The Power of Capital
The most valuable economic substance in the world is capital. It is not “money” if we define money as pieces of green paper. Governments cannot create wealth by printing money. If they could we wouldn’t have to work.
The formation of capital plus a culture of entrepreneurship is the only way to create economic well being. When government policies destroy capital it diminishes everyone’s economic well being.
Capital is saved wealth. If you produce goods and you make a profit and save the profit, then you have created capital. Ditto with your labor. If you spend all of your wages, you’ve saved none of the wealth created from the goods you made and you have no capital.
It takes societies a long time to create and amass capital. In the U.S. we have a dynamic financial infrastructure to generate wealth/capital. It started with the rights guaranteed by the Constitution, but it took about a century to create our wealth-creating financial infrastructure. While you can criticize it all you want, wealth is widely distributed in America when one compares our standard of living to elsewhere.
This financial infrastructure is called capitalism.
Our current economic policies are destroying capital and our well being. These policies are now globalized. They are the Economics of Mass Destruction.
International Coordination of Economic Policy
I have a folder entitled “Supranational” in which I keep research related to international regulation of the world’s economy. As I anticipated, after the Crash nations joined together to coordinate economic policies and the regulation of financial activities.
The conformance of economic policies was rather automatic. Most of the world’s economic ministers, especially those of the G-20 countries, have adopted familiar Neo-Keynesian/Neoclassical policies of fiscal and monetary stimulus. In most countries the results of these policies have been as disappointing as ours.
Monetary Stimulus
Look at monetary stimulus. It is no coincidence that central bank interest rates of advanced economies are historically low; they all are trying to create massive monetary stimulus to revive their economies. Higher interest rate countries such as the BRICs with less stable economies either have more trouble selling sovereign bonds on the international markets or are attempting to thwart rising prices.
Central Bank Interest Rates
Fiscal Stimulus
Almost all these countries engaged in fiscal stimulus as well. The Bush Administration committed about $700 billion to the various bailout schemes. Then the Obama Administration came up with a massive Keynesian spending program (initially $787 billion). Other countries followed:
Type of Stimulus as a Percentage of GDP
Note this subsidies chart doesn’t reflect the U.S. TARP and related bailouts. Source the OECD
Financial Regulation
The last piece of the globalization of economic policy was to increase regulation over financial activities. The post-Crash drive to coordinate financial regulation was unified by the theory that the cause of the Crash was Wall Street: the investment banks, investment companies, hedge funds, the big “banksters,” and insurance companies. Not to mention greed and overpaid executives. If governments admit any fault it is that they failed to adequately exercise their existing regulatory powers.
Which means that many of the laws passed here are or will be similar to those enacted in other major countries. For example, the Dodd-Frank financial overhaul act contains many rules that had been discussed with G-20 counterparts. “Forum shopping” or the “you can run but you can’t hide” policy, was a major factor. The new bank capitalization rules of Basel III are an outcome of the Crash. No treaties are required to accomplish most of this legal conformation; meetings between economics ministers and their regulatory staffs were all that was needed and individual governments did the rest.
The Failure of Regulation
Unfortunately our new laws (Dodd-Frank) fail to address the primary cause of the Crash: the Federal Reserve itself. Its years of easy money policy kicked off the massive credit boom that landed on the housing market because of U.S. government policies that encouraged capital to flow into residential real estate. The boom ended when the Fed raised rates.
I don’t mean to spare Wall Street in my criticism; they failed in many ways, primarily their faulty risk models. But, while they pushed the scheme forward, they didn’t cause the boom or the bust. History shows us that cheap money from central banks, or from banks or sovereigns pre-existing central banks, always have caused these boom-bust cycles. Just because the Fed took over doesn’t mean that bad banking theories changed.
The Globalization of Failed Economic Policies
The purpose of this article is not meant to be an exposé of an international conspiracy or secret cabal to control the world. These policies are the logical conclusion of theories of economics and political organization that have been taught in our universities before our oldest citizens were college freshmen. Some of these ideas even trace back to Ancient Rome. Sub sole nihil novi est.* These ideas were developed in Europe, but took root and flowered in our best universities. Because of the stature of America’s academic institutions, which stature is founded on capitalism’s prosperity, it is no surprise that these Neo-Keynesian ideas have spread throughout the world.
*There is nothing new under the sun.
You may believe this regulatory coordination and conformation is a good thing because it gives enterprise a more stable regulatory foundation in which to operate. Or that it is necessary to prevent another crash. Or that regulators have superior knowledge and can be trusted to properly guide economies. But that is not the case.
The serious economic problems we have are the direct outcome of mainstream economic thought and these ideas now operate worldwide. If one studies economics in London, or Paris, or Rome, or Beijing, the lessons are very much the same. If one examines the policies of the EU and its member states or China or Japan, they are remarkably similar.
Perhaps the term the “Economics of Mass Destruction” is a bit of hyperbole, but I am giving fair warning that we Americans, the most dynamic capitalists and the primary drivers of the world economy, are heading for long-term economic decline if we continue with the same Keynesian doctrine that got us into the current historically big mess.
While it is nice to believe that emerging economies such as Brazil, Russia, India, and China will take up the slack, I am not convinced they yet have in place the cultural and financial resources that have made America the world’s leader.
Because of the globalization of these ideas, it now appears that the whole world will rise or fall on these policies.
Tomorrow, Part II of II: The fallout of the globalization of failed economic policies.
Thanks for writing and posting this Jeff. I don’t think you have overstated it at all, and if anything UNDERstate it when you say that America is going to have a long period of decline.
Unfortunately, I don’t think that the collapse of the quadrillion-dollar derivitives bubble, or the collapse of the trillions of dollars of unpayable debt is going to be a controlled or linear process.
Thanks again Bearster. It was a struggle!
“While you can criticize it all you want, wealth is widely distributed in America when one compares our standard of living to elsewhere.”
Hi there Jeff. This is your arch nemesis, Reality, speaking:
* The United States is the country with the highest inequality level and poverty rate across the OECD, Mexico and Turkey excepted.
* The poorest 10% of US citizens have an income about 20% lower than the average for OECD countries.
* Redistribution of income by government plays a relatively minor role in the United States. Only in Korea is the effect smaller. — Growing Unequal: Income Distribution and Poverty in OECD Countries, 2008
Not reality, spin. Cherry picking a statistic, dropping the context, and putting it in BOLD doesn’t prove a thing.
For example, why don’t you quote a comparison of the poorest 10% of people elsewhere to the average in the US? That wouldn’t serve the narrative…
In any case, since when does justice, honesty, integrity, productivity, or efficiency have anything to do with how “the wealth” gets (re)distributed? I thought Marx has long since been discredited?
It should be clear by now that the government cannot pretend that the wealth “just got here somehow” as it designs how to redistribute it. Some societies make it possible for people to be productive, and in particular, for entrepreneurs to create wealth. Since wealth is created by someone, that person is by nature and by definition going to have more wealth than someone who didn’t. This is not a bug, but a feature. And all of the neo-marxist propaganda by the UN and its brethren doesn’t change this.
Wealth is not a zero-sum game. It can be a positive-sum game when people are free to save, accumulate capital, invest, make profits, start businesses, hire people … and of course they must also be free to make mistakes, waste their money, close businesses, fire people, etc.
Attempts to make it zero-sum actually turn out in reality to make it negative-sum. If people cannot accumulate capital, then even if they didn’t care if the gov’t taxed 50% or 90% or whatever of their profits, they cannot invest. You can’t invest capital you don’t have. And of course entrepreneurs don’t take on the burdens and stresses of starting and running a company just so they can enjoy the envy of everyone else. They do it to get rich. So without capital accumulation, and without entrepreneurs, any society stagnates and decays.
REALITY: Findings of fact that directly address (and reject) the author’s unfounded assertion. Link to source with full context provided.
SPIN: Off-topic diatribe that addresses neither the author’s proposition or its rebuttal. Largely devoid of fact but replete with irrelevant belief statements.
Buck: You’re wearing me out. Bearster is correct. The OECD ignores basic facts that in general we have probably the highest standard of living in the world. It depends on what you measure of course. The OECD as I recall factors in things like social welfare programs to make this comparison, but if I’m wrong I’m sure you will correct me. The main thing is to recall what the great James Brown said “Shape up your bag, don’t worry about mine.” If Bill Gates has $50 billion, who gives a shit? The point being that our “middle class” and our “poor” are better off than almost everywhere else. And that reflects a wide distribution of the results of capitalism. The rich are always going to be there. Who cares that they have a zillion times more money than the average guy. These measures are meaningless. Now what you should worry about is why the middle class is going backwards. You can redistribute the wealth of the top 10% (who have most wealth) and it will do nothing to help the less fortunate. You may wonder if economic and political policy has something to do with it. Only capitalism can raise the standard of living.
Jeff,
First, I understand and agree with both you and Bear that measuring something as elusive as ‘standard of living’ depends entirely on what one defines it to mean. I was responding specifically your unambiguous claim that, “wealth is widely distributed in America when one compares our standard of living to elsewhere.” This is categorically false so long as ‘elsewhere’ includes other countries that are actually worthy of comparison (i.e. developed/first-world nations with similar standards). OECD nations comprise a meaningful comparison, in my opinion. The measurement of inequality levels and poverty rates cited are strictly economic measures, not hedonic. I don’t give a damn what the OECD ‘mission’ is, they just happened to be where I got the facts. Don’t attack the messenger; the facts are not in dispute here.
Jeff, do you believe I should let a claim like yours go unchallenged? And why? I get the impression you think I am just nit-picking your posts. The fact is we are in agreement on a lot and I try and make it known when this is so. I am sure I want the size and influence of government reduced as much as you do. However, I simply cannot allow misrepresentation or falsehood be the basis on which people may be influenced towards similar conclusions.
We must freely and accurately acknowledge the bad and the good of our architecture before proceeding to a debate on its merits.
Thats all.
[...] The economics of mass destruction [...]
Jeff your are absolutely right these are failed policies and reflect the political doctrine the Governments can fix everything. We need to learn very quickly that Governments must retrench on a large scale and let private enterprise get on with what its does best creating wealth and capital.
Buck: You have stated your premise explicitly that government somehow *can* create wealth. Your first post on this topic shows that you are enamored of the idea of government redistribution of wealth You do not seem to make a distinction between earned wealth vs wealth taken by force (loot).
You say that you would like to reduce government as much as Jeff (or me). But in light of the above, it doesn’t seem credible.
Let me add two thoughts on the distribution of wealth (RE-distribution is just theft with a fancy name.
First, for decades, the socialists have fretted over the rising disparity between the poor and the rich. This is a natural consequence of the fact that if the productive are not limited, they can rise to any amount of wealth, limited only by the scope of integrations that their mind is capable of. But the unproductive, the lazy, the dishonest, the irrational, and the moochers are still zero as they always have been. So of course the difference between an ever-rising quantity and zero will be ever-rising. So what? This is not at all the same thing as a free country sinking into a dictatorship wherein the middle class are drained dry and an ever-smaller number of politically-connected looters become every wealthier (in nominal terms, anyways) vs. the ever-larger numbers forced into true poverty. It happened in Argentina, which used to have a large middle class and today does not. It is happening in the US.
Second, I have to say that I recently returned from a trip to London. I assume anyone would consider this “first world”. Not only do they not have certain basic things that Americans take for granted–like orthodontia–but their salaries are lower, their taxes are higher, and the prices they pay for everything are much higher than in the US. As they grind downwards into their “austerity” plan–whatever *that* means in a regime of irredeemable fiat money run by socialists–it will become obvious even to them.
“You have stated your premise explicitly that government somehow *can* create wealth.” True. This in no way seems unreasonable to me.
“Your first post on this topic shows that you are enamored of the idea of government redistribution of wealth.” False. Facts are not value statements. The only inference that should be made of my citation is that I understood Jeff’s assertion re: distribution to be false; nothing more. See my reply to Jeff above.
“You do not seem to make a distinction between earned wealth vs wealth taken by force (loot).” False. A rich man and a pirate can both be equally wealthy. The “wealth is blind”, but the acquisition of that wealth is another questions altogether.
“You say that you would like to reduce government as much as Jeff (or me). But in light of the above, it doesn’t seem credible.” False. Recap: I believe it is possible for government(s) to create wealth; I understand that the distribution of wealth in the U.S. is low (relative to first world counterparts); I understand that earning wealth is different from looting it, inheriting it, creating it, etc. I also would prefer to see the size and scope of government reduced. There exists no contradiction here.
Lastly, I am just as concerned as any regarding the decline of the middle-class in the United States. I do not bode any ill will towards the ultra rich; I do have an instinctual disdain for elitist ‘attitude’, however. I do not believe the government should increase its “relatively minor role” in redistribution of incomes. I do feel that high levels of poverty should be a ‘concern’, even if we are only talking in productive terms, versus emotive.
What is an example of government creation of wealth? Please don’t just show us the assets side of the balance sheet while ignoring the liabilities. For example “the NASA space program invented tang and velcro”. While that may or may not be true, you have to also consider how much the government took from private corporations, entrepreneurs, and investors–and what those corporations, entrepreneurs, and investors WOULD HAVE INVENTED had not their wealth been taken away.
To put it bluntly, if you take $1B worth of loot and produce $1M worth of wealth with it, this is a net destruction of wealth. EVEN IF THE BILLION YOU TOOK IS DIFFUSE ACROSS THE POPULATION, AND EVEN IF THE MILLION YOU PRODUCE IS HIGHLY VISIBLE AND EVEN FAMOUS.
Government has a monopoly on the use of force. That is what distinguishes government from any other group of people. While this is essential to protecting us from domestic criminals and foreign invaders, it has nothing to do with creating wealth.
The fact that you would characterize the government’s redistribution of wealth as “relatively minor” in a paragraph that also states that there should be (in a general, societal sense) “concern” about high levels of poverty confirms that you do think that forcible taking wealth from someone, in order to give it, unearned, to someone else is proper. What else can the word “concern” mean in a context of economic systems?
By the way, the government has taken a lot more of my wealth than anyone would call “relatively minor”. For example, although I have no children, I have paid property taxes that largely transfer my wealth to those who have children. Although I am healthy and not receiving benefits from SS, I pay FICA taxes that largely transfer my wealth to those who are unhealthy and those who are old. I won’t even get into the size of the redistribution when I sold my business.
While you have obviously typed in words to show that you understand the distinction between wealth produced vs. looted, the context of your last several posts shows the opposite. I am arguing that the very discussion of how “the wealth” is “distributed” is based on the idea that there is a level which is “too” concentrated. This only makes sense if you equivocate between production and loot. Otherwise what is the relevance? OK, so some really smart hard-working people produced an even larger multiple compared to the rotters in the street (is 1000 a bigger multiple of 0 than 100?). SO WHAT?!? Why is that fact even worth mentioning, let alone considering, let alone what does it mean??
What is an example of government creation of wealth?” Primarily, the government creates public goods; wealth that the society at large benefits from and leverages to create greater wealth. As Jeff alluded to, the very infrastructure upon which our entire system of capitalism exists is created and maintained by government. A secure territory, enforcement of property law and contract, maintenance of public roads, lands, natural resources, etc. are an indispensable foundation for civil society and/or the creation of greater wealth by the private sector. These oft overlooked public goods are a fundamental precursor to private wealth of any significant degree, and thus, you will find historically that ‘government’ always and necessarily predates anything that could ever be considered an ‘economy’ in any given society.
”While this is essential to protecting us from domestic criminals and foreign invaders, it has nothing to do with creating wealth.” According to my what I’ve written above, I’m sure you can infer that I 100% disagree with this.
“If you take $1B worth of loot and produce $1M worth of wealth with it, this is a net destruction of wealth.” False. As you have defined it, it’s a $1M net creation of wealth. Looting does not ‘destroy’ wealth; it merely transfers it from one hand to another. If a pirate loots 1B he has merely appropriated that capital unto himself; it still exists for whatever productive or nonproductive use he might deem necessary. If he puts it to good use and “produces $1M worth of wealth”, then the net must be $1M.
“The fact that you would characterize the government’s redistribution of wealth as “relatively minor” in a paragraph that also states that there should be (in a general, societal sense) “concern” about high levels of poverty confirms that you do think that forcible taking wealth from someone, in order to give it, unearned, to someone else is proper.” The government’s relatively minor redistribution is not a characterization, it’s a fiscal fact, measured relative to other comparable (first world) nations, per OECD (link above). I have no idea why you assume that because I express a concern (of any sort) it means I believe the concern should be alleviated via government, increased taxation, etc.
” What else can the word “concern” mean in a context of economic systems?” If I’m sitting at a poker game and the fish are all running out of money, that’s a ‘concern’ to me, and a purely profit oriented one at that. But more to the point, societies with high levels of poverty, unemployment, etc., are not optimally productive, in an economic sense. If the levels get too high, the very social fabric (i.e. stability), in addition to economic production can be impacted. This ought to warrant concern progressively as the situation deteriorates, even if it be a purely ‘self-concern’.
I am arguing that the very discussion of how “the wealth” is “distributed” is based on the idea that there is a level which is “too” concentrated.” First off, Jeff initiated the discussion claiming that “wealth is widely distributed in America”. It was his own, unsolicited statement. All I did was point out that his statement is not supported by the facts. That was it. No commentary on those facts by me. It was then you, followed by Jeff, who projected your own bias into the discussion, railing against Marx and socialists, demanding to know why I “give a shit” how much Bill Gates makes, etc. All sorts of irrelevant nonsense. Per my answer above, I am only pragmatically motivated to care about ‘distribution’ to the extent that it impacts myself. I don’t see myself as unique in this regard.
“Primarily, the government creates public goods; wealth that the society at large benefits from and leverages to create greater wealth.”
Hysterical.
Hysterical is the taking for granted of public goods that are a precursor of signifigant private economy.
“If a pirate loots 1B he has merely appropriated that capital unto himself…”
“merely appropriated that capital unto” – sounds like you live and work in the washington d.c. area?
The point is that the capital is not ‘destroyed’, as is often claimed. There is no value judgement or an endorsement of looting.
Buck, I agree that the government/state provides essential services such as police, courts, military, and emergency services to protect liberty and preserve private property which I never take for granted.
However outside of the aforementioned services, what “goods” do you speak of? Departments of Energy, Education, Labor do not provide goods or services…..so please enlighten us.
The services that you aknowledge as essential are public goods. You can view an introduction of what public goods are here.
“The point is that the capital is not ‘destroyed’ “…..Go rob a bank or steal a car and tell the cops that you “merely appropriated that capital unto yourself” and that you “did not destroy capital”…. let me know how that works out. Can’t tell if you are a communist or an anarchist.
The point is that the capital is not ‘destroyed’, as is often claimed. There is no value judgement or an endorsement of theft or robbery.