Red Sky at Morning, Part 3

As we move into the new decade, and the second year of the Obama Administration, we are beginning to get used to the taste of his specific flavor of universalism, which necessitates a ubiquity unforeseen in previous Administrations.  A takeover of the health sector.  Cough into your sleeve.  Detroit, do this.  Bankers, do that.  Don’t worry, Congress, go ahead and hold your health care committee meetings without those pesky Republicans (and outside the Constitution).  Security breaches are a systemic failure, and they are all my fault, while, simultaneously, they are no one’s fault, and no one will be held accountable.  Ignorance is Strength.  Long Live Big Brother.

While America wanted a break from the informal and idiomatic George W. Bush, this is not what they foresaw when casting their votes in November 2008 (for the record, I went a long way, both in distance and in study, to vote the way I did).  Americans seem more and more unimpressed with the Democrats, as indicated in polls.  Where some saw a mandate, most did not, so consequently, for this Administration, a backlash is coming.  Will the Obama Referendum be in 2010?  Or will it be delayed until 2012?

Furthermore, is the Republican Party serious enough, that is, do they deserve the Majority again?  The real mantle of opposition to Obama’s ubiquitous universalism has been the budding Tea Party Movement, no longer complacent in pleading Nolo Contendere.  Keep in mind, this movement is less than a year old.  The singular critique of the Tea Parties is that they are oppositionists only.  Wrong.  These critics - some of them,  smart people – lack wisdom, and fundamentally misunderstand the relationship between law and liberty.

To describe how I see this relationship, I’ll start with eighteenth century British philosopher Jeremy Bentham, who said, “Every law is an infraction of liberty.”  His American colleague John Stuart Mill went further in summarizing this into the harm principle, saying, “The only purpose for which power can be rightfully exercised over any member of a civilised community, against his will, is to prevent harm to others.”  The Constitution captured this idea in its “General Welfare and Common Defence” clause, that is, in some way or another, Americans are obliged to help their fellow citizens, with the government’s assistance.  However, all of the new proposals to further provide for ”welfare and defense” are massive in scope and effect, and stand in opposition to the Constitution’s idea of freedom.  In fact, most of the Democrat’s new proposals violate both individual liberties and economic freedoms.  In addition to dismantling these proposals, Tea Party candidates must explain which existing laws make sense, and which programs we can and cannot afford.

Government’s Role in Lowering the Debt

It’s now common knowledge the national public debt is growing at unsustainable rates.  But what to do?  Simply stated, from the government’s point of-view, the options to lower the federal debt are:

1. Raise taxes to raise revenues.  As Democrats control all levers of power in the federal government, the 111^th Congress has developed a couple of clandestine ways to “soak the rich” without admitting their intentions.  More on this in a minute.
2. Cut spending to lower deficit.  While this addresses the problem itself, neither Republicans nor Democrats have the willpower to do such a thing.
3. Print money to devalue the currency, thereby lessening the full impact of a large public debt.  Billion becomes the new million, trillion the new billion, and so forth.  Through an ingenious methodology, we are currently deploying this strategy along with the aforementioned hidden tax hikes.

New hidden taxes are coming:  taxes on medicine and health service companies, a value-added tax on every level of production, and a dreaded carbon tax for our largest companies, and all oil companies, that would effectively tax everything.  Then we have the not-so-hidden taxes, such as the “Cadillac” health care tax, a proposed increase of the Carried Interest tax rate, excise taxes for political opponents (and exemptions for union bosses and fence-sitters, the largest of which are now affectionately known as the “Cornhusker Kickback” and the “Louisiana Purchase;” Blue Dogs are indeed “For Sale” on Pennsylvania Avenue), and the vengeful return of the Estate Tax in 2011; a sick unintended consequence of this is, for the benefit of your immediate family, it’s much better to die this year than the next.

My favorite, though, is Obama’s proposed tax on the banks, those firms that were forced to take TARP funds, had their bonuses capped, repaid outstanding TARP funds with interest, are now being taxed to make up the difference of the TARP funds unpaid by other firms.  These same firms are being asked to make loans, again, to high risk homebuyers and small businesses.

Since TARP takers were the bane of Wall Street, some found ways to get to public funds outside of TARP; let me quickly describe the clandestine method our government is using to manipulate the stock market.  As you know, the federal interest rate is now 0%.  It doesn’t get any lower that that.  Large investment firms, namely Goldman Sachs, can conveniently buy 10-year Treasury Bonds at zero percent, and sell them back to the federal government at market value, reaping a 3% interest rate.  Goldman has been able to earn roughly $1 billion per quarter through this money laundering scheme.  So while some banks did not take TARP money, almost all are benefiting from taxpayer funds.  Some predict this too shall pass, and we will see a subsequent collapse of this Treasury Bond market bubble, with taxpayers, again, left holding the bag.

Give Me One Reason

People need incentives to put money into the economy.  Our government could stimulate an economy by tapping into this basic human instinct, or what Milton Friedman called letting loose “animal instincts.”  Need some ideas?  Put natural gas pumps at every gas station in America.  Build nuclear power plants.  Drill, baby, drill.  Or, simply, cut taxes.

Why is it so hard to understand, that higher taxes only hinder economic growth?  The final lines of an Income Statement are “Income Before Taxes,” then “Taxes,” then “Income.”  Businesses must reconcile what happens in those final lines in the lines that come before it.  That’s why jobs move overseas; it’s cheaper to ship goods to and from locations of cheap labor than to stay in the States.  Businesses have no incentives, but rather, disincentives, in the private sector, thereby killing jobs.  This is what I honestly believe.  When we collectively punish the rich for simply making money, everybody suffers.

The proverbial “rich” in this country currently have an incentive to leverage their capital towards start-up venture capital firms, where innovation is born.  Venture capitalism depends on its low Carried Interest Tax rate of 15%.  A bill to do away with the low rate by matching it to the Income Tax rate, H.R. 1935, is currently in the House Ways and Means Committee.  This is… incremental, activist, collective – yes, all of the above - and it’s set to destroy incentive, and with it, innovation.

Government could instead promote free market, common sense solutions with lower taxes, lower subsidies, less exemptions, and go after comprehensive entitlement reform.  Insetead, we take our eye off the ball by focusing on Cap-and-Trade (another tax) and the Health Care Bill (yet another tax).  Neither of these proposals will create American jobs; indeed, they will do the opposite.  For where there is a redistribution of wealth, there is also a redistribution of poverty, and when you kill wealth, you kill jobs.

Business has a role in economic recovery; it’s called Production.  But with so many unknowns in health care, taxes, employment, and regulation, how can they do that?  Production does not occur without innovation.  Policies that destroy capital also destroy innovation that thrives off it.  (See Soviet Union for details).  Supply and demand, as you know, sets a price.  There is also the price of doing business, required for a company to stay in business.  When the price of doing business exceeds the price set by the free market, the company goes out of business… or at least, it used to.  Government interference (bailouts, stimuli, etc) distorts the market place, as do set wages.

Like a fair price, a fair wage is set by supply and demand.  Although it’s a statistical fact that a higher minimum wage drives up unemployment, wages, high and low, are also subject to government intrusion.  Can you name one piece of our economy that is not?  The sickening part:  federal officials don’t understand that obscene taxes, aimed at “obscene” profits, shrink the entire economic pie, and in turn, their tax revenues.  I turn my attention now to the central planners in an Administration with virtually no business experience who are trying to recovery a stillborn economy.

Demand-Side Fallacies

There are essentially two schools of thought when developing economic solutions:  supply-side and demand-side.  I favor a supply-side approach, as best described by Arthur Laffer (see the Laffer Curve for details).  In a crisis, letting people keep more of their earnings will stimulate the vital and solvent pieces of the economy, encourage investments, and create jobs, while letting entities that would otherwise collapse (i.e., GM) go ahead and do so.  A demand-side approach, on the other hand, attempts to control the economy by stimulating demand with increased government spending, and lots of it, to save projects deemed worthy by the federal government (i.e., GM).

John Maynard Keynes, the foremost proponent of demand-side economics, believed government could induce “aggregate demand” with any sort of publicly funded job, famously stating the government could pay individuals to bury jars of money to stimulate the economy.  He went a step further suggesting the private sector would also benefit, as it would consequently employ people to find said jars.  These kinds of jobs – such as building crosswalks for humans, or turtles (I’m not making that up) – are not based on actual supply and actual demand, but instead, central planners’ interpretation of the economic forces.

It is true that infrastructure spending can facilitate private sector success.  President Eisenhower did just that with the Interstate Highway Act of 1956, which improved transportation and commerce in the United States.  Today’s supply chains are admittedly dated and could use rehabilitation.  Think food:  the average meal travels 1500 miles to get to your plate.  The success of this supply chain was contingent upon $30/barrel gasoline, not $130/barrel.  I have supported infrastructure spending in the past, particularly in my post “Think iGovt.”  Insomuch, I argued for simple, well-thought, easy-to-read legislation that garners a consensus, and accordingly, the trust of the American people.

That’s not what happening, though.  Our central planners are passing unilateral legislation, upon which they depend on trust in themselves, and not their constituency.  They will never have enough information to control aggregate demand or aggregate supply by themselves, and therefore, will inevitably commit misalignment errors.  Renowned Austrian economist Friedrich von Hayek exploits this fundamental demand-side fallacy in his novel, The Fatal Conceit, by saying, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

I would contend that the idea that government knows best has grown to a dangerous level, in which admittedly smart men cannot distinguish economic freedoms from economic securities, although more sinister ideas are purposely proliferated by the progressive American Professoriat, who revel as the lines between government and private sector continue to blur.  Where does it end?  Should we have a run-off, splitting the nation into free and independent states and socialized states, as to see which economic system works best?  From my perspective, we answered that question in November of 1989, when the Berlin Wall fell.  (Again, see Soviet Union for details.)  How quickly we forget.

Misalignment of supply and demand created the Tech Bubble of 2001, the Housing Bubble of 2007, the Wall Street Bubble of 2009, and is currently inducing the Government Bubble of 2010.  Keynesian economists order “Full Speed Ahead,” with no fuel in the federal coffers.  Our debt is simply out-of-control, and someone someday will have to pay for these errors.  Fundamentally, government has no incentive to spend time, money, or energy wisely, as they are consuming public funds, instead of their own private funds, in doing so.  No worries for these central planners, since they won’t be in positions of power when the fecal matter hits the rotary device.

So, what now?

What will happen if, I mean when, this Health Care bill passes?  I guess it’s not a done deal yet.  The Obama Referendum of 2010 may be happening sooner than November, with tomorrow’s election for Ted Kennedy’s Massachusetts Senate seat undecided.  If the Republican, Scott Brown, wins the seat, the Health Care legislation is doomed.  If the Democrats refuse to seat Mr. Brown in time for the vote, or use reconciliation (51 votes) to push it through, it could be a point de bascule resulting in more than just protest.  Physically speaking, revolution means to return to an original state of being.  Let’s go.

As for me, I’m tired of repeating myself here, and if you read this far, you probably are, too.  I’ll be posting more in the future, but I may divest myself of this tangled mess of psycho-socio-politico-economic-historic issues for a while, at least until I feel more encouraged to say something different.  For sure, no more of these “series.”

Maybe instead I’ll talk about Appalachian music, to include (but not limited to) guitar tonality, flatpicking versus fingerpicking, the genius of Bela Fleck, and the importance of Earl Scruggs and the three-finger-roll.  Maybe I’ll discuss running trails in the D.C. area, and how old men on recumbent bicycles are incredibly fast (and always incredibly happy).  Maybe I’ll explore various theories on why urban gas stations are so dilapidated and disheveled as compared to those in rural areas.  Maybe I’ll talk about my wife and son, and the different meals I’ve been eating lately; you’re missing out.  Maybe I’ll talk about how it feels to apply for jobs for the first time in ten years, or the meteoric rise to prominence of my Wrangler denim shirt.  Who knows?  As for this subject, I’ll come back to it when I’m ready, because ultimately, the American people will get what they want.

“Every citizen should be a soldier.  This was the case with the Greeks and Romans, and must be that of every free state.”

~ Thomas Jefferson

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