'Anatomy of an Economic Ignoramus'
This article, by Dr. Thomas Woods, is a great instructional tool because it deals with the most commonly heard objections to the market economy made by both Catholics and various leftists.
The Parable of the New Car
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!
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!
Raising the Capital Gains Tax
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.
(Liberal) Wolves in (Catholic) Sheep’s Clothing
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.
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.
Crony Capitalism and Its Remedy
If you read my last article, “What Is a Humane Economy?,” you will notice that in there I brought up the subject of whether large corporations seek money or power. I said that if they seek power, it is only because they seek money, which is their raison d’être. Well, this article was a paper I gave at a conference of an academic society. The format of the panel I was on was that each of four participants gave their papers, then responded to questions from the panel, and then responded to questions from the attendees. Mine was the last of the four papers. The first was by a very radical distributist who, I found out later, has no graduate credentials in anything, and said he teaches theology at a good Catholic university down south. I looked at the website of this university and his name does not appear there. Be that as it may, the only “question” anyone asked from the panel was this guy asking something about my paper. I put the word question in quotation marks because he did something I have never seen at any academic conference since I have been either attending or actually giving papers in over forty years: He shouted his question at the top of his lungs, saying: “How can you say that corporations don’t seek power?” I felt like replying in an Inspector Clouseau fashion: “Well, I just opened my mouth and the words came out.” But I didn’t. I tried to answer the question, but he kept shouting his question, phrasing it in various ways. I had to shout over his shouting. Finally, in desperation, I said that we would have to agree to disagree and get on with it. No one else on the panel had any question for anyone else. Incidentally, his paper was a hodgepodge of non-scholarship and ranting, such that if I wanted to question or critique his paper, I would not even know where to start.
There are two lessons from this episode. The first one is that distributism is merely an ideology. And distributists are unhappy folks, because this is not the first incident of this type I have witnessed, just not at academic conferences. If distributists had good arguments, why do they not discuss them in a mature way? But they either use trickery, like asking the speaker trivial questions they know the speaker can’t answer, or merely shout their way through. The reason is that an ideology has, by definition, no convincing reasons. It is merely taking an idea, usually unproven, and building a logical system around it. This is why they do not like probing questions. For example, in a meeting of distributists a student of mine asked how this distributist society is going to come about since there is absolutely no real movement in society toward it. Would it have to be imposed by the government? Everyone in the room got furious with this student for even asking the question—a proof that we are dealing with an ideology. (For a good discussion of probing questions and ideology see, Eric Voegelin, Science, Politics and Gnosticism [n.p.: Regnery-Gateway, 1968].)
Now for the heart of the question. I do not agree with Milton Friedman that the whole purpose of a company is to make a profit. The purpose of a company is to produce something that the founder of the company believes is beneficial to the public. Studies of entrepreneurs have borne this out. But the desire to do this cannot be fulfilled unless the company brings in more money than it spends. The difference between the money it spends and that which it brings in is called profit. As Pope John Paul II said in Centesimus Annus, profit is the sign of the health of the company. In addition, profits are returned to stockholders, who ponied up the money for the company to begin with. They would not have done this without some expectation of a return on their money, which they would have put into a different enterprise. Profits are also plowed back into the company for research and product development so that the company can produce better products.
Why, then, do large companies seek favors from government? They do so because the government will give them privileges which make it easier to make more profit. One way to do this, believe it or not, is to insist that government regulate the industry, because regulation costs companies money, and smaller competitors cannot afford dealing with the regulations, and go out of business, thus limiting competition for the original firm. The same is true of tariffs. Why do corporations not want power? Because power is not money, and they are judged on the basis of money, not power. When the CEO goes to a stockholders meeting, bragging about how often he has been in the White House, it does him no good if the company is failing. But if the CEO has been to the White House and has persuaded the President of the United States to suppress the competition in some way, and that has resulted in an increase in revenue, the stockholders are happy.
The reason that distributists and others do not understand this is because, repeating myself, their views are pure ideology. The value of any writer’s or speaker’s thought comes not from whether you like it or not, but from whether it jives with human experience. Distributism does not. Capitalism does.
But how do we solve this tendency to get government favors for some businesses so that they prosper over those who did not get favors? The remedy is to prevent government from getting involved in the economy. If government were strictly prevented from any interaction with companies for any reason, and this could be monitored, crony capitalism would end. A company would have to survive on its own effort and newcomers to the industry would have a better chance to compete, as well as foreign suppliers. Prices would go down, and the people of the US would not be paying for massive bailouts in exchange for votes for politicians.
There are two lessons from this episode. The first one is that distributism is merely an ideology. And distributists are unhappy folks, because this is not the first incident of this type I have witnessed, just not at academic conferences. If distributists had good arguments, why do they not discuss them in a mature way? But they either use trickery, like asking the speaker trivial questions they know the speaker can’t answer, or merely shout their way through. The reason is that an ideology has, by definition, no convincing reasons. It is merely taking an idea, usually unproven, and building a logical system around it. This is why they do not like probing questions. For example, in a meeting of distributists a student of mine asked how this distributist society is going to come about since there is absolutely no real movement in society toward it. Would it have to be imposed by the government? Everyone in the room got furious with this student for even asking the question—a proof that we are dealing with an ideology. (For a good discussion of probing questions and ideology see, Eric Voegelin, Science, Politics and Gnosticism [n.p.: Regnery-Gateway, 1968].)
Now for the heart of the question. I do not agree with Milton Friedman that the whole purpose of a company is to make a profit. The purpose of a company is to produce something that the founder of the company believes is beneficial to the public. Studies of entrepreneurs have borne this out. But the desire to do this cannot be fulfilled unless the company brings in more money than it spends. The difference between the money it spends and that which it brings in is called profit. As Pope John Paul II said in Centesimus Annus, profit is the sign of the health of the company. In addition, profits are returned to stockholders, who ponied up the money for the company to begin with. They would not have done this without some expectation of a return on their money, which they would have put into a different enterprise. Profits are also plowed back into the company for research and product development so that the company can produce better products.
Why, then, do large companies seek favors from government? They do so because the government will give them privileges which make it easier to make more profit. One way to do this, believe it or not, is to insist that government regulate the industry, because regulation costs companies money, and smaller competitors cannot afford dealing with the regulations, and go out of business, thus limiting competition for the original firm. The same is true of tariffs. Why do corporations not want power? Because power is not money, and they are judged on the basis of money, not power. When the CEO goes to a stockholders meeting, bragging about how often he has been in the White House, it does him no good if the company is failing. But if the CEO has been to the White House and has persuaded the President of the United States to suppress the competition in some way, and that has resulted in an increase in revenue, the stockholders are happy.
The reason that distributists and others do not understand this is because, repeating myself, their views are pure ideology. The value of any writer’s or speaker’s thought comes not from whether you like it or not, but from whether it jives with human experience. Distributism does not. Capitalism does.
But how do we solve this tendency to get government favors for some businesses so that they prosper over those who did not get favors? The remedy is to prevent government from getting involved in the economy. If government were strictly prevented from any interaction with companies for any reason, and this could be monitored, crony capitalism would end. A company would have to survive on its own effort and newcomers to the industry would have a better chance to compete, as well as foreign suppliers. Prices would go down, and the people of the US would not be paying for massive bailouts in exchange for votes for politicians.
What Is a Humane Economy?
When discussing economics, the layman to the field gets bogged down in all sorts of baggage about economics that clutters the view of the subject itself. He brings to the table theories that do not accord with reality; there are religious biases, meaning that because some theologian says something about economics or business, it has to be true; they come with a neo-classical bias given them by mathematical economics that obscures the philosophical and theological bases of economics; they come with schools of thought that, though they have been thoroughly discredited, still influence the thinking of many non-economists. The result of this menagerie of error has been to obscure the real nature of economics and to cause confusion in the councils of government and the realm of public discourse.
One problem with amateur philosophers is that they tend not to examine a subject in itself, without the previously mentioned baggage. I propose to begin again. Since economics is a human science, we should begin with a look at the human person.
Human beings are thinking and feeling beings. They are not automatons, acting with cold reason all of the time, but frequently, their choices are based on the heart—whether they like or do not like something. The word “choices” is the key. Humans live in a world where they have to make choices every day regarding a myriad of things, some important, some trivial. The important choices really require that they be thought out, and we look askance at someone who chooses a spouse or selects a career as though they were picking numbers in a lottery. Also, people make choices in a rational way in that they choose according to their values. Aristotle reminds us that all men seek the good; no one intentionally chooses an evil. But people do choose evil things. This is because, as Aristotle puts it, they choose either a true good or an apparent good. The apparent good looked good to them at the time, considering their values.
Next of all, all humans act, and the choice leads to an action. A person who makes choices but does not act lives in a fantasy world, and eventually dies from the lack of choice about the basics of survival. The very idea of choice implies an action. One cannot even reject this “action axiom” without acting. Contrary to what I call the “industry of evil,” which portrays all choices as between good and evil and sells a lot of books in the process, most of the choices people have to make are between competing goods. The choice is based on subjective valuation—what is consistent with a person’s values. This does not mean that there are not objectively good values, as I have heard so many people accuse free-market theorists of advocating, but even objectively good things have to be subjectivised prior to choosing them. In other words, I must see something’s value before I will choose it. And that choice must actually apply to me or my situation.
The next point is that all human beings act to better their condition. This is true in every area. Normal people desire to improve their participation in those things which they value. Academics want to learn more, advance their discipline, teach better, and publish their ideas. Married persons wish to do more for their families. All men desire to improve their physical lives by making them easier, healthier, safer, and convenient. Notice that all these things have nothing to do with money. These are things to which people naturally gravitate. Money only makes many of these things possible. Remember, though, that since the subject is human beings, not everyone will pursue the better things, for a variety of reasons, from laziness, ignorance, alcoholism, or even taste. So it is no argument against this to point to people who do not conform to this norm; it just means that we are not programmed robots, and that we act according to our values, which can vary quite a bit.
In discussing what a humane economy is, a number of things must be remembered. A free society and a free economy are what Hayek correctly called a “spontaneous order.” Contrary to those who have an anthropomorphic view of society or the economy, no one created society, assuming it was not set up by a dictator. No one set up an economy. A society and an economy are not “things,” but interrelationships which come about out of natural human sociability, and need. These interrelationships go from permanent, such as family, down to the one-time contact, such as when a person travels and needs to get lunch, stopping at a restaurant. A free society and an economy come about, as Adam Smith points out, as a system of “natural liberty,” meaning that these interrelationships are what people do. At the higher levels, people need friends who love them for themselves, and parents who will teach them how to be adults and give them what they need for survival when they are too young to survive without help. People also need the things that others have in order to enhance their personhood. This is the foundation of exchange. A humane economy is one which allows this to flourish. But since no one actually sets up a free economy, the humane economy is one that we set up ourselves, by doing our own actions.
It was pointed out that not everyone conforms to the norm because we are reasoning persons with free will and a fallen nature. Society and the market need a mechanism to prevent the actions of others from interfering with our legitimate actions, the ends that are not harmful to those around them. So some institution is needed to protect against fraud, coercion, and other such things. But because people generally know what enhances their values, that institution itself must not coerce them into choices that do not conform to their values, again within the ground of legitimacy—that is, choices that would hurt others to any significant degree.
What if, the complaint usually goes, the values of the society are stupid or bad? What is the cause of it? For instance, does the unparalleled success of the modern market economy cause materialism, or does the materialism in modern society come from the acceptance of twisted ideas, and the declining influence of Christianity? Or does it come from the human heart that is infected with what we Catholics call the seven capital sins? Do people have free will or not? Is becoming a materialist not also a choice, chosen because what makes a person a person has been obscured by a bad education system, the media, etc.? Are people as materialist as we think, or as the “industry of evil” has led us to believe?
Lastly, complaints are made about the size of corporations, that corporations are too powerful, and government needs to prevent their growth above a certain level of income. Firstly, this view that corporations want power comes from the progressivist platform, and has been parroted by many since then. Secondly, I would love to meet a non-economist who says these things who has read the ground-breaking article by Nobel Prize–winner Ronald Coase entitled “The Nature of the Firm.” In that article he does what no else ever did—ask, “What is the firm, why do firms exist and what governs the size of firms?”
Regarding the first point, corporations do not want power, they want money. If they want power, it is only to enhance their profits. Since firms can’t coerce purchases of their goods and services, they have to get someone to do it for them. That someone is an all-too-willing government, the members of which, in exchange for campaign contributions and the promised votes of the members of the firm, make a firm a monopoly, or give it special breaks. GE is a good example of this. There is a massive body of literature from what is called the Public Choice School of Economics on how this works, and the remedy is to take away government’s power to aid corporations. Non-economists never think of that. Plus, most firms do NOT seek government advantages.
On the second question, Coase shows that firms are as big as it takes to make a product or service, but not any larger. Why? The key is cost. For a firm to make itself any larger than it has to be increases costs. Increasing costs reduces profits. Reducing profits irritates the Board of Directors, and drives down the price of the stock, thus opening the firm up to someone who will try to buy a majority of the stock, fire the directors and officers, and put in people who will cut costs in order to make the firm more profitable.
A Word You Don’t Hear Anymore
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!
What's Up with Taxes?
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.
Where's the Recovery?
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?
One Major Source of Our Problems
An economist friend of mine, who is a Salesian Brother, recently gave a lecture at Oxford University reminding us of one major problem that is neglected by many economists and by papal writings on economic things. Yet this just might be the biggest problem that we are facing. All attacks on the free market by Catholics saying that it fosters greed, etc., have been shown to be nonsense, and that greed resides in the human heart. I learned this many years ago in the philosophy courses I took at a good Catholic university as an undergraduate. You would think that our clergy would also have learned it as well. Both the rich and the poor can be just as greedy.
But the “morality” industry, that is, those who make their living, so to speak, arguing that the cause of our financial problems is the lack of morality inherent in the free market, have missed the major point made by my Brother colleague: the problem of “rent seeking.” Famous economists Robert B. Ekelund and Robert D. Tollison define rent seeking as: “The behavior associated with the use of scarce resources in the pursuit of monopoly profits created by government action; the process of using scarce resources in an effort to obtain rents or a transfer of wealth.”[1] A rent is the payment to a factor of production such as land, labor, capital and/or entrepreneur skill in excess of its opportunity costs.[2] Basically a rent is profit. What the lay person calls rent, as in apartment rent paid to a landlord, is just one type of rent. And the rent paid becomes a rent only when the money paid for the apartment exceeds the cost of maintaining it and repaying the money loaned to build it. (This is one of the problems of rent control—government rent ceilings are usually too low to maintain the building so the owner has to abandon it and chalk it up a loss. The result is a slum.)
Notice that the definition given above includes government. How this works is that in exchange for financial and other support in future elections,[3] government leaders have an open door for those in business or unions who seek monopoly privileges. The privileges must be licensed by government, or the goods or services of the rent-seeking company will be open to competition, which will allow competition to drive down the prices charged for a similar product or force the rent-seeking company to improve the quality. Take the example of General Electric, oddly the company for which Ronald Reagan used to be a spokesman. GE is a failing company, but it also owns NBC. It appears that GE president Jeffrey Immelt got a lump of money from the government TARP funds, which was only intended to go to banks. It was given to GE’s financial arm, but since GE is not a bank, none of the strings attached to the TARP money banks received were applied to General Electric. GE CEO Jeffrey Immelt is a frequent visitor to the White House, and I am sure they have a coffee cup with his name on it. You can see the rent seeking here as NBC and MSNBC, owned by GE, were almost news outlets for the Obama campaign and now for his administration, bitterly attacking Obama’s critics. In addition, GE is a big supporter of the cap in trade (cap and tax) bill. One of the reasons behind its support is that it would stand to manage billions of in cap and trade contracts if the deal goes through. Not coincidently, Mr. Immelt is on the Board of Directors of the New York Federal Reserve Bank, which is the most powerful of the Fed banks.
I am not picking on GE, but I am attacking the notion that the government has a role in managing the economy, because this opens the door to groups and companies looking to get a hand on government monopoly privileges and your tax money, instead of earning it the hard way. Take the current “Jobs Summit” now being held in the White House. All of the Obama cronies are there: big unions, some big corporations, all looking for handouts or privileges. Noticeably missing was the US Chamber of Commerce, a public critic of Obama’s economic policies, and other representatives of small business owners—small business which employs most American workers. It was reported that when one person at the conference told the President that if he wants to help the growth of jobs, do not pass the health care plan, Obama replied that “we” are going to pass it whether you like it or not.
All this is rent seeking, and government is the middleman in the process. If the government were strictly prohibited for touching business or labor in the country, these folks could not get anything from it. Sadly, Catholics are among the biggest supporters of government’s running of the economy; therefore, Catholics are big supporters of rent seeking to the detriment of the economy and the common good.
But the “morality” industry, that is, those who make their living, so to speak, arguing that the cause of our financial problems is the lack of morality inherent in the free market, have missed the major point made by my Brother colleague: the problem of “rent seeking.” Famous economists Robert B. Ekelund and Robert D. Tollison define rent seeking as: “The behavior associated with the use of scarce resources in the pursuit of monopoly profits created by government action; the process of using scarce resources in an effort to obtain rents or a transfer of wealth.”[1] A rent is the payment to a factor of production such as land, labor, capital and/or entrepreneur skill in excess of its opportunity costs.[2] Basically a rent is profit. What the lay person calls rent, as in apartment rent paid to a landlord, is just one type of rent. And the rent paid becomes a rent only when the money paid for the apartment exceeds the cost of maintaining it and repaying the money loaned to build it. (This is one of the problems of rent control—government rent ceilings are usually too low to maintain the building so the owner has to abandon it and chalk it up a loss. The result is a slum.)
Notice that the definition given above includes government. How this works is that in exchange for financial and other support in future elections,[3] government leaders have an open door for those in business or unions who seek monopoly privileges. The privileges must be licensed by government, or the goods or services of the rent-seeking company will be open to competition, which will allow competition to drive down the prices charged for a similar product or force the rent-seeking company to improve the quality. Take the example of General Electric, oddly the company for which Ronald Reagan used to be a spokesman. GE is a failing company, but it also owns NBC. It appears that GE president Jeffrey Immelt got a lump of money from the government TARP funds, which was only intended to go to banks. It was given to GE’s financial arm, but since GE is not a bank, none of the strings attached to the TARP money banks received were applied to General Electric. GE CEO Jeffrey Immelt is a frequent visitor to the White House, and I am sure they have a coffee cup with his name on it. You can see the rent seeking here as NBC and MSNBC, owned by GE, were almost news outlets for the Obama campaign and now for his administration, bitterly attacking Obama’s critics. In addition, GE is a big supporter of the cap in trade (cap and tax) bill. One of the reasons behind its support is that it would stand to manage billions of in cap and trade contracts if the deal goes through. Not coincidently, Mr. Immelt is on the Board of Directors of the New York Federal Reserve Bank, which is the most powerful of the Fed banks.
I am not picking on GE, but I am attacking the notion that the government has a role in managing the economy, because this opens the door to groups and companies looking to get a hand on government monopoly privileges and your tax money, instead of earning it the hard way. Take the current “Jobs Summit” now being held in the White House. All of the Obama cronies are there: big unions, some big corporations, all looking for handouts or privileges. Noticeably missing was the US Chamber of Commerce, a public critic of Obama’s economic policies, and other representatives of small business owners—small business which employs most American workers. It was reported that when one person at the conference told the President that if he wants to help the growth of jobs, do not pass the health care plan, Obama replied that “we” are going to pass it whether you like it or not.
All this is rent seeking, and government is the middleman in the process. If the government were strictly prohibited for touching business or labor in the country, these folks could not get anything from it. Sadly, Catholics are among the biggest supporters of government’s running of the economy; therefore, Catholics are big supporters of rent seeking to the detriment of the economy and the common good.
