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Archive for July, 2012

Free Banking

I recently discovered this school and from what I can tell, I think they are about right.  There are some things they are missing but what they advocate seems to be basically the same thing I advocate.  So if you’re into that sort of thing, check them out.  I have added them to the links on the right.

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Categories: Uncategorized

You Don’t Own That

July 26, 2012 1 comment

Last week President Obama uttered the now infamous words “you didn’t build that” and sparked a seemingly endless cable news debate over what he meant by “that.”  But we seem to be missing the forest here.  It doesn’t matter whether he meant bridges or businesses (actually I think he meant the bridges).  But what we should be asking ourselves is “why is he talking about this in the first place?”

This is part of an argument which is designed to lead to a certain moral and ethical philosophy.  But have you ever noticed how progressives never come out and say: “Here is my moral and ethical philosophy.  Now let me tell you why I believe this.”  They just start making arguments.  The moral foundation of those arguments is unmentionable because if they said it, it would scare the hell out of everyone.  Read more…

Categories: Philosophy, Politics

Why are Austrians Obsessed with Hyperinflation?

July 24, 2012 14 comments

In WordPress, next to your “top posts,” it tells you the top searches that led people to them.  Next to my recent post on monetary economics I noticed the following search: “why are Austrians obsessed with hyperinflation?”  So I tried that search to see what came up and guess who is number 1 (me)! However, the post that it links to is not all that enlightening by itself.  So I figured I would give the people what they want and just answer this question directly.

Austrians are obsessed with hyperinflation because they don’t get how money is created in this country.  And I am saying this as someone who is morally and philosophically sympathetic with them.  But they have a model of money creation in their minds which is not accurate.  They can only see a system where the government just prints money and spends it.  In this system, we would be in great danger of hyperinflation for exactly the reasons they say.  Namely, the tendency of the government to print and spend more and more money would cause the money supply to expand constantly driving the value of that money down until eventually people decide to flee the currency in anticipation of this drop in value and then the value starts to drop dramatically and this causes a rush for the exits and so on.  In this scenario, all the things they say are correct including the stuff about inflation being a stealth tax on people who hold money, and the notion that governments can “inflate away” their debt.  The problem is that this is not the system we actually have.

What we have is a central bank (the Federal Reserve) which prints money and lends it.  This is entirely different from just printing and spending.  Notice that they do buy things with the money but what they buy are government securities.  In other words, they buy debt, which is the same as lending it.  When the debt matures (or when they sell it) the money goes back to the Fed.  This is completely different from the system outlined above because every dollar created also creates a counterbalancing debt.  This means that the money they put out there isn’t just out there forever, it is like each dollar is really a boomerang which they throw out but eventually comes flying back to the Fed.

But since they lend it with interest, when it comes back, it is even bigger than when they threw it out in the first place.  And that additional money which comes back to them has to come from somewhere which means they have to constantly throw out more and more to keep the quantity out there large enough that it can flow back to them fast enough to retire the debt without upsetting the inflation expectations they have cultivated.  The way it breaks down is not with them printing too much money but rather with them not printing enough to keep this cycle going.  In other words, it ends with a deflationary spiral, not an inflationary spiral.  This is far worse because not only does it mean that we lose all our money but we actually lose all of our stuff which is collateralizing all of these loans.  Or to put it another way (emphasis added):

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property – until their children wake-up homeless on the continent their fathers conquered.

–Thomas Jefferson 1802

Taxes, the Constitution and the Slippery Slope

[Note: This was written several weeks ago but not published so it’s a little out of date.]

A modern-day “conservative” is basically a libertarian who doesn’t believe in slippery slopes.  Indeed, there is a widespread denial of the phenomenon which defies logic.  Nearly every time someone tries to point out that something the government wants to do may lead to undesirable consequences, they are met with an automatic dismissal–“oh what the slippery slope argument?” (rolls eyes)—as though practically every time someone has warned of a slippery slope, it hasn’t ended up being the case. (See “argument from intimidation.” )

The left has to whitewash the notion of a slippery slope because their entire movement is based on it.  It is all about getting people to go along with things that most of them wouldn’t want through subtle manipulation over a long time-period.  It’s right there in their name—“progressive.” For too long, conservatives have allowed the government to start down these slopes and then tried to steer the slide away from the collectivist disasters that they are designed to funnel us into.  But they are always one (and quite often several) steps ahead of us because they designed the slope in the first place so that whenever we try to steer around Scylla, there is an undetected Charybdis waiting to swallow us up.  Nowhere is this more apparent than in the healthcare debate.  I will get into the economics of healthcare next time but first we have to talk taxes.

There is a real divide in political ideology in the country but it is not between Democrats and Republicans or liberals and conservatives.  It is between people who think society should be socially engineered through force by a centralized authority and those who think it should not.  It’s true that most of the people on the “should not” side are also on the conservative/Republican side.  But how often do you hear a “conservative” pundit say they want “small government” and then in the next segment call for the government to do something to bring down gas prices, fight “speculators,” save children from their parents and engage in all sorts of other interventions designed to engineer society in a supposedly conservative way?

Taxes

In order to have a government you need taxes.  In order to be free, you must have an absolute prohibition on the government (at least the Federal Government) using the tax code to socially engineer society.  Once you let go of the premise that social engineering is the proper purpose of government, and that the proper role of the individual is to try to influence the government to engineer it in the way that individual desires, then you become a libertarian (welcome aboard).  To most conservatives, this sounds great until they realize that giving up this notion means giving up your mortgage interest credit, your earned income credit, your continuing education credit, etc.

Of course, a libertarian tax code would also get rid of all the credits that you don’t use and offset this with lower rates (way lower rates if we also had a libertarian spending policy), so nearly everyone would be better off.  But strangely no congressman ever proposes a bill eliminating all tax credits and lowering rates.  Why is that?  Perhaps it’s because politicians like power and their power derives largely from their ability to divert money to specific segments of the public.  But I digress.

The Constitution

The founding fathers were libertarians.  In light of this, doesn’t it seem like they would have put something in the constitution prohibiting the Federal Government from using the tax code to target certain individuals and behaviors in order to socially engineer society?  Yes it does, and in fact they did just that.

“Representatives and direct taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers…”

-Article 1, Section 2, Clause 3

“No Capitation, or other direct, Tax shall be laid, unless in proportion to the Census or Enumeration herein before directed to be taken.”

-Article 1, Section 9, Clause 4

So how is it that we just witnessed the Supreme Court uphold a bill which gives the Federal Government the power to force every individual to buy healthcare on the grounds that the penalty for not complying is actually a tax?  The answer, of course, is that we allowed progressives to undermine this important provision of the constitution a hundred years ago when we passed the 16th amendment.

You might recall when President Obama expressed his regret that the constitution was only a charter of negative rights saying what the government can’t do to you and not a charter of positive rights saying what the government must do on your behalf.  The response of conservative commentators was to shout “see, he wants to change the constitution from a charter of negative rights into a charter of positive rights!”  But this was a misdirection, as I pointed out a while back.

What we should have said is “wait a minute, it’s actually not either of those things, it is a charter of enumerated powers.  It says what the government may do on your behalf.”  This is a very important distinction. All of the debate over the healthcare law was centered on the commerce clause.  The question was posed: can the government force us to buy broccoli under the commerce clause?  The court avoided answering this question, and so far nobody is asking the same question with regard to the power to tax.  Can the government “tax” me if I don’t buy broccoli?  Of course, the answer is yes.  Whatever the government wants me to do, it can declare a tax against me if I fail to do it.  There is no longer anything which falls outside of the enumerated powers of the Federal Government.

So what is the point of the constitution then?  It stops the government from discriminating against me based on race, infringing on my freedom of speech, freedom of religion, right to bear arms, etc. The protections contained in the constitution have been reduced to only those protections which are specifically mentioned.  In other words, it has been transformed into a charter of negative rights.

The slippery slope

Imagine the response if, in 1913, you had stood up and said “if we allow this amendment, there will be nothing stopping the government from taking over the healthcare industry, or any other industry, and telling us what we have to buy, and how much we have to pay for it, because this will ultimately transform the constitution from a charter of enumerated powers into a charter of negative rights.”  But the reality is that this power to tax us however they see fit, does give them the power to do pretty-much anything they want to us.  (Speaking of slippery slopes, in 1913, the top rate was 7% and this was supposed to be temporary.  By 1918, it was 77% and in 1944, the top rate was 94% and the first bracket was 23%)

I’m not making a slippery slope argument in reference to the future. I am making it in reference to the past.  We have been sliding for a century, the whole process is right there in the history books.  There is no speculation involved, you just have to look around and notice that we are at the bottom of the hill.

It’s not enough to just blame Obama or Democrats or Chief Justice Roberts or the media for what is happening.  This is happening because Americans have lost touch with the moral and philosophical foundations of liberty.  If we hadn’t we would have stopped it in 1913 (along with a lot of other things that started in 1913).  Progressives actually don’t want liberty and they are purposely trying to undermine it.  Conservatives don’t want this, we have just been tricked into going along with it.  But the reason we fell for it is because we stopped being libertarians.

This government is a Hydra with so many heads nobody can count them.  There is always one head nuzzling up to you while six others are devouring your neighbor.  Then, when one suddenly comes for us, our reaction is to try to cut off the head, but even if we succeed in cutting it off, two more spring forth (repeal and replace?).  In the end, everyone gets eaten unless we actually slay the monster—unless we can look at the head nuzzling us, the head devouring us and the head claiming to be protecting us from the one that is devouring us and say “you all gotta go”–in short, unless we become libertarians again.

Monetary Economics in a Free Market

July 20, 2012 1 comment

I tried to make the title reflect the level of excitement in the post.  I don’t want to mislead anyone after all.  If you’re not into economics just skip this one. What I want to do here is describe how the monetary system would function in a free market economy.  By this I mean an economy with no central bank or other government interference with the money supply and financial markets.  This is nothing like what is taught in economics classes these days.  It is a first step toward overcoming the serious confusion among people who, like me, would like to see such a system put in place.  The reason for the confusion is the same reason that it is not taught in economics classes.  We don’t live in an economy like that.  We have created a system which is at odds with natural economic forces.  So we don’t teach natural macroeconomic forces.  This is also the reason nobody understands the macroeconomics that we teach in economics classes.  As a warning, the casual reader will probably not understand this either, but if you are an undergraduate econ major and you apply yourself somewhat, it should make a lot more sense than intermediate macro.  In order to understand how our current system works (and why it will end in disaster), we must be able to start from here. Read more…