Feb 10 2014

Self Rule Verse a Ruling Class

Why America is Different

America and its unique Constitution was an experiment in self rule. The way the country was put together was something never tried before on this scale and with the freedoms established. Yes we did have some of the Greek city states and the original Roman republic but they did not give anywhere near the freedom that was established here under our Constitution. The rest of the world watched in awe as the Republic was formed and then actually worked.

Alexis de Tocqueville a young Frenchman visited the United States in 1831 with his friend Gustave de Beaumont for a nine month visit which would have been longer had he not been called back to France. After going back to France he wrote and published a treaties called Democracy in America the first Volume I Part 1 and Part 2 in 1835 and the second Volume II Part 1 through Part 4 published in 1840.

An English translation of the First part was published in America in 1838 by Henry Reeve but Tocqueville did not think it was completely accurate. A much later version by Francis Bowen In 1945 corrected some of this. The writing here used for reference the Penguin Classics version published by Penguin Books London in 2003 translated from French by Gerald E. Bevan with an introduction and notes by Isaac Kramnick.

Tocqueville’s writing skills and his passion for the subject make his writing a must read for any serious student in the theory of self rule. Democracy in America was an instant hit in France and set de Tocqueville up for election to the French Chamber of Deputies and a distinguish career thereafter.

What Tocqueville found in America, was that the freedoms that existing in America after the first settlers arrived had created an awakening of a spirit in the Citizens and that it was his opinion that this was because the colonists were initially left to fend for themselves. They were no longer restrained by artificial rules and regulations imposed on them by the Aristocracy which then ruled all of Europe in one form or another.

So they set up their own system of government based on Townships which Tocqueville credited for the eventual establishment of our present form of government. Once they had become free of those ‘old’ shackles they went on to better their lives by working hard and improving their conditions. They did this because they could keep the fruits of their labor — they had the right of property and “local” control of the property.

These liberated American Citizens were also very aware of their government, much more so then we are today. They understood the principles and what it meant to be free to succeed and also free to fail, but the opportunity to succeed outweighed the risks of failure. It could be said that the Citizens of America back then and without any expensive public education understood their form of government better then do even those with advanced college educations today. I know that I did not really understand out form of government until the ‘90s. That basic understanding was one of the surprises that Tocqueville experienced while here in America. It was a surprise because in his France the subjects and even some of the Aristocrats knew very little about their form of government.

During the period he was here he did note that women did not have the right to vote but then in Europe almost no one had the right to vote so what was here was a lot better then in his native France or anywhere else for that matter. Also free black men in the North had the right to vote but were subtly discouraged from doing so. Interestingly Tocqueville wondered if this freedom was good and whether self rule would work in the long run. He believed that an Aristocracy might be required to get the benefits of Art Literature and Science since there was a difference that came with being high born. More on this thought later.

Obviously that was not true as later works in America both in the arts and science would prove. So If nothing else we now know that freedom and self rule produce more benefits to the Citizens then does any other kind of system that attempts to manipulate the results no mater the reasons good or bad, meddling is meddling. Every obstacle that Tocqueville thought of as to why America would not work was overcome. The problems we have today started when the things that make us great were gradually taken away.

The importance of knowing what is going on today in Washington is the result of a push by the progressives (some in each political party but mostly they are Democrats) to establish a new ruling class in America. A ‘ruling’ class is made up of select group of people that have (mostly) inherited wealth and thereby have attended the best schools and know all the right people. Foremost they believe, because of their station, that they know what is good for society.

Most countries even today have either a ruling class or an aristocracy (class) which is not much different except for the titles that the nobility give to their supporters with an aristocracy. These people believe that by the very nature of their birth and privileged education they know better then anyone else what is good for the “common” man. This is what Tocqueville down deep believed — probably because he was one of the privileged few, and he was having a hard time accepting that this views were wrong even when he saw what was going on here.

When there is a ruling class, whatever they are called, you will find that most of the important politicians are of that class. Certainly not all politicians but the ones that are in the real positions of power in the government most definitely are. They also fill the management ranks of the government bureaucracy and make sure their supporters fill the lower ranks. These people are all well paid for the positions they hold and most retire with large pensions and connections that allow them to live well for the remainder of their lives. In the United States today they mostly come from the north east States.

Once a ruling class is established it is almost impossible to remove especially with the number of bureaucrats in Washington and the movement of politicians in and out of the public and private sectors for lobbying. With over $3.5 trillion dollars flowing through Washington on a yearly basis today that amounts to $10.0 Billion per day or almost $7.0 million per second of potential money up for grabs. That is a lot of temptation and incentive to grab as much as one can as Milton Friedman wrote about in his book Free To Chose. And then more recently we have the book Extortion written by Peter Schweizer where he shows us how in great detail the politicians are able to skim off large amounts of money and retiree very wealth.

Once a ruling class is established the country becomes theirs and legislation is always designed to benefit them first and the Citizens or subjects second. Not all those in the upper class are a part of this ruling class but as time goes on the ruling class will get larger and larger by nature and require greater and greater amounts of skim off the top of the federal budget. At some point these kinds of system either collapse or turn into a monarchy/dictator style system. There is a good book written by Angelio M. Codeville on this subject The Ruling Class: How They Corrupted America And What We Can Do About It. A portion of this book also appeared as an article in the American Spectator in the July 2010 – August 2010 issue.

There is little doubt that what is going on today in Washington is the push to establish a ruling class in this country. All the legislation and regulation that has been pushed through starting with the New Deal, then later whenever they could, was designed to slowly take away the rights of the Citizens as listed in the Declaration of independence the U.S. Constitution and all its amendments. We are now at the final stage of that process — we will either overcome the progressives and reestablish the republic or we will become subjects to them and the republic will be no more.

Benjamin Franklin, “Freedom is not a gift bestowed upon us by other men, but a right that belongs to us by the laws of God and nature.

Thomas Pain, “What we obtain too cheaply, we esteem too lightly; ‘tis dearness only that gives everything its value. Heaven knows how to put a price upon its goods; and it would be strange indeed if so celestial an article as freedom should not be highly rated.”

Feb 10 2014

Why Big Government Can’t Work

Friedman’s Spending Matrix

The very famous Nobel Laurite economist Milton Friedman explains a key aspect of social behavior in his 1980 book Free to Choose (Friedman’s wife, Rose, is a coauthor). Friedman’s book should be mandatory reading in all our high schools and is a very highly recommend read for anyone with an interest in politics and economics. Friedman’s writing style make this book an easy read. In Chapter 4 on page 116 of Free to Choose, Friedman presents a matrix which sums up the economic decision-making process, and this is critical to the understanding of the behavior of people with regards to how they spend and who they spend on. The following is my interpretation of Milton’s economic matrix:

Friedman’s Spending Matrix

	A	B
1	You use your money to buy something for yourself	You use your money to buy something for someone else
2	Someone else uses their money to buy something for you	Someone else uses your money to buy something for someone else

This simple matrix is really quite easy to understand. The two columns labeled “A” and “B” and the two rows labeled “1” and “2” result in four possible situations: A1, A2, B1, and B2. These four possibilities are described in the next few paragraphs.

A1 In this situation, someone earns money, assigns a value to that effort, and then spends the money on something for him/herself. The personally “assigned value” is used to make decisions about how the money earned will be spent. The amount earned will determine one’s priorities and motivation for distribution of it e.g. the spending. Maslow’s “hierarchy of needs” directly applies to these decisions — If one earns only a small amount, the money will be spent on the necessities of life; if one earns more, one can indulge in some “frivolous” spending. The bottom line is, however, that the person who earned the money will spend it to maximize his/her personal satisfaction (consciously or unconsciously in the best way he/she knows. Only the person who actually performed the work to earn the money can place a “true” value on it that is proportional to the effort that went into earning it. Further the “value” will be different for every person. This situation is the only one that optimizes the individual’s spending. The optimization of the individual’s transactions when summarized in the market place maximizes the economic transactions of the society. The maximization of monetary transaction in an economy must be steered into this category if the economy is expected to be viable.

B1 In this situation, someone uses the money that they have earned to buy something for someone else. A good example of this kind of spending is the simple birthday present. What you buy for the other person, however, may not be what he/she would have bought had they spent that amount of money on himself/herself. In many, if not most all, situations, an individual simply cannot spend money for another individual to the highest satisfaction of that recipient. Even husbands and wives or parents and children do not achieve total success in this arena (imagine how much worse people of less familiarity must fare!). This situation does not optimize the individual’s spending. However, the spender does allocate their money used in accordance with the value they placed on it. We all known how many times a person return gifts to a store after getting them, so time and money was spent by the giver to get the gift and time and money was spend by the receiver retuning it. So by definition this process can not be as efficient as that of A1. The best method for giving gifts would be to give cash or a gift card.

A2 In this situation, someone else uses the money he/she has earned to buy something for you. This, of course, is simply the reverse of B1. We have probably all experienced receiving a gift that we did not use or like, no matter how much we may have appreciated the effort made by the giver. The old expression “it’s the thought that counts” probably comes from this very situation. This situation, like B1, tends to be economically inefficient, and does not optimize the individual’s spending. (By all this Friedman does not mean to imply, however, that one should stop giving gifts there are other factors besides economics to consider!) Since B1 and A2 are just the flip side of each other they could be combined.

B2 In this situation, someone else uses the money you have earned to buy something for someone else. This is the problem situation, because there is absolutely no motivation to optimize spending. This scenario is epitomized by government actions and spending no matter what the form of the government: The government taxes you (you have no choice but to pay), and subsequently uses that money to buy something, or provide a service for, somebody else. This process can never be accomplished efficiently, since neither the spender (the government bureaucrat) nor the recipient care about the “value” of the money spent. It should be understood that it is the very process itself, and not the individual government employees, that causes the problem. There is no way to make government (of any kind) an efficient method of providing goods and services since the “value” link is completely broken. This is why Social Welfare, Communism and Redistribution of Wealth do not and cannot work in practice, no matter how hard one tries to make any of these policies work. But there is more as a layer of bureaucrats are required to handle the taxes and the distribution of the money; this process provides no economic benefit and so as these programs go the economy become less and less efficient. .

One of the objects of Friedman’s work was to show why the welfare start could not work for long in any society. Both Marx and Keynes tried to justify large transfers to those at the bottom from those at the top. Forgetting the wanting to do good issue by now after trying to do this so many times and always having it work out badly one would think that we would realize that Friedman was right. His B2 situation shows the fundamental issue with the process that makes it impossible to work. And Adam Smith in his book the Wealth of Nations comes to the same conclusions from a different perspective. Government by its very nature and purpose is not suited for legislating social believer and for sure never every actually running anything.

By contrast, private industry must provide services or goods on which individuals are willing to place personal value and spend money on. Private industry must entice the buyer with “Value” to make the sale (positive feedback). Firms or organizations that don’t provide real “Value” do not last long, for when their sales slow down they must immediately find and correct the problems (negative feedback) or they will either lose market share or go out of business. This is true for both large and small companies there are no exceptions.

For example, Sears which was the premier consumer retailer for decades stopped providing “Value” to its customers and was dethroned by Wal-Mart who found a more efficient way to supply goods to the consumer. The too big to fail belief of this current administration is not valid. Bailing out companies of any kind or size only make the situation worse for it mitigates the consequences of making bad decisions.

The Friedman matrix thus proves that it is virtually impossible for any government no matter how formed to efficiently manage an economy. Moreover, this logic is borne out by history, which has witnessed the absolute failure of all attempts at central planning or collectivism. The collapse of the U.S.S.R. (Russia) in the late 80’s and early 90’s was a result of the inability of the Russian “Central Planners” to make good economic decisions and their economy collapsed as a black market developed that was by some accounts becoming the real economy of Russia. We should keep this in mind as the progressive politicians are right now duplicating the very system that brought the Russians down. What these Politian’s’ don’t understand is that there is no way to make Central Planning work unless you have an absolute static economy with no innovation and growth, a hydraulic society as existed thousands of years ago especially in China and India. These were systems with strong Central Planning and static or unchanging social systems i.e. things were the same today as they were 10 years ago or 100 years ago or a 1000 years ago.

Only market-based systems can efficiently allocate resources.

Although it may be argued that social goals must sometimes take precedence over economic efficiency, Friedman disagrees with this statement explaining in his book that there are other ways to achieve social goals. Friedman did suggest that if the government had to do something that the best system would be a negative income tax that only gradually disappeared as income rose so there would be no disincentive to work and earn more, which is the core problem with most all social welfare programs as exist today.

Feb 9 2014

Is a Change in our form of Government Coming?

The Real Reasons for Health Care & Immigration Reform

There are many serious debates going on in the country today, especially as we have an election coming up in November 2014 that could have major implications for the future of the country. In this off year election, as it’s called, every member of the House of Representatives is up for reelection and 1/3 of the Senate. The outcome has the potential to change the course of the country for the good or the bad. There are three possible outcomes: the first is that the House remains under Republican control and the Republicans pick up enough seats that they gain control of the Senate; the second is that there is no major change in the makeup and the House remains under Republican control and the Senate remains under Democratic control; the third is that the Democrats gain control of the House and that they maintain their control of the Senate.

The core issue to be decided is the Obama administration going to be allowed to complete the “Transformation” of the country that he stated after he won the 2008 election and took office. Obama will probably be known, in history, as the least “qualified” person elected to this office out of the 43 that proceeded him, having only the barest minimum specified by the constitution. His reelection in 2012 was more by the incompetent management of the Republican Party than the support for his policies although it must be said that his message of more “free” stuff (Redistribution of Wealth) was very powerful to the underclass which he significantly added to, by the way, during his first four years. The question that begs an answer now is, have the American citizens woken up and are no longer mesmerized by the sweet talking progressive salesperson?

The debate over the unequal end result of life which occurs for many reasons such as heredity, station, motivation and luck has been going on for all of recorded history, some 5,000 years. The American experience of less than 250 years represents only 5% of that body of political experience. Many empires and kingdoms have lasted for thousands of years however none of them had a free citizenry. Only in America had the common man been allowed to do his own bidding not that of some master. The result was amassing as in less than 200 years we became the preeminent power on the Globe which simultaneously creating a way of life that was the envy of all. Keep in mind that even considering the programs started in the mid to late ‘30s the Federal government was still restrained by the Constitution and the Bill-of-Rights; so the Federal government cannot claim that all the growth that occurred before that had anything to do with Federal policies.

Not until the late 60’s did foreigners’ began coming here “primarily” for the “benefits” not the “opportunity” that existed here. The massive influx of people from Europe that occurred from after the civil war until the beginning of the Vietnam war came here for the opportunity not the benefits (free stuff) as the benefits did not exist until after President Johnson (LBJ) created them in the form they now are. Unlike previous waves of immigrants today’s immigrants are given special treatment and benefits such as “welfare,” “The anchor baby” and “The dream act” policies that actually give illegal’s more benefits than citizens. Since nothing can ever be totally “free” the existing citizens are paying for this out of their earning (taxes); such that if you can sneak across the border and get here the rest of us will pay you to live here, get health care and get education at no cost to the illegal. It’s a very good deal for them but not for us.

An argument has been made that we need the workers: but at the same time we are told that the workers we need are technicians, engineers and other professionals that can do the hi-tech jobs of the future. On face there is a very large disconnect here for the majority of those we allow to come here by our policies are uneducated for sure no technical skills and speak no English. In other words there are millions of illegal’s that have no chance of being productive members of our hi-tech society. Whether their children will be so qualified or not is not the point they are not and for the most part will never be. So on face the propositions before us in Immigration reform are preposterous.

Since we have the Federal Government, which is now controlled by the progressive wing of the Old Democratic Party, telling us that two mutually exclusive ideas must be followed something is amiss. The need for hi-tech workers does just not jive with bringing in illiterate non-English speaking immigrants. Therefore we can only assume that there are other reasons than those being started. The most likely being that if the existing crop of illegal’s were given any form of amnesty (meaning they could stay here) then it would be a very easy step for a future congress to grant them citizenship. Since these are predominately uneducated people (no fault of theirs) they will be dependent on the federal Government and vote Democratic in overwhelming numbers. Even if it would be 60/40 to the Democrats favor it would mean the end of the Republican Party. It would more likely be 75/25 or worse and than the Republican Party would be extinct.

Free health care from the Affordable Health Care act known as Obama Care is now going to add to the draw of third world people to come here one way or another. No political or economic system can sustain these kinds of policies for long without bringing economic destruction. By the end of this year the Federal Government will have added $10.0 trillion to the national financial obligations (T-bills are only one form) in only 6 years. Since foreign investors presently pick up 50% of the U.S. debt in the form of T-bills the continuation of this uncontrolled spending trend along with anemic jobs growth will soon make any U.S. investment problematical and some change in our form of government will be required.

When one studies Political Philosophy, especially the classic Greeks i.e. Socrates, Aristotle and Plato one finds that there are only a very few forms of government that are possible. Further there are patterns to transitions between them since no single from lasts for very long. These “basic” forms are:

A. The people are ruled by one person which can take two forms …

A-1 MONARCHY
One ruler, restrained by law who tries to serve all the citizens of a state.
Example: Queen Elizabeth the First.

A-2 TYRANNY
One ruler who uses his power for himself or for some special group.
Example: Adolph Hitler or Joseph Stalin.

B. The people are ruled by a few people which can also take two forms …

B-1 ARISTOCRACY
The rule by a small elite of the state’s best people chosen by ability or achievement.
Example: America after the revolution for about 30 years.

B-2 OLIGARCHY
Self-interested rule by a group chosen for their wealth or social caste.
Example: Post revolutionary France.

C. The people are ruled by themselves which can also take two forms …

C-1 POLITY
The rule by the majority of the citizens but controlled by constitutional law to protect the rights of the minority.
Example: Great Britain or The United States

C-2 DEMOCRACY
Rule by majority. It uses its power to oppress the minority. Small groups manipulate the masses to get what they want.
Example: Ancient Athens

You can see that the only difference between C-1 and C-2 is a “strong” Constitution” which the founding fathers knew and that was their stated purpose when they created it. Over the past several decades those that desire power but were frustrated by the Constitutional limits decided to get rid of those limits by first instituted a re-education system in the American schools. The tools they used were multiculturalism, political correctness and sustainable energy. That is now completed and the final transformation is now being instituted with all the talk of the old and obsolete Constitution and according to our current president the need for a “Bill of Positive Rights” meaning what the government can do for you. The current talk of by-passing Congress with a pen and a phone are also part of this change. The completion of this change in beliefs will move us from C-1 to C-2 which is the opposite of what most would think.

Once this happens, and it is very close right now, according to the Classical Philosophers we move from the “C” class to the “A” class of government. The normal transition would be from C-1 to C-2 to A-2, the transition will be quick and unless the Republican Party will wake up and embrace the “Tea” party the transition to A-2 will be completed by 2020. The reason it will be quick is that it is generally believed that the from C-2 is the most unstable.

There is only one way to stop this transformation and that is for “all” conservatives to band together and keep the House and take the Senate. The goal should be to create a coalition of conservatives in the Senate comprising 60 members. If that could be accomplished than the President could be removed from office by the Impeachment process. Although that would put Joe Biden in office it would be for a very short time and in 2016 a new president could be elected that was not interested in changing our form of government.

However, even if the 60 number could not be reached in the Senate, if the Republicans got the majority, anything over 50, than Obama would have his hands tied to the point that we could at least put changes on hold till 2016 and prevent more damage from being done.

Feb 9 2014

Private verse Public Development

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.

Feb 3 2014

What really caused the Great Depression?

Politics not Monetary Policy Rules

John Maynard Keynes, a gifted English mathematician (not either an economist or a political philosopher), developed a comprehensive set of theories during the early stages of the Great Depression that were published in his 1935 book titled The General Theory of Employment Interest, and Money. Keynes developed his theories in an attempt to explain why we had the Great Depression and how he thought we could get out of it and further to prevent like contractions from happening again. His theories of an active federal government and government spending from taxed or borrowed money are the bases that our government is using today in an attempt at getting us out of the jobs predicament that we have now which is very much like the situation that existed in the mid 1930s.

The General Theory was designed by Keynes to replace Laissez-faire (minimum government) economics as first promoted by Adam Smith in his 1776 book An Inquiry into the Nature and the Causes of the Wealth of Nations. Which was actually a follow on book to his first book The Theory of Moral Sentiments published in 1759; the two books fit well together and should be taken and studied as a set. Smith’s free market is the exact opposite of Keynes’ views that included that savings were bad and that an active government should borrow money to spend during a down turn and then (maybe) pay it off on the upside. Although there was some good in Keynes’ work, all the politicians back then heard was that savings were bad so that gave them the economic justification to tax wealth and even worse, if that was possible, that deficit spending was “required” to promote consumption and that by doing these things it would bring the economy to full employment Combined with the activist government concept this was a license to go wild as this justified anything the politicians wanted to do as long as it was paid for with a tax, as we recently found out with the Supreme Court ruling on the Health Care and Education Reconciliation Act 0f 2010 or Obama Care as it is now known.

In the early 30’s as the economic contraction continued to deepen, the citizens decided to try new leadership and Franklin D. Roosevelt (FDR) was elected in November 1932. However, between the times he was elected in November 1932 and took office in March 1933, the worst of the three banking contractions of the Great Depression started in January 1933. Drastic action was required and during the next two years FDR’s program was known as the New Deal which actually ended up being two programs the first New Deal (One) from 1933-1934 that was not working as planned. Then in 1935 a second and much more controversial New Deal (Two) 1935-1938 was instituted presumably this was based on Keynes’ radical new theories which gave Roosevelt the economic justification for what he was doing and what would, in time, become known as Keynesian Economics.

Technically the programs of FDR didn’t work, but the citizens saw the government doing things and they gave the government the credit for the small recovery that occurred. Back then just as what happens today — in politics — the politician takes all the credit for any good that occurs and blame others for all the bad. The outbreak of World War II in Europe is what really got us out of the Great Depression as the United States sold war material to the allies with Lend Lease.

Then after the war the pent up demand for civilian goods that had been repressed along with the massive rebuilding efforts of Europe’s Marshal Plan and Asia’s GARIOA is actually what drove the economy for several decades. Keynes and FDR got the credit even though the theory was wrong and FDR’s policy didn’t work. However what actually caused the banking collapse in America that started this black ball rolling was never fully understood by economists and so Keynes views took hold in the economic community; it would not be until 18 years after the end of World War II before the truth would be known.

Milton Friedman along with Anna Schwartz published an almost 900 page book in 1963 titled A Monetary History of the United States, 1867-1960 which along with other works of Friedman’s got him a Nobel Prize in Economics in 1976. Friedman and Schwartz showed how the Great Depression was caused by the actions, or more properly the inactions, of the Federal Reserve, first in allowing the credit bubble that lead to the stock market collapse in 1929 (excusable with the knowledge of the times) and then in collapsing the U.S. banking system (not excusable under any circumstances) by not following the methods that were then known for preventing this very thing from happening. Keep in mind that preventing a monetary contraction and/or a series of banking failures was the stated main purpose for creating the Federal Reserve in 1913. This work of theirs was the first explanation of what actually caused the Great Depression and this solved the issue which had puzzled economists for almost 30 years. This work of Friedman and later works by others, as well, showed how Keynes was wrong about savings and deficit spending. This is a very critical finding as Keynes views on economics and FDR’s policies were accepted as gospel and those policies have now taken us to the very edge of word wide economic collapse.

A side note with relevance here is that when the Federal Reserve (FED) was formed by an act of congress (HR 7837) and signed into law as Pub. L. 63-43 on December 23, 1913 a banker named Benjamin Strong Jr. one of those that developed the concept of the FED was appointed as the Governor of the New York Federal Reserve bank at that time. From its inception and until his untimely death in October 1928 he ran the New York FED which had the lead in monetary policies since most major transactions especially international were conducted in New York City where all the main U.S. banks were located. According to Friedman’s work Strong did everything by the book and discounting minor ups and downs up until his death the economy ran as smoothly as could be expected as a result.

Strong besides being a very knowledgeable man had a dynamic personality and others ended up in his shadow, so after his death the FED was reorganized to prevent one person from having the power that Strong had. His successor George L. Harrison although knowledgeable did not have the personality of Strong and with the FED operating rules being changed in March 1930 he was not able to do what he knew needed to be done, so in 1930, 1931 and 1933 there were three waves of banking failures that swept across the country each worse than the preceding one. The result was almost the total destruction of the United States banking system and the Great Depression. Friedman states that if Strong had lived only a few more years, he died at 55, and if he had done what he had been doing while he was the Governor of the New York Federal Reserve that the Great Depression and all it destroyed would probably never have happened. Friedman did more than state that as his opinion he showed in detail how the polices of the FED and the tools they had available to them were more than sufficient to accomplish the task of preventing the banking collapses which were the real cause of the Great Depression not the stock market collapse in 1929.

But the biggest kicker was that before the FED was established to prevent banking collapses the New York banks had come up with a method to stop these contractions on their own, and that it was used on one occasion in particular a market contraction in 1907,. Although the method wasn’t handled perfectly the logic within it was sound. The creation of the FED stopped banks individually from doing what needed to be done and established the FED as the only agency responsible for preventing banking contractions. The policies that should have been used were well known and had been used before so there was really no excuse for the FED to not allow Governor Harrison to do what he wanted to do. It was only the FED boards’ members not wanting Harrison to follow in Strong’s footsteps that created the Great Depression. Sadly this is what big government always gets you ‘politics’ not what really needs to be done.

But now back to our current problems; the FED is at it again with its easy money programs and massive Quantitative Easing (QE) programs. Technically what they are doing is what needed to be done in 1930 and since it was known and not used there was no excuse for what the FED allowed to happen. But as in most things there is also to much of a good thing and since the FED is more driven by politics than sound monetary policy the QE programs have been carried out way to long and that has created some serious distortions in the economy and is one of the reasons that job growth has been so anemic. The eventual result of the current FED policies will be high inflation and all we can hope for now is that it doesn’t cause us to lose the “Reserve” currency status we now have. If that would happen we would have “hyper” Inflation and that would bring economic destruction like never experienced in this country before.

The purpose of this post was to inform the readers of what “might” happen and that they should watch current events very closely so they can protect their assets. The current softening in the emerging economies and the resulting downward trend in the markets could be a sign that currency problems are now developing.

Feb 3 2014

GINI Index Explained

Hard to believe this …

The importance of the GINI index to intellectuals and others of the liberal or progressive persuasion cannot be dismissed. This popular index is used to rank countries as to how good a place to live they are by organizations such as the UN the World Bank and our own CIA. Those of us that believe that the American way of life is the best ever devised by man would place America at the top of any list of countries — American Exceptionalism — is what be believe in. We would however be very, very wrong. The chart below is based on our own CIA’s ratings and it places us way down the list at about 100 out of the 149 rated countries. Places like Cambodia, Uganda, Iran and Macedonia all have better ratings then America. The CIA gives America a GINI of 45.0 and to put that in perspective Kazakhstan has a GINI of 26.7 and that makes them the 9th best place in the world to live (lower is better). How can this be?

Most Americans would find this very hard to believe for just using common sense if this GINI index were true why would just about everyone in the world be trying to get into the United States both legally and illegally? For example India with a 36.8 GINI rating is ranked as 59th verses the American ranking of 100th — almost twice as good as America. So based on the GINI rating why would anyone move from a good place to a bad place? If the facts don’t match the theory there is one conclusion that can be made and that is that the theory (rating in this case) is wrong. This should be to no surprise to those of us that have a great distrust of things coming from agencies controlled by those seeking personal power.

One of the core precepts used to make this factious rating redistributing wealth can be understood by looking at what Milton Friedman wrote in his 1962 book Capitalism and Freedom. The answer can be found in Chapter X The Distribution of Income on page 171 of the fortieth anniversary edition. But first before we get into the explanation we must first understand why the rating exists at all. It’s actually very simple those that desire power need to find ways to justify their desires to the common man. Since America was so far above all the rest of the world they had to find some way to make it seem like it wasn’t as good as “we” thought it was. There was one segment of the Boomer generation that thought they knew a better way to run the country and when their revolutionary ideas failed in the 60’s and the 70’s to take hold in the general population they took a different tack.

The Education System and Politics was their path to the power they desired. Previous generations did not have their beliefs so all they had to do was wait till those that believed in America were retired and/or dead. The strategy was to out live the previous generations and manipulate the younger ones through propagandized education while they moved up in the ranks of the government at all levels. Most of us did not see this shift we were to busy living and raising our families. But we awakened after the election of 2008 put a believer of central planning and socialism in as president of the United States of American. The answer was the Tea Party, which changed the complexion of congress in time to stop further damage but not enough to reverse what was already done. The job needs to be finished this November.

Friedman has written many excellent books on the subject of economics and politics and when you read them you quickly find they are well thought out, the arguments logically developed and the conclusions sound. The issues are discussed putting both sides on the table and then he goes on to prove definitively that the only way to get a truly free and just society is to get government out of the peoples life’s. The key here is the fact that government is run by people and people have personal agendas and those are almost 100% self-serving. The founders understood that and that is why the powers they gave the federal government were so limited.

The opposite of what we have is America is central planning and limited freedom and that is what most of the rest of the world has — but we have seen that it just doesn’t work. Hundreds of million of people were killed in setting up these systems all through Europe and Asia over the last hundred years, and where are they now? These systems all had at their core an economy that was run (directly or indirectly) by their federal government, the names of the systems were different but the practice was the same in each case. We understand that and reject the concept but those that want to rule are clever and they found a way to get what they wanted through the back door while we weren’t paying attention. It started with changing our history and even the definition of words so things seemed to be different than what they really were. Keep in mind George Santayana, who, in his Reason in Common Sense, The Life of Reason, Vol.1, wrote “Those who cannot remember the past are condemned to repeat it.”

Starting in 1913 with the creation of the federal reserve and them in earnest with Social Security and quickly running through The Great Society, Medicare, Medicaid, The Department of Education and many other programs and Departments we now have government (federal state and local) running (directly and indirectly) over 40% of the American economy. When the health care system take over with the Patient Protection and Affordable Care Act (PPACA) of 2010, is completed in a few more years the government will be running almost 2/3 of the economy. When that happens we will no longer be citizens we will be subjects of those that rule us.

Now the explanation of why the GINI index is what it is and how it is used to justify the Federal government taking over more and more segments of our country using every trick in the book and even some new ones as those who desire power transform the country into one that is run out of Washington.

The GINI index has many factors but the one that seems to give many counties a bad rating and others a good rating is the one that measures income disparity between the classes. This factor measures the difference between those at the top, the 1% today, verses those at the bottom, the 99% today. For example lets say the bottom segment of country A earns on average $5,000 per year and the top segment earns $50,000 so there is a difference of 10:1 which is low and that gives country A a high rating. Now we have country B where the bottom segment earns on average $10,000 per year and the top segment earns $250,000 so we have a difference of 25:1 clearly this is a great discrepancy between the top and the bottom and so country B gets a lower rating. Based on those earnings numbers and the resulting GINI rating, policy is developed to reward country A for being good and penalizes country B for being bad. But is this even a valid measure and if it isn’t of what good is it?

Friedman gives an example like this in his book and then explains what if country A has a cast system with no mobility between the classes. This is not speculation many countries have de facto cast systems where if you are born poor you stay poor. These countries are almost all poor economically because of their system of no freedom no private property and a strong central governments run by rulers that have no reason to change anything. He goes on to explain that country B has freedom, private property and limited federal government. This gives the people the incentive to work hard and make something of themselves. Sure some make a lot of money and get to the top and some don’t. But all are better off even with this income spread for the bottom of those of country B have twice the earning power as those in country A. But more importantly those in country B can be born at the bottom and through hard work and effort end up at the top. The upward mobility is the key.

But there is another factor here often over looked. When you graduate from high school or college you enter the work force at the bottom. You maybe making a reasonable amount but you also expect to move up and be earning more later in life. So you are in a lower income group when young and in a higher income group when older. The point is that the people in a free society move up and down the income groupings over time. The top today is not made of the same people from 20 years ago and the bottom is made up of different people as well. Those seeking power and using class warfare try to made us think that people stay in a group all there life — maybe they do in some countries but most do not here.

Clearly we are in country B and most of the rest of the world are in countries like county A; the prove of this is not found in the GINI index but with people that come here because of the opportunity they know is here. They voted with their feet and that is the only vote that counts.

Feb 2 2014

Why have so few jobs been created especially since 2008?

Comparative Disadvantage

Over the past 30 years maybe even a bit longer there has been a steady and growing shift of manufacturing based jobs out of the country and into the Pacific Rim countries for example; Japan, Korea, Indonesia, India, Vietnam and China. We were told not to worry about this as those old obsolete factory jobs were being replaced by new service jobs in accounting, finance, health care, legal services and tech related development. We were told that this was no different then when the United States shifted labor out of agriculture into manufacturing. Therefore don’t worry about it, things will work out and be even better. We were told that this was called globalization and the free trade between nations was the way to prosperity for all. And according to Adam Smith in his book The Wealth of Nations this was, in fact, true and was explained by the principle of comparative advantage which we must understand first before we can understand the opposite of disadvantage which is what we have.

Comparative advantage is a result of one group, or person, doing one thing very well and another group, or person, doing something else very well. They then strike a bargain between them to trade some of each of their product or production to the other at some ratio that they both agree to. The result of this is that both groups, and/or both people, have more then if they had tried to make or produce everything themselves, as in jack of all trades master of none. This is a key concept and for it to work properly there must be a “free” movement of goods and services between the two groups, or people, and no “interference” between the bargaining that sets the exchange ratio. Meaning no outside influences like government and regulation which will always distort the process either some or a lot.

Today we find that the manufacturing jobs are gone but we also find that the service jobs are gone as well, in fact some of the service jobs left faster then the manufacturing jobs. Try calling for any tech support or customer service and you will, in many cases, end up talking to someone in India. Although it must be said that there has been some blowback on this as it was very hard to get someone to understand you. So what happened — what went wrong? Was it evil greedy business men looking to make a few cents more on a product because labor was cheaper someplace else? Was it labor unions driving up the cost of labor? Was in Health Care being to expense? Was it Wall Street financiers finding ways to manipulate markets? Was it the evil Oil companies ripping us off?

Actuality the answer is none of those! The question can be best answered by using a line from an old comic strip “Pogo” created by Walt Kelly from comments he first made in 1953 where he said, “We have met the Enemy and he is us!” So the answer is that we the citizens are the problem!

That is actually a parody of a message sent in 1813 from U.S. Navy Commodore Oliver Hazard Perry to General William Henry Harrison after the Battle of Lake Erie, stating, “We have met the enemy, and they are ours.” Kelly was a master of satire and parody and produced Pogo in syndicated form from 1949 to 1973 when he died from complications from diabetes. The strip was carried on by Kelly’s wife and son for two more years before it was stopped.

The reason that we the “Citizens” is the answer to why this happened is that we the “Citizens” let the politicians convince us that what was going on with globalization was OK and we should not worry. We believed them even though it didn’t sound quite right to us. But they told us they were the “best and the brightest so we believed them. And there were some good times originally until the dot com bust and then 9/11 and Enron after that the cancer took hold with a vengeance and the jobs were soon almost all gone. But there were signs early on like Billy Joel saw in his song Allen Town from a 1982 Album ‘The Nylon Curtain’. Then there was the 1987 movie Wall Street Directed by Oliver Stone starting Michael Douglas, Charlie Sheen and Daryl Hannah, with its warnings about breaking up companies for profits. And we can throw in Disclosure a 1994 movie also starting Michael Douglas which is about the games being played in Silicon Valley with all the production (a side issue) in Indonesia.

While the country was being dismembered one company and one job at a time we the Citizens were worried about all the really important things in life like; gay rights, abortion rights, civil rights, the environment, women’s rights, animal rights, handicapped peoples rights, emigration rights, affordable housing, breaking the glass ceiling, not offending anyone (Political Correctness), taking God out of everything, and not teaching anything of substance in our schools so that no one would feel bad because they couldn’t learn. So today we have all those rights in spades but no jobs. Which was really more important?

Having lived through the 1980’s as a businessman in production related industries in a senior management position the effects of the political policies of the 1980’s were very apparent. No one seemed to care about what was happening to business their focus was solely on all those issues listed in the previous paragraph which by the way is not a complete listing it’s just a sample. But why would these social issues matter to businesses and job creation? And what does any of this have to do with comparative disadvantage?

First we need to discuss business and its purpose which is to make a profit so that the investors can be paid back for making their investment in time and/or money. If a business can not make a profit that it can “keep” then the investors will either not invest or they will sell their position (at a loss) and the business will close. Therefore no business can stay in business without making a profit. So by simple extrapolation profits are good not bad.

They are the reward for doing a good job

The lack of them is the penalty for doing a bad job

So how does a business make a profit? Well there is really only one way and that is to sell a product for more then what it costs to make the product and in addition cover all the costs of being in business. A key point here that most people do not appreciate is that the only thing that matters to an investor is the net cash left after the deduction of all expenses; which includes production costs, operating costs and all business taxes. So it’s easy to see that to have anything left over to pay the investors, the price of the product or service has to be greater then all the costs of providing that product or service, including taxes.

Anything that raises any part of the cost of doing business “must” be passed on to the consumer in the form of “higher” prices. Even Adam Smith knew this, it’s in his book.

Therefore if society determines that businesses must include social costs as for example in complying with OSHA, EPA, NLRB rules and providing HEALTH CARE (a complete listing of rules and regulations would fill this entire paper) as well as property taxes and income taxes the costs of doing business are by definition driven up. And therefore as the costs are driven up the businesses must raise their prices or go out of business. Their revenue must always be greater then their costs, to stay in business. Or one other is by government subsidies (additional revenue) but then the government needs higher taxes to do that. And the government also gets the right to participate in that business.

Now we get to comparative disadvantage for we in America do not have a closed society we allow others to sell goods and provide services in this country. Discounting transportation cost which are minimized by huge cargo container ships we have goods coming into this country from countries that do not have the same social cost structure that companies here have. American companies are therefore at a comparative disadvantage. And to be honest the actual direct labor component, even with unions, maybe the smallest element in their high cost structure.

For example the hard push today to “Green Energy” which costs more to produce as any technical person will agree to. According to the International Energy Agency (IEA) in 2005 the average cost of electricity in the United States was $.052 per kWh and in China it was $.032 per kWh. This is before the big push to renewable sources which will drive up the cost of electricity here even higher. For example, according to the U.S. Energy Information Administration (EIA) in their report of H.R. 2454 (the clean energy act) electric rates $ per kWh could easily double during the time frame of the report if that law was ever enacted. If the business in China were paying on average only 55.2% of those of their U.S. competitors now, that is a major Comparative Advantage that they have. Further it would seem that that advantage will get bigger as the EPA pushes to implement its clean energy agenda. This is being done through rules and regulation by the EPA even without the passage of any carbon reduction legislation being passed.

If we add to that all the other social costs of doing business here (we are not considering the social merit here only the costs) from say worker safety and pollution for example we quickly find that it would be almost impossible for any U.S. company to produce anything in our country that could not be produced and delivered here cheaper from a foreign source. It does not require a degree in economics or finance to see that this is just not going to work. Common Sense alone tells us that the system our current leaders have put in, because we told them we wanted these social benefits, welfare programs and regulations, and this will continue to drive production related business out of this county.

Walt Kelly, “We have met the Enemy and he is us!”

However our politicians, although they gave us the rules and regulation we asked them for, didn’t explain to us the consequences of those rules and regulations as they became apparent. As we saw in the songs and movies of the 1980’s even the entertainment industry saw what was happening. So why didn’t the politicians do something — well it was really very simple. As the trade imbalance increased and cheap goods poured in, through Wall-Mart initially, the countries that were flooding the U.S. with cheap products elected to buy U.S. treasures bonds (T-Bills) rather then products and services that were too expense to buy from the U.S.

So what most of us would say? Well as it turns out this is the most critical element of the predicament that we are now in. Our elected officials being from the best schools and being very educated (that’s what they tell us and is the reason we are supposed to listen to them) knew what was happening but since the countries that were giving us the cheap goods were buying T-Bills the politicians had more money to play with and so to them having those extra funds meant they could pay for things that they otherwise could not provide (to us). This made them look good and got them re-elected. And they could always blame the job losses on the evil businesses that just didn’t care.

There has been a lot of talk by economists that claim this is of no concern as eventually those countries will have to move out of T-Bills so it doesn’t matter. Although technically that may be true in “economics,” in the real world its nothing but farm pollution. For example we are told that foreign purchases of T-Bills hold down the rate of interest which is good. True yes, but rather then use that low interest rate to build infrastructure and promote business investment we used it to finance our social programs. The problem with that was that the social transformations increased the cost of doing business which made the situation worse.

It was an absolutely perfect positive feed back situation working like this: as the foreign purchases increased the government had more funds to make social changes which then raised the cost of doing business, which drove more business out, which then resulted in more imports, which then result in more money for the government to play with. There was just no incentive to stop this from happening in the government; it would have stopped the money flow to them.

In addition as the businesses closed or moved operations out of the country there were both fewer businesses to pay taxes and fewer employees to pay them as a result. So with fewer and fewer workers the tax burden per worker was forced higher and higher. Fewer workers meant the government needed to provide more services and therefore the government needed more funds and the resulting growing deficit was financed increasingly by foreigners.

In simple terms the foreign purchases of T-Bills represents the hidden social cost of U.S. policies compared to those in the rest of the world that is bringing us our products.

In the study of economics one quickly learns that in the “long run” most everything works out. The artificially induced distortions by governments and rulers are never sustainable for very long. Look what happened to the workers paradise the U.S.S.R. it only lasted 70 some years before collapsing. China lasted even a shorter time maybe only about 50 years before making a major change and letting a private sector develop there. Although to be fair they did see what happened to the Russians and so making a change was the only way to avoid a similar collapse for them. They did stay in power which was the really important part to them.

We can not by law or regulation overrule these three things: human nature, the laws of physics and engineering or the principles of economics. An economics professor of mine one told us in class that the only thing any government can do is to create “shortages” or “surpluses” and he was 100% right.

We have the Department of Energy and a shortage of energy

We have the Department of Heath and Human Services and we have a surplus of poor

We have the Department of Labor and a shortage of jobs

We have the Federal Reserve and that has given us both a shortage of and a surplus of money.

Neither the shortage of energy nor the surplus of poor nor the shortage of jobs nor the swings in money existed as a major problem prior to the creation of these agencies. Each of these government departments was created to fix a problem that at the time was a short term problem not a structural problem. And each time this happened we lost a little bit of our Comparative Advantage for each of these changes added more rules and regulation that had to be followed.

So now these and many other government actions and social issues have eliminated most all of the Comparative Advantage that the U.S. once had. The options for getting it back are slim to none unless we take drastic action — and very soon.

So where has this taken us then what have all these really smart and educated politicians given us with their politics? Well it a very easy thing to answer — no jobs! Americans want to work and take care of themselves and their families they don’t want some big government telling them what they can or can not do. The Citizens can develop a feeling in them collectively when major shifts occur;.how this occurs is not the subject of this post but the facts are that the public, the Citizens, know that things are not right. They may not know the details because they have been hidden but they do know that the country is in deep trouble.

One last comment in this post is that there is a fix for at least a part of this. The process of other countries buying U.S. Treasurers in lieu of buy things here is the main reason we have lost so many jobs. In a free market this would not have happened but since there is no true free market we need some way to compensate for this.

There are two ways this could be done although neither would never be done, and it’s relatively simple. The first method would be that Congress could pass a law that would state: Starting immediately U.S. Treasuries will no long be sold to anyone that is not a U.S. citizen or a U.S. corporation. And if a Corporation then it must be at least three fourths’ owned by U.S. Citizens. All Treasuries that are now held by non qualifying entities will be held to maturity but will not be refinanced. This will force the money into product services or other non government equities of some kind.

This will raise the interest rate for government securities but that will only put the cost of this kind of borrowing in line with where it should be to begin with. The effect of this will be to raise stock prices and force the government to be more realistic with its expenditures. Obviously the change will be traumatic but it will be better then other alternatives as described elsewhere in the book.

The second method would be somewhat easier to implement but it would be just as confrontational. This method is one of tariffs but not as we presently know or think of them; we add a different twist to them. If we agree that the various social costs in the United States are in fact driving up business costs and if we agree that the corollary to that is many of the countries that import to us do not have those same costs then there is a way to fix this.

We would set up two tariffs the first being a Social tariff and the second an Environmental tariff. A task force would be set up consisting of the countries Business and Unions but no politicians. They would determine what those two non business (not related to producing the product or service) related costs are. They would also look at the various countries that ship goods here and estimate what each of those counties costs are. Once that has been accomplished a comparison can be developed between them and two tariffs established one for social costs and one for environmental costs. A particular country could have none, one or both applied and they would be administered separately.

It would not be reasonable to implement something like this all at once and so it would be phased in over time, say ten years, at 10% of the total differential added each year. Offsetting this would be an annual review of the tariffs such that if a country got worse of better vis-a-vis the United States the numbers would be adjusted up or down. A system like this would force countries doing business with us to either clean up their countries or pay the penalty through the tariffs. Over time the comparative disadvantage would be reduced and that would allow some of the lost jobs to be brought back here. The offset to this is that the costs of goods would go up and that must be understood itf we are going to protect our jobs.

Neither of these solutions is desirable in themselves but the alternative of continuing the present system is much worse. We must have jobs in this country commensurate with the abilities of the citizens and that means there must be a range of jobs available that encompass the full range from manual labor to university professors. Obviously those are the extremes and the bulk must fall in the middle such that the average person can hold a full time job that pays a decent rate. If we as a society do not provide that then we have failed both as a society and as people.

Feb 1 2014

A Constitutional Republic

Our Form of Government

When the American Revolution started there had been a 500 year debate going on within political theorists that was having the effect of undermining the prevailing validity of the heredity based monarchies’ that predominated Europe and most of the rest of the world at that time. Therefore western civilization was ripe for a change and that change came from the British colonies in America. Residing there was a group of very special men: Washington, Jefferson, Franklin, Adams, Madison, and Hamilton to name but a few of those that created this new system.

An interesting fact is that if we look at science and engineering for the period 50 years before and 50 years after 1776 we find that is the heart of the industrial revolution. Mostly in England but also in the Americans we have the perfection of the steam engine, the flying shuttle loom, the crucible process for making steel, the small pox vaccine, the first machine tools, interchangeable parts, the battery and photography all being invented. From there things moved faster and faster resulting in the standard of living that we have today.

Since this was also the period of political economic and legal writing that included the likes of Adam Smith, William Blackstone, John Locke, Jean-Jacques Rousseau and Thomas Paine it is safe to say that we are today the result of these men and what they did during that period.

But back to politics and government to find out what was created after the end of the American Revolution with the signing of the Treaty of Paris on September 3, 1783. A few years before that on March 1, 1781 the newly freed colonies begin operating under a loose form of government called the Articles of Confederation described in the first section of this book.

But there were problems with that form of government and so a few years later in 1786 a conventional was called to make changes as was allowed by the Articles of Confederation. That quickly lead to the writing of the United States Constitution that we now have and that was ratified and put into effect on September 13, 1788. By April of 1789 the elections had been held the 1^st congress convened and Washington sown in as the first President. The rest is history in the making.

We know most of that and most of us know a little about the form of government that we have but few know why we have what we have. That is sad for the why is the important part, especially today when some wish to make changes to the form of government that we have that will basically make the Constitution we have an obsolete document.

We know from historical records that there was a significant debate between those wanting a relatively strong central government (Federalist) and a weak central government (Anti-Federalist). The compromise that allowed for the ratification was the Bill of Rights which was the name given to the first ten amendments to the United States Constitution. The purpose of these amendments was to ensure that the power (for the serious readers the Sovereignty) stayed as much as possible with the people and the states.

Most of the first eight years of the new government were taken up in forming the government and forming the operating procedures for how it would actually function. There was little historical help to those that wrote the constitution and those that were elected to run it. And since the system was specifically set up to be cumbersome in operation with all kinds of checks and balances this was not an easy task. So why was our government set up to be hard to get things done?

To get that answer we need to look at the forms of government and what you know about them is not necessarily what the first impression is. If we go back to Locke and Rousseau we see that the power resides in the people and that they, through the ‘social’ contract give some of that power to the government. The purpose of this ‘social’ contract is primarily for the protection of the people. But it’s also to set up a system of governance that gives the people the rules (statutory and common laws) that determine the legal basis of how society operates day to day and year to year.

We can see that if there is no government and therefore no law that all the power resides in the people and they are free to do anything that they want. This is called anarchy. If we move to the other end as in a monarchy we have the opposite with all the power resting in the Monarch (king, emperor etc). The people here are subjects with no rights except those that the Monarch grants them. Today we hear about the right and the left or communism or fascism as forms of government but they are all really the same thing. Oh there are differences but the important thing is that they all have as their base a strong central government. Which makes them little different than the heretical monarchies that ruled the world for so long. Different titles and different procedures with or without voting but they all had at their core a ‘ruling class’ that governed the country some with almost absolute power.

Historically most countries ended up with a group that supported the monarch since it would be impractical for one person to run an entire country. These people ended up being the royalty with a whole range of titles to establish a pecking order. But even that wasn’t enough to affectively rule as the size of the countries increased and so councils were formed mostly of educated but not always aristocrats mostly with blood lines to the crown, so to speak. There were various names for these councils such as the parliament in England generally the rule makers served at the Monarchs’ pleasure and were called magistrates.

When the United States Constitution was being written the founders did not want to establish a system like existed elsewhere for they had just finished fighting a long war to get rid of that kind of system. But what else was there? Well that is why the work of Locke and Rousseau were so important. This is not to say that many others didn’t contribute to the thinking of that time but only that these two gave a theoretical basis for a different form of government.

So the task that those attending the constitutional convention in 1787 faced was to come up with something that was not a monarchy and not anarchy. Something in-between the two that would give the people soon to be called citizens their freedom but yet allow for the protection of the people through a federal government. To get a better understanding of this process one of the best books written is The Five Thousand Year Leapwritten by W. Cleon Skousen. First published in 1981 and then again in 2009 by American Documents Publishing.

The system that was set up here was deigned to fall between anarchy and a monarchy and be anchored there with strong controls and limits on what power the various governments’ power centers had. There were Local, County, State and Federal systems each with a defined and limited ability to make laws. Further, since their biggest concern was the Federal system it was broken up into many sections to defuse the power for they knew that the tendency would be for power to concentrate and once that accrued the form of government they had set up would be lost.

The purpose for all the checks and balances and splits in power and states rights and individual rights and the electoral system of determining the president was to prevent the concentration of power in the federal government which would inevitably lead to the Citizens be turned once more into subjects.

John Adams, “Liberty cannot be preserved without a general knowledge among the people, who have … a right, an indisputable, unalienable, indefeasible, divine right to that most dreaded and envied kind of knowledge, I mean the character and conduct of their rulers.”

Feb 1 2014

Special Forces Creed

Americas Best

I am an American Special Forces Soldier!

I will do all that my nation requires of me.
I am a volunteer, knowing well the hazards of my profession.

I serve with the memory of those who have gone before me.
I pledge to uphold the honor and integrity of their legacy
in all that I am – in all that I do.

I am a warrior.
I will teach and fight whenever and wherever my nation requires.
I will strive always to excel in every art and artifice of war.

I know that I will be called upon to perform tasks in isolation,
far from familiar faces and voices.
With the help and guidance of my faith,
I will conquer my fears and succeed.

I will keep my mind and body clean, alert and strong.
I will maintain my arms and equipment in
an immaculate state befitting a Special Forces Soldier,
for this is my debt to those who depend upon me.

I will not fail those with whom I serve.
I will not bring shame upon myself or Special Forces.

I will never leave a fallen comrade.
I will never surrender though I am the last.
If I am taken, I pray that I have the strength
to defy my enemy.

I am a member of my Nation’s chosen soldiery,
I serve quietly, not seeking recognition or accolades.
My goal is to succeed in my mission – and live to succeed again.

De Oppresso Liber

Feb 1 2014

A Soliders Duty

I am an American Soldier

Liberty never ever comes free,
and a soldier’s life is the key.
My blood in Lexington first flowed,
giving sweet life to her precious seed.
But liberty is a demanding thought,
and its growth with much sacrifice is bought.
I am an American Soldier

Liberties demands are many,
and the price we all must pay.
When next my blood flowed a plenty,
it came forth from both blue and gray.
But liberty is a demanding thought,
and its growth with much sacrifice is bought.
I am an American Soldier

Some help for others was now needed,
and they were not to be denied.
Answered now was this distant quest,
with my blood in the Argonne forest.
But liberty is a demanding thought,
and its growth with much sacrifice is bought.
I am an American Soldier

Storms now formed both east and west,
and their deep darkness threatened all.
Now for my dear blood there was no rest,
until Midway and Bastogne brought evils fall.
But liberty is a demanding thought,
and its growth with much sacrifice is bought.
I am an American Soldier

The storms were cleared and the sun was set,
When new alliances brought a different threat.
Yet again my red blood was sorely needed,
From so many, before Pusan succeeded.
But liberty is a demanding thought,
and its growth with much sacrifice is bought.
I am an American Soldier

Now perceived threats a new do grow,
In places hidden both near and far.
Still my red blood in earnest does flow,
From far away Nam’s ever present scar
But liberty is a demanding thought,
and its growth with much sacrifice is bought.
I am an American Soldier

Freedoms path is by the two towers,
which our liberty’s bright torch empowers.
But now she cries for the loss so dear,
dealt from those that deal in fear.
So sons and daughters of this land,
Must yet again to battle go.
This time our blood will flow in the sand,
So those seeds of liberty can grow.
But liberty is a demanding thought,
and Its growth with much sacrifice is bought.
I am an American Soldier

Written by David Pristash after 9/11

Centinel2012

De Oppresso Liber

Tag Archives: Orwell’s “1984”

Self Rule Verse a Ruling Class

Is a Change in our form of Government Coming?

GINI Index Explained

A Constitutional Republic

Special Forces Creed

Americas Best

A Soliders Duty

I am an American Soldier

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