THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Wednesday, February 25, 2009

We Have Seen the Future . . . And It Doesn't Work

Listening to President Obama's speech last night, it becomes increasingly obvious that, despite his very evident good intentions, he is headed off in the wrong direction. He has managed to surround himself with a group of Ivy League elitists who still believe that the State can do anything, as long as you throw enough money at the problem.

Much of what the president says we can take as enthusiastic, if misdirected cheerleading. Unfortunately, the situation does not call for mindless optimism or money-tossing, but a genuine solution. The stock market is continuing to bounce up and down as speculators try and figure out whether the president's confidence will do the trick, or if something more substantive is needed. Meanwhile, there seems to be an adamantine belief among the powers-that-be that gritting our teeth, and reminding ourselves that, "we are not quitters" is enough to turn things around.

That, and a few more billions for the banking industry so that the State can nationalize the banks and establish a monopoly over access to the means of acquiring and possessing private property.

The main problem is that nothing the president and his advisors propose or even say does anything to diminish State power, break up the power of concentrated ownership, or, worse, increase production or broaden ownership of the means of production by ordinary people. There is no appreciation or even recognition of the four essential elements of an economically (and thus politically) just society:
• Limited economic role for the State,

• Free and open markets as the most just way to determine just prices, just wages, and just profits,

• Restoration of the rights of private property, and

• Widespread direct ownership of the means of production.
Clearly, both the president and his advisors are still enamored of the Keynesian delusion that money and production need not be linked directly (or at all), and that the State can run up deficits forever with no ill effects, to say nothing of being convinced that the non-productive State can run things better than a productive private sector. This is the only way to rationalize Mr. Obama's increasing the federal budget by nearly $1 trillion in "stimulus" spending, claiming he will not increase taxes for anyone making less than $250 thousand a year, and (instead of balancing the federal budget) cut the deficit in half.

Logically, the only way to make up a tax cut on one group without increasing the deficit is to tax other groups more. Thus, Mr. Obama necessarily proposes (even if he doesn't say so) to engage in the ever-popular "soak the rich" technique, which somehow never seems to have the intended results.

It's been made clear in many postings on this blog that we consider the rich part of the problem. Their monopoly over access to the means of acquiring and possessing private property (i.e., "capital credit") means that the vast majority of humanity is condemned to perpetual servitude in the form of wage slavery, debt slavery, welfare slavery . . . and whatever else you can come up with to ensure a condition of dependency for most of the rest of us.

Unfortunately (and this is one of the reasons we regard Keynesian economics as certifiably insane), the rich are absolutely necessary within the Keynesian paradigm. To understand this, let's look at the Keynesian paradox into which the president has locked himself.

"Soaking the rich" sounds well and good . . . in theory. A State should never run up a deficit, but should tax at a level sufficient to meet current expenditures. Further, sticking it to the rich and powerful is always a popular move in a presumably egalitarian society, where unrecognized barriers to full participation in the economy foster resentment and envy instead of the more rational response of organizing to eliminate such institutional obstructions in a just and sane manner through acts of social justice. Refusing to increase taxes on the poor and middle class and promising to cut the federal deficit in half, however, leaves "the rich" as the only source of funding for the stimulus and the decrease in the deficit.

No one, not even the State, can create new money to increase demand for more than there is production to buy. Nor can taxes be more than the aggregate amount of current income (current production) and savings (unconsumed past production) that exist in the country. Even a State that indulges in levying the "hidden tax" of inflation by printing money to cover its deficits can't tax more than a country produces. All the State can do is redistribute purchasing power by stealing the value of older currency and transferring it to recipients of the State's largesse by printing additional debt-backed money. Prices rise in response to the greater amount of currency in circulation, fostering the illusion that wealth is increasing when, in fact, inflation doesn't produce wealth at all.

The biggest danger in Mr. Obama's admittedly attractive enthusiasm and conviction is that hope and change will, in and of themselves (with the addition of a few billion more dollars) solve all our current problems. On the contrary, his reliance on Keynesian advisors puts him into an untenable, even paradoxical position. Keynesian economics, which depends on protecting the rich as absolutely necessary for the wellbeing of the poor, does not allow him to do what he wants to do.

Mr. Obama wants to focus on creating jobs as a means of getting the economy moving again. "Creating jobs" is directly opposed to the natural job creation that comes in response to the increase in demand that could result by investing in new productive assets in ways that make people who formerly owned no capital into capital owners. The future consumption incomes of former non-owners would result from new job and ownership incomes from the private sector, not State largesse. The rich would be encouraged to use their investment income for consumption instead of more investment.

A State program of "job creation" almost inevitably means "boondoggling," or "make-work" jobs outside the market system. These kinds of jobs are intended only to provide people with income, not vest them with ownership of new production. Boondoggling and featherbedding do nothing to increase production of marketable goods and services, but are purely inflationary. Boondoggling only serves to increase the waste and inefficiency that Mr. Obama says he wants to eliminate.

To make this clear, in the "Bizarro World" of Keynesian economics there is a necessary — repeat, necessary — tradeoff between employment and inflation. If you want full employment, you must endure inflation caused by government deficits. If you want low inflation, you must put up with high unemployment. Any other arrangement is impossible . . . in Keynesian economics.

This is because (in Keynes' upside-down universe) there are only two ways to create jobs. The first is to get the rich to invest in new capital formation. As we learn in college macroeconomics courses, the State increases consumer spending either by cutting taxes or handing out money. The increase in "effective demand" lures businesses to use their savings to invest in new capital, which creates jobs, and increases effective demand even more. If the State either cuts taxes or hands out more money, it has to engage in inflationary money creation (borrowing from the central bank) in order to make up the loss in tax revenues or finance the handouts. This is because if the State taxes the rich in order to make up for lost tax revenues or fund the handouts, it decreases the amount the rich can use to finance capital formation and create jobs.

The second means of job creation is for the State to subsidize jobs directly by paying businesses to hire people for whom the business would otherwise have no use. The funds for a direct State subsidy can only come from increasing taxes on the rich (in which case you take money away from the rich to hand back to the rich so they can afford to hire people they don't need to hire), or by increasing the deficit.

Thus, in the Weird World of Keynes, unless you want to stifle job creation by taking away the money the rich have to invest, increased government spending can only come by increasing the deficit. Why? Keynes believed that it is impossible to finance capital formation out of "future" or "forced" savings, that is, by extending capital credit to be repaid out of the future profits of the new capital itself.

According to Keynes, then, money to stimulate demand, subsidize jobs, or decrease the deficit cannot come from the rich, because in the Keynesian universe the savings and income of the rich are the only source of financing for new capital. If the government taxes away the wealth of the rich to decrease the deficit, the rich can't invest their savings in new capital formation, and no new jobs will be created. If the government taxes away the wealth of the rich in order to subsidize job creation, all that is accomplished is that the State takes money away just to hand it back — the situation remains the same, and no new jobs will be created, because the State simply restores the status quo: businesses reduce jobs to meet their tax bills, and then hire the people back to fill subsidized positions.

No, the only way to create jobs in Keynesian economics is by increasing the deficit . . . and Mr. Obama has just pledged to cut the deficit in half at the same time he has promised to create jobs. The president, despite his welcome optimism and conviction that things do not need to be the way they are, has by his reliance on Keynesian economic advisors trapped himself in an impossible situation. Within the Keynesian framework, Mr. Obama can only keep his promise to create jobs by breaking his promise to cut the deficit in half, and he can only keep his promise to cut the deficit by doing what Keynesian dogma tells us will destroy the economy forever.

Of course, if you admit the validity of Say's Law of Markets and the "Real Bills" doctrine, and combine them with the expanded ownership proposals supported by the binary economics of Louis Kelso and Mortimer Adler, you don't need the rich. You can tax away the gargantuan mountains of wealth by means of which the rich, supported by the Keynesian dogma that the rich, and only the rich, can finance and own the new capital that presumably creates jobs for the rest of us, hold the world hostage. It doesn't seem to occur to anyone in power that if everyone owned an adequate stake of capital, we wouldn't need artificial job creation, inflation, State control over virtually every aspect of our lives — or the rich.

There is a way out of the dead end street that Mr. Obama has managed to get himself into by following the dictates of Keynesian economics. That would be to implement Capital Homesteading at the earliest possible date, not after he and his advisors have gotten us into a worse mess than we are already in. It will not be an immediate "quick fix," and there will be shrieks of pain . . . but the loudest shrieks by far will come from Keynesians who see their religion discredited, their idols thrown down, and the State moneylenders driven from the temple.