Wise Men in Governments can Do Anything but Pay for their Nanny States
Economics changed in the early Twentieth Century. America once again had a central bank. Progressives were expanding the role of government. And a new economist entered the scene that the progressives just loved. For he was a macroeconomist who said government should have an active role in the economy. A role where government tweaked the economy to make it better. Stronger. While avoiding the painful corrections on the downside of a business cycle. Something laissez-faire capitalism caused. And could not prevent. But if wise men in government had the power to tweak the private sector economy they could. At least this is what the progressives and Keynesian economists thought.
That economist was, of course, John Maynard Keynes. Who rewrote the book on economics. And what really excited the progressives was the chapter on spending an economy out of a recession. Now there were two ways to increase spending in an economy. You can cut tax rates so consumers have bigger paychecks. Or the government can spend money that they borrow or print. The former doesn’t need any government intervention into the private sector economy. While the latter requires those wise men in government to reach deep into that economy. Guess which way governments choose to increase spending. Here’s a hint. It ain’t the one where they just sit on the sidelines.
Governments changed in the Twentieth Century. Socialism swept through Europe. And left social democracies in its wake. Not quite socialism. But pretty close. It was the rise of the nanny state. Cradle to grave government benefits. A lot of free stuff. Including pensions. Health care. College educations. And a lot of government jobs in ever expanding government bureaucracies. Where wise men in government made everything better for the people living in these nanny states. And armed with their new Keynesian economic policies there was nothing they couldn’t do. Except pay for their nanny states.
According to John Maynard Keynes raising Tax Rates reduces New Economic Activity
The problem with a nanny state is things change. People have fewer babies. Health care and medicines improve. Increasing lifespans. You put this together and you get an aging population. The death knell of a nanny state. For when those wise men in government set up all of those generous government benefits they assumed things would continue the way they were. People would continue to have the same amount of babies. And we would continue to die just about the time we retired. Giving us an expanding population of new workers entering the workforce. While fewer people left the workforce and quickly died. So the tax base would grow. And always be larger than those consuming those taxes. In other words, a Ponzi scheme.
But then change came. With the Sixties came birth control and abortion. And we all of a sudden started having fewer babies. While at the same time advances in medicine was increasing our lifespans. Which flipped the pyramid upside down. Fewer people were entering the workforce than were leaving it. And those leaving it were living a lot longer into retirement. Consuming record amounts of tax money. More than the tax base could provide. Leading to deficit spending. And growing national debt.
Now remember those two ways to increase spending in the economy? You either cut tax rates. Or the government borrows and spends. So if cutting tax rates will generate new economic activity (i.e., new spending in the economy) what will a tax increase do? It will decrease spending in the economy. And reduce new economic activity. Which caused a problem for these nanny states with aging populations. As the price tag on their nanny state benefits eventually grew greater than their tax revenue’s ability to pay for it. So they increased tax rates. Which reduced economic activity. And with less economic activity to tax their increase in tax rates actually decreased tax revenue. Forcing them to run greater deficits. Which added to their national debts. Increasing the interest they paid on their debt. Which left less money to pay for those generous benefits.
President Obama’s Non-Defense Spending caused a Huge Spike in the National Debt not seen since World War II
It’s a vicious cycle. And eventually you reach a tipping point. As debts grow larger some start to question the ability of a government to ever repay their debt. Making it risky to loan them any more money. Which forces these countries with huge debts to pay higher interest rates on their government bonds. Which leaves less money to pay for those generous benefits. While their populations continue to age. Taking you to that tipping point. Like many countries in the Eurozone who could no longer borrow money to pay for their nanny states. Who had to turn to the European Union, the European Central Bank and the International Monetary Fund for emergency loans. Which did provide those emergency loans. Under the condition that they cut spending. Money in exchange for austerity. Something that just galls those Keynesian economists. For despite all of their financial woes coming from having too much debt they still believe these governments should spend their way out of their recessions. And never mind about the deficits. Or their burgeoning debts.
But these Keynesians are missing a very important and obvious point. The problem these nations have is due to their inability to borrow money. Which means they would NOT have a problem if they didn’t need to borrow money. So austerity will work. Because it will decrease the amount of money they need to borrow. Allowing their tax revenue to pay for their spending needs. Without excessive tax rates that reduce economic activity. Making the nanny state the source of all their problems. For had these nations never became social democracies in the first place they never would have had crushing debt levels that cause sovereign debt crises. But they did. And their populations aged. Making it a matter of time before their Ponzi schemes failed. Something no nation with a growing nanny state and an aging population can avoid. Even the United States. Who kept true to their limited government roots for about 100 years. Then came the progressives. The central bank. And Keynesian economics. Putting the Americans on the same path as the Europeans (see US Federal Debt As Percent Of GDP).
With the end of the Revolutionary War they diligently paid down their war debt. Which was pretty much the entire federal debt then. As the federal government was as limited as it could get. Then came the War of 1812 and the debt grew. After the war it fell to virtually nothing. Then it soared to pay for the Civil War. Which changed the country. The country was bigger. Connected by a transcontinental railroad. And other internal improvements. Which prevented the debt from falling back down to pre-war levels. Then it shot up to pay for World War I. After WWI the Roaring Twenties replaced progressivism and quickly brought the debt down again. Then Herbert Hoover brought back progressivism and killed the Roaring Twenties. FDR turned a bad recession into the Great Depression. By following all of that Keynesian advice to spend the nation out of recession. From the man himself. Keynes. The massive deficit spending of the New Deal raised the debt higher than it was during World War I. Changing the country again. Introducing a state pension. Social Security. A Ponzi scheme that would struggle once the population started aging.
Then came World War II and the federal debt soared to its highest levels. After the war a long decline in the debt followed. At the end of that decline was the Vietnam War. And LBJ’s Great Society. Which arrested the fall in the debt. Its lowest point since the Great Depression. Which was about as large as the debt during the Civil War and World War I. Showing the growth in non-defense spending. Then came Reagan’s surge in defense spending to win the Cold War. Once the Americans won the Cold War the debt began to fall again. Until the Islamist terrorist attacks on 9/11. Halting the fall in the debt as the War on Terror replaced the Cold War. Then came the Great Recession. And President Obama. Whose non-defense spending caused a huge spike in the national debt. Taking it to a level not seen since World War II. When an entire world was at war. But this debt is not from defense spending. It’s from an expanded nanny state. As President Obama takes America into the direction of European socialism. And unsustainable spending. Which can end in only but one way. Austerity. Painful austerity. Not like the discomfort of the sequester cuts that only were cuts in the rate of future growth. But real cuts. Like in Greece.
Tags: aging population, austerity, bloated government, central bank, Cold War, cut tax rates, debt, defense spending, deficit, deficit spending, Economics, economy, European Socialism, federal debt, federal government, government benefits, Government jobs, Great Depression, Keynes, Keynesian, Keynesian economics, nanny state, Ponzi scheme, private sector economy, Progressives, progressivism, recession, Roaring Twenties, social democracies, socialism, spending, tax revenue, war debt, World War I
The Policies of Herbert Hoover and FDR caused and prolonged the Great Depression
Franklin Delano Roosevelt (FDR) took Rahm Emanuel’s advice. Long before Rahm Emanuel gave it. FDR did NOT let a good crisis go to waste. And as far as crises go, none were better than the Great Depression. After the government’s bad policies (wage and price controls, higher taxes, Smoot-Hawley Tariff Act, etc.) caused the Great Depression and then their monetary contraction caused the massive bank failures the poverty rate soared for senior citizens. FDR saw that suffering and thought here was a way to forever lock in the senior vote. Give seniors a government pension. And put the fear of God in them that the opposition wants to take it away.
At the turn of the Twentieth century the new thing in politics was progressivism. Smart government people intervening into our private lives to make things better. The size of the federal government exploded during the presidency of Woodrow Wilson. He gave us the Federal Reserve System. America’s central bank. That would prevent anything like the Great Depression from ever happening. Which it failed to do. As the Great Depression happened on their watch. He gave us a permanent federal income tax. He attacked the U.S. Constitution. Making the case for expansive presidential powers. And used the courts to get around Congressional opposition. As well as the U.S. Constitution.
The political opposition fought back against Wilson’s power grab. Defeating the progressive successor in the next election. And returning the country to normalcy. Warren G. Harding and Calvin Coolidge undid much of the anti-business policies of the Wilson administration. Returning the nation to prosperity. And giving us the Roaring Twenties. Where the nation modernized with electric power, the automobile, radio, etc. Unlike the speculative dot-com bubble of the Nineties. Where investors poured money into dot-com companies that never made anything to sell. The Federal Reserve was a little loose with their monetary policy causing some inflation in the Twenties. But the economic activity was so robust that it absorbed that inflation. Then the progressives got back in power. First the Republican Herbert Hoover. Then the Democrat FDR. Whose policies caused and prolonged the Great Depression.
When FDR gave us Social Security it only cost Employer and Employee each 1 Cent of every Dollar up to $3,000
FDR was picking up where Wilson left off. Expanding the federal government. And the power of the presidency. Using the federal courts like Wilson to bypass Congress. And the U.S. Constitution. Marking yet another departure from the free market capitalism that founded the country. And made it the world’s number one economy. It was a creeping socialism. At least, that’s how the political opposition saw. Especially with Social Security. Which helped tip the power from the states to the federal government. Just as Thomas Jefferson feared a strong executive would do.
Of course, the progressives played on our emotions. These were, after all, destitute seniors. We had to take care of these people. Our fathers. Our mothers. Our grandparents. Who sacrificed for us. Now it was time to sacrifice a little for them. And they promised it would be a little. Both employer and employee would only pay 1 cent on every dollar earned up to $3,000 a year. That’s all. Only $30 a year (about $483.58 today). And how could such a small amount be socialism? The problem was that it didn’t stay only 1 cent on every dollar earned up to $3,000 a year. The tax rate went up. As well as the maximum taxable earnings. The government has increased them both. Often.
(source: Historical Social Security Tax Rates)
That low tax rate lasted barely a decade. Then they started raising the maximum taxable earnings. Not much for the first 30 years or so. But once the Seventies arrived that maximum amount grew at an accelerated rate. Despite the increasing tax rate. Thanks to President Nixon decoupling the dollar from gold. And ushering in the era of out of control Keynesian economics. Where the government inflated the money supply like there was no tomorrow. Devaluing the dollar at an alarming rate. Which is why they increased the maximum amount of earnings at an accelerated rate. Because constantly devaluing the dollar reduced what those Social Security checks could buy. So they had to keep making those checks bigger. And that required more tax revenue.
The Social Security Tax Rate held Steady during the Nineties thanks to the Dot-Com Bubble and Japan’s Lost Decade
But it’s worse than that. For it’s just not bad monetary policy forcing the increases in the tax rate as well as in the maximum taxable earnings. Something else happened during the Seventies. Birth rates fell. The baby boom ended in the Sixties. But not the baby making activities. They just continued along without producing new taxpayers. Thanks to birth control and abortion. Also, over the years they expanded the Social Security program to provide for more than just those destitute seniors. So the benefits of the program greatly increases just as the falling birth rate reduce the growth rate of tax revenue. As the number of people leaving the workforce grew at a greater rate than those entering the workforce. Which is why when you convert the dollars into constant dollars the graph doesn’t change much.
We finance most wars with inflation. By printing money to expand the money supply. To give the government all the cash they need to buy the instruments of war. And to pay, feed and clothe their military personnel. We can see this rapid inflation during World War II as the real dollar amount of the maximum taxable earnings fell. That changed in 1951. When they started to increase that maximum amount. That and the higher tax rate stabilized things for awhile. Then the Seventies came along. Where both the tax rate and the maximum taxable earnings amount continued to rise. Even in real dollars. Reflecting the growth in benefits. And the fall in tax revenue. Thanks to the baby bust following the baby boom.
The tax rate held steady during the Nineties thanks to the surpluses of the Clinton administration. Due to that dot-com bubble. And Japan’s Lost Decade. Whose bad economic times helped boost the American economy. Still they had to keep raising the maximum earnings amount. As the baby boomers started retiring. Then Clinton’s dot-com bubble burst. Giving George W. Bush a recession to start his presidency. His tax cuts pulled us out of that recession. Then Bill Clinton’s revamping of the Community Reinvestment Act caught up with us. Giving us the subprime mortgage crisis in 2008. And the Great Recession. Which President Obama tried to ameliorate by reducing the employee’s Social Security tax rate from 6.2% to 4.2% in 2011. For his near trillion dollar stimulus bill failed to end the Great Recession in 2009. As his Social Security tax cut failed to do in 2011. Which was not enough to overcome his anti-business policies (such as Obamacare). All he did was starve Social Security of hundreds of billions in revenue. Making the Social Security funding problem worse in the long run. Requiring even higher tax rates than that once promised 1% (for both employer and employee). On earnings more than that promised $3,000 (about $48,000 today).
Tags: baby boom, baby bust, creeping socialism, devaluing the dollar, dot com bubble, falling birth rate, FDR, federal government, Federal Reserve, Great Depression, Great Recession, Herbert Hoover, inflation, Japan's Lost Decade, lost decade, maximum taxable earnings, money supply, Progressives, progressivism, Roaring Twenties, seniors, Seventies, Social Security, socialism, tax rate, tax revenue, Wilson, Woodrow Wilson
Liberals want to Tax the Poor while Looking Like they’re not Taxing the Poor
A sin tax is an excise tax. An excise tax is a flat tax. Everyone pays the same amount. Which liberals/progressives find unfair. As these taxes hit low-income people disproportionately. Whether it’s someone living on low wages. Or on limited government support. They live on a small amount of money each week. And if they buy alcohol or cigarettes those sin taxes consume a large proportion of their weekly spending money. By greatly increasing the price for alcohol and cigarettes. When you hear things like ‘placing a bulls-eye on Joe Six-Pack’s back’ it refers to a low-income guy that enjoys drinking beer. But drinking beer is difficult for him to do because the current tax structure favors the rich. Who can more easily afford excise taxes.
And it’s the same for cigarette smokers. There has been a war on tobacco. And it’s been so successful that a lot of college-educated people don’t smoke these days. For it is politically incorrect to smoke today. They’ve banned it from restaurants. From the office. Even outside in some places. Some are even trying to ban it in people’s homes if they have children. Progressives hate smoking so much that they have placed enormous sin taxes on cigarettes. Making it very difficult for Joe Six-Pack to buy his cigarettes. And it is the low-income and those without college educations who tend to smoke these days. So the people who can least afford to pay these high sin taxes pay most of them.
Progressives want to raise tax rates on the rich. Because they have more money and therefore should pay more in taxes. According to them. So they can transfer the cost of government away from the low-income to the high-income. And they’ve succeeded. Today almost half of all taxpayers pay no federal income taxes. While the top 10% of earners pay approximately 70% of all federal income taxes. Yet despite this huge transfer of wealth from the rich to the poor sin taxes have continued to rise. Meaning the liberals want to tax the rich. And they want to tax the poor. While looking like they’re not taxing the poor. By ascending their self-righteous soapboxes. For they know better than we. Sin taxes, they say, are for our own good. They discourage bad behavior. And encourage good behavior. Behavior that they approve of. And it’s only coincidental that they these taxes fall disproportionately on Joe Six-Pack. Then they try to take the little income remaining from poor Joe by selling him lottery tickets. Something else more lower income people buy than rich people. For rich people are already rich.
Obamacare combines the Joy of a Colonoscopy with the Fear and Loathing of an IRS Audit
Most people would rather have a colonoscopy than sit through an IRS audit. Why? Because a colonoscopy is more enjoyable. It only takes a couple of hours as an outpatient in the hospital. Your odds are better for getting good news after a colonoscopy than after an IRS audit. And doctors are happy to give good news to their patients. While IRS agents are happy when they can take your money. The more of it they can take the happier they are. And with today’s tax code they can always find money to take from you. Especially if you’re a business owner. Or a movie star. Where you can lose your pension, your children’s college fund and your house if you made a mistake or trusted an untrustworthy accountant. So given the choice people would choose a colonoscopy over an IRS audit almost any day. Even without the anesthetic.
And speaking of health care and the IRS, how about that Obamacare? The liberals’ solution to ‘fix’ health care. Even though it wasn’t broken. Americans have long opposed any form of national health care. They opposed it when Hillary Clinton tried to put a plan together behind closed doors. And they still oppose it. Based on that majority of the population that wants to repeal Obamacare. Which they passed into law thanks to some backroom deals. And fun with numbers. The big selling point was to keep the cost of it below what the wars in Iraq and Afghanistan cost. If the liberals could keep the price tag below a trillion dollars over a ten year period they could say it wouldn’t cost Americans an extra dime to give ‘free’ health care to everyone. Because they would just transfer all of that war spending to health care spending. Despite those trillion dollar deficits. A debt approaching $16 trillion. And an economy wallowing in the Great Recession.
So how did they do it? Keep the cost under a trillion dollars? By being devious. The data they submitted to the Congressional Budget Office (CBO) included ten years of expenditures but only 6 years of benefits. Because 6 years of benefits cost about a trillion dollars. Well, almost. They also stole about $700 billion from Medicare. So the real cost of Obamacare over a ten year period is closer to $3 trillion. Or about three times the cost of the wars in Iraq and Afghanistan. How’s that for free health care? So Obamacare is really, really expensive. Which is why Obamacare forces all Americans to buy health insurance. Even the young and healthy who would rather put that money into a house payment while they are young and healthy. And how are they going to enforce this? By combining the joy of a colonoscopy with the fear and loathing of an IRS audit.
Getting a Photo ID is too Costly, too Complex or just too Time Consuming unless you’re a 16-Year-Old Anxious to Drive
Because of Obamacare everyone will have to prove to the IRS that they have bought health insurance. Which means if you want health care you better file your federal income taxes. Have a Social Security number. And have proven to your employer that you are a legal citizen. With two pieces of documentation. Like a Social Security card. And a photo ID. Pretty intense requirements. And much more stringent than it used to be when anyone could go to the emergency room and receive treatment. Today if you’re sick you better hope dotted your ‘i’s and crossed your ‘t’s. Because in Obamacare before you can get a colonoscopy you have to first answer to the IRS.
And Joe Six-Pack? We love you. Because you’re just an average Joe. The backbone of America. Working hard and raising your family. So who are we to begrudge you a cold beer after a hard day’s work? Or a smoke? We won’t judge you for enjoying those things. Because a lot of us enjoy those things, too. Even if it’s not politically correct. Or in our best interests. Or behavior those ‘better than us’ would approve of. Just make sure you have your photo ID before you buy your beer. Or your pack of smokes. Because unless you look old you aren’t buying either without one. Even if you’re a grizzled war veteran. And been to hell and back in Iraq or Afghanistan. Because even a Purple Heart won’t get you beer or a pack of cigarettes without a photo ID.
The liberals have made it harder for you to get health care. Or to smoke. And they’re not making it any easier to drink adult beverages. If you want to do any of these things you better suck it up and get a photo ID. Because proving who you are, how old you are and whether you are a legal citizen are very important to liberals. Unless, that is, you want to vote. Then they don’t give a damn. They even say asking for a photo ID to vote is only a way to disenfranchise the low-income and young adults. So they can’t vote. Because getting a photo ID is too costly, too complex or just too time consuming. (Except for all those 16-year-olds anxious to drive.) Yet these are the very same people who acknowledge that the low income and young adults pay a disproportionate share of sin taxes. Which they pay on those things you can only buy with a photo ID.
So why this bizarre and inconsistent behavior on the part of liberals? Well, it must have something to do with the vote. And based on their devious behavior in passing legislation people don’t want, one can only assume that their lax attitude is for one reason. Making it easier for them to win elections when they pursue policies that the people don’t want. Like Obamacare. Which is why when it comes to the vote they want anyone to be able to walk in off the street and say they’re whoever they say they are and vote. Unlike the ‘hell’ people have to go through to buy a beer, a pack of cigarettes, getting a job or collecting their lottery winnings. Yes, if you win the big one you’ll need a photo ID to claim your money. But you don’t need it to vote. Because voting just isn’t as important as these other things.
Tags: alcohol, beer, cigarettes, colonoscopy, excise tax, federal income taxes, Health Care, income taxes, IRS, IRS audit, Joe Six-Pack, liberals, low-income, National health care, Obamacare, photo ID, politically correct, Progressives, sin taxes, smokers, spending, tobacco, young adults
The Twenties saw one of the Greatest Explosions in Economic Growth in History despite being on a Gold Standard
There is a duality in economics. There is Keynesian economics. And the Austrian School. The Keynesians believe in central banking. Forcing interest rates below market rates. Purposely creating a permanent but ‘manageable’ inflation rate. And other government interventions into markets. The Austrians believe in a strong currency. Even bringing back the gold standard. Letting the markets set interest rates. Are against purposely creating inflation. And oppose government intervention into markets. So these two schools are sort of the Yin and Yang of economics. The dark and the light. The wrong and the right. The Keynesian and the Austrian.
So it’s not surprising to see periods of history where these two schools bump up against each other. As we transition from good economic times to bad economic times. And vice versa. When politicians change policies for political reasons. Or when politicians change policies for economic reasons. When the Keynesians are out of power and want to get back into power. Or the Keynesians are in power, have destroyed the economy and the electorate wants to throw them out. Starting shortly after World War I. When John Maynard Keynes’ ideas came to light. Economic policies that used smart people and an active, benevolent government. Exactly what Woodward Wilson and his progressives were looking for. Who wanted to quantify human behavior and improve it. With an activist and scientific government. To bless the United States with their brilliance again now that the war was over. And return to the new enlightened way. Helping people everywhere to be better citizens. And fixing all the ‘faults’ of free market capitalism.
But the progressives lost the 1920 election. The voters favoring Warren Harding’s message to return to normalcy. And rejecting the progressives and their new scientific ways of government. They wanted jobs. And that’s what Harding gave them. By cutting taxes. Thanks to the advice of his brilliant treasury secretary. Andrew Mellon. And getting out of the way of businesses. When he died Calvin Coolidge continued his policies. And the Twenties roared. It was one of the greatest explosions in economic growth in history. Where credit was plentiful. Despite being on a gold standard. As the United States electrified. And modernized. Electric power. Telephones. Radio. Electric appliances. Movies. Even on the farm. Where mechanization provided bountiful harvests and inexpensive food. The Roaring Twenties were great times for consumers. The average American. Thanks to minimal governmental interference into the free market. And capitalism. But, alas, that wouldn’t last.
Ronald Reagan won in a Landslide based on an Economic Platform that was Austrian to the Core
It was the mechanization of the farm that began the process that lead to the Great Depression. The average American benefited greatly from those low food prices. But not the farmers who went into debt to mechanize their farms. And when those European World War I soldiers traded their rifles for plows the American farmers lost some valuable export markets. Farmers were struggling with low prices. And heavy debt. Some defaulted on their debt. Causing bank failures in the farming regions. Which soon spread throughout the banking system. And when president Hoover came to office he was going to help the farmers. For Hoover, though a Republican, was a progressive. He brought back activist government. He interfered with the free market. To fix these problems. Price supports for farmers to import tariffs. Raising costs for businesses. And prices for consumers. Then the Smoot-Hawley Tariff launched an all out trade war. Crashing the economy. And giving us the Great Depression.
The 1930s was a lost decade. FDR’s New Deal policies increased the size of government. And their reach into the free market. Which prolonged the Great Depression. But nothing they tried worked. Despite trying their progressive brilliance for some ten years. It took World War II to pull the United States out of the Depression. When the government at last allowed businesses to pursue profits again. And got out of their way. This surge in economic activity continued after the war and through the Fifties. And into the Sixties. With none other than JFK cutting taxes in a very Austrian way. Yes, Kennedy was an adherent to the Austrian school. But LBJ wasn’t. And when he took over things changed. The progressives were back. Calling themselves liberals now. And instead of the New Deal they gave us the Great Society. Which grew the government even larger than the New Deal did. And the Great Society spent the money. Along with putting a man on the moon and the Vietnam War, government spending exploded. The Keynesians were hitting their prime. For once they could do all of the great things they always said they could. And in the process fix a ‘broken’ free market system. Finally having brilliant people in all the right places in government. Making brilliant policies to help people live better lives.
And then came the Seventies. The government was spending so much that they turned to the printing presses. Because they could. Thanks to central banking. Even if it was hamstrung by gold. You see, at that time the dollar was convertible into gold. And with the Americans printing so much money and depreciating the dollar countries holding U.S. dollars said, “Screw that.” And converted their dollars into gold. That great sucking sound they heard in the Seventies was the sound of U.S. gold reserves getting sucked out of the country. Well, even though the Keynesians hated gold they didn’t want to see all their gold reserves disappearing. So Nixon did something very Keynesian. And decoupled the dollar from gold. Freeing the government at last to spend as irresponsibly as the Keynesians wanted. And spend they did. Turning the printing presses on high. Depreciating the dollar ever more and causing double digit inflation. Worse, all that Keynesian spending did nothing for the economy. There was high unemployment as well as inflation. An unusual phenomenon as you typically had one or the other. Not both. But this was stagflation. A Keynesian phenomenon. And you measured how bad it was by adding the unemployment rate to the inflation rate. Giving you the misery index. And the misery was pretty high during the Keynesian Seventies. It was so miserable that they joked about it on Saturday Night Live. With Dan Aykroyd impersonating Jimmy Carter. Joking about high nice it would be to own a $400 suit. And how nice it was just to make a phone call to get the printing presses to print more money. The people thought Aykroyd’s Carter was funny. But they didn’t care for the real one all that much. And made him a one term president. As Ronald Reagan won in a landslide. Based on an economic platform that was Austrian to the core. Including a promise to return responsibility to government spending by reinstating a gold standard. (Which was a political ‘bridge too far’.)
The Electorate paying Federal Income Taxes fell from 80% when Reagan was in Office to about 50% by 2009
The Eighties were so prosperous that the Keynesians, liberals and progressives derisively call them the decade of greed. They tried everything within their power to rewrite history. Calling the exploding economic activity ‘trickle down’ economics. But the figures don’t lie. Despite the liars figuring. The inflation rate fell. Interest rates fell. The unemployment rate fell. And despite the cuts in tax rates the government was never richer. Tax revenue collected under the reduced rates nearly doubled. But there was little cutting in government spending. Flush with all that cash they kept spending. In part to rebuild the military to win the Cold War. Which Reagan won. But all the social spending continued, too. Which led to some record deficits. Not the trillion dollar deficits of the Obama administration. But large nevertheless. Which provided the meme to explain away the prosperity of the Eighties. “But at what cost?” being the common refrain. They talk about the deficits. But very conveniently leave out that part of how tax revenues doubled at the reduced tax rates.
Well, as time passed the Keynesians got back into government. In the late Nineties as they kept interest rates low again to stimulate the economy. Creating the dot-com bubble. And the early 2000s recession. George W. Bush cut taxes. Brought the economy out of recession. But then the Keynesians went back to playing with those interest rates. Kept them artificially low. Creating a great housing bubble. And the Subprime Mortgage Crisis.
Keynesian economics have failed throughout the last century of trying. And taxpayers clearly saw this along the way. Voting for Austrian policies every time economic policy mattered. Especially after another failure of Keynesian policy. Every time their policies failed, though, the Keynesians had an excuse. Supply shocks. Liquidity traps. Something. It was always something that caused their policies to fail. But it was never the policies themselves. Despite Mellon, Harding, Coolidge, Kennedy and Reagan proving otherwise. So they had to try something else. And they did. Class warfare. They transferred the tax burden to the wealthier. Reduced the number of people paying federal income taxes. And gave ever more generous government benefits. This took the failed ideology out of the equation. Making it easier to win elections. For when Reagan was in office more than 80% of the electorate were taxpayers. And Austrian economics won at the polls. The Nineties ended with only about 65% of the electorate paying federal income taxes. By 2009 that number shrunk to about only half of the electorate. Which gave the tax and spend Keynesians an edge over responsible-governing Austrians. Because people who don’t pay income taxes will vote for policies to increase taxes on those who do. Not because of concern over economic policy. But just to get free stuff. Something Keynesians learned well. When at first you fail just buy votes. And then you can continue your failed policies to your heart’s content.
Tags: activist government, Austrian school, Austrians, bank, banking, banking system, capitalism, Carter, central banking, class warfare, Coolidge, cutting taxes, debt, deficits, economic policies, farmers, FDR, federal income taxes, food prices, free market, free-market capitalism, gold standard, government benefits, government intervention, government intervention into markets, government spending, Great Depression, Great Society, Harding, Hoover, inflation, interest rates, JFK, jobs, Kennedy, Keynesian, Keynesian economics, Keynesians, LBJ, liberals, markets, Mellon, misery index, New Deal, prices, Progressives, Reagan, Roaring Twenties, Ronald Reagan, scientific government, stagflation, tax cuts, tax rates, unemployment
We’re Moving on Up
Those on the Left see the world through zero-sum eyes. Especially taxes. For example, let’s look at the taxes of a group of 100 people. These one hundred can be broken down into three groups. Poor (20), middle class (79) and rich (1). With the following annual salaries. Poor ($15,000), middle class ($50,000) and rich ($1,000,000). Based on the 2008 tax tables (with a top marginal tax rate of 35%), they each pay $4,600, $17,000 and $454,000, respectfully. The total each group pays, then, is $91,000 (poor), $1,342,000 (middle class) and $454,000 (rich). Which is 4.8%, 71% and 24%, respectfully, of the total tax paid. The largest group of people pays the largest percentage of the total tax burden. The middle class. (All numbers are approximate.)
Now, let’s do a little zero-sum analysis. And figure out how to make the rich pay a larger share of the taxes. Hmmm. How about we raise the tax rate on the rich? If we raise the top marginal tax rate to 45%, the taxes the one rich person pays goes from 24% to 28%. And the taxes the middle class pay goes from 71% to 68%. So, to reduce the tax burden on the middle class, we simply have to raise the top marginal tax rates. Simple, right? Wrong. Because what happens in reality is the opposite of what most would think. As you raise the tax rate on the rich, the total tax burden shifts from the rich to the poor and middle class. Why? Because of one fundamental flaw in their analysis. Which is this.
Life is not zero-sum. People don’t always stay in the same economic class. They work hard. Earn money through the years. Some even save enough money to open a business. And some of these do become rich. And when they do, they pay a lot more taxes than they did when they were poor or middle class. And this is the very thing that high marginal tax rates discourage. Upward economic movement. As the poor move into the middle class. And the middle class move into the rich class. This is why low, not high, tax rates shifts the tax burden from the poor and middle class to the rich. Because low tax rates make more rich people to tax.
The Roaring Twenties were Kicked off by Tax Cuts
Andrew Mellon was a rich banker. Who understood business. Warren G. Harding tapped him to be his Secretary of the Treasury. World War I was over. And there was a huge war debt to pay off. Taxes were high. And the progressives wanted to raise them higher. But Mellon was a conservative. And he knew that you just didn’t stimulate economic activity with high taxes. And that’s what paid the bills. Economic activity. People gainfully employed and paying taxes. So he cut taxes. They cut the top marginal tax rate from 77% to 25% (a cut of 68%). Which gave us the Roaring Twenties. Electricity, appliances, radio, you name it, the modern age had come. Everyone was working. And buying stuff. Times were good.
Sure, you’re saying, but at what cost? The economy took off into the stratosphere but the rich got a free ride. With their tax rate cut of 200%, the poor and middle class must have been stuck with the tax bill. Right? Wrong. With the lower tax rates, the rich found it cheaper and easier to pay taxes than to shelter it. Also, the lower rates encouraged innovation (i.e., the modern age). Lots of people got rich. There was a lot of upward movement through the economic classes. So there were more rich people paying taxes. In 1920, the very rich paid approximately 30% of all federal income taxes. That number jumped up to 62% by 1929. That’s an increase of 108%.
If the name of the game is funding government, you got to like what happened in the Twenties. Because the government got fat on tax receipts. And the richest of the rich were paying about twice the amount of taxes they were at the beginning of the decade. That is a huge transfer of the tax burden from the poor/middle class to the rich. And the federal debt? It fell from about $26 billion to $17 billion. That’s a decrease of about 35%. Lower tax rates, tax burden transferred to the rich and a lower debt. Wow. Mellon was right. Cutting tax rates on the rich works. And it works very well.
The Eighties Economic Boom was Kicked off by Tax Cuts
Ronald Reagan was another conservative who understood business. He defeated Jimmy Carter who was trying to win a second term. But the malaise and stagflation of the Jimmy Carter years made him a one-term president. To lift the nation out of recession, Reagan did like Andrew Mellon. And cut taxes. The top marginal rate dropped from 70% to 28% (a 60% cut). And economic activity exploded. Especially in Silicon Valley. And the world went high-tech. Electronics and computers entered our lives. A new modern age had come. Everyone was working. And buying stuff. Times were good. Again.
At the beginning of the Reagan years the top 1% paid about 19% of all income taxes. At the end of his second term they were paying about 27.5%. That’s an increase of 44%. Once again, tax cutsfor the rich transferred the tax burden from the poor/middle class to the rich. As in the Twenties, the rich found it easier to pay their taxes rather than trying to shelter it. Also, the lower rates encouraged a lot of entrepreneurial innovation. We used the first cell phones and personal computers in the Eighties. A lot of this innovation started small in someone’s garage. And ended in an IPO on Wall Street as they took their companies public. Lots of people got rich. Creating a surge of upward movement through the economic classes. Making many more rich people to tax.
The Reagan years were an economic juggernaut. A lot of people got rich. But at what cost? The debt exploded under Reagan. So those on the Left jumped on this. They say his tax cuts mortgaged our future. Impoverished our children. By not paying our bills along the way. To that I say, “Nice try.” That debt had nothing to do with the Reagan tax cuts. It was a spending problem. Federal tax receipts in 1980 were $517 billion. After Reagan’s tax rate cuts, they jumped to $909 billion in 1988. That’s an increase of about 76%. Lower tax rates, tax burden transferred to the rich and a 75% increase in federal tax receipts? Wow. Reagan was right. Cutting tax rates on the rich works. And it works very well.
Conservative Policies Favor the Poor and Middle Class
So there are two great economic booms created by tax cuts. Both periods lifted the country to a new modern age. People’s standard of living improved across all economic classes. And a lot people moved up through the economic classes. Which is key to the success of tax cuts. And the reason why those on the Left ignore this and focus instead on zero-sum policies. Why?
Because the Left knows their economic policies don’t work. But that’s okay with them. For their policies aren’t about the economy. Or your well being. They are about political power. There are more poor and middle class people than rich. No matter how far you slash the top marginal tax rate. So that’s where the votes are. And a good way to get those votes is with class warfare. The rich have an unfair advantage. And with your vote, they will right that wrong. Sounds good. Especially if you’re not rich. Or don’t know the history of high marginal tax rates. Of how they transfer the tax burden from the rich to the poor and middle class.
Of course, there’s a problem with this strategy. It transfers more and more of the tax burden to the people you need votes from. And the more you choke off economic activity by taxing the rich, the more you starve the treasury of tax dollars from the rich. Which means you have to come up with more and more clever ways to bleed the middle class. And they don’t have a problem with this either. What they have a problem with is that the middle class may figure this out one day. And vote conservative. Whose policies actually favor the poor/middle class.
Tags: Andrew Mellon, Big Government, class warfare, conservative, cut taxes, debt, economic activity, economic class, economic movement, economy, Eighties economic boom, federal debt, funding government, income taxes, Jimmy Carter, Mellon, middle class, money, poor, Progressives, Reagan, Reagan tax cuts, Reagan years, rich, Roaring Twenties, Ronald Reagan, stimulate economic activity, tax, tax burden, tax cuts, tax dollars, tax rate, tax receipts, taxes, top marginal tax rate, upward economic movement, votes, zero-sum
Almost half of a Plantation’s Value was its Slaves
Slave labor wasn’t cheap. First there was the capital expenditure to purchase the slaves. Then you had to feed them, clothe them, house them, etc. It took money. But that money made money. Mostly on the big plantations. Where the division of labor was minimal. And large labor gangs could work a single crop profitably.
The more slaves on a plantation the more land they could work. So the more slaves on a plantation the more valuable the plantation was. Like a dairy farm with many dairy cows is worth more than one with fewer cows. A productive dairy farm makes money. And it can borrow money to grow. Ditto for a cotton plantation.
Now suppose we free dairy cows everywhere. They’re free to walk off of their farms and pursue their own lives. What will become of the dairy farm? It won’t make money. It won’t be able to pay back its loans. The farm will lose value. Because no one will buy it without the cows to make milk. Dairy farmers everywhere will go broke. And they will lose their farms.
If not for the Civil War, Abolition would have been the Greatest of all Bailouts
When we discuss slavery, we focus more on issues of morality. But the reason we had it for so long is partly due to the economics. There was a large price tag attached to abolition. And the question was who was going to pay? Slavery, though immoral, was legal. The plantations grew. They purchased more slaves. Worked more land. Incurred debts to grow further. All based on the collateral of their plantation. Much of which was their slaveholdings.
Based on the 1790 census, there were just fewer than 700,000 slaves in America. At the time, the nation’s finances were in a mess. We were begging Europe to loan us money. There was no money available to reimburse the slave owners. And the North didn’t want to pay for this ‘southern’ problem. There was no easy way to free the slaves without a huge financial hit. For someone. So we tabled the issue. For another generation to consider. And resolve.
But we didn’t. By 1860, the slave population topped 3.8 million. That’s over 5 times the number from the 1790 census. The cost to reimburse these slave holders had grown to over $3 billion dollars. That was almost 70% of the 1860 GDP. In comparison, the total budget of George W. Bush reached as high as 69% of GDP. Clearly, the cost of freeing the slaves was huge. It dwarfed all other federal spending. And this is one of the reasons that it took a war to finally resolve. And it was our nation’s bloodiest conflict. More died in the American Civil War than did in WWI and WWII combined. And the war devastated the southern economy. Besides the direct war damage, the South was impoverished. And easy pickings for northern carpetbaggers.
The issue of slavery was less costly to resolve sooner than later. But the price was always so great that the institution continued on because no one was willing to bear the costs at any time. This only guaranteed that the final reckoning would be greater. Which it was. The final cost was so great it nearly destroyed the nation. And bitter feelings linger to this day.
Never Let a Good Crisis Go to Waste
Woodrow Wilson and his fellow Progressives were going to change the world. But that didn’t work so well. In fact, a lot of their meddling just crashed the economy. Secretary of the Treasury Andrew Mellon helped President Warren Harding fix the economy. And we got the Roaring Twenties.
But the Progressives kept tinkering. And Republican Herbert Hoover was even a bit of a Progressive himself. Anyway, some government mismanagement (and inept Federal Reserve actions) gave us the Great Depression. Our nation’s greatest crisis. Which Franklin Delano Roosevelt (FDR) would exploit to transform the nation with his New Deal.
FDR’s economic policies failed. Only capitalism re-unfettered for the war effort brought the nation back. Even though he failed he is still remembered fondly by most Americans. He stood fast with our allies and defeated Nazi Germany. And he gave us Social Security. Which, financially speaking, will cost the nation more than defeating the Nazis did.
The Great Ponzi Scheme Social Security
Social Security was originally intended to help poor widows who had struggled through the Great Depression. It has subsequently grown to cover retirement and disabilities. Not a big deal then. The actuaries crunched their numbers. They took into account immigration, birthrates, life spans, death rates and other important stuff. Like actuaries are wont to do. And they figured it would work. Because we had a growing population. With a lot more younger people entering the workforce than there were old people retiring and collecting benefits.
So, like a Ponzi scheme, Social Security was as sound as a pound. As long as their assumptions held. But they didn’t. Immigration slowed. Our life spans increased. And worse, we just weren’t having as many babies as we once did. Now we had more people retiring and collecting benefits. And fewer entering the workforce to pay for these retirees. The pyramid inverted itself. The base was smaller than the tip. And that just ain’t good for a Ponzi scheme.
Everyone predicts Social Security will go bankrupt. They’ve been trying to fix it through the years. To extend the solvency. By reducing benefits. Raising taxes. And raising the retirement age (to decrease the years retirees collect benefits). These ‘fixes’ have pushed insolvency out a few more years. But it hasn’t addresses the elephant in the room. Old people. They’re living longer than the actuaries ever imagined. Worse, because they’re living so long, they’re getting all kinds of medical problems that are costing Medicare and Medicaid a lot of money. And, you guessed it, they’re going bankrupt, too.
Why Fix something Today that we can Leave for Future Generations?
Because there are so many seniors in these programs no politician wants to touch them. They’re the ‘third rails’ of politics. Seniors vote. And if you cut their benefits, they’re probably not going to vote for you. Every politician knows this well. So, like slavery, they table the issue for a later generation to address. But every day that passes, more seniors join the ranks of the retired and begin collecting benefits. While fewer people enter the workforce to pay for their retirement. Which guarantees that the cost to fix these problems will grow ever larger.
The day of reckoning will arrive. It always does. For the issue of slavery it was civil war. Over in Europe as they struggle to control their out of control spending they’re having riots. Which sometimes happens when you take away stuff from large numbers of people. Let’s hope it doesn’t come to that here. But one thing that we can be pretty certain about. Fixing this problem is going to hurt someone in the wallet. And the longer we wait, the greater that someone will hurt.
Tags: abolition, bailouts, balance your books, carpet baggers, Civil War, FDR, free the slaves, never let a good crisis go to waste, old people, plantation, Ponzi scheme, Progressives, seniors, slave labor, slaveholdings, slavery, slaves, Social Security, southern economy
Lying to Make Future Liberal Democrat Voters
Ask anyone some questions about the Great Depression and they’ll probably get them wrong. Why? Because their history teachers revised history to make government look better. Government wore the white hats. And business wore the black hats. Because their teachers were public school teachers. And the teacher unions are one of the strongest unions in the country. The government takes care of them. And, in return, the public school teachers takes care of government. By turning out as many future liberal Democrat voters as they can.
So what did our teachers teach us about the Great Depression? Evil rich people caused it. By speculating in the stock market. And it was their speculation that caused the Great Crash which caused the Great Depression. Rich business people bad.
Then Franklin Delano Roosevelt (FDR) rode into Washington and saved the day. FDR expanded federal power and went to work to fix things. He punished the rich (raised taxes). Created a huge federal bureaucracy to manage the economy. And spent money like there was no tomorrow. Public works programs. Even gave us Social Security. He made everything better. Big hearted government people good.
That’s the history in our history books. The only problem is that it’s wrong.
Tax Cuts and the Roaring Twenties
This is the story told because it favors those who favor expanding government. Big Government wants to tell us what’s best for us. And our public schools want to shield our children from their parents. Because they (and Big Government) are smarter than parents. So they revise history. And lie to our kids.
Really? Come on, they’re not really lying to our kids. I mean, what reason could they possibly have to lie to our kids? Just look at the demographics. The far Left, those in government who like to spend money and tell us how to live our lives, are about 20% of the population. The other 80% have real jobs and pay taxes. And this is a problem. How do you convince 80% of the people (who pay taxes) to pay more taxes so the government can spend it against their wishes? All the while having the government telling these taxpayers how they should live their lives? Easy. You lie. And you lie to their kids.
There was an economic boom before the Great Depression. The economy was roaring so strong that they called it the Roaring Twenties. And it had nothing to do with speculation. We were building automobiles. Electrifying the country. Selling electrical appliances. And building radios. This was no speculative bubble. It was real and strong economic growth. And guess what kicked it off? Tax cuts.
Higher Tax Rates Shelter Wealth instead of Creating Jobs
They don’t talk about this in the history books. Because no public school teacher or government bureaucrat likes tax cuts. Because economic growth created by tax cuts sends a very simple yet powerful message. We don’t need Big Government.
Following World War I, government was a bureaucratic behemoth. With a huge federal debt. Fighting world wars can do that. The Progressives, who gave us Prohibition and other nanny-state-like things, liked that big bureaucracy. They liked activist government. But even they knew that a high debt was not good. And being the zero-sum economists they were, they knew only one way to reduce that debt. Higher taxes. And their candidate for the 1920 election, James M. Cox, promised to do just that. And he lost the election. Proving that Progressives don’t understand economics. Or the American people. Those Americans who have jobs, at least.
Warren G. Harding won that election. And his secretary of the treasury, Andrew Mellon, understood economics. To find a better secretary of the treasury you have to go all the way back to our first one. Alexander Hamilton. Mellon understood business. And understood rich people. High tax rates did not bring in more tax money. Why? Because rich people know how to shelter their wealth. But give them a lower tax rate where they can make and keep what they earn, they’ll invest that money and create jobs. They’ll pay more in taxes (even at a lower tax rate) because they’re not sheltering their wealth. Their employees will pay more in taxes because they’ll have jobs. And this is what happened during the Roaring Twenties. People were working. Making durable goods (cars, electrical appliances, radios, etc.). Times were good. Very good indeed.
Government Activism Gives us the Great Depression
The United States became an economic juggernaut during the 1920s. The Americans were eclipsing the Europeans. We were not a superpower yet. But the Europeans saw the writing on the wall. They wanted to form their own union of European states to compete against the economic powerhouse that was the United States. We were kicking ass and taking names. And no one could hold a candle to us. We were unstoppable.
Then Herbert Hoover became president. He was a progressive republican. He liked activist government. Hoover was a Big Government Keynesian and wanted to use the powers of government to end the business cycle. He believed high wages meant high prosperity. And in parity between farm and nonfarm prices. He was everything FDR would become. In fact, the Hoover administration started a lot of the FDR New Deal programs.
Farmers had mechanized their farms. They plowed more fields than ever. And grew more than ever. With bumper crops prices fell. Normally not a problem. You just sold more. But the war was over. European farmers were farming again. Not only did they not need our crops, they slapped tariffs on our exports to protect their farm prices. So farmers couldn’t sell enough to make a profit at the lower prices. Farmers went bankrupt. Farm loans went unpaid. Farm banks failed. The Federal Reserve failed to provide liquidity to help other farm banks in trouble. More failed. This rippled into the nonfarm banks. Which contracted the money supply. Business started to hoard their cash because of the tight credit market. They cut back on production. Laid people off. Then the Smoot-Hawley Tariff went to committee in Congress. Business responded, knowing that that higher tariffs on imported goods they used would increase their cost of production. They hoarded more cash. Cut back on production. Congress passed the Smoot-Hawley Tariff. Other nations respond by imposing their own tariffs. This resulted in a trade war. Business sales fell. Production fell. More banks failed. Hello Great Depression.
Tax Cuts Stimulate Economic Activity
This is the part they don’t teach you in history class. It was government involvement that killed one of the strongest bull markets in history. And would prolong the Great Depression. The growth of government and the anti-business climate created great uncertainty. And that didn’t go away until World War II. When James Byrnes (head of the Office of War Mobilization) allowed business to make fat profits if they could deliver the vast quantity of war material needed to defeat Hitler, Mussolini and Tojo. And they did. The Arsenal of Democracy won World War II. Private business doing what they do best. Business.
But liberals like to spend money. Our money. And tell us what’s best for us. To do that, though, they need us to vote for them. And telling us that they want to take more of our money while telling us what’s best for us won’t make us vote for them. It didn’t help Cox to tell the truth in 1920. And no other presidential candidate since. Because the 20% of the population that agrees with them isn’t enough to win an election. You need some of the 80% who have jobs and pay taxes.
History has shown tax cuts stimulate economic activity. They did when Warren Harding cut taxes. When JFK cut taxes. And when Ronald Reagan cut taxes. This truth doesn’t make a good argument for raising taxes, though. So our public schools and Big Government revise that part of history. And lie to our kids. Until they bleat “Business bad. Government good.” Like good future liberal Democrat voters.
Tags: activist government, Andrew Mellon, Arsenal of Democracy, Big Government, creating jobs, economic activity, economic boom, economic growth, economy, farm prices, farmers, farming, FDR, federal bureaucracy, federal debt, federal power, future liberal Democrat voters, government activism, government bureaucrat, Great Depression, Herbert Hoover, higher tax rates, James Byrnes, Keynesian, Liberal Democrats, manage the economy, New Deal, progressive republican, Progressives, public school teachers, public schools, raised taxes, revised history, Roaring Twenties, shelter wealth, Smoot-Hawley Tariff, strong economic growth, tariffs, tax consumers, tax cuts, tax cuts stimulate, taxpayers, teacher unions, trade war, United States
We’ve all heard the joke. What’s coyote ugly? That’s when you wake up with an extremely ugly person in bed lying on your arm. After a night of heavy drinking. You’re fairly certain you had sex. You’re not 100% sure because you can’t remember anything. But here the two of you are. Naked. The circumstantial evidence is pretty damning. You want to get out. Fast. Instead of waking your lover, you chew your arm off so you can slip away quietly. Like a coyote will do if caught in a steel-jaw trap.
The lesson here is, of course, to drink in moderation. For when we drink to excess, we sometimes do things we wouldn’t normally do sober. But we do. Drink to excess. And get drunk. And, boy, when we do, some of us really do. Make a real mess of their lives, too. You see, drunken husbands do not make happy wives. Or good fathers. Especially when drunken husbands beat up their wives, spend their paychecks at the corner saloon, have sex with prostitutes and catch syphilis (which they then pass on to their wives and soon to be born children).
For these reasons, wives have been behind various temperance movements throughout history. And they have had modest success. If you ever found yourself in a dry county thirsting for an adult beverage, you can thank these ladies. But Prohibition? That’s a different story. That took Big Government. The Progressives. Who thought they knew best what was for the common good.
DO AS I SAY, NOT AS I DO
Wives have suffered unfairly from the affects of alcohol. But during the 19th century, their power was limited. They had to rely on grass-roots movements. And their churches. Which had moral authority as we were much more religious back then. Most drunken husbands knew they were behaving poorly. When sober. But things changed in the 20th century. The powers of the government grew. This power and new sciences (like eugenics) made some believe they could make a better society by passing enlightened laws. (And make better people in the case of eugenics).
We call it social engineering. Using the power of the state to change human behavior. Well, change it for those who are not apparatchiks of the state. The elite Progressives, including the ladies of high society, still drank. For it wasn’t illegal to drink adult beverages. Only to manufacture, sell, or transport them. So it was the poorer elements of society who felt the impact of Prohibition. And the immigrants. Who the social elites blamed for all the drinking woes. For people in their strata of society didn’t have drinking problems. So there was no reason to punish them. The elites. They weren’t the problem. It was the poor. And the immigrants. They’re the ones government needed to keep from drinking themselves to ruin.
So while the elites still enjoyed their intoxicating beverages in the safety of their mansions and clubs, Al Capone and other bootleggers fought for turf. For control of the illegal liquor trade. Shooting each other with Thompson Machine Guns in our public streets. That’s a .45 caliber round. It makes big holes. And shatters bone. A lot of these rounds were flying through our public streets. And they hit more than just gangsters.
Prohibition modified some behavior. But at great cost. Congress repealed it in 1933. In part to stem the liquor violence. And part because the Great Depression was too depressing sober.
JUST SAY NO
I once worked at a small office in a bad part of town. One day a woman knocked on the door. She asked if that ‘short guy’ that opens the gates in the morning was around. I said no. Then she asked me if I wanted to have a little fun. I said, “Thank you, but no.” My secretary had come to the door while I was talking to her. After I closed the door, she told me that woman just lost a lot of weight. And that she probably had AIDS.
Women like her were common in the neighborhood. They sold sex for drug money. When they weren’t with a John they were getting high. Men, too. One time, this 6-foot-plus behemoth in a skirt was walking in the street shouting something incoherent. Our driver discovered he was a guy. When he lunged through his open window while turning at the corner. I don’t know what scared him more. The assault. Or the fact that she was a he.
By the way, that short guy that opens the gates? He was married. And had a couple of daughters. God only knows what he gave his wife.
Drug addiction is not good. No one’s life ever got better by being addicted to drugs. None of these people ever planned on drug addiction. It just happened. Somehow. One day you’re just partying with some friends. Then the next thing you know you’re turning tricks or stealing to support your habit. If you have money it’s a different story. Then you can party until you kill yourself. John Belushi overdosed from a heroin/cocaine cocktail called a speedball. Chris Farley, too. It’s unlikely that the speedball was their first high. They probably started out with something less potent. Like marijuana. The entry drug of choice. Only when that drug loses its charm do people step up to something a little more potent.
Of course, if you don’t start, chances are you won’t move up to something more potent. This was the idea behind Nancy Reagan’s anti-drug program. Stop the kids from starting. To resist peer pressure. To just say no. Her program did modify some behavior. Kids did use fewer drugs. But she was Ronald Reagan’s wife. The Left didn’t like him. Or her. So they ridiculed her program as being simplistic. Discontinued it. And drug use by kids increased.
Like Capone and his fellow bootleggers, the illegal drug trade is controlled by gangs. And they, too, fight over turf. But those involved at the street level of the drug trade today are a lot younger. During the days of Prohibition, kids played with toy guns. Today, they’re playing with real guns. Not so much playing but killing each other. And innocent bystanders. In drive-by shootings. Why? Because drugs get you money. And money gets you power. Put all that together and it’s very seductive to kids from broken homes in the hood. Who have nothing. And have nothing to lose. It’s almost romantic. Fighting. And dying. A regular gangster. Living in a gangster paradise.
Once in, though, it’s hard to get out. The song Gangsta’s Paradise (by Coolio featuring L.V. from the 1995 Movie Dangerous Minds) laments about that paradise. “Tell me why are we so blind to see. That the ones we hurt are you and me.”
You get higher up in the echelon and the violence gets worse. You can see that on America’s southern border. And further south. Kidnappings. Beheadings. And other unspeakable things. Because of the big money in illegal drugs. Like there was in bootlegging. Make something illegal that people still want and will buy, and that something becomes a very profitable commodity indeed.
DAMNED IF YOU DO, DAMNED IF YOU DON’T
So what’s the answer? What is the best course of action for the common good? We can keep drugs illegal. And continue to fight the war on drugs. And watch the violence escalate as people fight to control this illicit trade. Or we can decriminalize drugs. Make them easily accessible. And cheap. The drug gangs would go the way of the bootlegger gangs. And the crack/meth whore in the street won’t have to perform as many sexual acts to support her habit.
Alcohol is legal today. And there are a lot of social costs because of that. But the majority of people who do drink are not driving under the influence or beating their wives. Or getting syphilis from a prostitute hanging out at the corner saloon. Wouldn’t it be the same for drugs?
Kids drink. Even though they can’t legally buy alcohol. But the worse thing they can do is kill someone while driving a car. Or get killed in a car driven by another drunken kid. Or kill themselves from binge drinking. Or get pregnant because they got drunk at a party. Or get infected with a venereal disease because they got drunk at a party and had sex. These are very bad things. But they’re not an addiction. Sure, you can become an alcoholic, but a lot of kids don’t like the taste of the adult beverages they’re consuming. They’re just doing it for the party buzz. And vomiting after. It takes awhile, for some, to get over that hump where those awful tasting beverages don’t taste so awful anymore. But drugs? They’re tasteless. There isn’t a delivery system ‘hump’ to get over. Which makes the addiction process that much easier. And where there is only one kind of drunk, there are all sorts of highs. New and different drugs to explore. When you get bored with the drug du jour. So, no. It probably wouldn’t be the same with alcohol. It would probably be worse.
THE LESSER OF EVILS
Often the choice comes down to a lesser of evils. So, to do what is best for the common good, we just need to determine which is the lesser evil. So which is worse? The violence from trying to keep something illegal? Or the social costs of decriminalizing something that is already causing a lot of harm while being illegal? It comes down to what you, as an individual, think. And that is, must be, a subjective decision. And therein lays the problem of choosing what is best for the common good. It’s an opinion. Choices aren’t right or wrong. There’re just different opinions.
And that’s why so few can agree on what is best for the common good. Different people think different things are better. And different things are worse. And, at best, they can agree to disagree.
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WHAT GAVE BIRTH to the Federal Reserve System and our current monetary policy? The Panic of 1907. Without going into the details, there was a liquidity crisis. The Knickerbocker Trust tried to corner the market in copper. But someone else dumped copper on the market which dropped the price. The trust failed. Because of the money involved, a lot of banks, too, failed. Depositors, scared, created bank runs. As banks failed, the money supply contracted. Businesses failed. The stock market crashed (losing 50% of its value). And all of this happened during an economic recession.
So, in 1913, Congress passed the Federal Reserve Act, creating the Federal Reserve System (the Fed). This was, basically, a central bank. It was to be a bank to the banks. A lender of last resort. It would inject liquidity into the economy during a liquidity crisis. Thus ending forever panics like that in 1907. And making the business cycle (the boom – bust economic cycles) a thing of the past.
The Fed has three basic monetary tools. How they use these either increases or decreases the money supply. And increases or decreases interest rates.
They can change reserve requirements for banks. The more reserves banks must hold the less they can lend. The less they need to hold the more they can lend. When they lend more, they increase the money supply. When they lend less, they decrease the money supply. The more they lend the easier it is to get a loan. This decreases interest rates (i.e., lowers the ‘price’ of money). The less they lend the harder it is to get a loan. This increases interest rates (i.e., raises the ‘price’ of money).
The Fed ‘manages’ the money supply and the interest rates in two other ways. They buy and sell U.S. Treasury securities. And they adjust the discount rate they charge member banks to borrow from them. Each of these actions either increases or decreases the money supply and/or raises or lowers interest rates. The idea is to make money easier to borrow when the economy is slow. This is supposed to make it easier for businesses to expand production and hire people. If the economy is overheating and there is a risk of inflation, they take the opposite action. They make it more difficult to borrow money. Which increases the cost of doing business. Which slows the economy. Lays people off. Which avoids inflation.
The problem with this is the invisible hand that Adam Smith talked about. In a laissez-faire economy, no one person or one group controls anything. Instead, millions upon millions of people interact with each other. They make millions upon millions of decisions. These are informed decisions in a free market. At the heart of each decision is a buyer and a seller. And they mutually agree in this decision making process. The buyer pays at least as much as the seller wants. The seller sells for at least as little as the buyer wants. If they didn’t, they would not conclude their sales transaction. When we multiply this basic transaction by the millions upon millions of people in the market place, we arrive at that invisible hand. Everyone looking out for their own self-interest guides the economy as a whole. The bad decisions of a few have no affect on the economy as a whole.
Now replace the invisible hand with government and what do you get? A managed economy. And that’s what the Fed does. It manages the economy. It takes the power of those millions upon millions of decisions and places them into the hands of a very few. And, there, a few bad decisions can have a devastating impact upon the economy.
TO PAY FOR World War I, Woodrow Wilson and his Progressives heavily taxed the American people. The war left America with a huge debt. And in a recession. During the 1920 election, the Democrats ran on a platform of continued high taxation to pay down the debt. Andrew Mellon, though, had done a study of the rich in relation to those high taxes. He found the higher the tax, the more the rich invested outside the country. Instead of building factories and employing people, they took their money to places less punishing to capital.
Warren G. Harding won the 1920 election. And he appointed Andrew Mellon his Treasury secretary. Never since Alexander Hamilton had a Treasury secretary understood capitalism as well. The Harding administration cut tax rates and the amount of tax money paid by the ‘rich’ more than doubled. Economic activity flourished. Businesses expanded and added jobs. The nation modernized with the latest technologies (electric power and appliances, radio, cars, aviation, etc.). One of the best economies ever. Until the Fed got involved.
The Fed looked at this economic activity and saw speculation. So they contracted the money supply. This made it hard for business to expand to meet the growing demand. When money is less readily available, you begin to stockpile what you have. You add to that pile by selling liquid securities to build a bigger cash cushion to get you through tight monetary times.
Of course, the economy is NOT just monetary policy. Those businesses were looking at other things the government was doing. The Smoot-Hartley tariff was in committee. Across the board tariff increases and import restrictions create uncertainty. Business does not like uncertainty. So they increase their liquidity. To prepare for the worse. Then the stock market crashed. Then it got worse.
It is at this time that the liquidity crisis became critical. Depositors lost faith. Bank runs followed. But there just was not enough money available. Banks began to fail. Time for the Fed to step in and take action. Per the Federal Reserve Act of 1913. But they did nothing. For a long while. Then they took action. And made matters worse. They raised interest rates. In response to England going off the gold standard (to prop up the dollar). Exactly the wrong thing to do in a deflationary spiral. This took a bad recession to the Great Depression. The 1930s would become a lost decade.
When FDR took office, he tried to fix things with some Keynesian spending. But nothing worked. High taxes along with high government spending sucked life out of the private sector. This unprecedented growth in government filled business with uncertainty. They had no idea what was coming next. So they hunkered down. And prepared to weather more bad times. It took a world war to end the Great Depression. And only because the government abandoned much of its controls and let business do what they do best. Pure, unfettered capitalism. American industry came to life. It built the war material to first win World War II. Then it rebuilt the war torn countries after the war.
DURING THE 1980s, in Japan, government was partnering with business. It was mercantilism at its best. Japan Inc. The economy boomed. And blew great big bubbles. The Keynesians in America held up the Japanese model as the new direction for America. An American presidential candidate said we must partner government with business, too. For only a fool could not see the success of the Japanese example. Japan was growing rich. And buying up American landmarks (including Rockefeller Center in New York). National Lampoon magazine welcomed us to the 90s with a picture of a Japanese CEO at his desk. He was the CEO of the United States of America, a wholly owned subsidiary of the Honda Motor Company. The Japanese were taking over the world. And we were stupid not to follow their lead.
But there was no invisible hand in Japan. It was the hand of Japan Inc. It was Japan Inc. that pursued economic policies that it thought best. Not the millions upon millions of ordinary Japanese citizens. Well, Japan Inc. thought wrong.
There was collusion between Japanese businesses. And collusion between Japanese businesses and government. And corruption. This greatly inflated the Japanese stock market. And those great big bubbles finally burst. The powerful Japan Inc. of the 1980s that caused fear and trembling was gone. Replaced by a Japan in a deflationary spiral in the 1990s. Or, as the Japanese call it, their lost decade. This once great Asian Tiger was now an older tiger with a bit of a limp. And the economy limped along for a decade or two. It was still number 3 in the world, but it wasn’t what it used to be. You don’t see magazine covers talking about it owning other nations any more. (In 2010, China took over that #3 spot. But China is a managed economy. Will it suffer Japan’s fate? Time will tell.)
The Japanese monetary authorities tried to fix the economy. Interest rates were zero for about a decade. In other words, if you wanted to borrow, it was easy. And free. But it didn’t help. That huge economic expansion wasn’t real. Business and government, in collusion, inflated and propped it up. It gave them inflated capacity. And prices. And you don’t solve that problem by making it easier for businesses to borrow money to expand capacity and create jobs. That’s the last thing they need. What they need to do is to get out of the business of managing business. Create a business-friendly climate. Based on free-market principles. Not mercantilism. And let that invisible hand work its wonders.
MONETARY POLICY CAN do a lot of things. Most of them bad. Because it concentrates far too much power in too few hands. The consequences of the mistakes of those making policy can be devastating. And too tempting to those who want to use those powers for political reasons. As we can see by Keynesian ‘stimulus’ spending that ends up as pork barrel spending. The empirical data for that spending has shown that it stimulates only those who are in good standing with the powers that be. Never the economy.
Sound money is important. The money supply needs to keep pace with economic expansion. If it doesn’t, a tight money supply will slow or halt economic activity. But we have to use monetary policy for that purpose only. We cannot use it to offset bad fiscal policy that is anti-business. For if the government creates an anti-business environment, no amount of cheap money will encourage risk takers to take risks in a highly risky and uncertain environment. Decades were lost trying.
No, you don’t stimulate with monetary policy. You stimulate with fiscal policy. There is empirical evidence that this works. The Mellon tax cuts of the Harding administration created nearly a decade of strong economic growth. The tax cuts of JFK were on pace to create similar growth until his assassination. LBJ’s policies were in the opposite direction, thus ending the economic recovery of the JFK administration. Ronald Reagan’s tax cuts produced economic growth through two decades.
THE EVIDENCE IS there. If you look at it. Of course, a good Keynesian won’t. Because it’s about political power for them. Always has been. Always will be. And we should never forget this.
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ONE OF THE lasting consequences of war is the feminization of men. War makes widows. And fatherless sons. Their mothers raise them the best that they can. But women tend to be kinder and gentler than men. More nurturing. Fathers are, after all, the disciplinarians. “Just wait until your father gets home.” Sons with fathers knew what that meant. And it wasn’t kind, gentle nurturing.
The American Civil War killed some 600,000 men. A generation of fathers was lost. When their sons came of age, they were more sensitive to the suffering of others. And they felt a mothering urge to do something about it. In politics they became Progressives. They grew government. Because government knows best. Well, mother knows best. And a government that mothers would solve all our social ills. And these men would mother. Compassionately. And they thought all that rugged individualism was overrated.
World War I killed some 9 million men in uniform and about another 7 million in civilians. These fatherless sons would rise in power and help create the cradle-to-the-grave welfare state known as European Socialism.
World War II killed some 400,000 American men. And their sons would follow the European’s lead. They would attend the universities where the progressives taught. They came out with heads filled with caring and compassion for victims everywhere. LBJ’s Great Society would grow out of this movement. As well as a hatred for American rugged individualism. And anti-war fervor.
AND THEN YOU had the filthy, maggot-infested hippies. South Park is a crude comedy. And Cartman has few redeeming qualities. But he’s right about hippies. They ruined this country. Born in the baby boom following World War II, most had the benefit of a father. However, by the 1960s, the universities they attended were a lost cause. Their professors would attack whatever their parents taught them. They would learn to hate. In a kind, gentle, nurturing way.
They hated America. How it became. What it did. What its values were. Are. Instead, they would embrace America’s enemies. Have kind, gentle, nurturing compassion for them. They were proud Marxists. And Communists. They relished their First Amendment right to attack the American Republic that gave them that right. While they supported oppressive regimes where you had no such right. And spoke ill of the government at your own peril. Oh, they damned America and its allies for all of their ‘crimes against humanity’. But they said nothing about the reigning co-champions of human rights abuses. The Soviet Union. And Communist China. No, they wanted to extend the proletarian revolution to America. So more could suffer the worst of human rights abuses. Why would anyone adopt such a conflicting course of political action? Because they’re idiots.
Power to the People. Give Peace a Chance. All You Need is Love. They knew all the answers. John Lennon et al. War was business. Nothing more. Or the folly of kings. As the Monkees sang about in this anti-war song:
They met on the battlefield banner in hand.
They looked out across the vacant land.
And they counted the missing, one upon one,
None upon none.
The war it was over before it begun.
Two little kings playing a game.
They gave a war and nobody came.
(from Zor and Zam by Bill Chadwick and John Chadwick
Album: The Birds, the Bees and the Monkees)
This is what the anti-war people believe. Either war is business. Or the folly of kings. That there is no ‘bad guy’ in war. Just pawns. And units of production. Because human nature is peaceful.
WHO DID THE high school bullies pick on? Who did they pansts? Steal their lunch money from? Give a wedgie to? A swirlie? Beat up. Belittle with name calling? Not tough guys. Weak guys. This is human nature. The strong feed on the weak.
WHEN GUN OWNERS discovered a ‘loophole’ in Floridian law about carrying concealed weapons, they started carrying concealed weapons. What happened? Crime on Floridians dropped. Crimes on tourists rose. Why? Because the bad guys knew that tourists didn’t carry concealed weapons. This is human nature. The strong feed on the weak.
BACK WHEN DETROIT was the murder capital of the U.S., a friend traveled there and bought a t-shirt. It read, “Detroit: Where the Weak are Killed and Eaten.” Now I don’t recall reports of cannibalism in the Motor City, but the message was clear. Figuratively, of course. Human nature was becoming animal nature. The strong feed on the weak.
MANY ANIMAL SPECIES have large litters. Or numerous litters. Like bunnies. Cute little, fluffy, harmless bunnies. But bunnies are tasty. They’re low on the food chain. They are food to almost every carnivore in the wild. Including man. Few bunnies live long before becoming a meal. This is animal nature. The strong feed on the weak.
“IN EVERY GENERATION there is a chosen one. She alone will stand against the vampires, the demons and the forces of darkness. She is the slayer.” (From the television show Buffy the Vampire Slayer.) In the world of vampires, demons and the forces of darkness, it’s kill or be eaten. It’s even the nature of the supernatural. The strong feed on the weak.
BIG GOVERNMENT AND UNIONS grew big and powerful in the 20th century to protect the little guy. They said that Big Business and the free market favored the rich and powerful. At the expense of the poor and weak. They said it was human nature. For the strong to feed on the weak.
DURING THE TIME of America’s involvement in Vietnam, the Communist Party of Kampuchea went on a killing spree. While the hippies protested Vietnam, they praised the social compassion of anti-capitalistic communism. Power to the People. Baby. Meanwhile, the Khmer Rouge killed their own people wholesale (by a percentage of population killed, the greatest in history). Included in the genocide lists were students or people with glasses. They killed any ‘educated’ person. And those who even looked educated. So, yes, the hippies supported a movement that would have killed their own worthless selves if given the chance. Human nature at its worse. The strong feed on the weak. And the stupidity of hippies.
THERE ARE BAD guys in the world. And there’s no denying it. Human nature is not peaceful. It is anything but. Darwinian Theory never played out so fiercely. The strong feed on the weak. They seek them out. Like a predator in the wild, they seek out the weak and maimed and move in for the kill. You can’t reason with them. Just like you can’t reason with a bully. Those who think that we can need to man-up and face facts. And if you can’t, don’t worry. We have others that are more than willing to man-up and fight our battles for us. To keep America strong. If we let them.
Predators don’t respect weakness. They respect power. And power is the only thing that will deter them. The bad guys have attacked American soil few times. Because America is powerful. You mess with the big dog and it’s going to bite you. And maul you. So the bad guys don’t mess with the big dog often. Because they pay dearly when they do.
America has known peace and prosperity like few other people can possibly imagine. And the reason for that is that we have the biggest and baddest military in the world. It kept the Soviets at bay in Europe. It thumped Iraqi’s vaunted million-man army in less than 100 hours of combat. It then thumped them again with a smaller force. (That display of power cowed Libya from sponsoring terrorism for fear of that awesome power thumping them next. And it got the Saudis to do the politically unthinkable – take on Al Qaeda in their kingdom.) It ran bin Laden deep underground leaving him more impotent than threatening. It held the line in Korea. And it won every battle it fought in Vietnam. (Of course, everything went to hell in a handbasket when we left. But that’s another story.)
But that kind of power doesn’t come cheap. And you gotta have the will to use it. But when you do, you get peace. An expensive peace, yes. But peace is always cheaper than war. Especially when that peace deters war.
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