False Unemployment Statistics

The unemployment numbers are adjusted to make it seem that the recession is over.

The most important statistic is the Number of People Employed in Non-agricultural Activities, available for all to see online at http://www.bls.gov/cps/cpsaat01.htm :

Year     Employment
2006    142,221,000
2007    143,952,000
2008    143,194,000
2009    137,775,000
2010    136,858,000
2011    137,615,000
2012    140,283,000

As you can see, in 2012 the number of  jobs since 2008 decreased by more than 2.9 million (that’s 143.194 million minus 140.283 million).

And yet we are constantly told that the US economy has been improving.  That’s a lie — there’s just no other way to describe it.

Tax Cuts Are Not a Cost

Tax cuts are often described by politicians as a “cost” to the government.  That is an Orwellian lie for two reasons.  First, tax receipts are revenue, not cost.  As any householder knows, revenue is income and cost is spending.  Government spending is a cost.  Now, if government revenues are less, then the government can (a) reduce spending or (b) borrow money to cover current spending (which will incur further costs in the form of interest on the borrowed money).

The second reason has deeper implications.  To describe a tax cut as a cost to the government is to assume that all money belongs to the government. Therefore, from the government’s perspective, tax cuts are money begrudgingly spent by the government.  This is a bizarre twisting of logic.  All monetary wealth in the US is due to the productive efforts of its citizens, tallied annually as the Gross Domestic Product.  In other words, all the wealth in the US belongs to its people because that is who created it.  From the point of view of the people who create this wealth, the taxes paid to support the government are a cost of production. As citizens we pay a percentage of the money we create to support the government, which is tasked with our collective defense and maintenance of the infrastructure that we all use.

Economic Stimulus is Crony Capitalism

The economies in the US and Europe are currently characterized by high debt-to-GDP ratios.  Lately, the most popular remedy for that condition has been to engage in government stimulus spending.  The stimulus spending has not proven to be as effective as hoped, and has increased national debts.  The proponents of the stimulus approach argue that stimuli have had limited effect because they haven’t been large enough, proposing more.  At the same time they want to increase tax rates to finance the new spending and the interest payments on the increased debt.

That debate largely sidesteps the true origins of the economic situation we are faced with:  government intervention in markets.  The interventions may be well-intended but just as often they are on behalf of individuals or entities seeking an unfair competitive advantage, called rent seeking or, more commonly, crony capitalism.   Rent seeking is when a company lobbies the government to back, endorse, or create an artificial market for productsand services for which there is no sustainable business case. In most cases the government is the business’ only customer. In other words, without government sponsorship the product or service would not have sufficient buyers in the open market to make it a viable business.   “Crony capitalism” highlights that the relationship between the business and the government is based on graft: favors made in exchange for money or power.  In crony capitalism, the government may persecute the favored entity’s competitors, create regulations that only the favored entity can conform to (thereby eliminating smaller competitors), grant special loans or loan guarantees, create subsidies and tax exemptions, etc.   The monstrous 72,536 page US tax code is the foremost example of decades of special interest (i.e., crony-supporting) tax exemptions.

GDP = Consumption + Investment + Government Spending + (Exports – Imports)

Using that equation let’s examine what happens given certain circumstances.  First let’s assume that Government Spending (G) increases as a percentage of GDP (1).   In order for that to happen government must increase taxes.  Taxes are sourced from investment incomes, consumer incomes and business incomes. That results in less money available for consumers and businesses to spend and invest.  Now it is true that increasing G results in the purchase of goods and services from businesses, and those businesses employ consumers.  Admittedly, that does partially offset the reduction in income available for spending by Consumers and Businesses.  However, G is inefficient: some of the value of the money created by businesses and collected as taxes is lost due to the cost of administrative bureaucracy.  Furthermore, G consumes but does not create new value.  The overall result is a net reduction in GDP.  And paradoxically (or so it may seem), GDP contracts and less new income is created to be taxed.  Eventually, even though tax rates are increased, tax revenues decrease.

Now let’s consider what happens when government spending is reduced.  Because less money is required to operate the government, tax rates can be reduced.  That results in a larger percentage of GDP attributable to Consumer Spending, Business Spending, and Investment.  Increased Investment (2) creates new businesses (3), which creates more employment, resulting in more consumer income that can be spent (4) — spending, for example, on new products and services created via investment.  Note that this results in new value being created, causing  GDP to increase.  And oddly enough, even though tax rates are reduced (or at least not increased), tax revenues increase as GDP increases.

The Socialist

How does one to interpret the motives of left wing proponents?  Left-wing adherents fall into one of the following categories.

  • She/he has an emotional empathy with socialist ideology that is connected to a sincere concern for people’s welfare.  No logical thought process here, it just feels right.
  • He/she has come to a logical conclusion that supports the ideology, but the logic is based on incomplete information colored by emotional empathy.  The conclusion is reached based on faulty data and stops short of the true culmination of the logical process. This person applauds his critical thinking ability, but does not see far enough beyond that to apply critical thinking to his own assumptions. (We were once a person like that.  In high school we learned to apply critical thinking by questioning authority, questioning what was taught in history class, questioning the social standards of our parents’ era, etc. – typical for a teenager struggling toward an individual identity, independence from his parents, and maturity.)
  • The cynical insider, operating on the certainty that the masses are ignorant and always will be, therefore deeming it best to manipulate them for their own good. Among the cynical insiders are the power seekers, the political elite who would control the populous by any means at their disposal.  They will lie about their motives while continually trying to press beyond limitations on their power.  They will espouse a dedication to fair play as they bend and break the rules.  Their goal is absolute control.   Sincere social idealists are their tools.

Tax Breaks for In-sourcing

A recent proposal by the White House was to reward companies that bring jobs back to the US with tax breaks.  If one assumes that that is an effective policy for bringing outsourced jobs back to the US, then doesn’t it stand to reason that applying reduced taxes to all companies will prevent jobs from leaving the US in the first place?

Income Inequality

There is no such thing as “income inequality.”  It’s true that some people make more money (income) than others, and it’s true that a few are born having more money than others.  But all money accruing to households is earned in one way or another.   (By the way, note that governments earn no money.)

The income inequality thesis infers that income across the population should be level, more or less.  It is based on a worldview (a “fundamental cognitive orientation”[2]) that a CEO is just as important to society as a janitor.  From a human standpoint, that is valid and is expressed in our Declaration of Independence (that all men are created equal) and codified in our Constitution as equality under the law – “the law” being a synecdoche for the system of rules governing social and economic interactions of individuals and groups of individuals.    However, that CEOs and janitors are equals before God and the law has no validity from the standpoint of income expectation.  The Declaration makes no mention of income equality. The Constitution levels the playing field, not wealth.

Income is the monetary value of work performed by an individual within an organization created to produce something of higher value, and sold in the marketplace of goods and services.  (Wealth, its corollary, is the accrual of income and property through savings or investment.) The individuals themselves come from a marketplace of skills: the labor market.  The fundamental law of market value (fundamental as in: the law of gravity) is scarcity. The scarcer, or less common, the good or service is, the higher its value. That is why gold has more value than iron.  In the labor market scarcity can also be thought of as unique or specialized skills. For example, engineers have specialized skills that few people have. Since there are fewer engineers than janitors, the market value of engineers is higher.

The same applies to Chief Executive Officers.  A CEO creates value by managing the organization of individuals, their skills, and resources to produce a good or service that will be highly valued in the marketplace. A CEO possesses a rare blend of skills such as leadership, communication, industry experience, salesmanship, corporate law, accounting, finance, and likely has an MBA.  The CEO’s value is her/his ability to maximize the income of the organization as a whole.  Few individuals combine those skills effectively, and the most successful are in high demand.  Organizations will outbid each other to attract the most successful CEOs.

By comparison, the skills required by janitors are common, so the value of janitorial labor is relatively low.  That said, janitors that work in successful organizations generally have higher incomes and better benefits.  Furthermore, there is no reason why a wise janitor’s children cannot excel in school and in life to become engineers or CEOs.

To summarize, income inequality is a concept ignorant of the market value of labor. It is a petty emotion rooted in envy and covetousness that demeans the efforts of individuals to realize their potential.  Equality of opportunity is what America is all about.  And while it is true that we can’t all be CEOs, it is also true that we shouldn’t all aspire to be janitors.

The Appeal of Socialism

If you do not understand the economic fundamentals of capitalism and socialism, then you have no basis for separating economic truth from fiction, or facts from propaganda, or wisdom from evil.  The horrific failures of the socialist experiments (for example the Soviet Union, Mao’s China, North Korea) are well recorded history.  Yet so many people are unaware of the structural economic theory behind those tragedies, which allows modern day proponents of socialism to pass it off as something else entirely. Those proponents know that if they called it socialism, few would support it given its history.

We are a fan of both Old and New Testaments of the Bible.  Although we agree with historians as to its inaccuracies, we have faith in its universal truths and vast wisdom.  Among those wisdoms are the standards of behavior delineated in the Ten Commandments. They express the moral ethic embraced by America’s founding fathers and that became the backbone of our American culture and laws.  One of the Commandments is relevant to a discussion regarding the appeal of socialism.  Consider for example the 10th Commandment.

Thou shalt not covet thy neighbour’s house, thou shalt not covet thy neighbour’s wife, nor his manservant, nor his maidservant, nor his ox, nor his ass, nor any thing that is thy neighbour’s.

Socialism appeals to the ugly emotion of covetousness.  It motivates by leveraging the jealousy poor men often feel for the possessions of the rich.  The socialist separates the rich and the poor into opposing classes, those who own the means of production and those who work for the owner.  The socialist speaks to that jealousy by saying, “They are rich because they profit by exploiting your labor.  They have stolen from you what is rightfully yours.”

The socialist reasons that profits created by the working class should not accrue to the owner (whom they allege produces nothing) but instead should be distributed equally among the production workers.  The owner, no longer needed, can be replaced by a manager loyal to the interests of the production workers.  This all sounds so very fair and logical that it’s easy to forget that the original appeal was to ugly, jealous covetousness. The socialist also elides over the fact that, in the US, anyone can start a business if they’re willing to take the risk and work harder than they’d never thought possible.  The opportunity for upward social mobility based on ability and commitment to a goal is what has made the US a magnet for innovators and achievers. In the US, social “class” is neither predetermined nor permanent.

Where the ‘fair and logical’ idea gets dangerous is in the nationalization of the means of production and the appointment of production managers ‘loyal to worker interests’.  Nationalizing production requires that owners forfeit their property claims.  Since US law is rooted in the ethos of the Bible, the sacrosanct nature of property ownership, and capitalist economics, a commitment to socialism would require abandonment of the current US Constitution and establishment of a new type of government.  Marx describes this.

Between capitalist and communist society there lies the period of the revolutionary transformation of the one into the other. Corresponding to this is also a political transition period in which the state can be nothing, but the revolutionary dictatorship of the proletariat. [emphasis added]

Karl Marx, Critique of the Gotha Program (1875)

Contrary to its appearance of democratic populism, socialism is a “dictatorship of the proletariat.” Not dictatorship by but of.  In order to transition to a socialist state, non-socialist forces and ideas must be totally suppressed.  A socialist state must have only one political party. There can be no opposition party to challenge state policy and no meaningful elections that would give voice to an alternative will of the proletariat.  The path of Socialism leads inevitably to the totalitarian state.
The socialist ideal can be appealing. There is an oxymoronic “emotional logic” to socialist economic theory. Socialism seems like a reasonable system for organizing resources for the betterment of all.  However, the flaw in socialism is the human one.  The entire structure of socialism is founded on the participation and cooperation of a united people acting in concert, whom it is assumed will agree to sublimate their individual desires and channel their energies for the collective good.  The reality is that people will vary in their motives and commitment.  Some people will be inspired and dedicated to the ideal; some will go along, living their lives according to the new norm; some will do the minimum required, seeking every opportunity to “free ride” the system; some will resist (and be imprisoned as counter-revolutionaries); and malicious opportunists will take advantage of all the aforementioned.  The most ruthless of the opportunists will rise within the political elite and wield absolute power over the state.  In the past their names have been Hitler, Lenin, Stalin, Mao, Castro, Kim, Chavez, et al.

Another major flaw of socialism is the idea that a bureaucracy can allocate an efficient use of resources for the collective good in what’s known as a planned economy or command economy.  Historically, this has always resulted in misallocations, overweight imbalances between supply and demand, and an inability to respond flexibly to changing ‘market’ conditions.  Rather than instilling order into national production priorities and social needs, the history of socialist states typically documents production of low quality goods not correctly targeted to the ‘market,’ and spectacular misallocations leading to poverty and even mass starvation.  As an example, consider China’s Great Leap Forward era under Mao, during which 30 million perished.

Socialist planners inherently have little margin for innovation beyond improvement of existing methods and products.  In a socialist society, risk-taking is dangerous regardless of the success or failure of the venture.  Inventing a new method or product can run afoul of the planning bureaucracy by highlighting their incompetence or by crossing cultural boundaries instituted to restrict free thought.

Socialist societies institute cultural behavioral boundaries designed to steer the populous away from independent thought, which is negatively associated with the capitalist free market.  In a socialist society free thought is a potential threat to the state’s power and therefore considered treasonous.  Strict adherence to and dogmatic recitation of the “party line” is necessary for survival in a socialist state.  As a result, socialist citizens rarely dare to create innovative products or methodologies.  Socialist states eventually become technologically moribund, one of the many reasons for their eventual collapse.