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A guaranteed job denies the crucial fact that all jobs are to some extent created by the worker; it is only he who can guarantee the job, by the act of supplying labor, undergoing hardship, achieving distinction, and thus becoming part of the struggle by which human life improves itself.
It comes from the output of productive jobs elsewhere, either through increased taxes, expanded financial borrowing, or directly inflationary creation of money. All three possible sources diminish the wealth available to the private sector for purchasing capital equipment that sustains jobs, for spending on goods and services produced by jobs, and for savings that go into job-creating home construction and renovation.
The result is that whether the federal government borrow or taxes or inflates to finance its job-creation programs, the victims are likely to be the small-and moderate-sized firms that can more cheaply and efficiently and productively employ the poor. Since the government was spending over 10 billion annually in the late seventies and much of the money was going to unionized municipal workers and middle-class social servants, the simultaneous rises in unemployment, labor-force withdrawal, and small-business failure in the inner city are not as surprising as they may seem.
By paying the minimum wage and more for work far less stressful than the petty manufacturing, retailing, and other menial jobs available in the lower reaches of the private sector, the welfare jobs raise still further the labor costs of small business and decrease their number and profitability. Potential permanent jobs involving real work are replaced by artificial jobs that offer a deceptive and demoralizing work experience and that once again deprive the poor of an understanding of their real predicament: the need to work harder than the classes above them in order to gain upward mobility. This insult is compounded by the injury of a net creation of many fewer jobs and the shift of new jobs from petty enterprise to credentialed bureaucracy and countercultural self-expression.
Within the US, the states are independent from the federal framework to a large extent, in that they are responsible for their own budget. This situation allows a variety of economic philosophy to exist. Unfortunately for those states that have progressive fiscal spending programs, they often dont work as well to those whose curtail government spending. An example of this socialist vs. capitalist struggle is apparent in Massachusetts where including all the government jobs, employment growth in the state was less than half as rapid as in the rest of the country. The prospects for the future seemed worse, at least for private employment. According to the First National Bank of Boston, the state suffered an acute decline in capital investment and in 1977, the commonwealth ranked dead last among all the fifty states in its share of new corporate plants within its borders. Massachusetts ranked number one in terms of welfare payments, welfare growth, welfare percentage of the state budget; ranked high in both unemployment and unemployment compensation. In essence, government replaced private industry.
When commonwealth officials lament the loss of jobs to other states and call for renewed federal aid, they do not often mention that companies are literally driven away, if not by the lack of workers, then by government or community harassment as firms are accused of hiring aliens, exploiting fundamentalist religious sects (who are willing to work), or even emitting unsavory smells, as a maker of large-screen television sets was said to be doing in Cambridge, despite full conformance with all EPA regulations. The television manufacturers real offense was creating a public nuisance-conspicuous capitalism. He and his plant were shortly seen off to New Hampshire. With more regulation the jobs would go to Japan. Job creation is performed chiefly by individuals. Their supplies of work and human capital can engender their own demand.
Government subsidizing rarely works anywhere. As the experience of the US railroad industry, the post office and the NY city public services all attest, access to the US treasury cripples management in negotiating with unions. The resulting contracts consistently exceed productivity gains and thus erode the assets of any company until it fails and must seek the support of government. Experience with companies in Europe, that once a company becomes a ward of the state, it only rarely again becomes reliably profitable.
It is the capitalist gift of giving, in the mere expectation of return, transformed into the public gift of giving the money of others, in the virtual assurance of eventual profit from the taxpayer. The activity is the same: a vision of opportunity to serve, a mobilization of capital and support, an organization of labor, and a marketing of product, but without, most of the time, any real sense of a bottom line or public demand.
One philosophy which demonstrates the inanity of socialism is the paradox of redistribution: beyond a certain point already reached in most modern democracies, raising the taxes on high income leads to more, not less, luxurious living by the rich, and to less, not more support and opportunity for the poor. Take the case of a person facing a 70% tax rate on investment income. He can choose to invest 50G at 10% Rate of Return, which would bring him 5,000 per year of additional income before taxes. Or he can choose to spend 50,000 on a Rolls Royce. Since the after-tax value of 5,000 is only 1,500, he can enjoy a fine motorcar by giving up only that amount. Britains 98% tax rate on unearned (investment) income had reduced the cost of the Rolls in terms of forgone income to only 100 a day. Profusion of rich items is never a good thing.
Another socialist problem with redistribution is that with the money out of the middle classes hand, the remaining investment opportunities are limited to those who have any money. The irony of redistribution is that it can help the rich, the group the socialists wish to squeeze the most. When a country overtaxes, people pull their money from the stock market and bigger companies buy the stocks that investors arent investing in. the result is a greater glut of mergers and more big business.
It is the psychological forces that above all else shape the performance of an economy with given resources and technology. It is ambition and resolve that foster the impulses of growth, enterprise, and progress. A particular high tax rate or tariff may so deflate the hopes of businessman that it brings certain kinds of effort to a halt. It can choke off commerce without leaving tracks.
The US gets the bulk of its revenues, through business profits and capital-gains taxes, which tend to have the heaviest impact on the rich who hold the bulk of stock.
Several advanced countries, like Britain, have been hypnotized by a soak the rich slogan, only to discover that by heavy taxes on personal incomes they have stifled the drive to exceed and expand.
For liberals concerned with the distribution of income, moreover, the Laffer curve offers a promise as seductive as any of the Keynesian strictures against austerity and thrift. Regressive taxes help the poor! It has become increasingly obvious that a less progressive tax structure is necessary to reduce the tax burden on the lower and middle classes. When rates are lowered in the top brackets, the rich consume less and invest more. Their earnings rise and they pay more taxes in absolute amounts. Thus the lower and middle class need pay less to sustain a given level of government services.
Nonetheless, they failed to mention a more direct way that taxes cause inflation. Even before taxes inflict their brakes on productivity, they have the inflationary tendency to raise immediate costs. A large portion of the current inflation in capitalist countries is best characterized neither as demand-pull inflation nor even exactly as cost-push. The best term is tax-push, in which taxes are seen to have an immediate inflationary impact on wages and prices.
No one denies that an increase in the supply of money, without new flows of goods, reduces the value of money. The theory is a mathematical truth. As long as goods and money can be satisfactorily defined, along with various velocities and such, the relations among them can be reliably computed.
What are these ghastly periods of inflation that last up to a century, increasing the cost of human necessities by four and five times and often putting the average worker through a wringer? They are, none other than the most glorious stages of human economic history, precisely the periods long identified by historians, depending on their semantic tastes, as seminal or revolutionary. These are the times when new classes emerge, organized in new ways, applying new technologies, when new tides of energy and invention surge through new technologies, when new tides of energy and invention surge through a society, casting forth new roles and specializations, structures and hierarchies, attitudes and ideologies, as men collectively slough off the institutional coils of previous age and launch a new era, with a different and far more complex division of labor arising among the ruins of the old. Including the present epoch, there have been four of these inflationary metamorphoses in the last one thousand years.
Each of the great metamorphoses creates a new governmental form and extrudes a characteristic new sector of enterprise. The feudal era gave birth to a commercial sector of small traders; mercantilism produced strong national regimes and a sector of national and international trading companies; the industrial revolution established the rationalized democratic state and the sector of great manufacturing corporations. The modern era, has given us the bureaucratic welfare and regulatory state and a booming, but still massively inefficient and unproductive sector of services, in government, business, nonprofit, and international forms.
These periods of gestation of vast new divisions of labor are costly and convulsive. They resemble the initial stages of corporate formation and expansion, when large capital purchases are made, large numbers of workers are hired and trained, great debts pile up, bottlenecks and inefficiencies abound, and huge sums of money are disbursed, all into an economy with as yet, from all the new investment, no new finished products to buy. In the most recent period much of the investment has occurred outside the capital accounts of business. But as John Kendrick has shown, inclusion of investments by the government and nonprofit sectors and in human and intangible capital such as training, research, and mobility, reveals an expansion of total investment spending in recent decades.
The best ways to fight inflation and to contain its effects is private-sector growth and limit the expansion of the public sector, which caused the problem in the first place.
We have reached the end of the line for demand-side economics, whether Keynesian or monetarist in character. Rather than attempting to rigidly control unruly aggregates, we should focus on the impact of specific policies on the incentive to work and invest, on the ultimate sources of the pressure for cash and credit and for the goods and services for which they are created. This is the message of the new economics, from both the Lafferites and from the theory of diffusion.
It is also important to come to terms with the structural dimension of the most advanced and perplexing inflation: the one in the United States. Before the interplay of supply and demand, the basic price of each marketable good is the tip of a pyramid of production, consisting of all the intermediate costs plus a share of other costs passed on in its own price. When the pyramid grows and productive processes become more complex and specialized; when new groups of workers and managers participate in the productive structure; when the state extends its services and raises its taxes; when foreign gangs or governments extort and additional take; when simple tasks are broken down and industrialized; and when the universe of economic activity enlarges and unifies, the price at the tip necessarily tends to rise in proportion to the growth of the intermediate claims on it. Then, as the whole system gains experience and efficiency, the price of any particular pyramid will stop rising, and it may even fall. During a period when many new price pyramids are being launched and enlarged, when the proportion of intermediate costs to final prices is expanded, the general prices level will rise.
I pay three dollars for a cheeseburger and a dollar for a cappuccino. Elsewhere, I could get the same coffee, and a much larger cheeseburger, for less than half the price. I am paying for architects and carpenters and sellers of tropical plants, for advertisements in the Seattle times, for printers of the menu, for the black ties and brisk service of the waiters, for cooks and dishwashers and entrepreneurs, for ranchers and truckers and Brazilian generals, for metalworkers and glaziers, and accountants and lawyers. But most of all, as Warsh shows, in America all final prices embody the pyramid of public services, paid for by taxes at every point in the productive system.
Taxes are the rents of bureaucracy and there is a historic pattern of bureaucratic growth and national decay seems most probable. As in all services, productivity in government is largely a management problem. In the diversity of its roles and enterprises, government resembles a giant conglomerate. In business, conglomeration sometimes affords efficiencies of scale, typically in finance, publicity, and personnel policy. It works because each part of the enterprise will survive only if its unit costs are low enough to allow profitable operation. Business is fundamentally a productivity system. Government is a rule-and-consent system. The larger the budget granted to a government bureau by the citizens, the greater the consent expressed by them. In addition, one way to gain the consent of the governed is to give them money and jobs. Government can thus assimilate its own constituency. But the assimilation can work both ways. Elected officials, particularly in states and localities, find themselves deeply constrained by their government workers, who are not only a powerful voting bloc but also have monopoly power over necessary government services for which the officials are responsible. As government extends its functions of operational management, it may assimilate its own consent. But public employees also assimilate the powers of government. This is a counter productivity system. When it is working best on its own terms, when government budgets and payrolls grow most rapidly, productivity usually declines, engorging ever-greater resources, drags down the entire economy.
But this effort will fail if it is not combined with a consciousness that cutbacks must be combined with efficiency improvement. Very often the first thing cut by a threatened bureaucracy is public service; the last thing cut is excess employees. If an agency reacts to tax cuts in this manner, it will become yet a larger burden on the economy, because the public will feel poorer from those taxes that they still pay but they will be receiving virtually no return on them at all. The wedge effect of taxes-the extent to which they deter productive effort in the private sector-depends not on their amount alone but on the attitude of the public toward them.
The canny legions of lawyers, accountants, and other financial finaglers are of considerate value to their clients, but in this field they contribute little to the long-run growth of the economy. Tumescence within the corporate structure, these ancillary departments grow in direct proportion not only to rising taxes, but also to the rise of regulation and bureaucracy in Washington.
Many of the favored programs to promote capital formation, such as accelerated depreciation, do little for the struggling business with a new product and little profits. The deductibility of inflated interest only helps companies heavily in debt, and loans are least available for risky ventures. Bankers must always exaggerate the possible risk factor, since they can suffer from it, but only the equity owner benefits heavily from success. Tax relief for non-real-estate capital gains-together with benefits from Research and Development will prove strongly anti inflationary in the long run. The impact of inflation on productivity can be reduced if inflation is seen as a tax and its most perverse effects are counteracted by tax cuts. When productivity growth is restored and innovation renewed, the problem will no longer seem so grave, and indeed it will likely disappear.
There is no such thing as a measurable economy or an absolute supply of money, labor, or resources. Labor and resources, for example are enormously elastic. The average worker exerts himself at about half of capacity and the average executive is vastly less productive than the best ones. Modern economies are filled with fat, grease, and underused or much abused manpower and industry, about ground and below. In an overtaxed system, the statistics of economic limits and capacity are mostly mush.
Any resource depends largely on ideas and technologies, which change rapidly. In recent years they have transformed supposedly exhausted oil wells and useless heavy crude, as well as the slag heaps of old copper mines and the silicon in beach sand, into industrial treasures. The money supply is similarly elusive. New forms of money and credit proliferate in the US, and a multi-billion dollar Eurocurrency market, which sprang forth without any government guidance and little comprehension, plays a key role in world trade and exchange.
Although a large national debt can stump the credit rating of the country, it will typically not overburden a countrys capacity to operate. That is if the national debt was acquired through industrial growth and not socialist redistribution programs. Thomas Macaulays in the History of English demonstrates the huge debt his country gathered through their history. When the great contest with Lewis the Fourteenth was finally terminated by the Peace of Utrecht the nation owed about fifty million; and that debt was considered, not merely by the rude multitude, not merely by fox hunting squires and coffee-house orators, but by acute and profound thinkers, as an encumbrance which would permanently cripple the body politic
Soon war again broke forth; and under the energetic and prodigal administration of the first William Pitt, the debt rapidly swelled to a hundred and forty million. As soon as the first intoxication of victory was over, men of theory and men of business almost unanimously pronounced that the fatal day had now really arrived. The only statesman, indeed, active or speculative, who was too wise to share in the general delusion, was Edmund Burke. David Hume, undoubtedly one of the most profound political economists of this time, declared that our madness had exceeded the madness of the Crusaders. For it was impossible to prove by figures that the road to Paradise did not lie through the Holy Land; but it was impossible to prove by figures that the road to national ruin was through the national debt.
Not less gloomy was the view which George Grenville, a minister eminently diligent and practical, took of our financial situation. The nation must, he conceived, sink under a debt of a hundred and forty million, unless a portion of the load were borne by the American colonies. The attempts to lay a portion of the load on the American colonies produced another war. That war left us with an additional hundred million of debt, and without the colonies whose help had been represented as indispensable.
Again England was given over, and again the strange patient persisted in becoming stronger and more blooming in spite of all the diagnostics and prognostics of state physicianssoon however the wars which sprang from the French Revolution, and which far exceeded in cost any that the world had ever seen, tasked the powers of public credit to the utmost. When the world was again at rest, the funded debt of England amounted to eight hundred millionit was in truth a gigantic, a fabulous debt; and we can hardly wonder that the cry of despair should have been louder than everyet like Addisons valetudinarian, who continued to whimper that he was dying of consumption till he became so fat that he was shamed into silence, England went on complaining that she was sunk in poverty till her wealth showed itself by tokens which made her complaints ridiculous.
The beggared, the bankrupt society not only proved able to meet all its obligations, but while meeting these obligations, grew richer and richer so fast that the growth could almost be discerned by the eyewhile shallow politicians were repeating that the energies of the people were borne down by the weight of public burdens, the first journey was performed by steam on a railway. Soon the island was intersected by railways. A sum exceeding the whole amount of the national debt at the end of the American war was, in a few years, voluntarily expended by this ruined people on viaducts, tunnels, embankments, bridges, stations, and engines. Meanwhile, taxation was almost constantly becoming lighter and lighter, yet still the Exchequer was full
Those who uttered and those who believed that long succession of despairing predictions erroneously imagined that there was an exact analogy between the case of an individual who is in debt to another individual and the case of a society which is in debt to part of itself; and this analogy led them into endless mistakesThey were under an error not less serious touching the resources of the country. They made no allowance for the effect produced by the incessant progress of every experimental science, and by the incessant effort of every man to get on in life. They saw that the debt grew and they forgot that other things grew as well as the debt.
Most of the greatest episodes of economic history-from the commercial revolution to the industrial revolution-occurred in the midst of rising prices and rising debts. The great triumph of capitalism in Asia over the past decades hung on debt and inflation. Yet it financed its growth with no explosion in the money supply or in the inflation rate. This achievement merely required tax policies heavily favoring savings and investment. BAD debt such as that in America, which is piled up to finance programs paying people not to work, combined with penalties on business for being profitable, can destroy an economy. But GOOD debt that is incurred for capital projects of benefit to citizens and their productivity, or debt that is incurred to avoid inflicting destructive taxes on growing firms-such liabilities can become vital assets of growth and progress
The problem in the US and Britain is not debt but waste, not deficit spending but a redistributionist war against wealth that makes everyone poorer-and ironically even promotes inequality.
These government tendencies toward regression are reinforced by the media. Every report of a defective new product, a possibly poisonous industrial waste, a vaguely carcinogenic chemical, produces headlines in the newspaper and somber commentary on television news. But the valuable products and services that are never created or marketed because of regulatory excess have no voice. This is what is called media bullshit.
Energy similarly, the field of energy is full of self-fulfilling prophecies as the media spread technophobia propaganda about nearly all forms of fuel production and transport. Power plants, oil and gas refineries, and all new energy development is invariably obstructed and delayed in the name of saving lives or protecting the environment. Yet the blackouts, power shortages, increased energy costs, and industrial stagnation of coming decades will cause far more death and destruction later, when the society resorts to desperate measures: nationalizes utilities, returns to coal, and heightens the risk of environmentally pollutant wars. In celebrating decay and cringing before technology, the media promote the emergence of truly dangerous crises in the future.
As government grows, there all too quickly comes a time when solutions are less profitable than problems.
Supporting the future, though theoretically simple, provides plenty of challenges for human governance. Government can bring forth miracles of creativity and growth merely by enforcing the laws equally; protecting patents and property rights; promoting educational excellence-above all, in science and technology; restricting public powers to create and sustain monopoly; removing barriers to trade; lifting wherever possible the dumb hand of bureaucracy; imposing sensible penalties and incentives on industries that endanger the environment; fostering an atmosphere of stability and security both in domestic and international affairs.
The railroads when they were built could hardly be justified in economic terms, as the subsequent ruin of many stockholders demonstrated. Furthermore, they would never have been economically justified if the country had not been swarming with thousands of small entrepreneurs who repeatedly overestimated their chances of success, but who collectively managed to settle and develop the West while many of them individually were failing.
It is hard to explain in rational economic terms why men settled in the Middle West in the 1860s and 1870s. Trollope (1862) in his travels down the Mississippi River could never stop marveling at why people would volunteer to live in such primitive conditions. Because no one knows which venture will succeed, which number will win the lottery, a society ruled by risk and freedom rather than by rational calculus, a society open to the future rather than planning it, can call forth an endless stream of invention, enterprise, and art.
Free economics goes in conjunction with the personal liberty a bicameral republic allows the individual. Government should never get in the way of business. It should regulate it, but even that that must be done in a discerning and controlled manner. If not, the legal system will become unstable and eventually abused by lawyers who create lawsuits to take the money from companies through immoral lawsuits. I describe them as immoral because there are few ethics in law. However, as a promoter of free-market capitalism I cant completely blame these shyster attorneys. Theyre simply exercising that individual entrepreneurial spirit which as noted earlier, was and is the lifeblood of the most powerful country that has ever existed.
The lawsuit is one of the best remaining ways to strike it rich-the best remaining scene for gambling, with the odds against the productive stacked ever higher by the government-is the civil suit: malpractice, product liability, discrimination, antitrust, libel, pollution-whatever. The government has created a vast new sweepstakes open to the man willing to play for high stakes and to the law firms that join in the new champerty.
Our principles offer no hard and fast line how far it is appropriate to use government to accomplish jointly what it is difficult or impossible for us to accomplish separately through strictly voluntary exchange. In any particular case of proposed intervention, we must make up a balance sheet, listing separately the advantages and disadvantages. Our principles tell us what items to put on the one side and what items on the other and they give us some basis for attaching importance to the different items. In particular, we shall always want to enter on the liability side of any proposed government intervention, its neighborhood effect in threatening freedom, and give this effect considerable weight. Just how much weight to give to it, as to other items, depends upon the circumstances. If, for example, existing government intervention is minor, we shall attach a smaller weight to these negative effects on additional government intervention. This is an important reason why many earlier liberals, writing at a time when government was small by todays standards, were willing to have government undertake activities that todays liberals would not accept now that government has become so overgrown.
Tariffs and other restrictions on international trade, high tax burdens and a complex and inequitable tax structure, regulatory commissions, government price and wage fixing, and a host of other measures give individuals an incentive to misuse and misdirect resources, and distort the investment of new savings. What we urgently need, for both economic stability and growth, is a reduction of government intervention not an increase.
The gold standard was still from a 100% gold standard. There were government issues of paper money, and private banks issued most of the effective circulating medium of the country in the form of deposits; the banks were closely regulated in their operations by governmental agencies-national banks by the comptroller of the currency, state banks by state banking authorities. Gold, whether held by the Treasury, by banks, or directly by individuals as coins or gold certificates, accounted for between 10% and 20% of the money stock, the exact percentage varying from year to year. The remaining 80% to 90% consisted of silver, fiduciary currency, and bank deposits not matched by gold reserves.
In retrospect, the system may seem to us to have worked reasonably well. To Americans of the time, it clearly did not. The agitation over silver in the 1880s, culminating in Bryans Cross of Gold speech, which set the tone for the 1896 election, was one sign of dissatisfaction. In turn, the agitation was largely responsible for the severely depressed years in the early 1890s. The agitation led to widespread fears that the US would go off gold and that hence the dollar would lose value in terms of foreign currencies. This led to a flight from the dollar and a capital outflow that forced deflation at home. There were still crises, in 1873, 1884, 1890, 1893 and huge panic of 1907.
I know of no severe depression in any country that was not accompanied by a sharp decline in the stock of money and equally of no sharp decline in the stock of money that was not accompanied by a severe depression. The Great Depression in the US, far from being a sing of the inherent instability of the private enterprise system, is a testament to how much harm can be done by mistakes on the part of a few men when they wield past power over the monetary system of a country.
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