I Wish OWS Stood for “Occupy Washington, Stupid!”

Occupy Wall Street still seems to be bringing the turmoil to cities across the country.  I would like to start off by saying that I think it’s great that folks are exercising their freedom of speech – when they aren’t being maced by John Law – and their right to make a peaceful stink in public.  That said, I still think OWS has missed the boat on the fundamental reasons why this whole financial catastrophe has come about in the first place.  I know that I might as well wish for the moon, but I really wish some “End the Fed” protestors would make the rounds at these things and get some more people educated.  That might bring a bit more direction and sense to OWS, which unfortunately seems to lack a clear focus about what it wants.  The movement, as a whole, knows it’s pissed off, but doesn’t really know what to do to go about getting anything done.  There is no clear platform here.  And yes, this is another post about monetary policy.

There is a great illustration that was created by a guy named James Sinclair, and it looks like this:

In a lot of respects, they’re upset about the same things.  The main differences are that OWS protestors tend to be young adults or students with a socialist tendency while Tea Party members tend to be middle-aged and kinda like Sarah Palin.  Well, I don’t like socialism or “Sexy Sarah,” but I do think it would be nice if some of the “End the Fed” elements popped up more often.

The truth is that the current financial crisis was not created by Wall Street, as such; it was created by the Federal Reserve.  Both current Fed chair Ben Bernanke and his predecessor, Alan Greenspan, are both known for targeting inflation.  That is, they take a look at one measure of the economy – the consumer price index (CPI), for example – and then move to keep that index on a target rate of inflation.  They become fixated on that index and that number.  Without Fed intervention, the market would extend credit based on savings, and investors would take risks based on the rate of returns on capital investment.  The central bank’s manipulation of the money supply, however, throws these things off.

The Austrian business cycle essentially states that the whole thing begins when a central bank buys up assets, which directly leads to the banks expanding credit.  The result here is that prices and inflation concurrently go up.  Businesses will tend to borrow more and, when this money comes onto the market, it will artificially lower interest rates.  The problem here is that when interest rates are artificially low, investments that might have otherwise looked like a losing proposition to business owners will suddenly look far more palatable, and these businesses will start buying up capital goods.  To quote Murray Rothbard: “In short, businessmen react as they would have if savings had genuinely increased: they move to invest those supposed savings.”  I bet you can see where all this is going.

Rothbard continues to explain that, because of an excess of work in the capital goods industries, worker wages are bid higher and higher.  The workers will, in turn, begin to spend this money.  Unfortunately, the lower interest rates reflect saving that is not really happening, and saving is necessary for capital investment to occur successfully.  In effect, businesspeople have a false perception of the real amount of capital available to them.  They have been tricked into believing that people are saving more than they really are.

So what happens when consumers start to get back into their old savings/consumption routine?  Bad news bears, that’s what happens.  Businesses realize that they have invested too much in production goods and not enough in consumer goods.  At this point, an economic depression occurs.  It should be noted, however, that depressions are a necessary evil in the business cycle, for that is the time when bad investments are liquidated and the market rights itself.  As unsavory as it may be, liquidation in the market is vital.

The question now might be this: how is it that booms are allowed to go on for years and years without any retribution, so-to-speak?  This is where you might want to start penning a “thank you” note to the Fed.  By continually increasing the money supply over and over again, the system never has a chance to right itself.  Consumer spending habits never find their norm, and the cost of the capital goods industry never catches the rise in prices.  Only when the banks finally start to become unstable must the money supply be contracted.

Still with me?  Hang in there.  We’re almost at Ground Zero of the current financial crisis.

The problem now is that the Fed is keeping interest rates artificially low.  In effect, they are continuing to expand credit at a time when it oughtn’t to be extended at all.  The Fed continues to print money every day by holding interest rates so low.  They accomplish this, in part, by buying up long-term Treasury bonds (quantitative easing).  They used to only purchase short-term bonds – ones that matured within days to months – but because the interest rates on them are so low, the Fed has turned to buying longer-term bonds.  This has the result of ticking off our foreign debt holders (like China), weakening the dollar, and it’s also going to directly lead to undervaluing risk and misplacing scarce capital – things we can hardly afford at this stage of the game.

I know that I’ve said this time and time again, but I’m going to repeat myself.  (Those of you who know me will be used to that!)  I say again that there will come a time to pay the piper.  We cannot continue to monetize an ever-growing debt.  There must be a correction, and we are only prolonging the time until that eventual day arrives.  And when it does arrive, it is going to speak with authority.

At this point, I’ll bring us back to my original comparison of OWS and the Tea drinkers.  They’re mad about a lot of the same things, quite rightly.  There aren’t enough parties, however, in either camp who truly understand why the US is in its current situation.  It is vital that both camps understand what is really driving this crisis, and then maybe we will begin to see some real results, instead of the usual left-right paradigm repeating itself ad nauseum.

Note: I used the following articles and books to help me write this post.  Hop on over to Cato and Mises.  They will give you a thorough and academic run-down on Austrian economics and the business cycle that is far superior to anything I could ever hope to print.  Have a look!

 Malfeasant Central Bankers, Again
Business Cycle Primer
Tea Party, Meet Occupy Wall Street
For a New Liberty – Murray Rothbard

The Myth of the 1% and Other Occupy Wall Street Crumbs

I just stumbled across this great article from the Cato Institute, which was posted on my Facebook feed, of all places.  It’s a commentary on Occupy Wall Street and how things aren’t always as they initially appear.

I have a lot of university friends who have been involved in the protests in San Francisco and Denver.  I want to be clear that I think it’s great that young people are politically active at all.  I think that’s a great step in the right direction, in some respects.  However, I think that people also need to get it clear in their minds exactly what they’re protesting against.  Although I know that my friends who are involved have it in their minds politically what they want – which, believe me, is a far cry from what I’m after – I maintain that most of the people involved, while well intentioned , are somewhat (okay, a lot) misguided.

The Cato article, written by Michael Tanner, makes some incredibly compelling points about the wealthy in America today.  Eighty percent of all millionaires in America are the first in their families to be wealthy.  The wealthy also work longer hours than lower wage earners.  You can check out the article for a break-down of the makeup of some of this slice of society, but the majority seems to be made up of professionals and entrepreneurs.  That’s not exactly what we’re being led to believe, is it?

Also interesting to note is that since 2007, there has been a sharp decline – by 39%, in fact – in the number of millionaires making over $10 million per year.  The super-rich have been hit even harder with a 55% decline.  Also interesting to note is the short but sweet expose on the likes of Warren Buffett, who made the claim that his secretary gets taxed more than he does.  That probably has to do with the fact that most of earnings come from capital gains, and therefore the money is taken out in corporate taxes.  Most damning of all is the fact that the rich earn 16% of the total American income, and they pay 36% of all the income taxes.  Suddenly, it doesn’t quite seem as though the rich aren’t paying their share.

Ultimately, what these Occupy Wall Street protestors fail to see and/or comprehend is that the government doesn’t create jobs – the private sector does.  And the rich are in a far better position to hire these down-and-out folks than other poor people or our bankrupt government.  So many of these protestors see the government as the center of everything.  They have no idea how economics in the real world work.  They think that if we raise the taxes of the middle class and the rich and put that money into the hands of government, regulate the heck out of what’s left of the private sector, and demand more workers’ rights, it’s somehow going to fix the problem.  People have got to wake up and realize that government IS the problem.

For every dollar that goes into government hands, it’s a dollar taken away from the private sector.  It’s a dollar taken out of the hands of private citizens who may spend that money however they like.  The only way a government can create jobs is by expanding its own already enormous girth, and that ultimately kills more jobs than it creates.

Look at the other things that the government spends its money on: air conditioning in Iraq, missiles to chuck at Libya, maintaining Camp Humphrey outside of Seoul, paying appallingly high salaries, pensions, and benefits to Congressmen, and paying for programs that purport to life people out of poverty but are, in reality, doing anything but.  We have lost the war on drugs, the war on poverty, and now we are losing the war to maintain what little freedom we have left.

So what’s the solution, you ask?  It starts with education.  Get down to those protests and try to educate people on what we should really be protesting – the Federal Reserve, the endless wars, the expanding government, the war on drugs, low interest rates, and endless government bailouts.  Let’s talk about the government regulating us to the point where we can’t drink raw milk, if that’s what we want.  We can turn the tide, but we’ve got to get the word out.  It’s up to us to help people understand that true freedom isn’t something given to you by a government authority – it’s something with which we are all born and, unless we are careful, are very liable to find ourselves without, and we won’t even know how we lost it or why.

This isn’t the revolution I had in mind

I’ve been thinking a lot about what to write about the Occupy Wall Street movement.  I always want to be enthusiastic about any protest movement, and I was about this one for about three minutes.  That’s a tragically short ideological honeymoon though, even by my low standards.

I’ve just read through the movement’s list of demands, and I have to say that I’m incredibly disappointed that I can’t find anything particularly with which to identify beyond the feeling of discontent that seems to be all-pervasive in America now.  Frankly, any movement that springs up at this juncture in history should at least be able to cough up a reasonable feeling of misery and depression.  I wish this group of protesters could do more than increase my fear that we are headed down the road to socialism on a mass scale.  Unfortunately, a somewhat large sector of the population seems to believe that socialism is the cure, rather than the cause, of our problems.

Honestly, this list of demands is nothing short of insane.  Raise the minimum wage to $20 per hour?  Free college education?  Has anyone ever bothered to point out that nothing is free, unless you find $10 on the sidewalk?  “Free college education” just means that you pay for it out of your taxes.  “Free health care” means that you and everyone else pay for it out of your taxes.

It’s not the I can’t understand why people would want these things, because that’s simply not true.  I can understand and appreciate it.  My real problem with anything that is called “free” because the government is taxing people to pay for it is that it’s not free.  This is what the late, great classical liberal theorist Frederic Bastiat called “legalized plunder”: that is, taking money away from people and deeming it legal and morally acceptable because it is done by a government authority when it would never be considered acceptable in private life.  Regardless of how one tries to argue otherwise, the fact of the matter is that anything you give to the government is given on the assumption that, should you attempt to avoid giving whatever it is that they want, that they can use physical force to take it.  If you believe in natural rights, then you are vehemently against a government that can use physical force to coerce you into doing something that you don’t want to do, such as give up your personal property, i.e. money.  For many libertarians, that argument by itself is enough to render most opposition philosophically null and void.

The other thing to take into consideration, with demands for free health care, drastically expanded infrastructure, and so on, is that it would require a massive expansion of the already bloated federal government.  Who do they think is going to implement these plans?  Believe me, if taxes went up enough to support all of this, it wouldn’t be the free market or business.  The simple fact of the matter is that any money that is removed from the economy by taxation is unavailable for use in other areas.  Why in the world would they want to raise taxes so that GE, Bank of America, and those others of their ilk can continue to receive tax refunds and bailouts – all of which are supported by the taxpayers?  It’s absolutely insane to think that further expansion of the government and tax hikes would do anything to solve these problems.  Corporate welfare, sponsored by a government that got too big for its britches a long time ago, is a large part of what has gotten us into this mess, and the very idea that further expansion of the government will do anything other than add jobs to the government is ludicrous.

Does anyone remember my article on the Broken Window Fallacy?  I’m not going to go back over the whole idea, but basically it says that if money is spent in one place, it can’t be spent somewhere else.  If a business or individual is forced to spend money on one thing, they are deprived of another benefit – one that may have been vital to the survival of the business.  I might add that in many cases, it is possible if not very likely that the market can provide whatever government benefit would be cheaper and more efficiently.  One of the first laws of bureaucracy is that it will gobble up exactly as much time and money as you allow it to – and probably some extra, just for fun.

Raising the minimum wage to $20 an hour.  Wow.  Minimum wage leads to a host of unsavory effects, such as: mechanization of jobs previously done by people; low-paying jobs remain an entry point for those with few marketable skills; businesses outsource because foreign workers can do the same job cheaper; foreign companies get the competitive advantage; small businesses are driven out of business, etc. The list is extensive.  What most people don’t realize is that minimum wage actually does the most harm to those whom it purports to protect: the poor.  In fact, the South, black male teenagers, and the unskilled are hurt more by minimum wage than anyone else.

Why is that?  Well, let’s say that I own a small business.  I have twenty employees who earn $5.15 an hour because that’s what I can afford to pay them.  Along comes a politician, who says, “I’ve raised the minimum wage to $6.15 an hour!  Everyone rejoice!  There’s now more money to help the poor get by!”  Well, the problem there, assuming that all 20 of my employees work a full eight hours a day, is the increase in cost for the business.  At $5.15 an hour, I spend $103 per hour, if all of those employees are working at the same time.  That cost jumps to $123 per hour – an increase of $160 per day.  Since most smaller businesses only make a modest profit to begin with, the only options available, if I want to meet the new minimum wage standard is to either: a. sell more of whatever I’m selling, which I would probably already be doing, if I could; b. raise prices, but demand curves are not vertical, or; c. let some people go.  See where this is going?

However, much like the author of “Occupy Wall Street: A Story Without Heroes” author Anthony Gregory, I am in support of open borders.  Think about it.  Politicians and business people are always rambling on about how good it is for goods to be able to circulate as much as possible for the betterment of the economy.  If it holds true for goods, why wouldn’t it be true for people, too?  As it stands right now, only the wealthy are really allowed freedom of movement throughout the world to seek jobs and homes in countries outside of the ones in which they were born.  It hardly seems fair to restrict a person’s movement just because he or she isn’t rich.

Here’s something else to think about: most immigrants, frankly, are a brave lot.  I speak this an expat living outside of the United States, and I’m not just tooting my own horn.  It takes a person with motivation and drive to move to a foreign country, attempt to get a job, learn the language, and adhere to the cultural norms.  Immigrants provide diversity and culture to societies.  Also to be considered is that people from different backgrounds and cultures view the world in different ways.  Perhaps by working together, we can innovate and create even better and faster than before!  And I don’t mean this to be limited to people who work in knowledge-based jobs; anyone should be able to ply his or her trade wherever they want.  Within the US, we encourage movement between states to take jobs in sectors that are showing growth.  Why wouldn’t this work on a global scale?

I feel like I could write on and on about the topic of Occupy Wall Street, but I think I’m losing focus.  Ultimately, I feel that the movement is seriously misguided and offers no real solutions to the path down which we are currently traveling.  I find it impossible to believe that the solution to a government that is an ineffective waste of money and resources on a mass scale will be made better by expanding it and calling for it to further legislate.  Even Obama himself made the (rather large) concession that further regulation of the economy at this point would result in job loss – job loss that we can hardly afford.

It isn’t that I am not frustrated with the economic and political situation in America, because I am.  I think most Americans are fed up with what has been happening for the past few years.  Unfortunately, it seems as though we are doomed to repeat the mistakes of the past.  The Federal Reserve’s answer to our economic woes has been to inflate the currency to levels not seen since the post-war era.  That hasn’t worked.  New Deal lawmakers doubled the government spending in the 1930s, and yet the country was worse off by the end of the decade than it had been in the beginning; it required a war to get us out of that hole again.  Are we really willing to travel down the same route again?

If people want to go out and protest something, protest the Federal Reserve.  Protest the fact that the government wants to strip away the gun rights that will protect you from the police you fear so much.  Protest the fact that for every $1 the government hikes taxes, the economy loses $1.10 and our taxes are going up.  But for God’s sake, don’t go to a protest pretending to be revolutionary and then offer nothing but more of the same.  I think I can speak for a lot of people when I say that the last thing I want is more of that.