After a long hiatus, involving sickness and a car accident, I am finally back in the ball game.
Many of you must have noticed that recently the Democrats have been pulling the Chicken Little act saying that if the sequester goes into effect the country will basically come to a halt, we will have no military of any significance to protect us, jobs will perish by the boatload, and the poor will starve. My experience with New York City politicians sheds some light on this situation. In the 1970’s, when the city’s budget busting spendthriftery caused austerity to become a necessity, the first things to be cut were police and fire protection. Why, you may ask? Why not other non necessary things like the giant lumbering bureaucracies, for example? The only purpose of these cuts was to scare the citizens into insisting on removing the needed budget cuts and to say, “to heck with balancing the budget.” The same tactic is evident here. If the military budget gets cut, hoards of Canadians will come sweeping over the border in a murderous frenzy, and we will be helpless to stop them.
Nothing is further from the truth. I have gotten this from many sources, but the MSN Money site summarizes it most succinctly:
1. No recession is coming. They say that in a $16.4 trillion economy, the cuts are not nearly enough. After all, the cuts are only 2.4% of the whole Federal Budget.
2. The cuts are less than $85 billion. What the Democrats and many Republicans are quiet about is the economy and job killing $200 billion tax increase we are not saddled with.
3. Federal employees will feel the impact. Obama, or as someone in the comment called him, Oblabla, has expanded the Federal bureaucracy so much that Federal employment is really the only segment of the economy that is doing well.
4. Congress could give the Pentagon more flexibility. Since the cuts are across the board, allowing the Pentagon and the other agencies pick and choose where they will cut will assure that necessary programs will still function.
5. March first is not set in stone. Congress could pass a continuing resolution, as they have many times before, to extend the deadline and continue to fund the budget at current levels.
So before you build that disaster shelter and stock up on dried foods, mull this over. The gigantic Federal sector is like a cancer eating up everything in sight, like the blob from the jersey swamps. Is that what you want? And even if those evil Canadians attack us, we still have our Second Amendment Rights to fall back on, at least for the time being.
There are many reasons for the general population, and the politicians who cater to their wishes, not to accept what the scholars tell it to be true in economics and politics. There is ignorance, like the case of the woman who said that Obama was going to pay her rent, electric bill, etc. When asked where he was going to get the money, she replied, “From his stash.” There is the classic problem that you can never successfully oppose a principle to an interest. Even if I know what is right, it is very hard to think of the common good if that will stop my check from coming in. But what I would like to discuss in this entry is the problem of knowledge, the validity of it, and the method by which we attain it; and the problem of knowledge in our society.
This subject is called epistemology, from the Greek word epist?m?, meaning true knowledge as opposed to opinion. Opinion is a statement made with fear that the opposite may be true. Note that the fear does not have to reside in the know-it-all making the statement, but in the hearers, who would not bet money on the truth of the statement. Seeking the truth is a process designed to replace opinion with knowledge. In order to achieve knowledge one must be assured that the human being can accurately know the world outside of itself. This not only applies to physical things, but things such as the order contained within things on which the senses focus. Take the example of the little child who is given a new pink rubber ball. Such balls were common when I was a kid. Unless he has never seen one before, the child knows that that is a ball, that it is rubber, and that it bounces. The child immediately begins to bounce the ball until his mother tells him, “Not in the house, dear.” The child then goes outside to continue to bounce it. That child did not spend any serious time thinking about the ball; he got it in his hand, bounced it, his expectations were correct.
The great political philosopher Leo Strauss calls the fact that that we can accurately know what we sense pre-philosophical common sense. While there are cases when your senses can be deceived, those are out of the ordinary. I remember smelling what I thought was the smell of rotten eggs coming out of the chemistry lab, when it was really burning sulfur. Once I knew of the place from which the smell originated, and since I know there is no reason for eggs to be in the chemistry lab, I immediately drew the correct conclusion. I replaced opinion about the smell with knowledge about the smell. We could not live without this ability. Also, this does not apply to purely sensible objects but to more and more complex things. Think of the name Mary. It may remind you of our Blessed Mother, or a nice relative with that name. Suppose I add the word “typhoid” to Mary, so that it becomes “Typhoid Mary.” Typhoid Mary was the nickname of a woman in New York who, beginning in 1901, contracted typhoid fever as a carrier without symptoms and infected numerous people because she was a cook and unknowingly infected her customers. It was very difficult to find this carrier, so she became a household name.
Notice how your mind changed its orientation when the word “typhoid” was added to “Mary.” You needed no prompting from anybody to go from a joyful attitude toward “Mary” to a fearful attitude to “Typhoid Mary.” How did this happen? Typhoid Mary was a real person of which we received an intelligible species impressed upon our mind, such that “Typhoid Mary” became in some sense a part of you. The concept, coming from the reality and being impressed upon the intellect, can be analyzed by the intellect, and conclusions can be drawn. Hence flows the negative attitude. This is how human beings exist in the world. Their senses pick up something intelligible, the species impresses itself on the mind, the intellect analyzes it, and logical conclusions are drawn, frequently, but not always, followed by action.
But nowadays, the matter has become complicated. Beginning with the thought of René Descartes (1596–1650), who was a Catholic and a canon and civil lawyer, there arose the idea that we really cannot know what is outside our own head. For Descartes, the disagreements among philosophers were proof that we could not know reality outside of our mind, but we could only know our own ideas about reality. Thus he thought geometry was the true philosophy—because all of it was a mental construct. John Locke picked up on this in his epistemology by holding that our knowledge is only conversant regarding our own ideas, not external reality. Bishop Berkeley, who was a devout Anglican, felt that original creation could easily have been only mind and ideas, not real things. He held that anything that was not perceived did not exist, meaning that we know only what things are perceived by our own senses, and known by our own mind only. Any thinking not linked to these subjective things of sensing and perceiving have no existence. The things we think exist are, if you will, products of our senses and our mind, and we cannot posit their objective existence. Berkeley wrote: “Their esse [existence] is percepti [perceptible], nor is it possible they should have any existence outside of the minds or thinking things that perceive them.”
David Hume (1711–1776) continues this line of thought by holding that man has no distinct intellectual capacity for abstracting the intelligible from what his senses perceive. The things that the senses perceive are faint copies of the original, hence any intelligibility is a figment of the perceiver’s mind. Immanuel Kant took Hume seriously, and held that there was the world as it is and the world as we know it, and they were not the same. What humans do, supposed Kant, is impose categories on perceptions as though the perceptions were of real things. The categories are subjective. The person projects these categories or ideas outward on to the perceptions.
With all of this as background, we see in today’s society that these ideas are rampant, not just in intellectual circles but in the very populace itself.
We have all had conversations where our interlocutors have said, “Well, that’s true for you; not for me.” (As I recall that there is a line in West Side Story that says that very thing.) But today this subjective approach to reality even encompasses public policy. People in public life say things that are factually not true. More to the point, politicians, and even some economists, say things that the study of economics for centuries show are not true, yet they continue to mouth the same ideas. Even the economic practices of government have shown that they are not true, yet the persons uttering these same ideas continue to do so. Let’s take the economic stimuli. As a freshman in college, I could have told you that these injections of government funds (taxes) will not stimulate the economy. At best, they will lead to a temporary boom, which will end in a bust. At worst, like today, it will have no effect. The only outcome is inflation. Ben Bernanke, former economics professor at Princeton, should know better, but he now says he will continue injecting money into the economy by the billions every month to stimulate growth, despite the fact that economic theory tells us otherwise and practice over the past few years has verified the theory, as it did, by the way, in the 1970s. Nevertheless, Bernanke and politicians, the media, and many citizens think it will work. Why? Because the only reality is in their minds. If they think that it will “jump-start” the economy (as if the economy was a motorcycle), it will.
All of this is a type of Gnostic thinking. Gnosticism is a kind of infused, private knowledge given from “above” that only the elite have, such as Obama, Bernanke, and Geithner. Their followers are either in the Gnostic elite’s second tier, slavishly following the “enlightened,” or in the group that hangs on because of what they can gain from the elites being in power.
How do we remedy this situation? How do we change the minds of those who think that what they think is true, despite the objective truth? First we must ask the cause of the problem. I believe it falls directly on the government educational system and on the colleges and universities. Where would people pick up such outrageous epistemology except in the college classroom, taught by professors who cling to the Cartesian-Kantian fad? They inject the idea that we cannot know reality directly into the minds of students, who then go out and teach in the government schools. The poor teachers may never have heard of another epistemology. Oddly enough, on the other hand, those who major in business administration do not pick up these false philosophies because, if they thought like this, their business would fail and they might even wind up in jail. They cannot say that “they believe” that the company has a certain amount of funds, if the funds are not really there; but a liberal arts graduate can say that the stimulus will work, even though there is not a scintilla of evidence to back that up. Hence, prior to reforming the society, we have to reform education. When hiring teachers and professors, it is not where their degrees come from that matters, it is what they teach. If this is not done, the society will continue its downward slide.
Anyone who is living has heard of the dispute between the Obama administration and the Catholic Church regarding the Obamacare ruling that religious organizations, such as schools and hospitals, must provide contraceptive services, including sterilization and abortifacient pills. Due to the tremendous outcry, the administration rescinded part of the mandate and said that the religious organizations did not have to provide the services, but their insurers did, and for free, women’s “health care” being considered a right under the Obamacare plan.
The major problem here is that the Catholic people and institutions will be paying for these “health” services, to which Catholics must have nothing to do, and many of the insurers are the Catholic organizations themselves. For example, in my diocese, the diocese is the insurer, and Catholic Charities is its insurer.
Why would a politician who wants to be reelected in November go charging into a large crowd of Christians, Jews, and religious liberty-loving Americans in general with only one horse and lance? Is he politically suicidal? Does he not know that he will be overwhelmed?
There are standard answers to this question, such as, Obama is appealing to his base. Even if he loses the fight, no one can say that he did not try to take on the evil, out-of-date Catholic Church. This will shore up his base, just as the stupid decision to stop the Keystone pipeline will solidify his radical environmental supporters. All this might be true. But an economist sees things from a little more complex view.
I have in the past explained what public choice economics is (see my article, “The Economics of Politics”). Let us apply Public Choice to the HHS mandate. What explains this action of the President and his Catholic henchwoman, Kathleen Sebelius, which seems to be political suicide. Remember, all people act in their own interest. That is not generally a bad thing, especially in the private forum, because 99% of what we do for ourselves helps the common good. Self-interest is not necessarily selfishness. But in public life it is another story. When a politician acts also for his own interest in public life, this interest usually contradicts the common good. Politicians protest that they are “public servants” and suddenly receive a halo when working for the government that they did not have in private life. Does that make sense to you? When politicians act (generally speaking), they act because they want something. Threatening to regulate an industry brings forth that something. Threatening to place expensive regulations on, say, the hat industry brings about a flurry of meetings among the hat industry executives about how to stop the regulations. The scenario usually ends up where the industry raises money and offers it to the politician’s election campaign funds or PACs, getting a promise to back down on the regulations. It also works in the other direction. A government cartel can be threatened by a politician to have the regulations which protect the cartel from competition removed. This forces the cartel to do the same thing—cough up money for the politician’s war chest to keep the regulations in place.
Now let us take the case at bar. We all know that Obama has a Catholic strategy. His idea is to rope in Catholics to his team by trying to show that despite the fact that he is a fanatical supporter of birth control and abortion, there are many prominent Catholics that follow him: Professor Kmiec, Kathleen Sebelius, Notre Dame, Joe Biden, etc. But his problem is that the American bishops are beginning to develop a backbone and are a bit more outspoken regarding the incompatibility of Catholicism with Obamaism. Since the original strategy meant to gain Catholic support is floundering, a new strategy to release the Catholic pressure against him is necessary. He now threatens to “regulate” Catholic institutions by making them pay for birth control, sterilization, and abortifacients. The Church puts up a big stink about it, good, but I am sure negotiations are going on behind the scenes to the tune of, “Mr. President, what do you want for this to go away?” Now the President can hardly expect the bishops to put money in his coffers. But one thing that they can do is soften their criticism of him, from now until election time.
Can we prove this? No, but we can see what happened in retrospect. If Obama lifts all the regulations, let us see if we see any opposition to Obama from the bishops in general. If they are silent prior to the next election, then that was probably what the deal was.
Once upon a time, there was a man, let us say for the sake of the story it is me (it isn’t, but if I did these things, I would be in the same state as the man in the story). One day my 11-year-old Buick died. So, I needed another car. But instead of getting a nice used car for cheap, like the Buick I had which lasted 6 years, I went out and treated myself to a Ferrari. The price of this new car was over $225,000. Now I am a man of modest salary, and I already have a mortgage on my house and am trying to pay off credit cards, which means that I do not have that much discretionary cash. But the payment on this car (I looked this up in the amortization tables) at 5% for five years (the most they usually allow in a new car) is $4700 per month. Since, up to this time, I had a good credit record, they actually loaned me the money.
So I came home with the new Ferrari, and, after my wife stopped hitting me on the head with her rolling pin, she yelled at me for spending too much money and for putting us in so much debt. I felt very bad that she was so upset, so I decided, as soon as the headache went away, that I would do something nice for her. Since my wife does not have her own car (again, for the sake of the story), I went out and bought her a car. But since she was mad that I spent so much on the Ferrari, I decided to get her a cheaper car, so as not to spend as much. The car I bought, a Mercedes-Benz, cost $42,000 and the payments, at 5% for 5 years, would be about $800 per month, surely a bargain compared to a Ferrari. This means that I just boosted by monthly liability payments by $4700 + $800 which equals $5500 per month.
For a man of modest salary and only a small amount of discretionary cash, this payment is way too much. Suppose, for the sake of the story, I am not allowed to give the cars back. Even if I did, they would be considered used cars and I would still owe a chunk on them, though nothing like I am currently paying if I keep them. How do I make the payments? I borrow the money. After all, I made these purchases in only two days; maybe they have not gotten into the credit system yet. Suppose I got some credit cards with high credit levels? I would not have to borrow the whole payment from the cards every month, because I could make some part of the payment with my discretionary cash. I would, however, have to borrow a large portion to make the full payment. Maybe I could make my wife go to work, if she is not already working (in real life, she is). Maybe I can suddenly get hired as a vice-president of a big company so that my salary will take a big jump. But is that likely to happen anytime soon? No. Basically, I am in serious financial trouble.
Now, what is the meaning of this parable? If the reader did not already see it coming, we can compare the man in the parable to the Federal government. The man got attached to material goods, and not just any goods, but fancy, expensive cars, probably due to the mid-life crisis syndrome. The populace gets attached to transfer payments made to them, called entitlements, and the government gets attached to the power that comes to it in return for promising these entitlements to the people attached to them. But the government and the populace, who pay for these things, cannot really afford it, and, like the wife in the example, will shout and scream about the cost. So the government (husband) goes and gets loans to pay for the entitlements, and to appease those who complain about the spending, gets them some goodies, like bailouts for profligate banks and companies, the executives of which get to keep their jobs. Of course, to do that, the government has to borrow more, and in a pinch, the Federal Reserve Bank can counterfeit some cash, for which the man in the parable would go to jail for a long time if he got caught doing that. Meanwhile, the people (like the wife) are furious and are worried that the whole edifice will collapse. Just as the family will have to declare bankruptcy, the government will have to default on its debt. So the government (husband) finds a way to keep borrowing, though a lower amount, to enable everyone to keep their programs (and their cars), the protesters (wife) having gotten used to the bailouts (the Mercedes-Benz), etc. This is the recent debt deal worked out between Democrats and Republicans. Spending was not cut; just the rate of new spending is less than the old rate. We can still borrow more money, which we will also have to pay back, but since the economy has been malfunctioning for some time (no gigantic pay increases for the husband), where will the money come from?
This parable is not far-fetched in any sense of the word. The laws of economics, which are not laid down by anybody but come from the actions of humans, are the same for all. Milton Friedman famously said that there is no such thing as a free lunch. For those too young to know the reference of this wise statement, my grandfather, who was born in New York in 1880, told me that bars in those days advertised a free lunch. Of course, most people going in to get a free lunch got some alcoholic beverage. The cost of the beverage was high enough to pay for the food, so the lunch was not free. Everything has to be paid for, and the debts incurred are not incurred by the “government” but by the individuals in government whose actions try to defy the laws of human action—the laws of economics. Just as the husband in the story would be a fool to buy a Ferrari with the income he has, and then buy a less costing but costing nevertheless Mercedes-Benz right after that, so the people in government are crazy to think that they can keep promising and giving benefits to voters without considering how to pay for them. Thus endeth the lesson!
As everyone knows, the government has painted itself into a corner. More and more spending on more programs, more bureaucracies, more entitlements, and more buying of votes with these programs has gotten the Federal (and some state) government into the unenviable position of reaching the end of the tolerable income tax level, beyond which the populace will revolt, and at the end of the indebtedness limit, beyond which we cannot repay all the money it borrowed in order to fund these things beyond the tolerable tax level. Calls are being made for a hike in taxes “on the rich,” and a hike on capital gains taxes.
So let us examine what a capital gain is, and then examine the effect on the economy of higher capital gains taxes. A capital gain is the proceeds less cost from the sale of a capital asset, such as property, stocks or bonds, a car, etc. These proceeds are taxed at a lower rate than income, because if income tax rates were applied, most of the proceeds would be given to the government. Suppose you win a million-dollar lottery. This is not a capital gain, and it is taxed as income, which means that about one-half of the million dollars goes to the government. A capital gain, however, is taxed according to different rates. According to the Tax Foundation, the current capital gains tax rate goes from 20% to 39.6%, depending on how long you have owned the asset. The higher rates are for shorter time spans. So if you held a piece of property for a year, you would pay virtually a 40% tax on the proceeds. If you held it for five years or more, you would pay 20%.
What is behind the capital gains tax? Those who propose a capital gains tax, or those who propose raising it to higher levels, are motivated by a number of things. Firstly, there are the government officials whose spending is so profligate, by which they “buy” votes by rewarding their supporters and harvesting more followers, that they need to tax everything that they can, and Americans are habituated to the thinking that everyone has to pay their “fair share” so that the racket can continue. Then there are people motivated by false thinking. Neither of these parties cares about you selling a seven-year-old car, or an old outhouse. Both of these are interested in people who sell, say, the Empire State Building. These types of capital gains are targeted both by government officials and by the people of the second type of thinking, who have in their heads the image of rich people with yachts, with large living quarters on the most desirable locations in the world. To this second group, it is a question of pure class warfare and envy. In their minds, the wealthy sold this big asset so that they could live “high on the hog,” while the rest of the country toils away for a modest living. There was an anecdote I heard when I was a kid, although the story pre-dated my birth, of rich people sitting around having cocktails and one of them says: “I wonder what the poor people are doing today.”
This story is like the cartoon version of the truth, so let us examine what people do when they sell a major capital asset. Firstly, why would a person, or a company, for that matter, sell a major capital asset? Unless the person just wants cash to retire with, which is not that common, he or she wants to do something more profitable with the money. Take our Empire State Building, for instance. That building is income property. Companies rent the offices and the owner, after expenses, is the residual claimant, which means he or she, or their company, gets what’s left. It is this money that allows the owners to live a comfortable life, assuming that they can keep the building rented. The owners do a great service to companies in providing such a building for companies to use. But if the economy tanks, they might find companies that rent space in the building going out of business, and getting others to rent might be difficult, requiring the lowering of rents, so then the residuals will get smaller. Now let us posit the scenario of a midwestern city that is going to get a major-league baseball and football franchise, and now needs a stadium. The owners of the Empire State Building notice that even though the economy is not doing so well generally, and in New York, the Midwest is doing better, and throughout the Midwest receipts for sporting events are actually increasing. The rule here is that money goes where it is most productive, because that is where it is most needed. So the owners of the Empire State Building will find a buyer for the building, even if they sell it for less than they think it is really worth, to raise the cash to build a stadium. (Of course, we are leaving out many technical details here, such having to bid for the contract, etc., but these are not relevant to the story.) But, and here is the key to the article, if the capital gains tax takes too much of the proceeds, the owners of the building will not sell it because the sale will not render enough cash to build the stadium. So, the result of high capital gains taxes is to keep capital frozen in current projects and forestall new, more profitable projects. Notice that the owners of the Empire State Building did not want to sell the building so that they could buy another mansion, but to enter a venture that will increase their own cash flow or income. If they succeed, money will flow from where it is not really needed—New York, where things are in decline—to the Midwest, where people are begging for investment funds.
The result of all of this is that whatever the reason for wanting to foist higher and higher capital gains taxes on business folks, either to fund government profligacy or to soak the rich, the result is the same—economic stagnation.
Speaker of the House of Representatives John Boehner was recently invited to give the commencement address at the Catholic University of America. Boehner himself is a practicing Catholic. But some professors both at Catholic U. and other “Catholic” colleges wrote a public letter upbraiding Speaker Boehner for violating Catholic social teachings by proposing major cuts to entitlements. The letter treats the Speaker like a five-year-old, one who is ignorant and hard-hearted, neither knowing about the social teachings of the Church (they sent him a copy of the Compendium of the Social Doctrine of the Church) nor caring about the poor. They repeat the old complaint that “it [the budget] carves out $3 trillion in new tax cuts for corporations and the wealthy.”
While there are a few recommendable passages in this letter—such as, you cannot cut the budget in a way that is a disproportionate sacrifice of the benefits that the poor get—most of it shows a very poor understanding of Catholic social teaching, such that my undergraduate students could write a better letter than this one. In fact, there are so many problems with the letter that one does not know where to begin. So let’s examine just a few points.
First of all, it turns out that Professor Schneck, the first signer of the letter, and hence, probably its author, is a board member of both Democrats for Life and Catholics in Alliance for the Common Good. The fact that he is a Democrat tells us a lot, in that most Democrats have major socialist tendencies, and bow down to the Obama agenda. Secondly, I even question the “life” title. Remember Professor Kmiec (see my articles in this forum about him), who, in supporting Obama’s presidential run even though Obama is the most anti-life presidential candidate we have ever had, justified his support by lumping together concern for the poor with the overt act of murdering an innocent baby, holding that Catholics who concentrate on abortion take away from the other life issues, as if these could be compared. For his loyalty to Obama in suppressing a major moral teaching of his faith, Kmiec was rewarded by the president by being nominated to be the Ambassador to the Vatican. The Vatican rejected him. (Gee, maybe that tells you something.) He then was appointed to be Ambassador to Malta—remember, the island converted by St. Paul (“[i]t profits a man nothing to give his soul for the whole world but for Malta?”). He got that position, but resigned soon after because basically the Inspector General reported that he was incompetent, used his office for his personal agenda, and did not take directions from the State Department, his immediate superiors. The always whiney Kmiec, of course, denied everything, just as he blamed those who wrote against his questionable life position as being mean.
The second organization of which Professor Schneck is a board member is funded by George Soros, the billionaire businessman-socialist-atheist, who also funds many of the most leftist organizations in America. While I do not know the personal thinking of Professor Schneck or the other academics who signed the letter, board membership in these organizations does put some questions up for discussion as to the sincerity of the letter and the interpretation given to the social teachings of the Church.
On the sincerity front, Professor Schneck says that he was shocked that the public letter “became viral” so quickly. This man who calls himself a political scientist did not know that a public letter attempting to embarrass the Speaker of the House prior to his speaking at Catholic University of America would cause a stir? This strains the bounds of credulity, to say the least. If the signers did not want the publicity, if they were that concerned with the Speaker’s moral understandings, why did they not just send it to him privately, even handing it to him after the commencement ceremony, to make sure he got it? The signers of this letter just became shills for the Democratic agenda, hiding behind their version of Catholic social teaching in the process.
Since Professor Schneck is a board member for Catholics in Alliance for the Common Good, let us take a look at the nature of the common good. Vatican II defines the common good as “the entirety of those conditions of social life under which men enjoy the possibility of achieving their own perfection in a certain fullness of measure and also with some relative ease, [but] it chiefly consists in the protection of the rights, and in the performance of the duties, of the human person” (Dignitatis Humanae, #6). Notice that this definition has no specific content, but specifies a certain “habitat” in which the human person can develop. The specifics are decided by the laypersons with the guidance of the Church. Nevertheless, the specifics of all this are generally prudential, not moral. Part of this common good is helping the poor. How this is done is part of the virtue of prudence, and includes actions about which there will be disagreements among well-meaning persons. But remember, “the road to hell is paved with good intentions.” As a Catholic economist, this writer is concerned with things that will actually help the poor, and save the most souls. The writers of this letter seem not to care about the poor or souls, and here’s why. The best way to help the poor is your own personal actions, either alone or in concert with others. Mother Teresa correctly pointed out that Jesus sometimes comes to us in distressing disguises. Personal contact with the poor is where Jesus is met. We, you and I, have the responsibility to help the poor, and when we do it personally, we sanctify ourselves, as opposed to having the government take the money out of our wallets to do that which it thinks it can do better, and buy votes in the process.
Also, the question should be asked, “Who are the poor?” Are they only those short of cash? Is there a reason why they are short of cash, like, say, just hard luck, or is the cause mental problems, addictions? Are they working poor who never got any skills? Did they have parents who never imparted to them a work ethic? Are they crippled, or seriously depressed? And what about rich people who live in a bubble and never think of the serious questions of life? All these are poor, and money is not always, and frequently is not, the solution.
What about the principle of subsidiarity, which Schneck mentions toward the end of the letter? Subsidiarity was annunciated first as a concept by Leo XIII, although it appears in many other Catholic thinkers, but not by name. Pope Pius XI gave it its name. Subsidiarity holds, first, that nothing should be done by a higher social level that can be done by a lower social level, and secondly, that nothing should be done by a government agency that can be done privately, by either individuals or their groups. As Leo points out, the state is the last resort, not the first. This begs the question, “What has the human race done all these centuries without government welfare programs?” How much of the “lower” and “private” has been destroyed by government doing everything, leading to a cynical approach to the poor by the citizen? How much is this attitude encouraged by statist Catholics who never really stress subsidiarity?
Lastly, what about the enormous budget deficit that threatens the very future of this country? If this is not taken care of soon, we will all be poor. That’s the reality that the letter takes no care to pursue. What about the question of taxes on business slowing the growth of those businesses or driving marginal ones out of business, and contributing to unemployment? It figures that these signatories would not even think of these things. The list of signers has only one economist on it, and he is from Catholic University. He seems like the odd man out, seeing that he is there with a lot of theologians, nursing professors, and directors of vaguely named institutes, and even the head of the Leadership Conference of Women Religious, a notoriously leftist and even heterodox organization of non-habit-wearing Catholic sisters.
The answer to the question as to why this even happened is contained in this video, which is very informative. It is really sad that our Church has become so politicized, that we have to beaten over the head with Democratic party themes disguised as Catholicism by folks who have very little idea of the nature of the world, and who have no problem putting Catholics on a guilt trip for trying to find prudential solutions to economic problems their kind of thinking caused in the first place.
There are a number of words one does not hear anymore, most of them slang: “twenty-three skidoo,” “boss,” “square,” “daddy-o,” “hip,” and the like. But in a more serious vein, politicians no longer use the word “consensus.” Consensus means to agree together. One builds consensus by a rational process of gathering the various views on all sides, and coming up with a proposal with which almost all but the most non-compromising holders of views will agree. Of course, the readers of this blog will realize that there are some things one must never compromise on, namely, those outright immoral things such as abortion and euthanasia. But politics is the “art of the possible,” and out of respect for the human dignity of the other citizens, those in office must try to get a consensus on questions placed before those officials, in questions that are not moral “yes” or “no” issues.
Take a situation where most of us find ourselves at least some time in our lives. Suppose that you are head of a social club, and the club wants to go to a restaurant for dinner. Suppose that there are ten members in this club, not counting you. Suppose six of the members want to go to a steakhouse, and four want to go to an Italian restaurant. Would you, as president, say, “All right, the steakhouse has won; it’s steakhouse or stay home”? Of course not. You would try to present other choices that all, or almost all, would be satisfied with. There is Chinese, Mexican, Thai, fast food, etc. You would take suggestions from the membership, so that an alternative might come up that you have not thought of, say, bowling instead of dinner.
The notion of consensus is a difficult one for experts. Take a real economist (please!). He knows what the economy needs in order to flourish, and knows what policies of government will stifle that flourishing. Nevertheless, his science and the political world are different in that unless one is a dictator, one’s science will not be implemented in its entirety, for the simple reason that not everyone is an economist, and, therefore, not everyone will see the truth about the laws of economics. In addition, many people’s minds are already poisoned to believe that the market economy is evil; among these are many Catholics. This is why the study of economics can be considered a civic duty, necessary for people to make sound decisions on the economic questions of the day.
Place politicians into the mix and the model becomes complicated. Most politicians have re-election uppermost in their minds. In fact, contrary to what the Founding Fathers taught, politicians like to have a life-long career in office. Take the recent cases of Senators Teddy Kennedy and Robert Byrd, who died with their proverbial boots on. Since politicians place re-election at the top of their value structure, their positions on issues are usually not determined by the merits of the case before them, but on what will win them the most votes. For example, in a recent debate, the Republican candidate for a Federal elective position recently pointed out that the Social Security system is in trouble due to the fact that it is just about out of money. The Democrat responded by accusing his opponent of trying to scare the people, and that there is plenty of money in the Social Security Trust Fund. But the truth is that the Republican was correct. President Reagan upped the Social Security taxes in order to accumulate money in the Trust Fund for the future needs of a growing elderly population and a smaller work force (thanks to the birth control fanatics). But the Congress raided that Trust Fund and replaced the money with IOU’s. There is no money in the Trust Fund. They spent it, and they owe the fund that gigantic amount of money when the time comes due. Think about it; we have a national debt of over $13 trillion, and a large part of that is owed to Social Security. This is just fact. The only way that the government can pay it back is to raise taxes. The Democratic politician in this example was trying to create a false sense of euphoria so that he, an incumbent, will not be held accountable for this situation, and get his necessary votes to continue his career in office.
Which brings us back to consensus. Any administration, even if they control Congress by overwhelming majorities, like the current one, should not just ram things through in the face of strong opposition, even if they think it is the best policy. Like in the dinner example above, a good, moral president and congressional leaders need to build consensus out of the sheer respect for those who disagree with them. Of course, this assures that no policy will be completely satisfying to all parties, but at least something is approved that everyone can live with. One of the reasons that Americans are so livid about the present political situation is that this was exactly what was not done.
Of course, the founders had the right solution! Government, particularly the Federal government, has no business being involved in many of these programs. They should be left up to the states or to the people themselves (see the Tenth Amendment to the U.S. Constitution). Our Faith teaches us subsidiarity: nothing should be done by a public authority that can be done by a private one, and nothing should be done by a higher-level authority that can be done by a lower one. Coupled with the public versus private distinction is also the fact that our Faith teaches us that WE are responsible to our brothers and sisters, and our own welfare. What government has done to a great extent is to take that responsibility out of our hands—so that we don’t feel that we have any responsibility. The government will take care of it. Gee, I don’t remember St. Francis saying that!
I don’t know about you, but I find most of the recent debate about renewing the “Bush” tax cuts disturbing. There is a certain class of liberals out there who frame their discussion on two themes, and when someone challenges one theme, they switch to the other, but neither are well thought out. But the conservative opponents of these tax-a-holics miss the point as well.
Let us look at the two arguments of those who want the tax cuts to expire. They start out by saying that the rise in taxes is needed to try to close the budget deficit. They appeal to people’s correct instinct that the massive budget gap and the accumulated debt are severe problems, which will adversely affect generations if not drastically lowered. When their conservative opponents ask, “Why not cut spending?”, the liberals switch to the other argument. This one appeals to the greed of the ordinary person. They say these tax cuts were for the wealthiest 2% of the population, and just continuing them allows them to enjoy life even more than before.
The conservatives then give their argument: you shouldn’t increase taxes in a recession. What has happened is that the liberals have fallen into the socialist envy trap with their top 2% argument. Who owns businesses? Who starts businesses? Who employs people? Not me. The wealthy do. The wealthy are not to be the victims of envy and hatred, they are to be thanked. They are not like the lords of old, sitting around on old money, and getting more as the peasants work for subsistence food. Today’s entrepreneurs work very hard for their income, not quitting at 5 PM. They take giant risks to start and run a business; the ordinary person just takes home his salary because he did what he was expected to do. Taxing those people takes the food out of the mouths of the workers because it discourages the wealthy person from doing more of the same.
But the conservatives fall into the Keynesian trap by repeating exactly what Keynes believed: that government should deficit spend in recessions and tax in prosperity. Now the conservatives do not buy the spending line but the whole argument is based on the presumption that government should be doing fiscal policy.
For the sake of the conservatives, let us return to principle. The original Constitution explicitly prohibited “capitation” taxes, that is, taxes on people (caput is Latin for head). There were not supposed to be any income taxes, and all government revenue would come from the states apportioned by population. The states had to raise the money, which means that they had to hear the complaints about high taxes. Since the senators were appointed by the state legislators, the states had a direct line into Congress. If the tax bill given to the state was too high, the senators would vote against it. Note how this would strictly limit the spending of the government. It could not reach into your pocket and just take the money it wanted for whatever project it wanted, or to “regulate the economy.”
Along came the progressive movement and with it the income tax. I remember my grandmother, who was born in 1880, telling me that “they” promised that the income tax would only be something like ¼ of one percent, and would apply only to the rich. Well, she said that that changed very soon as the rate went up and the threshold of minimum income came down. She felt that the income tax was “sold” to the people on false pretenses. Look what we have today! The average American spends half of his working life working to give the government money, which means he works half-time for the government.
The principle that liberals and conservatives miss is not the pragmatic one about whether we should raise taxes during a recession, or how to close the budget gap, or should we punish the rich for their success. The principle is, “Does government have the right to tell you what to do with your income?” The founders would say, “NO.” Things like sales taxes or tariffs, aside from their economic inadvisability, are voluntary, because you can decide not to buy the product or service. Income tax is not voluntary. To test this theory, just don’t pay your taxes and see what happens.
In one of my own undergraduate classes in the 1960s I was arguing the same point in class, and after class a fellow student said to me, “What’s the matter, don’t you want to pay your taxes?” I responded “NO!” Even as an undergrad I knew it was wrong to just take people’s money.
Lastly, look at the mischief that has come from it: gigantic increases in the size of government, in Federal enforcement agencies, military, and national debt.
Ideas have consequences, as the title of Richard Weaver’s book points out. We are in the current financial mess not only because of the government spending money it does not have, but because we have accepted the “end justifies the means” principle, and forgot that people have a right to the fruits of their labor. Case closed.
The other day, I was watching the news on television and the news anchor was interviewing an economist who was defending the government stimulus. The conversation was occasioned by the continued bad economic reports we have so learned to expect. The economist was telling the anchor that the stimulus was the right way to go, and then made the following statement with positive excitement: “There is so much liquidity in the system [this means so much cash put in by Federal deficit spending and the printing of money by the Federal Reserve Bank] that the economy should be really chugging along!” But the conversation was about the fact that the economy was clearly not “chugging along.” It should be noted, if I did not make it quite clear, that the economist said this in a positive vein. He definitely was NOT saying that the economy was not chugging along and I cannot figure out why it is not. He was saying that his paradigm says that we have done what we should have done, and any second it will be chugging along.
Let us take a silly yet analogous story. Say that you were told that to lose weight to need to eat five of the big Hershey chocolate bars every day. After getting off the scale where you see that you gained ten pounds this week, you say, positively, “I ate so much candy this week that I should be losing a ton!” Your paradigm predicted a weight loss and, since you followed the plan, any second you should see a significant weight loss.
In both of these scenarios we see a defection from reality. Everyone knows that to lose weight, one needs to eat less candy, not more. But you accepted a cockamamie theory, and then used the theory to color your perception of reality. It is the same with this economist. He accepted the Keynesian paradigm of government involvement in the economy, which says that in times of economic downturn, it is the job of various government agencies to “stimulate” the economy by injections of money, and that will bring the country out of the recession. The economist does not believe the actual data, like you do not really believe the scale, because the theory “predicts” an economic upturn or a weight loss. This is blindness.
It’s not like there is no historical precedent for this. For all that Franklin Roosevelt is touted as the savior of the country from the great depression, he did no such thing. Actual recovery did not come until after World War II. And it came on its own.
Let us examine why pumping money into the economy does not cause it to recover. First of all we have to realize that all macroeconomic theory has to have a microeconomic foundation or it’s just fantasy. One major fault of Keynes is exactly that: he has no microeconomic foundation for his theory. He treats the macroeconomy as if it is a machine. If you press the gas pedal, it pumps more gas and air into the engine, raises the RPM, and the result is an increase in speed. This is like the little kid’s version of economics. We need to ask how the influx of mere cash into the economy will affect the behavior of actual persons.
An increase in actual economic activity begins with savings being available for the purchase of capital goods, which are used to make consumer goods in the long run. Even if there are savings, those saving must be willing to risk their savings investing in projects which over time will result in more consumer goods. All the plans of the entrepreneur for the production of consumer goods come to naught without the savings needed to purchase capital goods. Savings are an indication of savers’ time preferences. All men have a desire for things now, not later. To persuade persons to save, that is, to put off acquiring consumer goods now, their time preference must become lower. In order for a person to lower their time preference, they must be compensated in the future for goods not purchased now. That compensation is called interest or profit. The lower the time preference, that is, the longer that person is going to go without the availability of his money, the higher the interest rate is going to be; that is, the more compensation a person will demand. In economically uncertain times, additional interest that will be demanded is called a “risk premium.” Now the interest paid to the saver becomes the “cost of capital” to the producer. The producer needs to predict that he will make enough money from selling his final product to pay the interest to all those who saved to help him produce the product. The higher the interest rate, the higher the cost of capital; the higher the cost of capital, the higher the cost to bring the product to market. But in an economic downturn, people are not able or willing to pay more for things, but actually look for cheaper things. The result is that the entrepreneur is reluctant to borrow money for his project because he might not be able to sell it.
So the Keynesian-Obama solution is to pump money into the economy from deficit spending and/or money created out of nothing by the Federal Reserve Bank. The theory goes that an increase in liquidity will lower interest rates and make borrowing cheaper, so that business will be more likely to borrow and invest in capital goods, thus picking up production and employing workers again. Problem number one with this theory is that the lower the interest rate, the less people are likely to save, because their return is not worth the lower time preference. Secondly, the Keynesian-Obamaites do not understand that people learn from previous events. The most recent one is the housing boom, which started this economic downturn in the first place. The Federal Reserve, to stimulate interest-sensitive industries like the housing market, pumped money into the economy, forcing interest rates to an artificial low. Many people, who before could not afford to buy a house because the higher interest rates made housing too expensive and increased the requirements for borrowing, now wanted to purchase housing. Seeing this increased demand, the building industry, which wanted to take advantage of the boom, began investing in house-building. Now while the increase of houses for sale would lower the price for borrowers, this artificial boom put strain on all the things needed to build houses. So now wood, plumbing supplies, shingles, construction equipment, and workers are relatively scarce as compared to the previous housing market, which makes the prices and wages go up, which also means that the houses built later on in the boom are no longer cheap. The result is that people who thought they could afford a house due to the artificially low interest rates now cannot afford them because of the price. Builders are now stuck with houses they cannot sell, and now declare bankruptcy.
In addition to this government-caused disaster, the Federal government passed the Community Reinvestment Act, which pressured banks to give housing loans to those who were hardly credit-worthy (in English, this means to those who probably could not afford to pay back the money). Banks, with the help of government corporations like Fannie Mae and Freddie Mac, lost tons of money because of defaults.
So President Obama and his cronies came up with bailouts. And what did the banks do with the money given them by the Federal government? They covered the losses in their balance sheets caused by the widespread defaults, instead of what Obama thought they would do—lend the money out again. “Fool me once, your fault; fool me twice, my fault.” To make matters worse, the Democratic administration has created a period of great uncertainty with the great deficits, threats of soaking the rich (that is, soaking the movers and shakers of the economy), and the massive health care “reform.” So nothing in the economy is moving. Entrepreneurs are afraid to begin projects, savers are unwilling to lend, and people are unwilling to borrow for or buy even a cheap house. In Detroit (that gem of liberal politician successes), there are houses that go for a few thousand dollars—and no one will buy them.
In short, that is why there is no recovery, and Vice-President Biden’s Summer of Recovery tour is a big joke covered with lies about how things are coming back. Bwahahahah! So, to the economist on television the other day, I say, your paradigm is dead wrong, and I knew even as an undergraduate in the 1960s that things like this do not and will never work. Where have you been?
The population-control weirdos believe that people are a blight on the planet. (I am not being harsh calling them weirdos—wait until you see my argument). They think that all people do is use up resources, and eventually the planet will be void. In fact, as the late, great economist Julian Simon pointed out, national income accounting counts the birth of a calf as an increase in capital, but the birth of a baby as a decrease in capital. Those economists who worship mathematical methods divide amount of capital by population. So, if you have $1,000,000 in capital and you have 1,000,000 people, you have one dollar of capital for every person. But if you have $1,000,000 of capital and then give birth to 10 babies, you get $1,000,000/1,000,010, or .9999 cents of capital per person, clearly a decline. One thing that these folks never seemed to learn in Economics 101 is that everybody, except the most handicapped or the most lazy people, produce more than they consume. This is true even in less-developed countries.
These characters also believe that the amount of natural resources in the earth has already reached its limits due to population growth. For example, Paul Ehrlich, a professor of biology specializing in butterflies, wrote the book The Population Bomb in 1968, in the middle of the hippie revolution. In that book, he predicted that in the 1970s there would be worldwide famines and resources would run out despite any emergency programs that would be put into place. To show the nonsense of this, in 1970, Dr. Julian Simon, late economics professor at University of Maryland, bet Ehrlich that the prices of any ten natural resources Ehrlich chose would be lower in 1980. The bet was for $10,000. Simon won; the prices were lower. Why? The resources were more abundant, not less. Ehrlich’s theory of worldwide shortages was an Armageddon fantasy. Simon offered the bet again in 1980 to anyone, but no one took him up on it. Why was that? They knew they would lose, which meant Simon was right, but also they had too much invested in this fantasy. One needs character to admit that one is incompetent, didn’t do his homework, and sold a profitable book on a fraud.
But today the racket continues. It is said that we must cut down on population, especially in developing countries, so they do not have so many mouths to feed. But economists know better, and the studies are there to prove it.
In a very well-researched book, The Mystery of Capital, Latin American economist Hernando de Soto shows that there are two main (among many others, none of which is population) causes of poverty in developing countries. The first is bureaucracy. The charts in his book show that sometimes it can take 20 or 30 years to get a permit to run a business due to all the offices which one must visit and to which one must submit paperwork. This would and does discourage many people from becoming entrepreneurs. The other reason is a caste system. Many people in developing countries are not allowed to own property. Despite this handicap, they run businesses anyway, with the fear that the government would ask for a property title which they could not produce, and thus lose the property and thus the business operated out of it. Notice that this has nothing to do with population.
But the population weirdos will not go away. In 1977, when Paul Ehrlich was watching the prices fall on the resources he picked in the bet with Julian Simon, Paul and Anne Ehrlich wrote another great tome with a man whose name is John Holdren entitled Ecoscience. In this book, the three authors continued Ehrlich’s apocalyptic scenarios of death and destruction due to population burgeoning. They recommended required abortions, dumping infertility drugs in the water supply, and forcibly taking babies from teen and single mothers and giving them to couples to raise. But the big question is (drum roll), who is John Holdren? He is Barack Obama’s science czar! Despite all that has been studied by economists, not to mention the morality and constitutionality of this kind of thing, these people never go away. Would you give a position of trust to someone who was dead wrong and never apologized for it?
This is what we are facing, and this is only the tip of the iceberg. If these folks who surround the president succeed in getting their plans into law, we will all be in danger, and by all, I do not mean just those now living, but the future generation as well, who may never exist.