Economic incest

I’m not an economist and I don’t even play one on TV. I am a one-time history major, though, and someone with the kind of knowledge-base that’s built up over years of being an autodidact, an employee and a small business owner. While I don’t understand economics at a complex level (I’m a lousy investor), I have a very good understanding of how currency developed, how credit developed, what purpose taxes serve, etc. I’m also good at explaining complex ideas in fairly simple terms.

So, in simple terms, I’m going to explain government’s role regarding money, spending and taxes. This is precisely the same lecture I gave my 6th and 4th graders, both of whom understood what I was saying.

In the old days — the really old days — there was no money. Instead, there were goods. You had wheat and wanted a cow. I had a cow and wanted wheat. We were a match made in heaven, trading our goods to fulfill our desires.

Problems arose, of course, when I wanted the wheat, which you had, but you wanted a chicken, not a cow. Or perhaps you had wheat, but only a little, and certainly not worth an entire cow.

There was also a problem with mobility. It’s simply not feasible to carry bushels of wheat with you wherever you go, unless you have a really big purse. And cows are hard to lead into the pub in exchange for a nice pint o’ beer. Not to mention the fact that you’d need a lot of pints to equal one cow.

Something better needed to come along. And it did: Gold.

Gold’s a great substance. It’s beautiful, infinitely malleable; it blends well with other metals; it doesn’t degrade; it can be replenished, although the effort needed to replenish it ensures the rarity that’s necessary to its value as a trade-able commodity. The only downside to gold is that it’s heavy. Very, very heavy. Get enough gold together, and you’ve got the weight of that cow — and, once again, your purse isn’t big enough, which is a subject I’ll revisit in a moment.

In all societies, some people, whether through trade or warfare, proved more adept at amassing wealth (whether wheat, cows or gold) than others did, and they assumed leadership positions. Once in those positions, they tended to demand that those subordinate to them pay them protection money, which amounted to protection both from harassment by that same leader and from attacks launched by enemies outside of the kingdom. Eventually, this protection racket got formalized as taxes. The leadership also discovered that, in addition to protection services, there was a virtue in providing basic services within the kingdom, such as roads, minimal care for the very poor, etc.

But back to those grand clumps of heavy, heavy gold. Someone eventually got the idea that, rather than have gold, it would be a good idea to have paper and coins of lightweight medal that stood in for the gold. Credit was also a useful substitute for dragging around that cold, gold metal. Of course, you couldn’t have just random sheets of paper or chunks of copper roaming around, because these money substitutes were useful only to the extent people believed them to be backed by the genuine gold article. And the only way to ensure that people could trust this paper was to delegate to a single entity the task of guarding the real gold and issuing the substitute paper. That entity was the government.

There are two important things to remember at this point: First, this paper’s worth is always relative to the gold. If the gold is finite, but you print more paper, the paper devalues. In that latter scenario, where one piece of paper once represented enough gold to buy a gallon of milk, it now would take five pieces of paper to by the same gallon.

Second, and this is the really important thing, one must remember that, nowadays, unlike the feudal lord of old who went and out raped another country for its gold, today’s government doesn’t generate the gold; it just generates the paper. Government doesn’t make wealth. To the extent the government has wealth, it’s because it uses its police power to demand that we give it our wealth in the form of taxes. The government hasn’t created anything. In today’s America, as in all modern economies, only the people create wealth.

I’m sure you’re all with me at this point, and you’re still bewildered by my post title: “economic incest.” That concept arises from the fact that, when government “creates” jobs and programs, the most it can do is to rob Peter to pay Paul. Thus, if I, the government, give you a government job I, the government, in turn tax you to raise money to pay for that job. The net result is that the money travels out of one government pocket and right back into the other.

For a brief while, when you first start shoveling this money into government funded programs, there’s a little pop into the economy as you, my little government employee, pay money for food, clothes, and shelter, etc. However, your government job, because this is the nature of government jobs, doesn’t create new wealth. It’s kind of busy work. And having too many busy-work jobs means that the economy contracts. There’s no innovation. There’s no energy. And the population, because it’s been sedated by the constant low flow of government funds, becomes passive, lazy and uncreative.

Aside from a torpid population, this cycle of paying people to do busy work so that they’ll have money to pay taxes back into the government creates the incest I mentioned earlier. Keep in mind that, in terms of a biological population, incest occurs when there is no new genetic material. If the same gene pool keeps recycling itself, it replicates errors, useful genes vanish, bad genes multiply, and you rather quickly end up with the Hapsburgs: ugly and insane.

The same thing occurs within the closed circle of a completely government run economy. It’s the same money cycling endlessly around. No new money, no new ideas. Instead, everyone constantly siphons off a little, government bureaucrats make mistakes that result in gold vanishing permanently, and corruption becomes the only way for those in the power seat to generate a little private wealth. Incest in the economy results in the economic equivalent of the Hapsburgs — a North Korean style economy, where the only people not starving are the elite.

If you’re still with me at this point, you understand why socialism is so dangerous. It weakens national wealth by endlessly cycling a constantly contracting money supply through the same government pockets, without the energetic infusions of true capitalism.

This actually isn’t a very complicated concept. And yet our esteemed, Ivy League educated president, the one who has never really held down a job or fully entered the economy, doesn’t get it. In his angry, uncontrolled speech to the House Democrats, Obama, after the school yard insults were over, had this to say:

So then you get the argument, well, this is not a stimulus bill, this is a spending bill. What do you think a stimulus is? (Laughter and applause.) That’s the whole point. No, seriously. (Laughter.) That’s the point.

At Power Line, Paul eviscerates the ignorant inanity behind that statement:

Under this “logic,” any bill that contains spending should be enacted because, by definition, it provides “stimulus.” It doesn’t matter how much stimulus is provided or when the stimulus will occur. This is quite possibly the most irresponsible position ever taken by a president on an economic issue.

Just a few weeks ago, in his inauguration speech, Obama said that his touchstone for governmental action is how well it will work. Now the touchstone is whether it constitutes spending.

A highway project will “work” better, i.e., provide more stimulus, than a Pell grant. A program that spends money in six months (or one that provides tax relief even more quickly) will work better as a response to the recession than a program that will result in a government expenditure years down the road when the recession likely will be over.

Obama is correct that, given enough time, every spending program in the Democratic plan will result in putting money into the economy, and thus produce some degree of economic stimulus. The problem is that given enough time, every spending program in that plan will have to be paid for by taking money out of the economy. The result of taking money out of the economy is the opposite of stimulus.

When Obama got elected, all of us worried about the fact that a Marxist economist had entered the White House. It may be worse than that. With his statements about the necessity for spending just to spend, Obama may have gone one step beyond the foolishness of Marxist economics, and entered the realm of out and out stupidity. Perhaps the next time he escapes the White House to spend time with elementary school children, he needs to sit down for a good elementary school level lecture about the nature of money, government, and initiative.

Cross-posted at Bookworm Room

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