Saturday, August 30, 2008

Health care and the unseen

Frederic Bastiat wrote a now-famous essay titled What is Seen and What is Not Seen. In it, Bastiat discusses the principle of economics that inspired Henry Hazlitt's one lesson in economics: "From this aspect, therefore, the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups." (Economics in One Lesson) These long-range consequences, or the consequences for all groups mostly consist of Bastiat's unseen. Because these consequences are unseen, it is easy to discount them in the public discourse.

There has been a great deal of discussion on the problems of health care and education, among other issues of social concern in the US during this Presidential race. What I wanted to discuss in this post, in terms of the seen and unseen, is the propensity to focus on a single issue and discuss ways that government revenues could be used to thoroughly solve that problem. A kind of tunnel vision sets in with each issue in turn: health care, education, the environment, national defense, and so on.

Let's start with health care. The Federal government collects more than $2 trillion a year in revenues. With $2T/yr. we could provid free, gold plated health care several times over to every citizen. Or could we? Let's consider brain surgeons. If we spent $2T/yr. on health care, would there automatically be enough brain surgeries to go around? Would there be enough of the latest CT scanners to go around? More money - in itself - does not create more health care. Granted, as we poured trillions of dollars into healthcare, new students would flock to the field, new medical schools would open by the bunch and medical technological investment would skyrocket, etc. After some time, there would be a great deal more brain surgeons than there are today, a great deal more CT scanners than there are today and even the poorest person could go in for the kind of health care that a US Senator or billionaire investor gets... every day of the week.
But what of education, or defense, or any of the other things which the government spends money on? Clearly, if we're spending the Federal budget on health care, we can't be spending it also on education and defense.

In the case of health care, the additional health services that could be purchased by the poor with government subsidy are the seen effects. The unseen effects are all the resources which must be diverted to purchase the additional health care resources. Spending the entire Federal budget on health care is an intentional hyperbole to illustrate the point that every increase in spending on one thing is a decrease in spending on something else. Every smart kid that becomes a brain surgeon didn't become a groundbreaking physics researcher. Every hospital that is constructed is some number of corn silos or factories that weren't. Ambulances are built instead of a grain harvester. In other words, the more money the government spends on one thing, the more resources that are diverted from other things.

In general, the government cannot do anything to make more resources. The things that it could do (for example, building factories or subsidizing births), it turns out that governments are extraordinarily bad at (cf the Soviet experiment). It's one thing to wish there were more resources and that there were no human wants. In most parts of the West, this goal has been achieved many times over, depending on when you set your point of reference. If we asked an early 19th century American whether there were any poor people left in America, the answer would likely be "no." But over against wishing is the problem of actually creating more resources.
Economists speak of two problems: how to slice up the pie and how to increase the size of the pie. The problem of taxing and spending is partof the problem of how to slice up the pie. But while slicing up the pie of government revenues (which account for as much as 50% of the nation's entire economic product), we have to be aware of two factors: the more revenues we divert to any one use, the more we are diverting away from other, possibly more important uses and not all uses are equally valuable.

This should be obvious, but people sometimes get confused on this issue when it comes to "make work" projects like those of the New Deal. The Civilian Conservation Corps (CCC) employed people clearing trails through forests and doing other menial tasks. Those people who were employed received a good deal (seen), they were employed. But the monies used to pay them could have, perhaps, paid other workers doing more valuable work than clearing trails in the forest. Many employments can be surmised to have been more valuable than clearing paths through the forest - perhaps baking bread or planting corn during a time when people were literally starving to death. The point is this: when resources are diverted from a more valued to a less valued use, society as a whole is impoverished that much.*

Let me give a specific example of this "tunnel vision" effect whereby we focus in on the seen while ignoring the unseen. I watched a History channel presentation on the Indonesian tsunami some time back. The head of the UN department which is tasked with blowing hot air about natural disasters said something to the effect, "This should have never happened. It could have been prevented and we must make it a priority that such a disaster never occurs again."

Basically, what he's saying is that the US has sonar early warning systems that would likely have prevented many deaths from occurring in Indonesia had similar equipment been installed in that region. His call to "make it a priority that such a disaster never occurs again" (paraphrase) is basically a plea to have international monies used to install such early warning systems throughout the world.

Now, let's go back to the brain surgeon vs. physicist dilemma. You can either install more early warning systems throughout the world, or you can spend more on health care. But you can't do both simultaneously, all things else being equal. Which do you choose? It doesn't matter to me, for the sake of this discussion, which you think is more important, all that matters to me is that you understand that it is a choice.

This brings me to the issue of the good which government spending does. It is often mentioned that when the government builds a road, for example, the road benefits us because we can travel over it and transport goods across it, thereby reducing the costs of doing business, and so on. But no one argues that government spending does no good whatsoever. The money which a purse snatcher spends out of the snatched purse also "does good" in the same sense. Rather, what is at issue is whether the money is being put to its most valued use in building a road.

So, when debating how we could use some number of billions of tax revenues to fix healthcare or some other number of billions to fix education, or some number of billions to build ever more baroque national defense weaponry, keep in mind that spending more on one thing means spending less on another, unless the amount of resources are increased - something which only occurs through capital investment (and new births). What we should be asking is not whether a decent society will stand by while someone dies for lack of money for a life-saving surgery, since it is always possible to divert ever more money away from other uses into medical expenditures. Rather, we should be asking: For each of the $3T the government spends each year, is the thing the government spends it on its most valued use? That is, does society garner the greatest incremental benefit from that dollar being spent on X insteady of Y, Z and W?

Some people protest that such mundane calculations are evidence of a mind which is cold and uncaring, but I say it is exactly the opposite. The one who refuses to face reality and count the costs of his decisions is an ignoble fool, no matter how loudly he protests his desire to "save humanity", "feed the poor", "educate the masses" or "provide universal health care to all." Willful ignorance and waste of much-needed resources** through carelessness are not virtues in my book.

Do not count only the seen, but also the unseen.

*I want to make clear that when I say "society as a whole is impoverished" I am not speaking of some kind of average wealth whereby a few can be super-duper wealthy while the rest live in squalor, balancing out to a decent, "average" wealth. The loss of the production of more valued resources to the production of less valued resources generally hurts the poor the most because each contraction of the resource pie will hurt the poor by proportion more than it hurts the wealthy. The rich capitalist might forego commissioning that yacht he'd been dreaming up, but the poor forego food, water and medical services.

**During the height of the Great Depression, tons of food were destroyed by the government to enforce agricultural price supports while people were dying of starvation. Waste - which so many armchair policy debaters casually dismiss when raised as an objection to government policies - can be a matter of life and death.

Saturday, August 23, 2008

In a retrospective article on the Russian-Georgian conflict, Lewellyn Rockwell discusses Washington's attempt to resurrect WWI-era rhetoric. He quotes a 1915 book written by Francis Neilson, "How Diplomats Make War":

"During a war it is no easy task to prevent your sympathy clouding your reason. The whole social system seems to be organized against any individual attempt to concentrate the attention dominantly upon the causes of the war. Governments, churches, theatres, the press, and local authorities, direct their efforts, in the main, warwards; the whole thought of society and commerce seems to be occupied with war; and all desire to question the reasons given by statesmen for participating in the war must be suppressed. It has been ruled already by certain 'leaders of thought' that it is unwise, unpatriotic, and un-English, to suspect the motives of Governments, or waver for a moment in swearing wholehearted allegiance to the authorities: you must think only of the war. If you dare ask for the truth, you are helping the enemy; if you suggest an early peace, you are hindering the militarists who desire no peace until their enemy is utterly crushed. Insidious, bewildering, and plausible, are the reasons given by statesmen and journalists for inflicting a humiliating defeat; without it, they tell us we must not hope for disarmament. No patriot is supposed to ask if disarmament is at all probable. No one must ask if a single statesman really believes such a blessing will follow if the enemy be annihilated."

What is particularly interesting about this Russian-Georgian conflict is that it is ultimately about preventing secession - the Georgians attempting to prevent South Ossetia, Abkhazia and other provinces from seceding. I am particularly interested in the link between pacifism and secession.

Ask yourself, if a nation has to use military force to keep a political region unified, isn't that an indication that there's something wrong? You could argue that there may be moral imperatives that justify use of military force to maintain unification, as in the Civil War, but there are serious complications with this position. Should any state have the right to make war on any other state for perceived immoral activities? If so, and states acted on this right, the world would be in a constant state of war. Even more important, if governments have a duty to use military force, if necessary, to prevent the violation of certain moral principles (as in the case of slavery), should they not apply this right consistently or not at all? If the state only punished murderers of a certain race, we would consider this unjust - the government doesn't have a right to not punish certain criminals on the basis of some arbitrary metric, such as race. If the US government has a moral duty to prevent the occurrence of slavery, then by what standard of justice do we apply this moral duty only to certain states (e.g. the Confederacy) but not others?

In short, if a smaller body politic wishes to secede from a larger body, I cannot think of any good moral justification for the use of military force. Every such artificial unification is ultimately imperialistic in nature. It seems to me that pacifists need to rethink their (usual) support for ever more centralized governments and ask whether every local region should have the right to peaceably and without molestation secede from the larger political organization to which they belong. If so, then pacifists should oppose US support of Georgia (and the implied threat of military force to protect her) and her oppression of the South Ossetians and Abkhazians who simply wish to live in their own, independent state. They speak different languages, for goodness sake.

As an aside, I think that a crucial element of human psychology on which imperial resistance to secession depends is the hubristic conviction of most individuals that they - or their identity group - know the way it oughtta be. If people just did things our way, why, there wouldn't be so many problems in the world. It's OK that my nation subjugates other, more ignorant and backward nations because we are tutoring them on how to run a civilized, decent human society. The Romans said exactly the same thing.

So, to those who oppose war (who doesn't oppose war?), I ask: How do you justify the use of military force to prevent secession? I just don't see it.

Thursday, August 21, 2008

Credit unwiding: good or bad?

This article has been making the rounds. The author, Paul McCulley, argues that as the banks deleverage their balance sheets they are counter-acting each other. As bad mortgages are sloughed off, the prices of homes generally fall, driving down the asset columns of all banks' balance sheets simultaneously.

He has a point, but this is a symptom of the fraudulent nature of fractional-reserve banking and money multiplication, not an indictment of the sound practice of sloughing bad assets to shore up one's balance sheet. McCulley proposes a band-aid solution that only serves to perpetuate the root problem: shifting the bad assets off of the banks that took them on and forcing taxpayers to foot the bill.

The moral hazard of socializing investment risk should be obvious. Frank Shostak of the Mises Institute gives a detailed response to McCulley's article here.

A key difference between McCulley and Shostak is the mainstream (Keynesian) view of savings versus the Austrian view of savings. In the mainstream view, savings are a reduction in someone else's income (McCulley alludes to this in his discussion of Keynes's paradox of thrift). Savings, then, always result in decreased productivity. On this view, if everyone starts saving money (perhaps because they are fearful or uncertain about the future), this is unhealthy for the economy. In the Austrian view, savings are deferred consumption. When I save money, I am simply exchanging present consumption in favor of future consumption. Shostak explains this view in his article.

What is crucial to understand is that when you consume in the present, you are employing resources to satisfy your present consumption. When you defer consumption (save), you are freeing the resources you would otherwise have employed to satisfy your present consumption. These resources are then free to be employed in other ways, perhaps at a lower price. In an uncertain economy, the first things on which people cut spending are luxury goods. People cancel their premium cable and go to basic cable or broadcast TV. They get fewer manicures and buy less fashionable clothes.

It might be argued that this is the worst possible thing that can happen in an uncertain economy - people are getting laid off and jobs are being destroyed. But this is not the case at all. The demand for money increases which drives down prices (making necessary goods and services more affordable) and human and capital resources are freed from more frivolous sectors (luxury goods) and can be repurposed to production of the more in-demand basic necessities. In an uncertain economy, this is exactly what should happen. When people are uncertain about the future, dancing and making merry is madness.

As people become less uncertain as the economy recovers, the demand for money decreases, savings decrease, spending increases, consumption increases, prices rise, and the sale of luxury goods returns to its normal levels quickly. Without monetary savings, the recovery would be hampered by a lack of liquidity. As Shostak argues in the article, there is no paradox of thrift - or paradox of deleveraging - in the real world, only in the fantasy land of Keynesian economics. Just as thrift is exactly the right medicine for an uncertain economy, so deleveraging is exactly the medicine our credit-saturated economy needs to take. Pushing the consequences of our drunken credit binge out onto the public purse only ensures the next hangover will be even worse.

Wealth & Money

What is money? Money is a human invention that solves the problem of a double coincidence of wants in a barter (primitive) economy. Man's earliest form of trade was barter: my rock for two of your bones. The problem with barter - as anyone who has been to a swap meet will understand - is that I have to want something you have and I have to have something you want. What if I don't want any bones and all you have to exchange for my rock is bones? Money emerges from barter as the good which is in greatest demand, or the most marketable good. The reason for this is simple: if you are going to accept a good which you don't want for its own sake (money) in exchange for something you have, you want to be sure that you can get rid of that good to someone else in exchange for something they have that you really want. You can only be confident that this will be the case if the good you are accepting in exchange for what you have is very marketable.

There are other properties which money has which are more technical. What is most important to understand is that money emerges from barter, it is the most marketable good and it takes on the role of the medium of exchange in an economy. Many things have functioned and function as money. Seashells, tobacco, pelts, gold, silver, tokens, currency, banknotes, checks and cigarettes are a few examples. In each case, however, money always emerges from barter as the most marketable good. What the market chooses to be money is not arbitrary. Money cannot be created by fiat and never has been.

Today, this is somewhat confusing because market money has largely been coopted by legal money. Legal money is a medium of exchange whose marketability is not derived from its innate physical properties, but from its special legal status. Gold and cigarettes are physical objects which serve the function of money in certain markets by virtue of their physical properties which make them suitable for consumption as human luxuries (gold as adornment, cigarettes for neurological pleasure.) Modern fiat currencies serve the function of money by virtue of their special legal status combined with their historical connection to gold and silver. It is the fact that modern fiat currencies have a historical connection to gold and silver that differentiates them from any other kind of piece of paper with special legal status and makes them money.

What is wealth? Typically, when we think of wealth, we think of money, or perhaps material possessions or maybe even land. Wealth, however, is even more broad than this and includes every aspect of one's circumstances which brings pleasure to oneself. Living across from a well-manicured park may make you wealthier, even though the park or its state of upkeep is not among your possessions. There are a vast variety of intangibles which are a part of wealth. What is important is to understand that wealth and money are not synonymous - you are wealthier than the amount of money you have. Also, wealth and money do not vary linearly. A multi-millionaire will not be twice as happy upon earning his second million dollars as he was earning his first million. There is a decreasing marginal utility for every good, including money.

Also, we must be careful to distinguish between individual wealth and social wealth. More money held by an individual increases that individual's wealth. More money in an economy, on the other hand, has either no net change or a negative effect on social wealth. This is because money plays a different role for the individual and the economy as a whole. In the economy as a whole, money is the solution to the problem of double coincidence of wants - you can always exchange money for something you want. Increasing the amount of money in the economy does not help the problem of double coincidence of wants get solved better. It is equally well solved by any finite amount of money. For the individual, any increase in the amount of money which he holds is an increase (though not linear) in his wealth.

Unfortunately, this is the source of a great deal of confusion, in my opinion. People assume that as wealth increases, the amount of money should increase as well. But there is no reason for the amount of money in the economy to increase. There are arguments to the effect that there are benefits to increasing the amount of money in the economy, but none of these arguments claim that more money helps better solve the problem of double coincidence of wants.

So what does increase social wealth? Social wealth increases as a society becomes more productive. Aliens looking down on humans from space could discern that people living in 2008 just have more things of all kinds than people living in 1608. Increases in productivity are the consequence of social and technological innovations. New business processes like the assembly line and new technologies like the steam engine enable society to greatly multiply its productivity. The benefits of this process of innovation spill over onto everyone. If you are a young adult, you will become wealthier throughout the duration of your working life even if you never move up in the business world. The equivalent (inflation-adjusted) income will buy more and more over time as an inevitable consequence of productivity innovations.

Social wealth also increases with trade. Two people only trade if each values the thing they receive in trade more than what they traded to get it. I'll only trade my rock for your two bones if I value the bones more than the rock and vice-versa for you. After we have traded, the total social wealth has increased.

I will take a diversion to explain by what measure social wealth increases. Economists use the word "value" or "utility" to describe the degree to which something is useful to a particular individual. The subjective theory of value (the predominant view) holds that no good or service has intrinsic value but what is conferred upon it by subjective, human valuation. iPods are valuable because humans desire to have them very much (doesn't matter why). That is, humans have a high subjective preference for iPods over other things like dirt, rocks or fingernail clippings. This preference is revealed whenever an individual exchanges something he has (e.g. money or labor) for something he wants (e.g. iPod or money). If you own many things I would prefer to have and I own many things you would prefer to have, when we exchange, the utility of the things we own increases, that is, our wealth increases.

Comparative advantage and specialization also play a crucial in the exchange of services. If you are a painter and I am a mechanic, and your car needs repair and my house needs painted, it will be more efficient if we agree to exchange services - the car will have been fixed and the house painted with less total expenditure of human time and effort. As a consequence of trading, we have economized our time and more total houses can be painted and more total cars can be repaired.

Social wealth also increases with consumer choice. A millionaire living in Dar Es Salaam is hardly as wealthy as a millionaire living in New York City - there are so many more choices available of how to spend one's money in New York City than in Dar Es Salaam.

What is key to understand is that wealth is not a zero-sum game. That is, when you and I trade, we both become wealthier. When Apple charges me $200 to purchase their iPod, I am happier with the iPod than I was with the $200 and Apple is happier with the $200 than they were with the iPod they just manufactured. Unlike money which cannot grow indefinitely (though the inflationists have always given it their best shot), wealth can grow indefinitely.

People sometimes speak of relative wealth (net worth percentile) versus absolute wealth. Some studies suggest that people would rather have greater relative wealth (higher social status) than greater absolute wealth. Would you rather live as a king circa 1608 or live in the lower-middle class in 2008 with things like iPods, internet, jet travel, and modern medicine? Fortunately, social status is not measured solely by the amount of money one has or earns. Wealth, beauty, fame and prestige are among the most universal measures of social status, but they are not universal. Clearly, if we measured relative wealth in terms of net worth percentile or income percentile, we are dealing with a zero-sum game. In order for me to move up, I must displace someone else.

However, since there are an abundance of measures of social status, relative wealth is also not a zero sum game. All the money in the world could not buy the world chess championship, and the world chess champion is top-dog in the world he cares most about. Given the choice between being the richest man in the world or the world chess championship title, I doubt even one world chess champion would accept the money instead. This is not because chess champions are more selfless than rich people, but because chess champions measure their relative wealth in a different way than someone like Paris Hilton.

In summary, remember these two principles:

- Money is a medium of exchange, not a measure of wealth (even though "wealth" and "money" are synonymous in colloquial usage)
- Wealth is not a zero-sum game (even if income percentile is)

Monday, August 11, 2008

The price of gold: going up or down?

Gold prices have been going down since mid-July. But gold prices have to go back up. The reasons are pretty simple. The Fed has been pumping money into the economy like madmen for decades (since 1971 when they cut loose from the gold standard completely... $1 in 2008 is equal to 19 cents in 1971 by official estimates which significantly understate true inflation.) That has resulted in a collapse of the market for credit, which contracts the money supply. If they do not vigorously inflate (even more), deflation will result.

They were able to inflate so recklessly for so long without catastrophe because of the artificially created demand for credit. Imagine you have a machine that can create apples at zero cost. You use this machine to create billions and billions of free apples and sell them at 100% profit into the economy. At first, people will want more apples than ever because you can sell them so much more cheaply than ordinary apples. But then, you will have to start lowering your prices to keep people buying them as ever larger quantities are consumed. Eventually, when you have sold so many apples that people cannot stand the sight of an apple, you will not be able to even give them away. This is what has happened with cheap credit via inflation. The Fed has kept pumping in cheap credit into the economy to inflate the money supply until even credit-crazy American consumers cannot stand the sight of another credit card. Now, the Fed and the commercial banking system cannot even give money away (0% loans), which is why you saw so many of those 0% credit card offers in the mail before this credit crunch hit.

In our system, money is created when loans are extended and destroyed when loans are repaid. But what happens when uncreditworthy borrowers start defaulting on loans but consumers and businesses are not taking out new loans? The money supply contracts, which causes deflation. Deflation causes prices to drop, which is a nightmare scenario for the fiat money system (the Great Depression was a deflationary crash.) Deflation is a nightmare scenario because it is a positive feedback mechanism. As credit is destroyed due to loan defaults, the value of the dollar increases. As the value of the dollar increases, incomes & revenues fall causing even more loan defaults as the old loans were denominated in inflated dollars - a 10x deflation of the dollar would cause my $40,000 in student loans to be effectively equivalent to $400,000 in today's dollars. If I didn't default, I would be massively impoverished. With all the outstanding mortgages, you can see how a deflationary scenario is effectively doomsday (as Gary North says, if you think this is going to happen and you're not living 100 miles from the nearest urban center with food and water (and ammo?) stocks, you're not taking your own prediction seriously.)

Since deflation is the banking system's worst nightmare, they will see to it that enough new money is created one way or another to offset the money which is destroyed as loans default with no new borrowers. So, we can expect to see much more inflation in the future. They would rather risk a Weimar Republic-style hyper-inflation than Depression-style deflation. There are truckloads more bad debt yet to be written off, clear into 2011. The idea that we've hit bottom is fanciful, at best. Until we hit bottom on this thing, I see no reason to expect gold prices not to continue to rise.

Sunday, August 3, 2008

The myth of working harder

At work last week, I was in a wonderful team meeting where we discussed promotion and raises. As expected, the myth of working harder quickly arose. My boss mentioned one of the Principle Engineers (PE) at the company and said (paraphrase), "Chuck works hard. You will see him filing issues in the database all hours of the night. He has to make a sacrifice of his family time to do what he does. That's why he makes more and has a high grade."

This is just a bunch of pig slop. Chuck makes what he makes because if my employer paid him any less, he would get a job somewhere else. That's all there is to it. Chuck may very well work a lot of hours and that may contribute to why his economically ignorant peers believe he is entitled to his rate of pay (perhaps even he himself believes that it is because he works so much that he is entitled to his pay).

This is all rooted in the myth of labor. The myth of labor is this idea that economic progress is had by working harder. Economic progress is had by dint of staying up later at night, taking no weekends or vacations and walking faster than anyone else down hallways. The reality is that this is childish nonsense. Economic progress occurs by virtue of the increasing division of labor and technological progress (in social as well as physical technologies.) To maintain the same standard of living in a growing economy, a person needs to work less and less.

We enjoy the benefits of economic progress even if we work very little. Progress is not driven by grit and labor, it is driven by increasing population, new ideas, new innovations, new technologies and discoveries - in short, anything that makes doing things people want done or making things people want made with less effort. Laziness is truly the mother of invention. Labor is whatever progress has not made unnecessary. That is, a car assembly robot eliminates the need for some human to run a welder and impact gun on an assembly line. But there is still required labor to push the buttons on the robot controller and monitor the machine for unforeseeable failures.

So, we shouldn't be praising Chuck for sacrificing his family to his job. We should be wondering why Chuck doesn't get a job where his peers are more enlightened and understand that economic progress does not occur by virtue of pointless demonstrations of company loyalty in the form of working ridiculous hours. Economic progress occurs no matter what Chuck does, but the value of Chuck's own labor increases as a result of an increase in its marketability. The more people willing to pay Chuck to work for them, the more Chuck can charge for his labor.

Let me quote an excerpt from the very excellent book called More Sex is Safer Sex by Steven Landsburg. I doubt he'll mind me quoting this large excerpt so long as you are inspired to go buy his book as a result! This excerpt is from chapter two, "Be Fruitful and Multiply", where Landsburg makes the case that we are wealthier because of population growth, not in spite of it. It is not the Chucks of the world who make us richer.

"...

Modern humans first appeared about one hundred thousand years ago. For the next 99,800 years or so, pretty much everyone lived just above the subsistence level - on the modern U.S. equivalent of $400 to $600 a year. In a few fortunate times and places, it was a bit more than that, but almost never more than about twice as much. There were usually tiny nobilities who lived far better indeed, but numerically those nobilities were quite insignificant. If you'd been born any time before the late eighteenth century, it's astronomically probable that you'd have lived on the equivalent of under $1000 a year - just like your parents and grandparents, and just like your children and grandchildren.

Then, in the late eighteenth century - just a couple of hundred years ago, maybe ten generations - something happened. People started getting richer. And richer and richer still. Per capita income, at least in the West, began to grow at the unprecedented rate of about three-quarters of a percent per year. A couple of decades later, the same thing was happening around the world. After thousands of years of stagnation, life started improving from one year to the next, and before long people started taking improvements for granted. Today, we expect our cars, our computers, our medicines, and our entertainment systems to keep dazzling us with something new. But that's not how it was before the Industrial Revolution. That three-quarters of a percent annual growth rate, once it got under way, must have seemed miraculous.

But then it got better. By the twentieth century, per capita real incomes - that is, incomes adjusted for inflation - were growing by 1.5 percent per year, on average, and since 1960 - for almost fifty years now - they've been growing by about 2.3 percent. Let me give you an idea of what those growth rates mean to the average American.

If you're a middle-class American earning $50,000 a year, and you expect your children, twenty-five years from now, to occupy that same modest rung on the economic ladder, then with a 2.3 percent growth rate, they'll be earning the inflation-adjusted equivalent of $89,000 per year. Their children, another twenty-five years down the line, will earn $158,000 a year. And if that 2.3 percent growth rate continues, then in fewer than four hundred years, your descendants will earn about $1 million per day - a little less than Bill Gates's current income, but at least in the ballpark. I want to make clear that these are not some future inflation-ravaged dollars we're talking about; they're the equivalent of a million of today's dollars.

If it strikes you as implausible that we could ever generate that kind of wealth, keep in mind that this is a conservative extrapolation of a centuries-old trend. It assumes today's 2.3 percent growth rate will continue unchnaged, whereas in fact, growth has been accelerating since it first got underway two hundred years ago. Keep in mind too that every historical advance has seemed wildly implausible until it happened. In the first century AD, Sextus Julius Frontinus wrote that "inventions reached their limit long ago, and I see no hope for further development."

Against a backdrop like that, the temporary ups and downs of the business cycle seem like a fantastically minor phenomenon. In the 1930's, we had a Great Depression, when income levels fell back to where they'd been about twenty years earlier. For a few years, people had to live the way their parents had always lived - and they considered it almost intolerable. The underlying expectation - that the present is supposed to be better than the past - is a new phenomenon in history. No eighteenth-century politician would have dreamed of asking "Are you better off than you were four years ago?" because it never would have occurred to anyone that they ought to be better off than they were four years ago.

Rising income is only part of the story. Not only are we richer than ever before, we also work less and have better-quality products. One hundred years ago, the average American workweek was over sixty hours; today it's under thirty-five. One hundred years ago, only 6 percent of manufacturing workers took vacations; today it's 90 percent. One hundred years ago, men entered the full-time labor force in their early teens; today labor-force participation by young teenagers is essentially zero. One hundred years ago, only 26 percent of male workers retired by age 65; today over 80 percent of 65-year-old males have retired. One hundred years ago, the average housekeeper spent twelve hours a day on laundry, cooking, cleaning, and sewing; today it's about three hours.

Here's a typical laundry day for a housewife in 1900: First, she ports water to the stove, and heats it by burning wood or coal. Then she cleans the clothes by hand, rinses them, wrings them out (either by hand or with a mechanical wringer), then hangs them to dry and moves on to the oppressive task of ironing, using heavy flatirons that are heated continuously on the stove. The whole process takes about eight-and-a half-hours and she walks over a mile in the process. We know this because the United States government used to hire researchers to follow housewives around and record every step they took.

It wasn't just laundry: At the beginning of the twentieth century, most households had no running water and few had central heating. So routine housework included lugging seven tons of coal and 9,000 gallons of water around the house every year.

By 1945, our heroine probably had a washing machine. Now, her laundry chores took just two-and-a-half hours instead of eight-and-a-half and instead of walking a mile, she walked just 665 feet. Today, so that you don't have to waste a single moment keeping an eye on your laundry, you can get a washing machine that emails you when it's done.

Today in the United States of America among the very poorest of the poor - those with household incomes under $15,000 a year - 99 percent have refrigerators (83 percent of them frost-free); 64 percent have air-conditioning; 97 percent have color TVs and over two-thirds have cable; 60 percent have washers and dryers. Almost half have personal computers and most of those have Internet access.

As far as the quality of the goods we buy, try picking up an electronics catalogue from oh, say, 2001 and ask yourself whether there's anything there you'd consider owning. That was the year my friend Ben spent $600 for a 1.3 megapixel digital camera. It weighed a pound and a half and wrote to a floppy disk! Go ahead and pick up that catalogue, and I guarantee you'll be astonished by how much better products have gotten in just the past few years.

Or, if you prefer, take a product like health care. Would you rather purchase today's health care at today's prices, or the health care of say, 1970 at 1970 prices? I don't know any informed person who would choose 1970, which means that despite all the hype, health care now is a better bargain than it's ever been. Our lives are better and our lives are longer. The probability that a 20-year-old has a living grandmother today is higher than the probability that a 20-year-old had a living mother a hundred years ago.

The moral is that increases in measured income - even the phenomenal increases of the past two centuries - don't accurately reflect improvements in our economic condition. The average middle-class American might have a smaller measured income than the European monarchs of the Middle Ages, but that does not prevent the American from leading a more luxurious life. I suspect that Henry VIII would have traded half his kingdom for modern plumbing, a lifetime supply of penicillin, and access to the Internet.

Will these trends continue? Of course, nobody knows - just as nobody knows whether the earth will be destroyed by an asteroid in ten years. But we can make educated guesses about probabilities. What we do know is that economic growth, despite some minor ups and downs, has continued - and accelerated - pretty much unabated for the past two hundred years. We also know that all that growth was fueled by technological progress. And we can reasonably conjecture that the reason we're not running out of fuel is that technological progress replenishes itself: each new idea makes the next new idea easier to come by. Add to that Professor Kremer's argument that increasing wealth allows us to support a larger population, which in turn figures out new ways to create wealth, and there is excellent reason for optimism.

A skeptic could easily point to countries where large populations coexist with abysmal economic conditions. But without exception, those are countries where the natural advantages of population size - a larger pool of geniuses and an abundance of trading partners - are undercut by government policies that limit both the rewards for ingenuity and the opportunities for trade. When the advantages of population growth are eliminiated, only the disadvantages remain.

..."

Stock prices

It has become a tenet of American economic faith that stock prices ought always to rise. But there is a serious problem with this. Let's say we had a gold coin economy. If prices of stocks never ceased rising (particularly in the exponential manner we have seen them rising for the last century), the gold supply would quickly be exhausted and all gold would be tied up in stocks.

Clearly, something is amiss.

The problem is that stocks are a kind of credit, or loan from the stock buyer to the stock issuer, the company. The price of stocks can go up over time, but in an honest economy, we would expect stock prices to go down when credit is tight and up when credit is loose. Stock prices in a gold coin economy would not increase indefinitely. Instead, companies whose growth potential is greatest would experience rising stock prices while other companies would experience concomitant stock price decreases, given a fixed "tightness" of credit. That is, for a given supply and demand of credit, only so much gold would be available for stock investment. The money that goes into growth stocks would have to come out of other stock investments.

That most stocks are able to rise in price most of the time is a simple consequence of central bank inflation. As the supply of money is constantly increasing, the prices of stocks can continually rise with the prices of everything else. The continually increasing index of the stock market, then, is not an indicator of economic progress! It is an indicator of the steady march of inflation. In an honest money system, we would expect the stock market indices to increase with loose credit and decrease with tight credit. The long-term trend of the stock market indices should be proportional to the long-term trend of credit availability. Obviously, credit availability cannot exponentially increase over time (in a gold coin economy).

So, Wall Street is a bunch of crooks, just as Main Street suspects. But it's because they're in collusion with the government, not because the government has not sufficiently regulated them. So long as the public continues to imbue the state with a parental aura, Wall Street will continue to profit off their romanticism. Each new legal restriction on the free market will be twisted by the number surfers to their own benefit. The average Joe cannot win the battle of re-writing the rules of the game with the professional financial gamer. But the average Joe, by supporting the protection of his own property from theft by the crooks on Wall Street and Pennsylvania Avenue can defeat them. So long as we play their game, they will always beat us. Their worst nightmare is a strong, private property society where what's theirs is theirs and what's mine is mine. The vultures on Wall Street are not content with a private property society and free market. They want to increase what is theirs by stealing what is yours and mine.

Don't ever buy the lie that you and I can be better off by letting the government take from others to give to us. It's just an excuse for the professional crooks to get their hands on what's rightfully ours - our property.

The true nature of taxation

I recently posted on the regressive effects of taxes on the poor. I have since been thinking about the nature of taxation as robbery, and it has dawned on me that taxes, which fund the parasitic class, have only one effect: taking from the many and giving to the few.

The rhetoric surrounding taxation attempts, in Orwellian fashion, to reverse this fact. Taxation is justified today by arguing that it takes from the rich (the few) and gives to the poor (the many). But this is never true. Even if a particular tax measure hits a group of wealthy individuals for PR value, the rich can only ever account for a tiny fraction of total revenues taken in by the government.

We can deduce that taxes never take from the few and give to the many by simple reasoning. Group dynamics always involves the public goods problem: how does a group of people come together to achieve a particular goal while minimizing the deadweight effects of freeloaders? The free-riding problem results from the fact that when a group of individuals come together to achieve a goal, there is only minimal detriment to the goal if one individual slacks off or doesn't contribute his part or pull his weight. A self-interested individual, then, is tempted to contribute less than his peers. But since this is true of each individual in the group, all individuals are alike tempted not to pull their weight. If left to self-interest alone, the group will likely fail to achieve their goal.

In the case of tax resistance, there is but a small benefit for any one individual if taxes are lowered. If I were to mount a political campaign and succeeded in getting taxes lowered, I would not benefit by more than a couple hundred dollars a year. The costs to me would be much higher than any benefits. I could try to distribute the costs by fundraising. But the public goods problem immediately undermines this effort: Each individual taxpayer has an incentive not to contribute to my tax-slashing campaign and instead let others foot the bill. If we succeed in lowering taxes, those who did not contribute will be ahead of those who did. If we don't succeed in lowering taxes, those who did not contribute will still be ahead of those who did. So, either way, the incentive is to not contribute!

Contrast this with a political lobby, say, the farm lobby. As an individual farmer, there is some incentive for me to lobby Congress for farm subsidies. But the costs of lobbying may exceed the benefits I receive from it. So, I distribute the cost by fundraising, that is, getting many farmers to contribute to the farm lobbying effort. There is a similar incentive for farmers to freeload and not contribute their piece.

But, there are two important distinctions between lobbying for subsidies and campaigning against tax increases. First, the pool of beneficiaries is far smaller, making the public goods problem less daunting. Second, and as a corollary, the political connections can help ensure that most of the benefits of lobby money go to those who participated while those who freeloaded do not receive much, if any, benefits.

Let's say there are 1 million tax payers. All their taxes go to a single special interest of 1,000 people. The size of the revenue collected is immaterial. Each taxpayer has an incentive to pay less taxes, but he also faces costs in campaigning to have his taxes lowered. Each member of the special interest lobby has an inverse incentive to have taxes increased. He also faces lobbying costs in order to get taxes increased. However, the 1,000 have a massive advantage over the 1 million in that the incentive facing each individual member of the special interest to have taxes raised is 1,000 times greater than the incentive facing each individual taxpayer to have taxes lowered. This is a simple consequence of the ratio of the number of taxpayers to the number of members of the special interest lobby.

When the incentives facing each individual are high, the public goods problem is small. This means that it is easy for special interest lobbies to remain organized and to achieve their goals, while it is difficult for tax resistance movements to do so. This is exactly what we observe in reality.

The thesis that taxation is from the few for the benefit of the many is laughable. The few who are the victims of this fictional, heavy taxation would face massive incentives to escape this burden and would find it easy to organize themselves to do so. Meanwhile, the many who are the supposed beneficiaries of this taxation have little incentive to ensure that the system continues and that the few do not escape through wiles. In reality, the exact reverse of taxing the rich and giving to the poor is the case. The few who benefit from taxation - the parasitic class - have massive incentives to ensure that the system continues, while their vicitims - the millions of taxpayers - have a much smaller incentive to stop the blood sucking since only a "small" amount of blood is taken from each victim.

What is most disturbing of all is that both political parties adopt this fiction that taxes go from the wealthy to the poor! The only difference is that Republicans think less should go from the rich to the poor and Democrats think things are fine the way they are or, perhaps, more should go from the rich to the poor. But the socialist promise requires a suspsension of disbelief greater than Carroll's Alice in Wonderland. Taxes do not go from the few to the many, they always go from the many to the few, from the productive class to the parasitic class. There is no exception. But Republicans buy into this socialist backwardation of reality every bit as much as Democrats do.

How to build an empire

I have argued in the past that America is a worldwide financial empire. I could point to the 700 US facilities located in 170 of the 200 nations in the world. I could point to the global posture of our naval forces, particularly our carrier groups. I could point to the cases where US diplomats bully smaller nations into accepting WTO "free trade" agreements specifically designed to benefit our industries at their expense. But I don't have space here.

It's not just that America is a rich nation. Money in itself is no threat to anyone. The most insidious aspect of our financial empire is the export of our debt and inflationary currency onto other nations. Thomas Jefferson said, "I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations ... will deprive the people of all property until their children wake up homeless on the continent their fathers conquered." Jefferson was very prescient, but he did not go far enough. National control of the issuance of currency is no better than private control. Europe's national banks are inflating their currencies just as heavily as the United States private central banking system, the Federal Reserve, is.

Back to the point, the United States is leveraging its strategic military advantages to coerce smaller nations to accept the US dollar as backing. Dr. Hans Hoppe explains how it all works in this article.

Let me condense it here. For my condensation to make sense, you must understand the following propositions which Hoppe elucidates in the article:

a) Governments seek to monopolize money creation
b) As a monopolist of money creation, the government has unlimited power - within its jurisdiction - to devalue the currency
c) The government uses this power to steal the savings of citizens by transferring the spending power in their bank accounts to itself

This is the mechanics of inflation. It is the same mechanism by which a counterfeiter transfers money to himself and away from everyone else.

Now, Dr. Hoppe explains the international nature of inflation:

Let us consider a world in which the process of political concentration has been effective for some time. As the result of interstate wars, large and mighty superpowers exist such as the U.S. and smaller, militarily defeated and dominated countries such as Germany. In contrast to the situation between two “equal” countries, France and Italy, monetary relations between the U.S. and Germany are significantly different and reflect this power difference.

... All countries are on a pure fiat money standard. The U.S. initiates the process of inflation, and by using dollars as reserve currency, U.S. inflation is exported to U.S.-dominated countries, while goods flow into the U.S. in the same way as described before. Yet a run on the U.S. gold reserves is no longer possible, of course. Even this system is unsatisfactory, however. In a world of many countries, and even if the U.S. is a superpower with troops stationed in well over 100 countries around the globe, this system of coordinated inflation is bound to crack again and again. ... a U.S.-dominated country may inflate less than the U.S., its currency would appreciate against the dollar, and, if this became a trend, the dollar would lose trust and might be abandoned in favor of the other, harder currency.

As the final solution in the drive toward monetary imperialism and as a decisive intermediate step in the drive toward world government, the U.S. has been working long and hard to establish a U.S.-controlled world central bank issuing a single, world-wide accepted paper currency. Only then are all obstacles to government counterfeiting eliminated because then the currency can no longer rise or fall against any other as no other currencies are left. The monetary integration currently under way in Europe, the establishment of a Europe-wide EURO, is an important step in this direction. The EURO will be more inflationary than the least inflationary of the previously existing national European currencies, the German mark. And it is easier for the U.S. central bank to “cooperate” with a single European central bank than with some fifteen or so different banks. Moreover, whereas these fifteen odd banks also could (and in fact did) use other reserve currencies besides the dollar, namely those of other European currencies (notably the German mark), with these other currencies gone, what else but the dollar can the European bank use for this purpose?

Do not forget, however, that success in this attempt to establish a world central bank requires public support, and to secure this support it is necessary to promote another myth. Indeed, the same myth that is propagated currently in Europe to establish the EURO. This is the myth that a single currency reduces transaction costs. There will be no more tedious exchanging of money when you travel from Germany to Italy, for example. This myth contains an important half-truth - and this makes it particular dangerous and potentially effective, because it is indeed true that money more truly serves its purpose as a medium of exchange the more widely it is used. International trade and economic calculation is in fact facilitated by the existence of a single money. Commodity money such as gold, which emerges as the result of markets and market exchange, has the tendency to become a world-wide used commodity money as trade expands.

Matters are fundamentally different, however, if this money is a fiat money produced by a government world central bank. Given the nature of government, we can safely predict that such a money will be more inflationary and lead to a more massive redistribution of income and wealth in favor of government and its favorite supporter-clients at the expense of the general public than anything seen so far. Indeed, if we are to have a fiat money (rather than a commodity money), and the only alternative is to have competing national paper currencies or an international paper money, the choice is clear: As much as competing and fluctuating paper currencies are dysfunctional as facilitators of exchange, the former alternative is infinitely better. [Emphasis added]


It is because of the portion that I highlighted that I think it is crucial that the public begin to critically examine the imperial activities of the United States in the financial realm. It is bad enough that every government of the world inflates its own currency and thereby regressively redistributes wealth from its people to big business and political cronies. If the project of American financial imperialism succeeds, the plumbing for which is being created by the World Bank and IMF, we can expect to see ever increasing levels of inflation.

The terminal goal would be abolition of money altogether. Without money, as corny as it may sound, we are effectively serfs, vassals of the government, completely dependent on political beneficience. Of course, I think this goal is unachievable since barter and primitive currency would constantly sprout up as unstoppably as prohibited drug imports. But it will not be for lack of trying since there is no greater ideal which elites punch-drunk on political power could desire. There is no conceivable dominion more absolute than a worldwide, moniless empire. Even the dystopias depicted in 1984 and Brave New World would look like patty-cake by comparison.

This idea that the United States government is working to create a worldwide financial empire by establishing a World Bank and uniting world currencies is not an interpolation. See this Wikipedia article on the Amero, the currency which the Bush administration has quietly been working to establish (and I'm sure whoever succeeds him will continue working to establish) that would be a united Canada-US-Mexico currency. There is information on the internet that similar projects are in the works for a united African currency and Asian currency. The obvious next step would be a single world, fiat currency. Wiki also has an article on that (just search "world currency").

Fortunately, there are two huge strategic obstacles to this unsettling trend.

First, as far as I know, China isn't playing ball. The Chinese are smart, and I'm sure they understand exactly what all the World Bank and IMF wheeling and dealing is about. They invented paper money, inflation and were the first to experience hyperinflation under Kublai Khan. China holds very large national gold reserves and has just recently legalized private gold ownership. It also holds what I think of as a "dollar bomb" in the form of more than a trillion US dollars. It can dump these into the world market at any time to weaken the dollar if it so chooses. I used to think that they were primarily holding all these dollars for a military strategic purpose. However, I am beginning to wonder if they're holding all those dollars as a lever against Western pressure to cooperate with a worldwide currency empire.

Second, Islamic nations, as far as I can tell, also don't seem to be playing ball. Islamic banking is full reserve (though their governments have worked around that limitation and inflate their national currencies, as well). The Arab nations have plenty of bright people, too, so I have no doubt they understand the strategic moves to create a world currency. However, it must be understood that Islamic banking is older than European banking. The Islamic world still makes heavy use of gold (the dinar) in transactions and it is an integral part of their culture. I am not aware of any cooperation between the Islamic nations and the Western nations to unite their currency, and my guess would be that the Islamic nations have told Western banking interests to f off, since such a union would have the completely one-sided effective exporting our debt problems onto them.

Is it a coincidence that the #1 and #2 strategic enemies of the United States are an Islamic country and a Far East country (Iran, North Korea)? I can't imagine that the effective demonization of Islam since 9/11 and the subsequent invasions of Afghanistan, Iraq and sabre rattling at Iran have absolutely nothing to do with the Islamic non-cooperation in formation of a world currency.

The most disappointing thing to me is that the people that should be tracking this just aren't. The news media is reporting all the individual facts. But academics, who should be doing this, are not putting the puzzle pieces together and indicting this imperialism for what it is. The only academics that I hear of denigrating US imperialism also want world government and worldwide socialism, which is exactly what a world currency is tantamount to. The only reason I can think of for why not more academics are exposing this situation is that their funding in large part comes from the inflationary machine. What a travesty.

Stop trusting your government but don't stop trusting in the basic goodness of your fellow man.

Demand for money

Money can be a tricky thing to reason about. I want to briefly regurgitate my understanding of the interaction between the money supply and demand for money.

With a strongly conserved money supply (e.g. gold or a divine fiat money that never increases in supply), prices denominated in money will increase whenever the demand for money goes down. When the demand for money goes down, fewer goods and services must be offered in exchange for money. That is, more money must be offered for the same goods and services. Normally, however, the demand for money goes up, not down.

What determines the demand for money? Population plays a role - as there are more actors demanding the use of the money, the demand for money increases and the prices of everything measured in money decreases. This is why we expect a gradual fall in prices given a rising population. Uncertainty also plays a role. When times are uncertain, the demand for longer-term stores of money for greater deferral of consumption increases and the amount of short-term spending on immediate consumption drops. This is not a reflection of some mysterious "deficiency of demand" as the water-headed Keynesians make out, but a reflection of an increase in the demand for money itself. When people restrict their spending on all goods and services, the prices of goods and services, generally, will tend to go down.

I think that division of labor and consumer choice must also play roles in the demand for money. As the division of labor increases, the price of labor itself goes down, since more labor must be offered to acquire the same amount of money. Similarly, as consumer choice increases, prices must go down since there are more options of how to spend any given amount of money. Those choices are all bidding against one another in competition for the consumer's money. They must continually offer more goods and services in exchange for the consumer's money.

I am irked every time I hear on a documentary or radio program that "an ounce of gold bought such-and-such 2000 years ago and it still buys the comparable such-and-such today." If that is true, then economic progress is an illusion. If the real prices of comparable quality goods and services are not falling, then we are making no headway at all. The reality is that things are constantly falling in price. I paid the equivalent of two gold coins for my pickup truck. It can travel more than 80mph, has A/C and a (really crappy) stereo. It can go into 4WD on backroads and operates for hours and hours on end without fatigue. It is comparatively inexpensive to fuel. 2000 years ago, I could not even have gotten a mode of transportation of this quality. But the best quality transportation I could have gotten (horse and saddle), would have cost far more than two gold coins and a lot more to fuel per mile.

It is frightening just how abysmal our economic literacy must be that people consider it normal that prices are always increasing. Somehow, it is expected that it should always be getting more expensive to get by and harder to make a living. People associate population increase with a rise in prices, when elementary logic tells us to expect the exact opposite. As more people demand the use of money, prices in terms of money should go down. As the division of labor and consumer choice increase, we should also expect prices to go down. And while uncertainty can cause temporary decreases in prices as people defer consumption more than usual, price decreases due to uncertainty should self-correct when the uncertainty dissipates. Conversely, a decrease in population, decrease in the division of labor, decrease in consumer choice or decrease in uncertainty should all result in an increase in real prices, even with a conserved money supply.