America’s economic system is under siege—by economists—American economists—and has been—for about one hundred years or so—more recently since Franklin Delano Roosevelt, President from 1932 to 1945, surrounded himself with advocates of deficit-spending-is-the-way-to-improve-the-economy. To satisfy special interests, these so-called “experts” have been deliberately dumping misinformation on Americans.
Economic fallacies are drummed into the consciousness of the gullible public. How does that happen? Simple. The public is gullible because it is ignorant. They don’t know how to defend against the fallacies. Part of the reason is that they have accepted the very same fallacies.
Economists have a language of their own. They use technical jargon to conceal the true meanings of what they are saying. They make pronouncements based on mythological principles and defile sound logic. They lie by omission. What’s worse, ignorant, gullible Americans are accepting their garbage as truth. Do these statements seem harsh? Perhaps, they are, but it doesn’t make them less true.
Many people will see the title of this piece as being provocative. Their curiosity will be aroused and they will want to know more. Responding to that impulse, some of those people will begin reading it, but will not get past the first paragraph. Some won’t even get past the first sentence. The reason for that is simple. The psychological defense mechanism of cognitive dissonance is activated. This impels them to quit reading. They may feel revulsion or anger or both. They will just “know” that, because the first sentence or paragraph “doesn’t make sense” to them, the rest of the piece won’t make sense, either. These people share a characteristic called by various names, including “progressive” or “liberal,”or even “Leftist” or “socialistic.” But, such a reaction is not limited to those of the aforementioned “persuasions.” A similar reaction can come from those on the opposite end of the political spectrum. Why? Because they were brought up to believe in the same nonsensical pabulum. This reflects the unfortunate fact that economic principles are very poorly understood by most people. So, it should be no source of wonder that people cannot make intelligent and informed economic decisions.
I confess that, earlier in my life, I, too, was ignorant of economic principles and therefore gullible. It wasn’t from taking a one-a-day-stupid-pill every morning. To me, economists were like magicians speaking mysterious incantations or members of a priesthood preaching sermons on the path to economic salvation of their design. Most of them seemed to work for government—one way or another. They operated like “black boxes,” sealed and operating in uncanny ways. They dispensed economic studies based on models easily skewed and easily misused.
They could, and still can, get away with it because of the widespread lack of public understanding. What’s more, well-respected politicians echoed them. As a result, for most people like me, it was just assumed that economists knew what they are talking about. I found out—over time—they don’t. Oh sure, the stories they tell sound plausible—but only until you take a closer look at them. When deconstructed, the stories and the models fall apart.
Take their story about federal government economic “stimulus” programs. These programs are intended to solve “problems in the economy.” Say, the government identifies a problem—an “unacceptably high” rate of unemployment. Naturally, the government wants to lower the unemployment rate to an “acceptable” level.
Yes, I know it’s not easy to get an accurate picture of employment. The economists use a number of different ways to survey, model and report on it. Their conclusions depend upon the kinds of questions they ask over the telephone. They include people, or not, according to certain rules. For example, if you’re out of a job, but you haven’t looked for one during the week you are surveyed, YOU ARE NOT COUNTED as unemployed. As a result, you don’t affect the rate of unemployment. But, if you worked as little as one hour in that week, YOU ARE COUNTED as employed. That reduces the unemployment rate. As they say, go figure.
Nevertheless, what does the government think will do the trick? Do the math. It’s fewer people labeled unemployed. The solution is to set up a employment stimulus program of some kind. To employ more people, the government program must “create” the jobs. It’s either that, or they will have to finagle the figures. How does the government think it can create jobs? The answer is: “Capital.”
How are these so-called economic “stimulus” programs supposed to work? Simple. With the problem “identified” and its solution “known,” the government decides to “pump” capital into the economy. This “pumped-in” capital is supposed to “create jobs.” Logically, the creation of jobs will lower the unemployment rate and another problem is solved by the “magic” of government action. Sounds great, doesn’t it? But, wait. Is it as simple as it sounds? Let’s examine the process.
Operationally, economic “stimulus” packages are “pump and suck” programs. Economists will talk your ear off about the “pumping” part, but not about the“sucking” part. This is their lie-by-omission. It might help to think of the fraudulent “pump and dump” schemes in the minicap end of the stock market. These schemes involve the use of false or misleading statements to hype a stock that is actually worthless. People respond to the hype and start buying the stock, causing a flurry of buying activity. As a result of this flurry of buying activity, the bid price of the stock gets “pumped” up. Then, when the “pumper” believes the price rise has run its course, the worthless stock is “dumped” on the public at the highly inflated price.
To help in delving into the process, first, think of an onion. It’s built up of a series of layers. To see what’s behind each layer, you have to peel each layer back, one at a time. To see what’s behind the economic “stimulus” package, we have to do the same thing, figuratively. So, let’s peel back the layers of a typical “stimulus” onion.
If the unemployment rate is too high, it must be that too many people are unemployed.
If too many people are unemployed, it must be that there are not enough jobs.
If there are not enough jobs, it must be that producers are not hiring.
If producers are not hiring, it must be that they don’t need people.
If producers don’t need people, it must be that they limit production.
If producers limit production, it must be that they are not selling their products.
If producers are not selling their products, it must be that people are not buying their products.
If people are not buying their products, it must be that they don’t have enough capital.
If people don’t have enough capital, it must be that they are unemployed.
If people are unemployed, the unemployment rate is too high.
It’s easy to see that, in this onion, there are two parties involved. They are the producers—and the people who work for producers. The only other significant factor present is capital. So, the answer to the question of what could be added to the situation to change it appears to be capital.
But, if capital is to be added, certain other questions pop up. How should the capital be added? Should the capital go to producers, the people who work for producers, or both?
But, wait. Even before the decision is made as to how the government will distribute the capital, another, obvious question must arise. Where does the government get the capital it is going to distribute?
But, wait again. Before we can answer that question, we need to know the answer to broader questions. What is capital? Does it just naturally exist or is it created?
Examination of the structure of an important financial statement will help to answer these questions. Let’s look at the components of a balance sheet. First things being first, “capital” is another word for “net worth” or “equity,” as in “total assets minus total liabilities equals total capital.” Another way of putting it is that “assets” are the things that you have title to. “Liabilities” are the things you owe to somebody else. If you have ever applied for a loan, you know these terms. It is easy to see that if the value of total assets exceeds the value of total liabilities, the value of total capital is a greater than zero—positive territory. This is good. If the value of total assets is less than the value of total liabilities, the value of total capital is less than zero—negative territory. This is bad.
In usage, the term “capital” is also applied to a stock of accumulated goods, or to the value of those accumulated goods. In either case, it is easy to see that, without production, goods cannot be accumulated and, consequently, capital cannot be created.
Currency can represent the value of capital, but it cannot be capital. For most people, this distinction doesn’t exist. They conflate currency and capital. People don’t realize that this is tantamount to equating the sports agent and his client, the star quarterback.
In reality, nobody confuses the agent with the quarterback. Everybody sees that it’s not the agent who is down on the field throwing the football. It’s the quarterback. But, everybody does not see that it’s not the currency that’s down on the field doing the work. It’s the capital. To make it easier to understand, picture a barter economy, where there is no currency in use to cloud the issue.
So, to be sure, the public sector can print currency, but the public sector cannot create capital. There is no capability for production in the public sector; only consumption. That leaves only one place capital can be created—the private sector, where production takes place.
An astute reader of the Constitution of the United States will also want to add that it is not a legitimate function of government to produce products for private consumption or to create capital. The bottom line on the latter is: whatever capital the government wants, it must expropriate from the private sector—through taxation.
It is clear, therefore, if the government intends to “pump” capital into the economy, there is only one place it can go to get it—the economy. It must “suck” that capital out of the private sector of the economy. It now becomes obvious that any capital the government already has on hand, it has already “sucked” out of the economy. It is also readily apparent that the government cannot add capital to the economy. Government can only redistribute capital that is either already in the economy, or expected to be there—later.
With respect to “later,” if the government wants to do the “pumping” even before it does the “sucking” it must set up a mechanism to “suck” out the capital it expects to be created. This kind of “sucking” is called “borrowing.” The mechanism used to do the “sucking” is the sale of debt instruments issued by the U.S. Treasury to the public in the public financial markets. These are variously called bonds, notes, or bills depending upon the length of time before repayment of the debt is due. When government does this kind of borrowing from in the public financial markets, this places government in direct competition with other seekers of financial resources. Every dollar borrowed by government removes a dollar from availability to private citizens, shrinking the amount of capital available to the private sector.
It should be obvious that, when the government borrows today, it is “sucking” capital out of the economy today. The astute observer will also notice that this kind of “sucking” has the same effect as the “sucking” due to taxation. In other words, when governments “borrow” they are doing the equivalent of collecting tax. The difference is that it just doesn’t look like it. The taking of capital through taxation is easily seen. The taking of capital through“borrowing” hides it from view.
You can prove this to yourself by performing two experiments. For experiment number one, cash your pay check. Set aside all but $100 in $1 bills to use in the experiment. Put on a pair of blue jeans. Let the jeans represent the economy. Let the right front pocket represent the private sector of the economy, the left front pocket, the government sector. Put all of the $1 bills into your right front pocket. Now, “pump” $20 from your left front pocket into your right front pocket. Wait. You say it’s not possible because your left front pocket is empty. Not to worry. “Tax” your right pocket of 20% of the total and put that amount into your left front pocket. If you have done this correctly, you now have $20 in your left front pocket and $80 remaining in your right front pocket. Now, you can “pump” the $20 from your left front pocket into your right front pocket. But, have you increased the total amount in your jeans above $100? No? How come? Doh!
For experiment two, follow a similar procedure with your pay check, except this time, instead of “taxing” the 20% from your right front pocket, “borrow” it. If you have done this correctly, you now have $20 in your left front pocket and $80 remaining in your right front pocket. Now, you can “pump” the $20 from your left front pocket into your right front pocket. But, have you increased the total amount in your jeans above $100? No? How come? Double-Doh! But, Wait! The left front pocket still owes and must pay back the amount it previously borrowed from the right front pocket. How can it do this? Repeat experiment number one.
What’s the major point to be learned from these experiments? First, neither experiment can be conducted unless you have a paycheck (Capital) to start with! The second point is that, operationally, there is no difference between government taxation and government borrowing. They both constitute redistribution—and taxation—both present and future.
The idea behind the “borrowing” is that the government will replace the capital later when the debt becomes due. Of course, if government has redistributed the capital previously borrowed, there won’t be any on hand to use for replacement. To make the replacement, the government will have to “suck” more capital out of the economy to make the payment. It will do this by collecting taxes or borrowing again, or “rolling over” the debt. How does the “rolling over” work? The government just sells new debt instruments to replace the old maturing ones.
All borrowing is done at the cost of interest. This additional cost must be paid from “sucking” additional capital out of the economy. It’s easy to see what the logical result of continuous government “borrowing” will be for the future economy. It would be accurate to say, “it sucks.”
Furthermore, having issued debt, government has an incentive to pay it off with cheaper dollars. Thus, the power to tax leads the state to replace private money by the state's currency and thence to the many ills attendant upon the inflation of that currency.
Remember the formula, “total assets minus total liabilities equals total capital?” What’s the situation called when the value of liabilities (the capital that needs to be repaid) is greater than the value of assets (the capital available to make the payments)? In “polite society,” this is called “insolvency.” Whether it is officially declared or not, another term for it is “bankruptcy.” Bankruptcy for an economy is a disaster. All that’s necessary to prove this is to look at what is happening in Europe today. Look especially at Greece, Spain, Ireland, for example.
Even if we assume, albeit incorrectly, that there are no transaction, handling, interest or other costs, all that can be accomplished by the massive government “pumping” and “sucking” scheme is the redistribution of capital from one place in the economy to another place in the economy. This redistribution of capital has very disruptive effects on people. But, let’s leave aside, for the moment, the issue of the specifics of how the capital will be redistributed and look at a problem that is created by it. The fact that, for capital to exist in the public sector it has to be expropriated from the private sector, presents us with a conundrum.
If, as government claims, it is true that “pumping” capital into the economy creates jobs in the place to which the capital goes, then it must also be true that “sucking” capital out of the economy destroys jobs in the place from which the capital comes. If any further proof is needed, it is easily observable that businesses and the jobs they represent will move from areas of high-tax to areas of lower-tax.
“At the end of the day,” as it is said, the essence of the matter is: all the “pumping” and “sucking” of capital cannot really add or subtract capital from the economy as a whole, it can only redistribute it within. And as capital goes, so go the jobs. Thus, from the standpoint of jobs, the only thing that can be accomplished by redistributing capital within the economy is to redistribute jobs within the economy. It cannot be otherwise. To reduce it to brutally simple terms, to create jobs in one place, the government must destroy jobs in another place. Neat, huh? Some people describe this process as “the government picking winners and losers.” However it is described, it is a form of social engineering.
The inescapable conclusion is that government spending on “job creation” causes unemployment. Funny, though, how the government takes credit for the jobs it “creates,” not the jobs it destroys. Why is that? The economists lie, that’s why. They do this because they can choose to see only what they focus on—jobs “created.” It’s easy to see why they do that. Economists don’t get paid to come up with ideas on how to destroy jobs. Thus, they have no interest in what they don’t see—the jobs destroyed. Add to that, the fact that economists are paid to spout the “party line.” Besides the money, they get plenty of perks, including favors and access. They also get power and feelings of importance.
Just as a person can’t be present in two places simultaneously, a person can’t work in two places simultaneously. A person has to choose which sector of the economy to work in. With this in mind, let’s return to one idea of how the government can redistribute capital.
One way to redistribute capital is to give it to people without jobs. Call it, “unemployment compensation” or “jobless benefits.” We remember that when the government expropriates capital to redistribute it, it “sucks” the capital out of the economy. The same thing must be true of “unemployment compensation.”
Let it not be said that I am in complete opposition to the idea of “unemployment compensation” per se. Properly done, and strictly as a stopgap measure, it can work. As done now, however, extensions of the benefit eligibility period can become massively unproductive. Extensions not only perpetuate the problem, but they exacerbate the problem, leading to even further extensions.
Take for example when a person takes a full-time job with the government. That person is not available to take a job with a producer. Each unemployed person who receives an unemployment compensation check is, in essence, “working” for the government. They have, for practical purposes, left the private sector. The bottom line is: they are getting paid not to work in the private sector of the economy. Thus, they can no longer help to create capital. Ponder this:
If people receive capital from the government, they cannot take a job in production.
If people cannot take a job in production, producers cannot produce.
If producers cannot produce, producers cannot create jobs.
If producers cannot create jobs, people cannot be employed.
If people cannot be employed, they are unemployed.
If people are unemployed, the unemployment rate goes up.
Multiple or long extensions of unemployment benefits eligibility periods have a profound effect on the psyche of many benefits recipients. Not only do they tend to destroy the incentive of the recipients to obtain work, even worse, they tend to create a strong disincentive to work. Recipients tend to become acculturated to a state of dependence upon receiving the government benefits. After all, why work when you can stay home and still get paid?
Or, why work when the differential between the amounts received from benefits and earnings is small? Personal acquaintances who have been receiving benefits have told me, and I have heard second-hand about others, that they tend to think that if they get work, they are working for the amount of the differential.
For example, a weekly benefit amount of $600 is equivalent to $15 per hour. If a job presents for $17 per hour, I am told the benefits recipient tends to reason in a manner similar to the following. “I’m getting $15 per hour and have a lot of free time. If I take the job, I will be getting only $2 per hour more than I am now but I will have to give up my free time. I’d be stupid to work for $2 per hour. I’ll just keep taking the $15 per hour and have another beer.” (By the way, my present favorite is “Blue Moon.”)
This kind of attitude is very effective in keeping benefit recipients out of the job market. In effect, government is not only engaged in a competition between itself and the private sector, it is winning it. As a result, operationally, extensions become construed as less of temporary “unemployment compensation” and more as a longer term straight welfare payment.
Extensions also introduce greater uncertainty into the job market. Generally speaking, for an employer, the highest expenditure category, after the cost of the goods sold, is the cost of labor. A rise in labor cost can have a profound effect on the Profit and Loss Statement. No private sector company can long pay its employees not to work. Not only is capital that producers could use to create jobs going toward paying unemployment benefits, they can’t plan on hiring unless they raise wages higher then they can sustain.
Finally, anything the government does has a cost. It could be from the phenomenon of lost motion, where people are being paid to stand by but who perform no useful work. It could be the interest that must be paid on incurred debt. Regardless of the cause, any cost to the government requires capital to pay for it. Remembering that government is not capable of creating capital, government must obtain capital through taxation or borrowing. Both taxation and borrowing “suck” capital out of the economy. “Sucking” capital out of the economy destroys jobs. Destroying jobs increases the unemployment rate.
Truly, as Daniel Webster said, in arguing the famous case of McCulloch v Maryland before the U.S. Supreme Court, “An unlimited power to tax involves, necessarily, a power to destroy.” In his decision, Chief Justice Marshall said: “That the power to tax involves the power to destroy…[is] not to be denied.”
It all comes down to this:
Job creation requires capital.
Capital must be created.
Production requires jobs.
Jobs create capital.
All taxation is redistribution of capital.
All taxation “sucks” capital out of the private sector.
All taxation destroys jobs in the private sector.
All government activities require taxation.
All government activities destroy jobs in the private sector.
Although the example I used has to do specifically with unemployment, the principles apply generally. The upshot is: the government’s need to “suck” capital out of the economy should be minimized. To do this, the size of government should be held down to the lowest level possible, consistent with its being able to fulfill the functions limited to it under the Constitution of the United States. These functions are the only legitimate reasons for expropriation of private capital and the concomitant redistribution of that capital to those who provide essential government services.
In the end, THE ONLY JOBS THAT COUNT ARE IN THE PRIVATE SECTOR. The economic “stimulus” packages are nothing but enormous “bait and switch” schemes. They are “smoke and mirrors” operations run by confidence men called—you guessed it—economists.
Economic fallacies are drummed into the consciousness of the gullible public. How does that happen? Simple. The public is gullible because it is ignorant. They don’t know how to defend against the fallacies. Part of the reason is that they have accepted the very same fallacies.
Economists have a language of their own. They use technical jargon to conceal the true meanings of what they are saying. They make pronouncements based on mythological principles and defile sound logic. They lie by omission. What’s worse, ignorant, gullible Americans are accepting their garbage as truth. Do these statements seem harsh? Perhaps, they are, but it doesn’t make them less true.
Many people will see the title of this piece as being provocative. Their curiosity will be aroused and they will want to know more. Responding to that impulse, some of those people will begin reading it, but will not get past the first paragraph. Some won’t even get past the first sentence. The reason for that is simple. The psychological defense mechanism of cognitive dissonance is activated. This impels them to quit reading. They may feel revulsion or anger or both. They will just “know” that, because the first sentence or paragraph “doesn’t make sense” to them, the rest of the piece won’t make sense, either. These people share a characteristic called by various names, including “progressive” or “liberal,”or even “Leftist” or “socialistic.” But, such a reaction is not limited to those of the aforementioned “persuasions.” A similar reaction can come from those on the opposite end of the political spectrum. Why? Because they were brought up to believe in the same nonsensical pabulum. This reflects the unfortunate fact that economic principles are very poorly understood by most people. So, it should be no source of wonder that people cannot make intelligent and informed economic decisions.
I confess that, earlier in my life, I, too, was ignorant of economic principles and therefore gullible. It wasn’t from taking a one-a-day-stupid-pill every morning. To me, economists were like magicians speaking mysterious incantations or members of a priesthood preaching sermons on the path to economic salvation of their design. Most of them seemed to work for government—one way or another. They operated like “black boxes,” sealed and operating in uncanny ways. They dispensed economic studies based on models easily skewed and easily misused.
They could, and still can, get away with it because of the widespread lack of public understanding. What’s more, well-respected politicians echoed them. As a result, for most people like me, it was just assumed that economists knew what they are talking about. I found out—over time—they don’t. Oh sure, the stories they tell sound plausible—but only until you take a closer look at them. When deconstructed, the stories and the models fall apart.
Take their story about federal government economic “stimulus” programs. These programs are intended to solve “problems in the economy.” Say, the government identifies a problem—an “unacceptably high” rate of unemployment. Naturally, the government wants to lower the unemployment rate to an “acceptable” level.
Yes, I know it’s not easy to get an accurate picture of employment. The economists use a number of different ways to survey, model and report on it. Their conclusions depend upon the kinds of questions they ask over the telephone. They include people, or not, according to certain rules. For example, if you’re out of a job, but you haven’t looked for one during the week you are surveyed, YOU ARE NOT COUNTED as unemployed. As a result, you don’t affect the rate of unemployment. But, if you worked as little as one hour in that week, YOU ARE COUNTED as employed. That reduces the unemployment rate. As they say, go figure.
Nevertheless, what does the government think will do the trick? Do the math. It’s fewer people labeled unemployed. The solution is to set up a employment stimulus program of some kind. To employ more people, the government program must “create” the jobs. It’s either that, or they will have to finagle the figures. How does the government think it can create jobs? The answer is: “Capital.”
How are these so-called economic “stimulus” programs supposed to work? Simple. With the problem “identified” and its solution “known,” the government decides to “pump” capital into the economy. This “pumped-in” capital is supposed to “create jobs.” Logically, the creation of jobs will lower the unemployment rate and another problem is solved by the “magic” of government action. Sounds great, doesn’t it? But, wait. Is it as simple as it sounds? Let’s examine the process.
Operationally, economic “stimulus” packages are “pump and suck” programs. Economists will talk your ear off about the “pumping” part, but not about the“sucking” part. This is their lie-by-omission. It might help to think of the fraudulent “pump and dump” schemes in the minicap end of the stock market. These schemes involve the use of false or misleading statements to hype a stock that is actually worthless. People respond to the hype and start buying the stock, causing a flurry of buying activity. As a result of this flurry of buying activity, the bid price of the stock gets “pumped” up. Then, when the “pumper” believes the price rise has run its course, the worthless stock is “dumped” on the public at the highly inflated price.
To help in delving into the process, first, think of an onion. It’s built up of a series of layers. To see what’s behind each layer, you have to peel each layer back, one at a time. To see what’s behind the economic “stimulus” package, we have to do the same thing, figuratively. So, let’s peel back the layers of a typical “stimulus” onion.
If the unemployment rate is too high, it must be that too many people are unemployed.
If too many people are unemployed, it must be that there are not enough jobs.
If there are not enough jobs, it must be that producers are not hiring.
If producers are not hiring, it must be that they don’t need people.
If producers don’t need people, it must be that they limit production.
If producers limit production, it must be that they are not selling their products.
If producers are not selling their products, it must be that people are not buying their products.
If people are not buying their products, it must be that they don’t have enough capital.
If people don’t have enough capital, it must be that they are unemployed.
If people are unemployed, the unemployment rate is too high.
It’s easy to see that, in this onion, there are two parties involved. They are the producers—and the people who work for producers. The only other significant factor present is capital. So, the answer to the question of what could be added to the situation to change it appears to be capital.
But, if capital is to be added, certain other questions pop up. How should the capital be added? Should the capital go to producers, the people who work for producers, or both?
But, wait. Even before the decision is made as to how the government will distribute the capital, another, obvious question must arise. Where does the government get the capital it is going to distribute?
But, wait again. Before we can answer that question, we need to know the answer to broader questions. What is capital? Does it just naturally exist or is it created?
Examination of the structure of an important financial statement will help to answer these questions. Let’s look at the components of a balance sheet. First things being first, “capital” is another word for “net worth” or “equity,” as in “total assets minus total liabilities equals total capital.” Another way of putting it is that “assets” are the things that you have title to. “Liabilities” are the things you owe to somebody else. If you have ever applied for a loan, you know these terms. It is easy to see that if the value of total assets exceeds the value of total liabilities, the value of total capital is a greater than zero—positive territory. This is good. If the value of total assets is less than the value of total liabilities, the value of total capital is less than zero—negative territory. This is bad.
In usage, the term “capital” is also applied to a stock of accumulated goods, or to the value of those accumulated goods. In either case, it is easy to see that, without production, goods cannot be accumulated and, consequently, capital cannot be created.
Currency can represent the value of capital, but it cannot be capital. For most people, this distinction doesn’t exist. They conflate currency and capital. People don’t realize that this is tantamount to equating the sports agent and his client, the star quarterback.
In reality, nobody confuses the agent with the quarterback. Everybody sees that it’s not the agent who is down on the field throwing the football. It’s the quarterback. But, everybody does not see that it’s not the currency that’s down on the field doing the work. It’s the capital. To make it easier to understand, picture a barter economy, where there is no currency in use to cloud the issue.
So, to be sure, the public sector can print currency, but the public sector cannot create capital. There is no capability for production in the public sector; only consumption. That leaves only one place capital can be created—the private sector, where production takes place.
An astute reader of the Constitution of the United States will also want to add that it is not a legitimate function of government to produce products for private consumption or to create capital. The bottom line on the latter is: whatever capital the government wants, it must expropriate from the private sector—through taxation.
It is clear, therefore, if the government intends to “pump” capital into the economy, there is only one place it can go to get it—the economy. It must “suck” that capital out of the private sector of the economy. It now becomes obvious that any capital the government already has on hand, it has already “sucked” out of the economy. It is also readily apparent that the government cannot add capital to the economy. Government can only redistribute capital that is either already in the economy, or expected to be there—later.
With respect to “later,” if the government wants to do the “pumping” even before it does the “sucking” it must set up a mechanism to “suck” out the capital it expects to be created. This kind of “sucking” is called “borrowing.” The mechanism used to do the “sucking” is the sale of debt instruments issued by the U.S. Treasury to the public in the public financial markets. These are variously called bonds, notes, or bills depending upon the length of time before repayment of the debt is due. When government does this kind of borrowing from in the public financial markets, this places government in direct competition with other seekers of financial resources. Every dollar borrowed by government removes a dollar from availability to private citizens, shrinking the amount of capital available to the private sector.
It should be obvious that, when the government borrows today, it is “sucking” capital out of the economy today. The astute observer will also notice that this kind of “sucking” has the same effect as the “sucking” due to taxation. In other words, when governments “borrow” they are doing the equivalent of collecting tax. The difference is that it just doesn’t look like it. The taking of capital through taxation is easily seen. The taking of capital through“borrowing” hides it from view.
You can prove this to yourself by performing two experiments. For experiment number one, cash your pay check. Set aside all but $100 in $1 bills to use in the experiment. Put on a pair of blue jeans. Let the jeans represent the economy. Let the right front pocket represent the private sector of the economy, the left front pocket, the government sector. Put all of the $1 bills into your right front pocket. Now, “pump” $20 from your left front pocket into your right front pocket. Wait. You say it’s not possible because your left front pocket is empty. Not to worry. “Tax” your right pocket of 20% of the total and put that amount into your left front pocket. If you have done this correctly, you now have $20 in your left front pocket and $80 remaining in your right front pocket. Now, you can “pump” the $20 from your left front pocket into your right front pocket. But, have you increased the total amount in your jeans above $100? No? How come? Doh!
For experiment two, follow a similar procedure with your pay check, except this time, instead of “taxing” the 20% from your right front pocket, “borrow” it. If you have done this correctly, you now have $20 in your left front pocket and $80 remaining in your right front pocket. Now, you can “pump” the $20 from your left front pocket into your right front pocket. But, have you increased the total amount in your jeans above $100? No? How come? Double-Doh! But, Wait! The left front pocket still owes and must pay back the amount it previously borrowed from the right front pocket. How can it do this? Repeat experiment number one.
What’s the major point to be learned from these experiments? First, neither experiment can be conducted unless you have a paycheck (Capital) to start with! The second point is that, operationally, there is no difference between government taxation and government borrowing. They both constitute redistribution—and taxation—both present and future.
The idea behind the “borrowing” is that the government will replace the capital later when the debt becomes due. Of course, if government has redistributed the capital previously borrowed, there won’t be any on hand to use for replacement. To make the replacement, the government will have to “suck” more capital out of the economy to make the payment. It will do this by collecting taxes or borrowing again, or “rolling over” the debt. How does the “rolling over” work? The government just sells new debt instruments to replace the old maturing ones.
All borrowing is done at the cost of interest. This additional cost must be paid from “sucking” additional capital out of the economy. It’s easy to see what the logical result of continuous government “borrowing” will be for the future economy. It would be accurate to say, “it sucks.”
Furthermore, having issued debt, government has an incentive to pay it off with cheaper dollars. Thus, the power to tax leads the state to replace private money by the state's currency and thence to the many ills attendant upon the inflation of that currency.
Remember the formula, “total assets minus total liabilities equals total capital?” What’s the situation called when the value of liabilities (the capital that needs to be repaid) is greater than the value of assets (the capital available to make the payments)? In “polite society,” this is called “insolvency.” Whether it is officially declared or not, another term for it is “bankruptcy.” Bankruptcy for an economy is a disaster. All that’s necessary to prove this is to look at what is happening in Europe today. Look especially at Greece, Spain, Ireland, for example.
Even if we assume, albeit incorrectly, that there are no transaction, handling, interest or other costs, all that can be accomplished by the massive government “pumping” and “sucking” scheme is the redistribution of capital from one place in the economy to another place in the economy. This redistribution of capital has very disruptive effects on people. But, let’s leave aside, for the moment, the issue of the specifics of how the capital will be redistributed and look at a problem that is created by it. The fact that, for capital to exist in the public sector it has to be expropriated from the private sector, presents us with a conundrum.
If, as government claims, it is true that “pumping” capital into the economy creates jobs in the place to which the capital goes, then it must also be true that “sucking” capital out of the economy destroys jobs in the place from which the capital comes. If any further proof is needed, it is easily observable that businesses and the jobs they represent will move from areas of high-tax to areas of lower-tax.
“At the end of the day,” as it is said, the essence of the matter is: all the “pumping” and “sucking” of capital cannot really add or subtract capital from the economy as a whole, it can only redistribute it within. And as capital goes, so go the jobs. Thus, from the standpoint of jobs, the only thing that can be accomplished by redistributing capital within the economy is to redistribute jobs within the economy. It cannot be otherwise. To reduce it to brutally simple terms, to create jobs in one place, the government must destroy jobs in another place. Neat, huh? Some people describe this process as “the government picking winners and losers.” However it is described, it is a form of social engineering.
The inescapable conclusion is that government spending on “job creation” causes unemployment. Funny, though, how the government takes credit for the jobs it “creates,” not the jobs it destroys. Why is that? The economists lie, that’s why. They do this because they can choose to see only what they focus on—jobs “created.” It’s easy to see why they do that. Economists don’t get paid to come up with ideas on how to destroy jobs. Thus, they have no interest in what they don’t see—the jobs destroyed. Add to that, the fact that economists are paid to spout the “party line.” Besides the money, they get plenty of perks, including favors and access. They also get power and feelings of importance.
Just as a person can’t be present in two places simultaneously, a person can’t work in two places simultaneously. A person has to choose which sector of the economy to work in. With this in mind, let’s return to one idea of how the government can redistribute capital.
One way to redistribute capital is to give it to people without jobs. Call it, “unemployment compensation” or “jobless benefits.” We remember that when the government expropriates capital to redistribute it, it “sucks” the capital out of the economy. The same thing must be true of “unemployment compensation.”
Let it not be said that I am in complete opposition to the idea of “unemployment compensation” per se. Properly done, and strictly as a stopgap measure, it can work. As done now, however, extensions of the benefit eligibility period can become massively unproductive. Extensions not only perpetuate the problem, but they exacerbate the problem, leading to even further extensions.
Take for example when a person takes a full-time job with the government. That person is not available to take a job with a producer. Each unemployed person who receives an unemployment compensation check is, in essence, “working” for the government. They have, for practical purposes, left the private sector. The bottom line is: they are getting paid not to work in the private sector of the economy. Thus, they can no longer help to create capital. Ponder this:
If people receive capital from the government, they cannot take a job in production.
If people cannot take a job in production, producers cannot produce.
If producers cannot produce, producers cannot create jobs.
If producers cannot create jobs, people cannot be employed.
If people cannot be employed, they are unemployed.
If people are unemployed, the unemployment rate goes up.
Multiple or long extensions of unemployment benefits eligibility periods have a profound effect on the psyche of many benefits recipients. Not only do they tend to destroy the incentive of the recipients to obtain work, even worse, they tend to create a strong disincentive to work. Recipients tend to become acculturated to a state of dependence upon receiving the government benefits. After all, why work when you can stay home and still get paid?
Or, why work when the differential between the amounts received from benefits and earnings is small? Personal acquaintances who have been receiving benefits have told me, and I have heard second-hand about others, that they tend to think that if they get work, they are working for the amount of the differential.
For example, a weekly benefit amount of $600 is equivalent to $15 per hour. If a job presents for $17 per hour, I am told the benefits recipient tends to reason in a manner similar to the following. “I’m getting $15 per hour and have a lot of free time. If I take the job, I will be getting only $2 per hour more than I am now but I will have to give up my free time. I’d be stupid to work for $2 per hour. I’ll just keep taking the $15 per hour and have another beer.” (By the way, my present favorite is “Blue Moon.”)
This kind of attitude is very effective in keeping benefit recipients out of the job market. In effect, government is not only engaged in a competition between itself and the private sector, it is winning it. As a result, operationally, extensions become construed as less of temporary “unemployment compensation” and more as a longer term straight welfare payment.
Extensions also introduce greater uncertainty into the job market. Generally speaking, for an employer, the highest expenditure category, after the cost of the goods sold, is the cost of labor. A rise in labor cost can have a profound effect on the Profit and Loss Statement. No private sector company can long pay its employees not to work. Not only is capital that producers could use to create jobs going toward paying unemployment benefits, they can’t plan on hiring unless they raise wages higher then they can sustain.
Finally, anything the government does has a cost. It could be from the phenomenon of lost motion, where people are being paid to stand by but who perform no useful work. It could be the interest that must be paid on incurred debt. Regardless of the cause, any cost to the government requires capital to pay for it. Remembering that government is not capable of creating capital, government must obtain capital through taxation or borrowing. Both taxation and borrowing “suck” capital out of the economy. “Sucking” capital out of the economy destroys jobs. Destroying jobs increases the unemployment rate.
Truly, as Daniel Webster said, in arguing the famous case of McCulloch v Maryland before the U.S. Supreme Court, “An unlimited power to tax involves, necessarily, a power to destroy.” In his decision, Chief Justice Marshall said: “That the power to tax involves the power to destroy…[is] not to be denied.”
It all comes down to this:
Job creation requires capital.
Capital must be created.
Production requires jobs.
Jobs create capital.
All taxation is redistribution of capital.
All taxation “sucks” capital out of the private sector.
All taxation destroys jobs in the private sector.
All government activities require taxation.
All government activities destroy jobs in the private sector.
Although the example I used has to do specifically with unemployment, the principles apply generally. The upshot is: the government’s need to “suck” capital out of the economy should be minimized. To do this, the size of government should be held down to the lowest level possible, consistent with its being able to fulfill the functions limited to it under the Constitution of the United States. These functions are the only legitimate reasons for expropriation of private capital and the concomitant redistribution of that capital to those who provide essential government services.
In the end, THE ONLY JOBS THAT COUNT ARE IN THE PRIVATE SECTOR. The economic “stimulus” packages are nothing but enormous “bait and switch” schemes. They are “smoke and mirrors” operations run by confidence men called—you guessed it—economists.
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