24 April 2009
First, I doubt those polled could even give the proper definition of either (the definitions are below in case you were wondering.) Second, if they really knew the definitions I doubt they would chose one over the other. When you get down to it, neither in their true form is palpable.
There is much hype on talk radio about how we are marching towards socialism. However, the reality is that the United States is already part of the way there. I would also argue that the United States will never be 100 percent socialist, just like the United States will never be 100 percent capitalist. Why you may ask? Because of what it is that makes the United States unique. We value freedom. We also look out for one another.
You see, the United States is neither a capitalist nor a socialist country. Even the European countries are not socialist by definition, they just pay more taxes and have larger social programs. The United States has a combination of socialist tendencies (defense, health care, education, social security) and capitalist tendencies (incentives to produce, ability to own shares of companies, own property, invest your money). Government also regulates the capitalist system.
We have a prime example of when capitalism is allowed to run amuck with the real estate bubble and the subsequent fall out which is why capitalism cannot be allowed to run unchecked. On the other hand, without a capitalistic system creating goods and services that the government can tax we cannot provide for the socialist programs which we can agree, to one degree or another, is needed for those destitute and downtrodden. Yes, when government grows too much and people start seeing everything as a right we tip the scales towards socialism. However, socialism may work on a micro level (Amish farmers come to mind – but even they sell goods for money), it does not work by itself on a macro level. Even countries like China are using capitalism – they have no choice but to embrace certain aspects of it.
The key to everything in life is finding moderation (the foods we eat, the debt we take on, activities we are involved in, etc.). The key for the United States is finding the balance between socialism and capitalism. I hope that President Obama and his fellow democrats in Congress understand that economic freedom is good for the economy and the American people just has I hope Rush Limbaugh and the republicans understand the need to keep businesses in check (everyone is human afterall).
1. a theory or system of social organization that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole.
2. procedure or practice in accordance with this theory.
3. (in Marxist theory) the stage following capitalism in the transition of a society to communism, characterized by the imperfect implementation of collectivist principles.
An economic system in which the means of production and distribution are privately or corporately owned and development is proportionate to the accumulation and reinvestment of profits gained in a free market. In such a system, individuals and firms have the right to own and use wealth to earn income and to sell and purchase labor for wages with little or no government control. The function of regulating the economy is then achieved mainly through the operation of market forces where prices and profit dictate where and how resources are used and allocated.
15 April 2009
There are many within the “intellectual” elite circle and ruling class calling for more stimulus. Paul Krugman, Nobel Laureate, and Robert Reich, former Secretary of Labor under President Clinton, are among those that support such thinking. President Obama appears to be listening to these wunderkids and is making rumblings of more stimulus spending coming our way. They say we need more stimulus than Japan had in their lost decade. Really? Have any of them stopped to think about what that would mean? If you compare the size of the Japanese and American economies and extrapolate we would need a stimulus package worth more than $20 trillion. Now does that pass the sniff test? I don’t think so. Most people in their gut know that this, just like bailing out AIG or GM, is the wrong course. Unfortunately for us, those people are not in charge.
Many of these people wanting more stimulus spending subscribe to Keynesian economics. Keynesian economists believe that government spending is the only way to get an economy in the doldrums going again. Please someone explain to me how the path we are on is sustainable and will not have long-term consequences. Let’s sum up where we are today:
National debt: $11 trillion and growing.
Budget deficit: $1.5 trillion this year and likely $1 trillion for years to come.
Unfunded liabilities for Medicare, Medicaid, and Social Security: $60 trillion and growing.
Looking at those numbers I cannot fathom how spending more money will help. Sure short-term, it may do some good, but then how are we going to pay the tab? It is the height of irresponsibility to push this bill onto our children and grandchildren. President Obama wants more programs and more spending. How is that possible without completing destroying the dollar and creating a Wiemar Republic scenario? Even Keynes pointed out that “governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.” Sound familiar? That’s where we are at now folks. But there are some people out there that have no problem with monetizing our debt. While small, short-term monetization may not pose a problem we are well beyond that. And I think they know it and are trying every stop gap measure hoping that the economy will turn around enough to naturally get us out of trouble. Of course they will claim that it was their massive spending that lifted us out of this recession. BULL SHIT.
Frederick Soddy, a 1921 Nobel laureate in chemistry turned economist, understood how bad debt was. In a recent op-ed piece in the New York Times, Eric Zencey, a professor of historical and political studies at Empire State College, wrote that Soddy
offered a perspective on economics rooted in physics — the laws of thermodynamics, in particular. An economy is often likened to a machine, though few economists follow the parallel to its logical conclusion: like any machine the economy must draw energy from outside itself. The first and second laws of thermodynamics forbid perpetual motion, schemes in which machines create energy out of nothing or recycle it forever. Soddy criticized the prevailing belief of the economy as a perpetual motion machine, capable of generating infinite wealth — a criticism echoed by his intellectual heirs in the now emergent field of ecological economics.
A more apt analogy, said Nicholas Georgescu-Roegen (a Romanian-born economist
whose work in the 1970s began to define this new approach), is to model the economy as a living system. Like all life, it draws from its environment valuable (or “low entropy”) matter and energy — for animate life, food; for an economy, energy, ores, the raw materials provided by plants and animals. And like all life, an economy emits a high-entropy wake — it spews degraded matter and energy: waste heat, waste gases, toxic byproducts, apple cores, the molecules of iron lost to rust and abrasion. Low entropy emissions include trash and pollution in all their forms, including yesterday’s newspaper, last year’s sneakers, last decade’s rusted automobile.
Matter taken up into the economy can be recycled, using energy; but energy, used
once, is forever unavailable to us at that level again. The law of entropy commands a one-way flow downward from more to less useful forms. An animal can’t live perpetually on its own excreta. Neither can you fill the tank of your car by pushing it backwards. Thus, Georgescu-Roegen, paraphrasing the economist Alfred Marshall, said: “Biology, not mechanics, is our Mecca.”
Following Soddy, Nicholas Georgescu-Roegen (a Romanian-born economist whose work in the 1970s began to define this new approach) and other ecological economists argue that wealth is real and physical. It’s the stock of cars and computers and clothing, of furniture and French fries, that we buy with our dollars. The dollars aren’t real wealth, but only symbols that represent the bearer’s claim
on an economy’s ability to generate wealth. Debt, for its part, is a claim on the economy’s ability to generate wealth in the future. “The ruling passion of the age,” Soddy said, “is to convert wealth into debt” — to exchange a thing with present-day real value (a thing that could be stolen, or broken, or rust or rot before you can manage to use it) for something immutable and unchanging, a claim on wealth that has yet to be made. Money facilitates the exchange; it is, he said, “the nothing you get for something before you can get anything.”
Problems arise when wealth and debt are not kept in proper relation. The amount of wealth that an economy can create is limited by the amount of low-entropy energy that it can sustainably suck from its environment — and by the amount of high-entropy effluent from an economy that the environment can sustainably absorb. Debt, being imaginary, has no such natural limit. It can grow infinitely, compounding at any rate we decide.
Whenever an economy allows debt to grow faster than wealth can be created, that economy has a need for debt repudiation. Inflation can do the job, decreasing debt gradually by eroding the purchasing power, the claim on future wealth, that each of your saved dollars represents. But when there is no inflation, an economy with overgrown claims on future wealth will experience regular crises of debt repudiation — stock market crashes, bankruptcies and foreclosures, defaults on bonds or loans or pension promises, the disappearance of paper assets.
It’s like musical chairs — in the wake of some shock (say, the run-up of the price of gas to $4 a gallon), holders of abstract debt suddenly want to hold money or real wealth instead. But not all of them can. One person’s loss causes another’s, and the whole system cascades into crisis. Each and every one of the crises that has beset
the American economy in recent years has been, at heart, a crisis of debt repudiation. And we are unlikely to avoid more of them until we stop allowing claims on income to grow faster than income.
Soddy would not have been surprised at our current state of affairs. The problem isn’t simply greed, isn’t simply ignorance, isn’t a failure of regulatory diligence, but a systemic flaw in how our economy finances itself. As long as growth in claims on wealth outstrips the economy’s capacity to increase its wealth, market capitalism creates a niche for entrepreneurs who are all too willing to invent instruments of debt that will someday be repudiated. There will always be a Bernard Madoff or a subprime mortgage repackager willing to set us up for catastrophe. To stop them, we must balance claims on future wealth with the economy’s power to produce that wealth.
Now I agree that Soddy and Georgescu-Roegen were on to something: too much debt is bad and our economic model based on consumerism and loose credit hurts us. But Soddy could not leave it at that. He had to develop his own five policy principles that he thought would combat that. His first four were once considered eccentric but are now conventional practices.
1. Abandon the gold standard
2. Let international exchange rates float
3. Use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends
4. Establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort
I would argue that these principles have led to the situation we are in. Abandoning the gold standard has led to the ability to print money and fund government programs that are unsustainable and allows trillion dollar deficits and an $11 trillion debt – the fiat currency.
Letting exchange rates float has hit Greenland and the former Eastern Bloc countries particularly hard as loans made in a foreign currency have created havoc as loan amounts increased as a result of a floating exchange rate – the owners of those loans cannot afford to pay them now. This has also allowed people like George Soros to speculate on currencies and make billions by gaming the system.
Soddy’s third principle is the most nefarious of them all. This principle has produced the mindset that cyclical trends are bad and government intervention is good. This is a very dangerous idea in my opinion. Cyclical trends are natural and we want them; they naturally regulate economies. The idea that a government can manage an economy is ridiculous – that should not be the role of government in the first place. Yes, you can provide some monetary policy, but controlling the economy like he suggests is the same stupid notion that we can control the climate. When people like Paulson or Greenspan meddle they make things worse, not better – like keeping interest rates artificially low. Government debt also takes money away from other private entity capital projects that create real jobs and not the government ones that leech money from our economy (made up work that has little to no value). Government surplus should be used to pay down debt and if it is not needed for that it should go back to the people so that they can use it how they see fit.
The stock market and our lives are now ruled by economic statistics thanks to Soddy’s fourth principle. We hear how the markets react to various economic statistics. Bad stats lead to bad days on Wall Street. Good news and the markets go up. More data manipulates the system and places value on short-term outcomes rather than long-term reality.
“Soddy’s fifth proposal, the only one that remains outside the bounds of conventional wisdom, was to stop banks from creating money (and debt) out of nothing.” Well, this runs counter to his first principle above anyway. The Federal Reserve has long been creating money out of nothing. If you want to stop them from making money out of nothing you need something like the gold standard. This has led our ruling political class to seek our favor by showering us with fake money in the form of inefficient and incompetent government programs we can’t afford. The more they sink their talons into our lives the less likely we are tell them to go to hell.
Lastly, Mr. Zencey, probably as much of an economist as I am, claims that we need a “100-percent reserve requirement on demand deposits”. This is unworkable and would unnecessarily lock up capital in banks and make investment onerous. Please leave the economics to those with common sense. The intellectual elite that include Krugman, Reich, and Zency, should shut themselves up in their offices and leave us alone. Please keep your intellectual workouts to yourself. Have you not done enough damage already? We do not need more of your meddling. You and your ilk landed us in this mess in the first place.
Finally, one last anecdote to dispel the notion that we need more stimulus or onerous regulation (some regulation, yes, not what Reid, Pelosi, Frank, or Schumer want). On a radio program here in Kansas City they were talking with a local bank president. His bank is largely unaffected by the whole subprime mess because he followed two simple rules:-1) they did not make risky loans and 2) they did not allow loans to exceed 70% of their deposits. He claimed that the banks now suffering had loan to deposit ratios greater than 100% and they invested heavily in the subprime market. Damn that Midwestern common sense.
The fix is pretty simple when you get down to basics and let common sense guide your business model. What the brain trust in government does not understand is that we are paying for years of negligence. We cannot simply make a 180 degree turn and suddenly everything is sunshine and lollipops. We need to let the markets correct themselves. Will it be painful? Yes. Will it be better this way and not place a huge burden on our children? Yes. There is no need for complex economic models or scraping our economic system; we just need to do what makes sense, and that does not include what the ruling class is suggesting we do. A better approach may be to do the opposite of whatever they want to do.