Archive for October, 2006

To Arms! To Arms! The Democrats are coming!

October 30, 2006

The national picture appears as bleak as it does locally here in Colorado. Big government types are poised to take the reign as conservatives fail to stand their ground and pander for votes. Of course, the polls could be wrong, but this time I rather doubt it. The Republicans made their beds, and now they get to sleep in them.

Just what do we have to look forward to from the Democrats? More sexist anti-male legislation that is for sure. More un-constitutional ex post facto laws. More takings of constitutional rights based upon non-felony crimes. Ever escalating taxes that will throttle the life out of the economy. Hide your guns and ammunition now before it is to late. Forget about raising your children because soon the Democrats will take parenting from you in order to establish a dynasty for socialism. Religion will still be tolerated, but only so long as you kneel to the alter of government authoritarianism. [Read Democrat Socialism.]

Just what would the Republicans do if given a second chance through some fluke? Probably just ask for more money to squander.

Both parties will continue to leave our borders un-secured and wide open for any terrorist to walk right across hell bent upon our destruction.

There are those that think that I don’t know humor!

October 23, 2006

http://i.euniverse.com/funpages/cms_content/13180/HillaryCondi_HoDown.swf

>         Tips for Handling Telemarketers
>
>Three Little Words That Work !!
>
>(1)The three little words are: “Hold On, Please…”
>
>Saying this, while putting down your phone and walking off (instead of
>hanging-up immediately) would make each telemarketing call so much more
>time-consuming that boiler room sales would grind to a halt.
>
>Then when you eventually hear the phone company’s “beep-beep-beep” tone,
>you know it’s time to go back and hang up your handset, which has
>efficiently completed its task.
>
>These three little words will help eliminate telephone soliciting.
>
>
>(2) Do you ever get those annoying phone calls with no one on the other
>end?
>
>This is a telemarketing technique where a machine makes phone calls and
>records the time of day when a person answers the phone.
>
>
>This technique is used to determine the best time of day for a “real” sales
>person to call back and get someone at home.
>
>What you can do after answering, if you notice there is no one there, is to
>immediately start hitting your # button on the phone, 6 or 7 times, as
>quickly as possible This confuses the machine that dialed the call and it
>kicks your number out of their system. Gosh, what a shame not to have your
>name in their system any longer !!!
>
>(3) Junk Mail Help:
>When you get “ads” enclosed with your phone or utility bill, return these
>”ads” with your payment. Let the sending companies throw their own junk
>mail away.
>
>When you get those “pre-approved” letters in the mail for everything from
>credit cards to 2nd mortgages and similar type junk, do not throw away the
>return envelope.
>
>Most of these come with postage-paid return envelopes, right?  It costs
>them more than the regular 37 cents postage “IF” and when they receive them
>back.
>
>It costs them nothing if you throw them away! The postage was around 50
>cents before the last increase and it is according to the weight. In that
>case, why not get rid of some of your other junk mail and put it in these
>cool little, postage-paid return envelopes.
>
>
>Send an ad for your local chimney cleaner to American Express.  Send a
>pizza coupon to Citibank. If you didn’t get anything else that day, then
>just send them their blank application back!
>If you want to remain anonymous, just make sure your name isn’t on anything
>you send them.
>
>You can even send the envelope back empty if you want to just to keep them
>guessing! It still costs them 37 cents.
>
>The banks and credit card companies are currently getting a lot of their
>own junk back in the mail, but folks, we need to OVERWHELM them. Let’s let
>them know what it’s like to get lots of junk mail, and best of all they’re
>paying for it…Twice!
>
>Let’s help keep our postal service busy since they are saying that e-mail
>is cutting into their business profits, and that’s why they need to
>increase postage costs again. You get the idea !
>
>If enough people follow these tips, it will work —- I have been doing
>this for years, and I get very little junk mail anymore.
>
>THIS JUST MIGHT BE ONE E-MAIL THAT YOU WILL WANT TO FORWARD TO YOUR FRIENDS

7 reasons not to mess with children.

A little girl was talking to her teacher about whales.
The teacher said it was physically impossible for a whale to swallow a human=
because even though it was a very large mammal its throat was very small.
The little girl stated that Jonah was swallowed by a whale.
Irritated, the teacher reiterated that a whale could not swallow a human; it=
was physically impossible.
The little girl said, “When I get to heaven I will ask Jonah”.
The teacher asked, “What if Jonah went to hell?”
The little girl replied, “Then you ask him “.

A Kindergarten teacher was observing her classroom of children while they we=
re drawing. She would occasionally walk around to see each child’s work.
As she got to one little girl who was working diligently, she asked what the=
drawing was.
The girl replied, “I’m drawing God.”
The teacher paused and said, “But no one knows what God looks like.”
Without missing a beat, or looking up from her drawing, the girl replied, “T=
hey will in a minute.”

A Sunday school teacher was discussing the Ten Commandments with her five an=
d six year olds.
After explaining the commandment to “honor” thy Father and thy Mother, she a=
sked, “Is there a commandment that teaches us how to treat our brothers and=20=
sisters?”
Without missing a beat one little boy (the oldest of a family) answered, “Th=
ou shall not kill.”

One day a little girl was sitting and watching her mother do the dishes at t=
he kitchen sink. She suddenly noticed that her mother had several strands of=
white hair sticking out in contrast on her brunette head.
She looked at her mother and inquisitively asked, “Why are some of your hair=
s white, Mom?”
Her mother replied, “Well, every time that you do something wrong and make m=
e cry or unhappy, one of my hairs turns white.” The little girl thought abou=
t this revelation for a while and then said, “Momma, how come ALL of grandma=
‘s hairs are white?”

The children had all been photographed, and the teacher was trying to persua=
de them each to buy a copy of the group picture. “Just think how nice it wil=
l be to look at it when you are all grown up and say, ‘There’s Jennifer, she=
‘s a lawyer,’ or ‘That’s Michael, He’s a doctor.’
A small voice at the back of the room rang out, “And there’s the teacher, sh=
e’s dead.”

A teacher was giving a lesson on the circulation of the blood. Trying to mak=
e the matter clearer, she said, “Now, class, if I stood on my head, the bloo=
d, as you know, would run into it,and I would turn red in the face.”
“Yes,” the class said.
“Then why is it that while I am standing upright in the ordinary position th=
e blood doesn’t run into my feet?”
A little fellow shouted, “Cause your feet ain’t empty.”

The children were lined up in the cafeteria of a Catholic elementary school=20=
for lunch. At the head of the table was a large pile of apples. The nun made=
a note, and posted on the apple tray: “Take only ONE. God is watching.”
Moving further along the lunch line, at the other end of the table was a lar=
ge pile of chocolate chip cookies.
A child had written a note, “Take all you want. God is watching the apples.

It doesn’t matter how many people you send this to, just remember if it made=
you laugh, your friends will laugh! too.

Ari lays it on the line

October 22, 2006

Ari Armstrong lays it on the line, with a little help from his father(that is.)

http://www.freecolorado.com/2006/10/election06.html

We have a mixed bag on the ballot here in Colorado. Clearly though, the Democrat vision is one of oppression and ever more Draconian government. The Republicans need to get back to their roots and once again start thinking like Goldwater and true conservatives.

The weak kneed positions on firearms rights as well as other issues bring to the fore the basic weasel like failure to fully support the Constitutions of both the United States of America and Colorado.

In these troubled times faced by our nation being politicaly correct will result in the very destruction of all that we hold dear.

By ignoring the Constitution, or twisting it beyond recognition; By treating the illegal immigration problem as a social issue rather than one of national security; By forcing citizens into second class citizenship our politicians are our worst enemies, as surely as Hamas and Al Quida in America.

Do you care about the USA?

October 19, 2006

If so, then this is indeed must reading. Iraq and Afghanistan aside, this is not only at our front door, but inside the house.

http://hsc.house.gov/PDFs/InvestigationsSubcommitteereport.pdf

PO2 Micheal Monsoor US Navy, SEAL Team 3, Iraq

October 16, 2006

Coronado, CA (AHN) – Navy Seals are known for their rigorous training, elite skills, and dangerous duties. Seals at the Coronado military installation report that one soldier, Petty Officer 2nd Class Michael A. Monsoor, used his training, courage, and selflessness, to save the lives of his comrades by throwing himself atop a live grenade tossed by an Iraqi insurgent, which took his life. While posted along a rooftop in Iraq, Monsoor and an undisclosed number of fellow Seals, positioned themselves for sniper duty when a live grenade landed in their position. The explosive first hit Monsoor in the chest and then rolled to the floor. The Seal then quickly lunged atop of the grenade softening the explosion for his comrades and ending his life. In an interview with the press, four Navy Seals discussed the heroic actions of Monsoor but withheld their names because of the secrecy of their work “He never took his eye off the grenade, his only movement was down toward it,” said one of the soldiers whose life was saved. He did not, however, walk away unscathed. He took shrapnel in both legs. “He undoubtedly saved mine and the other Seals’ lives, and we owe him.” Monsoor, who was killed in Ramadi, a city west of Baghdad, is the second Seal to die in Iraq.

Source [edited] http://www.850koa.com/pages/shows_gunny-heroes.html

Stagflation?

October 16, 2006

 Did Phelps Really Explain Stagflation?

By Frank Shostak

Posted on 10/10/2006
Subscribe at email services, tell others, or Digg this story.

This year, the Nobel Prize in Economics was awarded to American economist Edmund S. Phelps, whose book on labor was favorably reviewed by David Gordon and who has engaged the Austrian theory of the business cycle on the pages of the Wall Street Journal. While rejecting the Austrian view, Phelps has nonetheless written that “we must honor the Austrian theorists as the first to see capitalist ventures as voyages to the unknown, driven by visions of entrepreneurs and hunches of lenders and investors and fraught with unanticipated consequences.”

The Nobel committee credits Phelps for clarifying the relationship between inflation and unemployment. Indeed, he did made a contribution in this respect. What he did not do is what most economists credit him for doing: identifying the true causes behind the phenomenon of stagflation.

The phenomenon of stagflation is characterized by the simultaneous occurrence of a strengthening in the growth momentum of prices and a decline in real economic activity. A famous case of stagflation occurred during the 1974–75 period. In March 1975, industrial production fell by nearly 13% while the yearly rate of growth of the consumer price index (CPI) jumped to around 12%. Likewise a large fall in economic activity and galloping price inflation was observed during 1979. By December of that year, the yearly rate of growth of industrial production stood close to nil while the rate of growth of the CPI stood at over 13%.

The stagflation of 1970s was a big surprise to most mainstream economists who held that a fall in real economic growth and a rise in the unemployment rate should be accompanied by a fall in the rate of inflation and not an increase.

According to the then accepted view, the central bank influences the real rate of economic expansion by means of monetary policies. This influence however, carries a price, which manifests in terms of inflation. For instance, if the goal is to reach a faster rate of economic growth and a lower unemployment rate, citizens should be ready to pay a price for this in terms of a higher rate of inflation. Thus was it believed that there is a trade-off between inflation and unemployment (the Phillips curve). The lower the unemployment rate the higher is the rate of inflation. Conversely, the higher the unemployment rate the lower the rate of inflation is going to be.

The events of the 1970s therefore came as a shock for most economists. Their theories based on the supposed existing trade-off suddenly became useless. In the late 1960s Edmund Phelps and Milton Friedman (PF) challenged the popular view that there can be a sustainable trade-off between inflation and unemployment. PF had been arguing that, contrary to the popular way of thinking, there is no long-term trade-off between inflation and unemployment. In fact, over time, according to PF, loose central bank policies set the platform for lower real economic growth and a higher rate of inflation, i.e., stagflation. [1][2]

PF Explanation of Stagflation

Below we provide a simplified framework of the thought of Phelps and Friedman (PF) regarding the inflation-unemployment trade-off and its link to stagflation.

Starting from a situation of equality between the current and the expected rate of inflation, the central bank decides to lift the rate of economic growth by lifting the rate of growth of the money supply.

As a result, a greater supply of money enters the economy and each individual now has more money at his disposal. On account of this increase, every individual is of the view that he has become wealthier. This increases the demand for goods and services, which in turn sets in motion an increase in the production of goods and services. All this in turn lifts producers demand for workers and subsequently the unemployment rate falls to below the equilibrium rate, which both Phelps and Friedman labeled as the natural rate. [3]

According to PF, the increase in people’s overall demand for goods and services and the ensuing increase in the production of goods and services is of a temporary nature. To begin with, once the unemployment rate falls below the equilibrium rate, this puts upward pressure on the rate of price inflation. (According to Phelps, the natural-rate theory says that when unemployment is below the natural level, the tightness in the labor market will cause prices and wages to be reset above expectations.) [4]

Individuals then begin to realize that there has been a general loosening in the monetary policy. In response to this realization, they start forming higher inflation expectations. Individuals realize that their previous increase in the purchasing power is actually dwindling. Consequently, the overall demand for goods and services weakens. A weakening in overall demand in turn slows down the production of goods and services while the rate of unemployment goes up — an economic slowdown emerges.

In short, the realization that there was a general loosening in monetary policy weakens the demand for goods and services. Observe that we are now back where we were prior to the central bank’s decision to loosen its monetary stance, but with a much higher rate of inflation. Consequently, what we have here is a fall in the production of goods and services — a rise in the unemployment rate — and an increase in price inflation. That is to say, we have stagflation.

As long as the increase in the money supply rate of growth is unexpected, this theory implies, the central bank can engineer an increase in the rate of economic growth. However, once people learn about the increase in the money supply and assess the implications of this increase, they adjust their conduct accordingly. Subsequently, the boost to the real economy from the increase in the money supply rate of growth disappears.

In order to overcome this hurdle and strengthen the rate of economic growth the central bank would have to surprise individuals through a much higher pace of monetary pumping. However, after some time lag people will learn about this increase and adjust their conduct accordingly. Consequently, the effect of the higher rate of growth of money supply on the real economy is likely to vanish again and all that will remain is a much higher rate of inflation.

From this we can conclude that by means of loose monetary policies, the central bank can only temporarily create real economic growth. Over time however, such policies will only result in higher price inflation. In short, according to PF there is no long-term trade-off between inflation and unemployment.

Can money grow the economy?

We have seen that according to PF, loose monetary policy can only grow the economy in the short term but not in the long term. In this sense, PF have accepted mainstream ideas that for a given level of prices, an increase in money supply increases the purchasing power of money, which in turn lifts the overall demand for goods and services. (To be more precise, PF are saying that the rate of increase in the money supply must be unexpected.) The increase in overall demand in turn triggers an increase in the production of goods and services — demand creates supply. In this sense money is an agent of economic growth.

However, there are some serious difficulties with all this.

In PF’s story, as a result of the increase in the money supply rate of growth, a greater supply of money enters the economy and each individual now has more money at his disposal. This is, however, not a tenable proposition. When money is injected, there must always be somebody who gets the new money first and somebody who gets the new money last. In short, money moves from one individual to another individual and from one market to another market.

The beneficiaries of this increase are the first recipients of money. With more money in their possession (assuming that demand for money stays unchanged) and for a given amount of goods available, they can now divert to themselves a bigger portion of the pool of available goods than before the increase in money supply took place. This means that fewer goods are now available to those individuals who have not received the new money as yet (i.e., the late recipients of money).

This of course means that the effective demand of the late recipients of money must fall since fewer goods are now available to them. The fact that their effective demand must fall is made manifest through the increase in prices (more money per unit of a good) and to the consequent fall in the last recipients’ purchasing power. People are not identical, even if their respective money holdings have risen by the same percentage. Their response to this will not be identical. This in turn means that those individuals who spent the new money first benefit at the expense of those who spend the new money later on. [5]

Hence an increase in money supply cannot cause a general increase in overall effective demand for goods. Only through an increase in the production of goods can this be achieved. The more goods an individual produces the more of other goods he can secure for himself. This means that an individual’s effective demand is constrained by his production of goods, all other things being equal. Demand, therefore, cannot stand by itself and be independent. It is limited by production, which serves as the mean of securing various goods and services.

According to James Mill,

When goods are carried to market what is wanted is somebody to buy. But to buy, one must have the wherewithal to pay. It is obviously therefore the collective means of payment which exist in the whole nation constitute the entire market of the nation. But wherein consist the collective means of payment of the whole nation? Do they not consist in its annual produce, in the annual revenue of the general mass of inhabitants? But if a nation’s power of purchasing is exactly measured by its annual produce, as it undoubtedly is; the more you increase the annual produce, the more by that very act you extend the national market, the power of purchasing and the actual purchases of the nation…. Thus it appears that the demand of a nation is always equal to the produce of a nation. This indeed must be so; for what is the demand of a nation? The demand of a nation is exactly its power of purchasing. But what is its power of purchasing? The extent undoubtedly of its annual produce. The extent of its demand therefore and the extent of its supply are always exactly commensurate. [6]

We can also infer that the dependence of demand on the production of goods cannot be removed by means of loose monetary policy. On the contrary, loose monetary policy will only undermine the rate of growth of real goods and services. Here is why.

Increases in Money Supply Actually Weaken Economic Growth

In a market economy, money has just one role — to provide the services of a medium of exchange. According to Rothbard,

Consumer goods are used up by consumers; capital goods and natural resources are used up in the process of producing consumer goods. But money is not used up; its function is to act as a medium of exchanges — to enable goods and services to travel more expeditiously from one person to another. [7]

Money permits the product of one specialist to be exchanged for the product of another specialist. Or we can say that an exchange of something for something takes place by means of money. Things are, however, not quite the same once money is generated out of “thin air” as a result of loose central bank policies and fractional reserve banking.

Once money is created out of “thin air” and employed in the economy, it sets in motion an exchange of nothing for something. This amounts to a diversion of real wealth from wealth generators to the holders of newly created money. In the process genuine wealth generators are left with fewer resources at their disposal, which in turn weakens the wealth generators’ ability to grow the economy.

So contrary to PF’s theories, money cannot grow the economy even in the short run. On the contrary, an increase in money only undermines real economic growth. Notice that this conclusion is reached regardless of whether the money rate of growth is expected or unexpected.

To clarify this point let us assume that the central bank makes it known to everyone that the rate of growth of the money supply is going to increase from 5% to 10%. According to PF this shouldn’t have any effect on real economic growth.

If the earlier and the later receivers of money now anticipate higher inflation in the future they may lower their present demand for money. Once they lower the demand for money and increase the amount of goods bought, only then, all other things being equal, will the prices of goods start rising in line with the expected increase in price inflation.

This however, does not alter the fact that once early receivers spend the newly printed money it results in an exchange of nothing for something and to a weakening in the process of real wealth formation. (Again, the increase in money supply is never instantly spread across the board but always starts with earlier receivers.) In short, contrary to PF, irrespective of the fact that the increase in money is anticipated it will undermine real economic growth.

What then causes stagflation?

We have seen that an increase in money supply must lead to an exchange of nothing for something. As a result, the process of real wealth formation weakens and this in turn undermines the rate of economic growth.

The increase in the money supply rate of growth coupled with the slowdown in the rate of growth of goods produced is what the increase in the rate of price inflation is all about. (Note that a price is the amount of money paid for a unit of a good.) What we have here is a faster increase in price inflation and a decline in the rate of growth in the production of goods. But this is exactly what stagflation is all about, i.e., an increase in price inflation and a fall in real economic growth.

It seems therefore that the phenomenon of stagflation is the normal outcome of loose monetary policy. This is in agreement with PF. Contrary to PF, however, we maintain that stagflation is not caused by the fact that in the short run people are fooled by the central bank. Stagflation is the natural result of monetary pumping which weakens the pace of economic growth and at the same time raises the rate of increase of the prices of goods and services.

If we were to accept that increases in the rate of economic growth are inversely associated with the unemployment rate, then the unemployment rate and the rate of inflation should be positively associated — an increase in the rate of inflation is accompanied by the increase in the unemployment rate. Yet the historical data does not always support this conclusion.

For instance, during the 1948–1969 period, the rate of price inflation and the unemployment rate were negatively associated. (An increase in the rate of inflation was accompanied by a fall in the unemployment rate.) An inverse correlation between the rate of inflation and the unemployment rate can also be observed from 2000 to present.

 

 

A statistical correlation or lack of it between two variables shouldn’t be the only or final determining factor regarding causality. If anything, it can be of some help in the beginning of the investigation. The data and its correlation are simply the raw material, which must be scrutinized. One must figure out by means of reasoning what the statistical display might mean.

We have seen that when money is created out of “thin air” and employed in an exchange it weakens real economic growth in relation to a situation wherein no monetary expansion took place. Likewise we can confidently say that on account of the increase in money out of “thin air” in comparison with a situation where no such money was created, the rate of growth of prices must increase. The fact that the strengthening in monetary growth may not always manifest visible stagflation doesn’t refute what we have concluded with respect to the consequences of a stronger rate of monetary pumping on economic growth and prices. [8]

Consider the following situation. On account of past increases in the rate of growth of the money supply and the subsequent softening in the rate of growth of goods produced, the rate of growth of price inflation is going up. Now, because the underlying bottom line of the economy is still strong notwithstanding the damage inflicted by a stronger money supply rate of growth, the rate of growth of the production of goods only weakens slightly. Within such a situation the unemployment rate could still continue falling. (Remember that increases in the money supply undermine the wealth formation process and weaken the rate of production of goods and services.)

What we have here is a visible increase in price inflation and a fall in the unemployment rate. Any theory which concludes from this inverse correlation that there is a trade-off between inflation and unemployment will be false since it ignores the true consequences of loose monetary policy.

A shirt worth a Nobel

We suggest that any theory that relies solely on observed statistical correlations is nothing more than an exercise in curve fitting. For PF and most mainstream economists, the criteria for accepting a theory is a visible supporting statistical correlation. It is because of the visible stagflation of 1970s that PF’s theory of stagflation gained wide support. One would have thought that in order to be consistent with their way of assessing a theory given the observed inverse correlation between inflation and unemployment since 2000, PF should acknowledge that their stagflation hypothesis is not valid. [9]

Conclusion

This year’s Nobel Prize in Economics was awarded to Phelps for his work on the relationship between inflation and unemployment. Phelps could have made great contribution to the economic profession by dismissing the entire framework of the supposed trade-off between inflation and unemployment (the Phillips Curve). Unfortunately he has chosen to stick to the bankrupt framework by making some amendments to it. The profession’s understanding of these issues still hasn’t reached the heights of Mises’s own understanding, as seen in his book The Causes of the Economic Crisis.

Contrary to the accepted way of thinking, we suggest that these amendments have done nothing to further our understanding of economic conditions such as stagflation. In this regard, both Phelps and another Nobel Laureate Milton Friedman have introduced more confusion rather than clarity regarding the explanation of the phenomenon of stagflation.


Frank Shostak is an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org. He is chief economist of Man Financial, Australia. Send him mail and see his outstanding Mises.org Daily Articles Archive. Comment on the blog.

Notes

[1] Milton Friedman, “The Role of Monetary Policy,” American Economic Review 58 (March 1968): 1-7.

[2] Edmund S. Phelps (1969), “The New Microeconomcs in Inflation and Employment Theory,” American Economic Review 59.

[3] Milton Friedman, “Inflation and Unemployment,” Nobel Memorial Lecture, December 13, 1976.

[4] Edmund S. Phelps, “Scapegoating the Natural Rate,” The Wall Street Journal online August 6,1996.

[5] Ludwig von Mises, Human Action, 3rd revised edition, p.416–417.

[6] James Mill, “On the Overproduction and Underconsumption Fallacies.” Edited by George Reisman, a publication of The Jefferson School of philosophy, Economics, and Psychology — 2000.

[7] Murray N. Rothbard, What Has Government Done to Our Money?

With all the evidence that is out there Washington still endorses massive taxation as a panacea for all the ills of government.

[8] Jörg Guido Hülsmann, “Facts and Counterfacts in Economic Law.” Journal of Libertarian Studies 17, no. 1 (Winter):57-102.

[9] Milton Friedman, Essays in Positive Economics. Chicago: University of Chicago Press 1953

The “Fair Tax”

October 16, 2006

The Fraudulent Tax

By Laurence M. Vance

Posted on 10/9/2006
Subscribe at email services, tell others, or Digg this story.

Advocates of replacing the income tax with the FairTax — a consumption tax in the form of a national retail sales tax (NRST) on new goods and services — regularly point to the complexity of the tax code, the millions of hours and dollars wasted on compliance costs, the evils of the withholding tax, and the abuses of the IRS to bolster their case for the FairTax.

The twin truths that taxation is theft (no matter how the money is collected) and that the US government should never be given a budget that is in the trillions (no matter how the money is collected) are concepts that FairTax proponents have never grasped.

The FairTax is intended to be revenue neutral; that is, the federal leviathan and all of its programs will receive exactly the same amount of funding as under the current tax system. Federal spending will remain at the same obscene level that it is now. This means that, although conceivably some people might pay the same amount in taxes under the FairTax plan that they do now, some will pay more and others will pay less.

Or, if we accept without reservation the claim of FairTax supporters that tax evaders, tax avoiders, workers in the underground economy, and others who don’t pay their “fair” share will now be “caught,” therefore increasing the tax base, we can, for the sake of argument, say that some people might pay the same amount in taxes, many will pay less, and the few that will pay more are the ones who were paying little or no taxes to begin with.

But even though the things that FairTax proponents say about the tax code, compliance costs, the withholding tax, and the IRS are certainly true, what most people care about is the bottom line. If an individual’s taxes were lowered but the prices of all goods and services were at the same time raised, lower taxes might actually be a curse instead of a blessing.

The question is therefore not one of paying higher or lower taxes, but instead: Will I have more money remaining from my paycheck to save, invest, or spend on vacations and luxury items under the FairTax plan after I pay my bills and make my necessary purchases?

This is a question that FairTax activists have answered in the affirmative.

The FairTax Plan

Under the FairTax proposal, there will no longer be Social Security and Medicare taxes, withholding taxes, corporate taxes, gift taxes, estate taxes, capital gains taxes, and personal income taxes. However, these will all be replaced with a national sales tax on all new goods and services. But never fear, says the FairTax advocate, even with this sales tax, the prices of most goods and services will still be about the same.

As talk show host Neal Boortz [1] claims in The FairTax Book: “The prices of consumer goods and services remain essentially the same, with the removal of the embedded taxes compensating for the added consumption tax.” The embedded costs of taxes in all consumer goods and services drive up prices because they increase the costs of doing business of manufacturers and service providers. As Boortz explains about suppliers of goods and services:

When you buy that loaf of bread, you’re paying a portion of all of the bills, including tax bills, of every person or business entity that had anything to do with that bread, from before the wheat was planted up until the loaf of bread ends up in that plastic bag in the back seat of your minivan.

Have you thought about how much your doctor pays into the payroll tax system to augment his or her employees’ Social Security and Medicare taxes? And what about all the embedded taxes your doctor paid when purchasing all of that sophisticated equipment, not to mention the endless monthly outlay for cotton swabs and tongue depressors?

Compliance costs are also “costs that are ultimately embedded in retail prices paid by consumers.” Boortz’s coauthor, Congressman John Linder (R-GA), in his November 5, 2003, testimony in behalf of the FairTax before the Joint Economic Committee on “Rethinking the Tax Code,” stated that “because of the tax component incorporated into prices under the current income tax code, we are already paying the equivalent of the FairTax!” This must include the prices of all goods and services, for Boortz maintains that “like retail goods, new homes won’t be any more expensive, even with the FairTax added.”

The rate of the NRST under the FairTax is supposed to be 23 percent. But as I have already shown in my first article on the FairTax (“The Fair Tax Fraud“), that is just the initial rate — it will be adjusted upward every year. And as I have already shown in my review of Boortz’s book (“There Is No Such Thing as a Fair Tax“), the stated rate of 23 percent is really 30 percent — the new math used by FairTax proponents figures the rate inclusively (the tax is included in the price of the product) rather than exclusively (the tax is added to the price of the product).

To offset the full amount of this sales tax, retail prices would have to fall by a like amount if the prices of most goods and services are to “remain essentially the same.” This is exactly what Boortz asserts will happen after the FairTax plan is implemented:

One of the beauties of the FairTax is that the price of consumer goods and services in our economy will go down by roughly the same amount as the proposed FairTax rate of 23 percent. This very nearly makes everything a wash.

Consumers of all incomes will be paying at least 20 percent less for virtually everything they buy, including the basics of food, clothing, shelter, and transportation.

And how does Boortz know that this will happen? Why, Dr. Dale Jorgenson said so — or at least that’s what Boortz claims. Back in 1997, Jorgenson, the former chairman of the Harvard Economics Department, authored a report for Americans for Fair Taxation (AFT) entitled “The Economic Impact of the National Retail Sales Tax.” [2] Before writing his 1997 report for the AFT, Jorgenson had testified before the House Committee on Ways and Means in 1995 on “The Economic Impact of Fundamental Tax Reform” and in 1996 on “The Economic Impact of Taxing Consumption.” [3]

Referring to this study, Boortz says: “On average, Jorgenson concluded, 22 percent of the price paid for a consumer product represents embedded taxes. That means that for every dollar you spend on a loaf of bread, twenty-two cents ends up being passed on to the government somewhere along the line in the form of taxes.” Congressman Linder also referred to this report in his 2003 testimony before the Joint Economic Committee: “The FairTax plan creates transparency within the tax code. It eliminates the hidden tax component from the prices of goods. According to a Harvard study, the current tax component in our price system averages 22 percent.”

Boortz believes that prices will fall because “if these embedded taxes were to disappear — that is, if the tax burdens of all the corporations, businesses, and individuals involved in the manufacture, marketing, and sale of these items were to be removed — these businesses would experience an immediate increase in their profit margins that would roughly equal that 22 percent.” Then, once profit margins increase, Boortz presumes that “competitive market pressures” would “force prices down to a level where corporate profit margins are pretty much where they were before the passage of the FairTax.” Linder likewise testified that competition would “bring prices down an average of 20-30 percent.”

But this isn’t all that Boortz has promised, for under the FairTax system everyone will get a raise because everyone will be able to keep his whole paycheck:

Once the FairTax takes effect, you’ll be receiving 100 percent of every paycheck, with no withholding of federal income taxes, Social Security taxes, or Medicare taxes.

The poor — along with everybody else — will no longer have Social Security taxes or Medicare taxes withheld from their paychecks. Whatever they earn, they get on payday. For most of those we categorize as poor, this would mean an immediate 25 to 30 percent increase in their take-home pay.

We start collecting 100 percent of our earnings on our paycheck.

We all get virtual raises, since payroll taxes are no longer siphoned from our checks.

But as we shall presently see, these four statements turned out to be lies and were subsequently altered or omitted in the new paperback edition of The FairTax Book.

Boortz has seriously misread and/or misrepresented Jorgenson in four key areas.

Boortz’s First Misrepresentation

Boortz’s first misrepresentation concerns the rate of the FairTax. He maintains that in order to be revenue neutral the tax rate would have to be 23 percent figured inclusively or 30 percent figured exclusively. But here is what Jorgenson actually said:

The imposition of the NRST would produce a sharply higher tax rate on consumer goods and services, but the tenth chart shows that the initial consumption tax rate would be twenty-three percent at both federal and state and local levels or only 18.4 percent at the federal level. This would gradually rise over time, but remain below thirty percent or 23.8 percent at the federal level.

Unlike Boortz, Jorgenson does not give us any baloney about inclusive and exclusive tax rates. But note that Jorgenson’s rate of 23 percent includes federal, state, and local taxes. This is because of one of Jorgenson’s assumptions:

Since state and local income taxes usually employ the same bases as the corresponding federal taxes, it is reasonable to assume that substitution of NRST for taxes at the federal level would be followed by similar substitutions at the state and local level. For simplicity I consider the economic impact of substitution at all levels simultaneously.

Boortz’s rate of 23 percent (which is actually 30 percent) includes only the NRST. To this would have to be added any state or local sales tax rate. This means that in some areas of the country where the combined state and local sales taxes average 10 percent, consumers will pay a whopping 40 percent tax on all of their purchases. No wonder Jorgenson says that “as a consequence of the elimination of taxes on capital income, individuals would sharply curtail consumption of both goods and leisure.”

But in Jorgenson’s 1996 testimony at the “Hearings on Replacing the Federal Income Tax” held by the House Committee on Ways and Means he said that “the consumption tax rate required for replacing existing revenues from individual and corporate income taxes at both federal and state and local levels would be around fifteen percent. This would gradually rise over time reaching twenty-one.”

The initial “revenue neutral” tax rate has already gone up twice and the FairTax hasn’t even been implemented yet.

Other economists believe that the rate of a NRST would have to be much higher than 30 percent to be truly revenue neutral. This has been pointed out several times by Bruce Bartlett, and most recently by William Gale, an economist with the Brookings Institute, in his May 16, 2005, article “The National Retail Sales Tax: What Would the Rate Have To Be?

Gale estimates that “a federal sales tax that maintains real federal revenues under current law and real federal noninterest spending over the 10-year period of 2006 to 2015 would require a tax-inclusive rate of 31 percent, or a tax-exclusive rate of 44 percent.” This latter rate would actually climb to 49 percent by 2015. And these rates are assuming that there is no tax evasion or legislative erosion of the tax base.

Boortz’s Second Misrepresentation

Boortz’s second misrepresentation concerns the amount that prices could fall once the cost of embedded taxes is removed from goods. He maintains that the price of consumer goods will fall by roughly the same amount of sales tax that will be added under the FairTax plan. But again, here is Jorgenson:

Since producers would no longer pay taxes on profits or other forms of capital income under the NRST and workers would no longer pay taxes on wages, prices received by producers, shown in the sixth chart, would fall by an average of twenty percent.

In the long run producers’ prices, shown in the eighth chart, would fall by almost thirty percent under the NRST.

He is saying that producers’ prices will fall by about 20 percent in the short term and about 30 percent in the long term. Producer prices are not consumer prices. That is why the government has a Producer Price Index (PPI) and a Consumer Price Index (CPI). So, in order for a price increase from a national sales tax and a price decrease from the removal of the cost of embedded taxes to balance each other out, a much higher tax rate will be required since it is not consumer prices that will be 20 percent lower.

There are, of course, three other problems with any talk of a decrease in producer or consumer prices.

First, how does Jorgenson know for sure that producer prices “would fall by an average of twenty percent”? Why, an economic model that he created says they will, that’s how.

And even if producer prices did fall by about 20 percent, we still have the same problem: How does anyone know for sure how much consumer prices will fall? There is one thing we know and one thing we don’t know. We know that consumer prices will increase by 30 percent under the FairTax plan; we don’t know how much they will decrease because of the elimination of “embedded costs” in the price of goods.

Second, saying that because costs will fall by x amount that prices will likewise fall by x amount is a grave economic fallacy. Not only does this ignore the basic laws of supply and demand, it is based on the fallacy that the costs of inputs in the production of a good determine the price of the output they produce. As Ludwig von Mises has said about prices:

The ultimate source of the determination of prices is the value judgments of the consumers. Each individual, in buying or not buying and in selling or not selling, contributes his share to the formation of market prices. But the larger the market is, the smaller is the weight of each individual’s contribution. Thus the structure of market prices appears to the individual as a datum to which he must adjust his own conduct. What is called a price is always a relationship within an integrated system which is the composite effect of human relations.

Prices are determined between extremely narrow margins; the valuations on the one hand of the marginal buyer and those of the marginal offerer who abstains from selling, and the valuations on the other hand of the marginal seller and those of the marginal potential buyer who abstains from buying.

And third, the question of tax incidence — who actually bears the burden of a tax — is an elusive one that economists still debate. For example, many economists would argue that although a portion of the corporate income tax may be passed forward to consumers through higher prices, the majority of the tax comes out of after-tax profits and employee wages. Boortz is assuming that the full amount of all taxes paid by businesses are embedded in the costs of the goods they sell.

And what about the prices of imported goods? They would have no reason to drop at all.

Boortz’s Third Misrepresentation

Boortz’s third misrepresentation concerns the reason that prices could fall once the cost of embedded taxes is removed from goods. He maintains that it is the removal of the embedded taxes in the cost of goods that will account for the price reduction of those goods. Let’s revisit an earlier statement of Jorgenson:

Since producers would no longer pay taxes on profits or other forms of capital income under the NRST and workers would no longer pay taxes on wages, prices received by producers, shown in the sixth chart, would fall by an average of twenty percent.

How would workers no longer paying taxes on wages lead to a fall in prices? Workers currently have deductions from their paychecks for federal income tax, Social Security tax, and Medicare tax. Although employers remit these taxes to the federal government, the money does not come out of their profits — it comes out of each employee’s gross pay. Jorgenson is saying that prices will fall because of two factors, not one.

Producers costs would be lower because not only would they no longer have to pay taxes on their profits, they would no longer have to remit their employees’ deductions to the federal government — they would pocket them.

When Jorgenson testified on the subject of “The Economic Impact of Taxing Consumption” before the House Committee on Ways and Means in 1996, he made essentially the same statement that was quoted above from his report for Americans for Fair Taxation:

Since producers would no longer pay taxes on profits or other forms of income from capital and workers would no longer pay taxes on wages, prices received by producers, shown in the fifth chart, would fall by an average of twenty percent.

After an inquiry by a citizen [4] who was concerned that the FairTax proponents were misrepresenting his conclusions, Jorgenson made his position perfectly clear:

A more reasonable interpretation of my 1996 testimony is that workers would keep that after-tax pay; producers’ prices would fall, but retail prices would be increased by the national retail sales tax. Any gains by workers and investors would be the result of increased economic efficiency.

Boortz is double counting. The portion of the worker’s paycheck formerly sent to the government for taxes that will be now returned to him so he can collect “100 percent of every paycheck” is the same portion that producers will now pocket to help them lower their costs. This is because Boortz originally maintained that the embedded taxes that drive up the costs of goods and services are “in addition to the money taken out of your check in income taxes and payroll taxes.” He has since changed his tune.

From his Nealz Nuze, here is Boortz on what will really happen to “100% of your paycheck”:

On review, and after reading the critiques of opponents to the FairTax plan, we have concluded that there is one element of the FairTax that could have been present with more clarity in the book; the concept of embedded taxes and keeping 100% of your paycheck.

We write in The FairTax Book that the competitive pressures of the marketplace will force prices down when embedded taxes disappear from the cost of retail goods and services, and we cite 22% as the average amount of those embedded taxes. Does this 22% include the income and payroll taxes that are paid by employees? Yes, it does. So … what does this mean to your paycheck after the FairTax becomes law?

When the FairTax is implemented, and when business and personal income and payroll taxes disappear, your employer is going to have to make a decision. He will either take some or the entire amount he had been withholding for federal income and payroll taxes and add it to your weekly check, or he will readjust your pay figures so that your entire paycheck will be equal to what you used to call “take home pay” before the FairTax. The employer may also decide to do a little of both. Either way, you can see that the amount of money you actually receive as pay — the amount you can put into your bank account — will not decrease, and may actually increase.

On a larger scale real wages will rise to the extent to which the nation’s employers decide to return the embedded costs of their employee’s income and payroll taxes to the employee. Likewise, the cost of the products or services produced by the employer will be reduced to the extent to which that employer retains all or a portion of those income and payroll taxes together with the other taxes on capital and labor eliminated by the FairTax.

Because of Boortz’s epiphany, he had to make some significant changes in his new paperback edition of The FairTax Book. Gone is the statement on page 55 that embedded taxes which drive up the cost of goods by 22 percent are “in addition to the money taken out of your check in income taxes and payroll taxes.” Here are the other changes and omissions:

First edition, page 59:

Once the FairTax takes effect, you’ll be receiving 100 percent of every paycheck, with no withholding of federal income taxes, Social Security taxes, or Medicare taxes — and you’ll be paying just about the same price for T-shirts and other consumer goods and services that you were paying before the FairTax.

Paperback edition, page 60:

Once the FairTax takes effect, you will be in complete control of your paycheck as nothing will be withheld — and your purchasing power for t-shirts and all other goods and services will be almost exactly what it was before the FairTax.

First edition, page 120:

When we all start getting 100 percent of our earned income in our paychecks.

Paperback edition, page 120:

When we all start controlling 100 percent of our earned income in our paychecks.

Being in “complete control” of your paycheck no longer means keeping 100 percent of it.

First edition, page 83:

Remember that the poor, along with everyone else — will no longer have Social Security taxes or Medicare taxes removed from their paychecks. Whatever they earn, they get on payday. For most of those we categorize as poor, this would mean an immediate 25 to 30 percent increase in their take-home pay.

Paperback edition, page 83:

Remember that the poor, along with everyone else — will no longer have Social Security taxes or Medicare taxes removed from their paychecks. Whatever they earn, they get on payday. If employers leave this money in paychecks instead of taking it out of price, most of those we categorize as poor would see an immediate 25 to 30 percent increase in their take-home pay.

Now the increase in take-home pay is tied to the generosity of the employer. Prices cannot be reduced and take-home pay increased at the same time.

First edition, page 84:

When you factor in the lower prices caused by the disappearance of the embedded taxes, you’ll see that the total price paid for consumer goods will remain very nearly the same.

Paperback edition, page 84:

When you factor in the combined lower prices/higher take-home pay caused by the disappearance of the embedded taxes, you’ll see that the total price paid for consumer goods will remain very nearly the same.

This again shows that the fall in prices that may result under the FairTax is due to two factors, not just the removal of the embedded taxes.

In the “Time for a Quick Review” chart on page 111 of both editions, there are some substantial alterations:

First edition:

We start collecting 100 percent of our earnings in every paycheck.

Paperback edition:

We start controlling our earnings in every paycheck.

First edition:

We all get virtual raises, since payroll taxes are no longer siphoned from our checks.

Paperback edition: [this sentence is completely eliminated]

First edition:

The prices of consumer goods and services remain essentially the same, with the removal of the embedded taxes compensating for the added consumption tax.

Paperback edition:

Our purchasing power for buying consumer goods and services remains essentially the same, with the removal of the embedded taxes compensating for the added consumption tax.

Do these corrections mean that Boortz is no longer guilty of misrepresenting Jorgenson? Perhaps. But consider the following:

  • The new edition of Boortz’s book still states (on pp. 84 & 160) that people will take home 100 percent of their paycheck under the FairTax.
  • The website of Boortz’s coauthor, Congressman John Linder, still maintains that one of the results of the FairTax is that it “allows you to keep 100 percent of your paycheck, pension, and Social Security payments.”

Boortz is very naïve to think that once the FairTax plan is implemented that employers will be able to lower employee wages just because the net amount an employee receives might be more than his current take-home pay. Not only will workers be extremely reluctant to take a pay cut, wage contracts will in many cases prevent an adjustment downward.

And consider the case of two workers who currently make the same gross pay but each with a different take-home amount because they claim a different number of exemptions. Under the FairTax plan, if wages are lowered to current take-home amounts, one employee would end up making less than the other and certainly cry foul. Can you imagine the number of workers who will, on the eve of the implementation of the FairTax, rush to change the number of their exemptions on their W-4 forms so as to increase their take-home pay before their employer has a chance to take it away?

Boortz’s Fourth Misrepresentation

Boortz’s fourth misrepresentation concerns Jorgenson himself. Although Boortz quotes Jorgenson to give weight to his FairTax proposal, Jorgenson is not a devotee of the FairTax — he supports an income tax plan called the Efficient Taxation of Income. That’s right — an income tax. That means an IRS and a 1040 form, not a sales tax.

In his 1996 article, “The Economic Impact of Fundamental Tax Reform,” [5]Jorgenson states: “Changing the federal tax base from income to consumption is an idea whose time has come. This change will create important new opportunities for growth in the standard of living of all Americans.” But that was 1996, long before Boortz wrote his FairTax book. Since then Jorgenson has written quite extensively about his income tax plan. Here are just three examples.

In his 2002 article for the Financial Times, Jorgenson called his Efficient Taxation of Income plan “A Smarter Type of Tax,” and explained that

Efficient Taxation of Income is a new approach to tax reform that would introduce different tax rates for property-type income and earned income from work. Earned income would be taxed at a flat rate of 10 per cent, while property-type income would be taxed at 30 per cent.

Also in 2002, Jorgenson testified yet again before the House Committee on Ways and Means on the subject of taxes. But instead of advocating a consumption tax like the FairTax, he presented his Efficient Taxation of Income proposal. Under Jorgenson’s plan: “Income would be defined in exactly the same way as in the existing tax code.”

In 2003, Jorgenson wrote an article for Harvard Magazine on the subject of — you guessed it — the Efficient Taxation of Income:

Efficient Taxation of Income is a new approach to tax reform based on taxation of income rather than consumption. This would avoid a drastic shift in tax burdens by introducing different tax rates for property-type income and earned income from work. Earned income would be taxed at a flat rate of 10 percent, while property-type income would be taxed at 30 percent.

The Fraudulent Tax

Besides the misrepresentations of Professor Jorgenson, there are other reasons the FairTax should be called the Fraudulent Tax.

The FairTax does not abolish the IRS. Changing the name and some of the functions of the IRS does not mean that it will go away. The FairTax simply exchanges one federal agency for another. If there were no IRS or other enforcement bureau to enforce the collection of a national sales tax, then why would anyone bother paying or collecting the tax? Actually, the Fair Tax Act of 2005 sets up a “Sales Tax Bureau” in the Department of the Treasury. With a bureau comes an army of bureaucrats. And what Jorgenson said in his report on “The Economic Impact of the National Retail Sales Tax” shows that these bureaucrats will still have plenty of work to do:

Any definition of a consumption tax base will have to distinguish between consumption for personal and business purposes. On-going disputes over exclusion of home offices, business-provided automobiles, equipment, and clothing, and business-related lodging, entertainment and meals would continue to plague tax officials, the entertainment and hospitality industries, and holders of expense accounts. In short, substitution of the NRST for the existing tax system would not eliminate all the practical issues that arise from the necessity of distinguishing between business and personal activities in defining consumption.

The FairTax will abolish the IRS in the same way that it will abolish the income tax — by replacing it with something else.

The FairTax is not cosponsored by Congressman Ron Paul (R-TX). Every month or so since I began writing against the FairTax I have received an e-mail insisting that Congressman Paul is a cosponsor of H.R. 25, the “Fair Tax Act of 2005.” Although there are fifty-eight cosponsors of this bill, Ron Paul is not one of them. Why is it that no one bothers to mention the names of the actual cosponsors of the FairTax bill?

FairTax supporters know that it is Dr. Paul who consistently votes to lower or abolish federal taxes, spending, and regulation. His support for the FairTax bill would further their cause more than any number of cosponsors or anything Boortz could ever say or write. The Americans for Fair Taxation website lists Congressman Paul as a “supporter” of the FairTax. This is strange since Dr. Paul has not taken an official position in support or opposition to the FairTax. His priority is reducing government spending and taxes, not getting sidetracked in debates about which type of tax we should have. As he has made clear: “The real issue is total spending by government, not tax reform.”

So what about these cosponsors of the FairTax bill? Are they interested in reducing total spending by government? Out of the fifty-eight cosponsors, forty-four of them voted for the Medicare Prescription Drug and Modernization Act of 2003 — the largest expansion of the welfare state since the Great Society. Only six voted against it [6] (eight cosponsors were not members of Congress at the time of the vote. [7]) The sponsor of the FairTax bill, John Linder, also voted for the Medicare Act. No wonder the FairTax has to be revenue neutral now with adjustments every year! How else will the government come up with the billions of dollars it will need to pay for all these prescriptions?

 

  Readings before Adam Smith

The FairTax is not a voluntary tax. Calling the FairTax a voluntary tax has got to be the most ridiculous thing ever said about it. Boortz maintains in his book that “there is nothing coercive about the FairTax.” In Congressman Linder’s testimony before The Joint Economic Committee on “Rethinking the Tax Code,” he stated: “The FairTax plan is a voluntary tax system. Every citizen becomes a voluntary taxpayer, paying as much as they choose, when they choose, by how they choose to spend.”

Well, could we not also say that the current tax system is a voluntary tax system? Every citizen becomes a voluntary taxpayer, paying as much as they choose, whey they choose, by how they choose to work. Under the present system, if someone doesn’t work then he doesn’t pay any income tax. Sounds voluntary to me. Rather than being voluntary, the FairTax is a “permission-to-live” tax, as Murray Rothbard has described consumption taxes.

We know that retail prices will increase by 30 percent under the FairTax plan; we don’t know how much prices will decrease because of the elimination of “embedded costs” in the price of goods. Because it is embedded with fraud, the FairTax plan is not the answer.

The income tax should be repealed, not replaced. The IRS should be gotten rid of, not renamed. Tax reform should reduce taxes, not be revenue neutral. Government theft of the wealth of its citizens should be abolished, not adjusted. The FairTax should be called the Fraudulent Tax.


Laurence M. Vance is a freelance writer and an adjunct instructor in accounting and economics at Pensacola Junior College in Pensacola, FL. See his Mises.org archive. Send him mail. Comment on the blog.

Notes

[1] Congressman John Linder (R-GA) is Boortz’s coauthor, but since Boortz has previous writing experience and his name appears in larger letters on the book’s cover, I will refer to Boortz as the author of The FairTax Book.

[2] This report is unfortunately not available online.

[3] These reports are likewise not available online.

[4] Rob Northrup, to whom also I am indebted for bringing to my attention the new paperback edition of The FairTax Book.

[5] This appeared as chapter 11 of Frontiers of Tax Reform, edited by Michael J. Boskin (Hoover Institution Press, 1996), and was reprinted by the economics department of Harvard University as part of its Reprints in Economic Theory and Econometrics.

[6] Dan Burton (R-IN), Jeff Flake (R-AZ), Jeff Miller (R-FL), Charlie Norwood (R-GA), Mike Pence (R-IN), Thomas Tancredo (R-CO).

[7] K. Michael Conaway (R-TX), Dan Boren (D-OK), Thelma Drake (R-VA), Michael McCaul (R-TX), Ted Poe (R-TX), Michael Sodrel (R-IN), Lynn Westmoreland (R-GA), Tom Price (R-GA).

 

So then, are we to believe Mr. Boortz? I think not.

Wage Gaps

October 16, 2006

Wage Gaps, Inequality, and Government

By William Anderson

Posted on 10/12/2006
Subscribe at email services, tell others, or Digg this story.

Perhaps it is human nature for people to decry whatever their situation might be. All of us wish to be better off than we are at the present time, not matter how good the state of our current circumstances.

While that might be so, the supposed “inequality crisis” decried by some economists (and, of course, members of the political classes) does not stem necessarily from human discontent with the nature of scarcity, but rather from the propensity of some to play with aggregate numbers — and call it “economics.”

Although the typical American consumer today has more affordable goods from which to choose than any time in this nation’s history, that has not stopped some prominent voices from declaring that “unfettered” capitalism is undermining prosperity.

The most prominent voice on this current “inequality crisis” has been Paul Krugman, who from his New York Times editorial page perch has declared that “economic inequality is rising in America.” Moreover, Krugman squarely places the “blame” for this state of affairs upon the dominant ideological climate:

I’ve been studying the long-term history of inequality in the United States. And it’s hard to avoid the sense that it matters a lot which political party, or more accurately, which political ideology rules Washington.[1]

Certainly an issue like “inequality” in the United States will touch a nerve, given that this is a country founded upon a “Declaration of Independence” which declared that “all men are created equal.” Yet, people throughout history have understood that all earning power is not equal, and that no matter what a government does, short of killing everyone in the country, that there is going to be some inequality somewhere.

Anyone with even minimal training in economics understands marginal productivity and its effect upon the income one receives for services rendered, and it is a fact of life that some people are going to have skills that will be compensated higher than others.

(If Krugman really were to believe in his own doctrines of “income equality,” perhaps he might be willing to accept less pay at Princeton University in order to have other colleagues receive more. If he is not willing to do so, he has no right to demand that others be forced into having their incomes confiscated in the name of equality.)

Adherents of Keynesian theory — and Krugman is one — believe that income inequality ultimately leads to large-scale “underconsumption,” which ultimately pulls an economy into a state of low production and high unemployment. The reasoning is as follows:

  • High-income individuals are less likely to spend all or most of their income for consumables, unlike low-income people, and thus have a higher “marginal propensity to save”;
  • In the Keynesian system, net savings will always be greater than net investment, which means that some income will “leak” out of the economy;
  • As more income leaks from the economy, overall spending is not high enough for consumers to “buy back” the products they have made. Therefore, inventories pile up as underconsumption takes its toll;
  • Underconsumption then leads to unemployment, and unemployment leads to more unemployment until the economy implodes on its own and settles at a harsh “equilibrium” of low production and high unemployment.

Keynesians believe that because a free market economy is inherently unstable and leads to underconsumption, government must intervene via spending and taxation in order to bring the economy to a state of “full employment.”

One strategy, they hold, is for government to impose high marginal income tax rates in order to siphon money from higher-income earners and either transfer that money to lower-income people, or just have government engage in spending either for “massive public works” or some other scheme that will help the economy avoid the pitfalls of underconsumption.

Therefore the “equalization” of incomes through spending and taxation is not, they contend, simply a “feel-good” scheme by which the political classes can claim that they have created “income equality”: such policies also serve to keep an economy operating at a higher level than one left to the devices of free markets.

In the Keynesian state of the world, there is no difference between a government and private enterprise when it comes to efficiency and output. In fact, as Krugman notes, in areas such as medical care, government is going to be a lower-cost, higher-output entity than private medicine, since governments do not have to make “profits,” which in Krugman’s view unnecessarily pull money from the spending stream to go into the pockets of wealthy people, who then save their money and drive an economy into the throes of underconsumption.

It is clear, according to Krugman, that the golden age of income equality in the United States was long ago and can be revived only with policies that favor high, confiscatory tax rates and enforced unionization, as well as other methods of coercion. He writes:

Since the 1920s there have been four eras of American inequality:

The Great Compression, 1929-1947: The birth of middle-class America. The real wages of production workers in manufacturing rose 67 percent, while the real income of the richest 1 percent of Americans actually fell 17 percent.

The Postwar Boom, 1947-1973: An era of widely shared growth. Real wages rose 81 percent, and the income of the richest 1 percent rose 38 percent.

Stagflation, 1973-1980: Everyone lost ground. Real wages fell 3 percent, and the income of the richest 1 percent fell 4 percent.

The New Gilded Age, 1980-?: Big gains at the very top, stagnation below. Between 1980 and 2004, real wages in manufacturing fell 1 percent, while the real income of the richest 1 percent — people with incomes of more than $277,000 in 2004 — rose 135 percent.

What’s noticeable is that except during stagflation, when virtually all Americans were hurt by a tenfold increase in oil prices, what happened in each era was what the dominant political tendency of that era wanted to happen.

Franklin Roosevelt favored the interests of workers while declaring of plutocrats who considered him a class traitor, “I welcome their hatred.” Sure enough, under the New Deal wages surged while the rich lost ground.

What followed was an era of bipartisanship and political moderation; Dwight Eisenhower said of those who wanted to roll back the New Deal, “Their number is negligible, and they are stupid.” Sure enough, it was also an era of equable growth.

Finally, since 1980 the U.S. political scene has been dominated by a conservative movement firmly committed to the view that what’s good for the rich is good for America. Sure enough, the rich have seen their incomes soar, while working Americans have seen few if any gains.[2]

We have another term for what Krugman calls the “Great Compression”: It is called the Great Depression — and World War II. In other words, Krugman claims that the Great Depression, a time when the nation’s unemployment rates were in double-digits, was a good time for the American “middle class” because, statistically speaking, incomes for wealthy people fell. (Robert Higgs gives us another pictureof the Great Depression and the New Deal that is not as rosy as Krugman’s.)

Likewise, we are supposed to believe — if Krugman is an authority — that World War II was a good time for Americans because of “income compression.” Again, Higgs presents another pictureof so-called war prosperity:

Many aspects of economic well-being deteriorated during the war. Military preemption of public transportation interfered with intercity travel by civilians, and rationing of tires and gasoline made commuting to work very difficult for many workers. More workers had to work at night. The rate of industrial accidents increased substantially as novices replaced experienced workers and labor turnover increased. The government forbade nearly all nonmilitary construction, and housing became extremely scarce and badly maintained in many places, especially where war production had been expanded the most. Price controls and rationing meant that consumers had to spend much time standing in lines or searching for sellers willing to sell goods at the controlled prices. The quality of many goods deteriorated, as sellers forbidden to raise prices adjusted to increased demands by selling lower quality goods at the controlled prices.

One problem here is that Krugman depends upon “apples and oranges” statistics. One can use things like the Consumer Price Index to “prove” that Americans are worse off today, economically speaking, than they were in 1973, yet if we were to time-travel to that era, most of us would be shocked to discover just how much worse off we were back then compared to today. The US economy has seen great advances in computer technology, which in turn has driven gains elsewhere.

For example, would one today facing major surgery really want to be transported back to the health care of 1973? Perhaps one might want to visit a typical 1973 grocery store and compare the choices people had then to what is available today. (I remember talking long distance that year to a girl I was dating who lived in another city. We talked for two hours on a Sunday evening, and the call cost me $28, or close to $100 in today’s dollars. The same call today would have a marginal cost of zero, since I am on a plan for which all local and long-distance calls cost me $30 a month.)

Curiously, Krugman often condemns Wal-Mart in his columns, yet Wal-Mart has provided low-income people with consumer choices that simply would not have been possible in the former “golden ages” of income equality. After all, if the obvious end of production is consumption, then the real measure of economic progress is the number of opportunities that people have to consume and what is available to them.

If Krugman really wishes us to believe that the 1930s was a brighter era, economically speaking, than 2006, he can try to convince us. However, he has been quite inconsistent. In one piece, he writes:

Is the typical American family better off than it was a generation ago? That’s the subject of an intense debate these days, as commentators try to understand the sour mood of the American public.

But it’s the wrong debate. For one thing, there probably isn’t a right answer. Most Americans are better off in some ways, worse off in others, than they were in the early 1970s. It’s a subjective judgment whether the good outweighs the bad. And as I’ll explain, that ambiguity is actually the real message.

Here’s what the numbers say. From the end of World War II until 1973, when the first oil crisis brought an end to the postwar boom, the U.S. economy delivered a huge, broad-based rise in living standards: family income adjusted for inflation roughly doubled for the poor, the middle class, and the elite alike. Nobody debated whether families were better off than they had been a generation ago; it was obvious that they were, by any measure.[3]

In another article, he says:

Finally, since 1980 the U.S. political scene has been dominated by a conservative movement firmly committed to the view that what’s good for the rich is good for America. Sure enough, the rich have seen their incomes soar, while working Americans have seen few if any gains.[4]

Thus, he seems to believe that people today either are worse off or no better off than they were 30 years ago, and any gains in productivity only accrued to wealthy people. He goes on to say:

The stagnation of real wages — wages adjusted for inflation — actually goes back more than 30 years. The real wage of nonsupervisory workers reached a peak in the early 1970′s, at the end of the postwar boom. Since then workers have sometimes gained ground, sometimes lost it, but they have never earned as much per hour as they did in 1973.[5]

What is the cause of this human misery? According to Krugman, it is so-called conservative ideology. In one place, he writes:

Why have workers done so badly in a rich nation that keeps getting richer? That’s a matter of dispute, although I believe there’s a large political component: what we see today is the result of a quarter-century of policies that have systematically reduced workers’ bargaining power.[6]

Elsewhere, he declares:

…it seems likely that government policies have played a big role in America’s growing economic polarization — not just easily measured policies like tax rates for the rich and the level of the minimum wage, but things like the shift in Labor Department policy from protection of worker rights to tacit support for union-busting.

And if that’s true, it matters a lot which party is in power — and more important, which ideology. For the last few decades, even Democrats have been afraid to make an issue out of inequality, fearing that they would be accused of practicing class warfare and lose the support of wealthy campaign contributors.

That may be changing. Inequality seems to be an issue whose time has finally come, and if the growing movement to pressure Wal-Mart to treat its workers better is any indication, economic populism is making a comeback.[7]

In other words: Prosperity is the creation of the political classes. Should the government levy high taxes on the so-called wealthy, bring back labor union power to the levels that existed in the private sector in the 1940s through the 1960s, and engage in other coercive tactics, we can bring back a “golden age” in economics.

He writes:

That’s why the debate over whether the middle class is a bit better off or a bit worse off now than a generation ago misses the point. What we should be debating is why technological and economic progress has done so little for most Americans, and what changes in government policies would spread the benefits of progress more widely. An effort to shore up middle-class health insurance, paid for by a rollback of recent tax cuts for the wealthiest Americans — something like the plan proposed by John Kerry two years ago, but more ambitious — would be a good place to start.[8]

Indeed, I believe we should be debating why these technological advances have not had even more influence in wiping out poverty, but I would approach it from a different point of view. For the past century, we have seen the advance of the state, and all its coercion. Krugman argues that the way to advance an economy is to give the state nearly unlimited powers.

However, there is another way to put it: Since 1973, we have seen government grab powers, increase taxes, and regulate wealth out of existence. However, despite the growth of government and the continued debasement of the once-proud dollar by the Federal Reserve System, entrepreneurs and producers have still managed to make breathtaking achievements and to provide opportunities for others.

   He knew what’s what

Now, Krugman actually seems to believe that the way to prosperity is to destroy wealth, regulate firms like Wal-Mart out of existence, and make it more difficult and costly to produce goods. (He seems to labor under the delusion that higher factor costs mean that more wealth is being created.) Yet, that argument is nonsense, and it is nonsense on its face.Income equality and prosperity are not the same things. It is theoretically possible for the state to make all incomes equal; Lenin and his cohorts tried to do that in Russia from 1917-1921, and we know the horrific results of that experiment. Yet, if Krugman is to be believed, we would have to assume that 1917-1921 was a golden age for the Russians, rather than a time of war, famine, and death.


William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University. Send him mail. See his articles. Comment on the blog.

Notes

[1] Krugman, Paul. “Wages, Wealth and Politics,” New York Times, August 18, 2006, A17.

[2] Ibid.

[3] Krugman, Paul. “Progress or Regress?” New York Times, September 15, 2006, A25.

[4] Ibid., August 18, 2006.

[5] Krugman, Paul. “The Big Disconnect,” New York Times, September 1, 2006, A17.

[6] Ibid.

[7] Ibid., August 18, 2006.

[8] Ibid., September 15, 2006.

And so now there is hue and cry to increase the minimum wage. Too what end?

Wage Gaps

October 16, 2006

Wage Gaps, Inequality, and Government

By William Anderson

Posted on 10/12/2006
Subscribe at email services, tell others, or Digg this story.

Perhaps it is human nature for people to decry whatever their situation might be. All of us wish to be better off than we are at the present time, not matter how good the state of our current circumstances.

While that might be so, the supposed “inequality crisis” decried by some economists (and, of course, members of the political classes) does not stem necessarily from human discontent with the nature of scarcity, but rather from the propensity of some to play with aggregate numbers — and call it “economics.”

Although the typical American consumer today has more affordable goods from which to choose than any time in this nation’s history, that has not stopped some prominent voices from declaring that “unfettered” capitalism is undermining prosperity.

The most prominent voice on this current “inequality crisis” has been Paul Krugman, who from his New York Times editorial page perch has declared that “economic inequality is rising in America.” Moreover, Krugman squarely places the “blame” for this state of affairs upon the dominant ideological climate:

I’ve been studying the long-term history of inequality in the United States. And it’s hard to avoid the sense that it matters a lot which political party, or more accurately, which political ideology rules Washington.[1]

Certainly an issue like “inequality” in the United States will touch a nerve, given that this is a country founded upon a “Declaration of Independence” which declared that “all men are created equal.” Yet, people throughout history have understood that all earning power is not equal, and that no matter what a government does, short of killing everyone in the country, that there is going to be some inequality somewhere.

Anyone with even minimal training in economics understands marginal productivity and its effect upon the income one receives for services rendered, and it is a fact of life that some people are going to have skills that will be compensated higher than others.

(If Krugman really were to believe in his own doctrines of “income equality,” perhaps he might be willing to accept less pay at Princeton University in order to have other colleagues receive more. If he is not willing to do so, he has no right to demand that others be forced into having their incomes confiscated in the name of equality.)

Adherents of Keynesian theory — and Krugman is one — believe that income inequality ultimately leads to large-scale “underconsumption,” which ultimately pulls an economy into a state of low production and high unemployment. The reasoning is as follows:

  • High-income individuals are less likely to spend all or most of their income for consumables, unlike low-income people, and thus have a higher “marginal propensity to save”;
  • In the Keynesian system, net savings will always be greater than net investment, which means that some income will “leak” out of the economy;
  • As more income leaks from the economy, overall spending is not high enough for consumers to “buy back” the products they have made. Therefore, inventories pile up as underconsumption takes its toll;
  • Underconsumption then leads to unemployment, and unemployment leads to more unemployment until the economy implodes on its own and settles at a harsh “equilibrium” of low production and high unemployment.

Keynesians believe that because a free market economy is inherently unstable and leads to underconsumption, government must intervene via spending and taxation in order to bring the economy to a state of “full employment.”

One strategy, they hold, is for government to impose high marginal income tax rates in order to siphon money from higher-income earners and either transfer that money to lower-income people, or just have government engage in spending either for “massive public works” or some other scheme that will help the economy avoid the pitfalls of underconsumption.

Therefore the “equalization” of incomes through spending and taxation is not, they contend, simply a “feel-good” scheme by which the political classes can claim that they have created “income equality”: such policies also serve to keep an economy operating at a higher level than one left to the devices of free markets.

In the Keynesian state of the world, there is no difference between a government and private enterprise when it comes to efficiency and output. In fact, as Krugman notes, in areas such as medical care, government is going to be a lower-cost, higher-output entity than private medicine, since governments do not have to make “profits,” which in Krugman’s view unnecessarily pull money from the spending stream to go into the pockets of wealthy people, who then save their money and drive an economy into the throes of underconsumption.

It is clear, according to Krugman, that the golden age of income equality in the United States was long ago and can be revived only with policies that favor high, confiscatory tax rates and enforced unionization, as well as other methods of coercion. He writes:

Since the 1920s there have been four eras of American inequality:

The Great Compression, 1929-1947: The birth of middle-class America. The real wages of production workers in manufacturing rose 67 percent, while the real income of the richest 1 percent of Americans actually fell 17 percent.

The Postwar Boom, 1947-1973: An era of widely shared growth. Real wages rose 81 percent, and the income of the richest 1 percent rose 38 percent.

Stagflation, 1973-1980: Everyone lost ground. Real wages fell 3 percent, and the income of the richest 1 percent fell 4 percent.

The New Gilded Age, 1980-?: Big gains at the very top, stagnation below. Between 1980 and 2004, real wages in manufacturing fell 1 percent, while the real income of the richest 1 percent — people with incomes of more than $277,000 in 2004 — rose 135 percent.

What’s noticeable is that except during stagflation, when virtually all Americans were hurt by a tenfold increase in oil prices, what happened in each era was what the dominant political tendency of that era wanted to happen.

Franklin Roosevelt favored the interests of workers while declaring of plutocrats who considered him a class traitor, “I welcome their hatred.” Sure enough, under the New Deal wages surged while the rich lost ground.

What followed was an era of bipartisanship and political moderation; Dwight Eisenhower said of those who wanted to roll back the New Deal, “Their number is negligible, and they are stupid.” Sure enough, it was also an era of equable growth.

Finally, since 1980 the U.S. political scene has been dominated by a conservative movement firmly committed to the view that what’s good for the rich is good for America. Sure enough, the rich have seen their incomes soar, while working Americans have seen few if any gains.[2]

We have another term for what Krugman calls the “Great Compression”: It is called the Great Depression — and World War II. In other words, Krugman claims that the Great Depression, a time when the nation’s unemployment rates were in double-digits, was a good time for the American “middle class” because, statistically speaking, incomes for wealthy people fell. (Robert Higgs gives us another pictureof the Great Depression and the New Deal that is not as rosy as Krugman’s.)

Likewise, we are supposed to believe — if Krugman is an authority — that World War II was a good time for Americans because of “income compression.” Again, Higgs presents another pictureof so-called war prosperity:

Many aspects of economic well-being deteriorated during the war. Military preemption of public transportation interfered with intercity travel by civilians, and rationing of tires and gasoline made commuting to work very difficult for many workers. More workers had to work at night. The rate of industrial accidents increased substantially as novices replaced experienced workers and labor turnover increased. The government forbade nearly all nonmilitary construction, and housing became extremely scarce and badly maintained in many places, especially where war production had been expanded the most. Price controls and rationing meant that consumers had to spend much time standing in lines or searching for sellers willing to sell goods at the controlled prices. The quality of many goods deteriorated, as sellers forbidden to raise prices adjusted to increased demands by selling lower quality goods at the controlled prices.

One problem here is that Krugman depends upon “apples and oranges” statistics. One can use things like the Consumer Price Index to “prove” that Americans are worse off today, economically speaking, than they were in 1973, yet if we were to time-travel to that era, most of us would be shocked to discover just how much worse off we were back then compared to today. The US economy has seen great advances in computer technology, which in turn has driven gains elsewhere.

For example, would one today facing major surgery really want to be transported back to the health care of 1973? Perhaps one might want to visit a typical 1973 grocery store and compare the choices people had then to what is available today. (I remember talking long distance that year to a girl I was dating who lived in another city. We talked for two hours on a Sunday evening, and the call cost me $28, or close to $100 in today’s dollars. The same call today would have a marginal cost of zero, since I am on a plan for which all local and long-distance calls cost me $30 a month.)

Curiously, Krugman often condemns Wal-Mart in his columns, yet Wal-Mart has provided low-income people with consumer choices that simply would not have been possible in the former “golden ages” of income equality. After all, if the obvious end of production is consumption, then the real measure of economic progress is the number of opportunities that people have to consume and what is available to them.

If Krugman really wishes us to believe that the 1930s was a brighter era, economically speaking, than 2006, he can try to convince us. However, he has been quite inconsistent. In one piece, he writes:

Is the typical American family better off than it was a generation ago? That’s the subject of an intense debate these days, as commentators try to understand the sour mood of the American public.

But it’s the wrong debate. For one thing, there probably isn’t a right answer. Most Americans are better off in some ways, worse off in others, than they were in the early 1970s. It’s a subjective judgment whether the good outweighs the bad. And as I’ll explain, that ambiguity is actually the real message.

Here’s what the numbers say. From the end of World War II until 1973, when the first oil crisis brought an end to the postwar boom, the U.S. economy delivered a huge, broad-based rise in living standards: family income adjusted for inflation roughly doubled for the poor, the middle class, and the elite alike. Nobody debated whether families were better off than they had been a generation ago; it was obvious that they were, by any measure.[3]

In another article, he says:

Finally, since 1980 the U.S. political scene has been dominated by a conservative movement firmly committed to the view that what’s good for the rich is good for America. Sure enough, the rich have seen their incomes soar, while working Americans have seen few if any gains.[4]

Thus, he seems to believe that people today either are worse off or no better off than they were 30 years ago, and any gains in productivity only accrued to wealthy people. He goes on to say:

The stagnation of real wages — wages adjusted for inflation — actually goes back more than 30 years. The real wage of nonsupervisory workers reached a peak in the early 1970′s, at the end of the postwar boom. Since then workers have sometimes gained ground, sometimes lost it, but they have never earned as much per hour as they did in 1973.[5]

What is the cause of this human misery? According to Krugman, it is so-called conservative ideology. In one place, he writes:

Why have workers done so badly in a rich nation that keeps getting richer? That’s a matter of dispute, although I believe there’s a large political component: what we see today is the result of a quarter-century of policies that have systematically reduced workers’ bargaining power.[6]

Elsewhere, he declares:

…it seems likely that government policies have played a big role in America’s growing economic polarization — not just easily measured policies like tax rates for the rich and the level of the minimum wage, but things like the shift in Labor Department policy from protection of worker rights to tacit support for union-busting.

And if that’s true, it matters a lot which party is in power — and more important, which ideology. For the last few decades, even Democrats have been afraid to make an issue out of inequality, fearing that they would be accused of practicing class warfare and lose the support of wealthy campaign contributors.

That may be changing. Inequality seems to be an issue whose time has finally come, and if the growing movement to pressure Wal-Mart to treat its workers better is any indication, economic populism is making a comeback.[7]

In other words: Prosperity is the creation of the political classes. Should the government levy high taxes on the so-called wealthy, bring back labor union power to the levels that existed in the private sector in the 1940s through the 1960s, and engage in other coercive tactics, we can bring back a “golden age” in economics.

He writes:

That’s why the debate over whether the middle class is a bit better off or a bit worse off now than a generation ago misses the point. What we should be debating is why technological and economic progress has done so little for most Americans, and what changes in government policies would spread the benefits of progress more widely. An effort to shore up middle-class health insurance, paid for by a rollback of recent tax cuts for the wealthiest Americans — something like the plan proposed by John Kerry two years ago, but more ambitious — would be a good place to start.[8]

Indeed, I believe we should be debating why these technological advances have not had even more influence in wiping out poverty, but I would approach it from a different point of view. For the past century, we have seen the advance of the state, and all its coercion. Krugman argues that the way to advance an economy is to give the state nearly unlimited powers.

However, there is another way to put it: Since 1973, we have seen government grab powers, increase taxes, and regulate wealth out of existence. However, despite the growth of government and the continued debasement of the once-proud dollar by the Federal Reserve System, entrepreneurs and producers have still managed to make breathtaking achievements and to provide opportunities for others.

   He knew what’s what

Now, Krugman actually seems to believe that the way to prosperity is to destroy wealth, regulate firms like Wal-Mart out of existence, and make it more difficult and costly to produce goods. (He seems to labor under the delusion that higher factor costs mean that more wealth is being created.) Yet, that argument is nonsense, and it is nonsense on its face.Income equality and prosperity are not the same things. It is theoretically possible for the state to make all incomes equal; Lenin and his cohorts tried to do that in Russia from 1917-1921, and we know the horrific results of that experiment. Yet, if Krugman is to be believed, we would have to assume that 1917-1921 was a golden age for the Russians, rather than a time of war, famine, and death.


William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University. Send him mail. See his articles. Comment on the blog.

Notes

[1] Krugman, Paul. “Wages, Wealth and Politics,” New York Times, August 18, 2006, A17.

[2] Ibid.

[3] Krugman, Paul. “Progress or Regress?” New York Times, September 15, 2006, A25.

[4] Ibid., August 18, 2006.

[5] Krugman, Paul. “The Big Disconnect,” New York Times, September 1, 2006, A17.

[6] Ibid.

[7] Ibid., August 18, 2006.

[8] Ibid., September 15, 2006.

And so now there is hue and cry to increase the minimum wage. Too what end?

Iraq Through a Rebel’s Eyes

October 16, 2006

Iraq Through a Rebel’s Eyes

By Andrew Greene

Posted on 10/16/2006
Subscribe at email services, tell others, or Digg this story.

The strongest reason for the people to retain the right to keep and bear arms is, as a last resort, to protect themselves against tyranny in Government.

Thomas Jefferson was a rebel, as so many of his comments demonstrated. He also was a gun enthusiast, and not the bird-shooting kind. His gang of insurgents fought the British with the eighteenth century equivalents of assault rifles, RPGs, and roadside bombs — and that is why they are worth recalling when our conversation turns to Iraq.

Before going further, I should declare that I am a patriot, but a qualified one. My loyalty is to the kinds of ideas Jefferson put in the Declaration: the sanctity of property, suspicion of power, and extra suspicion of the state. I am saying so now because some of what follows might sound deeply unpatriotic to the modern ear, but I think it would have sounded just fine to Jefferson’s classical one.

The shock of September 11th did some damage to my political resolve. The murder of two thousand innocents was an act so outrageous that it demanded a quick and violent response. So, like many Americans, I wanted to see someone punished, and the federal government appeared ideally placed to do the punishing. I silently agreed with the plan to go after the bombers and their friends.

The way I saw it, the army could pummel some bad guys (not necessarily the 9-11 culprits) and that would be one way to get our revenge. Self-declared allies of the killers would find themselves being treated as such.

It was a classical liberal’s rationale: a stand for the subjective individual and his property; finally, the government doing its job. Of course the logic was twisted by emotion, and I knew the whole enterprise might end badly, but I felt like punching anyway, at least until my arm was completely exhausted and the anger was gone.

But the Jeffersonian in me had other ideas about Iraq, and they do not make happy reading — not for neocons who like the war or apologists who don’t. If we woke Jefferson’s gang up today, what would they make of it all? Well, the first thing they would see is the US government punching away on our behalf, and that they would probably endorse. Knowing about the carnage in New York and Washington, the attempted assassinations of two Presidents, the invasion of Kuwait, and the chemical attacks on Saddam’s subjects (and, of course, the fact that he had subjects) would be reason enough.

But then, as their excitement subsided, I think they might notice a few disturbing things: the sheer size of the US force, for one, and how far it is reaching across the ocean, for another. And they could only be dismayed to discover that their libertarian brainchild had grown up to be an empire, feeding off its citizens’ labor, with legions stationed around the world, fighting in foreign civil wars, enforcing a Pax Americana, and tasting the bitter fruit of its adventures.

Once over that disappointment, though, Jefferson and his friends might spot a ray of hope in Iraq. Their radical eyes would pick up on something about the guerilla war that we — after two hundred years of relative comfort and ease — have missed.

The US government’s arm is tired. Even with one hundred and fifty thousand troops, a fortune in fuel and supplies, and the best weapons ever invented, all that power is having a rough ride. Humvees loaded with high-tech regulars are sitting targets for bits of plumbing packed with C-4, left at the side of the road. There are plenty of surprises from the front, but such news would only elicit a sad smile from Jefferson, and the same from his fellow insurgent, Madison, who wrote this:

The highest number to which a standing army can be carried in any country does not exceed one hundredth part of the souls, or one twenty-fifth part of the number able to bear arms. This portion would not yield, in the United States, an army of more than twenty-five or thirty thousand men.

To these would be opposed a militia amounting to near half a million citizens with arms in their hands, officered by men chosen from among themselves, fighting for their common liberties and united and conducted by governments possessing their affections and confidence. It may well be doubted whether a militia thus circumstanced could ever be conquered by such a proportion of regular troops.

Even though Madison was talking about a war between the feds and the people, the parallel with Iraq makes it a devastating tactical appraisal. The biggest military machine — even the GPS-guided, kevlar-toting, night-fighting, uranium-shooting US Army of 2006 — can’t subjugate a rabble of ornery civilians if a good number of them have guns. Yes, it can obliterate them, but that’s not the same as governing them. Madison knew, and Iraq proves, that a rifle over every mantlepiece can safeguard freedom.

American insurgents from 1776 would see Iraq through the filter of their own occupation: the struggle against the Crown and its Hamiltonian successors. They would see the setbacks of the 75th Rangers in Baghdad and the 8th Cavalry in Fallujah, and would mourn the casualties among the professional soldiers, as we do, but another part of them would be saying I told you so — and might even be glad. They couldn’t feel anything else, because they were rebels to the core:

The governments of Europe are afraid to trust the people with arms. If they did, the people would surely shake off the yoke of tyranny, as America did.

The man who wrote that would not have rooted for Iraq’s fanatics and murderers, out to become tyrants themselves, but neither would he have cheered the federal juggernaut fighting them now. The Iraqi insurgents are the bad guys, for sure, but they are sovereign men, too, armed with nothing but light assault weapons, trip wires, and explosives. Just as Madison predicted, they are holding their own against the attack helicopters of the King. Our government is against them today, but that doesn’t change their tactical likeness to the snipers of 1776.

The comparison is a disturbing one to make in the middle of our war, but we need to make it. And maybe it would put Madison and Jefferson at ease about the monster they fathered — the global superpower. A successful insurgency, independent of its underlying purpose, is a reason for every man who loves liberty to cheer.

  There are limits

For both of our modern wings of politics, Iraq is a lesson in government, and not the one either of them wants to learn. It proves the assertion that the best way to keep the state down is to get everyone a weapon.Some part of the gun rights lobby should want the army to lose in Iraq, and some part of the gun control lobby should want it to win.

Let neocon Republicans, who support the war and guns in the home, and leftist Democrats, who despise both, put that contradiction in their pipes and smoke it. Do they like state power or not? I am afraid the answer is: they like it when it suits them. That is why we — who can be true patriots only by being rebels ourselves — must not forget how our patriotism was born.

Here is one last quotation, this from the insurgent commander himself:

… the rifle and pistol are equally indispensable. The very atmosphere of firearms everywhere restrains evil interference, they deserve a place of honor with all that’s good.

That’s not Moqtada al-Sadr talking, but George Washington. You get the idea. Staring into Iraq’s quagmire, we should see a second chance for freedom everywhere, including the United States.


Andrew Greene was born in Philadelphia and lives in London. Send him mail. Comment on the blog.Interesting commentary to say the least.


Follow

Get every new post delivered to your Inbox.

Join 205 other followers

%d bloggers like this: