Delivering the Goods

The United States rose up from a handful of rebellious colonies to become the richest and most powerful nation in the world. Why? Because we led the world in production. For 200 years, America delivered the goods.

But, in the 1970’s, all that suddenly changed. For the first time in history, the U.S. started having trade deficits. That means our net consumption exceeded our net production. And, every single year since 1975, our nation has consistently consumed more than it produced. It doesn’t take a rocket scientist to know that’s not sustainable.

The depressing truth is America is no longer a world leader in production. We are trailing the pack. We are now a debtor nation, and our biggest creditor is China. — What the hell happened? And how will we ever recover? And, the more disturbing question is, what will happen to America if we don’t?

If we ever want to restore America to its proper place in the world, the first thing we need to understand is why we no longer have a productive economy. It’s pretty simple, really. — Because we no longer produce. Why not? – If we take a good hard look at the nature of production, maybe we can figure that out. The three key elements of production are capital, labor, and raw materials.

First, you need capital for research and development. To develop a new product that meets a real need in the marketplace takes a lot of research. It may take many years to develop. Research and development is extremely expensive, and there’s no guarantee of success. There has to be an enormous potential return on investment to justify that kind of risk.

That kind of return on investment is what our current administration refers to as “excessive profits.” And they have this notion that “excessive profits” should be punitively taxed. When government puts a lid on the potential for return on investment, what happens? The investors take their capital and invest it someplace else, — someplace that welcomes production, and wants to build up their economy and provide employment for their population. (Unlike the United States, it would seem.)

The second thing you need for production is raw materials. No matter what you want to produce, you need some combination of raw materials to produce it, whether wood, paper, metal, glass, fiber, or petroleum products. All raw materials come from the earth; they don’t come out of the air, or some genius’ imagination, or the printing presses at the Federal Reserve. They all come out of the ground, either through timber, mining, or agriculture.

Here, in Southern Oregon, we live in one of the richest areas in the country, in terms of natural resources. We’re rich in timber. We’re rich in minerals. But, if this part of the country is so rich, why is it so poor? Why is unemployment so high? Because we’re not allowed to use the natural resources with which we’re abundantly blessed. Overregulation, and the endless environmental litigation it has spawned, has all but curtailed the timber and mining industries, — the very industries that provide raw materials for every sort of production on which our economy relies. And the overregulation doesn’t stop there. It’s hobbling the manufacturing industries, too.

The third thing required for production is labor. We’ve actually got a surplus of that. Look at our unemployment numbers, nationwide. Private sector jobs are steadily declining because our industries are stymied by excessive regulation and punitive taxation. So how does our government address that issue? It tries to replace the jobs lost due to declining production by creating new jobs in the public sector.

The trouble is those jobs do nothing to restore our national productivity. Public sector jobs and service jobs don’t create any new wealth. They just swirl money around in the economy. And, as that money swirls around, more and more of it leaks out to other countries, as we buy foreign-made products because we can’t or don’t produce enough at home.

As the real wealth leaks out of our economy, the Fed prints up more and more new money, which only dilutes the value of the money we already have in circulation, leading to higher and higher inflation. As long as we consume more than we produce, there is no way to add real value back into our economy, and our currency will continue to lose whatever value it has. We must restore production to have a sustainable economy.

This country was founded on the sacred principles of liberty and freedom. Not just individual freedom, but economic freedom. America became a world leader because America delivered the goods. That’s what it’s all about. That’s what it’s always been about. We have to stay solvent to preserve our liberty. If our economy fails, we’ll lose our freedom. Stifling production smothers the economy. And that’s what our government is doing.

Contact your Congressmen and Senators and tell them we want our economy back. Government can’t solve this problem. Government is the problem.


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Economics Lessons for Liberals: Inflation

This past week, the Federal Reserve announced that it’s going to buy $300 billion worth of long-term Treasury bills over the next six months, and $750 billion of mortgage-backed securities, to try to loosen up credit and lower mortgage rates. It was also announced that they’re not going to raise taxes to come up with this additional trillion-plus dollars (on top of the recent bailouts and stimulus bill). Instead, they would just crank up the printing presses and print up the money.

How many things can you find wrong with this picture?

Wasn’t it loose credit that created the current financial crisis they’re purportedly trying to get us out of? Aren’t mortgage-backed securities the “toxic assets” that precipitated the collapse of all those banks and financial institutions that we’re already bailing out with our tax dollars? These are the very building blocks of the biggest Ponzi scheme in economic history, but the Fed, in its infinite wisdom, sees fit to gamble 3/4 of a trillion dollars of our money on the most discredited and dangerous financial instrument ever concocted to dupe unsuspecting investors. Only, at this point, they can hardly be said to be unsuspecting.

We’re supposed to be placated by the fact that, this time, they’re not using our tax dollars, but are printing up the money on their little printing presses. So, therefore, it doesn’t cost us anything, right? That would seem to be what they expect us to believe.

Economics for Liberals, Lesson #4.* When the Fed prints new money, it devalues all the money that’s currently in circulation. Printing more money literally dilutes the value of everybody’s savings, investments, salaries, and retirement funds.

Currency has no intrinsic value; it’s merely symbolic of the value of goods and services that can be exchanged. The only way to increase the total value in a system is to increase the production of goods and services that somebody wants to consume. The sum total of the currency in a system represents the sum total of the real value in the system (goods and services produced). The value that each unit of currency represents is the ratio of the total units of currency to the total actual value in the system. When the actual value (goods and services produced) remains stable, but the total units of currency are increased, each unit of currency represents less of the total actual value and, consequently, has less purchasing power. That’s what’s known as inflation.

Inflation is simply another type of taxation. Instead of taxing you on each incremental unit of value you produce, the Fed simply dilutes the value of everything you currently have, as well as every dollar you will earn in the future. It’s an invisible tax, because you don’t see the government taking it away from you. You see higher prices for everything you buy, and you blame the producers. But the producers are paying higher prices for everything they have to purchase to produce what they sell to you.

So everybody’s stuck paying higher prices for everything, but they don’t have any more money. So everybody’s purchasing power is reduced, making everybody, in real terms, poorer than they were before the currency was diluted. That’s because the money that was printed up by the government was not distributed to the people whose currency lost its value, but rather was used to buy whatever the Fed buys with it. — In this case, toxic assets that they know are overvalued.

How do I know with such certainty they are overvalued? Because, if they were not overvalued, they’d be able to be sold on the free market. The very fact that government has to buy them up indicates they’re not worth the price at which the government is buying them.

Economics for Liberals, Lesson #5. The value of an investment is based on the ratio of risk to potential reward. If the risk is greater than the potential rewards, the investment is overvalued and nobody will buy it unless the risk is reduced or the reward potential is increased. In many investments, the risk is simply the risk of losing what you invested, so the risk can be reduced by lowering the price. When a balance is reached between risk and potential, buyers can be found on the free market who are willing to assume the risk.

But, when the government assumes the risk, the people making the decisions aren’t risking their own money. They’re risking the taxpayers’ money, either directly (through taxation) or indirectly (through inflation). In this case, the Fed is cranking up the printing presses and diluting all of our savings, investments, salaries, and retirement funds to purchase investments that are known to be bad before they buy them. If any corporate CFO were to behave that way, knowing what we all know today, they would be fired.

And, to add insult to injury, they think we’re stupid enough to believe it isn’t costing us anything because they aren’t raising our taxes — yet. But the biggest irony of all is that the purpose used to justify this devious machination is to perpetuate the very circumstances (loose credit and easy availability of mortgages) that got us into this economic crisis in the first place.

Just how stupid do they think we are? Just how stupid are we?

*Lessons #1-3 are posted in Economics Lessons for Liberals: Minimum Wage.


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Environmentalists vs. Alternative Energy

As energy prices skyrocket, so does inflation. Our personal budgets, as well as our national economy, are shriveling up. While all Americans feel the pain of higher fuel prices, and most understand the correlation between energy prices and the inflation that’s eroding their buying power and chipping away at their standard of living, not nearly as many recognize the potential impact of energy dependence on national security. Much of the world’s oil is controlled by forces that are hostile to us. Our precarious energy position makes us very vulnerable.

We need to produce more energy at home. There are two reasons we aren’t doing that today. The first reason is the cost of R&D. The U.S. has a lot of shale oil, but it’s expensive to extract. However, with the prices of oil on the global market today, it’s getting to the point where the return will justify the investment. The other reason we aren’t producing more energy is counterproductive regulations and endless litigation brought about by environmental groups.

There may be enormous reserves of oil in ANWR, but we need to do exploratory drilling to find out where they are and assess how much oil there is. Environmentalists have stymied any attempt to do that, because it might disturb the polar bears. Other countries are taking full advantage of off-shore drilling but our government won’t permit that, because it might disturb the rich and powerful environmental lobbies that help our legislators get reelected.

The environmentalists claim they oppose drilling for oil because they favor alternative energy sources that are cleaner and safer for the environment. But it turns out that the greatest opposition to alternative energy production comes from environmental groups!

Wind power is about as clean as you can get. Environmentalists used to promote it but, once massive wind farms became a reality, environmentalist groups all over the country sprang up with injunctions and litigation to shut them down because of their impact on birds, bats, and even ground squirrels.

Hydroelectric power is another source of clean energy that environmentalists used to tout. But now they want to blow up dams, and have successfully lobbied and litigated to have dams removed, at tremendous taxpayer expense, because of their impact on fish habitats.

Natural gas burns cleaner, with lower emissions than petroleum products, and even the Sierra Club initially came out in favor of it. Yet, all over the country, wherever drilling for natural gas is undertaken, or a natural gas pipeline is proposed to be built, environmentalists rear up in litigation because of speculation about the potential harmful consequences of potential leaks.

Geothermal power is an interesting concept, because it’s clean and safe and permanent. It doesn’t vary with the weather, and it can never be depleted. Yet, the Sierra Club’s Juniper Group is litigating to prevent an exploratory project for development of a geothermal plant on a 5-acre parcel outside Oregon’s Newberry Crater, which is one of the most promising geothermal resources in the world. There is no specific threat to the environment or habitat of any particular species. They’re just concerned that having the project so close to a national monument might have a potential impact on forests or wildlife.

There are many more examples of environmentalists opposing alternative energy. But what does it all mean? They tout alternative energy until it starts to become a reality, and then they start backpedaling and litigating to thwart it. Is it just because they can’t accept the idea that any kind of energy production will necessarily entail environmental tradeoffs? (See What Have Progressives Got Against Progress?) Or is there some other agenda that motivates them to try to block every avenue of energy independence? I believe many of them are simply naive, and haven’t thought it through. But the consequences of their good intentions affect us all.

There’s a group in Oregon, called Lights On Oregon, that has launched a Campaign for Affordable and Reliable Energy (CARE) in our state. If you’re a resident of Oregon, you might want to consider signing the petition. If you’re not a resident of Oregon, you can contact the national headquarters of FreedomWorks to see if they have a project like Lights On Oregon in your state.


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Economics Lessons for Liberals: Minimum Wage

A year ago, the minimum wage went up from $5.15 to $5.85 per hour. Last week, it went up to $6.55. Next year, it will go up to $7.25. That’s more than a 40% increase in two years.

My friends on the left tell me that’s a good thing. What could possibly be bad about legislating raises for poor people? They’re absolutely incredulous that anybody could be against it. After all, it doesn’t come out of your pocket, so why should you begrudge it to others?

Economics for Liberals, Lesson #1. Profit is revenue minus expenses. If expenses go up, without a commensurate increase in revenue, profits go down. Profits are necessary to stay in business. In today’s economy, many businesses, particularly small businesses, are just hanging on. Small businesses hire a lot of minimum wage workers, because that’s all they can afford. They also generate less revenue than larger businesses, so they’re more sensitive to higher expenses. Smaller businesses are hit hardest by minimum wage hikes, and may find their profit margin squeezed so thin they can no longer sustain their business.

When we see a rash of local businesses closing their doors, my liberal friends always shake their heads and blame it on the encroachment of big chain stores. They prefer not to acknowledge the role that increased labor costs play in their favorite local businesses being unable to compete any longer. Yet they still defend every increase in minimum wage because they think it “helps poor people.” Meanwhile, as more local businesses go under, more minimum wage employees are left without jobs.

Economics for Liberals, Lesson #2. There are two only two ways to increase profits. Increase revenue or cut expenses. When faced with a significant increase in the cost of labor, a business has two options to recoup the immediate loss of profits. They can either lay people off or raise prices. Both have negative impacts on the economy. One causes unemployment and the other causes inflation.

Nobody likes to lay people off but, when labor costs go up by 40%, many employers are forced to cut their work force by up to 40% to offset the higher cost per employee. When an employee is given a raise based on merit, the expense is offset by the fact that their high productivity contributes to increased revenue. But, when legislation raises wages arbitrarily and unilaterally, there is no increase in revenue to offset the increased expense, so it’s an out and out loss to the business. Furthermore, a significant reduction in work force usually results in reduced revenue, so the small business is squeezed from both ends. First, they cut to the bone; then they raise prices to make up the difference.

In some businesses, cutting back on labor isn’t an option. For example, in agriculture, cutting back on labor would leave produce rotting in the fields. In such cases, the employer has no choice but to raise prices to offset the increased labor costs. Many basic materials, from which other products are made, are produced by low-skilled, low-wage workers. When the prices of those materials go up, due to increased labor costs, it drives up the prices of all the products that depend on them, directly or indirectly, creating a ripple effect of rising prices throughout the economy.

Economics for Liberals, Lesson #3. The real value of a dollar is its purchasing power. When prices go up, your purchasing power, and the value of every dollar you have, goes down. This is known as inflation. Rising labor costs aren’t the only cause of inflation, but even the most basic understanding of economics tells us they cannot help but fuel it. In the short term, the people at the bottom of the pay scale will have more buying power. But, as the ripple effect permeates the economy, everybody ends up having less. In an economy where inflation is already getting out of control, the last thing we need is to fuel it faster.

Raising the minimum wage results in higher prices, fewer jobs, and more businesses closing their doors. — But, if that’s true, why would our elected representatives continue to do it? They do it because most of their constituents have no understanding of economics, and more money always sounds good, so promising more money gets them more votes. And getting votes is more important than the economy.


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Greenology is a Bankrupt Philosophy

 

Guest Article by Jack H. Swift

This is a first for Government Is Not Your Daddy. I’ve never published a Guest Author before, but Jack Swift is somebody who truly ought to have his own blog. Anyone who regularly reads GNYD is likely to enjoy Jack’s writing as much as I do. He’s top shelf.

The great green movement driven by the Sierra Club, the Audobon Society, and other more nefarious forces appears about to run out of gas. A half century of a reckless orgy of economic extravagance driven by environmental values is finally coming home to roost. We are about to discover that you cannot protect anything if you are broke.

For nearly fifty years the new environmentalists have hounded industrial manufacturing out of business in the interest of protecting the environment. The result has been a constant elimination of jobs and the transfer of manufacturing capacity to foreign shores. That is a monstrous expense in a world economy dominated by balance of trade considerations critical to the value of one’s currency. Industry by industry, it could be selectively justified in genuine feel-good considerations of the intellectually unwary. Collectively, it has been a formula for disaster.

For nearly forty years, the new environmentalists have prevented the development of nuclear power plants as an alternative to fossil fuel powered electrical plants while the nation’s demand for more and more power has increased incrementally. Site by site, an emotional argument in opposition could always be fabricated. The cumulative effect was to have the nation buy into a collective policy recklessly discarding cheap, clean, renewable energy. In the face of growing demand, another formula for disaster.

For nearly thirty years, the new environmentalists have log-jammed the exploitation of our domestic oil resources, be it drilling in ANWR, drilling on the continental shelf, or using the shale on the continental divide. In the face of that constraint nationally, we are today forced to purchase oil overseas in a market controlled by a hostile cartel and foreign speculators. The cumulative effect of that has been a further deterioration of our balance of trade and the subjection of our currency to the artificial inflation induced by regimes bent on our destruction. Yet another unthinking, ill-conceived disaster.

For twenty years, particularly here in the Northwest, the new environmentalists have frustrated the utilization of natural resources, renewable or not. Once again creating a loss of jobs and a dependence on foreign imports. This has been an unmitigated disaster community by community, with no relief in contemplation.

Recently, the new environmentalists are driving for and effecting the removal of our hydro-electric power generation system. Once again eliminating cheap, clean, renewable power and forcing greater reliance upon foreign fuel imports.

Today, the new environmentalists are pressing our representatives Wyden and DeFazio for legislation to effectively turn the rural portions of our state into a great pristine wilderness area.

The forces of the new environmentalism recognize no economic restraint and they are more relentless than a spend-happy teenager.

We have gasoline at $4.00 per gallon, looking for $5.00 by the end of the summer. That cost factor is appearing in every commodity we consume. We cannot avoid it any more than the spendthrift can avoid the interest on his credit card debt. The effect is runaway inflation with further devaluation of our currency. The total impact portends to be an economic disaster on a scale of the great depression.

The message is the fundamental one that one cannot spend one’s limited money on luxuries one cannot afford. Enhancing the environment at the expense of the economy has led us to the brink of national insolvency. Having to work for a living is not nice, but a necessary reality of life. One undergoes the unpleasantness in the interest of comfort and survival. Despoiling the environment to a limited degree is also a necessary trade-off in the interest of economic survival.

Unthinking and injudicious commitment to aesthetic values, emotions, and desires has brought us to the brink.

As a matter of survival, it is time to consign the environmental movement to the stupid bin in the ashcan of history. We need to get about the business of restoring our solvency and we need to do it now.

— Jack H. Swift


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Obamanomics

We’ve heard a lot about Hope and Change from Senator Obama, but his actual positions on the issues have so far struck me as vague. He almost seems to have become a modern cult figure, with hysterical fans fainting and squealing at his appearances, and all the frenetic excitement he’s generating among the young and ‘young at heart.’ So I decided to visit his Web site and see if I can figure out where he actually stands on some issues.

Naturally, the first issue that drew my attention was the Economy. According to Senator Obama, The Problem with the economy is twofold. The first part of the Problem is that “Wages are Stagnant as Prices Rise.”– As soon as I read that, I thought “Let me guess. He wants to raise the minimum wage.” Sure enough, further down the page, it says “Obama will also increase the minimum wage and index it to inflation to ensure it rises every year.”

Now, those of us who have taken Economics 101 know that’s like a puppy chasing its tail. As wages increase, they drive up the cost of goods and services, which, in turn drives up inflation. Wages being indexed to inflation, this drives up wages even higher, and the cycle perpetuates itself into a never-ending inflationary spiral. Sound like a good idea? Not to a fiscal conservative, perhaps, but the reaction of the average undereducated citizen is “Higher wages? Oh, boy, I’ll get a raise!” And, while Senator Obama may know better, himself, that’s exactly the reaction he’s counting on.

The second part of the Problem with the economy is apparently “Tax Cuts for Wealthy Instead of Middle Class: The Bush tax cuts give those who earn over $1 million dollars a tax cut nearly 160 times greater than that received by middle-income Americans.” Huh? When I read that, I couldn’t help but wonder where Senator Obama is getting his data. 

The Congressional Budget Office releases statistics on the Effective Federal Tax Rates for each year. (The latest figures are from 2005.) The effective tax rates are not the same as tax brackets, but represent the actual taxes paid as a percentage of total gross income from all sources before any deductions, exemptions, credits, etc.

Effective Individual Federal Income Tax Rates
Income
Distirbution
Catagory
2001
Effective
Rate
2005
Effective
Rate
Percent
Change
2001-2005
Lowest Quintile -5.6 -6.5 -16.1%
Second Quintile 0.3 -1.0 -433.3%
Third Quintile 3.8 3.0 -21.1%
Fourth Quintile 7.2 6.0 -16.7%
Fifth Quintile 16.3 14.1 -13.5%

The data shows that the middle and lower-middle income distribution catagories have actually received larger effective tax cuts than the upper income categories. So it’s rather difficult to see what Senator Obama is talking about, especially since he didn’t reference any sources for his claim.

Even assuming he’s referring to actual dollar amounts, rather than percentages, it’s hard to imagine that the tax cuts received by those earning over $1 million a year amounted to 160 times (that’s 16,000 percent!) of the tax cuts received by the middle class. It’s true that the top five percent of earners did pay 60.7% of all taxes in 2005 but, in 2001, the top five percent of earners only paid 55.5% of all taxes. That means the wealthiest taxpayers actually paid a higher percentage of all taxes collected in 2005 than in 2001. So how is it they got 160 times the tax cuts that the middle class got? I’m trying to do the math, but it just doesn’t work.

As I said, I can’t help but wonder where Senator Obama got his figures. Perhaps it was a misunderstanding. Perhaps a campaign aide mistranscribed the data, or he misremembered something he thought he had heard. Who knows? Is it important? That depends. Perhaps the actual statistics aren’t as important as the underlying message. But, if so, why quote statistics at all?

Regarding the underlying message, someone sent me a link recently to a very insightful (and entertaining) Modern Fable of Taxing the Rich, written by one of our neighbors to the North. I highly recommend it.


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Published in: on March 2, 2008 at 12:00 am  Comments (6)  
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A Free Market Approach to Illegal Immigration

I applaud the work ethic of anybody who comes here seeking to do honest labor because there isn’t enough work to support their families in their own country. But I do not support amnesty, nor do I welcome with open arms all who wander across the border for whatever reason.

From a free market perspective it’s clear that, if the marketplace is providing jobs for illegal immigrants, there’s a need that they’re filling. Employers hire them because they’re willing to provide a service at a fair market price that Americans either will not provide at an equivalent price because it’s easier to collect welfare, or cannot provide at an equivalent price because labor laws and unions require greater compensation and benefits than the market will bear.

Some insist that it’s not a “fair market price” because it doesn’t satisfy U.S. labor laws, but labor laws are not what determines a fair market price. A fair market price is the price at which both parties are willing to freely engage in a transaction. If the workers were not better off accepting these jobs at the wages and conditions offered than they would be if they remained in their own country, they would not be so eager to come here and take these jobs. By eliminating the jobs, we hurt the workers as well as the employers. How is that more fair?

By hurting the employers, we also hurt the economy. The significantly higher labor costs would have to be passed on to the consumer and food prices would rise dramatically, driving up the cost of living across the nation. Food being, literally, at the bottom of the food chain, when food prices go up, people at the lower end of the economic ladder need to get pay increases (or apply for public assistance) to feed their families. This necessarily sets off a chain reaction up the economic ladder leading to overall inflation.

Nevertheless, I don’t support amnesty. One reason is because granting amnesty to illegal immigrants is unfair to all the law abiding immigrants who have gone through the long and arduous process of obtaining citizenship legally. The other reason is because I don’t believe it will solve the problem. In fact, I believe it will make it worse.

As soon as the illegal immigrants become legal, they lose their competitive advantage. As citizens, they’d have to make at least minimum wage, and the employers would have to provide benefits and pay employment taxes. Once the unions get involved, the stakes become even higher. The reason agribusiness employs illegal immigrants is to avoid those costs. So, once the workers gain legal status, what’s to stop the employers from dropping them and bringing in more illegal labor from across the border?

Then we’d have a bunch of new citizens with no jobs, tossed into the already overloaded social services system, and we’d still have a problem with illegal immigration. Our social welfare programs would suddenly be flooded with hundreds of thousands of poor, unemployed (but legal) immigrants who can’t find work because the only jobs they’re qualified for have been given to a new crop of illegals. It’s a bad idea.

What I do support is a guest worker program that provides temporary permits for people who enter the country to work and leave when the work is finished, deportation of anybody who’s in the country illegally,  starting with the immediate deportation of anyone who commits any kind of crime, and a constitutional amendment to cease granting automatic citizenship to babies born in this country to non-citizen parents. I also support anybody who wants to become a citizen getting in line and going through the citizenship process.


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