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.
If you liked this post, please share it on your Twitter or Facebook page. You may also like The Collapse of the Brain Bubble – How the federal government will end college education. Check out the index page for more from the Worst-Case Scenario!
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!
If you liked this post, please feel free to share it on your Twitter or Facebook page. You may also like Coverage of the Raleigh Tea Party Rally in Five Minutes with One-on-One Interviews
To listen to the audio version, play the videos below. To read the transcript, simply scroll down. The audio track had to be split across two videos, so click the second one after the first has finished.
Good evening. Tonight I’d like to discuss a battle of modern politics with which every American is intimately familiar, and that is the so-called “War on Drugs”. The discourse surrounding the war is among the most philosophically insightful of all the hot-button issues, and nothing says more about a politician’s true principles than how he defends his position on drug use in America. Through careful examination of political rhetoric we can see that, despite the recent trends towards decriminalizing marijuana, the philosophy of freedom is actually losing the fight for the minds of the American people, especially among the established politicians. Even as drug laws grow more relaxed and penalties less severe, the government is actually tightening its control over the daily lives of innocent civilians.
To the enlightened individualist who recognizes non-violence and the freedom to choose as the hallmarks of great civilization, it is immediately clear that any production, retail, and consumption of drugs or any other products which do not cause harm to others is absolutely none of the government’s business. It is further clear to any literate person that the Tenth Amendment to the Constitution prohibits the federal government from passing any legislation restricting the trade and use of drugs regardless of whether such actions harm others or not. This of course has nothing whatsoever to do with any particular “right to use drugs” or lack thereof; it is simply the moral and Constitutional mandate that one person cannot use coercion against another to control personal choices. To advocate for the repeal of drug legislation is not an endorsement of drug use, but rather a rejection of assault and imprisonment as a response to non-violent actions.
Unfortunately, the battle cry of the mainstream anti-“War on Drugs” movement has become, “Decriminalize, regulate, and tax”, or “DRT” for short. Presumably, the unusual word “decriminalize” is used here specifically to distinguish from legalization, as, for example, minor traffic violations are typically not criminal offenses, but are still illegal. Regulation, of course, means only allowing government-approved vendors to sell government-approved drugs in government-approved quantities. Furthermore, the concept of taxing drugs is invoked with the intent that they would be taxed above the rate of ordinary sales tax, just as cigarettes and alcohol already are. This stance is philosophically void; it signifies no fundamental change in how people interact with one another. If the movement to end the War on Drugs takes the DRT form, it deserves to lose in Congress.
The DRT argument is not a moderate form of the Libertarian stance. It is in fact a moderate form of the statist stance. Advocates of personal freedom must not regard DRT as any improvement whatsoever over current laws for the simple reason that the DRT argument treats the question of government control of drugs as one of degree rather than of morality. Both current laws and the proposed changes accept it as a foregone conclusion that certain people have the authority and the responsibility to use force to help others make personal decisions. Neither side of the debate rejects philosophically the idea that aggression is a moral good, and so neither side is any better than the other.
Some freedom fighters have mistakenly fallen into the trap of thinking that the regulation of DRT only implies that harmful drugs will be kept out of the hands of small children. This is of course not what the legislators intend by the term at all. Keeping drugs away from children is regulating child care, not regulating drugs. What the legislators mean is that they want to control who sells drugs and in what quantities, just as there are already huge barriers to entry in the bars and distillery industries. When they say they will tax drugs, they mean to apply steep taxes to disincentivize the consumption of drugs, as if that is the government’s prerogative or responsibility. The establishment politicians, even the seemingly drug-friendly ones, have no intention of rejecting coercion and nanny-state values in favor of a philosophically individualist attitude towards drug use. Their purportedly new ideas are just a rehashing of the well-worn and thoroughly despised statist programs.
Those who will oppose the live-free-or-die stance of the Tenthers and the Libertarians fall back on tired and intellectually lazy distractions masquerading as arguments. Politicians will try to confuse the issue by citing collateral damage done by drug users operating vehicles on public roads. This has nothing to do with the issue at hand, because drug legislation has nothing to do with roads, and no one has ever seriously suggested that druggies should be allowed to harm others without accountability. The only point put forward by the Libertarians is that drug users who do not harm others should not be forbidden from pursuing their recreation on their own property. Taxing drugs to disincentivize their use has no bearing on whether people drive while high or not, and so the latter should never be brought up in a debate about the former.
By far the most widespread counter-freedom argument on the issue of drugs is the fabled plea for moderation. Almost all politicians and most citizens would not hesitate to agree with the statement that the government should not tell people how to live their lives if they aren’t hurting others. However, when that philosophy is taken to its logical conclusion of repealing all drug laws, the average Congressman will retaliate with a criticism of “absolutism”, arguing that society should not take moral principles to “extremes”. It is impossible to exaggerate how intellectually void and utterly meaningless this is as a defense. To criticize an otherwise valid principle simply for being a principle is to abandon all hope for consistency and morality in the world. To cry out against absolutism for no particular reason save that it is absolutism is the last, desperate act of a failing philosophy in the face of incontrovertible truth. Essentially, a plea for moderation is nothing more than a spiteful admission of defeat. The “Decriminalize, regulate, and tax” camp is as much of a moral failure as the War on Drugs itself, and the only legitimate stance to accept is that of complete legalization and individual choice.
The importance of this philosophical distinction cannot be overstated. Ayn Rand once noted that sociologists and historians go to extraordinary lengths researching trends in history to try to explain events, but that she was able, with relatively little intellectual effort, to predict events by understanding the philosophical motivations of the various schools of thought in modern politics. Even John Maynard Keynes declared “The ideas of economists and political philosophers are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economist.”
I am here to tell you that I am a philosopher. I know why people do things, based not only on their moral values but on the even more fundamental structures of epistemology and ontology that guide their whole lives. Because of this, I can predict the future of politics more accurately than any sociologist who tries to study only statistics and feelings as if they are dissociated from logic and the mind. I have analyzed the theory of the War on Drugs and its associated debate, and I have educated myself as to how others perceive the situation. If you wish to know what will happen with the War on Drugs, I will tell you.
The War on Drugs will never be won. It is far too late for the central planners to put the genie back in the bottle and convince society that drugs are a paralyzing threat to the nation. However, the anti-War movement will not succeed, either. As the federal debt continues to climb and the prison crisis grows ever more severe, decriminalization and the increased nullification of federal marijuana legislation will be inevitable, but full legalization of all drugs will not be realized. The efforts of Congressmen Ron Paul and Barney Frank to promote individual freedom will continue to make repealing drug laws a cool way for establishment politicians to appeal to younger voters, but the establishment will never renounce government control as a fundamental value.
The consequences of this intellectual laziness will be far more severe than is presently believed. In fact, the government will reassert itself in another decade or two with a new crusade for our protection. This post-War on Drugs phenomenon will actually be more restrictive and affect more Americans than the current battle, because it will be excused as being more relevant to the functionality of society. The demon will be bad nutrition and health habits. The so-called fight against childhood obesity will merge with the campaigns to outlaw trans fats and excess salt consumption. Nanny state do-gooders from the Left-wing establishment will incite rage and riot among naive Right-wingers by complaining that unhealthy, lazy, fat people are bankrupting the nation’s health-care systems. They will rally the false fiscal conservatives into an elitist fit and decry the unhealthy scum that pollutes our nation the same way illegal immigrants and the unemployed are resented by the dumber Republicans today. The same underlying principle of the government protecting individuals from the substances they choose to consume under the guise of promoting general health will lead to a far more disruptive and personally invasive institution than the War on Drugs ever has. Granted, it is unlikely that half a million people will go to jail for eating too much salt, but they may be chastised regularly by public school officials. Restaurants will be forced to submit to periodic menu evaluations, and folks with a sweet tooth will be forced to pay high taxes to offset their own choices.
In the long term, mainstream American society will pay dearly for its decision to marginalize drug users today. All tyranny and oppression begins with small groups who are easy to criticize and treat as plagues upon the larger national population. Once the philosophy of individual liberty has been supplanted by state-enforced “wellness” and collective decision-making, the regulations become ever-more invasive and destructive to everyday people. The transition from minor regulation of drug use to absolute Orwellian totalitarianism is merely one of degree, and the inherent nature of government is to gradually exploit whatever power is given to it more and more as time goes by.
Thank you all for listening. I’ve got some procedural and promotional business to attend to tonight. I’ve decided that, in order to diversify my content and communicate better with my listeners, every fifth audio track I publish will discuss topics and questions suggested by the fans. The Worst-Case Scenario has a Facebook page, and you can find the link here or on the Connections and Networking page of the blog. Add the page on Facebook and submit any questions, comments, or ideas you may have to the Discussions section. I want to do these in Discussions rather than on the Wall because that encourages multiple people to post their thoughts on a particular topic. As I said I’ll do these user-submitted episodes every fifth time, so I’ve got one more of my own after this and then I will take submissions. Please post your thoughts and questions for me on the Facebook page and share it with your friends. Thank you.