Entrepreneurs drive the economy; so what is the role of consumers?  Put simply, they are judge, jury … and executioner.

Consumers represent the ultimate democracy of the marketplace.  They decide who succeeds (and by how much) and who fails.  They determine what products are most urgently needed and what goods are either unwanted at the moment or unwanted at a price that can be provided at any given time.  The sovereign consumers decide whether or not the actions of entrepreneurs result in profit or loss.

In an odd paradox, there is a common misconception in modern liberal thought that, at the same time, both embraces and denies this simple truth.  On the one hand, it is believed that consumers drive the economy and that interfering in the economy to place ever more resources into the hands of the consumer can solve all economic ills.  On the other, modern liberalism embraces any number of interventions that pretend that the consumer simply cannot be trusted with this power.

The entrepreneur acts first, but he must do so with an eye toward meeting the demands of the consumer.  If he undertakes any action that fails to meet consumer needs to the greatest extent and at the lowest possible price, the consumers will exercise their power to penalize him.  They will seek out the products of a competitor, attempt to locate substitute goods that will meet their most urgent needs in another way or they will ignore the producers’ goods to an extent that will put such enterprises out of business.

In such an environment, the entrepreneur who wishes to survive the judgment of consumers cannot engage in “price gouging” because, in a marketplace unrestricted by government, there will always be another means of meeting those customer demands.  In such an environment, the entrepreneur cannot incur costs that make his products less competitive with those of other producers.  Taken to its logical conclusion, it is the consumer that imposes restrictions upon producers that prevent them from paying above market prices for any resource – capital, material resources … or labor.  In that sense, it is the sovereign consumer that determines not only the level of wages that can be paid in the marketplace, but even whether or not the producer must consider seeking labor from (foreign) markets where the costs are materially lower.

The mandate of the consumer is ultimately inviolable and yet it is contradictorily believed that unpopular actions – primarily with regard to the employment of labor – are undertaken arbitrarily and either maliciously or without care for the consequences.

The same sort of disconnect takes place when someone demands intervention in the marketplace to manipulate prices.  In each and every case, the consumer is deemed incapable of setting the “correct” price and, as a result, the state must artificially manipulate prices to achieve some “better” result.  Part of this disconnect comes from the misguided belief that producers set prices in a vacuum, but, again, in the rare exception of monopoly – which I’ll touch upon in a moment, consumers will not permit such “gouging” to take place.  In reality, the justification for manipulating prices, is that the state (or, in the case of debate, the individual demanding such intervention) has asserted that their wisdom is superior to that of the free choices of individual consumers.  It makes no difference whether the intervention is to keep prices higher, to keep them lower or even, as was disastrously demonstrated during the Roosevelt years, both at the same time.

Interestingly, the former case is the most prevalent.  Consumers, we are told, should simply pay more for some products than they would in a truly free market.  If we let consumers do what they wish, they might not want to pay enough to support the least efficient producers in the agricultural sector, putting farmers out of work.  They might purchase items from abroad rather than patronizing domestic business to a significantly greater extent.  They may even – hold onto yourself – choose to buy alcoholic beverages, cigarettes or gasoline in greater quantities than our benevolent leaders would like.

It must be remembered that the manipulation of prices invariably harms everyone.  Protecting the least efficient farmers, for example, not only forces the consumer to pay more for produce, making those resources unavailable for use elsewhere, but it subsidizes inefficiency preventing the marketplace from allocating those resources to more useful endeavors that generate more products and more jobs.  When the Bush administration intervened to “protect” steel workers in the US, prices were artificially inflated.  This not only prevented the steel industry from adapting more quickly to market forces – again, subsidizing inefficiency and destroying capital – but it was a devastating blow to those industries that use finished steel.  The net result was that even more jobs were lost in those industries than were “saved” – however, briefly – by the manipulation of steel prices even for a relatively short period.  The deleterious consequences of efforts to inflate prices invariably cause more harm than any perceived benefit from their implementation, often yielding the exact opposite of the stated objective.

In the latter case, it is asserted that consumers should not be required to pay market prices for “necessary” commodities.  In such circumstances, the state either intervenes by imposing price ceilings or by substituting state control for the function of producers.  [Note: The choice not to use the word “entrepreneur” here is deliberate.  The entrepreneurial function that drives the economy requires responsiveness to the market.  State control of production renders such responsiveness impossible.]

But in the case of price ceilings we know the inevitable result is shortages, often in unexpected ways.  Rent control, for example, has simultaneously reduced the availability of rental units – affordable or otherwise – and created slumlords: property owners whose revenue stream has been curtailed by rent control so, rather than responding to the needs of consumers, fail to maintain minimum standards in their buildings.  Government run enterprises have, without exception, proven to be vastly inferior to private sector enterprises, typically running losses that must be covered by taxpayers while providing less than optimal service.  The postal service is just one such example.

Along these lines is the intervention to attack market monopolies.  The vast majority of monopolies arise out of governmental regulation: legal barriers to entry or preferential treatment but, occasionally, monopolies or near-monopolies arise in the marketplace because one provider of goods or services better meets consumer needs better than any other provider.  Classic examples include Standard Oil and Microsoft.  The chief complaint about monopolists is that they can charge consumers higher prices, but that happened in neither case.  Through Standard Oil’s greater efficiency and better refining techniques, the price of oil and kerosene fell significantly for consumers.  Likewise, Microsoft’s decision to bundle certain software items resulted in lower prices for consumers.  The intervention by the state in each case harmed consumers.

Consumers always do a better job of allocating resources than any central authority ever could.  This is why those economies engaging in such socialistic measures to a greater extent lag economically behind those that embrace free market capitalism.  When the government says it must do something about prices, overruling the power of consumers, it is consumers who must ultimately pay the price.

[Originally published February 26, 2007]

Once upon a time, the world “liberal”, in ideological parlance, meant defender of individual liberty.  Now, often as not, it means advocating the taking from one individual to give it to another.  For a number of years now, I have been making the argument that modern liberals have failed to grasp the simple distinction between “freedom” and “means”.  This confusion has led to the creation of oxymoronic phrases like “wage slave” and, in the context that liberals use the term, “economic justice”.

The distinction should be relatively simple.  Freedom is the absence of external constraint.  If you are prevented by an external agency (i.e., the state) from engaging in some activity, then your freedom has been infringed upon.  If you are prevented from engaging in essentially any activity by that external agency, you are a slave.  If, on the other hand, you lack the resources or abilities to engage in some activity, your freedom has been impaired in no way, whatsoever.  I lack the ability to simply soar into the air on my own power or the resources to purchase a Boeing 707 but there is no external agency preventing me from doing these things if the means were available to me.

Sadly, liberals frequently fall back on the nonsensical argument that employers restrict the freedom of the workers by not paying them enough – as if, in the real world, people lacked the power to seek employment elsewhere – so the state is justified in ensuring that everyone is given a certain level of means by taking it from others – infringing upon their economic liberty.  So, this time, I’d like to tray a new tack.  I’d like to demonstrate how the surest way for as many people as possible to acquire the means, is to give them the greatest possible economic liberty.

Arguments about how the chief reason for the prosperity and economic superiority in the world of the United States is overwhelmingly due to the relatively greater level of economic freedom tend to fall on deaf liberal ears.  Some, such as columnist Paul Krugman, perform truly amazing feats of statistical manipulation in order to make it appear that the more socialist economies of Europe are doing better than we are despite the evidence.  It’s dishonest, but there’s a market for people who will tell liberals what they want to hear.

So let’s set aside the US performance for the nonce and look at some examples elsewhere in the world.  Using the annual Index of Economic Freedom (IEF) and inspiration from an individual who posts using the nom du guerre, UncaAlby, I have selected a few sets of countries whose geographical location, population type and resources are relatively similar, while their levels of economic freedom are markedly different.  Using data readily available from the CIA World Factbook, let’s look at these sets and see if we can determine whether or not economic freedom does a better job of providing the economic means to the populace or whether the liberals are correct and that government intervention into the economy actually benefits the citizenry.

North and South Korea:  A greater example of economic disparity is hard to come by.  Unsurprisingly the IEF gives South Korea a score of 68.6; North Korea scored a 3.0.

A once unified people living on the same southeast Asian peninsula have the most disparate living conditions imaginable.  South Korea’s standard of living, as measured by GDP per capita, is thirteen times that of its poorer neighbor.  South Korea’s unemployment rate is only 3.7%; North Korea’s employment rate is only 10%, roughly the same percentage of the population not living in poverty.  South Korea’s economy is growing four times faster; North Korea’s inflation rate is nearly four times higher.

Botswana and Zimbabwe:  These two adjacent African countries also have similar peoples and resources.  The chief difference is that Botswana mining concentrates in diamonds and Zimbabwe has far more mining in ferrous and non-ferrous metals.  Botswana is half again as large as its neighbor to the west, but much of the country’s land mass is consumed by the desolation of the Kalahari Desert.  Botswana’s economy, however, is markedly less encumbered by the state.  The IEF gives Botswana a score of 68.4; Zimbabwe’s is half that at 35.8.

Botswana’s standard of living is five times higher than that of Zimbabwe’s.  Zimbabwe’s unemployment rate has reached 80%; Botswana’s is currently 23.8%, less than a third of their neighbor’s.  Botswana’s economy is growing by 5.5%; Zimbabwe’s is shrinking by 7.7%.  Botswana’s inflation rate is high at 8.6%; Zimbabwe’s is devastating at 266.8%.

Israel, the West Bank and the Gaza Strip:  Here there is admittedly a distinct difference in the peoples under discussion and the size of the territories involved.  However, it is still a relevant comparison given that the economic conditions of the peoples that occupied these lands for the extended period ending roughly six decades ago had not been so different by any stretch of the imagination than they are today, particularly in the West Bank.  Certainly, a significant factor in the economic disparity between the peoples is due to the internecine conflicts that have continued nearly unabated for the entire period.  But it is my contention that the economic disparity is in large part due to the relative levels of economic freedom and that the disparity is a significant driver of the conflict itself.

The IEF gives Israel an economic freedom score of 68.4 – coincidentally the same score as Botswana and almost the same as South Korea; Both the West Bank and Gaza Strip score a 3.0 – the same as North Korea.  The standard of living difference is astounding.  The average standard of living in the Palestinian territories is a mere $660 per year; Israel’s comes in at $24,700, more than 37 times higher.  Unemployment in Israel is running at 9%; it’s about 20% in the territories.  And inflation in Israel is running at only 1.3% vs. 7% in the territories.

Taken together, in comparison to the more economically free countries listed, the more economically repressed countries have a standard of living a mere one-thirteenth as high, an unemployment rate that is 16 times higher, a poverty rate five times higher, and an inflation rate 40 times higher.

Another example not included because of the vast population disparity is China vs. Hong Kong and Taiwan.  Again, the peoples are overwhelmingly similar.  It is the economic system that is different.  China scored a 54.0 from the IEF, indicative of some opening that has occurred; Hong Kong and Taiwan scored 89.3 and 71.1, respectively.  China’s standard of living: $6,760; Hong Kong’s: $33,760; Taiwan’s: $27,350.  China’s unemployment: 9.0%; Hong Kong’s: 5.5%; Taiwan’s: 4.1%.

The conclusion is inescapable.  While freedom and means are two entirely distinct concepts, the best way to assure that the means are available to the widest number of people is to promote economic freedom and the surest way to guarantee that as few people as possible have the means available is to espouse the same socialist nonsense that has become the staple of modern liberalism.

The question has been one of the main drivers of economic thought for centuries.  And for centuries, governments have been getting the answer completely wrong and then undertaking actions that were ultimately detrimental.

Initially, it was believed that economic growth was a myth – that it was impossible for any one actor in the marketplace to experience a gain (profit) unless some other actor in the marketplace experienced a corresponding loss.  This misconception has been the basis for wrong-headed economic policies for hundreds of years.  It was, in fact, the basis for the non-capitalistic construction of mercantilism so completely exploded by Adam Smith’s “An Inquiry into the Nature and Causes of the Wealth of Nations”.

Sadly, this gross misperception refuses to die.  It is the cornerstone of beliefs behind modern protectionism, many variants of Christian socialism and the all-too-common fable that the wealth of the capitalistic West is nothing more than the stolen plunder of the third world at the expense of exploited workers.  That basic mathematics demonstrates such a conclusion to be absurd is merely written off as “capitalist propaganda”.  But simple logic demonstrates that the doctor who sets a broken leg for a fee has directly benefited the patient while generating income for himself.  Transactions do not take place unless each party to the transaction benefits.  Thus, the notion that someone must lose in order for someone else to “win” cannot survive the examination of any of the countless transactions that occur every day in a capitalist economy.

But the logical error regarding economic performance most relevant today is the myth that economic growth is overwhelmingly driven by … consumers.  It is the glaring misconception behind “stimulus” measures that endeavor to put “money in the hands of those who will spend it” and the same one that fuels the Keynesian and neo-Keynesian method of advocating government spending – such as extended unemployment insurance benefits and/or public projects – as a means of economic stimulus.  Such conclusions fly in the face of both logic and the empirical data indicating that such spending and “targeted” handouts have no stimulative effect whatsoever.

So where did this error come from?

Much of it stems from errors in assessing the size of the economy.  A common calculation used to determine economic strength is gross domestic product (GDP).  It is an attempt to assess the overall economic productivity of a country or nation-state over the course of a given time period – typically a year.  But it is impossible to correctly capture all of the disparate activities that take place in a dynamic economy in a single measure.  GDP is merely a flawed substitute for total economic strength even if it is the best measure we currently have available.

One of the major flaws with the GDP measure is that it includes government spending as a component comparable to that of private sector activities.  This tends to support the fallacy that economic growth can be stimulated or maintained by increased governmental expenditure.  But no allowance is then made for the difference in market driven spending to meet the needs of consumers which is overwhelmingly efficient and beneficial and spending by governmental mandate which rarely takes into account the needs of consumers and is, as a consequence, incredibly wasteful.  It is not spending, per se, that is economically advantageous, but rather investment in productive activities that creates wealth and prosperity in society.  As a matter of economic logic and historical evidence, the notion (most notably endorsed by Lord Keynes and pursued by the Roosevelt administration) that spending by the state generates wealth has been thoroughly discredited.

The second major flaw is methodological.  In an effort to avoid double-counting of wealth at various stages of production in the GDP calculation, intermediate goods and transitory capital goods are discounted in favor of final consumer goods.  While there is value in this methodology in determining a gross domestic product that does not count each stage of production and finished goods simultaneously, the shorthand method of avoiding a double count renders attempts to examine the components of the economy from a total GDP figure completely useless.  A commonly repeated fallacy is that consumer spending represents two-thirds of GDP, but that is only because the intermediate producer’s goods (which, arguably, are significantly more valuable) have been removed from the calculation.

Unfortunately, this belief in the primacy of the consumer in economic strength is behind efforts to “target” stimulus to those individuals most likely to spend whatever largesse the state dishes out.  No recourse to empirical data – such as the study of previous targeted expenditures – can dissuade the true believers from the defense of such methods because consumers are the most visible actors in the marketplace, so they must be the drivers.  But the fallacy of this position is the same.  One cannot spend oneself to prosperity either at the societal or the individual level.  In the absence of production, consumer action yields only scarcity and economic stagnation.

So who drives the economy?  Entrepreneurs.  Economists have understood this for decades but the general public reels.  How, it is asked, can a handful of big business types be of greater importance to the economy than all the “average Joes” buying goods and services?  The problem is that the function and definition of entrepreneurial action has been misunderstood.

Entrepreneurial action takes place whenever anyone in the marketplace, in anticipation of future demand, invests time, capital or resources in an attempt to meet those future needs.  It is not restricted to “big business” or even “business” at all in the sense of an incorporated entity.  The “average Joe” who undertakes action in the marketplace can be part of the entrepreneurial function.  Such action to meet future demands funnels capital to productive means increasing the demand for further inputs – more capital, other resources and labor.

This is the engine that creates jobs.  It is the entrepreneur who, in an effort to meet customer needs and improve his own situation, determines that those goals can be achieved by applying additional labor to his productive endeavors.  This is, in fact, the only activity that ultimately creates jobs.  Subsequently, this greater investment puts more resources in the hands of those “average Joes” in the form of “permanent” (in the relative sense) changes in their income stream and their supportable standard of living.  Attributing the driving force of the economy to the consumptive activities of the consumer simply fails to examine that which must happen first before the consumer activity can change.

Production – not consumption – yields economic growth.  It is the actions of the entrepreneur that drive the economy and it is only those policies that place more capital in the hands of those entrepreneurs – whether they be CEOs of Fortune 500 companies or small business owners or “average Joes” undertaking action to meet future consumer demand – that succeed in generating continued (or accelerated) economic growth.  Policies that ignore this dynamic – as politically popular as they may be – are doomed to inevitable failure.

Paul Krugman is exhibiting signs of schizophrenia.  A few years back, as the Bush tax cuts were being debated, he argued vehemently that such cuts were irresponsible in the face of a looming Social Security crisis.  More recently, however, he has adopted an Alfred E. Neuman expression and asked, “What crisis?”  On the other hand, John Konop, of Control Congress.org, has consistently argued that the system faces such a crisis that prolonged economic disaster waits just around the corner.  Who’s right?

Neither of them.  But it’s interesting to note what is right about their assessment of the situation, before going into what’s wrong.

Krugman is essentially conceding the very point that those predicting difficulties are making.  If the Social Security system is jeopardy because of tax cuts unrelated to the collection of payroll taxes, his position explicitly concedes that program can only be funded by additional revenues collected for the general fund.  While arguing – completely contrary to history – that retaining or returning to higher tax rates would make funds available for this later use, the concession that such funds would be needed to pay Social Security benefits highlights the inadequacy of the existing funding source.  Thus, the system as it now exists is in crisis (as elaborated last time) and Krugman’s current stance is completely disingenuous. 

John Konop’s point, on the other hand, is based on a basic accounting assessment of that funding source.  He simply forgets that the whole reason that the Ponzi scheme has lasted for seven decades is because the government is not constrained by basic accounting or contract rules.

According to the trustees of the program, the un-funded liability of the Social Security system is currently $15.6 trillion dollars – an amount larger than our current GDP.  The un-funded liability for Medicare is currently $76.5 trillion, five times larger even than that – in no small part due to the prescription drug benefit foolishly added by the current administration - but, while many of the same points made here (and in the last column) are relevant to Medicare as well, my focus, at present, is on the system that, among other things, helped prolong the Great Depression.

For all the money paid in and all that additional debt incurred, this program, amazingly viewed by many as one of the most successful programs ever devised by government, those paying into the program get a truly dreadful return – far below any market rate investment, even essentially risk-free instruments, and for a huge number of participants, particularly minorities, the return is negative.  Wow!  What a deal!

But I have argued that, while the system is clearly in crisis, and simply cannot survive in its current form, it is not the looming economic catastrophe that some have predicted.  How can I make such a prediction given the sheer size of the numbers involved?  It comes down to two things: a) the constraints, or, more specifically, their lack, on government and b) the responses of actors in the marketplace to current economic conditions.

Social Security was originally sold as an insurance program, not a retirement program or a social responsibility - in fact, Roosevelt himself argued against it being any such thing - though that, in and of itself, is debatable, since an insurance program would involve policyholders (in this case workers) paying the cost of some defined benefit to be provided under a given set of circumstances. If you want, you can go to an insurance company today and purchase an open ended annuity to begin at age 67 (or any other age, for that matter) and you can do so for less than the current system costs you.  Moreover, you can transfer that asset to someone else if you so choose. You could even cash it in at an earlier date in an emergency if you needed to based upon the value of the assets invested up to that time.  The notion that the current system is either a real insurance program or unduly risky if privatized in some manner is utter nonsense.

A quote I considered for my previous column highlights the point.  When asked whether there was a Social Security Trust Fund, CNN expert Dr. Allen W. Smith, PhD, noted, “Every dollar of the Social Security surplus has been borrowed by the government and spent for other government programs. The only thing in the Social Security Trust Fund is government IOUs called ‘special issues of the Treasury’.  These ‘special-issue’ securities have no commercial value because they cannot be sold in the market place. In essence, these IOUs represent a promise by the government that, in order to pay Social Security benefits, it will obtain resources in the future equal to the value of the securities.”

I have only one objection to Dr. Smith’s comments: no such promise exists.

Like the issue of whether or not the police are obligated to protect you, the courts have determined that the United States government is not obligated to honor any previously made promise to provide you with Social Security or anything else.  The history of the program is rife with such changes.  It was initially funded with a 3% tax on the first $3,000 of a worker’s paycheck and now siphons off more than 12% of the first $90,000.  In addition, the age at which benefits are received has changed numerous times over the years.  I suppose if it collected 80% of the first $350,000 and restricted payouts to centenarians, a surplus, albeit an incredibly short-lived one given the economic consequences, would appear and the program could be said to “work”, but the point is made.  Those promises are only as good as the willingness of the politicians in office to honor them and, since actually paying those astronomical sums is impossible, the chances that all of those promises will be honored is precisely nil.

That’s the bad news.  The good news is that not everyone has his, respective, head in the sand.  Overwhelmingly, individuals have factored Social Security out of their future financial plans.  Polls indicate that fewer of a third of people who have not yet retired believe they will ever actually receive Social Security benefits.  As Harry Browne once put it, “In the under-30 age group, more believe in flying saucers than in the survival of Social Security. And, of course, their skepticism is well founded.”

What this means is that when – not if, mind you: when – the federal government reneges on its earlier promises and changes the program, it will not be acting in a way materially different from the rational expectations that have already been factored into current economic decision-making.  That is, from an economic perspective, there is no impending hyperinflationary disaster ahead because the devaluation of the currency associated with those expected future liabilities has, to a large extent, been reflected in the value of the dollar already.

This does not mean that the inevitable change will not have negative economic consequences by any stretch of the imagination, nor does change the fact that whatever pain there will be is only increased by delay in addressing the issue, but it does mean the gloom and doom scenarios of massive economic collapse are overblown.

“Often ignored in the debate is the inevitable effect that the huge increase in payouts to retiring Boomers will have on the federal budget.

“That's because, in some ways, the Social Security Trust Fund is a fiction. It technically holds government bonds, but – as a way of disguising the size of the federal deficit – the government doesn't count those bonds as debt.

“So in about 15 years, when the trust fund starts turning in its bonds for cash to pay benefits, the government will have to raise that cash. It can do so in only three ways: by increasing taxes, cutting other spending or running a deficit.”

-- Washington Post special section on Social Security, February 25, 1999

No.  Really.

This is not an excuse or a cry for help or a solicitation for pity.  Even encouragement is not necessary.  I began writing a column on the basis of actually having something to say, so I am writing now on that basis.

I’ve been struggling with depression for a number of years now.  It’s genetic, resulting from a chemical imbalance that I inherited from the maternal line (at least five other family members have had it).  The good news is that it can be treated with medication … provided, of course, you can find the right one.  When it first surfaced, I was given Zoloft, a medication that I’m sure works marvelously for some individuals but, alas, caused me to give up sleeping for Lent.  No, it wasn’t April, but the inability to sleep more than forty minutes at a stretch did last for about six weeks.

Old news.

Because the condition stems from a chemical imbalance, it can also be accompanied by other physiological symptoms.  This has been the case for the other members of my family who have been in this situation and I apparently did not want to be left out.  In my case it manifested as something called dishydrotic eczema – little globules of clear fluid forming just below the skin, which eventually burst and … well, you get the idea.

They cleared up years ago, so, again, old news.

Chemical depression, like clinical depression, is extremely difficult to recognize when you are on the receiving end.  Frequently, it is much more readily apparent to those around you who recognize the abrupt personality change and then have the daunting task of convincing the person that they have a problem.  I am eternally grateful to my wife and children for their patience and love in those times when this has surfaced.  They have had a particularly difficult time getting through to a man who is self-assured to the point of stubbornness and committed to the principles of personal responsibility and self-sufficiency that seeking help has always been difficult under normal circumstances.

Depression, often exacerbated by stress, can carry with it a whole host of problems.  Some people become suicidal; some become dependent on alcohol or drugs.  I have been fortunate in that it has never come to that point with me.  The best way that I can describe the sensation is to let you picture a man walking through a forest.  Everything is fine except that the temperature is falling.  It falls so gradually that the change is imperceptible to him except inasmuch as he can compare the difference in condition to some period farther back.  No problem is perceived.  Eventually, the temperature gets so cold that the urge to simply stop walking and curl up for warmth becomes almost all-consuming.

I certainly was unaware of it, but the weight of the additional stress of sporadic employment for my wife and the pending end of my own employment on top of the everyday things we all endure had managed to overcome the medication I was taking.  The weight of the stress slowly but inexorably became debilitating.  I never became self-destructive but I was drained of all initiative.  Simple tasks became challenging.  I withdrew from nearly everyone.  I stopped seeing people, including the doctor which, as my daily medications ran out, was ultimately self-destructive.  Doing the things I enjoy, such as writing, became impossibly difficult tasks.  And yet still I could not recognize a problem, no matter what those around me had to say.

And then a couple of weeks back, small globules of clear fluid began to appear on my thumb.

I am now actively in the process of retaking my own life.  It’s not a short process and I cannot promise that I will be my normal acerbic self in any easily defined time frame.  But, you may ask – and you should – what about this experience is of value to others?  Why, beyond simple empathy, should anyone care about any of this?

Certainly, there is a value in spreading understanding of this condition so that others who might recognize the symptoms of others or themselves can propose action to treat it.  Some people aren’t as bone-headed as I am (pretty much everyone or so I am told) so perhaps getting someone to seek the help they need will be easier for them than it has been for me.

But more than that, it demonstrates, again, some reasons why I am not a modern liberal.

While I certainly never asked for this (and could arguably say that it is not “fair” that I have to deal with it), I don’t pretend that it is either the fault or the responsibility of anyone else – including the state – to deal with this problem.  I don’t pretend that I have a “right” to be given anything because I got a raw deal.  You know why?

Everybody gets a raw deal.

Don’t get me wrong.  In truth, I can’t put into words how magnificently I have been blessed with family, friends and two wonderful, healthy children now becoming responsible, honorable adults.  My only point is that we all are subject to, as Shakespeare put it, “the slings and arrows of outrageous fortune” and the “the thousand natural shocks that flesh is heir to”.  That the nature of those fortunes is different for everyone is nothing more than the human condition.  It grants neither privilege nor favor.

We are fortunate to live in a country where the charitable instincts of individuals are so strong.  Many people – more, in fact, than at any other time in history – give personally so that others who are not so fortunate can have a better life.  I’m one of them.  But it has nothing to do with entitlement or state imposed altruism (which is an oxymoron) or “social conscience” as defined by others.  It’s personal and, as such, most effective.

And I remain optimistic.  While my wife is still not permanently employed, she has a long-term gig substitute teaching (teaching was always her first calling) and, in my quest to secure employment where I might avoid ob transition due to merger or acquisition for a whopping seventh time, I have found a position with the largest remaining independent takeover target (*ahem* - bank) in Maryland beginning next month.  Ah, well.

The timing, at least, is fortuitous as I will keep my severance and retention without suffering through a period of unemployment and can, thus, get rid of the car with a quarter of a million miles on it.  Of course, the dynamic in my home is that the wife always gets the newest set of wheels…

Anyway, as you can see, my principles remain intact and I can promise that you’ll hear more from me in the not too distant future.

Certain liberals, and sadly, some conservatives, are card carrying members of the do something fraternity – insisting that they must come to the rescue of the economy, the American worker, the American consumer, etc. by … interfering.  As often as not, the result ends up something like this scene from Monty Python and the Holy Grail:

Sir Lancelot: We were in the nick of time. You were in great peril.

Sir Galahad: I don't think I was.

Sir Lancelot: Yes, you were. You were in terrible peril.

Sir Galahad: Look, let me go back in there and face the peril.

Sir Lancelot: No, it's too perilous.

Sir Galahad: Look, it's my duty as a knight to sample as much peril as I can.

Sir Lancelot: No, we've got to find the Holy Grail. Come on.

Sir Galahad: Oh, let me have just a little bit of peril?

Of late, the complaint is that something must be done because the Chinese violate the concept of Adam Smith’s “invisible hand”.  The admonition goes that we must pressure them to change their ways and should not trade with them until they no longer employ “slave labor” which is stealing jobs from American workers (and this doesn’t include the “outsourcing” myths to be addressed in a later series).  What such admonitions demonstrate, however, is an ignorance of conditions in China and a failure to comprehend the “invisible hand” concept.

During the thirty years following World War II, China became one of the most restrictive regimes on earth, imposing strict controls over nearly every aspect of the people’s lives.  Foreign trade was severely controlled; strict autocratic socialism was imposed and tens of millions died in famines and purges.  It wasn’t until after Mao’s death in 1976 that any hope for reform was realized.

Since then, the Chinese fist has been steadily and inexorably loosening.  Where once there was a centrally planned economy in which the citizenry worked at the whim of the state, now collectivized agriculture has been phased out, price controls have been gradually lifted, state enterprises once dominated by centralized political goals have been operating with increased autonomy as businesses, the non-state sector has grown rapidly (though it still remains relatively small), and even a stock market has been developed that is open to the Chinese people.  While the pace of reform has varied over the years and there is still a long way to go, and while political power remains concentrated in the hands of a few, the Chinese people have more economic freedom than they’ve had in six decades and the reins loosen still further every year.

How did this happen?  It is not sufficient to say that economic freedom is the penultimate road to prosperity; the corollary is that lack of economic freedom is the road to economic ruin.  And there is no more economically bankrupt system than slavery – it is actually impossible to achieve prosperity on the backs of slaves.  As markets have opened and greater access to opportunity has increased in China, so, too, has the quality of life for its people.  The process is self-sustaining.  Since reform began, China’s economy has grown more than ten-fold.  The general standard of living for the Chinese, while still quite low by American standards, has been rising steadily.  Some look at the low wages and long hours worked in China and call the Chinese people “slaves”, just as they looked at the wages and hours in this country around the turn of the last century and said the same things, going so far as to coin the oxymoronic term “slave wages”.  It is a complete mischaracterization.

This is not a defense of the autocratic political system that is still in place in China.  Nor is it either a defense of socialism or of the conditions that Chinese workers operate under.  Quite the contrary, I am advocating the only course that undermines socialism, improves the conditions of Chinese workers and improves prosperity in the United States.

Workers are subject to the economic conditions in which they reside.  The only thing that can ever change them is to allow the market to function unhindered, funneling capital to where it can be best put to use.  It is childishly unrealistic to expect that companies should pay wages comparable to American standards in China or Cambodia or Nicaragua (that just eliminates jobs and leaves workers without resources) or to demand that trade with such nations cease (which accomplishes exactly the same thing).  Instead, as has been demonstrated repeatedly throughout history, particularly in the former republics and client states of the Soviet Union, the best way to undermine totalitarian socialism is economically - through greater trade.

But doesn’t that harm the American worker?  Shouldn’t we prevent low-wage operations such as those in China from putting Americans out of work?  In a word: no.  Exactly the opposite is true.

Back in the 1980s when I was a lowly undergrad and Japan was still perceived by many to be an “economic miracle” – before it’s economic policies inevitably created the recessionary disaster that was to come – an economics professor was asked about what should be done about the Japanese practice of subsidizing their manufactured goods.  He responded: “If the Japanese are willing to pay higher taxes so that I can get a cheaper car, who am I to complain?”

The fundamentals are the same.  In a dynamic economy such as ours, opportunities are created by economic efficiencies and increased capital flows.  It is the availability of resources to be put to productive use that ultimately creates jobs and the surest way to increase the availability of resources is to expend as few of them as possible when one makes purchases.  If China can produce textiles at a significantly lower cost than can a company here, it may have an adverse affect on the domestic textile industry, but more jobs are created than are lost, particularly in those industries (say, for example, upholsterers) that use textiles.  The converse is also true as demonstrated by the Bush steel tariffs.  The end result was that certain jobs were, briefly, protected in the steel industry but more jobs were lost in those domestic industries that use finished steel.

What is one to do?  Let Adam Smith’s “invisible hand” work exactly as he predicted it would.  By allowing the free market to operate without external interference, the self-interested actions of individuals both here and abroad channel resources into the most productive activities, making everyone better off.  Domestically, cheaper products and increased capital flows reduce the relative cost of living and create jobs.  In countries like China, increased reliance upon foreign trade coupled with the greater prosperity associated with greater economic freedom strengthens economic interdependence, creates demand for still greater opportunity and increases the standard of living for the populace in ways that are never available to slaves.

The alternative is to do something that must take certain cheaper products off the market, reduce opportunities both here and abroad, and hinder economic growth.  Personally, I’d rather “face the peril”.

[Originally published February 21, 2007]

…or Part II of Dr. StrangeFletch or: How I learned to Stop Worrying and Love the Chinese.

The sky is falling. The American economy is going down the tubes because of the massive trade deficit with China. Just go into any store. Nothing is actually made in this country anymore; we just buy it from the Chinese while US manufacturing sector collapses…

In the classic Stanley Kubrick/Peter Sellers comedy, Gen. Jack D. Ripper has decided that someone must do something to put an end to a dangerous threat to the American way of life. In fact, he undertakes the most drastic action imaginable in order to bring to an end “the most monstrously conceived and dangerous communist plot we have ever had to face.” Whenever I come across trade alarmists pontificating that something must be done about the trade deficit with China, I cannot help but imagine Sterling Hayden, stogie protruding from the side of his mouth, bemoaning the “loss of essence” that the communist conspiracy was creating.

Because worries about the “trade deficit” make Gen. Ripper look reasonable. In reality, the “trade deficit” is a fairy tale designed to frighten children, liberals and populists … but I repeat myself.

The layman who looks at the data – a “deficit” of more than $800 billion per year – and can sometimes be convinced that the sky is falling. But even if we were talking about a real problem, that figure needs to be considered in context. Through the third quarter of 2006, the gross national product (GNP) was $13.34 trillion dollars, putting the figure at about 6% of the total. Total Chinese imports – not the trade deficit - come to just shy of $290 billion a year or about 2% of the whole, nowhere near enough to cause the penetration that the alarmist wish you to believe is evident every time you go to the store.

But that isn’t where the argument really goes astray.

It is all too easy to fall into the familiar trap of assuming that an analogy of individual behavior is applicable or that trade takes place for “paper” or that it is necessary to go into debt (as much as $3 billion a day according to Lou Dobbs who apparently was sick the day they taught economics at Harvard) in order to sustain the “deficit”. It is a complete fiction. Worrying over it is on par with worrying that your employer is on the brink of bankruptcy because every two weeks he gives you money but you never give him money back.

The problem with the “trade deficit” is that it both mischaracterizes the nature of the transactions and erroneously eliminates important parts of those transactions from consideration. The trade deficit is nothing like the budget deficit. In that instance, the analogy of individual behavior holds because it is the government (as a single entity) that is undertaking the transaction (and spending more than is coming in). That is inflationary, in and of itself. It is not necessary to “print money”; the issuance of new public debt has the same impact on the money supply and is already inflationary.

On the other hand, international trade is undertaken by literally millions of individual entities exchanging value for value - otherwise no such transaction would take place. How, then, could millions of individual transactions that do not create a deficit between the parties involved somehow create a massive trade deficit when aggregated? Quite simply, it can’t. The trade deficit specifically excludes certain transactions that, if considered, would completely eliminate the so-called deficit.

The “trade deficit”, or more accurately the current account deficit *, is mirrored and offset by the capital account surplus, but those bemoaning the “deficit” with the Chinese are simply ignoring the latter part of the transaction. If you buy 100 shares of a stock at $20 a pop, you are out of pocket $2,000. Using trade-deficit-math, the measurement stops there - you are suddenly out $2,000 and have gained nothing in return. In reality, of course, you would not have made the purchase unless you believed that the real capital value of the stock to you was at least $2,000 plus fees plus an expected future rate of return. As in the real world of international trade, value has been exchanged for value and neither debt nor a real deficit has been created.

In international terms, the investment of capital into US enterprises allows economic expansion, greater job growth and, at the same time, demonstrates the attractiveness of US ventures to the rest of the world.

Look at it another way. A deficit in the current account has, by and large, accompanied strong economic growth in this country – throughout all of the 1990s, in fact. On the other hand, large surpluses in the current account have accompanied severe economic downturns. In all but one year of the Great Depression, the current account showed a solid surplus.

The reason that economic growth corresponds so readily to increases in the trade deficit is not because of any real “deficit” but because the capital flows whose exclusion allows a deficit to be calculated are exactly the type of beneficial activity that spurs the economy. The 1990s were by no means the exception. This country has a long history of deficits in the current account during times of economic prosperity and surpluses during times of economic hardship dating back at least until the Great Depression.

So we have a choice. We can follow the path of General Ripper and do something to bring the trade deficit with China to a halt, probably some sort of protectionist legislation like Smoot-Hawley that did so much for the economy when it was signed into law in June of 1930, interfering with the free flow of goods and services to American consumers and reducing their spending power by rendering those imports that they would otherwise have purchased either more expensive or unavailable. Or we can stand down the interventionist impulses and suffer the unmitigated disaster of continued economic prosperity, cheaper goods, more economic efficiency, lower unemployment and a more internationally integrated economy that gives the countries of the world a greater stake in continued peace.

Decisions…. Decisions….

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* - The current account deficit as a national income account includes a bit more than the trade deficit, but trade makes up all but a tiny fraction of the total and the distinction in no way undermines the point under discussion.

[Originally published February 19, 2007]

…or Part I of Dr. StrangeFletch or: How I learned to Stop Worrying and Love the Chinese.

In the now-classic Mel Brooks comedy Blazing Saddles, there is a scene which is a perfect analogy to a certain fear of China that has reared its ugly head not only from liberals but from a number of conservatives of the populist bent.

In the film, the townsfolk are angry that the new sheriff, Bart, is a, er, … “person of color” (the racial interplay is part of the joke in the film). They begin to load their guns and aim them at the sheriff. He quickly draws his own pistol and aims it at his own head:

Bart: Hold it! Next man makes a move, the n----r gets it!

Olson Johnson: Hold it, men. He's not bluffing.

Sam Johnson: Listen to him, men, he's just crazy enough to do it!

Bart: Drop it! Or I swear I'll blow this n----r's head all over this town!

Bart: [higher voice] Oh, lo'dy, lo'd, he's despit! Do what he sayyyy, do what he sayyyy...

[The townspeople drop their guns. Bart jams the gun into his own neck and “drags” himself away through the crowd.]

Harriet Van Johnson: Isn't anybody going to help that poor man?

Sam Johnson: Hush, Harriet, that's a sure way to get him killed!

Bart: [higher voice] Oooh! He'p me, he'p me! Somebody he'p me! He'p me! He'p me! He'p me!

Bart: Shut up!

[Bart puts his hand over his own mouth and “drags” himself through the office door.]

Bart: Ooh, baby, you are so talented! And they are so dumb!

Alas, those same townspeople are having a conniption because (gasp!) the Chinese have amassed a huge amount of US government debt! The worry, however, is completely without basis.

Let’s get the obvious out of the way first. There is nothing good that can be said about the massive size of the national debt of the United States, which now rests in the neighborhood of $8.7 trillion dollars. It is the result of the accumulated deficit spending of literally generations of politicians and has been with us since the country’s inception In 1791, the national debt was about $75 million (more than $800 million in real dollars), certainly no pittance … except as it is dwarfed by the current behemoth.

All that can be said about the debt itself beyond its flat condemnation are those things that mitigate the severity of the problem. The most valid of these is to discuss the debt as a percentage of GDP. In much the same way that a $1,000 debt is a huge burden to little Timmy working his lemonade stand and entirely manageable for a man earning the median wage of more than $39,000 per year, the sustainability of a given debt level depends upon the size of the underlying economy. At present, the US national debt is the largest in the world in raw dollars, but in a comparison of debt/GDP, the US currently ranks 32^nd, comparable to Austria and lower than such countries as France, Germany, Italy and Canada.

Japan ranks second on the list primarily because it followed the same type of Keynesian nonsense put forth by such lights as Jeffrey D. Sachs and Paul Krugman and tried to spend their way to prosperity. Japan’s central bank engaged in nearly a dozen “stimulus programs” in the 1990s amounting to more than 100 trillion yen (about $825 billion at the current exchange rate). None of them did anything to cure Japan’s recessionary economic woes and Japan’s debt/GDP ratio ballooned to a whopping 175.5% (2006 est.). Only Lebanon ranks higher.

The point is that you will never find me defending the accumulation of government debt. But that is not the issue. The concern is expressed in terms of risks emanating from the concentration of debt holdings by foreign governments, specifically China. And in that respect, the concern is completely unwarranted.

Of the $8.7 trillion in US debt outstanding, the largest chunk is owed to pay future Social Security benefits (a massive problem in and of itself). About a quarter of the debt ($2.2 trillion) is held by foreign investors, including governments. Most is held by foreign nationals, but a sizable percentage is held by the central banks of foreign countries sometimes as a stability measure, sometimes as an investment. Virtually all governments own some amount of foreign paper to facilitate international transactions, but the issue that strikes fear into the hearts of the masses is the concentration of debt holdings in the hands of an arguably hostile power – China.

The bulk of the debt held by central banks is concentrated in the European Union. The central bank with the largest holdings of US debt is Japan with more than $640 billion as of August 2006. The People’s Republic of China holds about $340 billion. But even that doesn’t matter. If the size of the holdings were at issue, certainly $340 billion, while representing less than 0.4% of the US debt, is sufficiently material to impact the economy as a whole, right? Wrong.

What exactly can China, or any other country for that matter, do with their debt holdings to adversely affect the American economy? They could choose to stop buying them which would certainly have an impact on the marketability of US securities but not sufficiently to harm the economy as a whole. Or they could simply dump all $340 billion in holdings onto the world market … and suddenly Sheriff Bart is holding himself hostage again.

Should China decide to undertake that course of action, it would simply be impossible to do such a thing instantaneously. In order to dump securities, one must find a buyer. One of two things must happen. Either the PRC has no difficulty finding a buyer and the value of the securities does not fall significantly or they have very real difficulties finding buyers for so many securities and the value of their own holdings falls. Worse, for them, if such an action were undertaken as the initiation of hostile activities against the United States, the US government would have a huge incentive to simply repudiate that portion of the debt.

Government securities are not like your mortgage. If you tell your bank to go pound sand, they can take your house. If China decides to get nasty and the US tells them to go pound sand (“we will not redeem the securities you hold and to the extent that we know which ones you do hold, we are telling the rest of the world that we will never redeem them”) they can take … nothing. They could go to war, of course, but the action so feared by the uninformed presupposes that hostilities already exist.

The fact is that, when foreign governments hold US debt instruments, they have a vested interest in the success of the US economy, which reduces the risk of such hostilities ever taking place. That we have such a large debt is bad, that China chooses to hold some of it is an unmitigated good thing.

[Originally published February 16, 2007]

It’s such a divisive issue that people on both sides will frequently fall back on emotional arguments and heated rhetoric to win the point, even when those arguments cannot help but fall on deaf ears. A number of conservatives will argue the issue from a religious vantage, but this tack is doomed to failure because many with the opposing view will not accept the validity of the underlying premise. Even those, such as myself, who embrace a definition of morality consistent with a religious belief system, may be loathe to legislate from such a perspective. For this reason, I will not be making scriptural entreaties. Similarly, you will not find me defending marriage on such ephemeral grounds as “sanctity” or “higher moral purpose”. Again, this is not to say that such opinions are invalid, but rather that they take the discussion to an arena that gay marriage proponents (and some of its detractors) are simply unwilling to accept. Many liberals make arguments on equally shaky foundations to defend their positions. And some arguments are completely specious.

A little background before going deeper: I am a libertarian. What that means is that I prize individual liberty and am vehemently opposed to nearly all governmental infringements upon it. The proper justification for government, from this underlying premise, is the maximization of individual liberty by protecting the rights of the individual from infringement by others (unscrupulous individuals, foreign powers, the state, etc.). This is why most libertarians argue that “gay marriage” is outside of government purview and, therefore, should be unhindered by the state. And yet, I offer an argument against “gay marriage” that I contend is consistent with libertarian principles.

Let’s first look at a couple of the more outrageous and frequently advanced arguments in favor of gay marriage (or against its opposition) and why I reject them.

First is the “shouldn’t-we-worrying-about-something-more-important?” non-argument. These days, it’s usually presented in terms like “3,000 servicemen have died in Iraq and all you want to talk about is gay marriage?” Nonsense. Some 650,000 people in this country die of heart disease every year. Do we drop everything else to confront this issue? Or do we recognize that several issues are worthy of consideration and the fact that some may deem on