There has been a lot of yapping recently about the advent of "big government" in the United States as the Fed and Treasury wade into the financial system to try to sort out the mess that the greed of Wall Street has caused.
I've got news for you all: big government has been here for years. What we are seeing is not a beginning to an era of big government, but a ramping up to huge government. I'm referring to a trend that pundits across the world attempt to create debate over, but in reality is a very long term occurrence. When the term 'era' is used to define a trend, then what few people fail to realize is that 'era' encompasses a lengthy period of time - often longer than a single human lifetime. In our hyper-materialistic, hyper-present culture that has increasingly permeated Westernized society, people fail to realize the historical implications of big and small government.
Not since the British East India Company enjoyed domination over the entire Indian sub-continent were governments in such danger of become so completely marginalized. In the years following, as the Great Powers coalesced in Europe - England, France, Austria, Prussia and Russia - government began to wrest power back from the private sector. Prior to that, the driving force for international economic development was by far the corporation.
Today we find a similar trend emerging. Massive corporations are become ever more dominant over entire sectors of economies. Google, Microsoft, McDonalds, Nike - these are Western names that we all are familiar with and who have gigantic influence in politics and culture. In Asian economies, notably India and Japan, business culture fosters the development of corporate conglomerates; giant groups, often family controlled, owning an array of companies across sectors resulting in combined dominant market shares.
Since World War II, especially, government has been highly influential in international markets and economies. Where traditionally the idea of democratic government was a social structure providing the protection of man's basic rights, and little else, in the second half of the 20th century and early 21st century, governments have routinely flexed military muscle, tampered with economic markets and controlled financial flows around the world. By the factors of culture, geographical situation and a knack for politics the United States has emerged the victor of this clash, but not without its own share of blood on its hands.
Today, we might be seeing the last gasp in an era of big government.
Where World War II was undoubtedly the largest conflict of 'big government' in recorded history, the Cold War took the concept to the next level. From 1945 through 1991, world policy was set in Washington and Moscow. There was little accomplished without the consent of the leaders of the United States and NATO or the Soviet Union. Bush Sr.'s presidency was marked by conflict in the Middle East and increasing American dominance in the Middle East. The mid-90s and the Clinton presidency saw a small hint of the possibility of a decline in the strength of the American empire as the European Union accelerated its creation of a single market and single currency, and a notable effort led by the Americans was made to increase the role of the IMF, World Bank and UN, among other international institutions, in global politics.
This trend was violently reversed following the events of September 11th, decisively shifting power back into the hands of the Bush administration and opening a period of gigantic government. The United States pursued increasingly independent policies that erased all progress towards a united international community made in the '90s and served to sustain American sovereignty as a single world superpower. Although the Obama administration has ridden to power on a wave of rhetoric declaring a more passive international role, it continues to support 'big government' policy by maintaining the American military presence in Iraq and Afghanistan and insisting that Washington play a major role in restructuring the global financial system.
The continuation of big government rests on the success of Washington's attempts to fix the American financial system. With success, there will surely be popular approval of the government and a continuation of its dominance. With failure, there will be uncertainty and a powerful voice from the public denouncing government action and forcing a new debate about how best to regulate financial markets. Perhaps more frightening will be the government's reaction to this, particularly considering the growing buildup of military power across the globe. Will the republic utilize the military to quell revolt? How far will it impede the rights of man that this nation's Constitution laid out so clearly 300 years ago. How it plays out will be infinitely interesting. I wait with baited breath.
Wednesday, February 11, 2009
Sunday, February 8, 2009
Why the U.S. Bailouts Won't Work...
... Yes, sorry, but the U.S. government bailouts are only serving to make the problem worse.
A friend related to me a brief analogy. It's summer and it's hot inside your house. Your air conditioning is broken so your next best alternative is to open the windows, but your windows in one room are stuck shut. The government proposes a solution to the problem: let's pay somebody to come and fix the problem, it will create jobs and stimulate the economy. The person comes and breaks your stuck windows, problem solved. Additionally, there are now jobs created for the window makers, who will make you new windows; the glassmakers, who will make new glass for the windows; the toolmakers, who make new tools for the glassmakers; and so on down the line.
BUT, what if you had hired a repairman yourself, who could have fixed your broken window without having to pay for the extraneous costs of cleaning up broken glass, disposing of glass, and then making a whole new additional window. This would still stimulate the economy, since the repairman gets paid the same amount you would pay the government's repairman, and that money in turn goes on to be reinvested on whatever the window repairman needs to live, etc.
Essentially the government is using taxpayer money to fund these bailouts. Money that we give to the federal governments is going into the pockets of people who the government deems competent enough to create necessary new jobs and stimulate the economy. However, this is a fallacy and directly contradicts free market ideology. Washingon has no special advantage when it comes to knowing how to allocate resources efficiently, and it doesn't. When it goes to create these new jobs and spread the bailout money across the economy, the rules being followed are not the rules of an efficient market, but those of the interest and opinions of politicians. Additionally, the taxpayer money that the government is doling out is going to the very people who created the problem in the first place. There is no recycling of human capital to motivate fresh talent with fresh ideas to take leadership responsibility.
History supports this argument. Japan recapitalized its banks in the early '90s and suffered a decade of stagnation and depression / recession (whatever you want to call it) that still plagues its economy today.
Media pundits continually claim that the Federal Reserve is following the prescription that has worked before during the Great Depression, but they fail to realize the fundamental difference between the current crisis we face and that of our ancestors. Then, the U.S. had a current account surplus - it was a net exporter. The economy was not based on debt or credit. Now, we are billions of dollars in debt with an immense current account deficit. This critical point is profound in its affect on the diagnosis and the prescribed antidote.
Please don't take this to be anti-patriotic or in scathing criticism. I am not by any means making claims to the incompetence of the American government in its inability to efficiently allocate capital. This is a fundamental aspect of free markets, though, that we are tampering with by attempting to force a return to confident spending. People may start spending again, but it will never be as efficient or effective in the long-term, and inevitably the market will correct to account for the inefficiencies that are created.
A friend related to me a brief analogy. It's summer and it's hot inside your house. Your air conditioning is broken so your next best alternative is to open the windows, but your windows in one room are stuck shut. The government proposes a solution to the problem: let's pay somebody to come and fix the problem, it will create jobs and stimulate the economy. The person comes and breaks your stuck windows, problem solved. Additionally, there are now jobs created for the window makers, who will make you new windows; the glassmakers, who will make new glass for the windows; the toolmakers, who make new tools for the glassmakers; and so on down the line.
BUT, what if you had hired a repairman yourself, who could have fixed your broken window without having to pay for the extraneous costs of cleaning up broken glass, disposing of glass, and then making a whole new additional window. This would still stimulate the economy, since the repairman gets paid the same amount you would pay the government's repairman, and that money in turn goes on to be reinvested on whatever the window repairman needs to live, etc.
Essentially the government is using taxpayer money to fund these bailouts. Money that we give to the federal governments is going into the pockets of people who the government deems competent enough to create necessary new jobs and stimulate the economy. However, this is a fallacy and directly contradicts free market ideology. Washingon has no special advantage when it comes to knowing how to allocate resources efficiently, and it doesn't. When it goes to create these new jobs and spread the bailout money across the economy, the rules being followed are not the rules of an efficient market, but those of the interest and opinions of politicians. Additionally, the taxpayer money that the government is doling out is going to the very people who created the problem in the first place. There is no recycling of human capital to motivate fresh talent with fresh ideas to take leadership responsibility.
History supports this argument. Japan recapitalized its banks in the early '90s and suffered a decade of stagnation and depression / recession (whatever you want to call it) that still plagues its economy today.
Media pundits continually claim that the Federal Reserve is following the prescription that has worked before during the Great Depression, but they fail to realize the fundamental difference between the current crisis we face and that of our ancestors. Then, the U.S. had a current account surplus - it was a net exporter. The economy was not based on debt or credit. Now, we are billions of dollars in debt with an immense current account deficit. This critical point is profound in its affect on the diagnosis and the prescribed antidote.
Please don't take this to be anti-patriotic or in scathing criticism. I am not by any means making claims to the incompetence of the American government in its inability to efficiently allocate capital. This is a fundamental aspect of free markets, though, that we are tampering with by attempting to force a return to confident spending. People may start spending again, but it will never be as efficient or effective in the long-term, and inevitably the market will correct to account for the inefficiencies that are created.
A Bit on Inflation
This article is about inflation. Yes, it's a dull economic concept, but it's critically important that you understand its significance in relation to the health of an economy. We know that if inflation is high, it is bad. If inflation is low, everything's OK. If inflation is negative, it's called deflation, which also seems to be bad. So it's good when price levels rise at a low rate. Right? Maybe.
Inflation is a flighty concept these days, and it's thrown around in the news media and general public as a number of decisive importance. In contemporary Keynesian economics textbooks, it's described as the process by which price levels increase. Technically, this is price inflation. In the United States, the main indicator of price levels is the Consumer Price Index. This was put together by the US Bureau of Labor Statistics in 1913, and has been released on a regular basis since. Naturally, for economists, such an index is a wonderful tool for measuring prices across a large economy.
However, inflation didn't always address a change in price levels. Many economists, particularly libertarians, define inflation as the change in the supply of money - that is, a change in the amount of money circulating in a system. This is a stable and controllable variable. It depends on the system of banking in practice at any given time, but in the case of our current fractional reserve banking system, the required reserves to capital ratio banks are mandated by law to hold in their vaults, the amount of money in the system is fully controllable and measurable. This is monetary inflation.
This definition is a far more useful indicator of both price levels and the strength of a currency. If the amount of money in an economy increases, then the rise of price levels is a direct effect. This correlation is based on the laws of supply and demand: when the supply of something increases, then its price or value decreases.
To draw a simple example: You are stranded on a desert island with ten other people. One person finds a pineapple tree, and he brings a pineapple back to the group, offering it to the highest bidder. In essence, he's constructed a basic market where there is a supply of one pineapple. One person in the group found two sand dollars, which he offers in exchange. The monetary supply consists of two sand dollars, and the price of the pineapple is two sand dollars. You come back with ten sand dollars, which you found in your wanderings, just as this transaction is closing. You offer four sand dollars. The money supply has increased to twelve units, while the price of pineapples has increased by two units to four sand dollars per unit. You just witnessed basic inflation.
When people have more money to spend, they can demand higher prices and so they will. When there is more money in the system, the goods in demand will experience an increase in price. Of course, in a fully functional national economy, there are far more factors than sand dollars and pineapples. An economist needs to take into account supplies, demands and factors of land, labor and resources. This creates a far more complex scenario, but the fundamentals remain the same.
To tie this into real life: today's United States government plans to inject about $11 trillion into the national economy in the space of less than two years. Many of this is unaccounted for at the corporate level and is distributed far from evenly. Regardless, when it trickles down through spending, consumption, investment and reinvestment, it eventually will be factored in by the various indices that the U.S. government and other organizations use to measure money supply, inflation and similar statistics. Nevertheless, the fundamental change in the amount of money in the system is the same. There is more money, so prices are higher. The result: inflation.
Unfortunately, the US government is looking the wrong direction. Accepted economic theory posits that when prices increase, inflation occurs, so they are looking at prices, perhaps not entirely aware of the fact that when the Fed and Treasury release hundreds of billions of dollars into the system, there will be a negative effect on inflation. To make matters worse, the way the CPI currently works, it does not account for food and energy - two of the most liquid and measurable indicators of inflation. Essentially, the CPI is used to measure inflation, but it doesn't actually incorporate two of the most prominent inflation indicators.
This approach is horribly flawed. It's resulting in a misdiagnosis of the problem, and a potentially disastrous prescription of a viable antidote.
Inflation is a flighty concept these days, and it's thrown around in the news media and general public as a number of decisive importance. In contemporary Keynesian economics textbooks, it's described as the process by which price levels increase. Technically, this is price inflation. In the United States, the main indicator of price levels is the Consumer Price Index. This was put together by the US Bureau of Labor Statistics in 1913, and has been released on a regular basis since. Naturally, for economists, such an index is a wonderful tool for measuring prices across a large economy.
However, inflation didn't always address a change in price levels. Many economists, particularly libertarians, define inflation as the change in the supply of money - that is, a change in the amount of money circulating in a system. This is a stable and controllable variable. It depends on the system of banking in practice at any given time, but in the case of our current fractional reserve banking system, the required reserves to capital ratio banks are mandated by law to hold in their vaults, the amount of money in the system is fully controllable and measurable. This is monetary inflation.
This definition is a far more useful indicator of both price levels and the strength of a currency. If the amount of money in an economy increases, then the rise of price levels is a direct effect. This correlation is based on the laws of supply and demand: when the supply of something increases, then its price or value decreases.
To draw a simple example: You are stranded on a desert island with ten other people. One person finds a pineapple tree, and he brings a pineapple back to the group, offering it to the highest bidder. In essence, he's constructed a basic market where there is a supply of one pineapple. One person in the group found two sand dollars, which he offers in exchange. The monetary supply consists of two sand dollars, and the price of the pineapple is two sand dollars. You come back with ten sand dollars, which you found in your wanderings, just as this transaction is closing. You offer four sand dollars. The money supply has increased to twelve units, while the price of pineapples has increased by two units to four sand dollars per unit. You just witnessed basic inflation.
When people have more money to spend, they can demand higher prices and so they will. When there is more money in the system, the goods in demand will experience an increase in price. Of course, in a fully functional national economy, there are far more factors than sand dollars and pineapples. An economist needs to take into account supplies, demands and factors of land, labor and resources. This creates a far more complex scenario, but the fundamentals remain the same.
To tie this into real life: today's United States government plans to inject about $11 trillion into the national economy in the space of less than two years. Many of this is unaccounted for at the corporate level and is distributed far from evenly. Regardless, when it trickles down through spending, consumption, investment and reinvestment, it eventually will be factored in by the various indices that the U.S. government and other organizations use to measure money supply, inflation and similar statistics. Nevertheless, the fundamental change in the amount of money in the system is the same. There is more money, so prices are higher. The result: inflation.
Unfortunately, the US government is looking the wrong direction. Accepted economic theory posits that when prices increase, inflation occurs, so they are looking at prices, perhaps not entirely aware of the fact that when the Fed and Treasury release hundreds of billions of dollars into the system, there will be a negative effect on inflation. To make matters worse, the way the CPI currently works, it does not account for food and energy - two of the most liquid and measurable indicators of inflation. Essentially, the CPI is used to measure inflation, but it doesn't actually incorporate two of the most prominent inflation indicators.
This approach is horribly flawed. It's resulting in a misdiagnosis of the problem, and a potentially disastrous prescription of a viable antidote.
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