Americans Like the Taste of Snake Oil (110112)

“Neighbor,” I said, “I am overwhelmed. You’ve got great info but, can’t you just give me a really simple example of a commonly accepted fallacy and its effects?”

“Sure,” said my neighbor. “This is a classic. A guy heaves a brick through the window of a store and takes off. The store owner runs out. A crowd gathers. They all gape at the hole in the window. After a while, somebody in the crowd feels the need for philosophic reflection. Several members of the crowd remind each other, and the store owner, ‘Hey, there’s a bright side. It’ll make business for some glazier.’ They begin to elaborate on this idea. ‘How much does a new window cost, $500? That’s expensive but, if windows were never broken, what would happen to the glass business?’ The thing is endless. ‘The glazier will now have $500 more to spend with other merchants. These, in turn, will have $500 more to spend with still other merchants.’ And so ad infinitum. That smashed window will go on providing money and employment in ever-widening circles. The logical conclusion is, if the crowd were able to draw it, the guy who threw the brick, far from being a public menace, was a public benefactor.”

“Well, I certainly can’t buy the public benefactor bit, but there sure seems to be quite a bit of  logic in the other parts,” I said.

“Take another look,” said my neighbor. In its first conclusion, the crowd is right,. It will immediately mean more business for some glazier. But the store owner will immediately be out the $500 he has to pay to replace the window. Instead of having a window AND $500, he has only a window, or, because he was planning to buy a tailor-made suit that very afternoon, instead of having BOTH a window AND a new suit, he has only a window and NO suit. If we think of the store owner as a part of the community, the community has lost a new suit, and is that much poorer.”

“But, the glazier has gained some business. Isn’t that a plus?” I asked.

“Nope. It isn’t. The glazier’s gain of business is merely the tailor’s loss of business. No new employment has been added. See, the crowd is thinking there are only two parties involved; the store owner and the glazier. They totally forgot the potential third party, the tailor. They forgot him precisely because he’ll never enter the scene. He’s out of sight. They’ll see the new window, but they’ll never see the new suit. It’ll never be made. They’ll never see the tailor. They see only what is immediately visible to the eye.

I replied, “I may be a bit thick in the head here, but how does the broken window fallacy reflect what is going on in the world?”

“It’s this,” said my neighbor. “The broken window fallacy, under a hundred disguises, is the most persistent in the history of economics. Every day it’s solemnly reaffirmed by great captains of industry, chambers of commerce, union leaders, editorial writers, columnists, TV commentators, statisticians using the most refined techniques, professors of economics in our best universities. In their various ways they all promote the advantages of destruction—and it is all smoke and mirrors.”

“Thank you, Neighbor,” I said. “At long last, I think I’m getting it. I know there must be much more, but let’s leave that for another conversation.”

Americans Like the Taste of Snake Oil (110111)

I said, “If the professional economists are the ones generating these fallacies, economic problems are being caused by the guys who are supposed to be solving them. It sure gets discouraging to know that the people we expect to know what they are talking about, don’t. They’ve got to be delusional.”

Said my neighbor, “You’re right. And, although they flatter themselves that they are doing brilliant work, in their precise and minute examination of particular trees, they overlook the woods. They keep trying to reinvent the wheel. They don’t learn from history. In fact, they’re sometimes surprised to find themselves trying to revive defunct ideas from seventeenth-century mercantilism, Marxist Socialism, Mussolini-style Corporatism, or some other way to institute government regulation of the entire national economy.”

“You mean in their mathematical approach? I know they can produce charts and graphs at the drop of a hat,” I said. “Still, there’s something fundamentally important missing here. If the professional economists are so mistaken, and their mistakes are so obvious, how are they getting away with it?”

Said my neighbor, “Bad economists can present their mistakes more plausibly than good economists can present their truths. The sad fact is that bad economists can always be more plausible than good economists because, like demagogues, bad economists tell only partial-truths. To be fair, as far as the partial-truth goes, they may often be right. The insidious part to remember, however, is that although the public hears only the partial-truth, they think they have heard the whole truth.”

“So, how do we deal with that? I asked.

“The answer lies in supplementing and correcting the bad economists’ partial-truths with the missing truth. It’s in showing that the proposed policy would also have longer, less desirable effects. It lies in showing that the policy will benefit one group, but only at the expense of all other groups.”

“Oh,” I groaned. “Well, good luck on that. But, why is that so hard to do?”

“It makes me sad to say, Draco,” said my neighbor, “but many people are intellectually lazy and the process of explanation is really boring. To consider all the major consequences of a proposed policy on everybody requires a long, complicated, very dull chain of reasoning. On average, it takes at least thirty words of supplementary truth to balance one word of partial truth. People find it difficult to follow. They become bored, inattentive, turned off. They go watch TV or go do something else.”

On hearing that, I lost it. “I know, I know,” I screamed. “I feel like you’ve been making me crawl on my hands and knees over a field of broken glass to get this far. If it weren’t for the pain, I’d have gone to sleep a long time ago.” Then, recovering from my fit of pique, “I’m sorry, please go on.”

“Bad economists know about and take advantage of intellectual laziness. They assure people they don’t need to follow the reasoning or judge it on its merits. They say it’s only ‘laissez-faire’ or‘capitalist apologetics’ or whatever other abusive term may strike them as effective at the time.”

“And all those lazy people buy into it, right? That sucks, Neighbor. That just plain sucks,” I said.

Americans Like the Taste of Snake Oil (110110)

“When we enter the field of public economics, elementary truths are ignored”, said my neighbor. “There are economists, regarded as brilliant, who believe that a policy of spending, and I mean consumer spending on a national scale, is the answer to economic salvation. Quite literally, they hate having people put money into savings. When anyone points out what the long-run consequences will be, they reply, ‘in the long-run we're all dead.’ Believe it or not, they pass that crack off as wisdom.”

“I’ve heard that expression,” I said. “I never did like it. It’s insulting. It's fatalistic. It's as if nothing is worth bothering with, unless it’s for the short-run. Actually, it’s really a stupid expression!”

“Here’s the real tragedy, though Draco,” said my neighbor. “Contrary to that ‘wisdom,’ right now, and I mean this very day, we are already suffering the long-run consequences of the policies of the remote or recent past. Today is already the tomorrow the bad economist told us yesterday to ignore. Part of the problem is that it may take a few months, sometimes several years or even decades, before the long-run negative consequences of some economic policies can become clearly evident.”

“Well, okay, Neighbor,” I said, “What’s the bottom line here?”

“The bottom line is this: in every case, the long-run consequences contained in every policy, in fact, the whole of economics, can be reduced to a single two-part lesson expressed in a single sentence. This is that sentence: The art of economics consists in looking, not merely at the immediate effects, but at the longer term effects, of any act or policy, and tracing the consequences of that policy, not merely for one group, but for all groups. The bad news is that ninety per cent of the economic fallacies working such terrible and widespread harm in the world today are the result of ignoring one or both parts of the lesson laid out in that sentence.”

“That's terrible. But, at the same time, Neighbor, we do live in the present,” I said. “There are economic problems that need solving in the short-term. Wouldn’t a concentration on secondary consequences also cause problems?”

“Of course, the opposite error is possible,” said my neighbor. “Certain groups can be immediately hurt by policies that, in the long-run, can be proved to be beneficial on net balance. Look, please understand that in considering an economic  policy, I’m not advocating concentrating on long-run results to the community as a whole to the exclusion of the immediate effect on certain groups within the community. The need is to look at both.”

“That makes sense, but this is a widespread problem.” I said. “How do we deal with this?”

Replied my neighbor, “It’s widespread, yes. But comparatively few people today make this error. Those few who do make this error consist mainly of professional economists working in the government, the academy or writing for the press.”

“Say, what? It’s the professional economists that make this error? Are you actually telling me that the people generating these fallacies and spreading them far and wide are professional economists?”

“Yes,” said my neighbor.

“Okay, then. Answer me this question: What good are professional economists?”

Americans Like the Taste of Snake Oil (110109)

“Befuddled, indeed,” I thought. “There’s got to be something more at work here, something just out of sight. It has to be an important factor or operating principle. It’s something not immediately apparent and not anticipated. It’s some kind of regenerative factor.” So, I said, “Neighbor, it seems to me that there is something more fundamental than just ‘self interest’ that generates these fallacies.”

Smiling, my neighbor responded. “Yes. You’re absolutely right, Draco. There is a second main factor. The factor that spawns new economic fallacies every day is the persistent tendency of people to see a policy only in terms of its immediate effects and only on a special group. They don’t even think to inquire what the long-run effects of that policy will be, not only on that special group, but on all groups. I call it The Fallacy of Overlooking Secondary Consequences.”

“‘Overlooking secondary consequences’ sounds like, what we call, in business ‘Failing to Plan,’ which has a corollary known as ‘Planning to Fail.’ With either title, it’s bad. Overlooking secondary consequences leads to sub-optimization. That’s where one element in a system, acting to achieve its own goals, operates to constrain or to hamper the actions of other elements of the same system. Although successful in achieving its own particular goals, it often causes serious injury to the other elements of the system. The supreme irony in this is that the well-being of every element in a system depends upon the well-being of the whole system. That’s why, to preserve the well-being of the whole system, it’s sometimes necessary for one element to limit its goals and actions.”

My neighbor nodded, smiling.

I continued, “I can see, in the distinctly different areas of politics and economics, sub-optimization can have serious, widespread negative repercussions. This is where the special interests trying to do the sub-optimization gain sufficient political power to accomplish the dirty deed. This where, despite the doer’s intention to ‘do good,’ the doer ends up ‘doing bad.’ This is what proves that there’s a big difference between intentions and consequences. People tend to confuse the first for the second.”

Grinning, my neighbor rejoined, “Draco, you’ve nailed almost the whole difference between the good economist and the bad. The bad sees only what immediately strikes the eye, the good also looks beyond the immediate. The bad sees only the direct consequences, the good also looks at the indirect consequences. The bad sees only what the effect of a policy has been or will be on one group, the good also looks into what the effect of a policy has been or will be on all groups.”

“You know, I am wondering how we deal with the root of this problem,” I said. “It’s not like the distinction is not an elementary and obvious one. We’re not dealing with rocket science here.”

“The distinction may seem obvious and elementary,” said my neighbor.” But, the truth is that people tend to see only what they look for. They do this, despite knowing the elementary truths that there are all sorts of indulgences, though delightful at the moment, are disastrous in the end.”

“So, how does what you are saying play out in the field of public economics?” I asked.

Americans Like the Taste of Snake Oil (110108)

Expanding on the subject of boondoggling, my neighbor said, “If you think that’s mind-boggling, think about this chain of logic. If your intent is to put people to work, the more wasteful the work and the more costly it is in manpower, the better the project gets for providing more jobs. Naturally, that also increases government spending on overhead costs. But, it gets worse than that. Do you think that projects thought up by government bureaucrats will provide the same net addition to wealth and welfare per dollar expended as would have been provided by the taxpayers themselves if they had been individually permitted to buy or have made what they themselves wanted instead of being forced to surrender part of their earnings to the state?”

“No, I don’t suppose so. I have to admit, Neighbor, you’re making real sense here. Real—but very disturbing, sense,” I said. “You’re ‘rocking the boat’ of ‘common sense’ that I, and most people I know, have been sailing in all our lives. I’m being forced to accept the uncomfortable probability that most economic ‘common sense’ is bogus. The truth is becoming more and more clear. It is this. Most people have been brought up to believe in the fallacies you’ve described. I’m also sensing that most people don’t really know what ‘money’ is. I’m wondering why and how the fallacious beliefs came about.”

“For now, my neighbor responded, “accept as fact that economics is haunted by more fallacies than any other study known to man. Accept also, that this condition is not an accident. It’s not important, at this point, to go into the history of why and how the fallacies came about. What is important is knowing the economic beliefs that politically influential groups hold and can get government to act upon.”

“What do you mean, ‘not an accident?’ Are you telling me the fallacies are purposefully generated?”

“Let me answer this way,” said my neighbor. “To start with, there are inherent difficulties in understanding the subject of economics just as it stands. But those difficulties are multiplied exponentially by a particularly human factor. That factor is the special pleading of selfish interests. If the subject were physics, mathematics or medicine, it wouldn’t be a significant factor. In economics, it’s disastrous.”

I posited, “So, you are saying that the fallacies in the area of economics are generated by special interests. That’s the problem, special interests?”

My neighbor nodded, and said, “If you think about it, you’ll see an important truth. At any given time, any particular group has certain economic interests that are identical with those of all other groups. At the same time, every group also has interests that are antagonistic to those of all other groups. Certainly, there are public policies that would, in the long run, benefit everybody. Other policies, though, would benefit one group, but only  at the expense of all other groups. Obviously, the group that would benefit from the policies has a direct interest in them. That group will argue for them plausibly and persistently. That group will hire the best minds that can be bought to devote their entire time to presenting its case. In the end, that group will either convince the general public that its case is sound, or so befuddle people that clear thinking on the subject becomes next to impossible.”

Americans Like the Taste of Snake Oil (110107)

“You lost me on the Tennessee Valley Authority,” I said. Why does the size matter in this case?”

“Simple. Sheer size makes the danger of optical illusion greater. There’s a huge dam, a stupendous arc of steel and concrete. Economists and politicians called it ‘greater than anything that private capital could have built.’ It’s a heaven of socialists. They use it as a symbol of the ‘miracles’ of public construction, ownership and operation. There are huge generators, power houses, a whole region lifted to a higher economic level with factories and  industries that could not otherwise have existed.”

I grabbed the opportunity of the instant and jumped in with, “Well. So, you admit it. It did a lot to improve the economic situation there. How can you possibly argue against that?”

“Draco, the problem is that it’s all presented as a net economic gain. They don’t consider the offsets. Again, I’m not going to go into the merits of either the TVA or public projects like it. But this time we need a special effort of the imagination to look at the debit side of the ledger.”

“I’ll bite;” I said, “why is it so particularly hard to do in this situation?”

“When taxes were taken from people and corporations from all over the country, but were spent in only one section of the country, why should it come as a surprise when the section that got the money became comparatively richer. The fact is, the other sections of the country, the sections that lost the money, became comparatively poorer. Think about it. The project that was so big that ‘private capital could not have built it,’ actually was built with private capital, the capital that was expropriated from the private sector.”

A light suddenly went on in my head. “It’s almost as if we are talking about ‘opportunity cost;’ an added cost of doing business. It’s the difference between the actual values resulting from the use of capital, say for Project A; compared to the use of the same capital for Project B. The fact is that this is an every day situation for businessmen. They are always deciding between putting capital into use for production or putting it into use as an investment with equal risk but greater return. It’s the most basic, most far-reaching kind of decision a businessman can make. What's more, all decisions of this kind are based on intangible factors, things that can’t actually be seen. Making these kinds of decisions requires a lot of imagination. But, businessmen do it. Now, I’m wondering how they can do this kind of thinking when it involves private money but can’t do it for public money. Neighbor, this is very hard thinking,. I don’t know how ordinary people are going to get the picture. As you said, it takes a special skill. And practice.”

“Well,” said my neighbor, “the TVA may be one of the most visible, but it isn’t the only example. There are hundreds of boondoggling projects that were dreamed up with the main object to ‘create jobs’ and ‘to put people to work.’ The  crux of the problem is that the usefulness of the project itself was a subordinate consideration.”

“Hundreds!” I exclaimed, “it’s probably thousands, maybe hundreds of thousands of ‘make work’ projects. Wow! What a fertile breeding ground for political corruption and waste. You know, neighbor, it just boggles the mind, doesn’t it?”

Americans Like the Taste of Snake Oil (110106)

When my neighbor said that affordable housing causes one set of families to be forced to subsidize another set, I just had to get an explanation of that. “What’s the bottom line on this?” I asked.

“Look,” said my neighbor, I don’t intend to get into all the pros and cons of affordable housing right now. All I want to point out, right now, is there is a critical, fundamental error in two of the arguments most frequently put forward in favor of affordable housing. One is the argument that it ‘creates jobs.’ The other is that ‘it creates wealth which would not otherwise have been produced.’”

“Well, you’ve already demolished those as valid arguments for public works projects. What are you really saying?” I asked.

“What I’m saying is, both of these arguments are false. They overlook what’s lost through taxation. Taxation destroys as many jobs in other lines of work as it creates in housing. The result is unbuilt private homes, unmade washing machines and refrigerators as well as a lack of innumerable other commodities and services.”

“Well, that may be so,” I said, “but projects like affordable housing don’t have to be paid for up front. They can be financed and paid for over long periods of time. What about that?”

“It really doesn’t matter. Lump sum; annual rent subsidies; whatever; they’re the same thing. The cost is just spread out instead of being concentrated in one payment. It’s the same for tax collection. But, look, those are technicalities. They’re irrelevant to the main point.” replied my neighbor.

“You’re going to have a hard time convincing some people of that. You’re talking about what doesn’t exist. It’s very hard to prove a negative,” said I.

“Yes. Unfortunately, the great psychological advantage that affordable housing advocates have is that men can be seen at work on the houses going up. After they’re finished, the houses can be seen. But, and this is critical to understand, the jobs destroyed by the taxes used to pay for the housing are not seen. Neither are the goods and services that were never made. It takes a concentrated effort of thought to think of the wealth that was not created. What's more, it takes a new effort each time the houses, and the people in them, are seen.”

“Obviously, Neighbor, advocates for government spending aren’t going to touch that with a ten-foot pole,” I retorted.

“Is that surprising? People who push for affordable housing have to believe what I am saying is ‘mere theory.’ Sure, that’s false, but believing that allows them to dismiss the idea because they don’t want to be bothered with theory. They want to point to real buildings.”

“Right,” I said, in riposte. “Who are you going to believe, me, or your lying eyes? So, based on what we’ve covered, if I apply reasoning, the size of a public project is not relevant either.”

“Right, except for one thing. The bigger the project, the bigger the problem in seeing it for what it is. Take, for example, a project as big as the Tennessee Valley Authority, or TVA.”

Americans Like the Taste of Snake Oil (110105)

“Okay, Neighbor, you say that the important jobs we don’t see are the jobs that are destroyed by the loss of the million bucks taken from the taxpayers to build the bridge. I can understand the million bucks in taxes,” I said. “What’s the story on the destruction of jobs?”

“Well, if you look closely, said my neighbor, you’ll see what has actually happened. Jobs have been diverted from one place to another. Yes, yes, for a short time, there may be more bridge workers, but at the same time, there are fewer automobile workers, technicians, clothing workers, farmers and so on. Let me ask you, Where would the bridge have been if obstructionists had had their way?”

“Are you serious? It’s obvious. There would have been no bridge,” I responded.

My neighbor nodded, then said, “Right. There would have been no bridge. The country would have been just that much poorer.”

Somewhat confused at this point, I said to him, “For goodness sakes, neighbor, doesn’t that support the argument of the government spenders?”

“Not so fast, Draco. In this argument, the government spenders have the advantage again, but only with those who can’t see beyond the immediate range of their physical eyes. These people can see the bridge. What they can’t see are the unbuilt homes and cars, the unmade dresses, coats, perhaps ungrown and unsold food. Let’s face it. For a person to be able to see uncreated things requires a special kind of imagination that not many people have. With a great deal of effort and prodding, some people can think of non-existent objects. Maybe they can do this once, but they can’t keep in mind a non-existent object the way they can a bridge that they can go and take a look at. That’s why it’s so difficult for them to understand that the only thing that has happened in the building of the bridge is that one thing has been created instead of another. They can easily see the one, but they can’t see the other. The same reasoning applies to every other form of public work, by the way.”

“Every form?” I asked. “No exceptions? Can you provide another example?”

“Sure,” said my neighbor. “For example, it applies just as well to using ‘public funds’ to build ‘low-income’ or ‘affordable’ housing projects.”

“Neighbor, this is a very contentious subject. To a lot of people, affordable housing’s a sacred cow. Proposals to build them come up all the time. What happens?” I asked. “What’s the logic on this?”

“Just follow the money. To enable one set of families to live in better housing, for the same rent or for lower rent than previously, government takes the money to build these projects away from another set of families through taxation. These are families with higher income, perhaps even a little from families of even lower income. Thus,  one set of families is forced to subsidize another set.”

“Well, yeah,” I said. “That seems to be the basic idea, doesn’t it?”

Americans Like the Taste of Snake Oil (110104)

I waited, impatiently, to hear the answers. “You’ll hear the first argument before the bridge is built,” said my neighbor. “It’ll go like this: ‘building this bridge will create 500 construction jobs.’ That’s true, but don’t forget the really important, but less obvious, implication contained in that statement: ‘without the bridge, the jobs would not otherwise come into existence.’ Never mind that the jobs are short term and may last for only a year or so.”

“Well, yeah,” I said. “So, you agree that government spending on the bridge creates jobs. What’s the problem with that?”

“The problem is,” said my neighbor, “you are not seeing the secondary consequences. If you look beyond the immediate, i.e., beyond the people who are directly benefited to those who are, nevertheless, also affected indirectly, you’ll see a very different picture.”

“Wait a minute. This is not making sense to me,” I retorted. “C’mon, the bridge is being built and the workers are being paid. So, what am I not seeing, here?”

“Look, Draco, it is true that one group of bridge workers may receive more employment than otherwise. But, don’t forget this very important fact: every dollar government spends on the bridge will be taken away from the taxpayers, That’s a dollar they would otherwise have spent on the things they needed most. In other words, if the bridge costs a million bucks, the taxpayers lose a million bucks.”

At this point I am feeling exasperated. First, my neighbor disagrees with me, then he agrees with me. Then he wiggles around. So, I said, “And the bottom line is...” I let him finish it for me, “for every public job created by the bridge project, a private job has been destroyed somewhere else.”

“NO! Wait,” I protested. “Let me figure this out. Okay, so there are two job categories, public and private. If the money source is government, the job is public. If the money is not government, the job is private. Hmm. You know, when you first look at it, all you see is the private contractor. But, the bottom line is, a job can’t exist in the private sector and the public sector simultaneously. Neighbor, I’m starting to realize that things aren’t always what they seem to be on the surface. To understand things clearly, I do need to look for secondary considerations, things other than the immediate, local effect.”

My neighbor nodded in agreement, adding, “We can see the men working on the bridge, so the ‘creates jobs’ argument becomes, for most people, convincing. But the jobs we don’t see are also important.”

“Well,” I said, “what jobs do we not see that are important?”

“They are the jobs destroyed by the loss of the million bucks taken from the taxpayers to build the bridge,” responded my neighbor.

Americans Like the Taste of Snake Oil (110103)

The last time my neighbor and I talked, he said that, historically, chronic government borrowing always resulted in national insolvency or runaway inflation. “Insolvency,” of course, is not having enough money to pay off existing debt. But, if you never have to pay off the debt, how can you ever become insolvent? This is very confusing. Inflation, the “silent thief,” destroys purchasing power. Prices go up, real income doesn’t. It takes more money to buy the same things today than it did  yesterday. Anyone living on fixed income, retired people, for example, are hit with most of the impact and suffer severe financial dislocations. Said I, to my friend, “Can you please explain things to me, simply?”

My neighbor replied, “Here it is, as simple as it gets: either immediately or ultimately, every dollar government spends has to be obtained through a dollar of taxation. Inflation is a particularly vicious form of taxation. Once we understand this, the supposed miracles of government spending appear in a different light.”

“But,” I said, “there has to be some government spending. Certain things are necessary. Think of all the jobs public works create and all the money they bring into the community, too.”

“Of course, a certain amount of government spending is necessary. Streets, roads, bridges, tunnels, buildings to house legislatures, police and fire departments. I have no objection to public works as long as they are defended only on the basis that they provide necessary government services. That is, if a bridge solves a traffic or transportation problem that can’t be solved otherwise, or if a bridge is even more necessary than other things taxpayers would have spent their money on, if it had not been taxed away from them. Where there is a problem is when economists say public works ‘provide jobs’ or ‘add wealth to the community’ that it would not otherwise have had.”

“You’re telling me,” I responded, “certain public works are necessary, but building them can be defended only on the ground of necessity. At the same time, they don’t provide jobs or add wealth to the community, even when somebody has to put in the work to build them. Yet, those projects mean jobs and jobs mean paydays for the workers. Paydays for the workers mean money coming into the community, doesn’t it?

“But,” said my neighbor, “if a bridge is built primarily ‘to provide jobs,’ the need to build has become irrelevant. To keep the ‘provide jobs’ process going, government spenders have to invent projects. Instead of thinking about where a bridge ought to be built, they think of plausible reasons why a bridge can be built. Their projects soon become categorized as ‘absolutely necessary.’ What’s more, anybody who questions that necessity is labeled an obstructionist and reactionary.”

“Sheesh,”, said I, “But, bridges are being built for that reason. There have to be good arguments to justify the spending. Finding more places to build more bridges is pretty good job security for government spenders. But, what arguments do they offer in favor of spending to build a bridge ‘to provide jobs?’”

“That question has two answers, Draco,” said my neighbor.

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When my neighbor said, “a fallacy is an often plausible argument using false or invalid inference,” I decided to analyze it. After I went back inside, I grabbed a dictionary. I found “fallacy” to mean: “a false or mistaken idea;” “plausible” to mean: “appearing worthy of belief, but often specious.” I then found “specious,” to mean: “having deceptive attraction or allure;” and “argument” to mean: “discourse intended to persuade.” Then, “false or invalid” to mean: “not genuine or being without force in fact.” Finally, I found “inference” to mean: “conclusion.” I put it all together. The result was:“a fallacy is an idea that appears believable on the surface, but it’s concerned only with the obvious. It’s deceptive. It’s not a fact.” The next morning, I saw my neighbor out checking his mail. “Okay, Neighbor,” I said, “You’d better explain just what you meant yesterday by ‘common.’”

“Government continuously borrows,” he replied. “The amount government collects in taxes is less than the amount government spends. The difference has to be borrowed. But, my real point is not just about borrowing. As you found out when you asked around, economic fallacies are so common almost everybody accepts them as truth. In fact, the situation is so bad that there’s not a major government in the world whose economic policies are not strongly influenced, or even determined, by the economists and politicians buying into some of these fallacies.

I’m now agitated. I pop him with, “How is it possible all those government economists can accept economic fallacies as being fact? They are educated people. What I hear you saying is that their wonderful sounding pronouncements have no sound economic basis, right?”

He pops back with, “Exactly, right. Some of their ‘brilliant’ ideas are really nothing but errors of the past brought forward and recycled. Everywhere in this world, there’s no more persistent and influential faith than that government spending is a panacea for all economic ills. Starting with that, an enormous, intricate network of fallacies that mutually support each other has been developed.”

“How can this be,” I asked.

“Simple. A lot of people want something for nothing. The world is full of economists who come up with schemes to give it to them. All of these are empty promises, though. There is no such thing as a free lunch. Those economists say that government can spend and spend, continuing to pile up debt without ever paying it off, because, as you said before, ‘we owe it to ourselves.’ If you don’t believe me, just check out the economies of Greece, Spain, Portugal and Ireland, for just a few.”

“But, wait,” I threw in, “you have to admit that when the government spends money, it does go into the economy. What could be wrong with that?”

“What’s wrong with that? It’s a bad dream. That’s what. Whatever else it might do, it’s an historical fact that uncontrolled government spending has always been followed by national bankruptcy or runaway inflation. There is absolutely no way out of those results. There is no free lunch.”

“Oh, no,” I howled. As I said it, I realized that I sounded just like Ray Barone’s Cousin Gerard.

Americans Like the Taste of Snake Oil (110101)

Every once in a while, when I’m outside, in front of my home, checking for mail or taking out the trash, I get into a running conversation with a neighbor. He’s an older guy; “a self-made man.” He’s very well off. He’s really smart, too. I’ve learned a lot from him. He really knows his stuff.

On a take-out-the-trash day about a month ago, he and I started talking about a recent newspaper item. It had to do with taxes, government spending and borrowing. I mentioned that governments can borrow money to get out of debt. He looked at me kind of funny, as if he didn’t know that.

That funny look prompted me to explain it to him. So, I did. The same way it was explained to me. “You see, Neighbor, government represents the people. When government borrows money, it borrows from the people. Then, government uses it for the benefit of the people. That means the people are borrowing from themselves for their own benefit.”

Now, the first time I heard that, it sounded logical and plausible. After all, it came from famous economists. I do have to admit, though, it was never really clear to me exactly how it worked. Aside from the fact that it seemed to be circular reasoning, it also seemed as if something was missing. I couldn’t put my finger on it. I asked around. Everybody I knew said the same thing. Nobody came up with any kind of argument to shoot it down.

While I’m admitting stuff, well, I really hate to admit this but, I tried it—borrowing to get out of debt—I mean. It didn’t work. Somehow, I just got deeper into debt. Maybe I just didn’t do it right. So, I gave it up. But. that’s a story for another time. Anyway, when I told my neighbor, he burst out laughing. I thought he was going to bust a gut. When he got his breath back, I asked him what was so funny. He lost it, all over again.

Finally, he stopped. We began to talk. It was during that talk that I found out just how knowledgeable my neighbor was on the subject of economics. My education began when I said to him, “Alright, come on now, Neighbor, I asked you what’s so funny about my saying that when government borrows, it’s just the people borrowing from themselves?”

Smirking, he replied, “That, my friend, is a commonly accepted economic fallacy.”

I tried to let that idea sink-in a bit. Then, I looked at him, straight in the eye, a full twenty seconds. I went back to him with, “Now, just to be sure I understand you, Neighbor, what’s your definition of ‘economic fallacy’?”

He looked back at me, straight in the eye, a full twenty seconds. He came back to me with. “Draco, my friend, ANY fallacy—not just an economic fallacy—is an often plausible argument built upon a false or invalid inference.”

I thought to myself, “Oh, Man, this is going to be some conversation.

Introduction to the 12-part Series "Americans Like the Taste of Snake Oil"

Americans are being fed snake oil in the form of economic fallacies, and they like the taste so much they keep going back for more. Why? The answer is simple. They have accepted, as truth, the lie of the “free lunch.”

The reality is, as long as people can continue to perceive that they are receiving benefits and, at the same time, think somebody else is paying for them, they are quite happy to swallow the snake oil. The people who consume the snake oil are blind to the fact that, while they are enjoying the so-called free lunch, not only the money of others, but their own money, is being stolen.

This has to tell you that they don’t mind engaging in theft as long as it doesn’t look like they are doing the stealing. (Maybe that reflects that there may be a little larceny in everybody’s heart.) Certain terms come to my mind, like: Out of Sight, Out of Mind; and Receiving Stolen Property. But, on with the show.

Last year, I blogged a 20-part series called “Conversation with Henry”. It did not get many great reviews. In fact, it did not get many reviews. Those who did provide reviews said that the title was “old fashioned” and “who cares about this guy, Henry, anyway, whoever he is?”

Further, I was told I needed to “adjust” the content (i.e., “dumb it down”). That wasn’t my first choice. I had figured I would just move on. On the other hand, I thought the reviewers might just be right and, maybe it would be worthwhile to give it another shot. So, I did.

The result is a new series called, “Americans Like the Taste of Snake Oil.” Each part is only one page long.

The reader should understand that my primary purpose in providing the information is not to change the minds of believers of the fallacies. That is probably expecting too much.

So, what is my primary purpose? Simply, to give those who do not believe in the fallacies some supplementary, cogent arguments to mount when somebody tries to lay a fallacy on them. It is not rocket science, so that shouldn’t be too hard.

Comments on the series are not only welcomed, they are earnestly solicited. I hope the reader will enjoy them, and find something of value in them. Detractors are no less welcome to make their comments than boosters. Whichever you are, please let your presence be known.

America Under Siege by Economists—American Economists

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.

Intent of Minimum Wage: Put Unskilled into U.S. Concentration Camps

It is said that "Nature abhors a vacuum." We can dance around the invisible elephant in the room until pigs fly and we'll get nowhere. Nevertheless, in the following, I am not offering a solution to the illegal immigration problem. I am merely illuminating it.

Humans are very adaptable creatures and act on the basis of incentives, positive and negative. Without getting into a discussion of the merits, if any, of Skinnerian theory, we can look at certain "unanticipated consequences" of government policies. But first, we examine some basic psychology and economics.

Desire is an incentive to take action. To take action requires the power to do so. Until the levels of both the incentive and the power to take action are great enough, the situation will remain static. Desire will remain unnoticed and unfulfilled.

In the sphere of economics, power is measured in units of capital. Desire without capital has no practical meaning. Desire plus capital equals demand (economic demand).

Someone lacks something he desires and is unable to produce it by himself. He sees the way to fill the lack is to obtain it from someone who has or can produce what he desires. Unless he expropriates the object of his desire from that someone else, he must enter into a exchange transaction. In this transaction, he exchanges something he values less for something he values more. On the other side of the transaction, the same thing happens. Thus, each actor negotiates to exchange something he believes is of lesser value to get something he believes is of greater value. In other words, each actor pays what he believes is a "fair price" for what he takes out of the transaction. This is called a "win-win" situation. If either of the actors in the transaction does not believe that is going to happen, he does not complete the transaction. It just does not take place. This is called market pricing. A job is such a transaction.

When government establishes a "minimum wage," it removes, through the exercise of its police power, the ability of the actors to negotiate what represents to them a "fair price" for a unit of labor. This creates a situation of greatest consequence at the lower end of the labor market. This is the area of jobs not requiring significant job skills, i.e., unskilled labor. The saving grace (in a non-socialist economy) is that neither actor is forced to give or take the job. The bottom line is: if a 'win-win" situation is not sensed, the job goes unfilled and the job seeker remains unemployed. Thus, the minimum wage is a major cause of unemployment at the low end. Over time, the unemployment problem is reflected upward in the labor market.

Where did we get the “minimum wage?” It is more than just interesting to note that the original intent of the "minimum wage," or "living wage," originated in the United States during the "Progressive Era" which began in the late 1800s and lasted until the early 1900s. Implementation of minimum wage laws was designed to remove unskilled people from the labor market so they could be put into concentration camps.

Say What?????  Read on.

"Reform-minded economists of the Progressive Era defended exclusionary labor and immigration legislation on grounds that the labor force should be rid of unfit workers, whom they labeled 'parasites,' 'the unemployable,' 'low-wage races' and 'industrial residuum.'"

"Progressive economists...believed that binding minimum wages would cause job losses. However, the progressive economists also believed that the job loss induced by minimum wages was a social benefit, as it performed the eugenic service of ridding the labor force of the "unemployable."

"A minimum wage was seen to operate eugenically through two channels: by deterring prospective immigrants [intending to enter the U.S. legally] and also by removing from employment the 'unemployable,' who, thus identified, could be, for example, segregated in rural communities or sterilized." To make the deterrence factor operative, effective immigration controls were assumed to be in place.

"The minimum wage protects deserving workers from the competition of the unfit by making it illegal to work for less." "'We have not reached the stage...where we can proceed to chloroform them once and for all; but at least they can be segregated, shut up in refuges and asylums, and prevented from propagating their kind.'" (See: Thomas C. Leonard, "Retrospectives: Eugenics and Economics in the Progressive Era", Journal of Economic Perspectives, Volume 19, No. 4, Fall 2005, pp. 207-214.)

These days, nobody thinks about chloroforming the "unemployable." Nobody even tries to define the term "unemployable." What we do know is, government policies based on a "minimum wage" actually create unemployables. But, that's only the beginning.

Government can't let the unemployables starve. The fix for that is welfare. Of course, welfare payments comprise capital expropriated from the private sector in the form of taxes or borrowing. And, of course, higher taxes mean more capital removed from the private sector. Obviously, the more capital that is removed from the private sector, the higher unemployment goes. If you don't believe the last sentence, then explain how government stimulus packages designed to "pump capital into the economy to create jobs" work. (These packages don't result in a net creation of jobs, by the way. They merely redistribute jobs. Jobs follow capital. In the area where capital is removed, jobs are destroyed. 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.)

So, what does all of ths mean? The answer: Government knows that the minimum wage causes unemployment. The penalties paid by taxpayers for societal unemployables are higher taxes and more unemployables. The minimum wage leads to illegal immigration. Illegals have an incentive to come over the border and fill the "unskilled" jobs that are left unfilled. Why? Because they can. It’s a vicious circle. And, government policies are the progenitors of the problem.