This talk was originally delivered to a Campaign of Liberty chapter on December 3, 2009. Video will be available shortly.
Today President Obama will tour Allentown, Pennsylvania, in my home congressional district as part of a “Main Street Tour” to show his concern for economic plight of the masses. Many of the people I have spoken with while campaigning innately realize that government is at fault – or at least complain a lot about how the government should “fix” the economy. Unfortunately, many do not have enough of a grasp of economics to understand exactly how the government is ruining their lives and their childrens' lives. Speaking for myself, about 2 years ago I would have been included in this category. This is no surprise as most of the press and educational system has been hijacked by the disciples of Lord Keynes (the Keynesians) and the socialist Karl Marx for the past century.
The late economist from the Austrian school and NY Times columnist Henry Hazlitt wrote a series of easy-to-understand economic lessons in the 1940s in what was later published as Economics in One Lesson. Hazlitt warned of the dangers of what he termed the “seen and the unseen.” Let me give a rather harsh but true example.
Last week one local paper published a story about a local hardware store on Main Street in Nazareth going out of business. I grew up in Nazareth, and this store was there my whole life. The owners were not able to afford the rent, tried moving down the street for cheaper rent, but were not able to save the company.
On the exact same day, another local paper published a story about the Obama stimulus plan. They explain how $7.8 million was awarded to the private Lehigh University for research on hot lava, smarter electric wheelchairs, and Ice Age climate shifts in Alaska. This amount was more than the amounts allotted to Allentown, Bethlehem, and Easton, the three major cities in the Lehigh Valley. Before I continue - I am a proud alumni with an excellent education in chemical engineering provided by Lehigh.
So, what is going on here? It is nothing more than Hazlitt's seen and the unseen at work. What is normally seen is the government spending on government pet projects, whether the Hoover Dam, hot lava research, banker bailouts of Goldman Sachs, or even new roads and bridges. Some government projects may even have some utility, like new roads or bridges. These are held up to the population as examples of how the government is doing its best to help you – with your taxes, that is.
However, what is typically NOT SEEN is local hardware stores failing, or other businesses who fail to get listed on the government's gravy train list. What is NOT SEEN is those living on fixed incomes like social security whose standards of living are affected the harshest by inflation, the businesses that never started due to government interventions. What is NEVER SEEN is the employment these new businesses would be providing and, most especially, what is not seen is simply what would happen if the people were not plundered by government in the first place, either in the form of payroll taxes or the insidious hidden tax of inflation.
Of course, realistically speaking in today's America, what is seen is the looting of the public treasury by the special interest lobbyists who, to a large extent, control Congress, the FED, and the rest of DC. We must instead focus on the general interest of society over the long run. We must remember that government exists to protect liberty, not to redistribute wealth, nor to grant special privileges, nor to interfere with the lives of individuals and their actions.
When the government says that the path to prosperity rests in destroying used cars and giving cash incentives to buy new cars, they are instead saying that the path to prosperity rests with creating false demand, more taxes and destroying economic goods. When the government says that the way to prosperity is to increase the price of milk from dairies, it is like saying that the way to prosperity is to make food costlier for the city worker. When the government says that the way to national wealth is to pay out governmental subsidies, they are in effect saying that the way to national wealth is to increase taxes.
When the government says to make it a main objective to stimulate an increase in the number of jobs by providing government-paid salaries, they are in effect saying that excessive taxation and placing an immense debt burden on future unborn generations is really the main objective. When the government says that the way to recovery is to increase the minimum wage, they have found only another way of saying that the way to recovery is to increase costs of production and legally price people out of jobs. (slides 46-47)
Anytime when bureaucrats in government attempt to centrally plan economies, the result is ALWAYS failure, such as was seen in the modern socialism's longest-surviving market economy experiment, the Soviet Union. This is simply because America's economy cannot be planned by supercomputers or even thousands of economists sitting in a room computing X barrels of oil, Y loaves of bread, Z gallons of milk and – don't forget – thousands of tons of munitions and war material to be used in the wholly economically destructive practices of warfare. However, many Americans today still believe the MYTHthat the FED has enough knowledge to centrally plan interest rates, the supply of money and credit, and takeover corporations.
Market economies like ours consists of millions of individuals all making millions of mutually beneficial exchanges every day. Now, a Keynesian economist will look at a loaf of bread and say it equals $3. An Austrian economist will look at the exact same transaction and say no, it was certainly NOT an equal transaction. The seller of the bread benefited because he preferred the $3 to the bread. The buyer of the bread obviously preferred the bread to the $3, otherwise he would not have spent the money at all.
Keynesian central planners also have a bad habit of trying to crunch long equations to project, say, the average cost of rent six months in the future in New York City. The Austrian school will plainly admit that these calculations are pretty useless, as no model can contain possibly contain all the factors that factor into human actions.
Now when one considers the best steps to take for an economic recovery, one realizes that government is not only stopping a recovery from happening, but it is doing the POLAR OPPOSITE. Government, in effect, is at “war” with Main Street. Consider:
Instead of slashing government spending, which was done in 1920 and 1946 to rebuild the economic damage done by WWI and WWII, we are instead repeating the ruinous practice of FDR in the 1930s to spend record amounts with the Obama stimulus plan while simultaneously running three wars in Iraq, Pakistan and Afghanistan.
Dr. Thomas DiLorenzo points out that deposit insurance must be appropriately priced by the market and banks with higher risk should have higher insurance premiums. Regulation Q limited bank accounts to a maximum of 5% interest that could be paid on savings accounts while the fed funds rates were between 13-20% in the early 1980s. So, obviously, funds were leaving these accounts for higher-yielding accounts. Part of the way the government “saved” savings and loans in the 1980's was to increase FDIC insurance from $40,000 to $100,000, which only postponed and worsened their crash. Government encourages more risk-taking, and creates the moral hazard while at the same time proclaiming it's being reduced. And now today, to encourage safety in the system in 2008 the FDIC limit was increased from $100,000 to $250,000. The FDIC's Deposit Insurance Fund, as of September 30, now is officially bankrupt at negative $8.2 billion.
Obviously, the best possible cure to a recession is to reduce taxes and keep dollars in people's pockets. Instead, government is hard at work raising taxes – with the energy tax via the Cap and Trade bill, a health care tax, and repealing the tax cuts on capital gains. Inside the Obama stimulus bill there is the removal of the inflation-adjustment on federal income tax which will bump taxpayers to higher brackets.
Redistribution of wealth through the tax system to soak the rich will backfire as the very same rich, realizing that the more they produce, the more government legally plunders from their earnings, will opt to not act and take risks in creating more wealth. The federal income tax which began in 1916 was itself orginally a tax on just the super-rich, a maximum of 7% on the rich making the modern equivalent of a salary of $500,000. When one looks at the tax revenue numbers for the income tax, one can only conclude that not only is this tax immoral, but it's also unnecessary and should be abolished.
DiLorenzo also predicts that next year, just as was done during the FDR spending of New Deal funds, dollars will be funneled to areas where the electoral margins of victory were the smallest between the two gangs who hold monopoly and control of the political system. The bulk of the stimulus money will be spent in 2010, not 2009, due to the fact that this is an election year. This will not revive the economy -- providing international confidence remains in the dollar -- but will instead tighten the politicians' stranglehold on the economy.
Government must avoid all wage and cost adjustments to pricing. Today, what we have is the government propping bubbles such as the property and equity bubbles which only delays the inevitable, which is the markets clearing to appropriate price levels.
Union powers should not be expanded since they can contribute to strangling their business owners, such as seen in the case of General Motors. Instead, government is trying to expand the powers of the union through 'card check' legislation where unions can force votes in workplaces to install unions and takes away the anonymity of the ballot. [Unions can of course exist, but should enlist volunteers, not coerce members into joining.]
Only when private investors feel secure will they invest in assets, or what is termed as “regime uncertainty.” Right now, of course, the economic situation is completely unstable. We have lots of new taxes, such as the health care tax, possibly value-added taxes, and the war tax the Senate has been bandying about. The instability in the dollar and the unknown losses in theOTC derivatives market make a stable business environment all but impossible.
Avoid giving the Federal Reserve and government new bailout powers. What we have occuring right now, is that Congress has just passed through House committee yesterday HR 3996 which will grant the FED the ability to bailout any "individual, trust, or corporation" as well as vastly expanding the government's regulatory powers. The FED will also be able to force financial holding companies into bankruptcy. [This is the same bill that HR 1207, the bill to audit the FED, is unfortunately attached to as an amendment.]
Avoid giving the Federal Reserve and government wide new regulatory powers over the risk-taking of the private sector. Following the Enron and WorldCom frauds, Congress passed theSarbanes-Oxley Act, which has failed to prevent the rampant fraud in the financial system. The former NASDAQ Chairman, Madoff, is one such example, while the Wall Street Journal exposedScott Rothstein's billion-dollar ponzi scheme this week. SarBox legislation has placed American firms at a disadvantage to the rest of the world. The question is not which additional regulations were needed but rather how many other frauds exist. HR 3996 includes the creation of vast new levels of regulation bureaucracy. It will grant the FED the power to force companies to obey their orders if the company's actions or size pose a threat to their own "safety and soundness" or to the "financial stability of the United States," which are both incredibly vague and undefined terms.
So that's the bad news. America's sails are set on a pretty hazardous course. The good news is the course that we should follow is very easy. We need to return to what America does best. As an engineer, one principle quickly learned in industry is K.I.S.S. - “Keep It Short and Simple.”
America needs to restore individual liberty.
America needs to restore the rule of law per the Constitution.
America needs balanced budgets with a sound currency to impose discipline on government.
America needs very low taxes.
America needs a strong national defense while avoiding international intrigues, undeclared wars, bases on foreign soil, and nation-building missions.
Above all America must act to bring about a separation between the State and economic decision-making.
Mark my words – the above is what must be done to bring an end to government's “war” on Main Street -- once and for all.
Jake Towne is running for U.S. Congress in Pennsylvania's 15th District in the 2010 election as a citizen unaffiliated with any political parties. Jake also writes at www.LibertyMaven.com and www.CampaignForLiberty.com.
Also recommended is Jake's lecture on why the stimulus plan will fail and better alternatives and the collection of videos "Escaping the Current Depression - Causes and Cures."
Disclosure: No positions