It is very seldom that economists have a laboratory in order to test theories. For an Austrian, this is not a problem because the axioms of economics are apodictic, meaning they are self-evident. But even so, to the average non-economist, some verification is nice as an illustration. Normally, a specialist in economics is necessary to delve beyond the host of activities in the economy and the government to isolate the economic factors that lead, say, to a recession. Praise God! Besides the Great Depression, which I find easy to diagnose, we have such a laboratory—JAPAN.
The Wall Street Journal recently summarized the Japanese recession that has gone on from about 1991 to today. When we older people think of Japan, we think of an up-and-coming, technologically savvy nation—a competitor of the United States. But in this article entitled “Obama-san” (the “san” is a respectful way of addressing people in Japan), it shows that Japan embarked on the exact same Keynesian path that President Obama and his Congressional allies are embarking on today, and that was started by President Bush. That path is to cure a recession by dumping large amounts of tax monies, through deficit government spending, into the economy.
Well, how did the spending program do? Japan’s GDP, adjusted for inflation, rose 16%—wait for it!—in 14 years. That means that the Japanese GDP rose slightly more than 1% per year. The Japanese economy is a corpse that does not know it is dead yet. The government, with the blessing of John Maynard Keynes, has spent $1 trillion (double this figure to see the US amount to date) and got what? Nothing. Even the United States from 1929-1939 had an annual GDP growth of a paltry, nevertheless better 3.05%.
So, you the reader, tell me, will this gigantic stimulus plan work? As any economics student knows, productivity only grows by investment, not consumption. If you doubt this, take the rest of the summer to read Jesús Huerte de Soto’s book Money, Bank Credit and Economic Cycles, available at Mises.org. What President Clinton started to call “investment” was a euphemism for the same kind of government spending we have now, just smaller. It was not investment at all. Take the recent housing boom. It was caused by expansion of the money supply by the Federal Reserve, artificially lowering interest rates, making buying houses more attractive, and because of rising demand, building them, and putting a huge strain on the building industry, forcing wages and prices of everything used to build, up until it became too expensive to buy a house.
And what is investment, really? It is using savings to purchase capital goods, goods such equipment and plant and inventions and the like. You can’t get that by massive government deficit spending. Well, you might add, if that is true, why is such a path so popular? Economists who haven’t sold their soul, and there are very few of those, know the truth of it. But the ordinary people have no clue about the necessity of investment, and politicians don’t care for anything except votes and polls (with few exceptions). So the politicians say that they can cure our economic ills with this massive government deficit spending, and the people believe it. There it is. Vice-President Biden, whose gaffes usually contain much truth that he lets slip out, said the other day that people can’t spend their way to prosperity, but government can! HA, HA, HA, HA, HA!
Many Catholics, including popes, have contrasted economic development with personal development. They are at pains to point out that mere economic development does not necessarily lead to the development of persons or culture per se. They seem to harp on this as if everyone would be ignorant of this obvious truth, or as if the free market economic system automatically deflects one from development of their personhood. I think that some Catholics make their careers stating and restating this.
While to some extent this point is very true, in many ways, especially factually, it does not play out. The constant harping on this point is based on a faulty view of human nature itself. In a paper one time I criticized a colleague who said that, first, man is by nature a social animal. True enough. Then he went on to reflect in his paper the common 1950s theory that we are becoming mass men; that society, especially urban society, is becoming like people on a train; that the social bond is being dissolved by our business and technological culture. This notion is still reflected in some of the students I deal with. My response was that if man is a social animal by nature, that means that he has a natural drive to be so, and that any appearance to the contrary in a free society is a false vision of the reality. Unlike most academics, I worked for a number of years in New York’s financial district. In that time I never met anyone fitting the description given by this professor. Everyone came from families that they loved and wanted to be with; everyone cooperated with their coworkers and those who were not team players were filtered out; at the end of the day, everyone went home to these same families. Even the people on the train were for the most part courteous, even though New Yorkers are known to be a bit cold. Sometimes something funny happened on the train, and everyone laughed, showing that they were human, and could share a common human experience. Sometimes bad things happened on the train, and everyone pulled together to help. One incident stands out in my mind, although it did not happen in my presence. My father, who also worked in the financial district, was on the train on the way home from work when a man right near him pulled a big knife and threatened to kill everyone. Instead of fleeing for their own lives, this subway car full of World War II combat veterans, my father included, all jumped the man and disarmed him. I have seen people get sick, I have seen children become separated from their parents, and tons of people cooperated to help those in need.
Now of course there are those people who are one-dimensional. They focus on one aspect of their lives and for them there is no other thing. The top student of my high school graduating class was a pure curmudgeon. He had a photographic memory, and did nothing but read and study. He had no friends because no one could get near him to make friends. The number two student in the class, whose grades were almost as good as those of the front-runner, was completely, different. He was charming, funny, kind and athletic. He was a good friend to all who knew him. So there are people whose job, education, wealth, batting average are all there is to life. But these are very few. Most people are well-rounded, and if they work hard, they do so because it is a duty, even if they enjoy it.
In the case in point, the misunderstanding of human nature expresses itself in a similar way. It says that human beings are meant by God to be real persons. They are to be giving, loving, friendly, dedicated to the welfare of others, but for some reason, says this theory, when they begin to become materially comfortable, they veer away from their natural calling. They focus totally on wealth and the accumulation of it, to the neglect of everything else.
This is an extremely cynical view, and is not backed up by the facts. Just observing the people around one, one can see that most people, not all, of course, use their wealth to better their lives, beginning with their physical betterment, but going up from there. Firstly, one needs to provide for food, clothing and shelter for one and one’s family. When income increases, it is spent on things like medical care, better quality and healthier food, better clothing, education, travel. The data shows that as the wealth of a country increases, infant mortality declines, illness in general declines, life expectancy increases, education levels rise, and folks move to safer and nicer neighborhoods. In addition, charitable contributions increase. How many parents pay for the college and graduate education of their kids, help them get started in life, bail them out if they are in financial straits, pay for their grandchildren to go to school, or summer camps or trips, etc. Donations from individuals to charities totaled over $314 billion in 2008. It certainly would be more if our tax rates were lower. Note that this official figure does not count non-listed contributions like the ones I cited above—i.e., helping one’s families who need it and do not have a tax number. So the real amount is much higher. In addition to this, no matter what you think of social programs like social security, there are more of these programs in wealthier countries because, quite frankly, they can afford it. And they can afford it because the citizens create wealth, which, allegedly, makes people greedy.
Now there are some people who are materialists, and some who are consumerists, just like there are intellectual people who are curmudgeons, and there are workaholics, but to condemn wealth as a cause of greed and all the other problems of the world is very questionable. As one economist recently stated: “Greed is a constant.” This means that everyone is tempted by the capital sin of avarice. Interestingly, a recent survey of the seven deadly sins among people concluded that lust was the most common and greed the least. I rest my case!
The Congressional Budget Office has given us an estimate of how much it will cost to insure one-third of all the uninsured medical patients in the United States by something like 2012, and it will cost a certain bazillions of dollars, which Obama is now saying will not expand the deficit, while also having promised in his campaign that he will not raise taxes of anyone who makes below $250,000. There is nothing in the media but talk about how he can possibly do this without taxing, and the fact that this ginormous amount of money will cover only one-third of those allegedly needing coverage.
Believe it or not, all this is beside the point! Why? Cost to the good or service provider and price to the consumer are decided at the point of exchange. Let’s look at a simple example. I like bananas. If I go to the supermarket and see bananas which are so green they look like St. Patrick’s Day bananas, I won’t buy them, because they might rot before they ripen, and in the summer, they may get fruit flies. The price does not even get consideration. But if they are getting yellow, I will look at the price. If they are already ripened, they had better be selling cheap, because I know that the store cannot keep them much longer, because they will begin to rot and the stock must be moved. If they are too ripe, I will probably avoid buying more than one or two, because I will not be able to eat them in time, again, regardless of the price.
Now look at medical procedures. Most medical insurance plans have a co-pay. This means that when you go for treatment, you must foot part of the cost of that procedure. Why? This prevents people from going to the doctor for minor problems that one could fix with things one finds in one’s medicine cabinet. Minor scrapes, bruises from sliding in at third, typical common colds, etc., no normal person wants to shell out money for a physician to tell them to go home and put ice on it, or stay in bed and drink plenty of liquids. The higher the co-pay, the less frequent the visits, and the more serious the complaints for patients to be willing to spend on doctor’s office visits. Just as in the bananas example, even though the provider seems to “set” the price, the consumer has the choice of paying it or not, by not buying the bananas or not going to the doctor’s. Of course, necessity changes things. If I promised a relative I would make banana bread, the fact that I might not like the bananas for sale might not make a difference. I will buy them regardless of price or condition, up to a point. It is the same with a doctor’s visit. If I get something with weird symptoms, or excessive pain, or suffer a more than ordinary trauma, I will seek help, regardless of cost, depending of the desperateness of the situation.
This brings us to the wise and powerful Obama and his cohorts in the Congress and the CBO. How is it possible for someone, anyone, to predict the future cost/price of medical care? One can’t. Since cost/price is decided at the point of exchange, the wise and powerful Obama would have to be present at every transaction, and update the cost figures at every moment. He would also have to predict events, such as car accidents, diseases, etc., which no one can predict, or we would avoid them. The only thing we have is current trends, which are only past history and may not continue at all. Remember that British Prime Minister Neville Chamberlain, in 1938, after meeting with Adolf Hitler and signing an agreement with him, never predicted the things that Hitler would do just a year after that document was signed. How can someone predict what people will do about conditions this observer knows nothing about in people he has never met? Only the free market can do that, because the market adjusts to these transactions on a minute-by-minute basis, and there are billions of transactions every minute.
This explains why, in all countries having socialist medical programs, the costs are going off the charts, the number of doctors are declining and health care is now being rationed. This is what is coming to the United States.