The Free Market Works best, when it is “Free”

There has been much debate some very heated over many complex issues today energy policy and climate change being only two of them and so the methodology we use to resolve issues like these becomes a very important subject.  The core of the issue is; should the government set development policy or the private sector? But before we can even discuses methodology and who sets policy we need to review some history, in particular the period from 1929 through 1949. More or less before 1929 most development in this country was in the private sector.  After 1949 more and more development ended up being directed and financed from the public sector e.g. the federal government.  I do not mean to imply that these are hard dates but that there was a gradual soft turning from one way of doing things to another way of doing things.

Much of what happened in this period centers on economics which in non-economic terms was a battle between the Free Market (laissez faire) as developed by Adam Smith and Central Planning as developed by John Maynard Keynes views of governance. During the ‘30s Europe was experimenting with Central Planning and America, the home of the Free Market, could not get out of a very serious recession. So naturally central planning was being seriously considered as the solution to the deepening problem. Again keeping this technical subject short and simple it was the actions of the federal government playing with Central Planning through the newly created Federal Reserve (Fed) that turned the 1929 market crash, a normal market correction, into what became known as the Great Depression.

However, the true reason for this economic depression here wasn’t actually known until 1964 that Milton Friedman a noble laurite economist showed what really happened.  The bottom line was that the Fed’s inept policies collapsed the banking system. This is fact not speculation. Unfortunately forty years had passed and by then the fixes that were tried were ingrained in the people and the politicians.  The fix being that a strong federal government could spend borrowed or printed money to stimulate economic growth.  In reality it was WW II that ended the Great Depression as spending changed from social policy spending to making armaments.  But I digress so continuing the politicians loved this concept of “spending” as it gave them a way to buy the votes of the citizens — and the modern welfare state was created.  Obviously this was not all at once, it took decades, but once in place it became impossible to get out.

We know today that the economic logic used to justify large governments and deficit spending is false but that economic proof is beyond the scope of this paper.  For those that are interested read The Big Three in Economics by Mark Skousen. However, we don’t really need academic proof we can see that the 2009 stimulus legislation that authorized almost a Trillion dollars of spending to prevent a bad recession, all borrowed by the way, did not do what it was indented to do.  If the theory had been valid at any level there would have been a large jump in the countries Gross Domestic Product (GDP) and many hundreds of thousands of jobs created.  Instead we got almost no jobs and very little growth.  We were told that things would have been even worse if that money hadn’t done what it was supposed to do.  Try claiming anything like that in the private sector and see what happens. This along with the exact same inability to spend our way out of the great depression was definitive proof that the basic theory was flawed.

Now back to development and the source of funding. Partly because of the success of developing the atomic bomb in WW II in so short a period of time and partly as the growing but mistaken belief that large government was good, development money started to flow from the government to the private sector.  Nuclear power then space then computers (initially) were successful but when the spending began shifting from technology based to social policy spending like the “great society” and “war on poverty” we had a problem.  But we need some more history to understand what happened.

In any serious study of government one quickly finds that there was great fear of large powerful governments.  And for good reasons, the first reason is that over the last several hundred years all the major wars were started by countries with a strong central government. Then next look at history and all the economic chaos caused by government interference in the economy. Of course what government would ever admit they were wrong so that is mostly blamed on the private sector. History is full of debate and discussion on this issue and over time it became accepted thought that as Thomas Jefferson said “A government big enough to give you every thing that you need, is big enough to take away everything that you have …” and that is truer today then ever.  Think of all the recent scandals: Fast and Furious, Benghazi (Four dead in Libya), the IRS, the NSA, and now Health Care Insurance.   Besides the politicians lust for power a good part of the reason for this is that there is an inherent flaw in government spending.  The flaw is systemic one that can not be eliminated as many of the political theorists understood when our country was founded.

The flaw is that all government decisions are based on politics.  That means that almost all legislation is designed to either to buy votes e.g. Social Security, or to reward someone for political favors e.g. Solynda. There are almost no exceptions to this.  The main purpose of the U.S. Constitution was to make it “hard” for the federal government to actually do something or anything. The principle of separation of power was how that was done. Further there was a limit on their spending as there was no income tax. That was changed by the 16^th amendment in 1913 that established the income tax system we now have. And that same year the Federal Reserve Bank was created and that eventually gave the government the ability to create serious amounts of fiat money. Again don’t believe me read Free To Chose written by Milton and Rose Friedman.

So combining the two big government and unlimited spending we have money taken, borrowed or taxed, from the private sector that is spent on government programs that are based on legislation made for political reasons. This is contrast to the private sector which only spends money that is justified by a documented future return on that investment.  Granted that the private sector is not perfect but we do find that it is self correcting in that bad decisions do put businesses out of business. Profit is the reward for doing good and the lack of profit means that no one wants your product or service and you go away.

The government on the other hand when it wants to spend on something can: borrow more, taxes more or worse just print more which is basically just putting a tax on everything.  Then if it doesn’t work, and it almost never does, they just ask for more money.   The Department of Energy (DOE) was created to make us energy independent and we are much worse off today then when it was founded.  The Department of Education, now Health Education and Welfare, was created to improve education and even after changing the scoring system education is worse now then it ever was.  Only two examples there are many more. And yet after decades of no good results and billions spent they both claim they need more money to their job.

The most egregious current policy related to development is that based on the elimination of CO2 emissions.  The reason is that a critical requirement for plants to grow, CO2 has now been determined to be pollutant. This policy is of course the government program to buy the votes of the farmers be they private or corporate by subsidizing corn production to make into ethanol to make E85 gasoline. This program makes no sense at any technical or economic level and was never anything more then a way to buy votes from environmentalist and farmers.  It is not energy efficient since it takes more energy to make then it produces.  And by diverting good crop land to growing corn for E85 instead of food it raises the price of food not just in this country but world wide as less corn is available for export and what is grown is more expensive. No one today with knowledge on the subject will agree that this is a good idea.  But once started it, like any government program, cannot be stopped.

Another current government induced policy with very questionable benefits is the forced switch from cheap incandescent lamps to expensive compact florescent lamps (CFL’s). The logic is that the 10% efficient incandescent lamps will be replaced by 50% efficient CFL lamps and that will save a lot of electricity.  Less electricity means less pollution, CO2 and mercury. Although technically true there are major offsets that have been minimized by studies that are not completely valid.  The first reason is that all the energy from the lamps ends up in the building where it is installed mostly at night for obvious reasons.  It’s also colder at night and so the heat of the lamp is an offset against the heating load of the building.  The less lamp heat there is the more gas or electricity that must be used to maintain the set temperature.  This effect can completely offset the gain in cold climates.  There probably is some reduction over all but not what is claimed.

The other more serious issue is with the mercury in the CFL’s.  The EPA claims that the landfill emissions from CFL lamps is lees then that emitted from power plants making the electricity and therefore it’s a gain for the environment.  Whether that claim is true or not the real issue is broken lamps in the home where most of these CFL’s are going.  This more serious issue is not even considered in the EPA figures.  Whether this is a real problem or not I don’t know but considering this omission why would you believe a study that was not done by an independent lab.  If the government is promoting something they would be the last people that I would believe, just as I would be skeptical of the claim of a company promoting a product, at least until verified buy independent review e.g. Consumer reports.

One thing that is not understood with all government studies is the logic that they “have” to use to do these studies.  All government work is funded by legislation, law so to speak, and that legislation dictates that money be spent in certain ways, line item by line item. This method of funding and running departments includes the way that studies are done, which in some if not all cases dictates the methods to be used since the methods determine the costs. The bottom line to any government study is that although the report maybe 100% true in may also be meaningless if it did not consider all relevant items.  Before any government report can be used one must look at the law it refers to and what were the dictates governing the conduct of that study.  If you had only worked in the private sector you would not understand this process and how it can distort outcomes.

For example if you are in the U.S. military you do not exist for purposes of having a job even with the now professional military.  It was determined that the military did not keep track of their jobs the same way that civilians do and that since there was so few of them that they would just be ignored.  They were not worth tracking.  Is this a big deal maybe, maybe not, the point is that if you really wanted to know how many people were drawing a paycheck in the United States the government reports would not give you that number.  So we have a report that is correct to the accuracy available but yet doesn’t give us what we want to know.  All government work falls into this kind of quandary.

Some would say that our representatives are the only ones looking out for us, protecting us from greedy businessmen and Wall Street capitalists.  To those people I would say they are very, very wrong.  The politicians claim the private sector is the problem and therefore they need to be regulated; for example as in the Security and Exchange Commission (SEC) that makes it a federal crime to trade on insider information. However when that legislation was written they, congress, exempted themselves from being covered. So they can and do make trades after being briefed by say the Fed in closed door meeting.  They make money on insider information that anyone else would go to jail for.  And in fact there are people and firms that watch what stocks or land or other things that our representatives buy or short and do the same since these watchers know that those representatives have inside information.  Another maneuver to make money that our representatives’ use is to buy land directly or indirectly near an interstate highway and then appropriate federal money for an interchange to be placed there thereby raising the value of the property they bought.

Not understanding the systemic flaws of governmental actions we have created a host of government departments and agencies that do nothing much but distort the free market.  There is no business in this country big or small that does not have to deal with local state and federal laws and regulations.  Whether these laws and regulations were done for good reasons or not the bottom line is that they put government in the companies as a partner that must be consulted at every step of running a business. These reports, costs, fees and taxes raise the price of the product and or services that companies provide and that is the primary reason that so many jobs have left this country.  CFL’s for example are all made outside the country as are all the “I” phones and “I” pads.

As government got bigger and bigger after WW II and the funded research in computers space and other technologies, money started to flow into the universities for research.  Initially maybe that was OK but soon direct government funding for research reached 30% of all research and of the remaining 70% of private money a good portion was directed at supplying product to the government. Today all the major private research labs are now gone with the exception of pharmaceuticals. With government now in practical control of the research funding they could funnel the money into areas that they wanted benefit or to reward supporters.  Pick winners and losers based on political decisions. Since the primary goal of politicians is, number one get reelected and two make money one can see that money was taken from the private sector passed through the government and then dispensed to companies and universities with political connections.  The recent book “Extortion” written by Peter Schweizer explains the process the politicians use in details that you really don’t want to know.

My opinion is that over 50% of that “grant” or “study” money is a pay back for political support (direct or indirect) and therefore the result of the work product was of little practical use to anyone.  All federal departments and agencies partake in this process since they are all run by political appointees. You would be shocked to see how much funding goes to grants from say the DOE to study non energy issues or to groups that have political agendas that match those in power.  Tens of thousands of non profits have been created to suck up of this free money.  This distortion also makes it hard to determine how much is being spent on the real reason for that agency or department to exist.  And by doing this the politicians create massive duplication whose only purpose is to create federal jobs.

Many would argue over these statements claiming that these issues are not all that bad and there is more good accomplished than bad.  This view is not supported by any facts.  We know from history that any government that tried to work from a central planning basis was soon gone.  The distortions that government policies create in the market place by improper allocation of costs soon cause these governments to collapse.  The old U.S.S.R. is a prime example; it lasted less then 70 years.  The leaders in China not being stupid saw what happened to Russia and rather then lose their power they opened up a limited free market and that saved their positions, at least for now.  This change is only a couple of dozen years in the making and economic policies can take generations to work out so the jury is still out on this one.

But we can look closer to home and see what it going on in Europe and the European Union (EU) today with their sovereign debt problem.  Their problem is very simple the politicians promised their citizens that they could work less and get more (from the government), someone else would pay the bill.  They got away with this for many years only because the United States covered their costs of protection by stationing our military there.  But even without significant military costs they still couldn’t spend enough so they borrowed money, by in essence forcing their banks to buy their bonds, their sovereign debt. Now they are paying the price the debt service is getting out of control and it’s very likely that the EU will break up in 2012.  The point to this discussion is that big government is bad and that any big government will collapse the country that it is in within 40 to 60 years of becoming the dominant player in that economy.

The federal government of the United States now represents over 25% of the economy and once the take over of the health care sector is completed with “single Payer” it will be approaching 50% but worse if we also look at state and local spending we will be way over 50% and probably closer to 60% within five or six years, assuming the health care legislation is not reversed. Since right now the federal government is borrowing almost 25% of what it spends and that there is no way to close that gap with taxes there is a very, very big problem about to hit us.

Sometime in early 2012, the ratio of U.S. sovereign debt to gross domestic product (GDP) exceeded 100% and now in early 2014 it’s grown to over 110% of GDP.  Worse yet is that the ratio is increasing at an alarming rate such that possibly within five years the United States will be where Greece was when their debt exceeded their ability finance.  That is what triggered the European problem that they have not yet been able to solve; and it now seems likely that Greece will pull out of the EU rather then fix their problem. What happens after that is not good and that is why there is so much current effort (including the Fed loaning the EU dollars) to not let that happen.  Unfortunately, there is no way to fix the problem unless the Greek people would give up much of what they were promised by their government.  So far they seem unwilling to discuss that.

The Greeks are maybe the worse offenders but they are not alone.  Spain, Italy and France to name a few are not immune.  The recent S&P downgrading of many EU banks as well as the downgrading of the U.S. treasuries last year were predictors of what is coming down the pike. This sovereign debt bubble is a lot worse then the housing bubble was and it is all caused by the various government of each of these countries doing something that doesn’t and didn’t make financial sense.

Once the government gets to between 25% and 50% of the economy what’s left of the private sector focuses almost completely on getting government work not what the private individuals want — the government becomes their biggest and in some cases their only customer. It is obvious what that means as the politicians control policy and by doing so they pick winners and losers based on politics.  This is called crony capitalism verse free market capitalism and is what most of the rest of the world has.  There is a semi-independent private sector that exists mostly at the whim of the central government. Costs and prices are distorted by policy and things grind to a halt.

We are not there yet but we are not far from getting there.  However don’t get me wrong I am not for pure laissez faire as that could be just as bad as crony capitalism.  There must be a balance and its up to the citizens to determine that. If nothing else the one thing that should be kept in mind when making that choice is; that it is always bad to concentrate power.  And that those with power will always try to do just that. There is no justification for that and it has always and will always turn out very bad.

In summary although some of what the various government agencies publish is valid it should not be taken that everything they publish is gospel.  There are many factors that go into anything the government does; crony politics, blaming the private sector for everything that is wrong and never taking any responsibility for anything they have done are three to keep in mind. If you treat the government just like any other source of information and know there will be a bias then you will be much better off.