Achieving Energy Self-Sufficiency Would Be a Pyrrhic Victory

Everyone seems to agree that it would be a beneficial thing for America to become energy self-sufficient. Many reasons are advanced. The most common are national security and financial reasons. Sometimes these are one and the same; for example, that our oil dollars are financing global terrorism amongst people who at one time embargoed their product against us.

Nevertheless, this is not so. Once one digs into the issue for only a short while, he will realize the heavy costs associated with energy self-sufficiency—costs that negate and exceed the purely emotional benefit—making it, like King Pyrrhus’ victories over the Romans, so costly as to lose the war.

Why Do We Trade?

All the goods and services of modern life are the result of the division of labor carried to immense proportions. Self-sufficiency in anything, whether it be energy or toilet paper, means that we should restrict the division of labor to some extent. Think of our economic world as a bulls-eye. The small dot in the middle would be the goods and services represented by a subsistence economy, such as that of the North American Indian tribes. Small bands of people provided everything they consumed themselves. As capital and the division of labor expand, we move further out on the rings and the size of the economy grows exponentially larger. Instead of hunting our own food and weaving our own clothes, we rely upon the specialized skills of others, who perform only small pieces of the entire process but who perform their process unbelievably efficiently and productively. The division of labor expands to such a degree that we no longer understand how most goods that we consume are produced. We take all this for granted, yet it is a miracle of the free market. The more people engaged in the division of labor, the greater will be the total amount of goods and services available. Of course, the largest possible extension of the division of labor, until we trade with alien worlds, is the entire population of planet earth. (You can be assured that shortly after encountering our first alien civilization, entrepreneurs will be looking for trading opportunities!)

It is clear from this explanation that reverting backward from a more extensive division of labor society to a less extensive one means that society must accept a lower standard of living. There are two main causes for such an unfortunate occurrence—war and misguided economic policy. History is replete with examples of trade restrictions used as weapons of war. This makes perfect sense, too. If an enemy nation is denied trade, its total national product diminishes and its war-making capacity becomes a much larger burden upon the people. This burden may be so great that the war cannot be continued, lest the people starve. Therefore, it is ironic that societies often make war upon themselves! When they restrict the importation of some good, they force their society to revert to a less extensive division of labor, which results in a lower standard of living. Yet almost every country in the world restricts trade to some extent, almost always in order to protect the jobs and capital of some local industry which can no longer compete internationally. Government and special interest propaganda blind the people to the reality of the situation.

Energy Self-Sufficiency Would be a Pyrrhic Victory

The claim that our national security is enhanced by government restrictions on foreign energy imports and increased subsidies to domestic production fails to take into account that society at large is weakened by such action. Government intervenes to force business out of the production of goods more desired by the market and into domestic energy production. Few politicians and/or citizens recognize that an artificial requirement favoring some industry must come at the expense of another. We may get more domestic oil production, but we must have less of something else—the same capital and labor cannot be engaged in two production processes at the same time. If this process is carried far enough, an economy can collapse into backwardness. The Soviet Union is the prime example of our age. Its domestic production of goods to sustain life was so small that the people simply gave up. All production was geared to the military with no regard to the economy as a whole. Those who traveled there at the so-called height of Soviet power, like myself, were shocked at the state of the economy. There was nothing for the people—not housing, food, decent clothing, personal transportation, or even hot water! The Soviet Union had magnificent military hardware but little else. Its military might, achieved by ignoring the needs of the people, was a Pyrrhic victory. Society simply collapsed.

No one knows what sacrifices in lifestyle alone, not to mention capital investment in all other goods required by a modern country, would be required for America to become energy self-sufficient. Undoubtedly, our total energy consumption would be much less than it is today in addition to our loss of other goods. This means that our military budget would have to be cut unless we were prepared to go the way of the Soviet Union and simply ignore the needs of the people. We would be trying to support the same military preparedness on the back of a smaller economy.

All during the Cold War our military budget was a much smaller percentage of our country’s GNP than that of the Soviet Union, yet it equaled if not exceeded that of the Soviet Union in all objective measures of military power. Former economic advisor to Mikhail Gorbachev, Yuri Maltzev, estimates that the U.S. economic base was at least fifteen times that of the Soviet Union. In hindsight, it was no contest. And at no point during the Cold War was the U.S. self-sufficient in energy. In conclusion, rather than enhance our national security, attempts to achieve energy self-sufficiency actually would reduce it.

The Path to Sound Money and a Vibrant Economy

The greatest challenge facing the United States and Western Civilization—which includes all those countries engaged in international trade in order to facilitate social cooperation through the division of labor—is the destruction of money by central banks who have the power to expand their fiat money supply to unlimited proportions. Such fiat money expansion destroys the usefulness of money as a vehicle for communicating value through time and space. What will the dollar be worth in terms of apples and oranges in the future and around the world? No one knows, even when we may predict with a great deal of certainty the quantity of apples and oranges that will be produced in the future and market demand for them. It is not the quantity of apples and oranges that makes future exchange problematic; it is the quantity of money that makes it so.

Because societies have recognized that only a stable quantity of money may perform these crucial services to the economy has money always been a commodity itself with certain characteristics, chiefly among them being its scarcity in nature. For, as Ludwig von Mises has explained, any quantity of money may serve all the functions that are required of money regardless of the size or complexity of the economy. It is the crucial characteristic of scarcity—that is, its quantity—that has been undermined by central banks. Already we have seen the deleterious effects of this debasement of money in the form of repeated and ever more violent boom-bust business cycles. These cycles are the external manifestation of “sick” money; they are NOT the external manifestation of “excessive greed” or any other failing of society’s citizenry. “Sick” money has transmitted its disease to society, not the other way around. Therefore, it is imperative that the United States and other Western nations end the expansion of their money supplies and re-anchor them in some commodity of lasting value, namely gold, silver, or some combination of the two. But…how can this be done? That is the crucial question…the elephant in the living room, so to speak.

Let us first establish that the goal of any currency reform is to end at a stroke the further expansion of the money supply. The expansion of money confers no societal benefit whatsoever. More money does not bring into existence, either in the near term or in the longer term, more goods and services than would be produced without its expansion. The truth of this statement lies in its logic and also in historical experience. But these are subjects for another day. The important point is that ANY further expansion of the money supply causes harm; therefore, it is not a question of gradually reducing the expansion of money. No, we must stop any further expansion by even a very small amount.

First, End Fed and Bank Fiat Money Expansion

In our current fiat money environment, two institutions have the legal ability to expand the supply of money—the Federal Reserve Bank (the U.S. central bank) and commercial banks. Most people understand that the Fed can increase the money supply, but few understand that privately owned banks themselves also have the legal ability to increase the money supply. Although the manner in which money expands can be rather complicated (and needlessly so), I will explain the basics. The Fed can inject money into the economy by monetizing the federal debt; that is, it accepts the government’s promissory notes and credits its checking account. Then the federal government spends the money. This in itself increases the supply of money, as can be easily understood, but there is more. When the recipients of the government’s money deposit their checks, bank reserves increase when the bank of deposit sends the check to the Fed for deposit in its reserve account (a checking account at the Fed that is owned by the commercial, private bank. The Fed is the “bankers’ bank.) Now the banking system has “excess reserves” upon which to pyramid more loans and deposits by a magnitude of from ten times to over one hundred times! All the bank must do is make a loan and credit the loan customer’s checking account. It is restricted in the extent to which it may expand its loans and deposits (in equal amounts) only by the amount of its excess reserves. Remember, the Fed created excess reserves when it monetized the government’s debt. Here lies the danger—under normal conditions banks try to remain completely loaned up, utilizing every penny of their excess reserves by making loans and, in the process, creating money out of thin air. In our large economy, excess reserves normally amount to fewer than two billion dollars, an amount considered to be the frictional amount that cannot be fully utilized. Over the past year the Fed has injected massive reserves into the banking system, and now excess reserves stand at over a TRILLION dollars, or five hundred times the historically normal amount!

The Reisman “First Step” to Neutralizing Excess Reserves

At a Mises Institute Seminar in Long Beach, CA last month, Professor George Reisman presented an intriguing plan to prevent the banks from expanding their lending against this massive amount of excess reserves. He recommended that the Fed create even more reserves! But here’s the twist—the Fed should insert enough reserves of fiat money into the banking system to equal the current level of bank checking accounts, BUT at the same time also require 100% fiat reserves against those checking accounts and prohibit the Fed from creating any more reserves thereafter. This step would do two things. Number one, and most importantly, the banks would not be able to convert those trillion dollars in excess reserves into ten to one hundred trillion dollars of new money. Secondly, it would force the federal government either to tax the people for what it spends or borrow honestly from them. Either method would create a natural limit on government spending, forcing it to prioritize and moderate its plans to those more in line with society’s means.

The Barron “Second Step”--Convert Fiat Money to Commodity Money

Governments cannot be trusted to refrain from violating their own laws. They do so, of course, by passing another law to suspend “temporarily” the previous law which put what it considers to be an undue restraint upon its actions. Therefore, we must return to commodity rather than fiat money. The government could do this by simple arithmetic; it could divide the money supply by the number of ounces of gold it holds to establish a legally binding exchange rate of dollars for gold. Currently the most widely used definition of money—M2—stands at $8.4 trillion, and the government owns 260 million ounces of gold. Therefore, it could provide 100% backing of M2 with gold by agreeing to pay out an ounce of gold for $32,308 and, conversely, to buy gold for the same amount. Presently the price of gold has fluctuated between $1,000 and $1,200 per ounce, so a decision to support the dollar at this dollar-to-gold ratio would have unknown economic consequences. Better for the government to establish the ratio at a level closer to the current market level for non-monetary gold. But how can the government do this? If it prints more money to buy gold in the open market, it would not solve its problem—it would have even more fiat dollars to back by the new quantities of gold it received. But, the government has other resources! The government is like a cash-poor but property rich relative--it owns vast expanses of valuable land. In fact the government owns roughly 30% of the landmass of the United States, mostly in sparsely populated areas west of the Mississippi and in Alaska. This is its ace-in-the-hole.

Selling Government Land for Gold Is Doubly Beneficial!

The government has no just cause for owning more land that its normal day-to-day operations require, such as enough land for its military bases and other government office buildings. Its ownership of lands in the western United States and in Alaska has prevented the development of the resources on these lands for the benefit of the U.S. citizens and the world. Like an anorexic who prefers to starve with nutritious food close at hand, the government refuses to allow the development of valuable resources from its land holdings to feed the resource starved economy of the United States. These lands are potentially the most valuable on the face of the earth. Not only do they hold much mineral and vegetable wealth, but they are located in a capitalist country of entrepreneurs, skilled workers, an honest court system, good infrastructure…in essence, all the factors necessary for successful capitalist development. So, not only would the sale of government land for gold allow for the backing of the U.S. dollar by more ounces of gold and, therefore, ease the transition to a 100% gold standard at a better dollar to gold ratio, it would unleash the productive capacity of 30% of the nation’s land resource! This is not rape of the land any more than a farmer rapes his fertile soil or a timber company rapes its well-managed forests. Selling land allows it to be capitalized and managed for productive benefit into perpetuity, the opposite of government’s so-called management, which is nothing more than locking land away as if it did not exist.

In conclusion, the U.S. can quickly take the necessary steps to return to sound money and at the same time unleash a new, real economic boom. It needs to take steps first to freeze expansion of the money supply, followed by a judicious sale over time of its valuable land holdings for gold. The gold proceeds of the sale would allow the government to back its currency 100% by gold at fewer dollars per ounce. The U.S. would once again have the world’s strongest currency and most productive economy. There is nothing preventing us from taking this action but our own foolish adherence to failed economic theory.

The Fatal Combination

Two factors are driving the United States to totalitarianism and bankruptcy—unbridled state spending and fiat money manufactured by government. Either one is enough to destroy a country, but together the fuse to destruction is much shorter, because the two complement and build upon one another.

Spending Outside the Constitution’s Enumerated Powers

Consider. Federal spending has exploded beyond all comprehension, with the Obama administration desiring to spend even more on new entitlements. He is emboldened to do so, because his party controls a majority of votes in both the House of Representatives and the Senate. It’s a done deal. When I complain about all this, some of my friends say “Well, Pat, we have a democracy and the majority has spoken.” This is suppose to end all debate. A majority wants to spend more on entitlements and that is the end of the matter. But our Founding Fathers would scoff at such a conclusion. They would bring out the masterpiece of their time of trial, our blueprint for the happy society, our glorious Constitution. They would ask my friends to point to that clause in our founding document that authorizes welfare entitlements. It is nowhere to be found. Oh, I know that supreme courts have interpreted things in big government’s favor, but pardon me if I claim that I know how to read just as ably as any of them. Our founding document was designed to be read and to be understood by the common people, not by lawyers and academics alone. Ignoring the enumerated powers listed in our Constitution was one of the most serious breaches of liberty to befall our nation, for it opened the door to corruption. I use the term “corruption” in the Jacksonian meaning of allowing people to use government to attain advantages for themselves, their friends, and their constituents that they could not attain through voluntary means. This is impossible if our government adhered to the very words of the Constitution.

Manufacturing Its Own Money

So, for all practical purposes we have scrapped our Constitution and have opened the door to raiding the productive sector of the economy via the police power of the state. And yet, this is not sufficient for a complete collapse of our nation. That mechanism was set in place in 1913 with the establishment of our third national bank, the Federal Reserve Bank. Prior to 1913, the U.S. had enjoyed what was perhaps the greatest fifty-year period of economic growth of any nation in the history of the world. And it did it without a central bank or government money. Two forces restrained government spending, which is mere consumption of the product of the wealth generating forces in society. One, our political class still held within its bosom a reverence for our Constitution. And, two, the government was required to obtain the money it wished to spend from the people themselves. Government did not have a central bank with its own printing press and, therefore, it could not spend money that it had neither taxed nor borrowed honestly from the people. It was in the position of state governments today. This placed a natural limit upon its spending. High taxes would be political suicide. Heavy borrowing would raise interest rates—the crowding out effect—and harm business. So peacetime spending operated within fairly narrow bounds that were naturally set by the reality of society’s ability to produce and to pay.

But the Federal Reserve Act of 1913 changed all that. Now the government could spend the very money that it itself manufactured. It became a counterfeiter, and not just ANY counterfeiter. It became the one and only LEGAL counterfeiter, with the power to forbid its citizens to use any money not of its own manufacture. In fewer than one hundred years, our dollar has dropped to less than on twentieth of its 1913 value.

Unlimited Government Funded by Unlimited Money

When FDR threatened to pack the Supreme Court during the Great Depression, a frightened court suddenly found that his spending programs were invisibly enumerated in the Constitution. Thereafter, there has been no institutional restraint upon government, and we have arrived at the situation today where no one in government expresses any concern over whether its spending promises can be fulfilled. Of course they can be fulfilled! The government just prints the money and spends it! Fed Chairman Ben Bernanke himself has famously stated that the Fed can expand the money supply to accommodate ANY level of government spending. Zimbabwe, here we come!

Conclusion

There is much agonizing and hand wringing over What, Oh, What can we do to solve our financial crisis. The answer has lain before us all along. It is to be found in a strict adherence to the very words of the Constitution that limit spending only to those areas so enumerated and lays a sacred obligation at the foot of the federal government to PROTECT (and not to manufacture) our money. Let the political process operate within those natural bounds and the U.S. can solve its problems rather quickly. The fatal combination of unlimited government funded by unlimited fiat money will be broken. Government spending will be limited to that expressly enumerated in the Constitution, and the government’s counterfeiting monopoly will be abolished. Ours will once again be a nation in which the government is our servant, limited to protecting our lives and our property, and not our master. All that is required is renewed dedication to our nation’s founding document, our supreme law of the land. I do not see how any politician can take a public stand against the Constitution, for such a stance is tantamount to a call for the repeal of the most precious gift from our Founding Fathers.

Awash in Unwanted Ethanol

Below is my letter to the New York Times regarding its story titled "U.S. Unlikely to Use the Ethanol Congress Ordered". Read it here.

http://www.nytimes.com/2009/11/27/business/energy-environment/27ethanol.html?_r=1&scp=2&sq=Ethanol&st=cse

----- Original Message -----
From: Patrick Barron
To: NY Times
Sent: Sunday, November 29, 2009 4:45 PM
Subject: Ethanol


Re: Awash in Ethanol, 27Nov09

Dear Sirs:
There are several fallacious concepts that drove the ethanol mandates. Number one is that it is in the best interest of the U.S. to become more energy independent. There is no reason, either economic or otherwise, that requires that the U.S. government deny its citizens access to the cheapest form of energy available anywhere in the world, which includes, of course, many unexploited regions within our own borders. Furthermore, it is unconscionable that the government so blatantly penalize the vast majority of its citizens for the undeserved benefit of the farm lobby by using its power of compulsion and coercion to force us to use an inferior (ethanol delivers only three-fourths of the energy value of gasoline) and harmful fuel (as explained by Mr. Wald in his informative article). Scrap the ethanol mandates, allow drilling and refining anywhere in the U.S., and you will find that the so-called energy problem goes away.

Patrick Barron

Reserves Poised to Destroy the Dollar

Our prosperity rests upon cooperation under the division of labor. We all produce just one or a few things, but we produce them in massive quantities. Our productivity rests upon capital accumulation applied to our work. We command the output of others’ work efforts by use of money, the indirect medium of exchange. Without money we would be reduced to a primitive barter economy. Most of us would die. This is the bald fact about the need for a money economy.

The Price Level Determined by the Supply and Demand for Money

How much money is required to purchase the output of society is called the price level, which is determined, in broad terms, by only two things—the quantity of goods available for sale and the quantity of money available for purchasing society’s output. Because we use money as the mechanism for exchanging the goods and services produced in our division of labor society, economists refer to the price level as being determined by the supply and demand for money. But this does not change the nature of the issue. Money merely represents the value the market places upon previously produced goods. Rather than price things in terms of the number of apples an apple grower must exchange in order to purchase his necessities, he uses money. Therefore, its quantity and its demand determine the purchasing power of money.

Say’s Law Explains Purchasing Power

Jean Baptiste Say explained this as clearly as anyone, when he stated that all economic activity tends toward the equilibrium level at which all supply is demanded by purchasers. Most people understand this economic law—Say’s Law—as “supply creates its own demand”. This is merely shorthand for explaining that it is what we produce that becomes the means by which we buy things. Instead of the apple grower exchanging apples for a necessity, he sells his apples for money and then buys his necessities with that money. Money is the intermediate exchange mechanism, but it was his apple production that gave the apple grower purchasing power in the market.

One can now understand the importance of money. Not only do we need something to use for intermediate exchange, but its quantity is critically important too. Expanding the quantity of money provides society with no utility; it merely lowers its purchasing power on the market, disrupting commerce and making it more difficult to plan for our economic future. If we do not know what money will buy in the future—because its supply has been expanded or may be expanded arbitrarily to some unknown level—then investment in long term production processes becomes very risky and we get less of it. And the only way to have more goods available in the future is to expand long term production.

One can see from the above brief discussion of the nature of money as a medium of exchange that it is crucial that the quantity of money remain stable in order for it to provide us with its primary service, which is as a communication mechanism of people’s preferences not only in the near term but also in the future. Unfortunately, it is the quantity of money that is under severe attack today.

Expanding Reserves Means Expanding Money Supply

The quantity of money available in the U.S. is controlled by our central bank, the Federal Reserve Bank (the Fed). Its primary means of control is by manipulating bank reserves, either by changing the ratio of reserves banks must keep at the Fed (increasing the reserve ratio would be deflationary and decreasing the reserve ratio would be inflationary) or by adding to or subtracting from the level of bank reserves. The latter method is the more important of the two. There are several methods that the Fed uses to add to bank reserves--but it is not important to explain HOW the Fed adds reserves as is the fact that the Fed has added MASSIVELY to bank reserves in the past year and continues to add to reserves. The outcome could be catastrophic.

Here are some statistics taken from the Fed’s own website. I will explain their importance further down. All numbers are billions of dollars.

M2 (Cash, checking accounts, savings and money market accounts): $8,333
Total Reserves: $1,122
Required Reserves $62
Excess Reserves $1,060

Notice the level of “excess reserves”. These are reserves of the banks that may be used in the future to increase the money supply. Currently the level of “required reserves” is only $62 billion to support $8,333 billion of the most widely used measure of the money supply--M2. This means that the ratio of reserves to money is only .74%-- less than one percent. Under normal circumstances the amount of excess reserves banks hold is around $2 billion; this small amount relative to our money supply being considered the frictional amount that cannot be utilized in a dynamic banking system. Excess reserves are now a whooping $1,060 billion! Just consider this fact: if a money supply (as defined by M2) of $8,333 billion can be supported by “required reserves” of only $62 billion, then the current level of total reserves--$1,122 billion—will support a money supply of $149,784 billion, eighteen times the current level!

Remember our discussion earlier about how the price level is determined by the quantity of money and the demand for money, where the quantity of money commands all the supply of a society’s output (its “demand”, as we now understand it according to Say’s Law). If the quantity of money can expand by a factor of eighteen, the price level will expand right along with it, because no one expects America’s output--as measured in the number of real things, not its inflated monetary value—to expand by eighteen times its current level. If anything, the environmental movement has brainwashed a large percentage of our citizens to oppose any increase in American production as harmful to Mother Earth. But this is another issue.

End the Fed

Since the establishment of the Fed in 1913, there has been only one prolonged time period in which the banks kept a significant amount of “excess reserves”. You guessed it—the Great Depression years of the 1930s. It is in their nature for banks to expand lending, which concomitantly expands the money supply, until all of the “excess reserves” become part of their “required reserves”. This is how banks expand their business and their profits.

The current very high level of “excess reserves” means that there is no institutional brake upon hyperinflation. The level of bureaucratic irresponsibility at the Fed is bewildering, since the Fed’s primary commission is to safeguard our money. If the Fed bureaucrats have so inflated reserves to the level that our money supply can increase by eighteen times its current level, one is left to conclude either that they are hopelessly incompetent or that there is some malevolent intent to throw the nation, and the world, into chaos. Whatever the reason, we now can see clearly why there is a growing movement in America to “End the Fed”. For so many reasons in addition to the primary one I have discussed here, the Fed has become what President Andrew Jackson called a corrupt institution. Jackson did, in fact, “End the Fed” of his era, the Second Bank of the United States. His was a heroic effort that took both terms of his very popular presidency. Ours is a much more difficult task, since our president shows little understanding of the danger the Fed posses to the American economy and may actually be in favor of taking advantage of the corrupting powers of the Fed, such as the ability of government to spend without taxation or honest borrowing in private financial markets.

The Fed Acts Only According to Its Nature

I sent the following letter to the Wall Street Journal in response to its editorial that the Fed was determined to hold interest rates close to zero.

From: Patrick Barron
To: Wall Street Journal
Sent: Thursday, November 05, 2009 8:55 AM
Subject: Fed Acts Only According to Its Nature


Re: Money on Autopilot

The Fed was created to be an engine of inflation for the purpose of bailing out financial elites at the expense of the rest of the citizenry. To expect it to pursue a financially sound long term policy that would be neutral in its effects on every citizen, elite or commoner, is a foolish pipedream. Our Founding Fathers understood that man is fallible and will pursue his own interests and those of his fellows; therefore, it drafted a model of constitutionally limited government with enumerated powers. Nowhere in that short list of powers will one find the authority to form a central bank with the ability to issue fiat money in unlimited amounts. The Fed acts only according to its ultimately destructive nature; therefore, it must be abolished.


Patrick Barron
PMG Consulting LLC
West Chester, PA and Coralville, IA
www.patrickbarron.blogspot.com

The Swine Flu Arrived Just in Time!

The swine flu epidemic arrived just in time! What! How dare I say something so callous! Just in time for what? Well, just in time to provide an example of what government control of healthcare in America would look like. The Obama administration has attempted to sell its takeover of the healthcare industry by claiming that our admittedly imperfect system provides too little access at too high a price and, here’s the big pitch (drum roll, please), government can do better. The swine flu epidemic illustrates why government is wrong on both counts. Its control of this one, relatively small healthcare issue has demonstrated that its response is inadequate, expensive, and inhumane.

Like many unfortunate economic events, the restricted supply of the swine flu vaccine has its birth decades ago in government regulations that made it less profitable for domestic drug companies to produce vaccines of any kind. These regulations acted as forms of price controls and forced Americans to rely upon foreign suppliers, mainly in France and Australia. Now, there is nothing wrong with importing drugs that can be produced cheaper and/or more timely overseas—this would be just an example of the internationalization of the division of labor—except that the reason for this shift to overseas suppliers was neither cost nor timeliness of production. It was price controls by government that forced domestic drug companies out of the market.

Government did not limit itself to destroying the supply. Next it had to control demand, reinforcing the Austrian School of Economics’ rule that one market intervention causes unforeseen adverse consequences that lead to more market interventions until government, in desperation, takes over both supply and demand. Thusly, the federal government confiscated all the swine flu vaccine in the country and now distributes it through state health officials who, in turn, allocate it (according to their own, mysterious methods) to healthcare providers.

The healthcare providers have no control over how many doses of this vaccine they will receive. All they can do is order it from the government and take what they get, usually with no prior notification so as to plan its distribution. We have seen cases in which consumers stand in long lines on the rumor that vaccines have arrived. Armed police patrol the queue, chasing away those who they deem to be at less risk that others. Then, after hours of waiting, the armed police inform those still waiting that the supply has run out. I’ve seen this scenario first hand before--Moscow and Leningrad before the fall of Communism!—but seldom in the Land of the Free and the Home of the Brave. (Some of us remember the gas lines of the 1970s, another government-manufactured shortage caused by price controls.)

Government ineptitude is there for all to see. The details of who needs the shot and where these high risk groups reside is fairly well known, yet government sends too many doses to some areas and not enough to others. For example, university towns are shorted because the census data used by government officials does not take into account that students actually reside elsewhere than their official residence. This is even more frustrating this flu season, since young people are more vulnerable to the swine flu. Unlike older folks, they were not exposed to a similar virus decades ago. We older folks were exposed and, therefore, the vaccine does not offer us any increased immunity. This is opposite all previous flu outbreaks, where the elderly were most vulnerable. This twist adds to the public’s confusion and concern.

Nevertheless, we all seem to accept government ineptitude as par for the course and do not consider that this potentially life saving treatment could be produced and distributed any other way than by top down, bureaucratic fiat. We just assume that, although government does NOT control other necessities of life, the swine flu vaccine must be. Yet, this situation illustrates perfectly how diffusion of knowledge necessitates that we allow the free market to control vital supplies. The centralized, top down management style of government just cannot assimilate all the information that is needed to provide this product on a rational basis.

I believe that government’s confiscation of the swine flu vaccine was nothing more than grandstanding; in other words, government wanted to be seen to be doing something…anything!…about the swine flu. This is the unfortunate view of many in today’s society who have grown up under the heavy hand of the welfare state: we look to government for the answer to all of our problems. The mainstream media, who hold government responsible for all undesirable life events, reinforces this view. Government has brought this attitude upon its own head by sticking its long, bureaucratic nose into aspects of life that used to be the realm of private responsibility and initiative. Can anyone imagine that a government official would voice the opinion that the free market be left alone to ensure that an adequate supply of the swine flu vaccine was produced and distributed to those who most urgently needed it? Picture the press conference--people are dying of the swine flu and Mr. Representative proclaims that government should keep out of the way of the healthcare industry in its battle with the disease. It is hard to imagine that this scenario is possible in today’s political and media environment.

But, government does not ration food and we do not starve. We do not stand in line at government food stores while armed police walk up and down the aisles telling fat people that they don’t need food and that they should allow the skinny people to have first dibs on the limited supply. Yet this is exactly what has happened with the swine flu vaccine. Government must get completely out of healthcare or the swine flu debacle will be repeated on a daily basis for all of healthcare and all necessities of life, as it was in the Soviet Union.

More Backward Thinking by Al Gore

I sent the email below to the editor of "The Costco Connection" regarding its November 2009 cover story by the still confused Al Gore, who never lets a good crisis--in this case, three crises--go to waste without recommending even more government intervention in out lives.

You can read Al Gore's article here:

http://www.costcoconnection.com/connection/200911#pg27

----- Original Message -----
From: Patrick Barron
To: dialogue@costco.net
Sent: Monday, November 02, 2009 7:54 AM
Subject: Taking Issue with Al Gore


Re: "Separate Problems, One Solution", by Al Gore

Dear Sirs:
Regarding Al Gore's recent article in your November 2009 edition of "The Costco Connection", I take issue with his main premise--that his three crises have a common cause in our reliance on foreign oil. First of all, I do not believe that the global warming case is proven. If there is global warming--and I doubt it--the cause is beyond our power to control. Secondly, our reliance on foreign oil is caused by our domestic laws restricting American production. Professor George Reisman explains this phenomenon in his book, "Capitalism". Just think about the issue for a minute. Change the product from oil to autos. What would be the result of a cartel of foreign automakers conspired to charge Americans many times the price of a domestically manufactured car? Detroit would be a boom town, of course! The foreign automakers wouldn't sell any cars to Americans (their largest customer), permanently injuring their domestic manufacturers. But let us say that our government refused to allow U.S. automakers to expand production. The result would be a victory for the foreign auto cartel. Likewise, restrictions on American oil production gave the OPEC oil cartel undeserved power and wealth at our expense, both in terms of money and security. It has been a disastrous policy, aided and abetted by the likes of Al Gore. Thirdly, the current financial crisis has nothing to do with our reliance on foreign oil. It was caused by the federal government's fiscal and monetary policies. The Federal Reserve Bank inflated the money supply and drove down interest rates, which provided the necessary funds for bank credit expansion. Furthermore, its regulations, such as the Community Reinvestment Act, extorted banks to lend to those with poor credit. Finally, its finance banks--Fannie Mae, Freddie Mac, the FHA, etc.--created unprecedented moral hazard by lowering the standards of the loans they would purchase from the originating banks. Never has government, and its apologists like Al Gore, been so duplicitous in blaming others for the chaos that it has wreaked. The U.S. is a less wealthy and less secure nation as a result.

Patrick Barron

New Frontier of Moral Hazard

I sent the letter below to the Wall Street Journal. Is there any sanity left in Washington? The funniest part (in a black humor sort of way) is that the White House reached this agreement with...now wait for it...Barney Frank! I am reminded of de Gaulle's response to Nikita Khrushchev when the Soviet premier told him that the Russians would sign an agreement with Erich Honecker of East Germany to come to the East Germans' aid in attempting to kick the NATO allies out of West Berlin. De Gaulle told Khrushchev that he was not impressed with agreements among communists and that everyone knew that Honecker was his puppet.

Pat

----- Original Message -----
From: Patrick Barron
To: Wall Street Journal
Sent: Tuesday, October 27, 2009 4:24 PM
Subject: A New Frontier for Moral Hazard

Re: Big Financial Firms Would Bear Cost of Failed Rivals Under Proposal
http://online.wsj.com/article/SB125667090769111065.html?mod=WSJ_hps_LEFTWhatsNews

"Under a deal hashed out between the Treasury Department and a key House Democrat, financial firms with more than $10 billion of assets would have to pay for the rescue or unwinding of a collapsed competitor..." This is a new frontier for moral hazard. At least there always was some hope that government might not want to answer to the public over bailing out big firms with taxpayer money, but now the government will force the failed firm's competitors to bail them out. So, where is there any discipline to conduct one's business in a fiduciarily sound manner, when one reaps all the rewards of success and...Oh, this is deliciously evil!...one gets to make one's competitors pay the cost of failure?

Patrick Barron
West Chester, PA

My Letter to the Wall Street Journal

I wrote the letter below in answer to the essay by Sanford Weill and Judah Kraushaar in today's Wall Street Journal. They are singing the government's tune--the banks did it and they need more supervision, higher capital requirements, etc., etc., all the statist solutions. But, since these so-called solutions will not prevent another crisis, the obvious conclusion for all those who believe in this nonsense is a complete government takeover of the financial markets. They want bankers working for the government in the same manner that they want everyone in healthcare working for the government.

Pat


From: Patrick Barron
To: Wall Street Journal
Sent: Monday, October 26, 2009 4:00 PM
Subject: Missing the Point


Re: Six Steps to Revitalize the Financial System, by Sanford I. Weill and Judah S. Kraushaar, 26Oct09

http://online.wsj.com/article/SB10001424052748704335904574495130612291304.html

Dear Sirs:
As my friend, Professor Thorsten Polleit of the Frankfurt School of Management, is fond of saying, if you do not understand the cause of the problem, you will not propose the proper solution. Mssrs Weill and Kraushaar would have us believe that banks are inherently unstable beasts that must be kept on a short government leash lest they bring down the entire financial system. Thusly, they propose more financial regulation; specifically, greater transparency, a single streamlined and more vigorous regulatory agency (the Fed), more rules for the securities market, higher capital requirements, etc.,...the same "reforms" that other insiders assure us will prevent a similar crisis in the future. Nevertheless, an army of regulators empowered with new authorities and new analysis tools will not prevent another crisis, because the cause of the crisis lies deeper in our financial system. Our fractional reserve, fiat money, central banking system gives banks the ability to create money out of thin air. Our Federal Reserve Bank spurs them on by manipulating said reserves in order to create economic booms for the benefit of elected politicians. But it just doesn't work; the Fed simply creates one boom/bust business cycle after another, with each cycle creating more havoc than the last. Contrary to the implied system deficiencies embedded in Mssrs Weill and Krausahaar's recommendations, banking is as subject to Say's Law as any other business, meaning that banking ever tends toward equilibrium. In a free banking system, unhampered by government money and interest rate manipulation, poorly run banks go out of business and properly run ones survive. Absent socialization of risk by the FDIC, depositors would reward successful banks and punish unsuccessful ones as they do any other consumer product company--by rewarding or withholding their patronage. Those depositors who eschew risk can keep their money in a demand deposit account backed one hundred percent by gold. Those who desire to put some of their money to work would have the option of opening a savings account that was not backed by anything other than the banker's reputation and his capital. Now that is real banking, honest banking, stable banking! And there is no room for government in this free banking system other than to prosecute fraudulent bankers who fail to back their demand deposits one hundred percent by gold. The market takes care of everything else.

Patrick Barron

Avoiding Financial Collapse

Our current political leaders--and their sycophantic hangers-on such as New York Times columnist and recent Nobel laureate in economics Paul Krugman--do not care about tomorrow. They are concerned only with today. Yesterday provides no guidance to inform us of the likely consequences of today’s actions; furthermore, tomorrow never comes, so who cares? Thusly, our government piles debt upon debt with the promise of even more debt in order to bribe the people to remain quiet about the loss of their liberties.

The latest insult to our intelligence is the promise that replacing our current healthcare system with one run by the government will provide not only more access but cheaper access for all. One need only observe that if this were the case, why those of us who are satisfied with our current healthcare plans must sacrifice them in order for these unnamed others to receive better care. Is there something about our current, private care that deprives others of care? Of course not. If government wants to create a new, expanded welfare program, let them sell it to the public in a straight-forward manner as a new spending program that must be financed out of new taxes or cuts in other government programs. Since government is not willing to do this, we are left with the conclusion that providing a new welfare program is not the real purpose of the government’s healthcare proposal. The real purpose is to amass new, expanded powers for government to rule over us. The phony “crisis in healthcare” that must be solved through complete government control of the industry can be explained in no other way.

The Ticking Debt Bomb Will Cause the Dollar to Collapse

But this essay is not about the attempted government takeover of healthcare, but about how government will finance such an undertaking. In the preceding paragraph I said that government can increase taxes or cut current spending on some other program to finance its healthcare adventure. But government has a third, more stealthy way--it can create debt. And this is what government is doing on an unprecedented and unsustainable scale. Total U.S. debt as a percentage of GDP is close to 400% and rising rapidly. As Frankfurt economist Thorsten Polleit explains in his recent essay “An Unsustainable Path to Debt Expansion” (http://mises.org/story/3754), even the most conservative upward trend will cause total economic collapse within a few decades. The cause of this collapse will be a loss of confidence by holders of dollars that debt can be repaid without continuous reductions in the purchasing power of the dollar.

Now, this sounds very academic, doesn’t it? Most folks’ eyes glaze over when one discusses things like monetary debasement, loss of money’s purchasing power, etc., as if these terms were of academic interest only. But what if you knew that that the dollar in your pocket would be as worthless as a Zimbabwean unit of currency within a few years? Would you seek to amass as many dollars as possible, even selling assets to obtain dollars? I doubt it. You would seek to get rid of dollars and dollar denominated assets in exchange for something that would not fall in value. Ludwig von Mises called this phenomenon the “flight into real value”. When the holders of dollars believe that currency debasement (fall in the value of the currency) will not stop but rather will accelerate, they will attempt to get rid of dollars as soon as practicable. Professor Polleit points out that since the dollar’s final break with gold in 1971 the relative debt burden of the U.S. in relation to our economy’s annual production has accelerated from well under 200% to almost 400%. Government’s promise to initiate new programs means that this trend cannot fall but will accelerate. Therefore, we must conclude that the dollar will collapse.

The Only Way to Prevent Collapse

There is only one way to avert total collapse of the dollar—cut government spending and end the dollar’s debasement. The former must precede the latter, because, as Professor Polleit explains, government will not default (technically) on its debt as will private companies. The government will repay its debt in a technical sense only--by paying debtors in debased dollars. But debasement will lead to the collapse of the division of labor society and bring economic chaos on the 1923 German model, which wiped out the middle class and created the psychological conditions for the rise of the national socialist (Nazi) totalitarian state.

Therefore, the only path open to averting collapse is the abolition of government programs and cabinet level departments whose insatiable appetite for spending drives government debt. Government wealth transfer programs are not debt obligations of government. No one holds Social Security debt as one would hold a corporate bond or even a government bond. The Social Security program is just a spending program and may be ended in an instant. This we must do before spending on Social Security, Medicare, Medicaid, the Prescription Drug program, and the new healthcare mandates drive the debt burden to the tipping point. Ending these programs is not the same as defaulting on government debt. It is simply ending tyranny, for it is only the coercive intervention of government that sustains them.

Workforce Deregulation Will Open Job Opportunities for All

At the same time, government must completely eliminate all regulation of the economy, especially the workforce. People who have retired on Social Security and can still add something to the economy must be allowed to do so. Those who have yet to retire on Social Security must be given as much time as possible to plan for a retirement without Social Security. Abandoning all coercive wealth transfers and prohibitions against willing labor, such as minimum wage laws, will reduce the cost of labor and restore full employment. Reducing all the regulatory burdens of government will increase the sanctity of property rights, spur capital accumulation, and cause prices to fall. All this will go a long way toward mitigating the pain that will be suffered by those who currently depend upon government's coercive transfers of wealth in their favor. Once government has slashed its spending on other worthless programs--such as those sponsored by almost all cabinet level bureaucracies other than defense, state, and treasury--it can abolish the Fed and convert the dollar to a private, commodity backed currency, which will prevent government from ever again embarking on such a spending binge. A commodity backed money immediately reveals the true cost of any government expenditure and illustrates for the people the unassailable fact that all government is a burden on the people and not some sort of economic stimulus. At this point the government’s role in the economy will be that as envisioned by our Founding Fathers, as policeman for protecting us against fraud, theft, and coercion. Once again government will be our servant and not our master.

Diminished Authority and Increased Fear

The U.S. government is engaged in a policy of increasing control over the economy, starting with the banking system and major industries first and proceeding, as it inevitably must, to total control. The unprecedented takeover within the past year of major banks and General Motors, once upon a time the world’s largest corporation, has been followed by the establishment of a “pay czar” (currently Treasury Department official Kenneth Feinberg) who makes arbitrary ex post facto decisions about the compensation packages of major corporation executives.

Ludwig von Mises explained in many of his books and articles that government intervention leads to an ever expanding need for further intervention. Take price controls, for example, of which executive pay is but one small element in that government dictates what business may pay for certain services, the services of its chief executive being merely the most visible and public of the services it purchases. The Wall Street Journal reported on Friday, October 16, 2009 that “Mr. Feinberg is reviewing pay for the 175 most highly compensated employees at the firms under his purview, and he has been wielding his power extensively. He recently persuaded Citigroup to unload its energy-trading unit to defuse a potential showdown over a $100 million pay package slated for a star trader.” So, first government tackles CEO compensation and then brow beats business to renege on its promise to give star employees the incentive pay that they had been promised. Apparently contracts, even if only implied contracts, have no standing when a government bureaucrat makes a decision.

Earlier in the article the Journal reported that Mr. Feinberg’s duties were making him highly unpopular: “Government officials have acknowledged privately and publicly that the pay czar is likely to upset both those who think his actions are too intrusive and those who think he hasn't done enough. Mr. Feinberg himself has said he'll need to move to Pluto when his job is over.” Is it not ever so when property rights have been violated? Those who fear the implications of the loss of the rule of law are matched in number by those who desire a complete breakdown in the rule of law and despise the half measures taken by those whom they perceive to be weak in the execution of their extraordinary powers. No one is happy and rightly so.

There is no logical stopping point once the process of economic control by government has begun. Ethically there is no more reason to refrain from setting the compensation package of the lowest position in a business than from refraining to rule upon the same thing for its CEO. Practicality reinforces this tendency. If the CEO’s compensation can come under government review, why not the compensation of his immediate subordinates, the senior vice presidents? And if the government reviews the compensation of the senior vice presidents, why not the vice presidents, as so forth on down the chain of command to the lowest position in the company?

Furthermore, the whole idea of a “pay czar” or any other kind of czar to rule over an important element of our economy suffers from a profound error in understanding how an economy operates. The genius of the free market is that it coordinates massive amounts of diffuse knowledge that no single person or committee could possibly comprehend even with the most sophisticated computers. And it does this coordination of diffusely held knowledge effortlessly, timely, and without coercion of any kind. This is why almost any conceivable good or service is readily available in a free market and why command economies suffer from shortages even of essentials. Command economies lack the coordination of diffuse knowledge that exists in a free market. It is important to note that it is the price system itself that is the medium by which local knowledge is diffused throughout the entire economy. And it is the price system which government action interrupts and perverts. It is as if our body could not differentiate between a hot surface and a cold one. We would not know that we had placed our hand on a hot burner until blisters appeared and the damage was done. The longer we hold our hand on the hot burner, the worse damage we do to our bodies. Likewise, the longer and more pervasive are government’s perversion of the price system, whether perverting the prices business pays its employees or some other price fixing intervention such as farm price supports, the more damage government does to the capital structure of the nation, reducing its ability to meet the real needs of its citizens.

Mr. Feinberg is right to be concerned about whether anyone will be satisfied with his pay reviews, for I saw something similar occur almost forty years ago in Britain, where I served in Uncle Sam’s armed forces during the Cold War. Britain had nationalized shipbuilding at the end of World War II. A number of separate and highly militant trade unions worked in the shipyards. One or more of these unions were constantly on strike, paralyzing shipbuilding because no union member from the other unions would cross another’s picket line. The reason for almost all the strikes was pay, of course. No one ever thought that his pay was just, especially in comparison with the pay of some other union worker in the shipyards. But instead of learning a new trade that was more highly regarded in the marketplace, the union members learned that they could get higher pay simply by going on strike. So union A would strike for higher wages and, since the government owned the shipyards and work would stop in all of the nation’s yards, they eventually would get it. But, this set off a series of similar strikes by the other unions to regain their “differentials”, meaning the pay difference that union A had established, either higher or lower, with all the other unions. So if union A got paid another fifty pence per hour, all the other unions would strike for the same or slightly greater increase. Then if the government eventually granted all the unions their increases as desired, union A would be dissatisfied because others had shared its sacrifices. So…you guessed it…union A would walk off the job again, and the vicious cycle would start all over again. Needless to say, Britain today is not the shipbuilding powerhouse that it once was.

The same dynamic will plague Mr. Feinberg and his staff. It may take a few years, but once labor learns how to play the game, it will constantly seek advantages through political power rather than through self-help, market oriented efforts. One group of workers will demand greater pay, setting off a cycle of work stoppages while all the other groups scramble to regain their relative position in the compensation hierarchy.

This slippery slope to total economic control is described so chillingly by German businessman Gunter Reimann in his 1939 book The Vampire Economy: Doing Business Under Fascism. Mind you, this book was written BEFORE the war, and yet Herr Reimann chillingly describes the chaos of Nazi control over prices and production a mere half-decade after the first Nazi price decrees. Corruption was rampant, because that was the only way business could obtain raw materials; petty (and not so petty) Nazi bureaucrats learned how to exploit their tremendously powerful positions in the ever more centrally controlled economy. Naturally, the Nazi government proscribed suitable punishments for those who did not abide by its price dictates and who engaged in bribery of public officials. Nevertheless, corruption increased because, as Herr Reimann explains, economic laws still existed and corruption was the only outlet left before bankruptcy. Thus, the citizen’s view of the government changed radically. Now anyone could become a criminal, from a top industrialist to a small shopkeeper, just because he did what was necessary to stay in business.

Herr Reimann makes the following revelation, which is not something that we in the Allied camp ever considered about the Nazi regime: “This has the effect of lowering the authority of the State; on the other hand, it also makes the State authorities more feared, for no businessman knows when he may be severely penalized.”

Increased fear and lowered authority—does this not describe the current state of government in America? On the one hand we fear the long arm of government at all levels. On the other hand, our regard for the state—what Reimann calls its authority—ever diminishes. This is the fertile ground for radicalism, something that we have never experienced in America to any great extent. But when its own overreaching causes economic chaos, government’s authority diminishes among all economic classes and radicalism becomes a possibility. This is not something we would wish to live through. Our Founding Fathers fought for the only radical change that we should ever desire. And they provided a system of republican government for the GRADUAL changes that the citizens may deem necessary over the years, decades, and centuries to come. But a weakening of the state’s authority, despite the increased fear that it engenders, increases the possibility of radicalism. Seldom in the history of the world has a more benign and liberal (in the classical sense) government emerged following radical change.

My Letter to National Review Magazine

Thursday, October 08, 2009

Re: “Pop Economics” by Kevin D. Williamson

Dear Sirs:

In “Pop Economics” (Oct 19, 2009 Edition) Kevin D. Williamson exposes as a lie the government’s self-serving rationale for further financial regulation—that greedy, overpaid, and irresponsible executives caused it all. Although he does not attempt to provide a complete and systematic explanation for the mess in which we find ourselves, Mr. Williamson and his colleague Stephen Spruiell like the moral hazard argument advanced by Jeffrey Friedman of the University of Texas that “Basel rules encouraged banks to load up” on assets that carried more risk than initially perceived.

Regulations account for some of the problem, to be sure, but the real, underlying cause was bank credit expansion not supported by real savings. Earlier in his essay Mr. Williamson made the perceptive observation that the bankers “all made similar bad decisions at the same time.” In his classic mid 1960’s book "America’s Great Depression", Murray N. Rothbard called what seemed to be inexplicably poor decision-making by America’s elite bankers as a “Cluster of Errors”. Mr. Williamson asks the same question as Rothbard and comes to the same conclusion—“they thought they were making good investments on behalf of their shareholders…” But what led them down the garden path? What can explain the suspension of Say’s Law--that markets tend toward equilibrium? These errors should have been self-correcting; poor investors lose their own and their clients money and are trusted no more.

Mr. Rothbard’s explanation, backed by meticulous statistical analysis grounded in Austrian School economic theory, is that inherent, fatal flaws in the not-two-decade old central banking system (the Fed), unleashed the boom/bust business cycle. Unfortunately, nothing has changed since 1929. The Fed still causes the speculative boom. And, although the malinvestment eventually reveals itself, government still tries to short circuit the bust and reflate the bubble. Hoover-FDR have been reincarnated in Bush-Obama.

The solution is obvious—take monetary control out of the hands of government and place it back into the hands of the market. In other words, end the Fed and return to whatever private money is accepted by market participants. Without a doubt, the market would return to the gold standard.

Patrick Barron
West Chester, PA

TWIN PILLARS OF CIVILIZATION UNDER ATTACK

Economic prosperity depends upon social cooperation under the division of labor. The larger the pool of people who cooperate with one another by specializing in the production of one or a very few goods or services, the greater will be their individual productivity and the greater will be the total amount of goods and services available for man’s economic benefit. This fact is undeniable, both from an empirical and a logical perspective. Of course, the largest possible pool of people would encompass the entire world. We need only look around us to recognize the benefits of worldwide trade—coffee from the tropics, wool from Australia and New Zealand, electronic goods from Asia, manufactured goods from Europe, not to mention oil from the Middle East, to name just some of the most obvious examples.

Given the universal acceptance by economists that the division of labor accounts for all economic progress and that worldwide trade advances the division of labor, one would expect that mankind would be on a one-way escalator to higher and higher overall prosperity. But such is not the case. Even a supposedly free, capitalist country like the United States suffers almost routine, wrenching economic crises. Others seem on the road to permanent prosperity only to sink back into the Dark Ages, such as has occurred in many African nations since the spate of post WWII de-colonizations.

Statist apologists such as Nobel Laureate Paul Krugman blame the very foundation of our prosperity—capitalism--for these crises and demand that governments take a guiding role in important economic affairs. A frightened citizenry, constantly bombarded by this message, know that government has the power to redistribute wealth and, at least temporarily, protect vociferous, well organized, and high profile special interest groups. Such has been the case with the auto unions. They can deliver the make-or-break votes to key politicians and wage a well-financed publicity campaign to quiet dissenters. But one does not need to be a rocket scientist to understand that government cannot bail out everyone in society. If it could, there would be no crises in the first place. So either government interventions for the benefit of special interests is limited so that the real economy is able eventually to cure itself, or continued interventions will create what has been called a “vampire economy” marked by capital consumption. Then the plundered many will sink further and further into destitution until, eventually, the plunderers themselves will find fewer and fewer sources of capital to plunder and the entire economy will collapse. According to former Gorbachev economic advisor Yuri Maltsev, this was the scenario, carried out in the most brutal fashion, that caused the collapse of the former Soviet Union.

In contrast to capital consumption, capital accumulation proceeds from the above-mentioned process of social cooperation under the division of labor. But one must understand the policies that cause the two different outcomes. In other words, what policies aid and abet a division of labor society? It is that question to which we now turn and from which discussion will be revealed the twin pillars of civilization—money and the rule of law.

Money and the Division of Labor

In order to specialize, man must be able to exchange the goods and/or services that he produces above and beyond his own needs for goods and services produced above and beyond the individual needs of others. There are two ways to accomplish this exchange—direct exchange and indirect exchange. Direct exchange, also known as “barter”, requires a coincidence of wants; that is, A produces what B wants and B produces what A wants. The two agree to exchange. But direct exchange has limited usefulness. What if A does not desire the production of B, even if B desires the production of A, or vice versa? And how can one ever expect to produce something like a locomotive or a jumbo jet and exchange it for any ordinary necessity of everyday life such as bread? It is obvious that man would produce only simple goods and live a very limited economic existence indeed.

But, man discovered that some goods were always in high demand; therefore, he traded for them, secure in the knowledge that he could re-trade them for goods that he really desired. Thus was born, gradually over time, indirect exchange. All indirect exchange originated in some useful commodity, and over the centuries many commodities have performed the function of indirect exchange. But the precious metals, especially gold and silver, have always been used as indirect exchange, even when in competition with other commodities. The precious metals are rare, difficult to counterfeit, easily stored, impervious to the elements, divisible into small amounts for small transactions, etc. Now man would be able to extend the division of labor into more time consuming and capital intensive goods and services.

The Law and the Division of Labor

But it was not sufficient to discover indirect exchange only. In fact, indirect exchange made it easier to obtain the goods and services of others without exchanging anything at all. In other words, man could steal money or, worse yet, counterfeit money. Whereas, it would be difficult to hide thousands of dollars’ worth of some every day good, such as bread, and use it oneself or exchange it over a long period of time, money is ubiquitous and imperishable. That is, all money looks the same, is readily accepted everywhere, and does not lose its usefulness over time. Therefore, over the centuries, man adopted standards of civilized behavior and sanctions against those who failed to follow such standards. Thus arose a body of law, enforced by government’s criminal justice system, to make man secure in all his property, especially his money. Man had delegated his inherent, God-given right to self-defense to government to protect his life, liberty, and property. Without such laws and without powers delegated to government, man never would have been able to fully exploit the power of money to extend the division of labor to greater and greater levels of production. Civilization would have stalled at a very low level of existence, perhaps no greater than that of the indigenous tribes of North America.


Money and The Law Under Attack

Today both money and the law are under attack, boding ill for the future of civilization. Money no longer is based upon a useful commodity; it is fiat money and may be manufactured in unlimited amounts by the very man-made organization founded for its protection—government. Furthermore, government has become the prime tool by which certain groups in society obtain the production of others without freely trading a good oR service of their own. Whether by the name of “welfare economics”, “economic stimulus packages”, “trade tariffs and quotas”, or some other outrageous sophist claim, government dwarfs even organized crime as a group of bandits to be feared, for there is no legal basis for protecting oneself and one’s property from its predations. Furthermore, the third party beneficiaries give their wholehearted approval to government’s counterfeit money production and resource redistribution operations! Thus, we witness the sad spectacle of government, formed to protect money through enforcement of the law, becoming instead the agent for civilization’s destruction.

Corn for Ethanol

I sent the following letter to the Wall Street Journal today in response to a lobbyist's defense of the increased use of corn for ethanol production

Dear Sirs:
In his role as president of the American Corn Growers Association we should expect nothing less from Mr. Bob Dickey than that he make as good a case as possible for increasing the demand for his product. ("Ethanol Has Boosted Corn Output"--Letters--18Sep09) Nevertheless, each of his rationales defending the increased use of corn for ethanol production fails sound economic analysis. The fact that U.S. corn production has increased is to be expected when demand for any good increases. But what other agricultural good was sacrificed in order to increase production from the artificially boosted demand for corn? Mr. Dickey says that the price of corn is down and, therefore, its use as a fuel has not priced other uses out of the market. But the price would have fallen even further without the government's mandate for ethanol production. Finally, no one doubts that the government's mandates for ethanol production is good for farmers, but is it good for everyone else? Of course not. The point of any government intervention is to prevent the free market from guiding production and consumption decisions based upon man's true preferences. If ethanol were such a wonderful product, it would need no government mandates to force us to use it.

Patrick Barron

UNFAIR TRADE PENALTIES PROMOTE POVERTY AND WAR

The Obama administration proposes to slap penalty tariffs on imported tires from China. It accuses the Chinese government of engaging in unfair trade practices, namely, subsidizing its domestic tire industry. Beyond the spectacle of starting a trade war with one of our largest and most important trading partners who also just happens to be a nation that is emerging in fits and starts from being an implacable enemy, there is no ethical or economic justification for imposing said penalties. The public face of this seriously flawed policy is that Chinese subsidies destroy American tire manufacturers and cost American jobs. The private face is that once again the rest of the country must pay higher prices for lower quality union made goods.

Penalty Tariffs Violate Man’s Natural Rights

It doesn’t matter if the accusations about Chinese subsidies were true! Even if it were true--which it most assuredly is not!--that Chinese subsidies destroy American industries and cost Americans jobs, our government has no ethical basis to forbid by its coercive police power our citizens’ right to purchase any legal good from any person or company wherever it may be located on the face of the globe. This is not a utilitarian argument or even a foreign policy argument, although both are perfectly apt in this case. It is an argument based upon the rights of a free people, which may not be legally abrogated by the state. As American citizens we delegate to our government only certain powers. Our economic freedom is not one of those powers so delegated. Economic freedom is part and parcel of political freedom, for a man is not politically free if he must seek the permission of his government to engage in trade in order to sustain his earthly body. If a government may deny man the right to purchase tires, it may deny a man the right to purchase food. And, come to think of it, that is exactly what the U.S. government does when it slaps protective tariffs on sugar cane from the Caribbean! Cheap sugar is snatched from our very mouths in order to force us to purchase more expensive domestic sugar. And now we are not allowed to purchase Chinese tires. This is a violation of natural law and, therefore, the law is illegal and should be repealed forthwith. Nevertheless, there is a lot more to say about this matter from an economic perspective.

None of Our Business

What China does internally to subsidize its home industries is none of our business. Let me repeat that—it is none of our business. Chinese subsidies harm Chinese citizens, just as American subsidies—such as farm subsidies—harm Americans. Both are to be regretted, but it is our business only to lobby for the repeal of American subsidies. Let us set a good example. If China wants to tax its citizens so that Americans can live more prosperously, that is its business and its business alone. This is the case for all supposed “unfair trading practices” that allow Americans to purchase cheaper goods from abroad. Why must our government interfere with something that benefits its own citizens, especially when it creates ill will with the rest of the world?

Case Not Proven, Because It Cannot Be Proven

It is impossible for the U.S. to isolate any one cause as the source of decline of any American industry. There are too many factors that can cause a company or an industry to decline or fail to reach what its supporters may feel is its full potential. This is especially true of American unionized industries. First of all, unions force upon these companies higher wages than would be the case in the absence of government supported legislation requiring the companies to negotiate with the unions. This cannot be denied, since the legislation exists and the unions exist. Why do they exist if not to secure higher wages than other Americans, not members of the union, would willingly accept? Unions intimidate non-union workers (and their own members!) to prevent them from accepting jobs at less than the rate that the union leadership arbitrarily demands. Furthermore, they trespass upon the companies’ factories and destroy its physical plant, while the police and the courts turn a blind eye. The fact of union violence and government’s failure to protect industry property cannot be ignored as a major source of the decline of many of previously strong American industries.

In addition, American companies are hobbled by a myriad of labor and, increasingly, environmental regulations, all of which add significant costs to company products and prevent them from employing their labor and equipment in the most efficient manner. Local governments literally extort companies to provide public services in order to obtain permission to expand their operations. This is a well-known and open secret of local government operations. Ten years ago Boeing, America’s giant aircraft manufacturer, moved its head offices from Everett, Washington to Chicago, Illinois to protest the city of Everett’s continued demands that Boeing fund its wish list of public goodies.

International Expansion of the Division of Labor

I’m sure there are many more factors that must be considered when a company loses its international competitiveness, and we haven’t even discussed the obvious one of entrepreneurial error. How can any one of them be singled out as THE cause of its difficulties? But beyond this looms another, more basic, factor that accounts for the decline of some home industries—the normal process of the expansion of the division of labor beyond our borders. Just as no one would suggest that a town or a city or a county or a state must be completely self-sufficient in all things--because the expansion of the division of labor operates to destroy old industries and old jobs and create new and more productive ones in their place, the “creative destruction” phenomenon articulated by Joseph Schumpeter--one must not look upon international trade as some sinister plot by foreigners to destroy our country job by job and industry by industry. International trade represents an expansion of the capital base to include the workforce of the entire world.

Specialization, just another word for the division of labor, accounts for all of man’s economic progress. It cannot be otherwise. Just as we as individuals no longer hunt or grow our own food, we as a nation no longer produce everything that we once produced. To say that others can do this for us more cheaply is but another way of saying that we have better things to do. When the costs of the factors of production upon which an industry depends rise in one country, this means that these factors are more urgently needed elsewhere for the production of goods that consumers value more highly. This includes labor. Cheaper foreign goods free factors of production so that they may be employed to produce these more highly valued goods. There is a reason that most advanced nations import certain products from developing countries. Developing countries are like new entrants to the labor market; they perform the less skilled jobs first before moving to more highly skilled ones later. This process is taking place even among developing nations themselves. China itself is losing some manufacturing jobs that require lower skills to less developed countries like Indonesia. This is a process to be admired and encouraged. It is in everyone’s best interest, both economically and politically, for the entire world to become more capitalistic.

The Division of Labor Promotes International Peace

A little considered byproduct of the expansion of the division of labor as represented by increased foreign trade is that it promotes peace among nations. Of course, governments seem to do everything in their powers to thwart this process, erecting trade barriers to foreign products and penalizing supposed “unfair trade” practices. But ask yourself this question: do you want to kill your barber, your grocer, your filling station owner? Of course not, because these people perform valuable services for you. But one could also say that they have taken away some of your employment. At one time people cut their own hair or had a family member do it for them. More people lived on farms and grew much of their own food. They produced much of their own fuel—no, not gasoline, but oats to feed their own horses. Do we wish to return to this more primitive, meaning less capital intensive, time? Of course not. They why do we want our nation’s business owners and laborers to continue to produce absolutely everything that we require? The fact is that more international trade means a higher standard of living for everyone involved, and the “creative destruction” of some jobs and industries is a consequence and not a cause of this beneficial process. It is a peaceful process among cooperating peoples around the world. As this process deepens, we understand that we NEED the production of the rest of the world and they NEED ours. This creates a worldwide culture of cooperation and peaceful intercourse that leads to higher standards of living among peoples everywhere. Government trade barriers promote the opposite; government trade barriers promote impoverishment and war. The choice is clear.

Two Recent Letters to the Wall Street Journal

Monday, September 14, 2009

Re: China Strikes Back on Trade

Dear Sirs:
Regarding the brewing trade dispute between the U.S. and China over new U.S. tariffs on Chinese tires, you make this statement:

"The effect on the U.S. is less clear because China has not imposed sanctions."

But we do know the effect on the U.S., and it is clear as day--U.S. consumers will pay more for tires. That is the whole point--reduce our standard of living by denying us the products of overseas trade in order to benefit a few U.S. tire manufacturers and their union members. The Obama administration is dividing the country into those whose businesses and occupations will be protected by the coercive power of the state and those who are not members of this politically connected group and must pay.

Patrick Barron


Tuesday, September 15, 2009

Senseless and Murderous Drug War

Mary O'Grady explains the damage done to our southern neighbor by our senseless war on drugs. She details the murders of law enforcement officers and honest politicians in Mexico and the fear of its citizens. She could have mentioned the many needless deaths in the U.S., too. No, not necessarily from turf wars and that sort of thing, although there are plenty of these. There are many needless deaths from so-called drug overdoses, which really means that the user inadvertently took too large a dose or a corrupted dose of his drug of choice. How does this happen? Well, in a lawless business there is no way for customers to enforce standards through the normal court process. If a legitimate drug manufacturer tainted his product with poison, he would be taken to court, fined, and possibly sent to jail. But the victim of a tainted illegal drug just dies. I heard recently of the death of the son of French actor and director Gerard Depardeu. The reports claimed that M. Depardeu's son died of a drug overdose. Since his son was a rising force in the film industry himself, I doubt that he wanted to kill himself. More likely the drug was tainted or more potent than he believed it to be. Another needless death cause by our senseless and murderous war on drugs.

Patrick Barron

Blame Milton Friedman

I wrote the following letter to National Review Magazine in response to an article by my friend Kevin D. Williamson, which appeared in the September 21, 2009 edition.

Re: “Blame Milton Friedman” by Kevin D. Williamson

Dear Sirs:
I am tempted to respond to the excellent essay by Kevin D. Williamson (“Blame Milton Friedman”) as would the Kung Fu master of the old TV show: “Ah, grasshopper, you are established on the road to wisdom but you have a long way yet to travel.”

The gist of Mr. Williamson’s essay is that the bank bailouts (TARP, TARP II, and who knows what else) were necessary under the circumstances, because the forces of statism wanted to go even further, plus there is the possibility that these programs will be limited somehow. Furthermore, these programs probably did stem the danger of massive depositor losses and—Oh, the Horror!—uncontrolled deflation.

The Friedman/Schwartz analysis of the cause of the Great Depression as a failure of the Fed to prevent a decrease in the money supply has been challenged and, in my humble opinion, refuted by that of the Austrian School economists. Murray N. Rothbard’s breakthrough analysis of the economy of the 1920s and Hoover’s interventionist response—America’s Great Depression--explained why a recession was inevitable and intervention made things worse, much worse. The newly created Fed had created a bubble economy in the 1920s through its fairly continuous expansion of bank reserves, which became the building blocks of bank deposits. The subsequent crash is explained by the Austrian Business Cycle Theory, whereby artificially lowered interest rates from the expansion of bank reserves fostered unsustainable investments in longer-term, more time-consuming economic processes that were not funded by real savings.

(That is saying a mouthful in one sentence and hardly does justice to this elegant theory. The best book for an introduction to this theory is a compilation of four essays by noted Austrian School economists, Rothbard included, titled The Austrian Theory of the Trade Cycle, compiled by Richard M. Ebeling. Both the Rothbard book and the Ebeling book are available on line at www.Mises.org.)

Fiat money expansion cannot paper over these malinvestments forever. Either the bubble comes to an end and the unprofitable investments are liquidated, as occurred rather quietly in the unheralded and forgotten American depression of 1920/21, or hyperinflation destroys the economy, as occurred in Weimar Germany of 1923. The damage has been done. Socializing the loss through bank bailouts does not cure anything; it merely spreads the losses over the entire economy in the form of higher prices down the road and encourages future bubbles through moral hazard. Despite Mr. Williamson’s hopes, the damage has not been minimized either—the damage was done long ago--; it will not be temporary—as happened in 1920/21 but not in 1929/45--; and there is no political consensus to undo the federal incursions into the economy. Quite the contrary. Because the incursions kick the can down the road a few more yards, there are calls for more of them and in greater amounts. But this solves nothing and makes the necessary correction even greater, because malinvestment in unsustainable processes continues to expand.

Unfortunately, the best for which we can hope under our current set of policies is a repeat of the 1929/45 Great Depression and not a collapse of the economy as occurred in Germany in 1923. But almost of trillion dollars of excess reserves just waiting to be turned into bank deposits via a growth in lending, combined with other policy errors that will exacerbate the problem, tell me otherwise.

The Ethics of Compulsion

A controversial element of the Obama healthcare reform plan is its “public option “ clause, whereby those without health insurance would be enrolled in the government’s subsidized package. Opposition has come mainly from free market advocates who fear that a government plan would underprice private insurance and eventually lead to the demise of private health insurance and, with it, their ability to choose their own doctors, treatments, etc.

Apparently there is less opposition to more coercive government measures to force private insurers to accept those with pre-existing health problems, to price the same for all categories of risk (such as age, sex, and lifestyle), and the mandatory inclusion of politically motivated procedures, such as sex-change operations.

I regret to say that I am certain that something will pass and that eventually the government will take total control of healthcare in America. The same dynamic existed for government programs that now are completely out of control, such as Medicare, Medicaid, Food Stamps, Social Security, and other welfare programs. Once a foothold has been gained, there is an irresistible pressure to extend the benefits to the next tier of potential beneficiaries.

The reason that these welfare programs gain a foothold in the first place is that the electorate has too little concern over their loss of freedom and no understanding of the philosophical basis for advocating the protection of their freedoms. But all such programs fail the freedom test.

The Source of Our Freedom

Frederic Bastiat explained it best in his 1850 book The Law, in which he explained the foundation of man’s freedom and the logical implications for limiting the power of the state. Bastiat repeated the widely held (at that time) understanding that man (and woman, of course) is created in the image of God. And Bastiat meant each and every individual man, not some collective of “men” as an aggregate group. He explained that this is a logical conclusion and not exclusively a religious conviction. For one would come to the same conclusion about man’s relationship to the state even if he were an atheist.

Bastiat explained that man’s relationship to other men must fall into one of three categories and that only one of those categories was compatible with man as a rational being. One, man owns himself. Two, some men own other men. Or, three, everyone owns everyone else. The third option is impossible, for if everyone owned everyone else, we all would have to poll everyone else on the planet in order to do anything at all. This is impossible. The second option is the case of slavery, which we may dismiss without belaboring the issue of the impossibility of any ethical determination of how some become masters and the rest become slaves. Therefore, we are left with the first option, which is completely compatible with both religious convictions and secular reality.

Next Bastiat explained that man’s ownership over himself places natural limits on his actions. Most importantly man could do anything he chose, but only as long as he granted all other men the same natural right and as long as he harmed no other men in the exercise of his right. This leads to man’s innate right of self-protection. The only legitimate use of force is that which is required to protect oneself from the coercion and/or harm of others. All other use of force is illegal. But man soon saw that he was limited in his ability to protect himself and saw cooperation with other men as the solution. Thus was born society (or the state) as an artificial, man-made institution formed among cooperating individuals to more perfectly secure their natural rights of life, liberty, and property.

The Limits of State Action

The state, as a creation of man, cannot possess any rightful powers that do not come from man. Since man can delegate only his rightful power to self-protection, the state can lawfully exercise only this power and no more. Furthermore, since the state is a product of man, it is not an institution with any rights that are not rightfully man’s in the absence of the state. Therefore, there is no conflict at all between the free, harmless exercise of man’s rights as an individual and the state’s legitimate exercise of those delegated rights. Since there can be no conflict, any action of the state to interfere with man’s exercise of his harmless rights is unlawful. Thus, The Law, in all its majesty and rightly understood, flows from man’s inalienable rights for the better securing of his life, liberty, and property.

Absent from this irrefutable, logical understanding of man’s relationship to the state is the right of the state to force man to do something that man, as an individual, could not do legally himself. Therefore, since man, as an individual, cannot force his fellow men to behave in certain ways or contribute their wealth for the benefit of others, the state itself exercises no lawful right to do so.

All of this is embedded deeply in America’s Declaration of Independence and codified into law via our magnificent Constitution. These documents of our nation’s founding are all that the common man needs in order to evaluate for himself when the state has overstepped its bounds and has become a tyrant rather than his servant. Nowhere in either document can be found the right of the state to force one man to be another’s keeper or even to force men to adopt behaviors “for their own good”, such as cessation from smoking, gambling, drinking, etc. No single man has this power and, therefore, it is impossible for the state ever to get this power legally. It can exercise this power only illegally, its beguiling sophistry to the contrary.

Thusly may we evaluate the Obama administration’s healthcare proposals—or any other governmental proposal, for that matter--from an ethical and legal standpoint. Since I may not legally force my fellow man to stop smoking, when it does no harm to me or anyone else, the state has no right to do so either. Furthermore, since I may not force my fellow man to pay for my healthcare or anyone else’s, the state may not do so. Utilitarian arguments over the shame that many in our society do not possess healthcare insurance--or any other desirable good, such as food or housing—carry no legal right to force us to provide such healthcare or any other necessity of life. Furthermore, utilitarian arguments—legitimate, in my opinion—over the likely adverse consequences of the socialization of healthcare, are irrelevant to the proposal in a free society. Those who call for such measures are willing to abandon freedom and turn their backs on the natural rights of their fellow man. In my opinion this is a monstrously tyrannical ethical position and, therefore, we need discuss the socialization of healthcare no further.

No Power to the People!

My recent letter to National Review magazine, commenting on Mark Steyn's brilliant essay.

Re: Ethiopia Comes to You, by Mark Steyn

Dear Sirs:
Mark Steyn's recent skewering of the anti-population lobby could be applied in equal measure to the anti-energy lobby. Both are born of the environmental movement, whose blatant inhumanity places Mother Earth on a higher ethical scale than people. Talk about your pagan gods!

The legislators in my gone-crazy home state of Pennsylvania recently passed a bill requiring electric utilities to produce increasing LESS power, in graduated steps over the next five years, than the unhampered economy would demand. The environmentalists--such as my state representative, Chris Ross--claim that conservation efforts will make up the difference. But here lies a great logical fallacy. One does not produce electricity by conserving it. In fact electricity CANNOT be conserved; it can only be produced. The raw materials of nature, such as oil, waterfalls, uranium, etc. are not energy. They are merely oil, waterfalls, uranium, etc. One may say that energy lies trapped within them, awaiting the ingenuity of man to release it. But NOT releasing the energy accomplishes nothing of economic benefit.

Not harnessing the materials of nature--to avoid the energy police, and don't think they won't come!--forces man to move down his consumer preference scale. The lights must be turned off somewhere; a factory must close somewhere. Devices that use less energy in order to accomplish the same economic benefit divert resources that would have gone to satisfy something man valued more. The owners of businesses and homes have always invested in energy saving devices, without the heavy hand of governmental mandates, when it became clear that the savings would outstripped the cost. But governmental mandates to speed up this process merely lower everyone's standard of living. Unemployment and poverty follow.

PECO, my local utility, wants me to allow them to shut off my power when demand exceeds the government-mandated maximum supply. Of course, these peaks occur during very hot weather, when everyone runs his air conditioner. Who is most likely to sign up for such a program? The elderly, because they are trying to stretch their fixed income over increasingly expensive necessities. Will Representative Ross or any of the environmental lobby take responsibility for the deaths that will result? Not on your life!

As Mark Steyn might say--No Power to the People!