Obama Can’t Save Us: Government Can Only Destroy

Intro

Barack Obama thinks that the cause of economic crisis is lack of government oversight over our financial industry. Two quick questions:

1. Why does the government need to oversee economic affairs of our financial institution?
   
2. What does McCain or Obama know about finance and economics that people educated in finance and economics are not realizing?
   

Prices communicate need

The opposite of a market downturn is a market upturn. If Barack Obama wants strong markets then he doesn't want economic failure but economics success. Businesses fail if they do not make money or if they do not provide a product to the public that the public is willing to buy at a price higher than the cost of producing the product. If a business engages in a practice that does not bring about economic success for the business then it fails. Obama is implicitly saying that businesses do not know how to profit the way that government does and that people who are not motivated by money should be put in charge of these hapless money losing enterprises.

Interesting.

If I were selling lollipops for a thousand dollars a… pop…. and you notice me doing so while you are engaged in washing cars for pennies you may reconsider your occupation. In fact it is true that if I bought the ingredients for my lollipops pennies and sold the final product for thousands then you will do everything you could to copy this process and bring it to the market (a more relevant example may be iPod).

The price of my lollipops communicate to you and everyone else that the value of these tasty treats is worth a lot to people who can pay such a premium price. The reason they pay such a premium price is because I am the only one selling them. If more entrants come into the market and bring a large supply of lollipops they will only be able to sell a few for the price I am selling them for. At this point people will lower the price in order to achieve a larger profit due to volume sold. The price will be as high as possible until forced to come down.

This pricing mechanism communicates that not enough resources are being allocated to lollipop production. With more people motivated by profit (some say greed) more entrants supply more consumers at a cheaper cost. Who knew that greed could cause such social justice!

What could government regulation or oversight do to improve this process? To improve the economy, like I said above, we need businesses to make more money. Businesses make more money by providing for the needs and wants of other people. When a business textbook refers to a business as being unethical 9 times out of 10 it means that a business is doing something that loses money. Politicians have similar views. However, when they say greed is the cause of economic crises they are horribly wrong for the reasons stated above.

Inter-temporal prices (providing for future need)

Not surprisingly even in University level finance classes professor's vaguely understand the concept of interest as an inter-temporal price mechanism that, if distorted, can cause financial crisis like the one we are going through at this moment (Dow Jones fell 504 points today, Asian markets are crashing as we speak). It is not that they don't understand intertemporal activity (activity through time) empirically but they fail to take the right approach to it economically.

Austrian economists take a better approach to intertemporal prices or interest rates. Interest rates are determined by the supply and demand of loanable funds. If there is an increase in loanable funds then there is a decrease in the price or the interest on these funds.

If I am the only one not consuming everything I earn through entrepreneurial activity but instead am lending money out to others who think they could provide society with something they desire then interest rates will be extremely high. Other people see that I am making a lot of money by not consuming and they follow suit.

By saving more money the price of consumer goods drop (less demand) and the price of capital goods (goods that produce consumer goods or other capital goods) increase. In fact the whole economy will become more elongated as production processes increase in length and time producing more consumer goods which enables people to consume more for less. If a person can consume more for a dollar then 1 year ago then the REAL value of his money has increased.

As we can see it is profit that distributes scarce resources from where society wants it least to where society wants it most. To say that greed is the cause of this economic crisis is truly absurd.

If Not Greed Then What?

So what causes the Business Cycle (bull and bear markets)? Whenever a price is distorted whether it is wage controls or price caps like rent control there is no way to distribute scarce resources based on need. Instead scarce resources are distributed based on something other than the desire of people to have something. In a market economy interest rates, like prices, can be distorted if an outside influence forces others to take wages or prices that they declare reasonable. In terms of interest the Federal Reserve takes the role of price fixer.

The Federal Reserve distorts interest rates and distorts people's ability to act rationally in 3 different ways.

1. Reserve Ratio Requirement for Fractional Reserve banks.
   
2. Open market operations (buying and selling of gov't securities).
   
3. Interest rate for member banks borrowing from the Fed.
   

The Federal Reserve has the ability to increase the supply of money in the market which causes inflation. This is damaging because there is no longer a trade off between consumption and spending. People consume at a higher rate than they would have had this not occurred and they have less of an incentive to save because interest rates decrease. So, instead of curbing consumption to save the capital goods market isn't able to easily acquire the labor and resources it could have at a lower price because consumption goods market is bidding up the prices. Instead of a transition of laborers from the consumer goods market to the capital goods market the price of labor and resources are bid up between the two.

Since interest rates are lower there is much more of an incentive to take out a loan than there was previous to government intervention. More capital goods are produced with the assumption that at the current interest rate and consumption rate these entrepreneurial activities will be profitable.

When government intervention slows down or stops interest rates increase, the incentive to save increases, and consumption decreases. As prices decrease (because consumption decreases) producers realize that their investments will be unprofitable. This is because instead of consumers curtailing their consumption to lower interest rates the Federal Reserve has increased the supply of loanable funds and has artificially lowered the interest rate. Capital goods and labor becomes more expensive while the production process becomes lengthier when the Fed does this.

Under normal circumstances an increase in loanable funds would create a real wage increase but under the Fed's interventionist policy both the capital and consumer market go into a "boom" phase only to be followed by a "bust" when people realize the miscalculation of their economics ways.

Conclusion

As you can see when the Federal Reserve messes with interest rates the interest rate or prices through time get distorted. The most astute financial analyst is unable to calculate or know what will be a profitable or money losing investment.

The mortgage crisis was not caused by bankers becoming dumber (they want to make money and not lose it after all). Government intervention caused this problem. Regulating the banking community is adding insult to injury and exacerbating a problem government itself created. When Obama proposes to regulate business in order for business to become or ethical, or as we see, make more money instead of fail, he is proposing to do what bankers with years of experience cannot do… overcome the intervention of the government.

The secret life of Violent Vegetarians

    

 

I was browsing through a profile of someone I know from school and I saw an opinion saying "I don't think anyone should have guns except soldiers, hunting is unnecessary." I just thought to myself; "what is it about guns that would make someone not want other people to have them?" Furthermore what is it about soldiers or cops having guns that make this person think that the negative aspects of owning a gun ceases when we give up freedom for domination?

    1.2 million Iraqi citizens have been violently murdered since the presence of United States soldiers in Iraq. This fact doesn't faze animal rights activists because humans eat animals and are therefore immoral. I want to make a counter claim. I claim that humans have a right to kill animals and have no right to kill or harm another person's body or property. By person, of course, I mean those who are able to or potentially able to engage in contracts and fulfill obligations. Not only is this claim beneficial to gun owners but it is beneficial to those who want to see less animal death.

    The problem with using the state as an agent of change is controlling the direction of the change that occurs. If one is able to have a law passed that restricts the actions of other people simply because they despise the actions that are occurring then a law can be passed against anyone for the very same reasons. This process turns a diverse population into rank and file blank faces of submission (think Bolshevik Russia or all those idiot's who comment "glad they peppered sprayed the crazy holding a flower out to all those police at the RNC). As a minority, vegetarians will find it hard to pass restrictive laws on hunting and other violent acts against animals. There is a solution to this (and yeah, it means you are not allowed to dominate the lives and thoughts of your peers).

    Property is what enables human beings to rise above the squalor of animals into wealth and comfort. For centuries some people have used their property to better their own life and the lives of everyone that associates with them (we call this capitalism). Property has many good aspects to it. The best thing about property is that one can do what one will as long as it has no measurably negative effects on another person's property. If I want to hunt on my property and I keep it stocked with deer then not only do I have a right to do that but I have the right to violently protect my right to do that. If you, on the other hand, want to have an animal utopia on your property, well, you not only have the right to do that but a right to protect your right to do that.

Property is just by virtue of being human because otherwise humans would not be at all. ON top of that the existence of property maximizes human happiness. Without property agriculture would disappear and the tragedy of the commons would set in destroying everything from your house to your iPod (don't be naïve enough to think something like an iPod would exist in a property-less society). The solution is obvious: buy as many animals as you can and store them on your property! Ingenious.

Supporting the death of millions of foreigners and supporting the act of police brutality here in the United States by further concentrating power into the hands of our parasitical government will not only destroy your cause but it will destroy more human life than ever before. I want to be treated with respect when I walk around with my daughter not belittled with violent undertones by our militaristic state.

Capitalism for the Cool Kids

In higher education capitalism is not cool. One is not thought of as suave or savvy when labeled a capitalist. This could be due to the strife between university business departments and the other departments because of the high salaries business Ph. D's command or it could be an emo cool wrist slitting high to be the poor man's best friend at the expense of their wealthier counterparts.

People really don't gather to protest social injustice on campus as much as they used to but they like voicing their utterly uninformed opinion. This fact of life is more prominent in humanities department where they spend their days and evenings reading fiction and writing thesis after thesis comparing James Joyce to Virginia Woolf only taking a break to scorn those who are motivated by profit.

Alas I say unto you, you.. YOU! In the humanities department glaring at me! You neither care about the poor nor want to be their friend! You would not spend a second embracing the average poor person's tiresome personality nor do you care enough to reason through how the random interventions into their life you propose will effect them. To you they are like cute puppies until happenstance somehow brings you within a mile of the squalor you helped create.

I do not say this without reason. Here are a few antics college students have done that has help destroy the lives of truly unfortunate people.

1. Protesting sweatshops. Thomas DiLorenzo writes a persuasive article that debunks the myth that sweatshops exploit poor people. DiLorenzo brings up the point that in Honduras people working in sweatshops average about $13.10 a day. This seems like a very low wage but compared to the $2.00 a day average the rest of the population lives on this is exorbitant. But hey, these people don't need jobs if they don't pay as much as union workers here in the United States… they much prefer begging and prostitution which what many of them formerly did and do now. Protestors who choose not to buy from these sweatshops and choose instead to buy from union based companies serve only to hurt poor foreigners more than help. This discourages foreign direct investment and "agglomeration economies" which DiLorenzo explains as shops and other industries being built around a "sweatshop."
   

   
   

   That being said some sweatshops ARE horrible and should be shut down. This is because the children or whoever works there is working there against their will. An example of this would be the bonded child laborers in Delhi India that were not being paid to produce clothing for a company GAP subcontracted.
   

   
   

2. Protestation of minimum wage. Simple economic analysis (don't cringe you literature theory major!) shows that an increase in minimum wage brings about a decrease in employment ceteris parabis. This hurts inner city minorities and teens disproportionately more than others. This is not only inhumane but racist.
   

   
   

3. Advocates of welfare. When you subsidize something you get more of it. This is true for everything ceteris parabis (if it is an economic good). People make decisions based on what they think they can or cannot do. If a person is rewarded for having children they cannot afford to support, well, they have no incentive to stop. Poor people are not the smartest bulbs in the knife drawer. We really do not need more of them. However, if you are never around them when they are screaming at each other or beating their children they seem a lot like puppies. If you aspire to an ivory tower this is a good place to love the poor.
   

   
   

Milton Friedman said it best when he claimed that socialists are only half educated. At the risk of not being cool just take an economics class. Economists not only study other countries and policies they enact but also how those policies help or hinder those it affects. Or you can go back to your Joseph Conrad and keep glaring at me from afar.