Archive | June, 2012

We may be seeing the beginning of the end of the model for civilized governance that has dominated Western civilization since WWII. That model has been provision by the state of all or most of the needs of its people combined with the popular election of the government. Or, in other words, the welfare state plus democracy.

What we are seeing in Europe is that that model is inherently unsustainable. The concept of individual rights is the only standard for government action that puts an objective limit on what the government can do. The post-war leaders of Europe were completely ignorant of that standard. They adopted instead the principle that the primary function of government is to assure its citizens’ welfare. Since there is no limit in principle to the free benefits people would like to get from their government, politicians competed for their citizens’ votes by promising and providing more and more welfare. The political parties that promised the most benefits won the elections.

The desirability of welfare depends on not having to pay for it. People like the subsidies for milk, housing, student loans, health care and so forth, but they hate the taxes. Consequently, tax revenues have always lagged behind spending (the difference is the deficit). To make up the difference, governments sell their IOUs (government debt)—to their own citizens, to corporations, to private banks, to central banks, to foreign countries. Eventually the total debt grows so large, and the deficit grows so large, that holders of the debt begin to doubt that they will be repaid. Then it becomes harder and harder to sell the additional debt that is necessary to cover the deficit. The interest the government has to pay on its debt keeps rising to cover the rising risk, adding more and more to what the government will have to pay when its IOUs come due.

This seems to be the position Greece is in right now. Other European countries are giving or loaning Greece money to cover its deficit on the condition that Greece cut back on its welfare. But the citizens of Greece regard that welfare as a right and are rioting in the streets in protest. Several other European countries evidently are approaching the same crisis. The United States is not yet in crisis, but it has a one and a half trillion-dollar deficit (the government is borrowing 40¢ for every dollar it spends), a difference that cannot be sustained over time any more than Greece’s could be sustained.

There does not seem to be any other end to this process than some form of dictatorship. You cannot cut welfare as long as there are popular elections, so in the name of the country’s survival, popular elections will be first suspended, then suspended indefinitely. The United States will be the last to stumble down this road, but this is clearly the course we are on.

THE LAW OF SUPPLY AND DEMAND

AND WORKER MARKETS

Part II

M. Northrup Buechner

A series of essays elaborating Objective Economics: How Ayn Rand’s Philosophy Changes Everything about Economics by the author.

First, let us note that the national unemployment rate exceeding eight percent that we observe in the summer of 2012 is the consequence of an unfree economy. It is the consequence of government intervention in the economy, in literally countless ways. Minimum wage laws abound: there is a federal minimum wage and many states have their own minimum wage. The government legally protects labor unions, forcing employers to bargain with them, and forcing up the wage. In farm markets, the government has forced up prices with price supports and acreage controls. There are hundreds of thousands of other restrictions and controls whose cumulative effect we can only imagine.

However, to a certain extent, businessmen, employers, workers and farmers have adjusted to these controls. Minimum wages and the rest create inefficiencies. They waste labor, undermine the standard of living, and reduce economic growth. But they existed in the 1990s and the early 2000s in essentially the same form as today, and the unemployment rate was never eight percent.

By far the most important impositions on the current economy are the enormous uncertainties hanging over every investor in the form of the Health Care Law and Dodd Frank. Implementation of both of these laws has required bureaucrats to write thousands and thousands of new regulations, a process that is still going on. Some of these regulations have been announced to outcrys of horror and indignation by the victims. Some regulations have already been withdrawn. In others, the bureaucrats have remained adamant. No one can know what they have written; no one can predict what they will write; no one can predict what regulations ultimately will be enforced and on whom.

In addition, the new year is scheduled to bring with it a massive increase in taxes. The result is that banks and businesses and other potential investors are sitting on more than a trillion dollars which they are afraid to spend or invest.

There are other uncertainties in the world, in the summer of 2012, that are independent of the economic policies of the United States government: Islamic terrorism, the war in Afghanistan, the atrocities in Syria, Iran’s quest for nuclear weapons, China’s growing economic and military power, and the looming collapse of the European Economic Union. Of these, however, only the last might have a major economic impact on American businesses, and therefore may be counted as a lesser cause of our economic stagnation.

The primary cause is here, in the policies of the Obama administration. In principle, it is the same cause that stretched out the Great Depression for ten years: the fact that nobody knows, or can know, what the bureaucrats will do next. Consequently, every captain of industry is frozen in place, gripping his armrests, refusing to move until the unknowable reveals itself. This is why any significant economic progress until after the fall elections is unlikely.

What would the unemployment rate be if there were no government controls on worker markets? Who would be unemployed? We will take that up next.