And thus the economy stalls. It isn’t the deficit they are afraid of, but government force.

It might be argued that the correct approach to cutting spending would include some advanced warning. Perhaps people should be given a year or two to get their lives in order in preparation for changes in government spending. Yet, that still doesn’t address the underlying problem. If there isn’t sufficient economic activity, sufficient investment, sufficient production, sufficient productive jobs, advanced warning would provide no benefit. There are no economic alternatives to prepare with. Advanced warning only is beneficial if the person affected has alternatives to what he is currently relying upon.

At this point the response that I receive is that I am evading the moral issue of the theft of the property of those who are paying the taxes (either direct or indirect from the borrowing and inflation). It is wrong, I am told, for the theft to continue. It should be stopped immediately.

Aside from the fact that Ayn Rand did not advance this point when she had the chance, and aside from the fact that I am not disagreeing with either the immorality of the taxes or the spending, and aside from the fact that I vehemently argue that the spending and borrowing has to stop, and aside from the fact that I recognize the moral hazard from the dependency upon government spending, I reject the argument that the morality requires us to act without considering the immediate consequences and how very bad ones can be avoided.

I would argue that Objectivist morality is fundamentally a morality of consequences, that is, of causes and effects, of ends and means. If implementing a moral decision means the destruction of those who are the intended beneficiaries, the innocent and the productive in this case, then there is something wrong with the reasoning. And destruction of the productive and innocent is definitely a result of “austerity.” It isn’t just the person receiving the government handout who is suffering but the entire economy, the productive and innocent. Real, honest businesses are going under. People who made rational decisions within the context of their country are loosing all they possess. It is these people who a morality of self-interest and the social-economic system of capitalism is suppose to protect. It is they who should flourish. “Austerity” is destroying their lives as thoroughly as socialism itself. Therefore, “austerity” is the wrong approach.

While government spending upon anything but the protection of individual rights is automatically a violation of rights and a move toward the destruction of those rights, the spending itself isn’t a major catastrophe, in the sense of the immediate, economic consequences. Just as with a household, it isn’t the spending per se, it is the spending in relation to the income, which means the economy’s production. If the spending is higher than the production allows (not even considering the savings necessary to increase production), then there will be problems. That is true for either a household or a business or a government. It is worse when the overspending is for unproductive consumption, which is always true of governmental spending. “Infrastructure” is consumption. Something constructed by the government might sit there for a while, like a bridge, but it is not paying its own way and replacing itself, as a business investment would, is consumption.

Of course, governmental spending is often accompanied by restrictions on the population because the government wants to keep its monopoly, i.e., only the government can build roads, etc. If there was competition, the incompetence of the government would be clearly demonstrated. Look at the U.S. Post Office.

No, government spending isn’t the cause of a country’s economy failing to grow.

On the other hand, the best any of the commentators that I have read have made only the slight suggestions that regulation has any effect on production and prosperity. It is recognized that regulation has a cost in time and money, but not on an economy’s ability to produce and grow. This is a complete blind spot. I attribute this lack of knowledge to the general rationalist trend found in economics and business schools. Looking at how things actually work is not an acceptable practice. At least at one point in time efficiency studies were all the rage. If there are still such studies they most likely don’t question government mandated business practices. They just treat regulations as acts of nature.

However, the point is that government regulation is treated as just a part of life and is not questioned and its consequences are not considered. This last point is true in a wider scale than you probably realize. Few look to see if the supposed good consequence of government regulation actually happened. No follow up studies are done to evaluate the success of the regulation. Those consequences are assumed and bragged about but never proved or evaluated. Recently, I received an email from Ending Big Government, the website set up by Yaron Brook and Don Watkins in connection with their new book, Free Market Revolution: How Ayn Rand’s Ideas Can End Big Government. This email was entitled “Story about Stories” in which people who were impacted by government regulations explained what was happening (See here). This is a great idea. The consequences of regulations have to be concretized for people. They have to see in detail that regulation is destructive in order to understand that it has to be stopped. For example, people don’t know how extensive, intrusive, expensive, and anti-productive the FDA regulation is. These details need to be made public. The media won’t do it. The Republicans won’t do it. Who will?

So, let me suggest that you continue to watch Europe attempt to practice “austerity” and how they go into recessions. I think that Spain is already in a depression, or will be soon. Greece certainly is. Think about the consequences as the government just spending less. Think about why their economies can’t seem to grow. What is stopping them?

Next week I hope to finish up a post that will be more specific about Europe and the backlash against “austerity.” I think that we will see another lesson there as well.

The Right Way to Solve the Entitlement Problem

It is important that I first am clear that I am against the use of government, i.e., the use of force, against the inhabitants of our nation, to provide for benefits of the retired, the sick, the unemployed, business, anyone. Such action by the government is wrong morally, wrong politically, and very bad economics. It should be stopped. It must be stopped. Okay? Is there any question about my position on this (for the justification see Ayn Rand’s “The Nature of Government”).

What I am concerned with in this post is that I have seen people, good, solid, rational people, suggesting solutions to the entitlement problem that I think are not good choices. It is possible that they are not completely setting out their solutions, but what has been offered are insufficient to change the situation.

I want to begin my comments with a question: What do we want to achieve? My answer to this question is that, ultimately, what we want to achieve is a productive, rational society in which we are free to pursue our own goals based upon our own judgment. We want to achieve freedom, capitalism.

Further, we want to achieve this result with the least chaos and human suffering as is possible. We see that if capitalism isn’t achieved we and our fellow man will be in for a lot of suffering, and possibly worse. We may completely lose our freedoms. We may completely lose our stand of living. In an interview on The Dailer Ticker, Yaron Brook emphasized these very points. Stop gap measures will not work. There needs to be a change in philosophy.

Our goal is capitalism, not merely lower government debt or fewer people depending upon the government. Anything but actual capitalism would not be safe or permanent, but would merely delay reinstatement of the government activities that we had managed to reduce. In an interview on The Dailer Ticker, Yaron Brook emphasized these very points. Stop gap measures will not work. There needs to be a change in philosophy.

More broadly, capitalism is the only system in which anyone who puts forth effort can and will find a way to maintain themselves, and to achieve the success they are capable of. Those who do not or cannot put forth the effort will be dependent upon the voluntary support of someone who does. There is prosperity. Capitalism does not support suffering. Contrary to criticism, capitalism does not support poverty, hunger, hopelessness.

The problems with entitlements, in addition to the moral issue, is that in the present situation, entitlements and other government wealth transfers, such as unemployment insurance, are necessarily resulting in massive government borrowing and are moving us inextricably to bankruptcy (in one form or another) and depression. Depression for an advanced country like the United States will be an unprecedented event.

It is obvious to anyone who is honest enough to look that the current situation will result in disaster. The entitlements and wealth transfer payments have to be eliminated. The rapid, dramatic growth in the government debt has to be stopped and brought down. There is no choice. Not doing so will result, as I indicated above, in disaster.

It is at this point that people are then offering some suggestions as to how the entitlement programs could be stopped. However, solutions that focus on the entitlement programs as the main issue are making an error. Stopping these programs at this point will not achieve anything but chaos and massive poverty and illness.

Consider the numbers of people who are dependent upon government programs today. The number of unemployed, (very) underemployed, and that have given up looking for work is close to thirty million people. If you add in their dependents you probably have forty to fifty million. The number of people receiving Social Security is currently sixty million (over forty million aged 65 and older). The number on Medicare is nearly forty million. Those receiving food stamps is nearly forty million. Some of these numbers overlap. Some are gaming the system and fraudulent. But the totals are overwhelming.

Another group of people dependent upon government transfer payments are government employees, federal, state, and local. A fairly recent figure for this group (excluding the military) is nearly twenty million. If you also add in the employees in the private sector who’s responsibility is keeping up with government regulations, you have another large group who are not engaged in productive work and whose indirect reliance on government money has to come to an end. (The government figure does include some who are rationally required, but it is a small percentage, I think.)

In a country of over 313 million people, over thirty to thirty-five percent are wholly dependent upon government funds and are immorally living off the productiveness of others and are an enormous drag on the economy.

The bad news is that if they all, or just the most obvious. were turned loose from their dependency and the government money were turned off, their desperate situation would become a major, immediate cause of riots and distress.

You might say a couple things, for example, that the money freed up will enable the economy to do better, or that the change will happen more slowly. The current problems in the economy is not a question of money, employment, or actually resources but government controls and interference. The constant stream of new government orders, crises, and attacks is finally, after nearly a century, dragging down the possibility of growth in the economy. Merely stopping some government transfers would not be sufficient. It would only possibly delay the result. Nor would the speed of change matter. The economy still couldn’t handle it. That is to say that these people would not be put to productive use. New, productive jobs would not appear in the numbers needed. There would be constant pressure to reinstate the programs or for something worse.

For those people who are retired, the suggested methods of replacing Social Security and Medicare, that is, putting money into their hands based upon some calculation relating to what was taxed in the past would not be sufficient to support them over the remainder of their lives, even if there were no additional general consumer price increases. Nor would they know what to do with the money, since few ever acquired the necessary knowledge.

But besides those points, very important consideration is that the economy would not be productive enough to support the massive number of people who are expected to retire.

All of the problems are interconnected. It is one economy. No freedom, no productive economy, no support in any fashion for the large number of retired people that are in the baby-boomer generation. The issue of the debt hides the fundamental problem of the welfare state. It saps the productive ability of the economy to the point that it can no longer support itself. The build up of government debt is the easiest way for today’s welfare state to finance its programs, but it could use other ways such as massive taxation and high levels of inflation, which would also lead to failure. The problems are the result of the welfare state: its morality and its economics combined.

Let me say this again. The point needs to be emphasized. Our economic structure today and into the foreseeable future will not support the expected number of people retiring over the next decade or two. That is so with or without the entitlement program. Something more has to be done than just ending the programs.

But, more important, the focus is wrong, confused, and misleads us into forgetting our goal. The entitlement programs are a symptom of the wrong philosophy supporting today’s trends in government and the economy. Do not focus on the symptoms. Focus on the philosophy and our goal.

Focusing only on the entitlement programs is also terrifying to those immediately affected and their families. It would terrify anyone who does not want to see wide spread poverty and illness. I am certain that we don’t wish to see that either.

Taking the steps to achieve the establishment of capitalism will also allow us to easily, cheaply, and happily eliminate the negatives (which we should expect would be the result of the achievement of productive values).

The initial steps of establishing capitalism would be the freeing of the productive, creative businessmen. When asked what should be done first to change the economy, Ayn Rand answered, “Start decontrolling the economy as fast as rational economic considerations permit. I speak of “rational economic considerations” because today, every part of the population is dependent on government controls. Most professions have to function under controls, and their activities are calculated on that basis. So if anyone were to repeal all controls overnight, by legislative fiat, that would be a disastrous, arbitrary, dictatorial action. What a free country needs to give all the people concerned sufficient notice to readjust and reorganize their economic activities. Therefore, after working out with economists the kind of program necessary to decontrol the country, and what controls should be repealed first, I would then advise passing legislation announcing that certain controls will be abolished within three years, say – the period calculated to allow people the opportunity to readjust their activities. In a free economy, no change happens out of the blue and overnight. Every economic change, every development, is gradual. Therefore, in a free society, there are no immediate and disastrous changes. But given our present situation, any sudden changes could create disastrous dislocations, and so we should decontrol gradually.” (Ayn Rand Answers, p. 49) She goes on to suggest that the anti-trust laws can be gotten rid of immediately, especially laws that jail businessmen. She points out that the decontrol of the economy will then pretty much eliminate our economic problems. That means, today, that the debt issues and the economic aspects of the entitlement programs will be come easier to solve. Decontrol would also result in the creation of lots of new, productive jobs.

This prospect, the resulting productivity, prosperity, and creation of wealth, will be the foundation, along with the morality of self-interest, for convincing people that ending the entitlements is going to cause, at worst, only a brief period of difficulty and the long-run result will be significantly better than Social Security and Medicare. (I have written about how these programs can be funded for those unable to rejoin the job market.)

Within a few years the older population will be the majority of voters. Many of the arguments for changing the system have to be aimed at them. They have to be shown that they will not be abandoned, that they will do okay. Merely coming up with a nice sounding set of steps will not work. It shouldn’t. Do you expect the average American retired person to accept an idea that requires him to live in abject poverty for the remainder of his life? If you want the support of intelligent people you need to show precisely how it will work. You say that they can’t expect that things will go wonderfully. No. And if you do your job right and make clear that if they don’t allow the change to happen, if they do not clamor for the change to capitalism to happen, they necessarily will live in abject poverty for the rest of their lives, then they will be able to put up with some discomfort.

Let me say this again: People have to learn that the current situation is going to result in misery. It can not survive. Depression is our future. That is their choice: depression or capitalism.

Winning the war to put man on a rational course requires both the moral and the economic argument, with full knowledge of the consequences for everyone of each step. We have to communicate and justify the idea that capitalism will be a real road to prosperity and that there is no other road. The argument is not just the moral. It is about all of reality, with a major focus on the economics. People do not know the economics of capitalism (or the world they live in now) any more than they know the morality. Neither will be a strong enough argument by itself. Combined, they are intellectually overpowering. All it takes is finding people who are willing to look at reality and showing it to them.

The Fraud of Waste and Fraud

“There are widespread misperceptions about the state of the federal budget. A majority of voters incorrectly believes the federal government spends more on defense/foreign aid than it does on Medicare and Social Security (63%). Also, a similar majority (60%) incorrectly believes problems with the federal budget can be fixed by just eliminating waste, fraud and abuse.”

This quotation is from a recent poll.  Read the top of the second page.

There we are. People are believing the politicians, especially the liberals. People are not connecting any legitimate idea of waste to a $1.7T deficit. There is a disconnect. This disconnect is going to get us into bigger trouble than any of the other fears that we have considered. This disconnect means that when the meltdown into depression begins people will again be open to the claim that capitalism is at fault. Potentially, our only safeguard will be that the meltdown will be bigger than the last one and the authorities will not be any more prepared than they were last time. They will not have an organized, planned capability to meet the various challenges that a meltdown in a complex civilization like ours will create.

Please allow me to offer my small support to Yaron Brook. He is absolutely right that the immediate present is the best time we have ever seen to make our point, that capitalism, freedom, egoism, and reason are the correct path to take. We may not have another chance.

It is sometimes a bad sign when someone suggests that their own particular area of interest is the most important. I don’t wish to suggest that other areas, say, health care or the war on terror, are minor or less scary. I merely want to say that if we don’t focus on the debt and the deficit and get that turned around, we won’t have the time or energy to spend on other things. A depression in the U.S. will be very bad because we have so far to fall and we depend upon very complex and highly sophisticated economic interrelationships. Just look at the problems we begin to face when the price of gas goes up some. Think of the problems we might have if the supply of gas is greatly reduced. Just think of the process of getting food into our cities, not to mention medications.

Let me suggest another way of looking at your activities. It seems to me that there are several ways of deciding what to focus on. One, which I would normally think is the best, is to focus on what interests you the most. If your interest, for whatever reason, is running a business, for example, it would be appropriate for you to spend your time and energy to free up business practices.

But, consider this, if there is a tidal wave coming at your shoreline residence, you are risking you life by arguing about business regulation. The deficit and debt issues facing us today and the next few years are the economic equivalent of a tidal wave. It will sweep everything before it. We need to either stop the tidal wave or protect ourselves from it as best we can. Look at what is happening in economies much less developed than our own that are having to face up to their debt. What is bad for them will be worse for us.

On the “Front Page” on JPTV, Yaron Brook and his friends try to emphasize that what is happening with our debt is not just another big deficit, like we have seen in the past. The ObamaDeficit is larger by several orders of magnitude, and projected to become bigger. That is bad enough, until you remember that Obama’s predictions are based upon rosy estimates of the economy. It is a tidal wave.

So what do we need to do? There are two avenues to pursue to achieve a solution to this problem. As with any question of budgeting, there is income and there is spending. Most addressing this issue are focusing on spending, especially the entitlement programs. I don’t want to imply that cutting spending isn’t important, it is. Certainly, much of what Obama has added to the budget can be safely discarded (like his medical programs).

Attacking the entitlement programs is a problem. It isn’t that people, especially younger people, aren’t able to accept cuts in entitlement programs. But you do have to find a way to communicate that you don’t want to kill all the old folks. If we can get people to consider financial sanity, a way can be found to ramp down the entitlement programs with out creating a class of impoverished old people.

What I think would help the most is focusing on getting capitalism working, that is, remove the restrictions and regulations. Kill the mixed economy. A few years ago we went through a phase of semi, sort of, half-assed deregulation. There was actually significant results from just the minor changes we saw. If we can begin building on the importance of letting people have the freedom to act, we can “grow” our way out of our mess. I think that the central driving force of our efforts needs to be: make America capitalistic! In this case, focusing on business regulation will help divert the tidal wave.

Instead of going off in many directions, let’s focus our energy and thought on pushing capitalism and the truth about the nature and impact of the Federal debt.

Notes on the Jobs Data

Someone noticed that the employment figure released recently by the Federal government was actually slightly less than the number they released ten years ago. I have looked for this comparison on the web, with no luck. I heard this report on PJTV, in the weekly discussion with Yaron Brook.


It is disturbing that employment is nearly the same as ten years ago. We are not talking about percentages here. It is the actual number of people employed. It means that the steady inflation that is suppose to make us prosperous didn’t work. Bernanke’s solution to all our problems hasn’t been a solution.


But two things come to mind, mine, anyway. One thought moderates the news, the other makes it worse.


The first thing that needs to be noticed is that an exactly ten-year comparison doesn’t really give you an honest read on what the figures mean. Given that we have been forced to live through two business cycles during that time, it would be a better comparison to go from peak to peak, or trough to trough. In this case the lowest employment during the earlier period of time as a basis of comparison to today. It might not look as bad. Of course, you might still argue that the growth in the population over the same period would tend to mean that the number of people employed today should still be higher today, even if this is a trough and the earlier number was mid-lower cycle. Okay, that’s true. (Note that this is the employment number, not the unemployment number, which has other problems.)


On the other hand, today’s number is bogus, and make the comparison to the earlier, ten-year old number, much worse. This is especially true if the government included in today’s figure any of the Obama, make-work “jobs”, that just soak up money.  There are more government "jobs".  There are also a lot of jobs in private enterprise that consist of doing stuff the government requires but don’t actually produce anything. These “jobs” don’t actually add anything to the economy either. All of these new jobs combined, new government jobs, Obama make-work jobs, and jobs created outside of government just to take care of government required reporting or compliance, mean that the actual number of productive jobs today are much fewer than ten years ago!


So, if you want to look at the level of prosperity-producing employment of today vs. 10 years ago, given the misleading, arbitrary choice of dates, you would have to conclude that the economy has lost a lot of jobs and that we are experiencing as prolonged decline in our living standards.


The resource that is most scarce in any economy is people. The more people you have, the more productive you can be (another point lost on the anti-immigration folks). We actually have lots of people but our government insists on forcing us to employ them in ways that tend to be less and less productive, or not employ them at all.  When will they notice that their whole thing is not working?  Do they care?  No, they don't.