The Reality of Reality

As the cameras moved along one of the cell blocks, a prisoner with a thick Arabic accent said sarcastically:

Al Qaida used to be only 50 people, now it is about half a million! Thank you America!

This was the scene in a recent National Geographic Channel Explorer episode entitled, “Inside Guantanamo.” The documentary provides an eye opening look at the United States government's unlawful detention camps at Guantanamo Bay, Cuba. While the episode makes a valiant effort to validate America's need for the prison, it also gives the prisoners a voice – a voice that America should listen to. Why, though, do so many Americans fail to hear these warnings?

During the Republican primary debates, prior to the 2008 election, Congressman Ron Paul regularly and correctly cited the CIA's “blow-back” theory as an explanation for the escalation of the threat of terrorist activity against the United States. However, every time Dr. Paul reiterated that argument, it was met with the inevitable rhetoric, “Are you suggesting that we invited the attacks of September 11th?” Well, the short answer is, yes! The ignorance that our nation's leaders exhibit towards the adverse effects of our interventionist foreign policy undoubtedly perpetuates the hatred and contempt that Al Qaida and other terrorist groups around the world display towards the West. While Americans did not invite the attacks of September 11th – nor were the thousands of deaths justified – America's policies over several decades provided the terrorists with ample motivation to carry out their attack.

Many Americans are unaware of the history of our involvement in the politics of Middle Eastern states. Since the end of World War II, America and its allies have found themselves engaged in the affairs of several Middle Eastern countries - the CIA's coup to overthrow the democratically elected Shah of Iran, US Marines in Lebanon and Beirut, and America's current involvement in Afghanistan and Pakistan only represent a small portion of the extensive list of military and political involvements by the US and its allies in the Middle East Region. And all of this in an effort to “protect American interests” - in other words, to protect big oil and other corporate concerns. Although I, in no way, wish to validate the arguments of radical Muslims, what is essential to their position is that these are countries that are on land that is often regarded as sacred by the Muslims that inhabit the area.

For another perspective, let's look at what is happening in Iraq and consider what we Americans may think if we were in their position: What would we do if another country kicked in America's door, wiped out our military, and occupied us so that they could set up a government that better serves their interests. Would anyone expect Americans to accept this scenario? Why then should we expect these middle eastern nations to accept the United States frequently meddling in their affairs?

This prisoner at Guantanamo Bay offered a unique perspective to which Americans should pay much attention. Unfortunately, rather than heed their warnings, the leaders of our country have repeatedly ignored the words of our enemies. The current US foreign policy will only continue to intensify the threat of violence on our citizens unless we promptly reverse our course. To reverse course is not to give in to the demands of our enemies, it is to abide by our nation's commitment to freedom from tyranny and government coercion - freedom for its own people and the people of all nations. If we are to be respected around the world again, the era of American imperialism must end. We must halt our interventionist foreign policy and return to the foreign policy of Thomas Jefferson – a policy of “peace, commerce, and honest friendship with all nations – entangling alliances with none” – for these are the principles on which this great republic was founded.

Quote of the Day - Totalitarianism

Nevertheless the theory of output as a whole, which is what the following book purports to provide, is more easily adapted to the conditions of a totalitarian state, than is the theory of the production and distribution of a given output under conditions of free competition and a large measure of laissez-faire.

- John Maynard Keynes, Preface to The General Theory, September 7, 1936

Something for Nothing

As the drumbeat for stimulus policy grows louder, following closely behind the recent slew of widely criticized bailout attempts, the majority of analysts and economists still do not seem to understand the root cause of our financial crisis and recession. This was never more evident than in a remark made last week by Janet Yellen, President of the Federal Reserve bank of San Francisco:

Typically, recessions occur when monetary policy is tightened to subdue the inflationary pressures that emerge during a boom. This time, the cause was the eruption of a severe financial crisis.

For anyone with a basic understanding of cause and effect, this statement is painful to read. While the recession might have been the result of the financial crisis (this is disputable), what was the cause of the financial crisis itself? Is it not important? Did it occur magically? Without knowing its cause, how can we be sure that our solution will be equally magical in preventing further financial crisis and resolving the recession?

The solution, as proposed by Janet Yellen and other like-minded economists who have yet to fully understand the cause of our recession, is stimulus. In order to grow the economy, create jobs, and solidify the financial infrastructure, the government will borrow money and spend it. Unfortunately, this idea falls flat at the outset without first understanding how we came to where we are.

The fact is, the root of our current economic troubles and the solution being proposed by Yellen are one in the same: debt. Debt is a wealth destroyer. It enables over-consumption, malinvestment, asset bubbles, and perpetuates non-productive economic behaviors that otherwise would not have been possible. All of these side-effects of debt played a role in creating the current recession, yet as can be seen with Yellen's comment, the ultimate culprit of the recession is noticeably absent from public discussion. Perhaps it is no wonder, considering that the expansion of debt in the US is controlled by the Federal Reserve. But while this might explain Yellen's support for stimulus, it doesn't explain the broad support from so many others.

The idea that stimulus can combat a recession is rooted in the idea the economy can be forced to grow faster than it otherwise would, without excessive side effects. But the very existence of recession, an economic contraction resulting from overcapacity, overspending and malinvestment, seems to indicate that the economy needs to correct itself when such abuses occur. The idea that we can prevent such a correction from occurring via stimulus fails to acknowledge the real cost that economic abuses have. It attempts to defy age old adage that you cannot get something from nothing.

But attempting to get something for nothing sure does sell. The government loves it, Wall Street loves it, economists love it, and Americans sure love it. Ultimately, it is no wonder that we try, futile as it may be, to manipulate the economy into giving us what we want while not giving us what we don't.

Wisdom on Bailouts

Ron Paul recently spoke on the subject of bailouts:

We must remember that governments do not produce anything. Their only resources come from producers in the economy through such means as inflation and taxation. The government has an obligation to be good stewards of these resources. In bailing out failing companies, they are confiscating money from productive members of the economy and giving it to failing ones.

By sustaining companies with obsolete or unsustainable business models, the government prevents their resources from being liquidated and made available to other companies that can put them to better, more productive use. An essential element of a healthy free market, is that both success and failure must be permitted to happen when they are earned. But instead with a bailout, the rewards are reversed - the proceeds from successful entities are given to failing ones. How this is supposed to be good for our economy is beyond me.

Shooting in the Dark

Paul Krugman, a proponent of fiscal stimulus, recently published some of his thoughts on the subject:

Nearly every forecast now says that, in the absence of strong policy action, real GDP will fall far below potential output in the near future

...

we need a fiscal stimulus big enough to close a 7% output gap

These brief statements highlight a major problem with Keynesian economics, the assumption that there is one ideal "potential output", or worse, that the ideal level of output is that which is the greatest. What this fails to consider is that output based on debt is generally not good. To put it another way, growth based on debt and speculation is false growth. As we've seen recently, false economic growth eventually reverts, which can lead to quite severe crashes. So this leaves us with some questions: What sort of growth should we look to achieve? Is perpetual growth by any means possible the goal? Is contraction always bad, and if not, is there some magical level beyond which contraction becomes bad?

In the Keynesian view of the economy where consumer spending drives growth, merely stimulating consumer spending is the theoretical key to prosperity. But if this were so, why not take on unlimited amounts of debt, stimulating unlimited amounts of consumer spending in good times and bad? The fact that such a scenario would lead to disaster is not lost on Keynesians, which is why they instead look to achieve optimal growth, and stimulate spending if needed via the optimal amount of debt, whatever those things may be. If consumption can be stimulated just enough to increase output, but not so much that the cost of the stimulus outweighs the increase in production, then we've achieved something good. But how can we measure the result of our stimulus to know if it's been successful? How do we know if we've not simply created more false economic growth?

Keeping in mind that increased production based on consumption is the goal of fiscal stimulus, the success or failure of stimulus would clearly lie in what is or isn't consumed. This brings us to an important distinction, productive consumption versus nonproductive consumption. With productive consumption, a participant consumes based on what they produce. Their production not only enables them to maintain their well-being through consumption, their consumption sustains their ability to produce. Obviously not all consumption is productive though. While some economic participants are able to produce much more than they need to consume, which is clearly productive, other participants consume much more than they are able to produce, or they produce goods which are not useful for sustaining further economic production - this is clearly nonproductive. If the goal of fiscal stimulus is to grow production, we would certainly want to support the economic activities that produce the most useful production sustaining goods with the least amount of input. But herein lies the problem with stimulus policy, it makes no distinction between productive and nonproductive consumption, nor can it.

So what happens when we implement a fiscal stimulus? Realistically, it is impossible to measure and distinguish those economic activities which are productive from those which are nonproductive. Therefore, the result of stimulating consumption is a blanket subsidizing of both productive and nonproductive economic activities. Unfortunately, subsidizing those economic activities which are nonproductive results in false economic growth, which as always, will painfully revert at some point. Looking at recent history, we can clearly see that the growth of the housing and financial services sectors were beyond what was needed to sustain other economic participants. While their growth was measured as increased output, clearly it was false growth and has since receded.

Getting back to the original topic of implementing stimulus in order to achieve "potential output", two things are now clear: some portion of growth resulting from stimulated consumption will inevitably be false, and stimulating nonproductive activities is not only counter-productive, it is harmful to productive activities that are competing for the same resources.

Ultimately though, all that anyone is cares about is whether or not the end will justify the means. Do the benefits of fiscal stimulus outweigh the costs? Can we achieve potential output through fiscal stimulus, and more importantly, do we even know what an optimal output is? The problem with the calls for fiscal stimulus isn't the idea of stimulus itself, but with the fact that such calls fail to address the many inherent problems and questions raised here. For all of the very real costs that stimulus carries, we should hope for more from its proponents including Krugman. Anything less is shooting in the dark.

Innocence and Freedom

Consider a recent argument in favor of a housing bailout:

I know many, many innocent people who just wanted to buy a home...Now the innocent people have houses worth $200,000 less than their 2005 purchase price.

The innocence of a homeowner relative the innocence of an uninvolved taxpayer is arguable. But innocence isn't the key issue pertaining to bailouts. They key issue is personal responsibility, an idea that is closely tied to freedom.

If someone bought an overpriced home, that was their decision, just as if someone decided to invest in beanie babies or NASCAR collector plates, that too is their decision. They, and nobody else, are responsible for the outcome. Forcing that responsibility onto someone else who had no involvement is a most clear violation of the other person's freedom.

Is it sad that people make bad economic choices? Of course. But what is most sad is the idea that anyone thinks it is ok to force the outcome of their bad decisions onto others. In the same way that we would not sentence one man for another man's freely executed crime, we should not burden one man with another man's freely made economic decisions.

As I've shown before, government economic policies such as subsidies, bailouts, stimulus and inflation are counter-productive, but even more important to recognize is that they are also counter to individual freedom.

Freedom to make bad decisions is inherent in the freedom to make good ones. If we are only free to make good decisions, we are not really free.

- Ron Paul

Rationalizing Theft

A writer for the NYT recently called for something to be done about housing:

Yes, there were lots of Americans who were not greedy or foolish during the housing bubble, and many resent the idea that their neighbors might get a bailout they don’t deserve. They need to get over themselves. If housing prices keep falling, many millions of additional homeowners will find themselves, through no fault of their own, with underwater mortgages. Besides, foreclosures damage property values for everyone, not just those losing their homes.

It's interesting that certain parties should be protected from the harm brought on "through no fault of their own", but not others. In case you had trouble understanding this rationalization for a bailout, let me translate:

Wealth needs to be taken from party A (taxpayers) and given to party B (homeowners), because even though party B was foolish the outcome of their foolishness might hurt party C (other homeowners). And while party C might also have been foolish, though clearly not as foolish as party B, both parties are somehow more deserving of party A's wealth than party A itself. Allowing harm to come to parties B or C as a result of their foolishness is somehow worse than harming party A by stealing its wealth.

Since the government has nothing and produces nothing, all it can do is use its powers of coercion to redistribute wealth from one party to another with the hope that this redistribution will bring about the greatest overall benefit for society. This is the reason given for such intrusions, that the end will somehow justify the means. But how is it that the redistribution of capital from economic activities that are succeeding to those which have failed will some how bring about a better outcome? How do failing activities produce more wealth for society than those which are not? Perhaps it is important to look at who the activity is producing wealth for and for whom it is not.

A successful market economy depends on fairness and justice. These aren't just ideas that appeal to us as individuals, they are necessary in order for a market economy to function properly and to its full potential. A market economy that lacks fairness and discipline, where winners and losers are picked by the coercive power of the government, is an economy that disincentives participation, work ethic and innovation. It is the same problem that caused the failure of classical socialism - why work hard when the product of your labor may be taken away and given to someone else?

An economic system which allows for the forceful redistribution of wealth with the thought that it is for our own good, ultimately and ironically, disincentives economic productivity and brings about the very economic harm that it claims to protect us from, subsidizing activities that the economy cannot afford and that consumers do not want, violating freedoms all along the way.