It was February 3, 1913 and an amendment to the United States Constitution had just been ratified that would forever change the course of the nation.  It was the Sixteenth Amendment and it still reads, “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”  Prior to 1913 personal income taxes in the United States were deemed by the Supreme Court to be forbidden by the Constitution.  The constitution stated, and still states today, that “No capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.”  This essentially means, as determined by the Supreme Court, that the federal government shall not tax any single person, including his income, without distributing the revenue from such a tax to each of the States based on their population as determined by the latest census.  The Constitution had forbidden an income tax that would be spent by the federal government.  The Sixteenth Amendment changed this.  The federal government of the United States now had the power to tax each of its citizens for whatever it pleased, most notably those citizens’ income.

The taxation of income in the United States has become the greatest producer of revenue for the government; more money is raised through the income taxes than by all other means combined.  Personal income taxes account for 78% of all income taxes; the other 22% is accounted for by corporate income taxes.  In 2008 the federal government collected about $1.22 trillion in personal income taxes.  That divides to over $8300 per working person in the United States.  Given that the top 50% of income earners pay more than 96% of income taxes, those people earning over $26,800 per year average paying over $16,700 per year in taxes.  The income tax, as horrible as it is, is only the beginning to what the United States government would deploy in 1913 that threatened the liberties of every American.

On April 8, 1913 the United States ratified the Seventeenth Amendment to the Constitution, which changed the way a Senator was elected from the legislation of each State electing its own Senator to the people of a State electing a Senator by popular vote.  Additionally, it changed the way vacancies were handled.  The duty now falls on the shoulders of the Governor (executive authority), whereas it used to come to a vote in the State’s legislature.  Though less important than the legalization of a personal income tax, changing the rules of election for Senators has transformed the position from one of being a State’s ambassador to the Union to being a political figure seeking popularity among constituents.  This has inspired costly campaigns to win voters’ hearts and has led to legislation favoring the largest donors instead of favoring the State’s interests.

The Sixteenth Amendment would be more than enough to call 1913 one of the worst years in the history of the United States, but the federal government was not through extracting power from the people.  On December 23, 1913, two days before Christmas, Congress enacted the Federal Reserve Act.  The Act effectively transferred the constitutional duty of regulating the money supply from the Congress to the Federal Reserve – which would have its Chairman selected by the President.  Control of the money supply had been taken from the Legislative branch and given to the Executive branch.  Furthermore it allowed one body of seven men autonomous power over the supply of money in the banking system and thus in the economy.  Control over the money supply would lead to the Great Depression and almost every boom and bust cycle in the American economy.

Twenty years subsequent to the Federal Reserve Act, Franklin D. Roosevelt made it one of his first orders of business as president to relieve the Federal Reserve of the gold standard.  Prior to 1933 United States currency read something along the lines of, “WILL PAY TO THE BEARER ON DEMAND TWENTY DOLLARS.”  This amount of value the government promised to pay the bearer is no longer an option.  Now United States currency simply reads, “FEDERAL RESERVE NOTE” and it notes that the bill is legal tender, but nowhere does the government offer to acknowledge the currency’s value.  This would not be much of a problem if the government was responsible with the creation and supply of money, but that would be too easy.  In 2008 the United States federal government spent over $4.5 trillion and had total revenues of just over $2.5 trillion – you do the math.  This money they create is not free; we all pay for it through inflation.

The United States government has grown by leaps and bounds over the last century, and the amendments to the Constitution that transpired in 1913 are largely to blame.  Perhaps 2013 can be the year that such growth is reversed.

Sources: Federal Reserve Act, Sixteenth Amendment, Seventeenth Amendment, Government Revenues, Government Spending, The United States Constitution, Median Income, Income Tax Distribution

Today’s society is turning into one of those portrayed in novels such as 1984 or Atlas Shrugged.  There is a growing sense that failure is not acceptable. That one man’s collapse should be spread among millions so that instead of the devastation of one deserving person, millions of undeserving people are only slightly harmed.  We have become a society where there are no guilty, so all guilt must be divided equally.  We now believe that “All men are created equal” does not mean that all people have equal rights and opportunity, but have equal outcome.  We have become despicable.

The State of Illinois further propagated this feeling today as it extorted Bank of America (recently “bailed out” by every American) into extending a line of credit to a non-creditworthy company.

Last week Republic Windows and Doors,  a window and door manufacturer (tough to figure out by the name), notified its employees that it would be closing its doors (irony, anybody?) due to liquidity issues arising after Bank of America refused to extend debt to them.  The approximately 300 employees decided that they were due something that was not theirs so they sat in the factory and refused to leave.  They stated that they would not leave and that they ought to have the assets in the building in return for losing their jobs.

Let us make one thing very clear, employees do not own their companies unless they own the stock, the companies are owned by the stockholders.  This would be no different than working in an office and being laid off because of tough times and claiming that you were taking your desk as severance.  Furthermore, the assets in this factory were likely pledged to the company’s lenders as collateral for the loans in the same way that your car is the collateral for your loan if you are financing it.  The employees of Republic Windows and Doors at no point had any claim to any of the equipment or inventory owned in that factory.  As such, this in and of itself is extortion.  They are refusing to give up physical control of these items without monetary compensation.

So why did Bank of America not provide the liquidity that was needed to keep the doors open at Republic?  The same reason that any bank decides not to lend money, the risk was too high that the loan would not be repaid.  Republic was not a profitable company and had been declining for some time.  Bank of America had even worked with Republic to help them become profitable, but the manufacturing of windows and doors in a society that is overwhelmed with an inventory of homes and other buildings  that have already been built is just not feasible.  As such, Bank of America refused the loan and the natural course of action took place as Republic announced that it would be closing its doors and going bankrupt, as many companies do every year.  Furthermore, it was not only Bank of America that would not lend to this company, but no other bank would either.  Republic, simply put, was not worthy of a loan.

Rod Blagojevich, Governor of Illinois

This, however, was completely unacceptable to not only the employees of Republic, but also to the Governor of Illinois, Rod Blagojevich, and Barack Obama.  Yesterday the Governor stated that Bank of America would get no further business from the State of Illinois, a giant client, so long as credit was not extended to Republic.  This, my friends, is pure, uninhibited extortion – by a Governor no less!   The Governor blatantly threatened financial ramifications for Bank of America if it did not lend money to a borrower that was unlikely to repay its loan.

President Obama was quoted as saying at a press conference that the workers were “absolutely right” for demanding their severance pay.  He went on to say, “These workers, if they have earned these benefits and their pay, then these companies need to follow through on those commitments.”  Borrowing a line from John Stossel, “Give me a break!”  Barack, this company is out of business, there is no money to pay the employees a severance.  This was not a trimming of personnel so that the company could improve its bottom line; this was a “shut the doors we’re out of business” closing.  Would this happen if a small company closed?  Would they deserve severance from their bankrupted owner?  By taking a job at a company you agree to the risks of that company.  If the company fails it goes without saying that you lose your job and all of your pay.  How many people do you know that have worked for companies that have collapsed who have been confused as to why they aren’t receiving paychecks anymore?

Unfortunately, Bank of America gave into the demands of Governor Blagojevich and extended credit to Republic Windows and Doors.  Really, it had no choice.  The money it would miss out on by losing the accounts of the State of Illinois would have far outweighed the amount they may lose if Republic does not repay its loans.

This is an unfortunate story.  The most unfortunate part of this debacle is how much this is representative of the times we are living in.  This transformation from capitalism to socialism has gone more rapidly than I had ever imagined possible.  We are no longer individuals with individual tastes, aspirations, emotions, and talents, we are becoming the body of a group that is ruled by one head.  We have entered a time when there are neither winners nor losers, there is only equality of outcome where everybody equally wins and loses.  The prospect of personal advancement is dying before our eyes as we see the incentives for such advancement disappearing in this crusade to slaughter the productive so that the idle may lap up their blood.  Soon those productive members of society will all be killed off (figuratively of course), and we will only be left with the beggars and the thieves.  Karl Marx said, “Democracy is the path to Socialism.”  I hope we can prove him wrong.

Some good news to note is that Governor Blagojevich was arrested today on unconnected charges of corruption.  One of the two main charges are that he was selling Barack Obama’s vacant seat on the Senate (governors are responsible for replacing vacant Senators).  Mr. Blagojevich was quoted as saying, “A Senate seat is a fucking valuable thing, you don’t just give it away for nothing!”  Additionally, Mr. Blagojevich was charged with refusing financial assistance to the Chicago Tribune from the sale of Wrigley Field unless the Tribune agreed to fire a number of employees that the Governor did not enjoy; probably a result of negative stories about him.

Sources: Bloomberg 1, Bloomberg 2, WSJ

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.

President Obama was quoted as saying this 15 months after a trade agreement was reached between the United States and South Korea that essentially eliminated any major barriers to trade between the two countries, specifically with regard to automobiles.  Despite Obama’s apparent ignorance to major current affairs in the United States and his outdated, deceptive statistics, the quote is still a great example of how bureaucrats view trade with other countries.

Bureaucrats seem, in my experience, to put no value on goods.  If goods are imported it is somehow seen as a bad thing because Americans had to pay cold hard cash for those goods.  Conversely, when American companies export goods and are paid cold hard cash for those goods it is seen as some glorious event, as though those companies were given something for nothing.  In reality, since the United States uses fiat currency (currency that has no real backing such as gold), we are, in fact, trading paper for goods.  Not a bad deal.

All we hear about is our trade deficits, that we import so much more than we export.  It is true that the United States is operating at a trade deficit; it has done so since 1971.  In the 37 years since then we have not gone broke as a result of our trade, rather our lives have become richer.

The fact that Americans purchase goods from overseas is not a bad thing; they are purchasing those goods because they are somehow better or cheaper than similar goods that are produced domestically.  Again, no trade will take place in a free market that does not benefit both parties.  Americans are not forced into purchasing imported goods – they want to.  Similarly, American companies make the choice not to export many of their goods, likely because they will not receive a high enough price.

A common phenomena among trade deficit nations, such as our own, is that the citizens of those nations are typically far more affluent and, as such, have more opportunity to buy goods produced in other corners of the world.  Equally, citizens in trade surplus nations tend to be more destitute, not even able to afford the goods produced in their own country, much less from abroad.  Additionally, the labor in trade surplus nations is typically far cheaper than in trade deficit nations, another testament to the lower quality of life in trade surplus nations.  The fact that a nation’s citizens are poor makes it far more likely to have a trade surplus because companies will move to those nations to enjoy the benefits of the cheaper labor to be found there.

There is no doubt that exporting goods is good for companies in the United States that can profit from doing so.  The problem arises when bureaucrats only look at the trade deficit and do not dig into why there is a trade deficit.  To limit the importation of goods as a reaction to another country doing so is harmful to both countries (as explained in Part 1).  Imports are good in that we get to enjoy the little luxuries of the world for a lower price than we would otherwise be able to.

Free trade is an easy scapegoat at times.  It allows politicians to blame an outside force for something that is far from blameworthy.  It allows bureaucrats to increase their union’s power in Washington or increase the price they receive for the good they are selling.  Free trade is a good thing.  It makes many goods and services more readily available for a much lower price than would ever otherwise be possible.  Don’t be fooled by politicians and bureaucrats that have something to gain personally by limiting your right to free trade.  The computer you are reading this on, the chair you are sitting on, part of your dinner this evening, and so many other goods we consume come from other nations outside of our own.  You purchased the computer you are reading from now because it was likely better and cheaper than an option that would have been exclusively manufactured and designed in the United States.  Likewise, many people abroad are enjoying American made products that would otherwise not be enjoyed.  Trade is one of the most valuable part of human life in that it allows people to have access to a much wider variety of goods and services and improves the lives of every person that takes part in trade.

Trade can be confusing as a concept and that is why there is so much deception.  However, the more you understand about trade the less ammunition bureaucrats will have when they try to pass laws that inhibit your right to freedom.

The most important single central fact about a free market is that no exchange takes place unless both parties benefit.
-Milton Friedman

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.

I just do not even know where to begin with the remarkably flawed logic that President Obama is utilizing in this portion of his quote.  The amazing part is that he isn’t the only politician that has a gripe with this, republicans and democrats across the board complain about China in this respect.  Obama is accusing the government of China of intentionally inflating their currency so that exports coming from China are cheaper for other nations and imports entering China are more expensive for the people of China.  Barack Obama is explicitly complaining about Chinese companies providing products to American consumers at prices that are too low!  Once again it almost appears that Obama is choosing to defend the citizens of China over his own constituents.  As it stands now, assuming this theory that China is intentionally inflating its currency is true, the people and companies of China are essentially subsidizing our consumption.  That is, they are paying for part of the goods we consume by providing materials and labor at prices that are well below what the market price would otherwise be.

Barack Obama, and other bureaucrats, feel that this just is not right, that the people of the United States should not enjoy cheap goods.  Their real gripe comes from their delusion that somehow by Chinese companies selling cheap goods that the people of the United States will not be able to make as much money.  As I showed in Part 1 of this series, that just is not true.  Incomes have consistently gone up over the last forty years and there are actually more people employed as a percentage of population.  People have more money to spend and are able to buy goods at cheaper prices, and our politicians wish for this to all end.

If China wishes to inflate their currency in order to provide the rest of the world with underpriced goods then I say we let them.  They may import a few less things, which they probably wouldn’t have imported anyway, but it will be more than made up by the cost savings consumers in the United States will enjoy.  There is no doubt in my mind that no matter what policy is in place, the people of the United States will import more goods from China than they will export to China for the foreseeable future.  China simply has more people and is at the point of economic development that is prime for manufacturing.  The American people are making more money as we move away from manufacturing and we are simultaneously enjoying lower prices on the goods we purchase.  Why would we want to end that?

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 this portion of the quote, President Obama is stating that the United States should add enforceable rules to NAFTA (North American Free Trade Agreement) that require the countries that are included in the agreement (United States, Canada, and Mexico) to maintain certain labor and environmental standards (for the purposes of this article I will ignore environmental regulation as it is more complex than other regulation and needs an article of its own to outline and explain).

NAFTA Logo

The problems with this are numerous.  The United States government should only be concerned with one thing – protecting its citizens’ property and rights.  By demanding that other nations change their laws they do neither of these duties.  In fact, they begin to infringe on the rights of their people to purchase goods they desire because increased regulation of labor and environment will almost certainly increase the prices of many goods.  Having a free trade agreement, which, as I stated earlier, is generally redundant, is almost made void by outlining what must be done in order to actually trade freely.  It is hardly free trade if the agreement forces companies to pay their employees wages that are higher than the employees’ value.  If the consumers of certain foreign goods are not pleased with the labor practices or environmental practices by the foreign companies manufacturing those goods then they will likely either refuse to purchase that good or service or require that the price be lower to purchase it.  This is incentive enough for foreign companies to improve their labor practices or environmental practices.  It is inefficient for a government to decide what its people want, especially when the people it is trying to protect are in another country.  Barack Obama seems to wish to make his constituents pay more so that people in foreign nations can enjoy higher wages.  Doesn’t seem right, does it?

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 . . .