Fresh produce 7.31.09

1. The chaos that is "Cash for Clunkers".

2. Goldman Sach's record profits (and bonuses) are essentially subsidies. That is to say, their profits are taxpayer dollars.

3. John Stossel ponders outlawing cigarettes. Why not?

4. Capitalism, Jewish Achievement, and the Israel Test: Is Israel a capitalist beacon in the Middle East?

Does Capitalism Work?

Here is a map depicting how each states' GDP compares to other countries around the world:

















What system can generate such a circumstance? How can comparatively small states like New Jersey can produce more than the geographical area of Russia? Is it merely that New Jersey has more natural resources than all of Russia? Or that the people of New Jersey are smarter than the people of Russia? Or is it related to each states' respective proximity to the natural state of liberty?

From the index of economic and political freedom:

"State involvement in economic activity remains considerable, and institutional constraints on economic freedom are severe. Non-tariff barriers add significantly to the cost of trade. Inflation is high, and prices are heavily controlled and influenced by the government. Virtually all foreign investment faces official and unofficial hurdles, including bureaucratic inconsistency, corruption, and outright restrictions in lucrative sectors like energy. Corruption weakens the rule of law and increases the fragility of property rights and the arbitrariness of law enforcement."

The answer is quite simple - the government acts as an obstacle to natural market activity. Price controls and excessive bureaucracy prevent individuals from disposing of their property how they see fit. A weakened rule of law and barriers to trade stifle risk taking and entrepreneurship. All of these things lower productivity. The truth becomes clear - it does not matter how many natural resources a country has, nor how intelligent the population is. If government will not allow people to trade freely with each other, guarantee the security of property and establish the rule of law, productivity and quality of life will suffer.

Thomas Jefferson, George Washington, and the rest of the founders took a different approach. They recognized both the economic and personal woes that emerge from a bloated State. The United States was founded on the principles of individual liberty and the rule of law, precisely what is lacking in Russia. Capitalism works, and one need to look no further than to compare New Jersey to Russia.

* It should be noted that New Jersey outproduces Russia despite being one of the most heavily taxed and regulated State's in the Union.

Keynes on Inflation

This is somewhat of a cross-post from Cafe Hayek, but I'd like to expound on it. John Maynard Keynes is an economist whose ideas have shaped government policy since the early 20th century. His ideas are the heart and soul of stimulus plans all over the world. Stimulus is supposed to be the antidote to massive deflation and the paradox of thrift. The government prints or borrows money for spending now, to "stimulate" the economy and improve private consumption rates. This policy is inherently inflationary, and it must be so. The only way to combat deflation is through inflation.

That being said, it is important to take a look at what Keynes himself said about the consequences of inflation:

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls . . . become 'profiteers', who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished not less than the proletariat. As the inflation proceeds . . . all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless. (from pages 220-233 of The Economic Consequences of the Peace (1919))

Some will point out that he begins by stating that a "continuing process of inflation", and that perhaps a one time stimulus would be good. Let's look at the value of the dollar after we completely abandoned commodity money in 1971. (chart from here)



Look at what happened to the cost of living when the USA went off the gold standard. We are clearly in a "continuing process of inflation". Let's look at the lower part of the graph for some interesting events in US history.

• 1860-1865: Funding the civil war creates massive inflation.
• 1913-1920: The Fed is created, an agricultural depression occurs.
• 1930-1940: The Great Depression.
• 1940-1945: Funding WWII.
• 1970-1980: End of Bretton-Woods
• 1980-present: Stable 2-3% inflation

There is a divergence in the two graphs, as inflation appears to be stable at 2-3%, the cost of living skyrockets. If inflation is low and constant why would the cost of living grow so rapidly? What is the cause? Not allowing a deflationary force to manifest is to create an inflationary force. Before 1940 we had alternating periods of deflation and inflation, which gave us stable average prices over time. There basically has been no net deflation since 1940, only varying degrees of inflation. That is why the cost of living has gone up year after year. You can thank these guys.

To your left you'll see a table charting the declining value of the dollar since the creation of the Federal Reserve in 1913. The dollar lost 50% of its value (you need twice as many dollars for the same purchasing power) between 1913-1920, 1920-1970, 1970-1980, 1980-2000. From 1913-2008 the dollar has lost ~95% of its value.

Now that continuing process of inflation is clear, lets revisit some of the consequences that Keynes' spoke of:

• Governments can, in a hidden way, arbitrarily confiscate the wealth of their citizens.
  
• Typically the poor and middle class lose money while foreign and domestic banks and other financial institutions profit from inflation.
  
• When the poor and middle class see this arbitrary rearrangement of riches, it is blamed on capitalism.
• Eventually the relationship between creditors and debtors is so distorted that the debtors will never possibly be able to pay back what they owe, and so the two terms become essentially meaningless.

Keynes is saying that inflation can be dangerous. Not in the mere sense that people will lose value of their money, but that it undermines the entire system of capitalism! Nowadays, deflation is a dirty word. In the not so distant future inflation will be the dirty word. The truth is that there are no dirty words in economics, but in politics. This is what is happening in the USA. Furthermore, the politicians are acting on the assumption that we are not in a "continuing process of inflation" and thus a one time "stimulus" would possibly work. Keynes implies that is an exceedingly dangerous assumption.

Happy birthday John Maynard Keynes
June 5, 1883 - April 21 1946

Do we live in a capitalist country?

And can we blame the recent fallout on "market failure"? Well, first we should define capitalism. The answer according to this well (and vehemently) argued case, is no:

"Nobody's abandoning capitalism here."

True. Capitalism was abandoned -- destroyed, actually -- long ago, beginning around 1913, when the last of free banking was destroyed with the creation of the Federal Reserve and the imposition of a fiat money supply controlled by that Fed.

Since that point in time, what has existed in the United States is a "mixed economy", with continuously-diminishing elements of freedom mixed with continuously-growing elements of statism in the form of fascist controls and regulations on business and economic activity as well as socialist welfare-state looting and redistribution-of-income schemes.

It is true that a whole host of non-government entities and players have helped urge on this destruction of freedom. Lots of big businesses have lobbied for regulations to strangle their competitors -- labor unions of all sorts have lobbied for regulations that permit them to coerce higher-than-market wages. "Special interest group warfare" -- as Ayn Rand called it -- is an inevitable result of government having the power to regualate the economy and dispose of the citizen's money, against their will.

But the main point is that what exists in the U.S. at this time is not capitalism. Capitalism does not feature, among other things:

1) Capitalism does not feature fiat money.

2) Capitalism does not feature a central bank -- the Fed -- with total control over that money, with power to expand it or contract it at will -- with the power to dictate interest rates and enforce capital requirements for fractional-reserve banking that leverages commercial banks at 20-to-1, investment banks at 50-to-1, and government-sponsored entities at 1000-to-1.

3) Capitalism does not feature bank regulators that enforce legislation like the Community Reinvestment Act, the Fair Housing Act, the Equal Credit Opportunity Act, the Community Development and Regulatory Improvement Act and the American Dream Down Payment Act, regulations which banking regulators can and did use to pressure lenders to make billions in loans to people who, under capitalism, would not have qualified for those loans.

3) Capitalism does not feature government-sponsored entities, like Freddie and Fannie and Ginny Mae, that create secondary markets to help encourage nervous lenders to continue making shaky loans. Nor does it feature federal agencies like the Federal Department of Housing and Urban Development (HUD), the Federal Housing Authority (FHA), the, the Federal Housing Enterprise Oversight Office and the Federal Home Loan Bank -- all of which were created because those selfish, stingy lenders wouldn’t give money to people they suspected would not pay it back.

4)Capitalism does not feature a government-controlled cartel of investment rating agencies, which all issuers of securities are required by law to use -- and which are still in business, and whose "services" are still being forced on the investment community, even after these ratings agencies disastrously rated securities containing sub-prime loans as "AAA".

5) Capitalism does not feature “bailouts” of failed companies in the form of taxpayer-financed loans or loan guarantees -- bailouts that insure the incompetent remain in business to further waste capital and further bleed the taxpayers..

6) Capitalism does not feature government-takeovers of failed companies, with government intervening to head off bankruptcy.

7) Capitalism does not feature massive labor regulations such as the Equal Employment Opportunity Act and the agency that enforces it -- the EEOC; or the Americans with Disabilities Act; or the Occupational Safety and Health Act; or the Family Medical Leave Act; or the state laws mandating Workman’s Compensation Insurance; or the state laws mandating Unemployment Compensation Insurance.

11) Capitalism does not feature corporate welfare programs, like the billions of dollars given to farmers who are paid not to produce or who are guaranteed prices -- all paid for by taxpayers who don’t have, and cannot afford, the lobbying power that such corporations or interests can bring to bear.

12) Capitalism does not feature an income tax and welfare system that rewards the lazy, the incompetent, the shiftless, the foolish, the ignorant and the just-plain-no-good by providing them free economic goods and services, paid for by seizing the earnings of the most rational, most productive, most responsible, most creative and most entrepreneurial members...

13) Capitalism does not feature a “code of Federal Regulations” -- now 75,000 pages in length -- that dictates the details of virtually every aspect of our financial and economic life -- a set of regulations that has steadily increased under every president and which, at present, would stretch for over 1.5 miles if its pages were laid end to end -- 1.5 miles of double-columned, small print, both-sides-of -page regulations.

14) Capitalism does not feature a government with departments designed to interfere, intervene and overrule the market in housing, transportation, healthcare, education, energy, mining, agriculture, labor, and commerce.

15) Capitalism does not feature a government in which the actions of the aforementioned departments are amplified by more than one hundred federal agencies and commissions, the most well-known of which include, besides the IRS, the FRB and FDIC, the FBI and CIA, the EPA, FDA, SEC, CFTC, NLRB, FTC, FCC, FERC, FEMA, FAA, CAA, INS, OHSA, CPSC, NHTSA, EEOC, BATF, DEA, NIH, and NASA.

As this quick overview of our current system shows, whatever else one may argue about, the claim that what exists in the U.S. today is capitalism is ludicrous beyond belief -- fully as ludicrous as the corollary claim that said non-existent capitalism is to blame for this “financial crises”.

Capitalism is dead -- long dead. What you are witnessing is the self-destruction and failure of the fascistic regulatory/welfare state that killed it -- a fascistic regulatory/welfare state that, in its death throes, is being vastly expanded in one last desperate attempt to loot whatever else can be looted from the remaining productive American taxpayers.

Martin wrote:

"We're not abandoning capitalism, because capitalism is all about protectionism and bailouts. It always has been. Capitalists don't want free markets."

That’s nonsense, Martin. The meaning of the term “capitalism” does not change because those participating in what’s left of the system are advocating destroying still more of it.

If the police and judges stopped enforcing the law -- and instead began advocating allowing more and more criminals to go free, that would not mean that the term “law enforcement” now means, “not enforcing the law”. “Law enforcement” is a term which, like “capitalism”, has a specific meaning that is not a function of what those participating in the system happen to advocate at any one time.

Posted by: Michael Smith | May 12, 2009 6:58:06 PM

From Cafe Hayek. I tried to throw some funny links in there. This was edited for brevity's sake. However, he does make a compelling case for the extent of generalized intervention in normal market processes. Just click on each one of those links for Federal agencies. It's staggering. Maybe we should begin to start blaming our troubles on a "mixed economy" instead of "capitalism"... Kinda like the first step in AA, you know? Admit that you have a condition, and it's not what you thought it was.