American Jobs Bill: Takes money from those who could create wealth and gives it to those who consume it.

The President gave a very effective speech....if you listened only to what he said and ignore what he didn't say. He continues to operate from the erroneous Keynesian perspective that the economic problem to solve is not enough consumption, ignoring the fact that without efficient production of real value, there is nothing to consume. Consumers must first produce value if what we want is wealth-creating, win-win exchanges. Instead, what President Obama offered last night is more wealth redistribution: take money from those who know how to create wealth and give it to people who know how to spend it. It's a recipe for continued economic stagnation.

Our country is in an economic pickle after decades of massive public funding of economic goods such as roads, bridges, education and health care. It is all too easy to see what currently exists and ask for more. It is much more challenging to see what could have existed if government had stuck to its proper limits and allowed the market to supply these goods. What we need is a president with more confidence in freedom, a better understanding of the benevolent benefits of capitalism and a greater appreciation of the destructive effects of central planning.

Updating Received Wisdom

In a delightful rewriting of an old proverb, Ron Pisaturo points out the truth of its obverse:

Update to an old Proverb: Obama supporters Take Heed

Rob a man who fishes, and you feed yourself for a day. Trade with a man who fishes, and you have a potential source of food—and so many other things that this free, thinking man might create—for a lifetime.

Read the rest here.

This is also another way of stating Say's Law of Markets: production must precede consumption and is what opens up the demand for products.

As we approach April 15th, ponder the fact that to tax one man to give to another is to use the coercive mechanism of government to rob Peter and pay Paul. Voting on this theft gives the illusion of a civil process--but a majority can have no greater right to a man's honestly earned wealth than can one acting on his own.

This explains the immorality of such taxation.

Ron's new proverb explains its impracticality.

The immoral and the impractical always go hand in hand.

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Say's Law of Markets in Today's World

Check out an excellent article by John Tamny in the 01-12-09 online issue of Forbes.

Saving is Stimulus

The 19th century political economist Jean-Baptiste Say observed that excessive consumption is the equivalent of capital destruction, because the amount of capital available to new businesses is being reduced...So while it is certainly true that we produce in order to consume, it is pure myth to suggest that parsimony is an act of economic destruction. More realistically, when individuals spend with abandon they're not only depriving themselves of interest and future financial security, they're also depriving industry of the capital necessary to grow...

In truth, if we must have the economic retardant that is stimulus foisted on the economy, the single best thing its recipients could do would be to put the money in the bank. At least then money borrowed from the private sector by the government for immediate consumption would potentially be made available to businesses eager to grow.

So despite the conventional wisdom telling us that we must spend irrationally in order to boost the economy, the simple fact remains that individuals can only grow wealthy if they save first. And when people work to enhance their personal financial situations, they're also providing real stimulus to the economy thanks to existing and future businesses having access to capital.

And he has another one here. "Government solutions Are Slowing the Economy"
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FIAT-PAPER MONEY IS NOT DEMAND!

There is no limit to the Fed’s ability to create money, so there is no limit to its ability to create demand.

from "Why 'Stimulus' will not Work" by Louis R. Woodhill 01-16-09

Neither government nor the Fed create real demand. This is the fallacy that all those in favor of government intervention into the economy of any type do not get.

Monetary demand is not real demand. That is the meaning of Say's Law of Markets. Real demand is not pieces of paper. Real demand is the actual wealth which pieces of paper may or may not represent. And government does not create wealth: it only seizes and redistributes it.

The government can print fiat-paper money, or the Fed can conjure up in multiple ways its electronic equivalent, but NONE of it is real wealth and therefore NONE of it is true demand. To "stimulate" real, sustainable, efficient growth in the economy, what is required is real demand, which means production. Since monetary demand is not real demand, it can only create the appearance of real, sustainable, efficient growth, which must eventually come crashing down, just as it did in the dot.com bust and the housing bubble bust, and multiple prior recessions. The larger the amount of artificial demand used to "jump start" the economy, the larger and more destructive the adjustment back to real demand will be. Artificial demand destroys savings, wastes resources, encourages excessive debt and risk-taking, and perhaps worst of all, undermines confidence in free-markets and freedom itself.

I try to keep in mind that most of the people who are advocating government bailouts, public work projects, stimulus packages and the like, honestly think they are doing the right thing. But when I think about the destruction these policies will cause, I can't help but get angry.

Something for Nothing

I came across this article yesterday. Saville doesn't really say anything which I haven't read in multiple places, but he says it very well and quite succinctly.

Trying to get Something for Nothing
by Steve Saville 10-21-2008

The current predicament was not caused by insufficient government regulation and the risk of future disruptions will not be mitigated by increased government regulation. The mortgage market was already heavily regulated prior to the crisis, but had it been even more regulated and had the regulations severely crimped, rather than boosted, the abilities and desires of financial corporations to expand the supply of mortgage-related instruments, then the focal point of the boom would have shifted; however, bubbles would still have formed somewhere and these bubbles would subsequently have burst, leaving financial wreckage and major economic dislocations in their wake (the bust is always and everywhere a consequence of the preceding boom)...

Now that the investment boom has gone bust and the necessary adjustment process has begun, we are being told incessantly that the solution to the problems caused by massive increases in the supplies of money and credit is additional massive increases in the supplies of money and credit. And given that the private banking industry is no longer capable of driving the monetary expansion, we are being told that the central bank and the government must become even more involved...

Whether the advocates of increased government spending and the various other re-inflation policies realise it or not, at the root of their proposed 'solutions' to the crisis is the idea that it is possible to get something for nothing. It is axiomatic that an increase in production must precede a sustained increase in consumption; that saving is the basis of long-term economic growth; that no individual can become rich by spending more than he earns; and that no country can become wealthy, or recover from a recession, by consuming more than it produces. And yet, most commentators have deluded themselves into believing that you can get around the problem of inadequate real savings by simply increasing the supply of the medium of exchange, and that you can bypass the need for increased consumption to be funded by increased production by simply getting the government to spend like a drunken sailor.


Sweet summary, isn't it? Truly, the whole article is worth a read.

Egalitarianism and Inflation

This article was recommended by a commenter. It's lengthy and not all of it is directly relevant to the topic of inflation. Also, although Rand has great ideas, her style of delivery can be distracting to those not already convinced of her point of view. For those reasons, I have chosen to post the excepts I found most pertinent to our current discussion on the nature of money.

excerpts from

Egalitarianism and Inflation

by Ayn Rand

Agriculture is the first step toward civilization, because it requires a significant advance in men’s conceptual development: it requires that they grasp two cardinal concepts which the perceptual, concrete-bound mentality of the hunters could not grasp fully: time and savings. Once you grasp these, you have grasped the three essentials of human survival: time-savings-production. You have grasped the fat that production is not a matter confined to the immediate moment, but a continuous process, and that production is fueled by previous production. The concept of “stock seed” unites the three essentials and applies not merely to agriculture, but much, much more widely: to all forms of productive work. Anything above the level of a savage’s precarious, hand-to mouth existence requires savings. Savings buy time...

On a self-sustaining farm, your savings consisted mainly of stored grain and foodstuffs; but grain and foodstuffs are perishable and cannot be kept for long, so you ate what you could not save; your time-range was limited. Now, your horizon has been pushed immeasurably farther. You don’t have to expand the storage of your food: you can trade your grains for some commodity which will keep longer, and which you can trade for food when you need it. But which commodity? It is thus that you arrive at the next gigantic discovery: you devise a tool of exchange—money.

Money is the tool of men who have reached a high level of productivity and a long-range control over their lives. Money is not merely a tool of exchange: much more importantly, it is a tool of saving, which permits delayed consumption and buys time for future production. To fulfill this requirement, money has to be some material commodity which is imperishable, rare, homogeneous, easily stored, not subject to wide fluctuations of value, and always in demand among those you trade with. This leads you to the decision to use gold as money. Gold money is a tangible value in itself and a token of wealth actually produced. When you accept a gold coin in payment for your goods, you actually deliver the goods to the buyer; the transaction is as safe as simple barter. When you store your savings in the form of gold coins, they represent the goods which you have actually produced and which have gone to buy time for other producers, who will keep the productive process going, so that you’ll be able to trade your coins for goods any time you wish.

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[Several paragraphs following describing what happens when people trade not with money representing saved production but money representing a promise of future production. Treated as equivalent, the increased amount of "money" gives the appearance of greater savings than actually exists and leads to unjustified increased risk taking, higher prices, and inappropriate consumption of real savings. The disconnection between money and production also allowed the development of the theory of a consumer-driven (as opposed to producer-driven) economy.]

Therefore, they conclude, the consumer—not the producer—is the motor of an economy. Let us extend credit, i.e., our savings, to the consumers—they advise—in order to expand the market for our goods.

But, in fact, consumers qua consumers are not part of anyone’s market; qua; consumers, they are irrelevant to economics. Nature does not grant anyone an innate title of “consumer”; it is a title that has to be earned—by production. Only producers constitute a market—only men who trade products or services for products or services. In the role of producers, they represent a market’s “supply”; in the role of consumers, they represent a market’s “demand.” The law of supply and demand has an implicit subclause: that it involves the same people in both capacities...

How many non-productive people could you support by your own effort? If the number were unlimited, if demand became greater than supply—if demand were turned into a command, as it is today—you would have to use and exhaust your stock seed... If you understand the function of stock seed--of savings--in a primitive farm community, apply the same principle to a complex industrial economy.

Wealth represents goods that have been produced, but not consumed. What would a man do with his wealth in terms of direct barter? Let us say a successful shoe manufacturer wants to enlarge his production. His wealth consists of shoes; he trades some shoes for the things he needs as a consumer, but he saves a large number of shoes and trades them for building materials, machinery and labor to build a new factory—and another larger number of shoes, for raw materials and for the labor he will employ to manufacture more shoes. Money facilitates this trading, but does not change its nature. All the physical goods and services he needs for his project must actually exist and be available for trade—just as his payment for them must actually exist in the form of physical goods (in this case, shoes). An exchange of paper money (or even of gold coins) would not do any good to any of the parties involved, if the physical things they needed were not there and could not be obtained in exchange for the money...

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When a rich man lends money to others, what he lends to them is the goods he has not consumed. This is the meaning of "investment"... [C]redit means money, i.e. unconsumed goods, loaned by one productive person (or group) to another, to be repaid out of future production...

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Consumption is the final, not the efficient, cause of production. The efficient cause is savings, which can be said to represent the opposite of consumption: they represent unconsumed goods. Consumption is the end of production, and a dead end, as far as the productive process is concerned. The worker who produces so little that he consumes everything that he earns, carries his own weight economically, but contributes nothing to future production. The worker who has a modest savings account, and the millionaire who invests his fortune (and all the men in between), are those who finance the future. The man who consumes without producing is a parasite, whether he is a welfare recipient or a rich playboy.

An industrial economy is enormously complex: it involves calculations of time, of motion, of credit, and long sequences of interlocking contractual exchanges. This complexity is the system’s great virtue and the source of its vulnerability. The vulnerability is psycho-epistemological. No human mind and no computer—and no planner—can grasp the complexity in every detail. Even to grasp the principles that rule it, is a major feat of abstraction. This is where the conceptual links of men’s integrating capacity break down...The most disastrous loss—which broke their tie to reality—is the loss of the concept that money stands for existing, but unconsumed goods...

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An economy based on specialization, division of labor and money is more complex than one based solely on direct barter, but the fundamental issues of production, consumption, saving and trade remain unaltered. Savings provide the escape from moment-to-moment survival, freeing up the time necessary for investments to improve future productivity. This investment in the future is only makes sense if our present and near-future are safe and secure. It is savings (production not consumed) that provides that security. To correctly calculate the extent of our safety-net, to decide how much excess production is available with which to take risks, or to tie up in future rather than immediate consumption, our money must provide an accurate accounting of that saving. The accuracy of that accounting is destroyed when "money" is disconnected from production such as occurs with money created by fiat. Money can fulfill its proper function only so long as it stands for actual existing goods--and this it does by remaining a good itself, i.e. a commodity-money.

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Consumption vs. Production, or...The Anatomy of a Stimulus

There is much talk in Washington about another stimulus package.

The idea is to give people the means to purchase goods, so as to create the necessary demand for producers to produce. The underlying assumption is that sufficient demand is lacking. Feed the bottom, then watch the economy grow. Trickle-up economics.

This is the dominant economic view today, developed and promoted in the 1930’s by Lord John Maynard Keynes. In Keynes’ theory, the state plays a central role to maximize production, achieve economic stability and assure full employment. In his view, the free market lacks the requisite compensatory mechanisms to achieve these goals. Instead, the state must intervene through the manipulation of taxes and interest rates, and by “investing” in infrastructure and other public projects.

From this point of view, the fundamental problem of economics is a lack of “aggregate demand,” i.e. not enough ability to consume.

But the need to consume is a fact of nature. We are born hungry, naked and poor. The fundamental problem of economics to be solved is not the creation of more need or desire or ability to consume. We are born with a limitless need for wealth. The fundamental problem to be solved is production. Without production, there is nothing to consume. With production, and free market competition, the interaction of supply and demand results in goods and services at affordable prices. Free market prices are the “requisite compensatory mechanism” which Keynes failed to see.

We can not improve the general standard of living simply by boosting consumption. The apparent chicken-and-egg of production and consumption has an essential fulcrum: the productivity of labor. Progress in prosperity is only made by figuring out and applying ways to do more with less. More goods with less effort and/or less material.

Increasing the productivity of labor makes the real cost of goods go down. As labor is valued by how productive it is, through increasing the productivity of labor, you also increase real wages. Cheaper goods and higher wages are the source of true prosperity and progress.

How do you increase the productivity of labor?

Not by handing consumers more spending money through a stimulus package. That approach fails on two accounts. First, consumer spending is a relative dead end. Items are purchased, enjoyed and consumed. Some businesses benefit, but the effect soon peters out, unless the stimulus keeps coming. Since the money has to come from somewhere, without production, this method is unsustainable. Second, where does the stimulus money come from?

Money is simply, stored wealth. To be stored, wealth first must be produced. So money for a government stimulus (or any type of government redistribution) must come from production, either directly via taxation, or indirectly via debasement of the currency (by increasing the national debt or simply printing more paper dollars) which then erodes away the value of our savings. To “invest” in consumer spending, you first have to subtract from funds which could otherwise be invested in improving production through capital investment. The nature of capital investment is to create the means for even greater production, i.e. more wealth. The nature of consumption is the depletion of wealth.

It is true that increased consumer spending will stimulate some increased production, but without the funds to invest in capital improvements (both human and material) the productivity of labor will not increase, or will increase to a diminished amount. With a stimulus package, some jobs will be created. Some people will be able to purchase more goods. However, the same money put towards capital investment would create even more jobs, and the resulting increased productivity would make even more goods affordable to even more people.

The jobs and goods which never materialize because of government redistribution policy is another case of “What is Seen and What Is Not Seen.” It is easy to see the money we are handed, and the immediate effect on spending. It takes more work to understand the hidden cost on future production and spending, because the goods and jobs that are never created is what we do not see.

This theory is supported by experience. As discussed in a recent article in the Wall Street Journal:

The nearby chart shows the arc of tax policy and economic growth across the Bush years. After the dot-com bust, President Bush compromised with Senate Democrats and delayed his marginal-rate income tax cuts in return for immediate tax rebates. The rebates goosed spending for a while but provided no increase in incentives to invest. Only after 2003, when the marginal-rate cuts took effect immediately, combined with cuts in dividend and capital gains rates, did robust growth return. The expansion was healthy until it was overtaken by the housing bust and even resisted recession into this year. Mr. Bush and Congress returned to the rebate formula in February, but a blip in second-quarter growth has now ended as the economy heads into recession.

Production must precede consumption. This is concretely evident in a primitive economy: the food that is not hunted, gathered or grown can not be eaten. The connection is easier to loose sight of in a complex division-of-labor economy, especially one of paper fiat money. As economist Dr. George Resiman explains in “Production vs. Consumption,”

The use of money makes this point somewhat less obvious but no less true. Where money is employed, producers do not exchange goods and services directly, but indirectly. The buyer exchanges money for the goods of a seller. The seller then exchanges the money for the goods of other sellers, and so on. But every buyer in the series must either himself have offered goods and services for sale equivalent to those he purchases, or have obtained his funds from someone else who has done so.

The fact that in a monetary economy everyone measures his benefit by the amount of money he obtains in exchange for his goods or services is interpreted by the consumptionist to imply that the mere spending of money is a virtue and that economic prosperity is to be found through the creation and spending of new and additional money — i.e., by a policy of inflation.

In rebuttal, the productionist argues that for everyone who spends newly created money and thereby obtains goods and services without having produced equivalent goods and services, there must be others who suffer a corresponding loss. Their loss, says the productionist, takes the form either of a depletion of their capital, a diminution of their consumption, or a lack of reward for the added labor they perform — a loss precisely corresponding to the goods and services obtained by the buyers who do not produce.

The destructive effects of redistributionist policies is not just the loss of wealth that it causes, but the violation of the moral principle that each man is an end in himself and must not be coercively turned into the means for another’s end. Reisman continues:

The only economic benefit which one can give to a producer…consists in the exchange of one's own products or services for his products or services. It is by means of what one produces and offers in exchange that one benefits producers, not by means of what one consumes. To the extent that one consumes the products or services of others without offering products or services in exchange, one consumes at their expense. (emphasis mine)

These two opposite views of economic life have consequences far beyond their effects on GDP, unemployment rates and the affordability of goods. They also define our most fundamental social relationship: free men and voluntary trade, or men controlled by the state in a system based on “from each according to their ability to each according to their need.”
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