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Unsinking the Titanic: Repairing the Hole that is America’s Debt Dilemma – Part 1

by Providence Crowder

 The Problem

There is a war of ideologies being waged on the American political scene.  Those on the left and right sides of the political spectrum are simply unable to come to a viable compromise concerning prominent socioeconomic issues of today.  In the meantime, while the politicians in Washington fight, the director of the Congressional Budget Office—Douglas W. Elmendorf—warned in his 2011 Long-Term Budget Outlook that the United States is headed towards the biggest economic downfall since World War II.  He testified:

Policymakers will need to increase revenues substantially as a percentage of the Gross Domestic Product (GDP), decrease spending significantly from projected levels, or adopt some combination of those two approaches to keep deficits and debts from climbing to unsustainable levels.

The CBO reports that for 2011, the federal government faced a 1.3 trillion dollar budget shortfall—the third largest to date—continuing its trend since 1969 of spending more than it takes in.  Only in the years 2009 and 2010 were the deficits greater—those years produced the largest budget deficits in modern history.  Elmendorf recommended early action and more sacrifices “for the benefit of younger workers and future generations.”  Simply put, the U.S. economy is in BIG trouble!

America, the most prosperous nation in the world, is currently the biggest debt owner in the world.  This colossal debt is reprehensible and represents instability and insolvency to our lenders.  Our looming liabilities threaten to eliminate the U.S. dollar as the world’s reserve currency, and the loss of this status would be catastrophic.  It would bring an instant devaluing of our investments, drastically drive up the cost of goods and services—hyperinflation—and create a radical change in American life as we know it.  All Americans would experience a significantly lower quality of life.  The idea of the American dollar collapsing should cause all Americans to take pause.

This Is What One Trillion Dollars Look Like

Jay Richards[1] explained that “Money has value only if trading partners believe it has value.  This is why currency quickly becomes stove fuel when people stop trusting it.”[2]  Our colossal debt is not the result of insufficient tax revenues because we are taxed at a level sufficient enough to pay for the necessary functions of government.  America’s problem is excessive and wasteful spending.  Any average American who has lived beyond his or her means could warn the federal government of the end result of its imprudence—reduce spending or risk losing everything.  At a whopping $13,561,623,030,891 of debt—according to the 2010 U.S. Treasury report—multiple years of deficit spending by the federal government has left our children to bear the burden of our irresponsibility and profligacy.  The interest alone on our nearly $14 trillion dollar debt make our meager attempts at debt solvency unrealistic.

The Cause

Many on the left, namely Democrats, choose to blame President George W. Bush for the economies troubles.  On the right, Republicans give President Obama the brunt of the blame.  Yet the administrations of both of these presidents, with their big spending and bailouts, and massive expansions of government have exacerbated the debt problem.  We also owe a huge debt of thanks to Democrat President, Bill Clinton, for our more recent recession and debt fiasco.  Back in 1995, the regulatory revisions made to the 1977 “Community Reinvestment Act” under the Clinton administration greatly weakened the housing market.  Initially the law was enacted to ensure that banks were fairly addressing the lending and banking needs of those people in low and moderate-income neighborhoods that they accepted deposits from.  Yet the Clinton administration’s 1995 revisions forced banks to lend hundreds of billions of dollars to people with little or no credit, and even people with bad credit—lending to these high risk borrowers under the guise of “the convenience and needs of the communities.”[3]

In other words, “if banks wanted to continue to indulge from the hand of government-created money and insurance (Federal Deposit Insurance Corporation), then they had to prove to government agencies that they were lending these indulgences to even the un-creditworthy in their community.”  The revisions to the Community Investment Act became a powerful mandate that reshaped lending practices.  This act was a recipe for economic disaster that the banks initially opposed because they didn’t want to be “forced” into bad lending.  Regardless, congress passed the initiative, alluring banks into lending big money to people with little or no credit.

To his credit, in 2003 President Bush attempted greater oversight of the two major government-sponsored lenders of the subprime, or risky loans—Fannie Mae and Freddie Mac—yet Democratic opposition shut his measure down, accusing Bush and the Republicans of all things, racism.  Shocking!  We know the end of this sad story—the 2007 subprime mortgage crisis led to the collapsing of a housing bubble that brought the banking and real estate industry to their knees.

To add insult to injury, the Federal Reserve Board’s response to the mortgage crisis was grossly irresponsible and unethical.  Wayne Grudem noted that “The Federal Reserve decided to pump reserves into the financial system by purchasing $1.2 trillion in assets, including $750 billion in mortgage-backed securities from companies like Fannie Mae and Freddie Mac . . . leading to increased inflation and thereby robbing everyone in society of the value of their dollars and their contract.”[4]  Simply put, the government rewarded reckless and irresponsible behavior by loaning hundreds of billions of dollars of taxpayer money to bailout the big banks and the mortgage agencies, with more than half of  the money going to Fannie Mae and Freddie Mac.  Economist Thomas DiLorenzo described that the current financial debacles are simply the “chickens coming home to roost after more than 30 years of progressive government interference and artificially deformed markets.”[5]  The current crisis is not a sudden or surprising occurrence, but the eventual result of salvation politics.[6]

No one is innocent in this scandal of magnificent proportions, not even the voters.  The recent political protest movement, Occupy Wall Street (OWL), self-righteously protest the “Wall Street” bankers and the “1%” of the rich.  Yet these crooks are the ones who knowingly elect politicians who extort money from others to subsidize irresponsibility and greed—they vote for big government.  OWL’s voted for crony capitalists who afforded political favors and preferential treatment for their friends at Fannie Mae and Freddie Mac.  Many of them voted for our current president, Obama.  He handed over a trillion dollars in taxpayer funds to bailout Fannie and Freddie, and the auto-industry and banks they now protest!

These OWL’s are the same who continue to vote for increased government spending on federally funded entitlements—the biggest debt busters of all.  Currently, the federal government is scrambling to fund its existing entitlements in Medicare, Medicaid, Social Security, retirement pensions, and welfare.  The funding of future entitlements is an even greater concern.  If the Federal Reserve continues the practice of pumping dollars into the system to keep up with government expenditures, Wayne Grudem asserts that “we can soon expect to see record high interest rates and/or inflation, coupled with the collapse of many entitlements.”[7] According to the White House Office of Management and Budget, entitlement spending as a percentage of GDP has now doubled that of U.S. spending on national defense.  An increase in entitlement spending and a decrease in spending on national defense, a core constitutional function of government, indicates clearly—our government’s priorities are misguided.[8]

Stay tuned for Unsinking the Titanic-Part 2, Ethical Implications.  Excerpt: “Spending of this sort is immoral; it is sure to hurt the poor and others who are dependent upon the government for their livelihood.  America’s reckless entitlement spending has baited many American’s into dependency and has promised future payments that won’t be worth the paper they are printed on.”

 

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Unsinking the Titanic: Repairing the Hole that is America’s Debt Dilemma – Part 3

by Providence Crowder

Suggestions, Solutions, Reflections

If we as a nation truly want to do right by our poor, we must urge our politicians to get out of salvation politics and leave the “saving” of the poor and needy of society to the faith-based communities.  A safety net of government services can be a good thing, but it profits no one if we put so much on it that it rips under the bureaucratic pressure of big government.   If our federal government truly respected American citizens, then they would stop robbing us and selling us back our own goods at a higher price!  They would end the practice of deficit spending for programs and entitlements that do more harm than help and pass a balanced budget amendment requiring the federal government to exercise responsibility and restraint concerning its outrageous spending.  All Americans are expected to live within their means; therefore, so should the government we elect. 

Seemingly, our current President, Barack Obama, has a vision for America different than the vision of the founders of the great American experiment.  They envisioned a nation of free peoples whom—unlike all the nations before her— would govern themselves and share in ruling.  American colonists became disenfranchised and disillusioned by monarchial British rule; therefore, personal liberty and limited government were central themes to the founding documents, the Declaration of Independence and the U.S. Constitution.  Many nations have since emulated the American model and have tried to duplicate America’s ingenuity and success. 

Yet President Obama envisions big government and limited liberty because he has no confidence that Americans are capable enough to make responsible choices with their money and with their lives.  He believes in a ruling class, the government.  He promotes class distinctions by demonizing the rich and demoralizing the poor.  His ideology is reminiscent of German revolutionary and socialist Karl Marx.  Cuban revolutionary Fidel Castro is quoted as stating this of Marxism;

Marxism taught me what society was.  I was like a blindfolded man in a forest, who doesn’t even know where the north or south is.  If you don’t eventually come to truly understand the history of the class struggle, or at least have a clear idea that society is divided between the rich and the poor, and that some people subjugate and exploit other people, you’re lost in a forest, not knowing anything.[14]

 But the grand communist experiment was just a secularized attempt to establish God’s Kingdom on earth, but without the God of heaven.  Richards notes that:

Marx’s story has the main elements of the Christian story: primeval paradise, fall, redemption, eternal paradise.  It’s just stripped of reverences to God, sin, Jesus, and the afterlife.”[15]  Christ established his Church, and we are expected to be salt and light—reflecting God’s kingdom though sin and death are among us.  Yet our good works will never bring about God’s kingdom.[16]  It’s a delusion to believe that we can build a utopia if we try hard enough.[17]  This vision doesn’t take in account human sinfulness and God’s mercy.  Jesus Christ will establish his Kingdom and if we try, we will not only fail, but “do more harm than good.[18] 

I believe Marx, Castro, and Obama genuinely want a world in which the ordering of society is more fair and just.  But when we speak of building a just society, we must ask ourselves, “just compared with what?  It does no good to tear down a society that is ‘unjust’ compared with the Kingdom of God if that society is more just than any of the ones that will replace it.”[19]  Compared to God’s Kingdom, every society gets failing grades.[20] Therefore, to hate capitalism and prefer socialism or communism is not more just.  Socialism has proven to bring greater poverty and injustice among the people and “never has there been a greater gap between ideas and outcomes than in communism.”[21]  Jay Richards notes that socialists, “talk a good talk, denouncing inequality and defending the poor, and despite the nasty outcome of their experiments, they can still get a pass from those who sympathize with their ideals.”[22]  

The current administration, under the lead of President Obama, should end its love affair with socialism and end his policies of taxing and spending.  The more that the government does for its people, the more dependent the people become and less likely they are to provide for themselves.  Without the safety net of big government, out-of-wedlock pregnancies look less attractive, hard work becomes necessary to eat, saving for hard times becomes a priority, community becomes important again to care for the least in society, and the government can focus on governing and protecting our freedoms.  America is still a great nation, and with the right leadership, the ideas upon which she was founded upon will again be respected.


 [1] Jay W. Richards is an author and theologian.  He has a PhD in philosophy and a Master of Ministry.  He has written dozens of books and articles on the topics of economics, theology, and science.  He has published in academic journals all over the country and he is an editor and contributor to numerous apologetic and theological research publications.

[2] Jay W. Richards, Money, Greed, and God: Why Capitalism is the Solution and Not the Problem (New York, NY: HarperCollins, 2009), 94.

[3] Joel McDurmon, God versus Socialism: A Biblical Critique of the New Social Gospel (Powder Springs, GA: The American Vision, Inc., 2009), 43.

[4] Wayne Grudem, Politics According to the Bible: A Comprehensive Resource for Understanding Modern Political Issues in Light of Scripture (Grand Rapids, MI:  Zondervan, 2010), 273-74.

[5] McDurmon, 43.

[6] Ibid.

[7] Grudem, 274.

[8] 2011 Chart Book, “Federal Spending Chart 7.”  Retrieved from http://blog.heritage.org/2011/08/21/chart-of-the-week-defense-spending-has-declined-while-entitlement-spending-has-increased/ on January 10, 2012.

[9] A baby boomer is a person who was born during the demographic Post-World War II baby boom and who grew up during the period between 1946 and 1964.  Retrieved from http://en.wikipedia.org/wiki/Baby_boomer

[10] John Wihbey, “2011 Annual Report by the Social Security Board of Trustees,” Retrieved from http://journalistsresource.org/studies/government/politics/social-security-report-2011/.

 [11] McDurmon, 47.

[12] Richards 51.

[13] Ibid., 47.

[14] Castro, Fidel; Ramonet, Ignacio (interviewer) (2009). My Life: A Spoken Autobiography. New York: Scribner.

[15] Richards, 30.

[16] Richards, 30.

[17] Richards, 31.

[18] Richards, 30.

[19] Ibid., 31.

[20] Ibid.

[21] Ibid.

[22] Ibid., 25.

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Posted by on January 21, 2012 in Uncategorized

 

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Socialist Candidates

A Spectre is Haunting America. Don’t Let It

By Dr. Richard A. Jones—November 12, 2008

Now that what some might call the “unthinkable” has actually happened, it’s certain that a vital remnant in the Church will wake up and realize that, “It’s time to start paying attention.” Had McCain won, the Christian Right likely would have given another overconfident sigh of relief, hoping that the other side would somehow not be able to advance its anti-Christian offensive in 2012. (It would have advanced anyway.) Either way, it’s folly to forget that the difference between the American Dream-killing, wealth-redistributing leftist, Obama, and the RINO McCain is negligible. A tip-off that both are operative socialists was made clear last primary season when mainstream media palmed off these two inexplicable “choices” onto us. Values voters never had a say. But that’s all spilled milk. It’s time to explore how it was that what was once essentially a Christian-leaning, U.S. voting populace was so easily set up for passive acceptance of a clear-cut socialist candidate in each party. Don’t be surprised by the major cause.

 

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Dedication to Marxism by East Coast political, academic and media types goes back to the days of FDR and even before. But, it neared max toxicity in the 1960s with Viet Nam. By 1989 and 1990, Marxist devotion in the U.S. had not weakened in the least even though the Cold War had ended and the USSR folded. That’s because, as we’ve argued here, true socialism at its core is an intense, life-dedicated hatred of God and the Christian family. And hatred of God is ever-present. This passion is what keeps the fires of nihilism and Marxism burning on campuses nationwide (and eventually in the public schools) even though it waned (for a season) in the Soviet Motherland. Viet Nam era zealots like Bill Ayers never stopped pushing radicalism at ever-lower grade levels in the schools. So it’s no surprise that mind-programmed young voters (and plenty of church goers, per Barna polling) have slowly fallen for Washington’s “equality, compassion (and vote-buying) plan;” i.e., socialism. How did this catastrophe come to pass with nary a whimper?

Many think that a deceived Protestant Church in America was the key. It abetted the slippery slope to socialism via a century-long bad habit of effeminate pietism and its cave-in to an “it’s just about over,” irrelevance-guaranteeing, dispensationalism. (Both of which developed mainly because due to loss of the best U.S. men during the cynically contrived Civil War.) Once the shroud of pessimistic end-times resignation had smothered what de Tocqueville experienced as “pulpits aflame,” the soft undermining effect of passive church irrelevance in a fast-changing society was assured. By election time 2008, scores of feminized, liberal-leaning pulpits had been taken in by the Left’s vague slogan of “change;” a change that a “truly loving God” supposedly desires.

As 1960’s radicals like Ayers and company wormed their way into the teacher colleges, the plan was that children…especially Dr. Benjamin Spock’s permissively trained and spoiled victims…would be progressively dumbed down to accept humanistic, anti-Christian socialism. The zeitgeist of the age was one of busy Baby Boomer parents marching resolutely to the beat of “me, mine and materialism.” While both parents took two salaries in order to pay their taxes and feed a consumption mentality, the planners knew that schools would be the perfect holding tank by day for “open minded” (read “gullible”) children who were getting, if any, only minimal moral guidance at home. What was being surreptitiously taught in the mega-compliant government schools was less critical to parents than the convenience of the handy babysitting. A passive Church, meanwhile, yawned. Only Rev. Rousas J. Rushdoony, virtually alone through the 1970s and 1980s, warned about the grave threat on the near horizon should government-controlled education be allowed to prevail. Has it prevailed? Having to ask the question gives the answer.

It was during this pivotal and still feasible-for-action time frame that others besides Rushdoony should have perked up and given the alert. Pro-active response conditions were still favorable. Post-Viet Nam, as socialist fruit began growing apace in the schools, pastors and young parents alive in the 1980s and 1990s (who would have been born at a time when the Cold War’s lessons about communism’s threat were still vivid) should have paid attention. And communism, as is well known, is merely the freedom-hating socialism of Obama and McCain worked out to its inevitable conclusion. With the facts so clearly visible, why didn’t those Boomer parents and their pastors figure it out?

It wasn’t just Dr. Spock. It wasn’t just end-times misinterpretations that led to irrelevance within church leadership. Post-Viet Nam pastors had other concerns stopping them from storming pulpits and with rhetorical swords drawn, proclaiming; “Parents: Remove God’s children from the humanist schools.” With Christianity under attack on all fronts, especially media, academia, and the entertainment sectors, humanistically-deceived moderns began leaving church. With tithing and giving down, pastors had worries other than the pesky socialism threat. They caved in to financial “reality,” very often using the wholly unjustified “salt and light in the schools” pretext. Instead of “taking a chance on God” and declaring truth, they ignored the get-them-out warning. They feared backlash from parents and public school teachers among the congregants. It was and is that simple.

But there’s plenty of blame to go around. All of the best known national power ministries on radio and TV happily followed suit. They too feared jeopardizing their donations and product-sales base. True, these national voices gave occasional, random attention to the school problem, but were quick to say, as a covering mantra, that the two alternatives, home education and private schools “are not for everyone.” Result: Only a few previously pro-materialism-leaning parents were sufficiently aroused to change gears, even for their own children. From pew to pulpit to the big production ministries, the ball was dropped, and the youth contingent response in the 2008 election reflects this failure. Millions of younger voters from churched homes (and often joined by their parents) had, in fact, succumbed to school socialism-based, pro-permissive, pro-class envy, pro-homosexual, pro-green, anti-defense and anti-capitalism deception. Twenty-first-century parents and leaders must wake up. “If you forebear to deliver them that are drawn unto death, and those that are ready to be slain…. If you say, behold, we knew it not, does not he that ponders the heart consider it? And he that keeps the soul, does he not know it? And shall he not render to every man according to his works” (Proverbs 24:10-11).

“Children of the State” in World Magazine for November 1, 2008, unintentionally revealed the degree of American reluctance to grasp 40 years of brutal truth…years at least somewhat reminiscent of 1930s Germany. It stated: “If you want a classic example of how fast a whole culture can be turned on a dime, redirected by 180 degrees, try this: Just when it seemed, through the 1980s, 1990s, and even well into the past decade, that a socialist mindset had been successfully put down in the United States, back it comes- with a vengeance.” No! 2008 was not a “here it comes back,” inexplicable surprise. Exactly the opposite! Since the 1970s, youth socialism-indoctrination has been like a freight train coming. And in 2008 it arrived-with a vengeance, right on schedule and just as planned. If not addressed now, 2010 will be worse. Today’s younger voters are politically illiterate, socialist-leaning, damaged goods and much of this because of a church-wide, millstone-risking refusal to protect Christ’s “little ones” (Matt. 18:6). “For the leaders of this people cause them to err, and they that are led of them are destroyed” (Isa. 9:16).

Wiser heads in the Church; in some rare pockets of government, and we here at American Vision, know that this trend to socialism and, with it, the soon loss of our freedoms, must end. That pitiable throng of those taken in by this fairy tale must decline. Those adults-to-be of tomorrow (and already-adults of today) who would help lead us out of the trap must increase. American Vision’s specialty in the culture wars has always been to supply God-honoring materials for Christians who want to enhance their Kingdom-advancing skills. But AV’s offerings will fall increasingly on deaf ears if the adult readers of tomorrow continue “learning” in the other side’s youth training camps. Why not tell your pastor to think over the challenge? Tell him that an obedience-respecting God will honor his leadership. This is a transformational hour in history and the hour is late. As Cliff May wrote last week in National Review; “The Democrats, i.e., the Left, now have the White House, control of both houses of Congress, a majority of governors’ mansions, a majority of state legislatures, the entertainment media, the elite news media, the unions, the educational establishment, the lion’s share of the philanthropic community, and increasing power over the courts.” ACORN is on its way to OAK status. Christians need to grow trees of influence of their own, their own forests, and fast. Failure to act now guarantees that things will all only get worse, and not just in the political realm but in all of them. We ask you to join us by removing your own children and encouraging others to do the same. Set January, 2009 as your target date. We don’t have forever. Thank you.

 

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Avoiding the Socialist Temptation

by Gary DeMar (Originally published April 24, 2006)

With the high price of gasoline, the temptation to fix the problem through government will be strong. It won’t work; it hasn’t ever worked. If all governments have to do to make us prosperous is to pass laws, why not get them to make us all rich? Socialism, as a political and economic system, continues to attract adherents around the world. America has its large share of operational socialists. Many of them are Christians. Avoid the temptation. Fixing the price of gasoline is only a first step to larger issues.

 

In the former Soviet Union, China, and Cuba, governmental control of the individual is nearly absolute. There is almost no freedom of movement. Chinese government officials inspect the wombs of woman to insure they are not carrying a child beyond the one-child policy instituted by the State. The former socialistic government of Germany built a wall around the city of Berlin to keep freedom loving East Germans from fleeing to the freedom offered in the West. Under full-blown socialism, the State interferes in the everyday affairs of the people, even in the transactions they make. The State determines what will be produced, how much of it will be produced, how it will be produced, where it will be produced, by whom it will be produced, what it will sell for, how people will get the product, and how it will be used. Under extreme forms of socialism, the individual is given little incentive to invent, produce a better product, or to be more efficient so a product can be sold at a lower price and thus benefit all of society. The State determines everything, since only the State is to benefit. There can be no individuality.

Milder forms of socialism allow for individual freedoms, but over time these freedoms are gradually taken away. Property rights are never absolute. The taxing power of the State increases in order to fund increased government programs always with the promise of creating a better society. Socialists claim that it is the duty of the State to implement laws to break down economic and social “inequities,” a form of class warfare, pitting the “rich” over against the “poor.” While some socialists have had good intentions, the effect of socialist policies has been disastrous. Rich and poor do reach parity under a socialist system-everybody becomes poor, except those implementing the laws.

One of the first attempts at a socialistic economy took place in colonial America at Jamestown (1607), hundreds of years before Karl Marx wrote the definitive work on socialistic economics, Das Kapital. For the first four years, all property was held in common. There were no individual property rights. The work was communal. All of what was harvested was put in a centralized storehouse. Since everybody got an equal share no matter how much work any individual performed, there was no incentive to work any harder than the next person. Historians record that after four years, no crops were planted, houses were falling apart, and the prime occupation of the men was bowling in the streets. The Jamestown Colony ultimately failed because the necessary incentives to work were taken away. Socialism begins with “interventionism,” the gradual manipulation of the economy through governmental decree. Again, it’s always with the promise that things will be better if the State steps in to “fix” things.

The history of the Plymouth Colony (1620) is a study in contrasts. Early attempts at a common storehouse were quickly abandoned. Every member of the colony was given his own plot of land to cultivate as he pleased. In just one year, even after losing half their members to death, the Pilgrims of Plymouth were so prosperous that they were able to celebrate a bountiful thanksgiving feast. In 1621, Edward Winslow wrote the following to those back in England: “I never in my life remember a more seasonable year than we have here enjoyed. We are so far from want that we often wish you partakers of our plenty. You might, on our behalf, give God thanks, who hath dealt so favorably with us.”

 

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Broken Windows Revisited

The Broken Window Fallacy Reapplied

Posted on 2008

[This talk was delivered at the 2008 Mises Circle in Houston.]

The claim of the Austrian School that has scandalized members of other schools for 150 years is the following. The propositions of economics are universal. The principles apply in all times and all places, because they derive from the structure of reality and human action.

What brought about economic growth, inflation, or the business cycle in China in 300 BC are the same institutions that drive phenomena in the United States in AD 2008. The circumstances of time and place change, but the underlying economic reality is identical.

That claim has made other economists — to say nothing of sociologists, historians, and politicians — scatter like pigeons. The Historical School poured scorn on this idea, and Carl Menger, the founder of the Austrian School, fought them tooth and nail. The Chicago School of positivists found the claim preposterous, and Mises and Hayek and Rothbard battled them. The Keynesians have long been outraged, and the postwar Austrian generation reasserted the truth. The socialists, who posit that rearranging property titles will transform all of reality, say that the claim is absurd, capitalistic nonsense.

But there it stands. No matter where or when, the essential prerequisite for economic growth is capital accumulation in a framework of freedom and sound money. The consequence of price control is shortage and surplus. The effect of money expansion is inflation and the business cycle. The effect of every form of intervention is to make society less prosperous than it would otherwise be.

The list of universals is endless, which is why every age needs good economists to explain and articulate the truth.

Well, I would like to add that there are universal fallacies too.

Frederic Bastiat pointed to one: the belief that the destruction of wealth fuels its creation. He explains this by means of an allegory that has come to be known as the story of the broken window. Most famously it was retold as the opening of Henry Hazlitt’s Economics in One Lesson, which is probably the bestselling economics book of all time.

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A kid throws a rock at a window and breaks it, and everyone standing around regrets the unfortunate state of affairs. But then up walks a man who purports to be wise and all knowing. He points out that this is not a bad thing after all. The man fixing the window will get money for doing so. This will then be spent on a new suit, and the tailor too will get money. The tailor will spend money on other items, and the circle of rising prosperity will expand without end.

What’s wrong with this scenario? As Bastiat put it, “It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way which this accident has prevented.”

You can see the absurdity of the position of the wise commentator when you take it to absurd extremes. If the broken window really produces wealth, why not break all windows up and down the whole city block? Indeed, why not break doors and walls? Why not tear down all houses so that they can be rebuilt? Why not bomb whole cities so construction firms can get busy rebuilding?

It is not a good thing to destroy wealth. Bastiat puts it this way: “Society loses the value of things which are uselessly destroyed.”

It sounds like an unexceptional claim. But herein rests the core case against everything the government does. Perhaps, then, we can see why the allegory is not better known. If we took it seriously, we would dismantle the whole apparatus of American economic intervention.

If you are with me to this point, perhaps you have a hard time believing that anyone really believes that wealth destruction is actually a good thing. Let me try to show that the fallacy is as pervasive as ever.

After every natural disaster, we at the Mises Institute start what we call the “Broken Window Watch.”

After hurricane Katrina, the Labor Secretary said, “[W]hat will happen — and I have seen this in previous catastrophes and hurricanes — there is a bright spot in that new jobs do get created.”

And The Economist said, “While big hurricanes like Katrina destroy wealth, they often have a net positive effect on GDP growth, as the temporary downturn immediately after the storm is more than made up for by the burst of economic activity that takes place when the rebuilding begins.”

And the New York Times said, “Economists point out that although Katrina has destroyed a lot of accumulated wealth, it ultimately will probably have a positive effect on growth data over the next few months as resources are channeled into rebuilding.”

After last year’s California fires, we heard this from Alan Gin, a University of San Diego economist: “In the odd nature of economic accounting, this will probably be a stimulus. There will be a huge amount of rebuilding in the next couple of years, financed by insurance payments.”

And CBS Marketwatch said, “Economists have noted the perverse reality that in the wake of disasters, reconstruction spending helps the economy, even as people are still struggling to recover from their personal losses.”

Note that personal loss here is deemed rather irrelevant compared with the beneficial macroeconomic results. Here we have a theme we find often in economics, the attempt to drive a wedge between what makes sense for individuals and what is good for society. We see this on display in this recessionary environment, when people are told to spend spend spend, even though most people understand that recessions are times for saving.

Continuing on, we find the Broken Window fallacy popping up even after 9-11.

Timothy Noah of Slate wrote, “We live in a very wealthy nation that responds to horrible disasters by spending large sums of money…. It will also provide a meaningful Keynesian stimulus to a national economy that, let’s face it, was tottering on the brink of recession well before Sept. 11. The recession may still come, but the countercyclical spending should help shorten it.”

Another economist declared, “Initially, this could provide a significant boost to an economy that had been slumping. The construction industry could benefit from the rebuilding process. There may also be a boon for slumping tech sales, in replacing lost equipment.”

“In fact, less spending and more saving is what is called for during a recession, which is nothing but a market correction writ large.”

Thus can we see the continuing relevance not only of Bastiat’s allegory but also of the characters in the story. The posturing wiseguy who says that breaking windows is good for the economy keeps reappearing again and again. So entrenched is this mistake that we might call it official economic doctrine for the whole country.

I ask you to consider the absurd discussion of a stimulus package designed to rescue the economy from recession. The idea is that the government will inject funds into private markets to stimulate them to the point that they will run on their own. Not once in this debate have I heard anyone ask the core question: where is this money going to come from?

It seems that Washington wants us to believe that they have some magic machine that can turn up $150 billion in new assets without anyone having to do anything to make these assets appear. One wonders, then, why we need to wait until a recession to stimulate the economy. Why not magically create hundreds of billions every day, and not just for this country but for the entire world? Why are we holding back?

Now, the ideas of the stimulus package are not 100% awful. Some people are talking about tax cuts, which is a good thing but rather pointless without spending cuts. I’m particularly intrigued by the underlying assumption here that taxes work as a drag on an economy whereas tax cuts fuel expansion. If that is the case — and it is indeed true but for different reasons than Washington gives — why wait until the recession to cut taxes? If taking less from us is good for the economy, we should institute this as a universal policy.

One great lesson of political economy, emphasized for centuries, is that the government creates no wealth of its own. Everything it has it has to get from you and me, one way or another. It can tax. It can borrow. And, finally, it can inflate by means of credit-market manipulation. This third option is the most disguised. When people hear the words “monetary policy,” they figure that this is something they will leave to experts. And central bankers have an astonishing talent for obfuscation to the point that no one knows with certainty precisely what they are doing.

The whole show is designed to make us go to sleep and not think about what is really going on. The unvarnished truth is that when the Fed artificially lowers rates, it is creating new money that waters down the value of the existing money stock, yielding a lower purchasing power for the dollar. That’s another way of saying that it creates inflation — perhaps not right away, and perhaps not across all economic sectors, but eventually and certainly.

This, my friends, is a form of breaking windows. It is wealth destruction. It matters not that there will be more dollars to spend, because prices will be higher and wealth has been drained out of the private sector — and redistributed within it. It is Bastiat’s fallacy reinvented in a new form.

New money also distorts production structures. At the very time when the market is pressuring long-term investment to pull back, the lower rates encourage expansion in ways that prolong the crisis. It only delays and worsens the inevitable. The Great Depression taught us that government is capable of doing this to the point that the crisis can last for 17 years. So this is no small matter. A government determined to prevent recession is a government that might end up sustaining one to the point of the collapse of civilization itself.

It is a perverse belief, but pervasive nonetheless. It is believed by both political parties. It is held by the president, the media, and the congress (except for Ron Paul). It is a reflexive belief, one that reflects a failure to think between stages and see the unseen effects of government intervention.

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Frédéric Bastiat (1801–1850)

One reason that Bastiat’s example has power is that it applies not just in one area of policy but all areas. If it isn’t true that breaking windows creates wealth, it is not true that government spending and inflating is a boon to the economy. It only ends up draining wealth from the private sector, which is the only source of wealth creation.

It doesn’t matter what the government spends money on. For example, building pyramids with tax dollars is not good for the economy, despite what Keynes claimed. But neither is waging war good for us or the victim country, despite constant claims to the contrary.

It is surely one of the most deadly myths that the Second World War ended the Depression. As Robert Higgs has shown, it further prolonged it, all phony data aside. And consider the spending on the war on terror: if government spending were capable of stimulating the economy, we would not have recession right now

Chris Westley assembled some data on the last seven years of economic conditions, and it is sobering indeed. Since 2000, tax revenues are up 25%. That’s wealth destruction. Government spending is setting records for expansion, with $1 trillion added to the annual budget, with military spending up $250 billion each year over the egregious $400 billion spent annually in 2000. That’s wealth destruction. The national debt is up 59%. That has to be paid. More destruction.

Social Security liabilities are up 60%. That too is the promise of future destruction. The money supply is up 72%. More destruction. Inflation itself has risen 20%, so the dollar of 2000 is now worth 80 cents. The gas price alone is up 118%, so that too is wealth destroyed. As an indication of economic trouble, the gold price is up 206%.

Here is the story so far of the government’s great stimulus. It has led to hard economic times. More of the same will create more of the same and worse. The unemployment rate is rising. Savings are falling. Prices are rising. We are less secure, less prosperous, and we have fewer opportunities than ever to dig our way out of this mess.

Government expansion has actually created the absurd scenario mentioned above. The boy threw the rock; the crowds in Washington believed the sophist; and now they are plotting to raze all homes on the block, in the name of economic recovery.

Have we learned from the Great Depression? Ben Bernanke believes that he has learned something. He believes that the key problem of that period was a failure of the central bank to pump in enough money and credit. He has never absorbed the critical observation of Rothbard that the Fed did attempt to pump up the money supply from 1929–1934. They used every mechanism, but the credit markets found few takers, and without their cooperation, the money supply does not expand.

The real lesson of the Great Depression is that there is nothing that the central bank can do to forestall a recession whose time has come, and nothing government can do to improve the situation once the recession has arrived. Everything it attempts to do — except shrink — only ends up making matters worse.

So it is in our time. We must ask ourselves what Washington is capable of doing this time around. I believe that the answer is anything and everything. Bernanke will attempt to flood the economy with money. Washington is perfectly capable of imposing price and wage controls on the entire economy. It is capable of terrifying levels of protectionist legislation. New taxes are less likely but taxation through debt accumulation is probably inevitable. There might be rationing, spending mandates, antihoarding legislation, and more.

The assumption that driving up consumption is the key to prosperity is particularly dangerous, and also pregnant with irony. During good economic times, we are hounded constantly by the intellectual elites for our consumption habits. It is said that we are a greedy nation, buying ever more fripperies and not looking after the long term. The American public is decried by the intellectual elites as materialist, consumerist, and short sighted.

“Today, the governing elite has never been more transparently ridiculous and even freakish.”

Then recession hits and the tune changes completely. Reliable leftists, fresh from having complained about the egregious spending habits of the American consumer, suddenly turn on a dime and tell us that more consumption is the key to economic growth. They favor policies that would get us to fork over ever more of our money, under the belief that the core problem is a lack of demand!

A recent example is Barack Obama, who said last year that the problem with popular culture is that it “saturates our airwaves with a steady stream of sex, violence and materialism.” But only this week, he seemed to endorse one of the three. “If the economy continues to decline in the coming weeks, we should” send checks to people, he said. “This is the quickest way to help people pay their bills and get them to start spending.”

In fact, less spending and more saving is what is called for during a recession, which is nothing but a market correction writ large. Attempting to coerce spending threatens the value of the dollar itself.

Here we face a very dangerous situation. If the dollar ever ceases to be the international currency of choice — and this could happen — we could face roaring inflation. And with dreadful legislation that prohibits any kind of choice in currency, Americans will be stuck. Here is a problem that could cause near panic in Washington.

The irony here is that after a century of failed interventionism and socialism, Washington is no less likely, and probably far more likely, to take the path of least resistance and accumulate ever more power unto itself, at our expense.

We are in an election season, so of course people ask who would be the least bad person to head the state in the years ahead. The answer here is not at all clear, if it is not Dr. Paul. As with the 1930s we face a choice between militaristic fascism and Keynesian-style socialism combined with environmentalism. These are two very grim choices.

I tell you this not to spread gloom but merely to be realistic about the prospects for the future of American politics. But there is also good news to be considered. The private sector has raced so far ahead of the state, and is so global, that it is far more resilient than before. There are safety valves available in the form of international capital markets.

The government is so much bigger now than in the 1930s, but, paradoxically, that also makes it less effective than it once was, which is very good news. It is a massive, lumbering giant, whereas the markets are a speed racer.

I might also point out that the government enjoys nowhere near the respect it once had. Once the governing elite consisted of the nation’s elite, coming from the best families and the best schools. Today, the governing elite has never been more transparently ridiculous and even freakish. Gone are the aristocratic public servants of yesterday; today, the government is made up of a class of hucksters and gangsters that inspires no confidence.

This is all to the good, for as Mencken said, it is always great when we do not get all the government we pay for.

On the intellectual level, the teachings of economics in the Austrian School tradition have never been more available to the world, or more frequently cited and discussed. And a recessionary environment guarantees more attention to the Austrian theory of the business cycle simply because this is the only model that makes sense of our current problems.

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Free Markets, Sound Money, and Private Property: the title nicely sums up the message of the economics of freedom.

We should never underestimate the power of ideas to make a difference in the world. During the Great Depression, the resistance to the state was present but weak. Today we have built up a mighty intellectual army that extends across the globe. We are prepared in ways that they were not. We have thousands of students and faculty, and men and women of affairs who know real economics. We have the Internet. We have new books that put the whole problem in perspective, such as Jesus Huera de Soto’s work on business cycles. We have the biography of Mises now, and it illustrates the heroism of political dissidence. The works of Rothbard on the Great Depression and central banking have never been more widely circulated and available. This time our masters in Washington will not go unopposed.

At the Mises Institute, now in our 26th year, we have tried to maintain a careful balance between serious and fundamental scholarly work, and public advocacy. We must never lose sight of the need for research and detailed work. It is not enough to merely repeat slogans. At the same time, there are some foundational lessons of economics that must be taught again and again with each new generation. The fallacy of the Broken Window is one of them, and its implications are truly radical.

Both Bastiat and Hazlitt saw that the government is the great window breaker, that destroyer of wealth that drives the economy backwards. The engine of creativity, recovery, and expansion is the private sector, completely unencumbered by state intervention. Ron Paul’s newest book is called Pillars of Prosperity: Free Markets, Sound Money, and Private Property. The title nicely sums up the message of the economics of freedom.

It bears repeating in every age, in all places, for we will never be completely free of the great threat of the window breaker. So long as there are governments with stones ready to throw, there will be a need for someone to point out that destruction is never productive, never beneficial, and never a path to the good life that we all seek.


Speaking of Liberty Llewellyn H. Rockwell, Jr. is president of the Ludwig von Mises Institute in Auburn, Alabama, editor of LewRockwell.com, and author of Speaking of Liberty. See his Mises.org archive. Send him mail. Comment on the blog.

This talk was delivered at the 2008 Mises Circle in Houston

 

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