Back to Basics

Governments do not create jobs.  Whatever they spend has to be taken from someone, whose wherewithal to hire new workers is thereby curtailed.

Increasing taxes, imposing strangling new regulations, flooding the economy with phony fiat money, and working actively to destroy selected industries create uncertainty and fear in business decision makers.  After four years of this, businesses understandably are very cautious about investing in new production facilities or expanding existing ones.  Only when those elements of uncertainty have been removed will business revive and create new jobs.

Louis Woodhill analyzes prospects for the economy under President Obama on the Forbes website.

Quote:

Obama’s $831 billion “stimulus” program of early 2009 failed utterly, as did Bush 43’s $152 billion stimulus program a year earlier. The economists in the grip of the Keynesian Superstition (e.g., Paul Krugman) were left sputtering that the stimulus “just wasn’t big enough”.

Because stimulus works in exactly the same way as trying to raise the level of a swimming pool by drawing a bucket of water out of the deep end and pouring it into the shallow end, no stimulus can ever be big enough.

Both of them are dead wrong.
Fed chairman Ben Bernanke and New York Times liberal-progressive polemicist Paul Krugman disagree about the Fed’s monetary policy.

Krugman continues to expound the view that, if the Fed accelerates its rate of creating phony dollars, consumers will go on a spending splurge and businessmen will put their excess cash reserves into expanding their operations and hiring more people.  Earlier he advocated multi-trillion dollar increases in government stimulus spending, i.e., fiscal policy, for that purpose.  To answer the fact that such policies have never worked, Krugman and his fellow Keynesian economists always say that, however huge government spending may have been, it wasn’t big enough.

There may be a short-term flare up of business activity, as with Obama’s cash-for-clunkers or subsidies for home purchases, but such stimulus spending merely pulls already-intended purchases into the immediate term.  As soon as the stimulus spending or subsidy ends, purchases drop below their earlier rate.

There is no historical precedent for a government spending its economy into prosperity.  The ultimate result is inflation and fundamental dislocation of the sectors of its economy.  It was tried, in a major way, in the 1960s and early 70s.  We got stagflation: soaring unemployment and the highest rate of inflation in peacetime history.  Franklin Roosevelt tried it in the 1930s.  After twelve years of the Great Depression, unemployment was still at 17% in 1940.

In our last major engagement with phony-money inflation, during the 1970s’ stagflation, not only did businesses not expand, many shut down entirely.  The Midwest, formerly the industrial heartland of the nation, became known as the Rust Bowl because of its abandoned manufacturing plants.  Inflation made American businesses uncompetitive with foreign producers, wiped out more than half the purchasing power of people’s savings and incomes, and dislocated huge swaths of capital investment and jobs.  People’s investible funds were plowed into inflation-proof assets like jewelry, precious metals, and art, none of which did much for employment.

The phenomenon of leveraged buyouts led to the liquidation of long-established businesses and the discharge of their workers.  Why?  Inflation had reduced corporate profits to such an extent that the entirety of company could be bought by tendering for all of its common shares at depressed prices on the stock market.  Take-over entrepreneurs than sold off pieces of a company’s least profitable business and used the proceeds to pay off their acquisition debt.

All of that was the consequence of the Federal Reserve’s hubristic presumption that they could create just a little bit of inflation and keep it under their control.

Even Bernanke recently has stated that the Fed’s mandate to stabilize the dollar outweighs, at the present time, its duty or ability to create full employment.

Let it be noted that Fed’s announced intention to create inflation at the rate of 2% per annum contravenes its mandate to stabilize the dollar.  A stable dollar, by definition, means zero inflation.  And inflation is, also by definition, increasing the supply of fiat, paper money faster than the increase in output of real goods and services (before Nixon took us off the gold exchange standard in 1971, inflation meant the Fed’s creating dollars out of thin air in excess of the government’s gold holdings).

In the notorious recent open-microphone exchange with Dmitry Medvedev, Obama’s apparent assurance to Russia’s Putin that he proposes to continue dismantling our national defense capabilities can be interpreted in several ways, none of them good for the future of the United States.

The first possibility is that Obama simply desires a diminution of America’s leadership role in the world community, because that’s one of the radical left’s strongest demands.  Premature withdrawal of our military forces in Iraq and Afghanistan also supports this thesis.

A second possibility is the liberal-progressive dogma, often articulated in Obama’s speeches, that history is moving us toward a single worldwide government under leadership of the UN and a world justice court.  Reducing our military capabilities would further that effort.

A third possibility is the expectation that reduction of our military capabilities will, at no serious cost to our nation, free more funds to support expansion of our welfare state. This “peace dividend” idea, popular with liberal-progressives after the disintegration of the Soviet Union, is dangerously simplistic, wishful thinking.

The implicit assumption is that the good aspects of the post-World War II world order wrought by the United States’s superpower status would continue if we cede our leadership role.

Robert Kagan’s recently published The World America Made makes clear, however, that a policy of diminishing America’s leadership in world affairs requires ignorance of history.  If we step down, there will always be some nations with the will and the military and economic power to fill the vacuum.  Struggles of national ambition to succeed the United States are likely to involve the world in more wars and other conflicts than we have experienced in the past sixty-seven years, when the rest of the world knew that the United States was prepared to impose economic or military sanctions to maintain world order.

The world order that America made includes, among many other things, the fact that Western Europe survived and rebuilt its economies, free of Soviet domination, because of the Marshall Plan.  Japan and Germany were converted from beaten down losers to strong economic and diplomatic allies of the United States to serve as bulwarks against the expansionist policies of China and the Soviet Union.  Trade lanes and free movement of people and goods around the world have been sustained by NATO and the United States Army, Navy, Marines, and Air Force.  We support the growing prosperity of developing nations.  Russia and China aim to control those economies to monopolize use of their resources.  The Cold War ended with the dissolution of the malevolent Soviet Union only because of our policy of containment that made clear to the Soviet leaders that we were prepared to stop them whenever they sought expansion outside their Eastern European sphere of influence.

Russia or China, if allowed to displace us, will seek to control international trade to their advantage by restricting free movement of people and goods.  Both have tightly controlled economies with laughable personal freedoms for their citizens.  Judging from post-World War II history, neither will be shy about imposing those conditions upon their neighbors and trading partners.

If liberal-progressives succeed in reducing the United States to some level of vassalage to other nations, the world we take for granted will be changed in many unpleasant ways.

Read The Weekly Standard’s report.

Quote:

…Pravda praises present Russian relations with the United States under President Obama. “Exactly at a time when Russia and the USA are finding that they have far more in common than differences, exactly when they see that they are much more friends than foes, when they see that there is so much to be gained through collaboration, a foul-mouthed, big-headed oaf like Romney with more money than sense makes a comment that reveals who he really is to the world: a pea-brained, pith-headed simpleton with too much testosterone and too little common sense, with zero tact, no diplomacy and a paramount grasp on the intricacies of world politics. A prize, good-for-nothing ignoramus…

The Fed’s near-zero short-term interest rate policy distorts the market, with many ill effects and none of its proclaimed benefits.

In a speech today before the spring conference of the National Association for Business Economics, Federal Reserve Commissar Ben Bernanke, now an Obama re-election campaign mouthpiece, reaffirmed the Fed’s intention to continue imposing artificially low interest rates for short-term Treasury securities.  According to the Washington Post’s report, he admitted that the economy and employment remain weak.  But, he maintains, “the Federal Reserve’s existing policies will help boost economic growth.”

If that is true, one is entitled to ask why after nearly three years of this policy the economy remains in the doldrums.  Unemployment, taking the most favorable measure used by the government, remains north of 8%.  Using comprehensive measures from the government, measures that include people who have given up looking for jobs and have dropped out of the labor market, unemployment is running around 17%.

Nonetheless, the stock market again roared ahead today on Commissar Bernanke’s affirmation that the Fed will continue pumping excessive amounts of fiat money into the economy to keep interest rates low.  Meanwhile businesses remain cautious about expanding, and consumer spending, as in the housing bubble that burst in 2007, is being floated on increasing debt and declining savings.

The Obama administration gets a free ride.  If interest rates were not artificially depressed, the cost of funding our multi-trillion dollar deficits would soar when the Treasury markets new debt.  There is also the ‘benefit’ of facilitating inflation to enable the Treasury to pay off today’s debt in the future with dollars worth less than the amounts of debt retired.

Liberal-progressives’ Keynesian macroeconomics deals with abstract categories, such as consumers, rather than with individuals in the real world.  Keynesians expect to push policy buttons and get automatic responses from those abstract categories.  If the government increases deficit spending on anything, consumers presumably will immediately begin spending more and unemployment will drop as business activity revives.  That is why administration officials in 2009 promised, falsely as we have seen, that Obama’s first stimulus plan would keep unemployment lower that 8%.

The Austrian school of economics looks instead to incentives that produce myriad different responses from hundreds of millions of individuals, who do not in fact move like a herd of cattle directed by government prods.  Austrians also emphasize that, even if government deficit spending should add to consumer spending, that does next to nothing to revive basic and intermediate industry such as housing construction, which constitute a huge portion of the economy.  Companies making production equipment or producing basic raw materials will not increase production and hiring until costs and inventories up and down the line have been realigned.  Theirs is a long term perspective, because of their much heavier investment of fixed capital.  Consumer goods producers, in contrast, can quickly increase production of goods if demand increases and can as quickly shut down production lines when inventories build up.

What happens in the real world is that government stimulus spending and the Fed’s low interest rates benefit those groups who get the money first.  People down the line, workers and producers of production goods and raw materials, see few beneficial effects.

Seeking to corrupt the minds of inexperienced students and others in the audience at George Washington University, Federal Reserve Commissar Ben Bernanke gave the official Keynesian-socialist version of the benefits of inflationary wrecking of people’s lifetime savings and standards of living.

Nowhere does he acknowledge that every major economic bubble-bursting since establishment of the Fed in 1913 has been funded by the Fed’s over-expansion of the money supply.  Our housing bubble and accumulation of crushing consumer debt was fostered and amplified by the Fed’s creation of fiat money.

The gold standard didn’t work, Commissar Bernanke opined, because it interfered with the Fed’s ability to play god with the economy.  It is apparently unimportant to him that the value of the dollar and prices remained stable under a gold standard, the economy boomed, and people’s living conditions improved rapidly.

If one is a liberal-progressive-socialist, this sort of thing is intolerable.  It stands in the way of reducing Americans to complete dependence upon our socialized government.

Read this New York Sun editorial for sunlight on the dark recesses of Commissar Bernanke’s speech promoting subscriptions to Pravda.

Read Obama’s $25B Deal Mocks Responsible Homeowners

The administration’s Keynesian bent leads to continual tinkering and intervention in housing and other markets, on the assumption that an academic and political elite can manage the economy by issuing decrees from Washington.  To a larger extent than in the past this may be true, given the regulatory take-over of the entire financial sector.  Don’t expect, however, that government control will revivify the housing market or prevent future booms and busts, so long as the Federal Reserve invariably floods the market with fiat money.

Obama’s latest proposal will delay, yet again, clearing the market of excessive housing inventory by leaving housing in the hands of uncreditworthy mortgagors.  It will also reduce lenders’ future willingness to make mortgage loans, now knowing that the government will abrogate their property rights with mortgage loan cram-downs.

Robert Curry continues his exposition of the influence of the Scottish Enlightenment on the founding of our nation.

The Scottish Enlightenment and America’s Founding: The Drama of the Constitutional Convention
By Robert Curry

“Discussion began on June 1 with the Virginia Plan, introduced by Virginia Governor Edmund Randolph and privately drafted by Madison …It would have resembled the parliamentary system of government that exists in much of the world today…[James] Wilson argued early on for a single President to be directly elected by the people…A small group of delegates, known as “the committee of detail”…produced a draft Constitution in early August.  Wilson, the consistent supporter of an independent executive, headed the committee, and it showed.  The Constitution now vested “the executive power of the United States” in one man.”
John Yoo, Crisis and Command

No doubt it is impossible to quantify the impact of the Scottish Enlightenment on America’s founding.  This is the kind of question that can be endlessly debated by scholars. It simply is the case that many factors contributed and many streams of causation converged to make America’s founding possible.

However, it would be possible to dramatize the impact of the Scottish Enlightenment.  That is of course true because the dramatist’s task is in one sense much simpler than the task of the historian.  The dramatist is free to create characters and structure the action to convey his message; the historian must deal with stubborn facts, with what actually happened.

Remarkably, the actual course of events during the Constitutional Convention, as if by dramatic intent, seems designed to draw our attention to the enormous importance of the Scottish Enlightenment in America’s Founding.

Conceived as a dramatic work, Madison and Wilson were given the roles that drive the action.  Madison opened with the Virginia Plan; Wilson played a central role in the debate and in the final decisive action, the drafting of the Constitution by the committee that gave it the shape we know today.  Remarkably, their central roles also dramatize the impact of the Scottish Enlightenment on the American Founding.  That is so because Madison and Wilson taken together perfectly symbolize that impact.

Madison perfectly symbolizes one half of the story of the Scots in America.  He represents the Revolutionary generation of Americans trained by the wave of Scots who brought the Scottish Enlightenment to America.  As Gary Wills observed, “At age sixteen Jefferson and Madison and Hamilton were all being schooled by Scots who had come to America as adults.” Madison’s tutor, Donald Robertson, was a product of the Scottish Enlightenment at its peak, but the great intellectual influence on Madison was John Witherspoon, also a Scot.  When Madison entered Princeton in 1769, under the leadership of Witherspoon it had become the American university where the great thinkers of the Scottish Enlightenment—Hume, Smith, Hutcheson, Reid, Ferguson and Kames—were studied most intensely.

As for Wilson, he is a perfect symbol for the other half of the story because he was actually a part of that wave of Scots in America. A member in good standing of the Scottish Enlightenment, educated at St. Andrews, Glasgow and Edinburgh at the height of the Scottish Enlightenment, he was also a signer of the Declaration—one of only 6 men who signed both documents.

Bernanke’s press conference announcement again booted the stock and bond markets, but did nothing to boost employment.

At his January 25, 2012, press conference, Federal Reserve Bank chairman Ben Bernanke stated that he expects the Fed to continue imposing near-zero interest rates well into 2014 on short-term Treasury securities. In response, the stock market surged, despite expectations of generally lower corporate earnings and reduced consumer spending. Loose credit and low interest rates usually facilitate stock market speculation.

However gratifying this may to individual investors and pension fund managers, it does little if anything to restore production of goods and services or to raise employment. It also continues to penalize increased savings, which alone provides a stable, long-term platform for economic growth. People living on fixed incomes have had their rates of income on saving chopped around 75% since the Fed first cut interest rates.

As Austrian school economists long have observed, central bank manipulation of interest rates and government deficit spending has an uneven impact on sectors of the economy. When unemployment is high and people are yet freighted with excessive personal debt, consumer spending will be among the last sectors to increase. Instead, deficit spending and loose money lead businessmen to over-invest in long term capital goods, because low interest cost for borrowed money makes even marginal investment projects appear profitable. When business finally revives and costs, including interest rates, increase, those marginal projects collapse and push the economy into recession.

Such was the genesis and progress of the housing bubble and subprime mortgage securities.

Contrary to the aggregate computer models of Keynesian economics, the economy as a whole never has been controllable via government stimulus spending. In fact, as reported recently, the 31% increase in business long-term investment over recent months has been largely concentrated in labor-saving equipment, which ironically adds to unemployment or postpones new hiring.

Liberal-progressive-socialist state planners are not as successful as private investors in satisfying consumers’ wants.

The collapse of Solyndra and Kodak’s bankruptcy filing illustrate the difference between a socialistic planned economy and capitalistic free enterprise. Under state planning, uneconomic companies can be created and failing ones propped up by the state. Under free enterprise, only companies that have a good chance of prospering will be bankrolled by investors, and those that don’t prosper will be left to fail.

Kodak for generations was an international icon of private technological success. Solyndra never even got off the ground.

In the first decades of the 19th century, when the doctrines of socialism were being codified, the concept of social engineering emerged. Belief in the possibility and effectiveness of a planned economy is the central economic doctrine of liberal-progressive-socialism. Presumably disinterested, state-appointed managers would do a better job delivering a more abundant supply of socially useful goods and services than putatively greedy, profit-oriented businessmen.

President Obama’s administration is firmly rooted in that early socialistic vision, modified by Lenin’s Gosplan 5-year programs. Examples are take-over and re-structuring of the banking system and imposing a car czar and labor union ownership on General Motors.

Obama’s penchant for socialistic state planning is particularly evident in federal financing for economically unsustainable “green” energy companies, none of which could survive without direct subsidies, tax breaks, and punitive regulation of private business competitors. More than $1.5 billion has been funneled down the rat hole of green energy projects, of which Solyndra is one of the more notorious.

Contrast Obama’s state-planning with a free-enterprise system in which companies must satisfy consumer desires, while supporting themselves and making sufficient profit to finance equipment replacement and growth. State-planned investment is channeled by political favoritism for special-interest groups and by ideology disconnected from the real world.

Under our original constitutional government, individuals were permitted to keep as much as they could save from the fruits of their labors and to invest their savings in any way they chose. Most people, having worked hard to save some money, are careful about where they invest it. The intermediaries in which they invest their savings — banks, mutual funds, life insurance companies, and pension funds — have a fiduciary duty to invest their depositors’ funds in prudent business ventures that can be reasonably expected to grow and prosper.

The critical point is that the capital necessary to start and to run a business is separated from the business people. Businessmen want money to create or expand their ventures. Lenders and investors want to lend money to businesses only when they can be reasonably sure of getting it repaid, plus a profit reflecting the risk incurred in lending and investing. Capitalism thus has a built-in regulator, a system of internal checks and balances.

To get money, businesses must first convince hard-eyed lenders and investors that a market exists for their products and that they can satisfy that market’s demands. Lenders and investors have strong incentives to avoid bad loans and investments: they lose their jobs and their own money if they don’t.

In liberal mythology capital and business are lumped into one evil mass that is dominated by a single-minded lust to plunder society.