I often write about the importance of free markets and the dangers of
big government. There seems to be a lot of confusion these days about the
meaning of those two concepts, especially when seen through the prism
of traditional political left/right divisions.
Yesterday, a friend of mine pointed out that the current crisis was created under George W. Bush. If free markets and small government are really the solution, how come a "right-wing" president who "reduced taxes" brought us into this mess?
That's a great question, and president Bush is a perfect example of all the misconceptions people have about economic policy and the right-left division in US politics. How so? Let's look at the numbers.
Bush may have reduced (some) taxes, but federal spending during his two terms went up 19.7% and 25.3% respectively, not including defense spending. If you include spending on security and other adventures, the growth is almost 50%.
Yesterday, a friend of mine pointed out that the current crisis was created under George W. Bush. If free markets and small government are really the solution, how come a "right-wing" president who "reduced taxes" brought us into this mess?
That's a great question, and president Bush is a perfect example of all the misconceptions people have about economic policy and the right-left division in US politics. How so? Let's look at the numbers.
Bush may have reduced (some) taxes, but federal spending during his two terms went up 19.7% and 25.3% respectively, not including defense spending. If you include spending on security and other adventures, the growth is almost 50%.
So,
on the one hand, the government took less money from the public. On the
other hand, the government spent more money than any other government
before it. How does that work?
Quite simply, it doesn't. You can't spend money that you don't have. So how did the government manage to do it?
It's called printing. The government has a monopoly on the supply of money. Whenever it needs more of it, it turns on the printers. Politicians know that raising taxes normally makes voters angry. So instead of taking our money directly, they simply print more of it and diminish the value of the money we have. This causes inflation. What it means is that what you can buy for a dollar today, will cost you a dollar and a half tomorrow.
Inflation is a nice way to 'tax' the public without causing too much concern, but when inflation starts running high, the public eventually notices, and gets angry. But the US government found a solution for that too. Since they can't print all the money they spend, they also borrow some of it from other countries, mostly from countries that export their goods and services to American consumers.
The US currently owes over US $3 trillion to China, Japan, the gulf states, and a variety of other countries. America's foreign debt doubled between 2003 and 2008. These countries give the US money in exchange for a promise to get it back one day, with interest. By giving America money, manufacturing countries ensure that US consumers will always have enough to spend. In order to make sure their goods always remain cheap, manufacturing countries - China and others - manipulate the rate of their currency. The US Government lets them get away with it, in order to make sure they keep financing America's debt. In addition, the fact that prices of goods remain low help the government pretend that they are fighting inflation and protecting American consumers. This is how it works, under Clinton, Bush, and how it continues to work under Obama.
It all works well, until it doesn't. At some point, prices need to return to their natural spot. At that point, lots of people suddenly realize that a lot of the wealth they thought they had no longer exists. Luckily for politicians, this normally happens once they are already out of office, so someone else needs to deal with it. Unfortunately for us, the next person usually does more of the same. So, in order to 'fix' the problems that Bush left him, Obama is now printing more money, borrowing more money, and spending more than any other president in history. At some point, somebody will have to pay for all this. You can already guess who it is.
And so, financial crises are caused by government intervention in the market: printing money and fixing interest rates in consumption-driven developed countries, and currency manipulation in manufacturing-driven developing countries.
The fact that the government has a monopoly on the supply of money seems completely normal to most of us, mostly since it has been going on for most of the past century. But things were not always like this. We'll discuss this, and other intricacies of the relationship between the US and its trading partners next time (until then, have a look here, here, here, and here).
P.S.
While we're talking about Bush, there is another critical point we must clarify: people who believe in free markets, limited government, and the precedence of individual choice and responsibility are normally against any violent or non-violent intervention in the affairs of other countries. This is quite the opposite of everything Bush (and Obama!) represents.
Quite simply, it doesn't. You can't spend money that you don't have. So how did the government manage to do it?
It's called printing. The government has a monopoly on the supply of money. Whenever it needs more of it, it turns on the printers. Politicians know that raising taxes normally makes voters angry. So instead of taking our money directly, they simply print more of it and diminish the value of the money we have. This causes inflation. What it means is that what you can buy for a dollar today, will cost you a dollar and a half tomorrow.
Inflation is a nice way to 'tax' the public without causing too much concern, but when inflation starts running high, the public eventually notices, and gets angry. But the US government found a solution for that too. Since they can't print all the money they spend, they also borrow some of it from other countries, mostly from countries that export their goods and services to American consumers.
The US currently owes over US $3 trillion to China, Japan, the gulf states, and a variety of other countries. America's foreign debt doubled between 2003 and 2008. These countries give the US money in exchange for a promise to get it back one day, with interest. By giving America money, manufacturing countries ensure that US consumers will always have enough to spend. In order to make sure their goods always remain cheap, manufacturing countries - China and others - manipulate the rate of their currency. The US Government lets them get away with it, in order to make sure they keep financing America's debt. In addition, the fact that prices of goods remain low help the government pretend that they are fighting inflation and protecting American consumers. This is how it works, under Clinton, Bush, and how it continues to work under Obama.
It all works well, until it doesn't. At some point, prices need to return to their natural spot. At that point, lots of people suddenly realize that a lot of the wealth they thought they had no longer exists. Luckily for politicians, this normally happens once they are already out of office, so someone else needs to deal with it. Unfortunately for us, the next person usually does more of the same. So, in order to 'fix' the problems that Bush left him, Obama is now printing more money, borrowing more money, and spending more than any other president in history. At some point, somebody will have to pay for all this. You can already guess who it is.
And so, financial crises are caused by government intervention in the market: printing money and fixing interest rates in consumption-driven developed countries, and currency manipulation in manufacturing-driven developing countries.
The fact that the government has a monopoly on the supply of money seems completely normal to most of us, mostly since it has been going on for most of the past century. But things were not always like this. We'll discuss this, and other intricacies of the relationship between the US and its trading partners next time (until then, have a look here, here, here, and here).
P.S.
While we're talking about Bush, there is another critical point we must clarify: people who believe in free markets, limited government, and the precedence of individual choice and responsibility are normally against any violent or non-violent intervention in the affairs of other countries. This is quite the opposite of everything Bush (and Obama!) represents.
It most certainly isn't Bush. He is part of the system that started years before his administration. If you want the roots to the FED's possibility to do whatever it wishes you'll find it in it's establishment by "what's his name" in 1933. Then, add Nixon's coup of removing the gold standard off the US dollars (and for a while forbidding US citizens from owning gold) stir well and what you get is an astronomic debt.
The FED doesn't just have monopoly over money in the US, they actually ARE PLAYING MONOPOLY in large scale. They literally flipped over the monopoly box and set the rule about money as their own:
"The Bank never "goes broke". If the bank runs out of money, it may issue as much more as may be needed by merely writing on any ordinary piece of paper."
And advocates of Laissez-Faire Capitalism are not homogeneus, objectivists (as i am) believe that free countries HAVE the right to liberate oppressed people just for the mere fact that they are opressed. And so, have the right of intervention in other countries affaires (in case they are playing dirty)
Thanks, Polantis. Indeed, Bush was just playing his part and it did begin with the Fed, the abolition of the gold standard, etc. As I wrote "it has been going on for most of the past century... and we'll discuss this next time".
As for the idea of using violence to liberate other people - I know that you, and others, support it. Still, it contradicts the basic premises of small government (without a big army...) and individual choice. If you have faith in your ideals, you would know that any oppressive government ends up bringing itself down, and external intervention often gives the oppressor an excuse to perpetuate its rule. Still, this is a complex moral issue and I don't (yet) have all the answer. Will write about it later this year and we'll argue properly! :)
Think of all the lives that could have been saved in China, Russia and that we cannot save today in Northern Korea... it's tens of millions that died for absolutely nothing. Some governments (like communist ones) are just a gang of criminals in the best regional power position. They should be removed if the price is reasonable.
That's not the issue. The issue is that once you (i) start deciding what is good for other people and (ii) set up a big army, based on public money to enforce your own views... you're asking for trouble, and creating powers (and moral standards) that will eventually be pointed at you. No doubt that in an ideal world you could use power effectively only for good, just like you could manage a whole economy and make sure everyone have enough, etc. In reality, once you create powerful institutions, they end up turning against you.