Once Again the Problem, Not the Answer
FUTURECASTS online magazine
Vol. 4, No. 10, 10/1/02.
In the 1970s, left wing efforts to blame the economic system failed.
| In the 1930s, left wing propaganda was able to blame the capitalist economic system for a
Great Depression that was actually caused by government policies of incredible
stupidity. However, in the 1970s it became widespread knowledge that the vicious swings of the business cycle and
stagflation suffered during that decade could only be caused by government.
In the 1970s, the left wing failed to sell their anti-capitalism propaganda line
of blaming the economic system for economic ills caused by government.
In the 1970s, it became obvious that
government was the problem, not the answer. That inflation and stagflation are always the responsibility of the monetary
authorities - the government - is an obvious fact, and by 1978, incumbent left wing politicians were
feeling the ire of the electorate.
The triumph of political expediency over national interest:
| However, there has been a major casualty
of this extended period of prosperity. The political pressure to improve
the political environment for commerce has materially receded. There are
few efforts any more to remove government burdens on the economy or
prevent taxes, regulations and other government activities from creating
economic and financial distortions.
Thus, political expediency increasingly triumphs at the expense of the national interest. Now, the predominant political pressures are to buy votes at the expense of the economy and the public treasury.
An intellectual tone accepting of vast new regulatory initiatives and entitlements and other welfare and special interest programs has been established.
often dominated by small groups fighting for gains that are highly
concentrated - frequently at even inordinate costs. But these costs are so widely
shared as to be imperceptible to the individual members of the public.
On the left, old socialists and advocates
of government "industrial policy," - their old ideological positions
no longer tenable - have adopted a fall back position in favor of the
entitlement welfare state. Where once they sagely pointed out all the weaknesses
and instabilities of capitalism, they now preach about the strength and
stability of capitalism - and its undoubted capacity to bear the burdens of vast
entitlements and heavy regulatory burdens.
It is the pressure for capital gains that has driven most of the recent accounting scandals.
Of course, this is a substantial change of emphasis - not a 180 degree change of course. Congress and the SEC, for example, are busy with the important task of assuring transparency of financial disclosures - trying to accomplish with additional regulations what would be better achieved if the tax system had not destroyed the attractiveness of dividends as the primary form of return on investment. It is the pressure for capital gains that has driven most of the recent accounting scandals. And Pres. Bush has at long last been provided with fast track trade negotiating authority - although burdened with special interest environmental and labor conditions and various protectionist measures.
Disdain for priorities, burdens and consequences:
| Vast new regulatory burdens were imposed on the
economy during the last two years of the Clinton administration. State
and local government spending soared in response to the flood of new revenues
produced by the prosperity of the 1990s - heedless of the inevitability of the
In Congress and the Bush administration, there is almost total unconcern for the massive new burdens being heaped upon the economy. The door is open for all kinds of social and pork barrel programs.
And now, the lid on federal spending
has been lifted by the War on Terrorism. In Congress and the Bush
administration, there is almost total unconcern for the massive new burdens
being heaped upon the economy. The door is open for all kinds of social
and pork barrel programs, driving a potentially disastrous increase in the
government sector as a percentage of the entire economy. Until the recent passage of "fast track"
trade negotiating authority - the results of which remain to be seen - progress
towards international trade liberalization slowed and in some cases was reversed.
There is as usual no indication of any recognition of budget constraints and the need for priorities - much less any rational effort to follow them. There is determined ignorance of unintended consequences.
Of course, the advocates of the many
regulations and social and pork barrel programs can all put forth reasons for these actions -
and some of their arguments actually have some validity. Of course, the social
engineers never tire of elaborating the tax statute in pursuit of their noble
ends. Unfortunately, there is as usual no indication of any recognition of
budget constraints and the
need for priorities - much less any rational effort to follow them. There is
determined ignorance of unintended consequences.
Accumulating burdens on commerce:
|And the burdens are indeed of visibly staggering proportions. Here are some samples.
Industrial and agricultural dinosaurs are being kept alive by massive subsidies and protectionist restraints on trade - thus blocking the process of creative destruction that is so essential to a healthy capitalist system.
Because of those noxious tax incentives, no amount of regulatory red tape will prevent the inflation once again of the capital asset bubble and continued expansion of the debt bubble.
It doesn't take a rocket scientist to realize that these programs - doubling in cost about every six years - will within the lifetime of many of today's young absorb all the financial resources in the universe.
Liability and casualty insurance rates for professionals, executives, and businesses of all kinds are soaring. Health care insurance cost increases are forcing many businesses to cut back on health benefits offered.
The turbulence in our future:
| This next period of recovery and
prosperity should be just fine - if more restrained than during the 1990s.
We start with interest rates at the lowest levels in half a century - although
an adverse credit shift has raised interest costs for many private borrowers. The recession has in fact been sufficient to force wide ranging
rationalization of private sector business plans that will produce considerable
benefits. The private sector does not require depression or severe inflation to
induce it to mend its ways - as is the case with government.
The two decade long period of accelerating prosperity is now over.
And the nation's banking system has
not been seriously impacted by this mild recession. Unlike in Japan and many other nations,
U.S. banks do not have substantial stock holdings. They took some hits to their
loan portfolio, of course, and there has been observable deterioration in the
quality of their loans, but the collapsed dot-coms had few tangible assets and
so were not able to borrow very much from the banks.
There are serious economic difficulties in the nation's future that could last for considerable lengths of time - depending on the extent of stubborn stupidity of the nation's political leaders.
| Except for people who have a long investment
time horizon in excess of at least 15 years, the old comfortable buy and hold
investment strategy that has worked so well in the last two decades will no
longer suffice. There are serious economic difficulties in the nation's future
that could last for considerable lengths of time - depending on the extent of stubborn
stupidity of the nation's political leaders.
As this period of prosperity proceeds, investors without very long time horizons will have to take profits and find safe places to put their capital. Government bonds will suffice if there is no inflation - but not if inflation becomes a part of the problem. Then, inflation indexed bonds might gain in attractiveness along with traditional inflation hedges.
Despite the well publicized shift to budgetary deficits at all levels of government - and a vast acceleration of monetary expansion - the economic recovery remains sluggish.
The predictable Keynesian excuse is that there simply hasn't been enough government deficits and monetary expansion. Well - as was demonstrated in the 1970s - there never is!
It may seem strange to raise concerns
about inflation at a time when inflation is nowhere in sight. However,
FUTURECASTS strives to be ahead of the curve. The current mild recession is
yesterday's news - and the recovery is today's news. The nature of the next
period of economic difficulties is tomorrow's news - which is what FUTURECASTS
strives to present.
Inflation invariably creates vast additional problems of its own - and always imposes the prospect of an austerity depression - such as in 1980-1982 - as a prerequisite to any relief.
| The impressive list of budgetary, regulatory and tax burdens that are
the fundamental causes of the coming economic difficulties cannot be dealt with by the
standard Keynesian palliatives. The particular problems must be confronted and
reformed. This is at best a difficult political task
that will be much easier without inflation than with inflation.
Inflation, after all, invariably creates vast additional problems of its own - and always imposes the daunting prospect of an austerity depression - such as in 1980-1982 - as a prerequisite to any relief.
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Copyright © 2002 Dan Blatt