Anyone who has been on Drudge Report the last few days will know of the Obama-Rush feud in which Obama asked congressional minority leaders to stop adhering to Rush’s advice and politics. Well Rush has responded to the President’s criticisms through National Review Online being that his show doesn’t operate on weekends. Without going into the specifics of the response, one particular phrase really stood out for me:

“Obama was angry that Merrill Lynch used $1.2 million of TARP money to remodel an executive suite. Excuse me, but didn’t Merrill have to hire a decorator and contractor? Didn’t they have to buy the new furnishings? What’s the difference in that and Merrill loaning that money to a decorator, contractor and goods supplier to remodel Warren Buffet’s office?”

Why didn’t I think of that? This perfectly demonstrated the utter inconsistency in how the left seems to approach economic matters. Subscribing to this crude Keynesian framework of all marginal deficit spending will entail a multiplier effect which will be the catalyst of “priming the pump” of aggregate demand.

I am not really qualified to comment on the validity of the multiplier effect and whether the inflationary pressures along with mounting debt are worth the tradeoff. In another post, it might be necessary to point out the additional public choice issues that arise such as bureaucratic inefficiencies in determining highest values at the lowest costs, rent-seeking problems, incentive problems, red tape, bloated oversight, and other governmental problems that, even if the Keynesian theory is entirely true, would limit its effectiveness.

What is so amazing about what Rush has pointed out is that Obama is entirely correct about being angry with Merrill Lynch and yet the President doesn’t seem to make the connection with his greater stimulus. Government does not possess the ability to effectively identify value. This is because value, with the exception of clearly defined public goods, can only be understood by its profitability. Lowering unemployment cannot be understood as a virtue in itself- it must be tied to productive growth. The tribes of thousands of years ago always had full employment- every single person worked, and yet it would be ridiculous to call those times prosperous relative to ours.

But to view every single marginal dollar spend as equal is complete economic ignorance. North Korea, for example, in an act of proving economic and social prowess, created plans to federally finance a massive epic building (I forget the name). They employed thousands of workers and tons of capital and resources. In the end because of no market price mechanism for conveying the best way to produce this building at the lowest price, it was never completely finished and is considered one of the ugliest sky scrapers ever constructed. But people had jobs!!! – all at the expense of foregone resources, squandered capital, and wasted tax dollars. By and large the American plan doesn’t include much public design of projects so it’s not entirely analogous (or maybe it does? I don’t know. If that is the case it will be even worse). But nonetheless, how is the government to know where to throw the money? If its goal is to get people working again, shouldn’t Obama praise Merrill Lynch for stimulating the decorating business so they can hire more people and those people can spend money in other industries and then they can hire more people and so on and so on as the multiplier theory tells us.

But Obama nailed it. Dollars can be wasted. A dollar spent doesn’t necessarily increase economic value and most of the time doesn’t. Hopefully he will display this same brilliance when it comes to his dear stimulus.

(I am in a huge hurry writing this and only have 15 minutes so I hope it sounds logical. If anyone doesn’t understand a certain point its probably not you but me and I will fix it later)

I’m sure by now pretty much everyone has heard of Madoff’s 50 billion dollar pyramid scheme. I’d hate to divulge deeper into this scandal as I’m sure the news has covered it quite extensively already. However, I’d like to cast light on another Ponzi/Pyramid scheme that has been in the making for over 70 years now; the one and only Social Security Act of 1935.

The idea behind Pyramid schemes are that the first people into the system are paid off money from the newer participants who are promised the same payoff in the future. The problem with this is they become unsustainable because they become larger and larger, so called “bottom heavy”

How does Social Security fit into this scheme? Quite nicely (See below).

Not a whole lot of explanation is needed except for that in this Social Security scheme the problem is even exacerbated by the fact that the next “rung” of the pyramid is mis-shaped with the baby boomers which has helped to hide the problem and imminent failure of social security. This is because this enlarged rung of the pyramid has been over-adequate the past few years and masked the future inability of this program to sustain itself. But, the problem will be magnified because of this as the so called baby boomer generation retires leaving the next rung to the burden of somehow supporting this oversized generation.

The scary thing is that today, we are farther away from the real solution to the Social Security system which is a privatized system. Why are we farther from this idea then we were 5 years ago when President Bush stated in his State of the Unions it was a priority? Because of the idea that somehow Americans are unable to decide their own future. The argument was always that if given the investment choices and ability to control their social security funds, Americans would be hurt because they would invest it and lose it. Well, today that scenario seems more likely than it did a few years ago. It is a sad state we live in where the Government not only attempts to use, but successfully uses a free individuals potential for poor investment as a justification for why they should not be able to determine their own financial future. Just fathom that for one second. We may lose our money if we invest it. Therefore, we should not have the authority to decide where our money goes. If you break it down even further, that is some flat out dangerous logic, and an even worse precedent.

The Social Security system, established in 1935 as a “temporary” solution, has hardly been temporary, and even worse hasn’t been a solution, but a ticking time bomb. We may lose our money if we invest it ourselves, but we will certainly lose it if it stays in the 74 year old ponzi scheme. Just ask some of Madoff’s clients.

It is widely believed that war is, at times, unavoidable.  I don’t completely disagree.  There are circumstances where there is a completely hostile nation that is invading your own nation it is your government’s duty to protect your property and your rights by repelling the invading force.  However, in the twentieth century and into the twenty-first we have only seen wars fought on foreign soil.  It has led me to wonder if these wars are at all avoidable.  After all, war destroys lives and costs unimaginable sums of money – two things that most anyone would hope to avoid.

How would a nation go about avoiding conflict with other nations?  Free trade.  As difficult as this question seems, the answer to avoiding war is remarkably simple.  In virtually every conflict the United States has engaged in within the past century the nation with which we were quarrelling was not one with which we traded freely.

The following is a list comprising the top 10 trade partners of the United States for 2007:

1.    Canada – 18.0%
2.    China – 12.4%
3.    Mexico – 11.1%
4.    Japan – 6.7%
5.    Germany – 4.6%
6.    United Kingdom – 3.4%
7.    South Korea – 2.6%
8.    France – 2.2%
9.    Taiwan – 2.1%
10.    Netherlands – 1.6%

Since 2004 the only deviation from this list has been Malaysia in the place of the Netherlands.  The United States has had no serious military conflict with any of these nations since the end of the Korean War in 1953 (North Korea was heavily backed by China in that conflict, whereas China was only a minor influence in the Vietnam War).

There are currently no military hostilities between the United States and any one of those nations.  It is not a coincidence.  Of the major wars in the 20th and 21st centuries, WWI, WWII, Korean War, Vietnam War, Afghanistan War, and the Iraq War have all included the United States battling with a country with which it did not open up free trade prior to the hostilities.

Pre-WWI Europe was flush with high tariffs and other suffocating trade barriers that prohibited much trade between nations.  The United States had passed the McKinley Act, which had increased already protective tariffs and duties to levels that all but eliminated trade.  After President Taft tried to rally congress to lower tariffs they passed the Payne-Aldrich Tariff Act, which did virtually nothing to lower tariffs.  Trade was stagnant as World War I broke out.  Having no ties to U.S. trade the German Navy began sinking U.S. merchant ships.  The United States abandoned its neutral position on the war and millions of people were slaughtered and countless sums of money were spent as a result of World War I.  It was only after World War I that the United States signed a trade agreement with Germany that would allow for a freer flow of goods and services between inhabitants of the nations.  Unfortunately that agreement would not last long.

In 1934, under President Franklin D. Roosevelt, the United States severed its trading ties to Germany, making trade with the nation impossible.  In July of 1941 the United States and other western nations severed all trade with Japan.  Having nothing left to lose, Japan attacked Pearl Harbor on December 7, 1941.  Again, all trade had been cutoff with both the United States’ to-be-enemies before there was ever any hostile action.  As a result, hostile action became an incentive and the U.S. was dragged into the Second World War, where again millions of people and countless sums of money were disposed of.  As was the case with the previous World War, free trade between the United States and its foes was only reopened after a devastating war had taken place.  Trade between the U.S., Japan, and Germany has proven to be very constructive to each economy and there are now no military tensions between any of the nations where there used to be a societal hatred.

Subsequent to World War II, Japan’s reign in Korea ended and Korea was left with the capitalist government of the South and the communist government of the North.  Both governments wished to control the nation.  The United States and its allies did not trade with the communist North and the USSR and its allies did not trade with the capitalist South.  Eventually there was a civil war from 1950 to 1953 between the north and the south; the United States defended the South and China defended the North.  Eventually a stalemate ended in the nation being divided in two, leaving North Korea and South Korea.  The United States still maintains crippling tariffs on any goods coming from North Korea, effectively shutting down trade with the nation.  Hostilities are still rampant between the United States and North Korea today.  South Korea and the United State have, conversely, opened up free trade and both nations have benefited greatly.

Prior to the Vietnam War the United States and Vietnam had made trade very difficult as they had enacted tariffs approaching 50% on nearly every good that each country might export.  Trade between the United States and North Vietnam was virtually non-existent, as they were communist and received subsidized goods from the USSR.  Tensions between the North and the South led to a civil war with the United States financing and committing military forces to the defense of the South and the USSR and China financing, though only providing limited military forces to, the defense of the North.  Subsequent to the U.S. exit from the conflict all trade relations with Vietnam were cutoff.  It was only after the fall of the Soviet Union that the United States reopened trade with Vietnam and both nations have greatly benefited and have no tensions today.

Total trade (exports + imports) between the United States and Afghanistan in 2000 amounted to $8.8 million.  In 2001 that amount shrunk to $6.8 million.  In essence, there was no trade between the two nations.  After the events of September 11, 2001, the United States needed a target and what better target than the nation with which it engaged in the least trade?  Since the United States gained control of Afghanistan trade relations have improved, but the total trade between the two nations is still minimal.  The United States still occupies Afghanistan today and fighting continues.

In 1990 the UN placed sanctions on Iraq that prohibited trade with the nation as retaliation for their annexation of Kuwait.  The income per capita in Iraq fell from $3,510 in 1989 to $450 in 1994.  Trade remained restricted until after the United States invaded Iraq in 2003.  In 2002, prior to the States invasion, the United States only exported $31.6 million worth of good to Iraq.  The U.S. did import a good deal of oil, but knowing that the nation would only lose $31.6 million in exports and would be able to secure oil fields relatively easily did not offer much resistance to the notion of war.

The old phrase “do not bite the hand that feeds” translates well to the world of trade.  Why would two nations that benefit by the way of trading with the other wish to quarrel unless there was very good reason?  The fact that nations benefit by trading with each other gives strong incentive to be cordial with one another.  A good example is the relationship between the United States and Saudi Arabia.  Though the two countries have virtually nothing in common and in fact citizens of both nations have strong prejudices or even hatred of citizens of the other nation, the two nations get along very well on a diplomatic level.  The only reason this is so is because both nations rely on each other for goods and services that the other can provide.  Another example is the vast expansion of trade between the United States and China; two nations that used to be very hostile toward one another are now very friendly.

Trade will not end war, but it will dramatically reduce the frequency and severity it.  By freely buying and selling goods and services around the world a nation can not only dramatically improve its economy, but it can also improve its international relations.  Additionally, the United States has entered into a sort of worldwide charity since World War II; continuously giving handouts to less privileged nations around the world.  A better solution would be to open up free trade with those nations as to inspire labor for export and improve the income of the citizens.  Trade is a tool that provides only good and we should use it more often.

I will note that there is an obvious “chicken or the egg” dilemma here with regard to whether a lack of trade causes tensions or tensions cause a lack of trade.  I would say that it has historically gone both ways, but in any circumstance there is virtually no reason to cutoff trade, it will only serve to escalate an already volatile situation and citizens of both nations will be harmed – not only by war but also by a lowered standard of living as a result of reduced trade.

Sources: Top trade partners, Iraq profile, Iraq trade stats, Afghanistan trade stats, Iraq import breakdown, Japan trade, Korean War, Germany trade, Pre-WWI trade, North Korea profile, Vietnam profile, Vietnam War, Vietnam tariffs

For far too long, certainly during the course of the Bush administration with the support of Sen. McCain, the attitude has been that any trade agreement is a good trade agreement. And NAFTA did not have enforceable labor agreements and environmental agreements.

And what I said was we should include those and make them enforceable. In the same way that we should enforce rules against China manipulating its currency to make our exports more expensive and their exports to us cheaper.

And when it comes to South Korea, we’ve got a trade agreement up right now, they are sending hundreds of thousands of South Korean cars into the US. That’s all good. We can only get 4,000 to 5,000 into South Korea. That is not free trade.

Somehow many of the politicians in our country have come to the conclusion that free trade is somehow harmful to Americans.  The above quote is from Barack Obama in October of 2008 during a presidential debate.  He touches on virtually every major qualm that politicians have with free trade, so I figured it was an applicable quote.

First, trade is trade, not a transfer, but trade.  When a trade takes place, whether it be in business, sports, or anything else, both sides have a selfish interest to get as much as they can and give up as little as possible.  This leads to negotiation, which inevitably leads to a trade that both parties are content with.  If both parties were not content with the negotiation, no trade would take place.  For example, when you go to the store to purchase toothpaste, you happily hand the clerk the three dollars it costs for that tube of toothpaste and they happily give you the toothpaste in exchange for your three dollars.  Since both parties are satisfied with the transaction it is typical for both parties to say “Thank you.”  In such a circumstance, you valued the tube of toothpaste more than you valued your three dollars and the opposite was true for the store clerk.  If this was not true then no transaction would have taken place.  Trade amongst countries is no different.  In any voluntary transaction, both parties benefit.

A major misconception about trade comes from the way it is phrased.  “And when it comes to South Korea, we’ve got a trade agreement up right now, they are sending hundreds of thousands of South Korean cars into the US. That’s all good. We can only get 4,000 to 5,000 into South Korea.”  That quote is a perfect example.  It makes it seem as though the nation of South Korea is sending the nation of the United States hundreds of thousands of automobiles.  In fact, Hyundai, a private company held by private stockholders, which happens to be located in South Korea, is sending its customers its products for an agreed upon price.  Of course, the cars go through a dealership first, but at the end of the day it is Hyundai sending a Sonata to Joe Schmo in Memphis.  It just so happens that the car Joe Schmo bought happened to be produced in another country outside of his own.  It was not the nations of South Korea and the United States that were trading; it was a company and its customer.  Hyundai made the decision to sell the car to Joe because they preferred cash to a car, and Joe decided to buy the car from Hyundai because he preferred the car to his cash.

Let’s go through President Obama’s quote step by step and explain why Mr. Obama is wrong about free trade being a negative thing.

For far too long, certainly during the course of the Bush administration with the support of Sen. McCain, the attitude has been that any trade agreement is a good trade agreement.

In typical bureaucratic phrasing, Obama makes strong implications that free trade is a negative thing that has gone on for far too long, though he does not come right out and say it explicitly.  Is any trade agreement a good trade agreement?  Well, no, not one that prohibits free trade.  But this is not what was implied by President Obama.  Based on the rest of his quote we can infer than Obama was stating that free trade has been a problem.  So, then let’s answer this question, is free trade ever bad for a nation?  Outside of the sale of arms and intelligence that could be used against that country in a wartime situation, free trade is always good for every involved party.  All we need to do is look back and realize that no trade will take place if both parties are not content at the time of the trade.  Because it is always the hot topic of debate when it comes to trade, let’s consider the American love for goods produced in China.  About 60% of all bicycles in the world are produced in China.  A good number of those bikes are then shipped off to the United States where they are sold for very low prices, lower than the bikes that are produced in the United States.  The obvious result of this is that the bike-riders of the United States benefit because they are able to purchase bicycles for lower prices, saving them money.  The company producing the bicycles in China benefits because it is able to make a profit on the bicycles sold.  What the politicians harp on are the employees of the bicycle manufacturing companies in the United States that went out of business as a result of the competition from China.  There are repeatedly stories of how these fine people lost their job because of the predatory practices of American retailers and overseas manufacturers.  Regardless of all of the hoopla surrounding the loss of manufacturing jobs in the United States, the number of people employed as a percentage of the population has grown consistently over the last forty years – despite the number of people employed in manufacturing jobs falling from 9% of the total population to under 5% of the total population.  Additionally, people are making more money than they did forty years ago.  In 2007 dollars (to remove the effect of inflation), the median personal income in the united states has increased from a little over $13,300 in 1967 to a little over $26,800 in 2007.  So, more people are employed and people are making more money than they ever did in the past when there were more manufacturing jobs.  As long as trade is left to be free then both parties in the trade will benefit.  As Milton Friedman said, “The most important single central fact about a free market is that no exchange takes place unless both parties benefit.”

Data source: U.S. Census

Date source: Bureau of Labor

There is another part to this portion of the quote, the word “agreement.”  Bureaucrats act as though it takes an agreement for free trade to take place.  It doesn’t.  We can trade freely with any nation, even if they refuse to trade freely with us.  Suppose Country X requires that all goods imported from the United States be subject to a 100% tariff, essentially making anything that costs $100 to be taxed an extra $100, doubling the price for the consumer and essentially blocking any goods from the United States to be imported.  Typically what our wise leaders would do is to counter this tariff by instituting a tariff of our own over here, effectively cutting off trade between the countries.  However, just because Country X won’t allow the import of American goods does not mean that the United States can not benefit from opening up free trade on our end.  Though it would be preferable to be able to export goods and services to Country X, the United States will almost certainly have at least one item that they wish to consume that companies in Country X can produce much more efficiently on a comparative level than the United States itself or other nations that the United States trades with.  For example, Country X may have some of the largest and most efficient mango farms, allowing for cheap mangos in the United States.  If the United States were to counter Country X’s high tariffs on imported goods, then the citizens of the United States would have to either grow their own mangos or import them from elsewhere, in either circumstance they would be more expensive and would cost the mango consumers of the United States more money.  Free trade is ideal when both countries open up their borders, but it does not necessarily take two to tango.  Both countries will still benefit from one-sided free trade.

To be continued . . .

We always hear our politicians tell us how they will cut unnecessary spending in government and rein in waste. Whether it is cutting military spending or cutting “earmarks”, we are constantly reminded how much money our politicians will save us. Have any of them every actually delivered on that promise? You should not be surprised to hear that the answer is decidedly “NO!”

Government spending in the United States has decreased significantly only TWICE in the last century. Even in these two circumstances it was not the politicians cut spending, it was that the country no longer had to build tanks and aircraft carriers. The only two times in the last century that the United States cut spending in a significant fashion was after World War I and after World War II. Under every administration, government spending has increased dramatically.

From 1902 (the earliest year for which I have comprehensive data) to 2008, annual government spending in year 2000 dollars (to extract the effect of inflation) has increased from about $29 billion to $4.503 trillion, or $4,503 billion. That constitutes a 15,269% increase in spending over the period, or about 154 times more spending in 2008 than in 1902. Keep in mind, we are utilizing year 2000 dollar figures, so inflation has no effect on the value of the dollar figures. To put it another way, the government spent less than 7% of the total GDP in 1902 and spent more than 36% than the total GDP in 2008. To put it yet another way, the government spent about $370 per person in the United States in 1902, compared to $14,882 per person in 2008 (again in year 2000 dollars). Even at the highest point of spending during World War II, 1944, when the country was entrenched in wars in Asia, Africa, and Europe, government spending only amounted to $6,456 per person, well shy of what it is today. In 2008 the government spent far more on interest on its debt than it spent every year up to World War II.

I wanted to add this in: total government spending for 2008 totaled just under 37% of GDP for the United States.  Conversely, the declared socialist government of Venezuela’s spending totaled 26% of GDP.  The United States government is spending far more, in total and relative terms, than declared socialist societies.  The United States also spent relatively more than Russia, (32% of its GDP), Iran (22%), and a number of other countries that one would not expect to be more frugal than the United States.  Luckily, the United States does still spend less than some countries, including communist Cuba (72%).

Despite these absurd levels of spending by our government today, the people of this nation and the politicians still demand more and more. It is not just democrats, but republicans as well. Both parties are guilty of being addicted to the level of spending that is seen in our government today.

What are the consequences of all this spending? Waste, inefficiency, apathy, and control. Waste in that the government acts as a middle man in spending tens of thousands dollars for each of us. For their services they take a large fee that will never be distributed back to the taxpayers. Inefficiency in that the government feels it is far more qualified to spend your money than you are. Unfortunately they are wrong. The government never has and never will spend other people’s money as efficiently and effectively as people that are spending their own money. Apathy in that the people of these United States will inevitably lose some motivation to produce as they are further taxed. It is a natural event that if a person’s reward is diminished that person’s motivation to obtain that reward becomes diminished as well. Control in that as the government spends more and more of our money we depend on them more and more. If the government controls the means of production then they control the people. When a government has total control of its people things never end in prosperity and happiness. To borrow from the movie V for Vendetta, “People should not be afraid of their governments. Governments should be afraid of their people.”

What can be done to turn back the dial on spending and return to a state of liberty and free markets in the United States? This is a question that I believe only has one answer. An amendment to the Constitution will have to be presented. The amendment would have to limit government spending in any given year to some percentage of the previous year’s GDP. I believe this percentage should be somewhere around 5-10%. The amendment will have to include a clause to allow for a higher percentage of spending during times of declared war by the House of Representatives and the Senate. To prevent constant war, this percentage should only increase to around 30% and last for a maximum period of time, perhaps four years. The federal legislative branch will have to pass by a two-thirds majority the amendment. This amendment will then have to be passed by at least three-fourths of the legislative branches of the 50 states. Having this amendment passed by both the federal legislative branch and the states is difficult because of all the money each of these states receives from the federal government. If federal spending is cut then these states will, of course, receive less money. As such, it is extraordinarily unlikely that such an amendment would be feasible. As such, there are really only two events that I can foresee leading to such an amendment: federal bankruptcy or a revolution. Hopefully I am wrong.

Government spending is a direct threat to liberty in any nation. At the end of the day, however, if we are trying to find someone to blame for the incredible advances of government control over the last century we need only blame ourselves. After all, it is our votes that determine our politicians and it is our politicians that restrict liberty. The government’s power to restrict its people’s liberty depends on ignorance amongst the people. Liberty is your right as a human being and is what makes life worth living. Fight for it by staying informed and informing others.

Suppose you just received your paycheck and were walking to the bank when you were approached by a man that was in the bottom 50% of income earners in the nation. The man requests that you give him $500 so he can pay his mortgage and fill his car with gas. Feeling that you can put your $500 to better use than to pay this man’s mortgage and fill his car with gas you tell him, “No.” The man then pulls out a gun and tells you that if you do not give him the $500 that he will take your money by force plus a fine for not giving it to him the first time he asked then put you into a cell where you will spend three to seven years of your life considering your mistake. Does it seem fair that this man should have your $500 that you worked for? I’m sure you can all see where this is going, but now imagine that the man is the IRS. This is exactly what happens every time anybody in this country makes money that is in the top 50% of income earners.

“A democracy is nothing more than mob rule, where fifty-one percent of the people may take away the rights of the other forty-nine.” – Thomas Jefferson