Monthly Archives: February 2010

How The Government Will Escape Its Mess

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The US Government’s balance sheet is looking a bit unsound lately – $12.4 trillion in public debt. Correcting for the Enron-like accounting that hides the Government’s Social Security and Medicare liabilities, the figure is estimated at $59 trillion. While “can’t” is not in the traditional American vernacular, repaying $59 trillion in debt, or even servicing it, is nearly impossible. How will the Government get out of this mess?

One way would be for the Government to mend its wasteful ways. Congress could eliminate pork, stop creating new programs, cut wasteful programs that are not essential or do not work, and focus on cutting the Federal Budget as a percent of GDP. As long as Congress runs a surplus, the economy would slowly grow out of its debt problems. Of course that would take decades of prudent fiscal management and is therefore unlikely. Few have ever realized such a monumental goal as responsible governance.

Another way would be for the Government to liberalize economic policies. If the cost of manufacturing in the US were allowed to reflect the true market, the US would again become the world’s manufacturing powerhouse. US labor is the most productive in the world, and the US’s system of property rights and its superior infrastructure are unmatched. Of course hindrances such as militant unions, abusive trial lawyers, excessive regulation, and anti-immigrant isolationism are so entrenched in US Politics that reigniting US industry is a long shot.

Should Congress fail to restrain its spending or liberalize its regulatory stranglehold on industry, what then? Governments have faced this dilemma since the early Roman Empire, and the answer has always been the same: inflation. Time and again, failed governments have used surprise inflation to melt away obligations they cannot pay. Also called ‘printing money,’ inflation reduces the real value of the principal on any debt.

Perhaps the most egregious example of surprise inflation was the Gold Confiscation Order of 1933. Pres. Roosevelt, in what seems outlandishly un-American today, outlawed the ownership of most gold. FDR forced gold savers (whom he called hoarders) to cash in their gold for paper certificates. Almost immediately thereafter, FDR declared the value of gold had risen from the confiscation rate of $20.67 per ounce to $35 per ounce. The value of every cash savings declined by a third overnight, and the US Treasury essentially stole it from those foolish enough to save.

Now, without a gold standard to manipulate, the Fed inflates currency by buying government bonds in the open market. During the recent recession, the Fed inflated the money supply by buying back bonds with new dollars. While this tactic is generally accepted as appropriate to combat a deflationary spiral, it is also the cause of runaway inflation. If the US cannot find lenders for its excessive deficit spending, it will be forced to issue worthless dollars in exchange for its obligations.

For inflation to work, governments must surprise or deceive their creditors. If a creditor expects inflation, as in the case of Zimbabwe, he will either not lend at all or structure payment in the form of harder currencies like the Dollar or the Euro. Paper money is a matter of trust alone, and to inflate one’s way out of debt requires violating that trust.

Inflation also harms those who save. Most assets do not go up in value as fast as inflation, so savings are reduced or wiped out by inflation. Inflation does benefit those who borrow, because the real value of their obligations is reduced. In effect, when a government inflates its way out of debt, it steals real wealth from those who save and gives it to those who borrow.

Unless the US changes its unsustainable ways very soon, the second half of this century will be grim indeed. The many benefits of the Dollar’s world dominance will evaporate. A generation’s savings will be wiped out by runaway inflation. International investment in the US’s economy will greatly slow. Foreign trade will be cramped by an unreliable Dollar. In short, the US may become a shadow of its former greatness when the Government is forced to inflate away its debts. That is something to think about the next time a politician wants to spend a few billion more dollars on some superfluous new program.

Corporations Are Not Nice People

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This week five corporations, including BP and ConocoPhillips, dropped out of the US Climate Action Partnership (a.k.a. USCAP, with an emphasis on the ‘CAP’) an industry lobbyist group that sought to mollify the most aggressive instincts of ‘green’ and government organizations while at the same time advance the environmentalist agenda. USCAP’s membership is chock full of corporations that will not benefit from cap and trade laws, yet they lobbied for them. One might assume that five brave corporations saw that global warming is more political than science based, and they made a principled stand by dropping out of USCAP. The real reason is more pedestrian, and a little sad. Why these companies joined and subsequently left USCAP goes a long way to explain the psyche of corporations.

USCAP is based on the strategy of ‘being at the table so as not to be on the menu.’ Big corporations are easy targets for opportunistic politicians – consider Pres. Obama’s relentless bashing of Wall Street ‘fat cats,’ or the Senate’s grandstanding over cigarette companies’ unhealthy products, or Sen. Hatch’s obsession with punishing Microsoft. Obviously BP has no interest in fossil fuel taxes, and Phillip Morris doesn’t really favor punitive cigarette taxes, but they, and countless other corporations play USCAP’s game because it is better than the alternative – the complete routing and destruction of shareholder value that Microsoft suffered as punishment for standing up to the Government.

Big Corporations ‘sit at the table’ with their enemies for another reason: to stifle competition. The Byzantine red tape that Washington imposes on the free market is easily navigated by multi-billion dollar corporations, but not so by their smaller competitors. The costs of complying with regulations that clog every aspect of the business world disproportionately fall on the shoulders of small businesses and entrepreneurs. For example, Mattel lobbied for a new law that, while imposing some product testing expenses on themselves, effectively outlawed independent toy manufacturers. Mattel even managed to make selling used toys at garage sales practically impossible. The law created and entrenched an oligopoly of big toy manufacturers; not bad for a day’s work in Washington.

Similarly, back when a socialized health care bill seemed inevitable, Wal-Mart came out and supported Obamacare. Why would Wal-Mart, the nation’s largest employer, want the burden of insuring all of its employees? Wal-Mart knew that it had the economies of scale to pay the very least for its insurance, and it owns its own Pharmacies to boot. Of all the employers hit by Obamcare’s mandates, Wal-Mart is best equipped to cope. Wal-Mart didn’t care about people so much as it wanted to suppress its competitors.

Likewise, USCAP’s mission is not to benefit its members by reducing their costs, but to harm smaller competitors more by raising their relative costs. From the formation of AT&T over a century ago, , to blue laws, to the Chamber of Commerce’s statist tolerance of government, regulation always evolves into an incumbent protection racket. The only losers are entrepreneurs and consumers.

Why the USCAP defections? USCAP is falling apart because the Obama agenda is falling apart. Cap and trade is dead with little hope for revival. USCAP’s mission of mitigating cap and trade’s damage to its well-heeled members no longer matters, so its members are dropping off. There was no change of moral compass here, just political calculus.

Similarly, with the implosion of Obamacare, PhRMA recently dumped its CEO, Rep. Billy Tauzin. PhRMA had the same mission as USCAP, but with regard to Obamacare – craft a bill that harms its members less than their competitors. Why continue to pay a Washington big-wig when the issue is comatose and ready for the morgue? Tauzin’s connections and moral flexibility are no longer needed.

Why are companies, especially the larger ones, so spineless on issues that are critical to very existence of the US? Why are corporations so greedy, feckless, and sometimes even evil? Simply because it suits their short term interests. Leftists want to believe that corporations should be good corporate citizens, but it is not in their nature. Corporations will always pursue politics as a way to benefit shareholder value.

Despite the evil corporations sometimes do, there remains no better engine for the betterment of people. The NYSE’s $16.3 trillion market capitalization proves that the corporate structure is the best way to generate wealth and improve everyone’s quality of life. In other words, the corporation is a wonderful source of good, but corporations are sometimes evil. Political opportunists in Washington set up corporate excesses as a straw man to hobble the corporate system and dole out their expensive favors.

Nobody should count on Corporate America to consistently support the cause of capitalism and freedom. The Supreme Court rightly ruled that corporations have the right to political speech, but that does not mean that informed voters should always listen, because corporations are at best a weak ally in the cause of liberty.

The Moral Superiority of The Lottery?

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When politicians want more money, they rarely ask honestly. V.P. Biden called paying extra taxes a “patriotic duty.” Colorado passed a multi-billion dollar tax increase, Referendum C, by calling it the “Economic Recovery Act.” Sen. R. Dole and Pres. Reagan passed the “Tax Equity and Fiscal Responsibility Act of 1982.” Lotteries, a tax on stupidity, are no different. Colorado’s lottery features a green mountain in its logo and its profits are earmarked for parks and open spaces.

Politicians know that a ‘union handout’ tax or a ‘bureaucrat bonus fund’ lottery would not hold up. Politicians hope that voters will forget that money is fungible. If taxes are raised to fund education, existing education funds can then be siphoned off to support pork for solar panel manufacturers. Especially in the Byzanthia that is government financial control, it is impossible to link revenues to spending. They don’t call the inscrutable Colorado budget the “Long Bill” for nothing.

Governments go to amazing lengths to defend the moral superiority of their tax earmark lies. In Denver, a group of dedicated locals raised private funds to build a children’s playground on a barren patch of Downtown. The Colorado Lottery fund withheld its support for over a decade until the citizens finally raised the lion’s share of the budget. Only then did the Government allocate lottery tax dollars to this modest project. Unlike all private philanthropic efforts, the Government outlaws most signage recognizing donors, it being offended by the public recognition of private and corporate donors. Not so for the lottery. At this particular park, there are already three prominent multi-color plaques advertising that the Colorado Lottery has partly funded the project.

Why would the Government outlaw the very practice it uses itself? Politicians know that tax increases and lotteries are tough sells when their real purpose – general revenue enhancement – is on display. They must lie and pretend that taxes and lotteries go to all the good things in life, like children’s playgrounds. That is why Colorado engages in an ongoing advertisement campaign that claims that the lottery funds open space trails, parks, and all sorts of public good – money that could be used to actually fund these projects. The Government does not want people to know that many of these parks are mostly funded by private donations; it is greedy for the public admiration it needs to perpetuate the lie that taxes and lotteries are the source of the good life. Without that smokescreen, people might remember that Colorado had parks and open space trails before the lottery, and that politicians simply siphoned off the old open space funds to support whatever nonsense the Government does.

Whenever the Government gets high and mighty, as it does with tax increases and lotteries, there is usually something sinister behind its rhetoric. Every tax increase has another fiscal crisis in its shadow. When times are good, the Government wants new fees and taxes to support feel-good programs. When times are bad, the Government needs people to pay their ‘fair share’ or else ‘the children’ will suffer. There is never a time when the Government does not want more money, and its greed knows no bound. So, when the Government says that the lottery paid for your local park, remember that that is a lie.