As readers of the Daily Capitalist know I, as a purveyor of unconventional economic wisdom, have a different take on … well, (almost) everything. I have some thoughts on the year 2012, a retrospective if you will of the really important economic issues in 2012. I and others here have written extensively about these issues this year. There are tons of issues I’ve not mentioned, but these are the big ones that stand out. Please bear with me.
1. The Recovery That Never Came
This is probably the real top economic story of 2012 because it led to a number of policies and events (below). Despite massive public spending (Keynesian fiscal stimulus) and unprecedented money “printing” by the Fed (monetary stimulus or QE), the economy stagnates and unemployment remains high.
One may wish to ask why these Keynesian/Monetarist nostrums have failed their task. I have a quick answer and that is they have never worked to revive any economy from a depression, ever. Our GDP has been in the doldrums all year, except for a recent blip which was entirely a figment of new money, not any underlying real, organic growth. There is nothing out there that will revive our stagnating economy in the near future.
2. QE 2.5, QE3, and QE4 (Money Printing)
The Fed has been pumping massive amount of “money” into the “economy.” The fancy word for it is quantitative easing, but it is no different than had they just printed more banknotes and distributed them to their cronies. If you look at the measure of this, the Fed’s balance sheet, it is at historic highs. Since November, 2008 the Fed has “printed” about $2 trillion of “money” created out of thin air. Now they have announced what is, in essence, QE Infinity. That is they intend to print more money until they see unemployment come down. Again, one may wish to ask why the five preceding QE’s failed to achieve the Fed’s goals, and since they failed, why do we need more? The quick answer here is that we don’t need more, it doesn’t work, and it destroys real wealth which leads to further stagnation. If printing money was the key to wealth and prosperity, then why is there so much poverty in the world?
3. Worldwide Economic Decline
While we are fixed on the events in Greece it should be noted that the entire world is in economic decline, and that includes China. While juggernaut China is growing, their growth has declined substantially since 2010 (from 11.9% in Q1 2010 to 7.4% in Q3 2012). China merely reflects the status of their major trading partners, the U.S. and the EU. The EU countries have been slowing as well and for some time. Yes, this includes Germany. Is this a coincidence? Well it could be that world’s economies are tied together in trade, but the main reason is that almost all of these countries follow the same unsuccessful economic policies that we here in the USA practice. The depressing thing is that all I hear is that world leaders promise more of the same failed policies. The outlook for positive growth, assuming they keep spending, racking up debt, and printing money, is not good.
4. The Constitutionality of Obamacare
You are free to not eat broccoli, but if you don’t the government will impose a penalty on you. This penalty is really just a tax and since the government has the power to tax for all sorts of reasons, they can tax you if you don’t eat broccoli.
This is the logic of Justice Roberts argument in the Obamacare case that was handed down in June.
This should not surprise us because the Constitution is whatever the Supreme Court Justices wish it to be. Now they have handed the government another mandate to regulate our behavior. As we know they can and do regulate our behavior already. For example, if you smoke, they will tax your habit heavily. It is not a giant leap in this line of thinking to force you to do something they want you to do by penalizing you for not doing it. According to the Court’s ruling, there is nothing in the Constitution preventing them from doing this.
The Constitution has been gutted by the Supreme Court, and their butchers work continues. The Founders’ fear of a powerful central government has been betrayed by the Court. Our original constitutional limitations on federal power have been ground down by redefining the Constitution to suit government goals. A Court can now find constitutional authority for almost anything the government wishes to do. This is the legacy of the “living constitution” philosophy.
5. The Economic Impact of Obamacare
Once an entitlement takes hold it is impossible to get rid of it because it creates its own constituency of voters who will seek to perpetuate their benefits. Once it is fully implemented it will create a further drag on the economy. Why? Can anyone name any government program that has not wildly exceeded its initial cost/benefits estimates? The answer is no, of course. As it fails to meet consumer needs, as all such systems do, the power of government’s regulation of the entire health care system will grow and eventually costs will be capped and service will be rationed. There not one national health care system in the world that is not going broke and failing to deliver the quality of health care that we have now. Eventually the burden on the private economy from taxation to support the system will be so great that permanently high unemployment and economic stagnation will result. This is similar to Europe and it cannot be sustained.
6. The Fallout of the 2012 Election Cycle
The Republicans continue to run bad candidates. That nice fella, Mitt Romney, tried to be everything to everybody and his policy inconsistencies failed to inspire voters. I dislike Mr. Obama’s Progressive policies, but I know exactly where he stands and what he’ll do. Voters liked his vision.
The only candidate that made any sense was Ron Paul, and while you may say that his run was quixotic, his candidacy did more to raise the consciousness of people about the proper role of government and the flaws in our economic policies. That is always a positive.
What is significant about the election is the rise of the “47% percent”. As was pointed out by liberal commentator Jonathan Chait in a New York Magazine article, “We Just Had a Class War (And One Side Won).” What was obvious, he said, is that the 47% is now the 51%. I hope he is wrong, but I believe he might be right. Is this the time in history when we Americans become a majority of takers than producers? Is this the tipping point that so many other countries reached where their social welfare programs led them into economic stagnation and eventual bankruptcy? I think we have reached that tipping point. We have only to argue the timing of its failure.
The only difference between us and our European friends is that we have a stronger entrepreneurial infrastructure that is cultural in its nature. Our system consists of a vast capital base provided by venture capitalists and a financial reward structure that inspires and drives entrepreneurs to succeed. So far, there is nothing quite like it elsewhere in the world. That entrepreneurial system drives our economy. Let us hope it doesn’t stop.
7. The Fiscal Cliff
Excuse my language, but what a crock the Fiscal Cliff is. All I hear from the media is doom and gloom because taxes will go up and government spending will go down. They posit a solution: how much can we tax ourselves to pay for the spending. No one focuses on the real problem which is out of control government spending. The Administration puts out phony number on so-called ”spending cuts” and insists on raising taxes on the rich even though such taxes are a literal drop in the fiscal bucket and does nothing to solve the problem.
And we have a big problem. No one in Washington, Democrat or Republican, has proposed any serious spending cuts. The reformers just talk in terms of reducing the rate of spending increases. Based on the entitlements the government has promised, plus our current national debt, we have unfunded liabilities that are estimated to be between $78 trillion and $128 trillion. There is not enough money to pay for it. The economics of all this is that the more the government spends the worse the economy will do. Nothing they do with the money they spend leads to prosperity. Only we, the private sector, create wealth for the government to spend. Eventually government spending will consume so much of GDP that the economy will falter and then the well dries up. This is not hysteria; it is happening all over the world – Greece is just one of the more “advanced” examples.
Don’t believe that the politicians will do any meaningful spending reform. It won’t happen. They have promised and promised over the years yet spending keeps climbing. I think falling off the Fiscal Cliff is probably a good idea. The automatic spending cuts they are arguing about are only about $110 billion a year, but at least it’s a start. Otherwise they are incapable of cutting spending.
Is it all doom and gloom? Well, yes. The world is taking a wrong turn and we, our children, and several levels of our descendants will bear the weight of our mistakes. I, unlike many of my fellow bloggers, don’t see a collapse of civilization on the horizon. These welfare states can last quite a long time. In the U.S. we have built up vast amounts of capital and wealth over the last 150 years and it could take a long time before it is gone. There are, of course, things that could send us over the edge soon(er), but I don’t see them on the horizon (yet). Don’t be looking for hyperinflation, riots in the streets, or military coups here.
Don’t dispair. Because you read the Daily Capitalist, you are on the right path. You think, you read our free market Austrian economic ideas and our classical liberal political views, which are the ideas and ideals that have been responsible for the forward march of history. I can say that these ideas are more widespread now than they have been in the past 80 years. We can change things. It is through the power of our ideas that this will happen. It won’t happen overnight. But you can join in the fight by promoting these ideas, by supporting organizations* that promote these ideas, and by doing your best to create wealth for you and your family.
Here in Santa Barbara it rained last night and this morning it is sunny. The world keeps turning. Best wishes to you all in 2013.