By Dr. Gary North • http://www.GaryNorth.com
As a dog returneth to his vomit, so a fool returneth to his folly (Proverbs 26:11).
We are about to be thrown back into the tender mercies of Keynesian economists. In the current setting, this will push the economy lower rather than higher.
The main Keynesian solutions to a faltering economy are federal budget deficits and monetary inflation. This two-part program assumes unemployment at 25% and annual deflation at 10%: the Great Depression in America.
Problem: it’s not 1936 any more.
Two recent articles reminded me that the intelligentsia of the United States is like the Louis XVIII, the king of France in the post-Napoleonic restoration: he had forgotten nothing and had learned nothing.
What the intelligentsia learned from the popularizers of Keynesian economics after 1936 they have not forgotten. They have learned nothing new.
The heart of John Maynard Keynes’ analysis in 1936 was the idea of a permanent free market equilibrium with high unemployment. For some reason, which he never explained coherently, sellers refuse to lower their prices when faced with buyers who refuse to buy at yesterday’s pre-Depression prices. This is especially true of workers who refuse to cut their wage demands.
Keynesianism is based on two fundamental ideas: (1) sellers do not learn that something is better than nothing, and therefore will not lower their selling prices; (2) economists do not learn that government spending that is financed by debt is accomplished in one of only ways: (a) money lent by savers, which could have been lent to businesses or consumers; (b) money lent by a central bank, which lowers the purchasing power of the currency unit. This is a philosophy of something for nothing.
We are told by economists that there are no free lunches. But, except for Austrian economists, all economists really do believe in something for nothing. They debate with each other about which “something” can be obtained for nothing — “nothing” always being a piece of legislation.
Non-Austrian economists believe that a gun, when held by a salaried government official and pointed at a citizen to extract his wealth can sometimes produce economic growth, whereas a gun held by an thief and pointed at a citizen to extract his wealth always produces economic loss. The first produces something for nothing, whereas the second produces nothing for something. What is the difference? This: the person holding the gun.
KEYNES AND THE NEW DEAL
Early in Franklin Roosevelt’s first term, Keynes met with Roosevelt. We know the date: May 28, 1934. Roosevelt’s Secretary of Labor, Frances Perkins, noted in her published recollections that Keynes came out of the meeting and commented on the President’s lack of economic literacy. Later, when speaking with Roosevelt, she noted that he said he thought Keynes must be a mathematician, rather than a political economist.
Both men had the other pegged exactly. Roosevelt knew no economics, and Keynes had earned a bachelor’s degree in math. He had no degree in economics. He got his job at Cambridge University in 1909 because his father, a Cambridge economist, put up half the money to hire his son.
Because the meeting was in 1934, and because Keynes had not yet come up with Keynesianism — he was still working on it — I do not think the meeting was important for the future of the American economy. Keynes justified in theory in 1936 what every Western government had been doing for several years: printing money, raising taxes, running deficits, and regulating the economy.
The New Deal did not end the Great Depression in the United States. World War II did. The war allowed governments to increase deficit spending, inflate tremendously, impose price controls, draft young men and put them to work killing each other (which reduced the labor pool), and hire women to work in munitions factories at below-market wages, using patriotism to persuade them to enter the labor force. Patriotism was used as a way to persuade men and women to work at what would have been below-market wages in 1938. Then inflation and rationing reduced real wages even more.
Economics teaches this: “When the price falls, more is demanded.” This is true of the price of labor. Keynes knew this in 1936, and wrote specifically that the reduced real wage rates produced by monetary inflation would fool workers into going back to work. But it took worldwide deception — wartime wages — to achieve this on a scale sufficient to end unemployment.
None of this is taught in any textbook — not in economics, not in history. To teach it would alert students to the economics of war, which centralizes the power of the State. This is the thesis of economist Robert Higgs in “Crisis and Leviathan.” This book’s thesis and data never get into college textbooks.
With this as background, let me summarize the first of two documents.
TIME MARCHES ON!
In the May 15 issue of “Time Magazine,” there is an article by Justin Fox. I had never heard of Mr. Fox. His biography on “Time”‘s site says he has a B.A. in international relations. He therefore writes for the business section. He has recently published a book, “The Myth of the Rational Market.” You get the general idea.
“Time” was started in 1923 by Henry Luce (Skull & Bones, Council on Foreign Relations). It has long been a popular outlet for the American Establishment. In fact, “Time” is the news magazine written by the American Establishment in order to shape the thinking of the voters on the Big Picture.
Mr. Fox’s enemy is what he perceives as Reaganism.
Economic eras don’t last forever, though, and there are signs that the current slowdown is a harbinger of something bigger: an end to America’s 25-year love affair with tax cuts and deregulation. A lot of the cracks that have emerged during that time, because of global economic shifts or our own neglect, have become impossible to ignore — stagnant incomes, a federal budget gone way out of balance, soaring energy prices, a once-in-a-lifetime housing crash and growing financial risks in retirement and from health care.
He says there has been growing inequality of wealth. He offers no statistics to indicate that inequality has increased from the income distribution of 1940, let alone 1900. Those who identify inequality as a significant economic or moral liability that calls for radical policy changes by government never do offer such statistics. There is a reason for this. The ratio of wealth by income class has barely changed, in the United States or in Western Europe, in a hundred years.
The evidence for a significant increase in American inequality since 1980 is based on tax evidence. But this evidence does not consider money in tax-deferred retirement funds. So, it is questionable.
In any case, the critics offer no evidence that their reforms will eliminate inequality. It does no good to provide a cure until a problem is diagnosed. Why is income more unequal today — if it is — than it was in 1980? Second, was 1980 significantly different from 1940 or 1900? Where is the evidence? Next, where is the explanation? Only after we have both should we — meaning policy-makers — begin suggesting solutions.
So what should be done about income disparity? In an April Gallup poll, 68% of respondents said wealth “should be more evenly distributed” in the U.S. — the highest percentage saying so since Gallup started asking the question in 1984. A smaller majority, 51%, agreed that “heavy taxes on the rich” were needed.
Surprise! Surprise! Voters with less wealth want to the government to stick a gun in the belly of anyone with more wealth, telling him to fork it over. Of course, voters do not want the government to send people with guns to stick in their bellies, on behalf of people even poorer, who are far more numerous.
The politics of envy is the politics of this commandment: “Thou shalt not steal, except by majority vote.” It is the politics of two wolves and a sheep voting on what to have for dinner. It is alive and well all over the world.
The author then launches an unsubstantiated attack on Reagan’s cuts of the top brackets: from 70% to 28%. No
ention is made of Kennedy’s cuts from 91% to 70%. The economy boomed in both cases.
Then there is the energy crisis. What is needed? Not more production. We need more taxes and more subsidies by federal government.
What makes doing the right thing on energy difficult is that it would almost inevitably involve raising costs now, with higher taxes on oil, increased subsidies for other energy sources or higher energy-efficiency standards for vehicles and homes — or all three. Economists tend to prefer the first of these approaches because taxes on gas, oil or fossil fuels in general tamp demand and allow the market — rather than members of Congress — to sift out the best alternatives.
Here is the good news, he says: the candidates’ stand on global warming.
Interesting, though, to fight global warming, Clinton, McCain and Obama are all in favor of a carbon-cap-and-trade regimen, which would raise the price of fossil fuels just as surely as a direct tax would. Almost in spite of ourselves, we may end up with a semi-rational long-term energy policy. It won’t make gas cheaper anytime soon — or perhaps ever — but in the long run, it could strengthen the country’s economic prospects.
Next, how should government solve the housing crisis? Simple: repeal the tax deduction for mortgage interest payments. That will do it! Yes, sir, there is nothing like a huge tax on everyone’s after-tax income to stimulate robust growth in the housing market. (Too bad it won’t happen — voters being used to the deduction.)
Several countries have dropped the mortgage- interest deduction in recent years, with no noticeably adverse effects, but there’s no indication that any of our presidential candidates are contemplating such a move.
Then there is universal health care. No problem here, either!
But there’s real hope on this front. It is possible to conceive of a system that brings the 47 million uninsured into the fold, improves medical outcomes and costs less than what we’ve got now. It’s possible to conceive of because many other wealthy countries already have such systems. Figuring out exactly how to make universal health care work in the U.S. is a matter better left to its own lengthy magazine article. But if you’re looking for big economic change from the next Administration, this is the form it’s most likely to take.
This article appeared in the premier Establishment outlet for the American intelligentsia.
My conclusion: get ready for a big dose of the politics of envy.
KUCINICH’S ECONOMIST SPEAKS OUT
There are not many American politicians further to the Left economically than Dennis Kucinich. In a recent interview, his economic advisor, Michael Hudson, provided a detailed and accurate assessment of the problems facing the Federal Reserve System. Then he offered solutions.You will not like the solutions.
The interviewer knew what questions to ask. The questions centered around the solvency of America’s largest banks. The FED is letting them swap bad debt for Treasury debt. Half of the FED’s reserves have been swapped for this supposedly AAA-rated paper since last December. This cannot go on much longer.
Problem: this program merely buys time. How will the banks unload this bad paper on suckers? The supply of suckers has dried up.
The Fed’s idea was merely to buy enough time for the banks to sell their junk mortgages to the proverbial “greater fool.” But foreign investors no longer are playing this role, nor are domestic U.S. pension funds. So the most likely result will be for the Fed simply to roll over its loans — as if the problem can be cured by yet more time.
The problem is bad real estate loans. There is nothing the Treasury can do to solve this problem. The game is over.
The financial sector has been living in the short run for quite a while now, and I suspect that a lot of money managers are planning to get out or be fired now that the game is over. And it really is over. The Treasury’s attempt to reflate the real estate market has not worked, and it can’t work. Mortgage arrears, defaults and foreclosures
are rising, and much property has become unsaleable except at distress prices that leave homeowners with negative equity.
Hence, the title of the article: “The Game Is Over. There Won’t Be a Rebound.”
The dollar is likely to fall. The problem begins with
the international trade system. When Europe and Asia receive excess dollars, these are turned over to their central banks, which have little alternative but to recycle these back to the United States by buying U.S. Treasury bonds. Foreign governments — and their taxpayers — are thus financing the domestic U.S. federal budget deficit, which itself stems largely from the war in Iraq that most foreign voters oppose.
This is exactly the problem. The United States has pressured oil-exporting nations in the Middle East to demand payment in dollars and then cycle these dollars back through American multinational banks.
For over 30 years they have been pressured to recycle their oil earnings into the U.S. stock market and loans to U.S. financial institutions. They have taken large losses on these investments (such as last year’s money to bail out Citibank), and are trying to recoup them via the oil market.
Conclusion: “. . . unless they are willing to make a structural break and change the world monetary system radically, they will remain powerless to avoid giving the United States a free ride — including a free ride for its military spending and war in the Near East.”
But the fact is, a refusal by central banks to buy T-bills is exactly such a structural break in the world monetary system. He thinks this is now happening. So do I. So, I see no way to remain optimistic about the future value of the dollar.
Regional banks will go under, he says. The FED and the government will oversee mergers.
False reporting also will help financial institutions avoid the appearance of insolvency. They will seek more and more government guarantees, ostensibly to help middle-class depositors but actually favoring the big speculators who are their major clients.
I add: this is already taking place. That is what the FED’s swaps of Treasury debt for private mortgage-backed assets is all about.
Then what should Obama do? Tax and spend.As president, he will have to do what FDR did, and challenge the financial oligarchy with new government regulatory agencies staffed with real regulators, not deregulators as under the Bush-Clinton-Bush regime. . . . Most of all, he will have to make the tax system back progressive again if the domestic market is to recover. He should remove the tax-deductibility of interest payments, and do what the original 1913 income tax did: tax capital gains at normal income rates rather than subsidizing speculation. . . .Wait a minute! This is what Mr. Fox recommends in his article in “Time.”What about Social Security and Medicare? Simple: exempt family that makes under $60,000 a year and tax all income for everyone else — no cut-off at $105,000.There is no deduction from gross income for donations under Social Security. This is just what the centralizers need! This will be Europe’s tax system.He says this will take power away from the American oligarchy. “Unless he does this, what used to be a democracy will be turned into an oligarchy.”
Yet “Time” ran a cover story on just this sort of tax reform. And time has been the popular news magazine for the oligarchy since its creation in 1923.
We are heading into a great reversal. We are going to see rising taxes and a falling stock market. Housing is unlikely to rebound next year.
The economic goal today is to keep what you have in the face of a revived welfare state. The days of wine and roses are going to be rolled back next year and beyond.
Gary North’s Economic Edge™
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By Rev. Tommy Davis
Greater than any disease is the issue of ignorance. I often talk to well meaning folks who have so many opinions about the Bush Administration and the economy while the facts that would truly advise them are totally ignored.
One lady told me that Bush is raising the price of oil to profit from its earnings. Another time I was told that the Republicans think they own the whole country and just allow us to live in it. On the same note I have been told that Obama is a very smart guy and he should be president.
Most of these statements spew forth from black and white liberals who desire freedom and prosperity at the expense of the wealthy. Economically, it would not make much sense for Bush to support buying oil from the Middle East when he could yield greater returns from the American oil industry.
Second, the United States is not a member of the Organization of the Petroleum Exporting Countries (OPEC). OPEC is made up of thirteen countries who control two-thirds of the world’s oil reserves. Their output is over 35 percent of the market. It’s OPEC who controls crude oil prices, and its government taxation that finally determines the price after refinery on American soil.
If the U.S. Government raises taxes for oil companies then those costs must be transferred over to the consumer in order for businesses to make a profit, pay their employees and reinvest capital.
A Republican form of government that believes in low taxes and small administration understand that the public will benefit more from innovative ideas through free-market competition. It is high taxes and government price controls that leads to inflation and an unstable market. Remember, it was Franklin Roosevelt’s National Recovery Act (NRA) of 1933 that helped prolong the Great Depression. The NRA required above-market wages for fresh hires which led to elevated unemployment.
Obama is a repackaged Roosevelt’s New Deal (‘Change’). The federal government attempted to control costs and production through many policies and ‘agreements’ with trade associations.
A president who signs activist legislation that penalizes businesses for providing goods to consumers will only make it more difficult for those very consumers to either purchase their desired goods; or those goods would not be provided at all due to the high cost of production and low return on capital (when a company is forced into bankruptcy).
FDR’s New Deal that found support with a majority Democratic Congress was a fable but he sold it to a desperate people. In similar fashion, Obama’s “change” is another step in taking America down a comparable road until a new “Ronald Reagan” gives power back to the consumer and restores true competition in the business world. Thus, resulting in a superior change in our economy.
‘I will neither give a deadly drug to anybody if asked for it, nor will I make a suggestion to this effect. Similarly, I will not give a woman an abortive remedy.’ The Hippocratic Oath.1
These words, penned approximately four centuries before Christ, still hold immense relevance today. Their writer was Hippocrates, a philosopher and physician of Ancient Greece who is often considered to be ‘the father of medicine’. Hippocrates’ ‘Oath’ encapsulated the idea prevalent in Greek philosophy that suicide was a social evil akin to killing another human person, but for the first time placed it in a code of practice for doctors.
Medical students in many western countries are still required to take the above ‘Hippocratic oath’. The anti-abortion clause, however, at least in my country of Australia, has been conveniently (and tragically) removed, a reflection of the secularization of our evolutionized culture. Modern medicine has all but abandoned the principle of the sanctity of human life that Hippocrates enunciated, and which is also found in the Genesis account of man being made in God’s image. For example, today abortion is considered by many to be a ‘pregnancy choice’ rather than the destruction of another human being. Medical treatments are withdrawn from patients on the basis that they lack ‘quality of life’, rather than considering whether the treatment will help the person get better or preserve their life until the natural end.
The belief that we have evolved from simpler creatures is often used to justify the rejection of God as Creator and hence the rejection of His authority through His Law. Without God, life becomes purposeless. Disability, suffering and the terminal stages of life are viewed as meaningless. This is a contributing cause to the ‘culture of death’ that is affecting the Western world in areas such as medicine and healthcare, where people’s lives are dependent on others.
The increasing acceptance of euthanasia is part of this shift in mentality towards the ‘culture of death’. Not long ago, the world watched a court of the United States rule that a disabled person, Terri Schiavo, should die by starvation and dehydration. How could an innocent person be deliberately killed in this way? (Remember that it is not like turning off complex machinery—anyone would die if prevented from taking in water or food, so we are talking about an overt act of killing the innocent—murder, by definition.)
The truth is that people have lost their sense of what it means to be human. Life, instead of being a precious gift, becomes evaluated according to its ‘quality’. A person whilst young, active and productive has a high ‘quality of life’, yet once this person becomes old, disabled or dependent, the quality is reduced, and his or her life may no longer be considered to be worth living or protecting. Without the possibility of recovery, disability or dependence on others become grounds for the termination of that person’s life.
Echoes of this sentiment were also found in Clint Eastwood’s popular movie, Million Dollar Baby. The main character, a female boxer, starts out bold and successful, but ends up suffering a high level spinal cord injury leaving her permanently disabled, dependent on a ventilator (breathing machine) and unable to move her limbs. For her, the loss of her previous abilities is too much and she seeks death, and her ventilator is switched off in what is depicted by Hollywood as a profound act of compassion. (It is interesting to note that the Third Reich used similar films to promote acceptance of euthanasia prior to the extermination of the disabled and the mentally handicapped in Nazi Germany.2) Far from being compassionate, the carers have simply taken the easy way out. Rather than supporting her through her illness and allowing her to adjust to life’s circumstances (compare quadriplegic Christian author Joni Eareckson Tada), they assist in killing her. Such an act rejects the essential aspect that her life is not her own to take. Made in God’s image, she has no right to destroy her own life, or permit others to do so, whatever her situation.
The story of Job in the Bible recounts how he refused to ‘curse God and die’ (Job 2:9) despite this counsel being given to him by his wife. This was because Job feared God and understood that only He has the authority to give and to take life. Even if all joy is taken out of life, as was the case with Job, that still would not justify the taking of life. Even in the depths of suffering, God’s image remains, and life remains an intrinsic good, worthy of protection and support. Not to mention the fact that in rare instances, people have unexpectedly recovered from what were deemed as ‘hopeless’ medical situations.
When courts or individuals become the arbiters of life or death, such power in the hands of mankind (which has a poor track record on handling it wisely) is open to abuse, misjudgment, and bias.
The Christian church, and indeed society in general, should never accept the lie that euthanasia represents ‘a good death’ (as the word’s etymology3 implies). Euthanasia, in its real sense, represents a profound rejection of the gift of life, and hence of the Giver Himself. Instead, there should be a recognition that man, being made in the image of God, has intrinsic value and dignity from conception to natural death.
The decline of respect for life in western culture is one more symptom of the tragic foundational shift away from a biblical worldview to one based on evolutionary humanism.
References and notes
- As translated by Ludwig Edelstein. Return to text.
- Burleigh, M., Death and Deliverance, Cambridge University Press, New York, USA, p. 210, 1994. Return to text.
- From the Greek eu = good or easy, and thanatos = death. Return to text.