Getting the Government We Deserve: What The Government Should Do And Which Candidate Will Do It

By Julian Dunraven, J.D., M.P.A.

Honorable friends,

Yesterday, I was chatting about the state of our nation with a friend of mine serving as an Army Captain in Iraq. When I asked how he thought the elections would turn out, he made an ominous statement: "People generally get the government they deserve." Goodness help us if that is true. Just look at what our government is doing right now!

To perhaps no one's surprise save Congress and the Fed, the market sank still further yesterday and today. The Fed has begun to authorize up to $1 trillion to be used to help 'stabilize' the commercial paper markets and short term loans. Money Morning's Shah Gilani has a good explanation of this problem. He also has a bit to say on why the new rate cut won't be effective. Meanwhile, Speaker Nancy Pelosi is now trying to push another $150 billion dollar 'stimulus' spending package. This bailout, she says, would be sent to help individual taxpayers. Do not expect it to stop there, though. AIG has already spent its way through almost all of its bailout money, and as we have already pointed out, the latest $850 billion bailout was nowhere near enough to cover all the bad debt sitting on the market, so we can expect another massive bailout package, this time probably including a citizen's stimulus check, sometime shortly after the elections. Much as the Speaker, Congress, and the President seem to think this is helpful, though, nothing could be further from the truth.

After my last few posts deriding the bailout, I received several letters asking what I thought the government should be doing to help. After all, these problems are severe and the collapse of the commercial paper market sounds especially dangerous. Isn't it good that the government is propping it up as a last resort? No, and it won't work. As I have stated before, this massive spending, none of which we actually have, just drives up inflation and devalues the dollar. It also massively increases our debt. That debt is already so large, though, that it is becoming clear that the only way we can pay it off may be to inflate it away. That reality is weighing heavily on our lenders, and they are far less willing to lend to us at all. Of course, that means inflation (money printing) is the only alternative we have to pay for these expenditures.

We are already dangerously close to collapsing the value of the dollar through inflation. Lower interest rates much more and that is exactly what will happen. Raise interest rates, though, and we will cripple the financial markets as the costs of doing business climb. Yet, we have to do one of the two in order to continue making these bailouts and propping up failed institutions. Of course, that also continues to lock up our capital in poisonous systems. By pouring money into these institutions, we prolong their existence and prevent their assets from being sold off, allowing them, over time, to slowly try to remove the poisonous assets (derivatives and other bad mortgage backed securities) from their books. Naturally, that means we often have to wait years, and continue to spend trillions, to facilitate that unnatural process. We then have to spend more years recovering from the inflationary damage we have done. There is an alternative though.

The government could do nothing at all. Faced with the unpleasant choice above, the government could simply stand back and let the market play out. Would there be widespread financial hardship as the market contracted? Absolutely. The failing entities would be torn apart, their good assets would be sold off to other, more stable and better run institutions while their bad assets were purged from the market. I stated in a prior post that money would be pulled back into savings and increase domestic capital. After some initial shocks and job losses, the market would readjust and begin to function far more healthily than it was before such a jolt. Best of all, this process could take as little as a few months. Thus, our economic recession could actually be reduced in duration and severity simply by doing nothing at all. The process of these recession and depression cycles, and what we can learn from them, are analyzed in depth by Murray N. Rothbard at the Ludwig von Mises Institute of Austrian School (free market) economics. Having seen how government actions actually worsened the crises in the Great Depression and other times of financial hardship, one would think Congress might start heeding the warnings of the Austrian School Economists. So far, though, they do not seem to be paying attention.

Our presidential candidates are not much better. However, there is some hope with McCain. According to Austrian School economics, if government wants to do anything at these tough times, it should work to reduce inflation, cut spending, and lower taxes to increase economic incentives for investment. McCain's proposals match those recommendations fairly well. He has called for a freeze on all unessential government spending. Though it is unlikely he will be able to classify much as 'unessential,' any success he has will be helpful. He has also called for an end to earmark spending, and would lower taxes across the board. This would also be helpful.

Obama's plans stand in stark contrast. He has called for spending for several new or expanded social programs, not one of which he has been willing to cut or drop. He voted against a bill prohibiting earmark spending during this last term in the senate. As for his tax plan, while he would lower taxes for most individuals, his hugely increased taxes (50%) on any business taking in over $250,000 per year in revenue (not profit) would be extraordinarily harmful to the economy as it would include more than 70% of all business. Compare the plans yourself at the Tax Policy Center.

Despite problems on both sides that leave me with little faith that either candidate would do much to actually help the economy, it is fairly clear to see which candidate would do the most damage to it. Barack Obama's commitment to increased spending and higher taxes, not to mention his dangerous rhetoric attacking free trade, makes him an economic nightmare for the United States. John McCain, on the other hand, by cutting spending and lowering taxes, may succeed in sparing us from a prolonged depression.

I know there are many who disagree, who would like to believe in Barack Obama's fine rhetoric and who feel that he is as inspiring as my recommendations are austere and dismal. I was told just yesterday that for the government to do nothing would be heartless, and that the people need to feel that their government is involved to protect them. Thus, to conclude, I quote Ayn Rand once more on the dangers of ignoring economic reality for what feels good:

"[W]hen we'll see men dying of starvation around us, your heart won't be of any earthly use to save them. And I'm heartless enough to say that when you'll scream, 'but I didn't know it!' - you will not be forgiven." Atlas Shrugged (New York: Signet, 1985), 385.

As my friend said, "People generally get the government they deserve."

The Prophecy Of Ayn Rand From The Gods Of Rudyard Kipling

By Julian Dunraven, J.D., M.P.A.

Honorable friends,

My ballot arrived in the mail today and I greeted it as I would a poisonous viper. As I considered which candidates would be least ill-equipped to deal with the situation we are beset with today, my mind continually turns toward a strange encounter I had this morning at the courthouse. Passing through the lobby, I paused to eavesdrop on a political debate between a few young people regarding the relative merits of McCain and Obama. I am always interested to learn how others view the political landscape, but was disappointed upon hearing only echoes of the populist nonsense the campaigns have been spewing about how their own brands of massive government intervention will save the economy—and all of us — from disaster. After a moment, though, my attention was drawn to an elderly lady sitting alone on a bench; she seemed to be silently crying.

Though this is not an entirely unusual event at a courthouse, it concerned me enough that I approached her to inquire whether she was well. She turned her careworn face to me and dabbed at her eyes with a handkerchief before managing an embarrassed smile. She explained that she had also been listening to the youthful debate and had become distraught by what she had heard. It seems that she was born in Germany and is old enough to remember Hitler’s rise as the nation descended into fascism. People spoke in just the same way, she informed me. Times were hard enough that when the government promised it could fix everything if it just had a few less restrictions and a little more control, the people believed them because they wanted to. She said never thought she would see America making those same mistakes: trusting government to solve all our problems and giving it unfettered access to our economy and our liberty to do it. She told me she knows where that road leads and despairing at the idea of getting any closer ever again.

I never did hear why this lady was at the courthouse, but I thought about what she said for quite a while afterward. Lately, as the Fed spins out of control and Congress and the President lurch from one irrational move to another, many of us have been warning about the failed economic controls attempted in the Great Depression and in communist and socialist economies which just serve to cripple markets and make bad situations worse. What we have not focused on, though, and what she is right to point out, is that massive government control of our economy has consequences that reach much further than just economics. Do any of you recall what Ayn Rand said of the doom of rotted civilizations in Atlas Shrugged?

Do you wish to know whether that day is coming? Watch money. Money is the barometer of a society’s virtue. When you see that trading is done, not by consent, but by compulsion – when you see that in order to produce, you need to obtain permission from men who produce nothing – when you see that money is flowing to those who deal, not in goods, but in favors – when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you – when you see corruption being rewarded and honesty becoming a self sacrifice – you may know that your society is doomed. Money is so noble a medium that it does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot.

Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked: ‘Account overdrawn.’ (New York: Signet, 1985. 383-384).

As I listen to the hum of the Fed printing presses, and watch as our government nationalizes our financial system and squanders the wealth of our nation on bailouts that should never have happened, I cannot help but think Ayn Rand may be correct.

The candidates this year all have a decidedly poor understanding of money and economics, and we have heard them make many promises of even more massive government intervention into the economy sweetened with populist rhetoric. Though John McCain, and Republicans in general, are less likely to balloon our government into the fascist, socialist nightmare Rand foretells, they have done little to earn anything close to our full confidence. We should all be putting a great deal of pressure on our Republican candidates in these last few days of the election to commit to solidly free market principles, and the reduction of government spending and power, or risk losing our votes. There has never been a better time to force a promise out of desperate politicians.

Should we fail to educate our politicians, unfortunately they will not be the only ones to suffer for their ignorance. Rudyard Kipling’s Gods of the Copybook Headings are even now descending in wrath to forcibly remind us of the economic realities we have tried so hard to deny for so long. Martin Hutchinson has a few good suggestions for appeasing these particular gods, all of which the candidates should probably study if they want to get us back on track to healthy free markets.