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Mandated spending is pushing on thread.

August 31, 2010 8 comments

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The folks over at Econ Stories made history in January of this year when they released Fear the Boom and Bust, the first popular, Ke$ha-endorsed rap video about economics. The video depicts world-renowned economists John Maynard Keynes and Friedrich August Hayek arguing about how the federal government’s fiscal and monetary policies affect the “Boom and Bust” business cycle, focusing on the parallels between the Great Depression and the housing and lending collapse which began near the end of the Bush administration and has continued throughout the Obama administration.

As with any rap, the main feature of the video is its lyrics, which contain the topic of today’s discussion: “Your focus on spending is pushing on thread.” This line is a rather esoteric reference, by way of clever metaphor, to monetary asymmetry. These are daunting words, but they actually refer to a very intuitive concept which has eluded policy-makers and even many economists for over a century. The aim of this post is to help the average observer understand just what is meant by the phrase “pushing on thread,” as well as to provide a conceptual base for further investigation of how ignorance of economics has had grave consequences for nations around the world.

The best way to discover economic principles is through thought experiments that investigate cause-and-effect relationships. Suppose, for example, that the average individual eats out at restaurants or bars about twice a week. If the government were to impose a law mandating that no person may eat out more than once a week, it would obviously have a negative impact on economic activity. In fact just about everyone can guess this if asked. Unfortunately, not so many of us can really explain precisely what is meant by “economic activity” or how the government’s new rule reduces it. Nevertheless, we understand instinctively that economic activity must be depressed by forbidding people from eating at restaurants.

What actually happens in a situation like this is as follows: Consumers, who at any given time have only a certain amount of liquid assets (money) they can spend, are willing to spend some of their assets at restaurants. However it may be that they decided to eat out twice a week, that’s what they’re willing to do. When the government declares that they may not do this, it prevents economic transactions from occurring. This is “bad” for one simple reason – people wanted those transactions to occur. Specifically, restaurant owners and restaurant customers wanted to make an exchange of money for food. They wanted to do this because each of them valued what the other had more than what they were giving. The customer would rather have a meal, and the owner would rather have cash. If the transaction occurs (the customers eat at the restaurant), everyone feels better off than before. If the government prevents this, economic activity – specifically, the exchange of assets in a beneficial way – is diminished.

Such a law won’t cause all of the consumers’ wealth to go to waste, of course. By preventing people from patronizing restaurants, the government induces them to do something else with their money. However, whatever it is that they decide to do, it is important to remember that it will always be their second choice. They would rather have spent their money on eating at a restaurant than whatever they spend it on instead. Therefore, the value of what they buy with the money they would have used at restaurants will be less to them. They will be worse off. Similarly, the restaurant owners will be worse off, even if they leave the restaurant industry and take up another profession. This is their second choice profession – it was not the most appealing and profitable venture for them. The transactions that people wanted to make to increase their lot in life have been prevented by the government, and whatever is substituted is by definition less beneficial.

Thus it is now clear precisely how a government mandate against eating out more than once per week reduces economic activity, in the sense of forcing a real reduction in beneficial transactions. The concept of pushing on thread enters if the government attempts to employ the reverse idea. Suppose, now, that a law is passed which requires each person to eat out at least three times per week. Remember the assumption that the average individual eats out twice per week. If limiting the amount that people can eat out has the effect of reducing economic activity, perhaps mandating that people eat out more often will increase economic activity. Certainly, restaurant owners might tend to think so. As there will be more transactions in the restaurant industry, revenue will go up for restaurant owners, some of which will be passed on to their employees. Indeed, more restaurants will be built, and that will create jobs in construction, cooking, and waiting. Consumers will have more meals, and probably better ones, too.

It would be great – right? Not at all. Mandating more consumption of products and services does not have the opposite effect as mandating less. If anything, it actually has the same effect, as total per-capita product still declines. This is the essence of the “pushing on thread” metaphor. If the government’s policies impacted the economy in a manner that were so easily manipulable and reversible as, say, a door – pull to open, push to close – then it is doubtful such highly educated experts would be hired to determine the government’s policies. Instead, though, the effects of policy are complicated, and the more they are analyzed, the more depressing the conclusions become. Mandates and regulations pull down, but can not push up, on the health of the economy.

To see how this is so, recall that consumers have only a certain amount of money to spend at a time. They must budget this money somehow; spending infinitely is not an option. Therefore, as people are forced to spend more and more at restaurants, they must by definition make sacrifices elsewhere. Perhaps before a person went out to eat twice a week and went to the theater once. Now he goes out to eat three times, but stops going to the theater to compensate. This, again, is not an even trade-off. He is actually worse than before, because he has stopped doing something he wanted to do – going to the theater – in favor of a second choice option. He didn’t want to spend all that money at a restaurant, so he is by definition worse off if he is required to do so.

Similarly, the business owners also take a hit in productivity. Obviously the owners of pre-existing restaurants will see a rise in profits if a law were passed requiring more visits to restaurants. Yet what is also true is that the owners of theaters must see a decline in profits, as well. As restaurants are built in the weeks and months after the law is passed, so also theaters are closed. Small business owners and their employees will shift industry. People will quit their jobs as theater directors and go to work in food service. Again, this is a second choice. Again, it is by definition worse than what was in place before. The converts from other industries to the food industry are taking jobs they weren’t trained to do in order to satisfy a fabricated demand that doesn’t really exist except that the government requires that it does.

Economists and politicians may preach about the stimulus effects of increased spending in the restaurant business. The newspapers scream headlines about the new jobs created by constructing more restaurants to meet the growing demand. Yet all of this is in the spirit of the broken window fallacy, commenting on the visible benefits of a transaction while ignoring the unseen opportunity costs. The idea put forth is that any economic transaction is by definition a good one, when in fact only a voluntary exchange benefits both parties involved. When praising the activity generated from a mandate to consume, it is necessary to ignore or dismiss the activity which would have occurred in the absence of the mandate – and that activity would have been preferable to both consumers and producers.

One might imagine that policymakers and politicians had by now come to understand the lesson in this simple parable of restaurants. At the very least, they certainly have hired economists and analysts who are too educated to fall for the basic fallacy of pushing on thread – of assuming that the opposite of an action which produces a result will produce the opposite result. Since elected officials tend to be of above average intelligence and education level, and since the federal government has many panels of experts with decades of experience in economics, it is to be expected that, although government policies may not always be perfect, they aren’t as utterly naive as requiring people to eat at restaurants and then declaring an improvement in the economy.

Aren’t they? It seems not, as the past three years have revealed an ever-increasing role of government spending and government-supported consumer spending in the name of “stimulating” the economy, without much consideration for the fact that it is impossible for such policies to increase total productivity at all. Remember the Bush package, when you and your significant other got mailed a check for six hundred dollars in order to stimulate the economy? The stated goal of this policy decision was to prevent an economic collapse and help boost GDP in the face of an expected moderate decline.

Well, it didn’t work at all. GDP ended up dropping far more than predicted, not in spite of the stimulus, but because of it. In fact, Bush’s idea failed so completely that Obama expanded upon it and extended it to affect more people. At every turn, with every new stimulus program, of which there have been about a half dozen since the housing crisis began three years ago, the federal government has sworn that there would be a demonstrable increase in GDP as a result, and every time real GDP (adjusted for inflation) has actually fallen.

This is by no means the extent of the damage – examples of government destruction rationalized as construction abound. It turns out that Barack Obama actually pulled the “mandate that people eat out” trick, only he did so with cars. The infamous Cash for Clunkers program, which one might argue is better termed “the General Motors bailout,” required Americans to buy new cars – with their own money, funneled through the federal government by taxes. Essentially, Obama offered a subsidy, funded out of tax-payer money, for people to scrap old cars and buy new ones. The program was sold on the claim that the act of buying new cars would spur economic growth.

It did not accomplish this, and it could not have under even the most generous interpretation. The philosophy of the program was flawed at its core, because it presumed that the activity generated by purchasing new cars must be good activity – ignoring the fact that, if it were beneficial to buy a new car, people would simply do that on their own. By taking tax dollars, which are of course collected by force, and demanding that they be applied to the purchase of automobiles, the government incentivized allocating resources to one particular sector of the economy, but by definition took resources away from other sectors where consumers would rather have used them. Requiring that people spend their money on a new car is no different from requiring that they spend it at a restaurant, and the damage done is exactly the same. Whatever else people would have spent their money on instead if given the choice, that was better for them than the purchase they were forced into. Ultimately, though, this was lost on policymakers, because they rationalized their decisions by observing the economic activity of buying cars and ignored everything else that money could have been used for.

When the government gets worried by how much of people’s money it is taking to fund purchases they didn’t choose to make, it has another card to play, which is monetary inflation and deficit spending. For a hundred years, Keynesian economists and federal-level politicians have struggled to convince the world – both the people in it and physics itself – that monetary policy allows the government to spend money it doesn’t actually have, if it’s careful enough. All manner of nuanced methods have arisen towards this aim. From the esoteric quantitative easing to tried-and-true manipulation of bonds and printing presses, an academic field and a sector of industry has grown up around selling the notion of the free lunch. The government, it is claimed, can fund programs with other methods besides simply taking money from individuals.

This, unfortunately, is not true. The government cannot create wealth out of thin air, no matter what elaborate practices its banks may employ. Whatever government money is not taken from individuals expressly through taxation is ultimately taken through inflation, the devaluation of savings accounts. When the government bails out banks with trillions of dollars of unofficial spending, this money is taken from the savings accounts of all Americans, especially the middle class, whose combined liquid assets represent the bulk of non-industrial capital. Literally, dollar bills and other written representations of money are created by the government, which the elites call “injecting money into the economy,” and the result is that the value of the dollar declines.

As the dollar is weakened, the ability of savings to buy real products and services decreases proportionally. That means that a person who used to be within a month of having enough money saved up to buy a boat, or who had savings to support his family for a year in case he lost his job, or who was preparing to send his children off to college, is now able to buy less than he otherwise would have with the same amount of dollars. This, then, is the cost of the bailout, and fits the exact same model as the fabled restaurant mandate. The government forces individuals to forgo purchases they otherwise would have made voluntarily in order to pay for a mandated bailout of corporations whose unwanted products and services failed to produce profits – all in the name of stimulating the economy.

The economic crisis has lead to the government fully doubling the monetary base in just a few short years. The long-term consequences of this will be the establishment of recession conditions as the “new normal.” The economy will not improve – it cannot improve – so long as the government continues its policy of mandating spending at levels above what would naturally occur. The American middle class individuals do not want to dig into their savings to bail out enormous banking corporations that have mismanaged their money. They do not want to buy new cars at a time when their income level is uncertain and the bare necessities are of immediate concern. When the government disrespects their decisions in managing their finances, it is only destroying any hope of recovery. Policies that focus on spending are pushing on thread, trying to create a stimulus but ultimately just allocating precious resources where they don’t belong. If Americans want a better future for themselves, the only option is less spending, less mandating, and less government.


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Tea Party Plans for Success at 912 Protests in 2010

July 14, 2010 1 comment

This year’s 912 protests promise to be truly extraordinary, as an unexpected and powerful coalition of conservatives, libertarians, new patriots, and principled Americans has formed to plan and oversee the events. The Tea Party Patriots recently released this announcement in preparation for the protests. In it, they explained that the operation now boasts the support of “partners at FreedomWorks, Institute for Liberty, the Ayn Rand Center, the National Taxpayers Union, and the Patrick Henry Center.” The intellectual diversity represented by these various groups, in particular with the inclusion of the notoriously atheistic and anti-Republican Ayn Rand Center, underscores the Tea Party’s commitment to fiscal responsibility, individual liberty, and government openness, rather than to any party lines or hidden agenda.

Perhaps even more impressively, the 912 protests of 2010 will have focal points in three separate cities: Washington, D.C., Sacramento, CA, and St. Louis, MO. The protests were big back in 2009 with just one central event, with about 75 thousand limited government advocates demonstrating on the streets of D.C., and tens of thousands more spread in various smaller cities across the nation. The Tea Party’s decision to expand into three cities this year shows confidence that their plans will be even more successful, possibly even reaching D.C.-sized demonstrations in each region of the States. This ambitious attitude likely stems not only from the large coalition of supporters which the Tea Party has built since 2009, but also from the mounting urgency of making a lasting impression on Congress and America before the mid-term elections 52 days later.

The 912 Project was created by Glenn Beck in March of 2009 to remind Americans of the core values like love of freedom, responsibility and accountability, and respect for God and fellow men that we all felt on the day after the 9/11 terrorist attacks. Over the next several months, the project evolved as the aspects of accountability and freedom were amplified, until they spawned a nationwide taxpayer rally to get the government back to serving the interests of the people, rather than destroying wealth in the false name of American values. The taxpayers’ march on Washington on 9/12/2009 was unprecedented in its size, scope, and influence.

Now the Tea Party Patriots plan to do it all again by coordinating cross-country travel and organizing what could be one of the largest taxpayer demonstrations in the history of the world. Most major cities across the nation will have local events on the big day, but everyone is strongly encouraged to make travel plans to attend the marches in D.C., St. Louis, or Sacramento if at all possible. I will be heading to D.C. from the Raleigh-Durham area. Anyone who wants to join (and you really all should!) can subscribe to my blog by clicking the grey button in the upper-right corner of the screen. You will then receive email updates as I negotiate travel plans from Raleigh to D.C. When enough people are on board, the costs really will not be high, and of course the demonstration itself is free!

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Building a Better Constitution: How to Combat Tyranny, Bureaucratic Drift, and Deviation from Original Intent

August 13, 2009 6 comments

I have grown very concerned at how far this federal Union of States has strayed from its original purpose, how an alliance of sovereign nations designed to raise an army to defend a continent has become a burgeoning country of its own, how the menace Abraham Lincoln declared martial law on his own citizens and conquered free lands, thus changing patriotic pride from that of “the United States are” to “the United States is”, how the statist tyrants Roosevelt and Johnson demolished the free economy which drives the world’s motor and replaced it with pseudo-socialist muck and bureaucratic tiers of wastefulness, how the federal reserve manipulates the value of real currency, and therefore real labor, thus playing the role of puppeteer to the puppets known as our lives, and how the bloated national system of regulations designed to “ensure our safety” contributes the bulk of all violent crimes every year by oppressing our rights to arms, drugs, and any other possessions we so choose.

None of the laws that made all of these actions possible are permitted under the Constitution of the United States of America. Congress was granted certain specific powers, and it was said very clearly (twice, in fact) that all other powers of regulation were to be left to the sovereign states and localities of the union. So it would be an ineffective strategy at this point to try to stop socialized medicine or interventionist warfare by crying out, “It is unconstitutional!” since we can clearly see that no one cares, and that no one has cared for a very long time, about the Constitution. Instead, we should consider how a constitution could be designed so that people would care, so that they would have to care, even centuries after the founders passed on. It is important to understand how the Union’s Constitution failed at keeping the federal government in line, and what must be done to prevent tyranny and drift from taking over.

It should come as no surprise to the rational-minded reader that the first step towards preventing drift is to remove the incentive for it to occur. In the United States of America, this incentive comes in the form of elections. To paraphrase Rush Limbaugh, “No one who wants to be president should be allowed to do so.” This is because there are only two reasons why a person would want to run for any high political office. One is that the candidate wishes to gain money or fame by becoming a political figure, enjoying the spotlight in the news media and public eye and reaping the fruits of excessive salaries and protection services. The other is that the candidate hopes to improve the lives of citizens or strengthen the nation by implementing reform policies that he believes will be beneficial. Both of these are terrible for the Union. Clearly a desire for money or fame will lead a president, legislator, or governor to take actions which are attention-seeking and destructive, not to mention the simple fact that a nation being led around by a bunch of greedy low-lifes is reprehensible in itself. But even more horrifying (and much more common) is the reformist complex, the president who thinks he can help people by implementing policies and changing the structure of the government. These people are passionate about morals, which means that they have a vision in their minds for how the world ‘ought to work’, and they will invariably use their political position to impose on individual liberties to achieve that end. Every enthusiastic, passionate leader with ideals has a concept of a better world, a way that people ought to do things, a system that ought to be in place. The problem is the government has no right to be implementing systems. The means of production, the types of communication, the forms of religion and spirituality, the allocation of resources, these are all things that people with ‘a vision’ try to alter when they get into the government, and that is why a person who wants political power must never be given it.

The vastly preferable alternative to elections is one that has been proposed only rarely by even the most daring extremists, and has never been tried on any large scale in history. Federal offices must be filled by random compulsory assignment. Each county must compile a list of names of all able-bodied, adult non-felons in its area, and randomly choose a name for each position that opens in the federal government (legislators, executives, and judiciaries alike). All of these names must then be sent to Washington so that one person may be randomly selected for each office. The citizens selected must then be forced under penalty of execution to fulfill their respective terms of service to the Union.

The responsibilities of these citizens would be exactly as stated in the Constitution, namely, to uphold and administer the law of the land. Since these are not people who campaigned on some virtuous crusade for reform, they would be able to function much like a jury in a criminal trial, coming to approximately objective decisions based on the letter of the law, not their personal values or ideals about how other people should behave. By having a large legislature composed of totally random choices, a fair representation of actual American people is much easier to achieve. No more would we be plagued by elitist Congressman whose salaries prior to becoming politicians were already five times our own. No more would the president always be a neo-religious figurehead with ‘a vision’ and no sympathy for reality. Would there be idiots in Congress? Yes. But they would be idiots in proper proportion with the total population (about 10%) as opposed to our current proportion (about 95%).

Under a system of compulsory random assignment, no one would have any incentive to appeal to the public eye, there would be no bias towards selecting wealthy and visionary leaders, there would be no ‘middle-aged middle class heterosexual Christian white male who loves his daughter and drives a Chevy’ bonus for Congressmen, and there would be almost no chance of serving a second term. They would simply be ordinary people, obligated by chance to fulfill what ought to be relatively simple administrative tasks. But then that leads to our next point, making government jobs performable by every man.

The federal government rightly serves only to maintain and command an army and occasionally mediate inter-state disputes, as might occur if a felon in one state escapes to another. The only task of the appointed bureaucrats, then, would be to hire the appropriate personnel, namely generals, and raise and allocate funding as the international threat level demands. The perfect constitution must somehow protect against the Congress attempting to undertake any tasks not directly relevant to the aforementioned functions. The way to do this is by explicitly stressing certain very key aspects of legislature:

All bills involving spending must have an explicit purpose. That is to say, the legislature cannot constitutionally approve any allocation of funds via any piece of legislation that does not at its outset specify the project to which funds will be directed and the intent of that project. Then all allocation therein must directly and demonstrably pertain to that project. Legislators who introduce bills which are determined by the courts to obscure the goals of their funding would be decommissioned and have their salaries retroactively revoked. For as long as any law remains in effect, its allocation of funding would be liable to be charged at any time if reason is found to believe that the funding does not actually direct serve the project outlined at the beginning of the bill.

All bills of any kind must have a particular objective outlined in a clause no longer than eighty words. Bills must consist entirely of this objective clause and pages of definitions and administrative procedures. All text that is not included in the eighty words must be defining terms or processes; no mandate or regulation may be present in any bill except in the first eighty words. In this way, we avoid bills that have dubious functions, or that are simply too long to read and understand.

All bureaucrats must be allowed to be charged at any time with violation of their duty to uphold the Constitution, specifically and directly, if it is discovered that they have attempted to obscure the purpose of a bill, alter the original intent of the Constitution, or otherwise avoid transparency in the legal process. If they are convicted of intentionally corrupting transparency, they must be decommissioned and have their salaries retroactively revoked. To prevent people from trying to get decommissioned to avoid serving their terms, an additional penalty of a year in jail should be appended to those who are convicted within the first year of their terms.

All taxes must be collected in the form of gold. Yes, gold. Money must not be drawn from our incomes before we see it. It must not be silently stolen away in sales taxes. The federal government, whenever it needs funding for a program, must send a bill to each American household with a specific weight of gold. That bill must include the name of the act for which it is allocated, and must include the eighty-word objective clause on the back side of the page. That way, every American will know exactly what his money is being spent on.

The bottom line here is pretty simple. Eliminate elections, eliminate the bias towards corrupt government. Make budgeting transparent, and make taxation explicit. Hold Congressmen responsible for trying to conceal their motives. When this happens, people will be able to serve their rightful function as watchdogs and maintain freedom and Constitutionality in these United States of America.

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