Cash for clunkers: economic retardation

c4c

Only government would be so backward as to take functioning used automobiles–objects of great value to many people who cannot afford to buy new ones–and require that they be destroyed.  This decreases the supply of used cars, causing the price of used cars to rise generally, and therefore making it harder for lower income Americans to buy them.  Of course, we should not be surprised to see the government hurting lower income Americans under the pretense of helping them; this is how the government expends much of its (our) resources.

Moreover, our entire economic crisis was caused by a credit bubble.  Before the crisis can end, bad credit must be liquidated.  Cash for clunkers only exacerbates the credit crisis; it encourages many people (who may or may not lose their jobs within the next year) to take out new car loans, and the government is effectually paying their down-payment in the form of a $4,500 rebate. This is exactly the sort of government “solution” that caused over-investment and distorted demand in the housing market.  Cash for clunkers will certainly be a contributor, albeit a minor one, to financial firm failures around the country over the next few years.

Two to watch for in 2010 Senate race

 Schiff

The U.S. government’s dramatic, corporate welfare response to the economic crisis has brought many Americans to the following conclusion: my Senator (regardless of party) is a big-government, special-interest-controlled goon who does not give a damn about me.  In an America spiraling further and further into the hellish abyss of corporate fascism, there are a couple of freedom-loving luminaries expected to run for Senate in 2010: Dr. Rand Paul of Kentucky and Peter Schiff of Connecticut.

Paul is a surgeon who brings a unique and insightful perspective to healthcare reform. His seat is particularly important to the cause of liberty, because the man he would replace is among the Senate’s staunchest supporters of free markets, Republican and baseball Hall of Famer Jim Bunning.  Bunning voted against all of the debt-propelling bills designed to fix the economy, which remains broken.  If either a Democrat or Paul’s Republican opposition, Harvard alum Trey Grayson, were to fill Bunning’s seat, the reliable vote against federal government interference in our personal lives will assuredly be lost.

Paul is expected to announce that he will seek the open seat on August 20th.  On that day, which is a planned “money-bomb,” I expect him to raise somewhere in the range of $250,000.  His total for the month of August will likely be somewhere in the range of $300,000, which despite national efforts, will leave his total far behind that of his Ivy League manufactured primary opponent, who has already raised more than $600,000, and boasts the support of the much maligned GOP leadership.

Peter Schiff hopes to replace Democrat Chris Dodd of Connecticut in 2010.  Senator Dodd has seen much face time in the media lately for three reasons: he chairs the Senate Banking Committee, which is overactive during economic downturns such as the present one; he was recently diagnosed with early and non-life-threatening prostate cancer; and he is strongly suspected of benefiting from improper mortgage practices–perhaps a political bribe.

Schiff is best-known for his remarkably accurate economic forecasts.  Several youtube videos, entitled “Peter Schiff Was Right”, have gone viral across the Internet, and have shown Schiff to be an economic genius.  On the other hand, Dodd has been an economic dunce over the past decade, defending policies and entities that economists across the political spectrum agree invited the economic crisis.  From an economic standpoint, the choice is a no-brainer: Schiff wins.  But in politics, being right does not guarantee victory, and Schiff knows he has a very tough fight ahead of him.

Like Dr. Paul, Schiff is expected to have a big fundraising day.  His is on August 7th, on which he hopes to raise $1 million.  In my opinion, that’s a pipe dream.  He will be lucky to raise half of that.

Despite fundraising concerns, both Paul and Schiff are forces to be reckoned with in the 2010 Senatorial elections for one reason: their message of limited government, free people, and free markets resonates with an American citizenry that is fed up with the federal government’s never-ending interventions into a society that never seemed very broken to begin with.

For further information or to lend your support to their campaigns, Paul’s and Schiff’s websites are: http://www.randpaul2010.com/ and http://www.schiffforsenate.com/ 

AIG spells nationalization of entire insurance industry

A I Jeez

The Wall Street Journal reports that since receiving government aid, insurance giant AIG has begun greatly underbidding its competitors in the insurance industry.  Fed Chair Ben Bernanke acknowledges this practice, and believes it is necessary for AIG to do this, in order to gain enough marketshare to become profitable.

With billions of government handouts, AIG is able to offer peerless premiums.  In a free market, offering such low premiums would be corporate suicide.  But AIG is not a free market participant.  It has government backing.  Bernanke and Treasury Secretary Timothy Geithner have, on numerous occasions, voiced their intent to do whatever is necessary to keep AIG from folding. In this context, risks that would normally bankrupt the company do not restrict its behavior, because its liquidity flows from a seemingly bottomless barrel, the purse of the citizenry.  Losses from these risks will continue to be subsidized, and those subsidies will encourage more risks, and bring on more losses.

Other insurance companies cannot compete with a company that has unlimited liquidity.  This leaves their executives with a dilemma: they can keep their premiums high and non-competitive, and lose all of their customers; or they can lower their rates to meet AIG’s, keep their marketshare, and become illiquid when they are forced to pay out to misfortunate customers.  Both of these options will end in bankruptcy.

When AIG’s competitors are nearing bankruptcy, one of a few results may play out:  they may fail outright, leaving their marketshare available to AIG; they may be bailed out by the government, which starts them on AIG’s path of neverending losses; or, they may be purchased by AIG.  In each of these results, a government-funded monopoly over the insurance industry is established.  This monopoly, like all monopolies, will suffer unnecessary costs and miss opportunities to innovate.

The added costs of a non-competitive insurance industry will be great, even in the unlikely circumstance that it is fully funded by premiums.  It is likely, however, that the monopoly would evolve into a nationalized insurance company, or a government service, rather than revert back to a private insurance corporation.

If AIG’s insurance role becomes a government service, it appears that the costs of that service will be borne by everyone who uses dollars, as the Treasury has started printing large amounts of currency to pay its bills.  This inflation is perhaps the most regressive form of taxation, because it hurts those who are not wealthy enough to protect themselves properly from its effects.

A letter concerning economic reality

As a response to this bloomberg.com article, which declares and celebrates the end of laissez-faire economic influence, I shared with my mother (who forwarded the article to me) thoughts so relevant to the economic discussion in America today, they are worth repeating here:

This article, besides unpardonably confounding economic liberty with imperial oppression and brutal dictatorhip, grossly neglects theoretical argument, so the ignorant reader is to accept its conclusion without understanding it.  This negligence of thought is a necessary means to an unreasoned end.  So far from being worthy of publication, this article would be expensive at any price, and is not worth the time spent reading it.  By equivocating much, it says nothing.

The idea that Barack Obama will “referee the laissez-faire versus free-market debate” is laughable; as referee in that non-existent contest (laissez-faire and free-market are inseparable allies), Obama would probably sabotage both competitors and declare an interventionist victory.

I will present a few points ignored by this article that, if attended to, would render a very different image.

First, it has been over a century since we have had a free market for goods and services and private control of production and consumption.  Therefore we have not had capitalism, and it is irrational to blame economic woes on a system that does not exist; it is as reasonable to blame Martians.

Secondly, and most importantly, government fostered the economic crisis.  Behold artificially low interest rates during the tech bust of 2001-02.  The only way to keep rates so low is by printing money out of thin air.  This government-created free money combined with implicit government guarantees of new loans via Fannie Mae and Freddie Mac generated a housing bubble and subsequent financial bubble large enough to threaten the existence of the global financial system.  Because that system is naturally undeserving of its legitimacy, its collapse may be a good thing, but only if governments practice humility in the aftermath.  Governments should understand that the maximization of individual freedom is their purpose, both politically and economically.  Governments should come to know that the evils of paper money cannot be overstated.  Governments should not allow interested monopolies to control monetary bases.  Governments should focus on destroying monopolies, not turning them into unavoidable institutions.  Inexplicably, we must now rest our hopes of economic salvation upon the imminent Representative Barney Frank and Senator Christopher Dodd, both of whom promoted bad loan practices and free money policies for years, and neither of whom saw the economic crisis coming.  This is a sure case of the inmates running the asylum.

On this point, note that at least one House Representative did accurately predict the events that led to the financial bust.  In a speech to the House in 2001, he said “despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policies of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.” That Representative was ignored by almost everyone, and probably laughed at by the interventionist economists that this article aggrandizes.  That Congressman was Dr. Ron Paul, who continues to be widely ignored by popular economists, his colleagues, and our media.

Thirdly, most true free-market economists follow the “Austrian” theories of Murray Rothbard, Ludwig von Mises, and Friedrich A. von Hayek.  Free marketeers typically place more value on each of these three than Milton Friedman because their work was much more thorough, more laissez-faire, and more conclusive.  Few if any contemporary proponents of laissez-faire economics hail from the University of Chicago.

Economic science and history inform us that there will eventually be a final and all-destructive economic downturn: the fiat currency bust, which in the United States will be the destruction of the dollar.  The nature of this destruction will likely be hyperinflationary, like Germany’s post-WWI Mark or the ancient Roman denari (severe dilution of silver content in coins was the ancient “paper” money, and is still practiced).  I hope this will be followed by a return to sound asset-backed currencies and the elimination of fraudulent banking institutions, whose theft brings so much hardship to the unaware, unoffending, humble human.

Henry Hazlitt and I on the Auto Bailout

Hazlitt

“Dying industries absorb labor and capital that should be released for the growing industries.  It is only the much vilified price system that solves the enormously complicated problem of deciding precisely how much of tens of thousands of different commodities and services should be produced in relation to each other.  These otherwise bewildering equations are solved quasi-automatically by the system of prices, profits and costs.  They are solved by this system incomparably better than any group of bureaucrats could solve them.  For they are solved by a system under which each consumer makes his own demand and casts a fresh vote, or a dozen fresh votes, every day; whereas bureaucrats would try to solve it by having made for the consumers not what the consumers themselves wanted, but what the bureaucrats decided was good for them.  Yet, though the bureaucrats do not understand the quasi-automatic system of the market, they are always disturbed by it.  They are always trying to improve it or correct it, usually in the interests of some wailing pressure group.” – Henry Hazlitt, Economics in One Lesson, 1946

My beefs with the bailout:

  • It rewards failure (through “loans”) at the expense of success (through taxes).
  • The excuses are lame.  A few loosely-quoted examples:  “People won’t buy our cars because they think we might go bankrupt.”  More likely: they won’t pay for your inferior product.  People know that bankruptcy does not equal death, as I am sure all of your sales associates have told their customers.  Lame.  “Foreign companies are receiving good incentives to open new factories, but we have to use our old ones.”  More likely: the unions have you by the balls.  Lame.  “Foreign companies are getting assistance from their governments, which is why we need assistance from ours.”  Not sure if either of the claims made in this excuse are true, but lame nonetheless.  If other governments want to misplace investments, that’s their business.  Their economies will become weaker for it, and our overall economy will be relatively more productive than theirs, regardless of what happens to the automakers.
  • I live in Tennessee.  The auto industry in Tennessee is doing relatively well.  Why should Tennessee be punished for Michigan’s business failures?  For the taxpaying laborer at a Tennessee factory, there can be no sufficient reason.  It is stealing from the Tennessean.  It is immoral.
  • It is unconstitutional (see part 2 of Jefferson’s argument and replace “bank” with “auto loan,” then become disgusted by the monstrous parasite that is your federal government).
  • It will not save the automakers.  The beggars will be back to Congress, palms upturned, and because the government will have already invested in their success, it will be much more difficult to turn them away.
  • The government cannot “save” one industry without adversely affecting another, or–what is more likely the case–many others, through opportunity costs and/or taxation.
  • I prefer Honda, Toyota, and Nissan to GM, Ford, and Chrysler, mainly because, when the Japanese automakers take my money, they give me a car for it–not a promise to try to pay it back A.S.A.P.
  • The United States government is in a fiscal abyss, and one unfortunate generation will eventually have to fit the bill.  This is what I call generational slavery, because one or more generations has decided, rather than extinguishing its own debts, to pass them on to posterity, guaranteeing “confiscatory” income taxation (as if there were any other kind) in the future, and thus robbing future generations of their own labor.
  • As poorly as the executives at GM, Ford, and Chrysler have managed their businesses, the federal government (or “car czar”) would do the job even worse–much worse, I believe.

If this bailout passes, the Lions will go 0-16 this season.  Sorry Detroit, karma’s a bitch, but I’m sure one more quarter of Ford’s failing operations is preferable to one win at Ford Field.  Go Colts!

Emerson cherished gold standard, limited government

Emerson

Ralph Waldo Emerson’s writing is popular among progressives, who often share his criticisms of materialism, simony, and intolerance.  When I began reading his complete works, I wrongly expected to see “progressive” economic and political views; I did not.  I was surprised to learn that, regarding the size and scope of government, Emerson is at odds with progressives; when they use his words, they abuse his philosophy.  Emerson not only advocates the idea of limited government, but holds the political philosophy of no-government.  He certainly did not believe in what Joe Biden incorrectly calls “fairness.”

Emerson is no critic of capitalism or free markets; he sees injustice in fiat money, and cherishes the gold standard.  Logically, then, the progressive who defames the gold standard shows more respect to the economic philosophy of Richard Nixon than that of Ralph Waldo Emerson.  If Emerson were to have a conversation with Barack Obama about economics, he would probably conclude that Obama is either poorly educated, or educated to think poorly.  Emerson, being a good assessor of fitness, would probably find Obama unfit to govern in a free society.

Relative Emerson quotes:

“We live in a very low state of the world, and pay unwilling tribute to governments founded on force.”

“It is not the office of a man to receive gifts.  How dare you give them?  We wish to be self-sustained.  We do not quite forgive a giver.  The hand that feeds us is in some danger of being bitten.  We can receive anything from love, for that is a way of receiving it from ourselves; but not from any one who assumes to bestow.”

“Necessity does everything well.”

“All public ends look vague and quixotic beside private ones.  For any laws but those which men make for themselves are laughable.”

“The less government we have the better.”

“Money, which represents the prose of life, and which is hardly spoken of in parlors without an apology, is, in its effects and laws, as beautiful as roses.  Property keeps the accounts of the world, and is always moral.  The property will be found where the labor, the wisdom and the virtue have been in nations, in classes and (the whole life-time considered, with the compensations) in the individual also.”

“Since we are all so stupid, what benefit that there should be two stupidities!”

“The laborer is a possible lord.  The lord is a possible basket-maker.”

“The English dislike the American structure of society, whilst yet trade, mills, public education and Chartism are doing what they can to create in England the same social condition.  America is the paradise of the economists; is the favorable exception invariably quoted to the rules of ruin; but when he speaks directly of the Americans the islander forgets his philosophy and remembers disparaging anecdotes.”

“The ambition to create value evokes every kind of ability.”

“Another machine more potent in England than steam is the Bank.  It votes an issue of bills, population is stimulated and cities rise; it refuses loans, and emigration empties the country; trade sinks; revolutions break out; kings are dethroned.  By these new agents our social system is molded.”

“It is rare to find a merchant who knows why a crisis occurs in trade, why prices rise or fall, or who knows the mischief of paper money.”

“What befalls from the violence of financial crises, befalls daily in the violence of artificial legislation.”

“How did our factories get built?  How did North America get netted with iron rails, except by the importunity of these orators who dragged all the prudent men in?  Is party the madness of many for the gain of the few?  This speculative genius is the madness of a few for the gain of the world.  The projectors are sacrificed, but the public is the gainer.”

“I have never seen a man as rich as all men ought to be, or with an adequate command of nature.  The pulpit and the press have many commonplaces denouncing the thirst for wealth; but if men should take these moralists at their word and leave off aiming to be rich, the moralists would rush to rekindle at all hazards this love of power in the people, lest civilization should be undone.”

“Wealth brings with it its own checks and balances.  The basis of political economy is non-interference.  The only safe rule is found in the self-adjusting meter of demand and supply.  Do not legislate.  Meddle, and you snap the sinews with your sumptuary laws.  Give no bounties, make equal laws, secure life and property, and you need give no alms.  Open the doors of opportunity to talent and virtue and they will do themselves justice, and property will not be in bad hands.  In a free and just commonwealth, property rushes from the idle and imbecile to the industrious, brave and persevering.”

“Friendship buys friendship; justice justice; military merit, military success.  Good husbandry finds wife, children and household.  The good merchant, large gains, ships, stocks and money.  The good poet, fame and literary credit; but not either, the other.  Yet there is commonly a confusion of expectations on these points.  Hotspur lives for the moment, praises himself for it, and despises Furlong, that he does not.  Hotspur of course is poor, and Furlong a good provider.  The odd circumstance is that Hotspur thinks it a superiority in himself, this improvidence, which ought to be rewarded with Furlong’s lands.”

“The true thrift is always to spend on the higher plane; to invest and invest, with keener avarice, that he may spend in spiritual creation and not in augmenting animal existence.”

“To detach a man and make him feel that he is to owe all to himself, is the way to make him strong and rich.”

Open bailout opposition letter to Congress

Stolen from you by U.S.

“That government is best which governs the least, because its people discipline themselves.” – Thomas Jefferson

There is a lot of hype in Washington this week, a lot of short-term thinking, but very little honest reflection and philosophically sound governance based on the long term prospects of the American economy.  Jefferson was right: our financial markets have fallen into a cycle of government dependence and therefore no longer discipline themselves.  The American economy has lived beyond its means; to deny this is to declare yourself ignorant and unfit to govern.  We have floated on a cloud of credit, and believed ourselves to be in heaven, and though we have ventured far from earth, the latest liquidity squeeze has allowed us to see just how far we must fall when our economy’s bill comes due.  Though the $700,000,000,000 proposal before you may indeed postpone the payment date, the American people will eventually have to pay dearly for living on money that has been given value–not by production–but by irrational faith, and you can be certain that every postponement will make that future payment more painful than it would be today.  Do not be convinced that there are no free market solutions to this crisis.  The unspeakable ideal of economic freedom will pump more liquid capital into our financial markets than the government ever could, and more importantly, the money generated by such a system would be sound and valuable.  The chronic risks of moral hazard and inflation this bailout poses far outweigh the risks of a brief credit crisis caused by market-liquidated debt.

We cannot become wiser before we admit that we have been foolish in the past.  Market interference was, in most instances, foolish.  The Community Re-Investment Act was foolish.  Taxing capital gains was foolish.  Turning over Congress’ constitutional money-coining responsibility to a private, secretive organization was foolish.  Encouraging irresponsible lending through never-ending taxpayer bailouts was foolish.  Artificially low interest rates were foolish.  Price manipulation was foolish.  Giving up on sound money was foolish.  Losing faith in freedom was foolish.  Ours, however, is not a fated existence.  Nowhere is it written in stone that we must remain foolish, or that we cannot obey Constitutional principles.  If, as Senator John McCain likes to say, you “came to Washington to change Washington,” now is your chance to realize your lofty dreams.  Crisis is the proper time for reform.  Now is the time to embrace real capitalism.  The American people should not be told to fear freedom, as they are being told now, but to embrace it.  The time has come for Americans to be rewarded for their own successes, and held accountable for their own mistakes.  The time has come for the ambitious legislators in Washington to stop fiscally abusing the children of this nation.

1994, 2000: Remembering the words of Goldwater and Reagan, American median voters want smaller government and balanced budgets, so they elect Republicans; in return, they receive the most rampant growth in government (and public debt) this continent has ever known.  2006: the median American voters want out of a conflict that is unrelated to their security or welfare, so they elect Democrats; in return, the war’s funding is not cut off but greatly increased.  2008: the American people want no taxpayer bailouts, they want to end the bubble-blowing policies of the Federal Reserve, and they want to stop the growing cycle of debt that has ruined a once free economy; in return, they are presented with the largest taxpayer bailout ever, a more powerful and secretive central bank, the largest economic bubble-blowing scheme ever contrived, and more debt than they can ever afford to pay off.

The blindfold has been removed from the American people.  They are awakening to a pattern that reveals self-government as a myth.  The extraordinary actions of the federal government are only serving to remove its mask, revealing its nationalist, socialist, imperialist, authoritarian, unresponsive, evil face.  We can accurately predict that, on matters of true importance, when a particular course of action is supported by more than 70% of the American people, their government will pursue the opposite course, pretending the people are a force of no consequence–an attitude to be expected of King Louis’ court, but not of a republic’s elected leaders.  I need not remind you of the French response to that attitude.  The United States government has lost so much legitimacy that it may not survive the latest proposal, should it pass.  The American people are well-aware of the truly criminal nature of any financial bailout; a huge one will both injure and offend them.  Moreover, it will not come without consequence; their lanterns are burning, their pitchforks are raised, and they are prepared to halt the criminal acts of this government, should it become necessary for them to do so.