Friday, February 27, 2009

Empire Skit

Skit 1: Money

Skit 2: Taxation and Inflation

Skit 3: Empire

Dramatis Personae 

King Roosevelt II—tyrant

Sir Hamilton--advisor to King Roosevelt II

Duke of Delanoleader of King Roosevelt’s army

King Grover—honest king from neighboring kingdom

Sir Ludwig—advisor to King Grover

Duke of Cincinnatus—leader of King Grover’s militia

Thaler—honest minter now living in Grover’s kingdom



Scene 1

The castle of King Grover

Narrator—Here we find King Grover considering a problem with the neighboring kingdom of King Roosevelt I 

King Grover—This urgent message from King Roosevelt could mean trouble; it seems he’s unhappy about our merchants redeeming the paper money from his kingdom for gold.  It says that his King’s Bank is running dangerously low on gold and silver and is threatened with bankruptcy. 

Enter Sir Ludwig

Sir Ludwig, have you given any thought to the recent message from King Roosevelt.  The neighboring king is displeased with our merchants.

Sir Ludwig—First it should be said that if King Roosevelt were not fighting aggressive wars and living in extravagant luxury, he would not need to have his bank printing so much paper money.  Our merchants are simply redeeming what is owed them.  This should never give an honest merchant or king any trouble.  You, King Grover, set an example of just rule; you tax only enough to pay for the royal police and royal courts with only a modest castle, no permanent army, and a strong navy to protect our merchant ships from pirates.

King Grover—I do try to always do what is right and rule justly, but what are we to do if King Roosevelt threatens war?

Sir Ludwig—I do not believe it will come that at first.  I expect that the king will simply declare that the paper money of The King’s Bank will no longer be redeemable in gold or silver.  I have heard some reports that he has already done this to the subjects in his own kingdom.  Our main concern is what will happen to trade between our countries.

King Grover—What do you mean?

Sir Ludwig—When our merchants are no longer able to redeem paper money from The King’s Bank for gold or silver, they will probably not accept it anymore as payment for goods. 

King Grover—Then they shall need to use a different money, no?

Sir Ludwig—Exactly, our merchants and those from Roosevelt’s kingdom will need to do business with honest, redeemable money; the kind provided by honest minters. 


Scene 2

King Roosevelt’s castle 

Narrator—Here we find King Roosevelt, considering a problem. 

King Roosevelt—I thought our paper money plan could go on forever, but foreigners are ruining my schemes by redeeming our paper money for gold and silver; we should have known it would come to this.

Enter Sir Hamilton

Hamilton, have you given any thought to our growing problem. 

Sir Hamilton—We have already taken the first necessary measures; we have made the paper money of the The King’s Bank no longer redeemable for gold and silver for our subjects.  Further we have required that our paper money be accepted for all debts, both taxes and to private merchants.  We have also made it illegal for subjects to own gold and silver.

King Roosevelt—But what about goods that must be bought from other kingdoms?

Sir Hamilton—I will schedule talks, with your permission, between our ambassadors to work out a plan where the royal banks will agree to stop redeeming the others’ paper money for gold and silver.  This should allow us to continue to print paper money as needed and to buy goods from one another.  An exchange ratio between the paper money our kingdom and the paper money of other kingdoms will have to be worked out.  It will add some trouble to our trade with other kingdoms, but should remedy our problems.  In the long run we may have to consider using a single paper money among countries who will agree to do so.  This will create less confusion.

King Roosevelt—But who will be in charge of a such a paper money?

Sir Hamilton—No doubt the country with the largest army, that being us.

King Roosevelt—What about the kingdom of Grover?  He has no royal bank and can’t seem to control his minters’ redemptions of our paper money for our gold and silver.

Sir Hamilton—Such renegade kingdoms as Grover’s will need to be brought into line.  Our message on the subject should have reached King Grover by now.  If we can’t trade with merchants from Grover’s kingdom to buy what we want because they refuse to use our paper money, we will simply take it by force. 

Enter messenger

Messenger—Trouble at almost every branch of The King’s Bank!  The people in mobs are demanding gold and silver for paper money.  Reports of this keep coming in!

King Roosevelt—I thought you said this problem was taken care of, Hamilton!

Sir Hamilton—Once our army has killed a few of these “bank runners” who dare defy the law, order will be restored.

King Roosevelt—Messenger, send for the Duke of Delano.

Messenger—Right away your highness.


Scene 3

Grover’s castle

Narrator—Here we find King Grover considering his reply to King Roosevelt. 

King Grover—I believe a diplomatic solution to our problem with King Roosevelt is best.  War never makes the people better off and must be avoided.

Enter Sir Ludwig

Sir Ludwig—I’ve been thinking about our problem with King Roosevelt; peace must be maintained for the people to thrive. 

King Grover—Exactly, compose a letter to King Roosevelt and I’ll review it with you before we send it.

Sir Ludwig—Right away.

Exit Sir Ludwig 

Scene 4

Thaler’s new mint in the kingdom of Grover

Narrator—Here we find Thaler considering his new situation. 

Thaler—Things are much better here in Grover’s kingdom.  I can mint coins and take deposits of coins for safekeeping without competition from dishonest bankers like Dilutio.  King Grover requires all minters and bankers who take deposits of gold and silver to always have 100 percent of the gold and silver on hand.  I am worried, however.  King Roosevelt has made the paper money of The King’s Bank no longer redeemable for coin.  It’s no large problem as long as some money can be found that our merchants will accept to trade with merchants in Roosevelt’s kingdom.  But King Roosevelt will no doubt be threatened by any money that competes with his own.  He may try to stop the use of all honest money in his kingdom.  If he does this, most trade between our merchants and theirs will stop.

Scene 5

Grover’s castle 

Narrator—Here we find King Grover and Sir Ludwig going over a letter meant for King Roosevelt. 

King Grover—Excellent, we can only hope that King Roosevelt will see the error of his ways.  He needs the trade between our nations to continue as much as we do.  We are ready to defend ourselves, nonetheless; our citizens have always been great soldiers willing to defend their country.

Sir Ludwig--- I certainly hope it doesn’t come to war. 

Enter the Duke of Cincinnatus 

Duke of Cincinnatus--- The local militia commanders have been put on alert  

King Grover --- Very good, we cannot afford to take any chances.

Scene 6

Roosevelt’s castle 

Narrator--- Here we find King Roosevelt and Sir Hamilton going over the message from King Grover.

Sir Hamilton--- Confound that Grover!  He leaves us no choice but war.

King Roosevelt--- I am afraid you are right again.  The unpleasantness with “bank runners” has, as you predicted, been put down for now.  Perhaps a new war with Grover will rekindle the patriotism of our people. 

Sir Hamilton--- At least it will give us another pretext for rounding up unpatriotic citizens who complain about the banks.

Enter the Duke of Delano

Sir Hamilton--- Duke, as I, ahem, we feared, King Grover is being uncooperative.  Prepare to invade his kingdom.  In the meantime, shut down all trade across our common border and arrest any “pirate” who dares smuggle goods in from Grover’s kingdom by ship.

Duke of Delano---Right away.  But I must warn that the army and navy are both weakened by our past adventures.  Plundering others countries hasn’t brought in enough to pay for the cost ruling them.  We are having trouble finding new fighting men. 

King Roosevelt---Nonsense!  All of our conquests have paid for themselves and so will this one.  We’ll draft the soldiers and create the money we need.  See to it Sir Hamilton.

Sir Hamilton--- Right away. 

Narrator--- So King Roosevelt invaded Grover’s kingdom.  However Roosevelt’s kingdom, weakened by constant war and inflation, could not conquer the citizen soldiers of Grover’s kingdom.  After the war, the honest minter Thaler returned home was elected king.  The people of both Grover’s kingdom and Thaler’s kingdom had learned important lessons about trade, honest money, war, and empire.  If goods don’t cross borders, armies are likely to.  Honest money facilitates trade and keeps government small while inflated money weakens the economy and feeds a corrupt government.  Wars and empire do not enrich a conqueror; they, along with inflation, drain the life out of country and lead finally to disaster. 



Taxation and Inflation Skit

Skit 1: Money

Skit 2: Taxation and Inflation 

Dramatis Personae

King Roosevelt II—he needs money to finance his wars

Sir Hamilton—advisor to the king

Duke of Delanoleader of the king’s army

Thaler—an honest minter of gold and silver coins

Dilutio— a dishonest minter of gold and silver coins ready to help the king



Scene 1

The king’s castle 

Narrator—Here we find King Roosevelt II considering a problem

King Roosevelt—What problems I have: my armies are running out of supplies and the people have almost nothing left to take as taxes to supply them.  If only I could find a new way to tax.  Everything I take from the people isn’t useful in supplying an army.

Enter Sir Hamilton

Have you given any thought to our problem supplying the armies?

Sir Hamilton—In fact, your highness, I have.  Remember I informed you that the people now are using coins made from gold and silver, minted by respected private citizens, as a medium of exchange.  These coins are so universally valued that you can use them to buy anything, even army supplies.

King Roosevelt—Go on, Hamilton.

Sir Hamilton—Well, although I’m sure you already thought of this, why don’t we just collect these gold and silver coins as taxes?  Then we can buy all the army supplies we want, anywhere we want.

King Roosevelt—Splendid!

Narrator—So things went well for the king, he collected gold and silver coins as taxes and bought all the war supplies he needed. 

Scene 2

At Dilutio’s mint


Narrator—Here we find Thaler asking Dilutio for the gold and silver coins in exchange for paper certificates. 

Dilutio—Your gold and silver coins are now loaded and ready for you and your armed guards to transport to your mint.

Thaler—Thank you, Dilutio.

Dilutio—I trust you, Thaler, not to tell anyone, but I hope no one else comes asking to redeem gold or silver certificates for the actual coins, I may run out of coins.

Thaler—How can that be, every certificate is backed by coins, is it not?

Dilutio—At one time, yes, but I’ve come up with a great way to make extra profits.  Instead of just charging a fee to store people’s coins in a safe place and giving them a paper certificate which they can use as if it were money, I now print more paper certificates than I have gold and silver coins and then loan them out at interest.

Thaler—Good heavens!

Dilutio—It’s a great scheme; I just have to make sure that everyone doesn’t come at the same time to redeem their paper certificates for gold or silver coins.  If they did, I’d be ruined, of course.

Thaler—Well, Dilutio, you can have your scheme.  I prefer to make an honest living.  I have only my reputation for the pureness of my coins and the redeemability of my paper certificates in coin on request to keep me in business.  I can’t risk my reputation on fraudulent schemes like your own.

Dilutio—But you’ll keep this just between us, right?

Thaler—I will for now, even while I advise you to abandon your scheme as soon as possible.

Exit Thaler 

Scene 3

The king’s castle 

Narrator—Here we find the king discussing military affairs with his top commander

Duke of DelanoYour highness, our last campaign was a success but we need more supplies and money to pay the troops if we are to continue on to victory.

King Roosevelt—I don’t see what more I can do, the people will revolt if I raise taxes again.

Enter Sir Hamilton

Hamilton have you any ideas on how we can raise more money for our next military campaign?

Sir Hamilton—Well, we could sell off some your hunting grounds, they would fetch a handsome sum.

King Roosevelt—Out of the question!  You have some nerve even suggesting it.

Sir Hamilton—Sorry, your highness.  There is one other scheme I have heard of, but it’s quite dishonest.

King Roosevelt—When have we ever had time for honesty here, except among ourselves?

Sir Hamilton—Fine, in that case, we could melt down all of the gold and silver coins, then add some base metal, like nickel, and then restamp them as coins with the royal seal.  Then we could buy many more extra war supplies without raising taxes and no one would know.

King Roosevelt—Brilliant!  Proceed with this plan right away. 

Narrator—So things went well for the king, he melted down all the gold and silver coins collected as taxes and reminted them with lower gold and silver content, ending up with twice the amount of money originally collected in taxes.  He bought all the war supplies he needed and no one caught on, at first. 

Scene 4

Thaler’s Mint 

Narrator—Here we find Thaler examining some of the new royal coins 

Thaler—So these are the new royal coins, minted, we are told, to protect us from dishonest minters who mint impure coins.  These coins don’t look or feel right to me.  I think I will melt them down and see how pure they are.

That evening, after melting down the royal coins

Ah ha!  So the king claims to be protecting us from dishonest minters who would defraud us while all the time it is he who defrauds us!  His royal coins have only half the gold they claim to have.  The king has been paying for war by defrauding the people.  No wonder goods cost more lately.  All of this new coinage is driving up prices. 

Scene 5

The king’s castle 

Narrator—Here we find the king thinking about what to do about unrest over high prices 

King Roosevelt—The coinage plan had worked so well until recently.  While the people seem to have no idea who or what is to blame for higher prices, they still expect me to do something about it; but with the war to fight, I simply cannot abandon the royal coinage program.

Enter Sir Hamilton

Hamilton, have you given any more thought to our problem with high prices? 

Sir Hamilton--Yes, I have actually.  I believe you will find my plan most clever and effective.  Perhaps you have heard of the minter and money lender, Dilutio.

King Roosevelt—Not until now, no.

Sir Hamilton—Well it seems that Dilutio, so my spies tell me, both mints gold and silver coins and loans out certificates that can be exchanged for gold and silver coins at interest.  Therefore there are more paper certificates circulating as money throughout the kingdom than there are gold and silver coins to redeem them.

King Roosevelt—So what does this have to do with the problem of high prices.

Sir Hamilton—Quite simple, we blame the high prices on Dilutio’s expansion of the paper money supply.  This draws attention away from our own practice of diluting the value of gold and silver coins.  Further, we can make ourselves into heroes of the people by taking control of Dilutio’s mint in order to make its operation honest again.

King Roosevelt—How can we convince Dilutio to agree to this?

Sir Hamilton—Again quite simple, for while we will give Dilutio’s mint the appearance of honesty by putting the royal seal on its coins and paper certificates, we can then print all of the paper certificates we want to pay for war supplies.  The whole affair will be so confusing that the people won‘t know what the problem is until it’s too late to do anything about it.  All of the paper certificates from Dilutio’s mint will be given as loans to the kingdom.  Dilutio will also be able to continue to loan his customer’s deposits and earn interest.  It’s a win-win situation; Dilutio himself actually suggested it to me.  If anyone complains, we will inform them that the good credit of the kingdom cannot be sacrificed; the loans must be repaid.

King Roosevelt—Pure genius!  Proceed at once. 

Narrator—And so Dilutio’s mint was taken over and the king got his money to pay for his war.  Soon the king found that Dilutio’s mint, now renamed The King’s Bank, could loan him money for just about anything he wanted.  Sure, prices in the kingdom would go up, but if the king didn’t spend too much of this new paper money, the small price increases could easily be blamed on bad weather, greedy storekeepers, or anything except their true cause—the king’s own spending of new paper money.  At least one problem remained—what if many people came to the bank to exchange their paper money for gold and silver coins?  Clearly there wouldn’t be enough coins and the dishonesty of the The King’s Bank would be exposed.  So Sir Hamilton convinced the king to outlaw all honest competition to The King’s Bank 

Scene 6

Thaler’s mint

Narrator—Here we find Thaler looking over the king’s latest proclamation 

Thaler—Well, this is the end.  I now must close my mint.  The king’s proclamation says that in the name of preventing dishonest men from making coins, all private mints like mine must be closed.  I guess the The King’s Bank dislikes having any competition when it comes to making dishonest coins.  Now all we’ll have is the king’s diluted gold and silver coins and his inflated supply of paper money.  The rising prices caused by this dishonest money are really just cleverly disguised theft by the king.  The king can pay for wars, reward his friends, and live in luxury, all at the people’s expense.  The people will be made poorer and poorer and never understand why.

Narrator—So concludes, for now, our sad tale of dishonesty in powerful places.  Justice may yet be served however.


Skit 3: Empire


Money Skit For Kids

Skit 1: Money

Dramatis Personae

Egg farmer—he wants new shoes

Ophelia—egg farmer’s wife

Shoemaker—he doesn’t like eggs, but needs wheat for bread

Zapata—shoemaker’s wife

Wheat farmer—likes eggs and has more wheat than he can use



Scene 1

Egg’s farmer’s kitchen 

Narrator—Here we find the egg farmer and his wife in their kitchen 

Egg Farmer—I sure could use some new shoes, these are all worn out.

Ophelia—Well why don’t you take some of our extra eggs to the shoemaker and see if he’ll trade some eggs for shoes

Egg Farmer—I’ve got it!  I could trade some of these eggs for a pair of shoes.

(Ophelia rolls eyes and looks at the audience)

Ophelia—Great idea.


Scene 2

Shoemaker’s shop 

Narrator—Here we find the shoemaker and his wife with no wheat to make bread

Zapata—I sure would like some wheat to make some bread

Shoemaker—Honey, I already traded shoes to the wheat farmer for wheat; how can I get more wheat?

Zapata—I don’t know, but here comes the egg farmer with a basket

(Egg farmer enters)

Egg Farmer—Good day all! 

Shoemaker and Zapata—Good day

Egg Farmer—I am wondering if I might trade you some eggs for a new pair of shoes

Shoemaker—Sorry, we don’t like eggs, but if you had some wheat, we’d be interested

Egg Farmer—I’m only an egg farmer but I’ll see what I can do (leaves)


Scene 3

Wheat farmer’s barn 

Narrator—Here we find the wheat farmer, hungry for an omelet 

Wheat Farmer—I’m sure getting tired of bread all time, I’d like some eggs.

(Enter Egg Farmer)

Egg Farmer—Hello, I’ve got some eggs here and I’m wondering if you might want to trade some eggs for some of your wheat

Wheat Farmer—So, you want to make some bread?

Egg Farmer—No, I actually want some shoes.

Wheat Farmer—Well, shouldn’t you go to the shoemaker then?

Egg Farmer—I did, but he didn’t want eggs, he wanted wheat.  So I came here.

Wheat Farmer—What a coincidence!  I want eggs to make an omelet and have the wheat you need to trade for the shoes you want.

Egg Farmer—Oh happy day!

(They exchange the eggs for the wheat) 

Narrator—And so ends our little tale.  The egg farmer got his shoes, the shoemaker got his wheat, and the wheat farmer got his eggs—all where better off and happier too.  As time went on, the people of this town found that gold and silver coins became known as the one thing that everyone would accept in exchange for anything they wanted.  So gold and silver coins became money, the universal medium of exchange, and trade became much easier for everyone.  Townspeople no longer had to search the whole town looking for someone who wanted to trade what they had to trade for what they wanted.  Soon the king heard about these gold and silver coins and began to demand them as payment for taxes.  Then trouble began, but this, I fear, is a tale for another day.

Skit 2: Taxation and Inflation


Take five minutes to listen to the best short explanation of what we need to do and why we need to do it.

Wednesday, February 25, 2009

Contra Obama, We Need To Be Quitters

The witty saying on the t-shirt goes, "Rehab is for Quitters"; well maybe members of the Obama administration should think about becoming quitters. Obama is intoxicated with using government power-- witness his delusional statements from last night's speech before a joint session of congress:

"The fact is our economy did not fall into decline overnight. Nor did all of our problems begin when the housing market collapsed or the stock market sank. We have known for decades that our survival depends on finding new sources of energy. Yet we import more oil today than ever before. The cost of health care eats up more and more of our savings each year, yet we keep delaying reform. Our children will compete for jobs in a global economy that too many of our schools do not prepare them for. "

So the stock market and the housing market collapsed because of our importing oil, our increasing health care costs, and our lousy education system? Are we to believe that if the stock market and the housing market didn't collapse we would still be deficit spending to the tune of over a trillion dollars?

"And though all these challenges went unsolved, we still managed to spend more money and pile up more debt, both as individuals and through our government, than ever before."

The obvious solution to this problem is that both individuals and the government should run up even more debt? Obama said we need to get the banks lending again. But as James Grant said so succinctly, banks made a lot bad loans when times were good, what kind will they make now in bad times? The Fed could easily open the flood gates on a new round of excessive bank lending by simply refraining from paying interest on the reserves banks have with the them. If this did not work the Fed could charge a fee on bank reserves. This would lead to a new inflationary era of lowered lending standards just like the one that caused our current mess. We cannot get out of our current situation by doing more of what got us into it. Obama says this himself, but does it anyway--delusional.

"In other words, we have lived through an era where too often short-term gains were prized over long-term prosperity; where we failed to look beyond the next payment, the next quarter, or the next election. A surplus became an excuse to transfer wealth to the wealthy instead of an opportunity to invest in our future...People bought homes they knew they couldn't afford from banks and lenders who pushed those bad loans anyway."

If Obama can get away with this type of rhetoric it only indicates that our national delusion matches Obama's. Prizing short terms gains is the way government always works; the rest of us can be driven to this by the kind of inflationary credit environment we've been living. Murray Rothbard explains:

"[During a period of inflation]: people become enamored of "get-rich-quick" schemes, seemingly within their grasp in an era of ever-rising prices [think housing and stocks], and often scorn sober effort. Inflation also penalizes thrift and encourages debt, for any sum of money loaned will be repaid in dollars of lower purchasing power than when originally received. The incentive, then, is to borrow and repay later rather than save and lend. Inflation, therefore, lowers the general standard of living in the very course of creating a tinsel atmosphere of "prosperity."

What institution is responsible for the flood of credit which built the stock and housing bubbles? That bastion of government-sponsored central planning, the Federal Reserve. One might disagree saying that Wall Street, Fannie Mae and Freddie Mac were the source of much of the credit that fueled the housing boom in particular. Actually through securitization and sale of mortgages, they merely recycled credit. Often it was recycled by way of foreign central banks, like that of China, which buy these mortgage-backed securities. But why does China have so many dollars with which to buy these securites? Because our Fed-inflated dollar is the number export of our economy; the dollar is the world's reserve currency. These dollars are all exported Fed-driven inflation.

"Regulations were gutted for the sake of a quick profit at the expense of a healthy market."

It is likely that Obama is referring here to the Gramm-Leach-Bliley Act of 1999 which broke the separation between commercial and investment banking established by the Banking Act of 1933. The "deregulation" of 1999 was really more of a re-regulation which true free-marketeer Congressman Ron Paul criticized at the time:

" we are considering a bill aimed at modernizing the financial services industry through deregulation. It is a worthy goal which I support. However, this bill falls short of that goal. The negative aspects of this bill outweigh the benefits. Many have already argued for the need to update our financial laws. I would just add that I agree on the need for reform but oppose this approach...My main reasons for voting against this bill are the expansion of the taxpayer liability and the introduction of even more regulations. The entire multi-hundred page S. 900 that reregulates rather than deregulates the financial sector could be replaced with a simple one-page bill."

Far from deregulating banking, Gramm-Leach-Bliley was 900 pages of different regulations that failed to do the job. Among the most troubled banks are those, like Citigroup, that were under the regulatory supervision of Tim Geithner's New York Federal Reserve. Geithner’s promotion to Secretary of the Treasury is a classic case of how promotion works in government--the most incompetent sycophants rise. Those who foretold of our current crisis like Ron Paul, Peter Schiff, and James Grant are left out of the official conversation on solving the crisis. Those who failed to foresee it, denied it as it unfolded, and then blamed all of the wrong people (like short sellers and hedge fund managers) are still in charge.

"And all the while, critical debates and difficult decisions were put off for some other time on some other day."

Make no mistake, critical debates are still being put off. The stimulus bill was voted on without even being read by congressmen. Medicare and Social Security are ticking fiscal time bombs that the huge current deficits make even more dangerous.

Now is the time to act boldly and wisely -- to not only revive this economy, but to build a new foundation for lasting prosperity. Now is the time to jumpstart job creation, re-start lending, and invest in areas like energy, health care, and education that will grow our economy, even as we make hard choices to bring our deficit down. That is what my economic agenda is designed to do…”

Obama’s claim that his porcine fiscal stimulus law will grow the economy so as to offset, by way of tax revenues, the borrowing done to pay for it is patently absurd. While the massive spending in the stimulus law may create some jobs for the short term, other jobs that would have been created with those resources will be lost and the economy’s structure of production will be thrown even more out of whack, creating more economic pain down the road.

What Obama fails to grasp is the distorting effects of money creation. We had massive, unsustainable malinvestment in housing due to the Fed’s easy money policies. Not only was the house building business unsustainable but a whole array of housing-related businesses, also fed on the Fed’s easy money, were also unsustainable. Now Obama wants to create some unsustainable malinvestment in energy, health care and education. This will fail to bring future prosperity.

“I reject the view that says our problems will simply take care of themselves; that says government has no role in laying the foundation for our common prosperity...For history tells a different story. History reminds us that at every moment of economic upheaval and transformation, this nation has responded with bold action and big ideas. In the midst of civil war, we laid railroad tracks from one coast to another that spurred commerce and industry. From the turmoil of the Industrial Revolution came a system of public high schools that prepared our citizens for a new age. In the wake of war and depression, the GI Bill sent a generation to college and created the largest middle class in history. (Applause.) And a twilight struggle for freedom led to a nation of highways, an American on the moon, and an explosion of technology that still shapes our world.

Sorry, but this is nonsense from someone in need of history lessons. The transcontinental railroads built with government money were monuments to waste, fraud and abuse that illustrate virtually everything wrong with government infrastructure “investment”. Shoddily built along routes chosen to wring maximum subsidy from the government rather than to operate efficiently, every government-subsidized transcontinental would go bankrupt by 1893. If one thinks that government subsidy was the only way to build a transcontinental railroad, one should think again. James J. Hill’s Great Northern Railroad was built "without any government aid, even the right of way, through hundreds of miles of public lands, being paid for in cash." I guess a business can grow without an endless stream of easy credit, the Great Northern did not go bankrupt when the other transcontinentals did.

The wonder of the G.I. Bill is another of the great myths that we labor under. As Thomas DiLorenzo so boldly put it, “In truth, the G.I. Bill was a budget-busting middle-class entitlement scheme that had destructive effects on higher education, and set the stage for virtually all our current educational problems.

His allusion to the wonders of NASA leads nowhere as well, Tim Swanson:

“The perceived benefits of a vain, nationalized space program include, among others, the fallacious need to fight the mythical shortage of scientists and engineers. Whereas in reality, it has stymied private tourism, exploration, and research for nearly half a century…It is a monumental drain of capital resources to simply satisfy a nationalist ego; and its motto should be changed to reflect the only groups that benefit from its existence, politicians and contractors: For Benefit of Few.”

With Obama’s speech said and done, one recommendation can be made: we need to become a nation of quitters. We need to quit believing that the government can save us from the problems it has caused. We need to go into rehab to rid ourselves of our addiction to believing any government promises, not just those of the latest messiah of salvation via government.

Thursday, February 19, 2009

Why Repeal the 16th Amendment?

Liberty lovers everywhere would love to be done with the modern income tax; we all know it, the one where they withhold the tax from our paycheck and then we file a return every year hoping we overpaid and are due a tax refund.  

Faulty Interpretation

The standard narrative, from its opponents, of how we got the income tax goes something like this:  For the first one hundred years of our history the federal government was financed mostly by tariffs, taxes on imports.  Then the progressives decided that taxing the incomes of the rich would be "fairer", so they began a drive to replace the tariff with a small income tax which was paid mostly by the wealthy.  However the progressives were tripped up by the heroic Supreme Court which ruled in the1894 Pollock case that income taxes were unconstitutional.  The progressives struck back with 16th Amendment in 1913 which permitted an unapportioned direct income tax.  At first the income tax was small and borne by the wealthy but has grown to the current ubiquitous nightmare.  

If the above is accurate, then one might draw the conclusion that repealing the 16th Amendment would bring us back to the halcyon days of Congressmen wrangling over how high the tariff should be with no intrusive income tax.  The problem is that the above is not accurate and repealing the 16th Amendment would likely have little effect on our current tax code, at least little effect which would be predictable.  The root of the problem with the standard narrative is a misunderstanding of the Pollock case.  

Getting It Right 

Rather than ruling the entire tax law of that year, which included an income tax, unconstitutional, the court ruled only one particular part of the tax bill unconstitutional; the entire bill was then thrown out on the idea that removing only the offending section would have fundamentally altered the intent of Congress in passing the bill.  The offending section was a tax on rental income from real estate.  The rationale to declare this tax unconstitutional was novel--an example of judicial activism--and it overthrew one hundred years of understanding of taxation under the Constitution going back to the 1796 Hylton case.  

Essentially the court said that a tax on rental income from real estate was in effect a tax on the real estate itself; this is a winning argument on purely economic grounds but is a loser under the Constitution.  Taxes on the value of property are, under the Constitution, direct taxes that must be apportioned (divided equally) among the states--only property taxes and head taxes (capitations) are direct taxes.  No historical instance of the federal government resorting to direct taxation comes to mind.  All other forms of taxation are, Constitutionally, indirect and must be uniform throughout the states, e.g. Charleston cannot charge a lower tariff than Boston.  The reasoning of the Pollock court took a tax on rental income which had always been understood to be an indirect tax and made it a direct tax on real property.  Its lack of apportionment made it unconstitutional.  Again, this was a novel argument.

The problem that the Pollock argument presented to Congress in creating future tax law was that virtually any tax, formerly thought of as indirect, could be turned into a direct tax by considering its source.  Hence a tax on income from any business activity could be thought of as a direct tax on the property used in the business.  This rationale may indeed have had the salutory effect of limiting the federal power of taxation, especially on business and rental income.  It did not seem to have the effect of limiting the power to tax wages.  In fact the Pollock court left standing wage taxes in 1894.  The court threw out the entire tax bill because Congress meant to tax mostly the rich but taxed primarily the poor after the tax on rental income was ruled unconstitutional.  

In a purely Constitutional sense, the 16th Amendment was a conservative amendment.  It did nothing more than prevent the use of the novel rationale of the Pollock case, i.e. a tax on income from property (the source of the income) was in effect a tax on the property itself.  It re-established the formerly clear line between direct and indirect taxes which Pollock had blurred.  As the Supreme Court said, and tax protestors have misinterpreted, the 16th Amendment conferred no new power of taxation--from the case Stanton v. Baltic Mining Co. (1916):

“ the previous ruling [in Brushaber] it was settled that the provisions of the 16th Amendment conferred no new power of taxation, but simply prohibited the previous complete and plenary power of income taxation possessed by Congress from the beginning from being taken out of the category of INDIRECT taxation to which it inherently belonged, and being placed in the category of direct taxation....”


The income tax was never meant to be what it is today.  "Income", one hundred years ago, was something a wealthy patrician earned passively while sipping brandy in one of his mansions.  It was investment earnings.  The drive to replace tariffs, which were thought to bear on the poor more heavily, with a "soak the rich" income tax was pure class warfare from the so-called Progressive Era. Today's system of withholding taxes from our wages did not come about until World War II, the brainchild of one Milton Friedman (this perhaps ironic depending on your view of him).  

So what does it all mean today? Income tax opponents need to come to terms with the fact that there was no glorious time of income tax (as we think of the term today) unconstitutionality before the 16th Amendment.  The current system of tax withholding would be unharmed by its repeal.  The question of how and how much we are taxed is political one.  Anyone who wants to influence tax policy must make economic arguments to influence the politically powerful, not arguments from faulty constitutional theories.  My hope is that those who want lower taxes will stop undermining their otherwise good arguments by referring to a glorious bygone era of Constitutional orthodoxy that never existed.  

Tuesday, February 10, 2009

Obamanomics: A Break With The Past? Hardly

To hear President Obama tell it, our current economic crisis was caused by the failed policies of the last eight years, which conveniently coincide with the Bush presidency. Does the Bush administration bear any blame? Of course. The Bush years were marked by reckless fiscal policy (monetary policy was no less reckless but that was the work of Fed chiefs Alan Greenspan and Ben S. Bernanke). Obama rejects any calls by congressional Republicans to exercise fiscal discipline regarding the current stimulus bill citing correctly that Republicans lost all credibility over the last eight years in the fiscal restraint department. However in calling out the hypocrisy of the opposition party, Obama's logic takes an odd turn; he says that the Republicans have run up a trillion dollar deficit and that he will not return to their "failed policies". Incredibly, Obama says this during an appearance designed explain his own addition of a trillion dollars to the current deficit.

For the purpose of creating political rhetoric, the President says that the policy that led to our current malaise is just in elementary school, a tender eight years of age. In fact this policy is well into its retirement years at almost eighty years old. It is great to see our seniors out in the work force refusing to retire, but this government employee should be forced into retirement. The government spending as economic savior policy has been around since Herbert Hoover, who like George W. Bush, believed that fiscal stimulus could rescue us from a depression. FDR's New Deal actually took what Hoover started and expanded it greatly. Obama plans to do to Bush's fiscal policy what FDR did with Hoover's--expand it beyond heretofor explored boundaries. So, far from breaking with the policy of the past, Obama plans to pursue old policy with ever-increasing recklessness.

Is there any justification for Obama's belief in fiscal stimulus? No, not one bit. The father of fiscal stimulus, John M. Keynes wrote:

“Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle.” -- Keynes, Collected Works, vol. XXVII, p.122

For Keynes, fiscal policy was simply too slow. It probably would not target idle resources either. He advocated monetary policy in the form of a zero interest rate, perpetual free money, to stimulate the economy as a first solution. Our problem is that we have a near zero interest rate now, with no apparent success and whole new set of central bank problems.

Not only do we know that the New Deal's fiscal stimulus, then unprecedented, failed to get us out of the Great Depression, we have also have some interesting, though rare, periods of fiscal contraction to consider. We had a depression in 1921 on the heels of World War I inflation. It had passed by the time Commerce Secretary Herbert Hoover convinced President Harding to do anything about it. Under Harding and President Coolidge, fiscal policy was contractive--the national debt decreased.

In 1947 we had another year of wrenching fiscal contraction after the massive inflation of World War II. All of the respectable Keynesian economists said this would bring on a renewal of depression-level unemployment. They were wrong. The post-war economy maintained high employment during a great fiscal contraction.

I would guess that President Obama and his advisors actually believe in the necessity of their stimulus package even as they and congressional Democrats salivate at the opportunity to fund their "pet projects". So I do not believe that Obama, as he says, hates to have to spend this money; he is relishing his role as our savior. However his crude rhetoric about breaking with failed policy of the past to bring us into a new brighter future is only persuasive to those unarmed with a knowledge of economic theory and history.

Monday, February 2, 2009

Monopoly Money

Ask a typical person to list the great laws of American history and almost without fail the Sherman Anti-Trust Act will appear. As we all know, the Gilded Age was an era when "unfettered capitalism produced the robber barons who ruthlessly exploited workers, brutally put down unions, gouged consumers, and corrupted politics." The Sherman Anti-Trust Act was used by enlightened statesmen like President Teddy Roosevelt to breakup the huge, abusive trusts like Rockefeller's Standard Oil. This put an end to their predatory ways, i.e., charging low prices to run their competition out of business and then charging higher monopoly prices. This is probably a fair summary of what is taught in a typical American school. Its major problem is that it is complete nonsense. Not one case in the history of antitrust enforcement has featured this behavior; and, as Casey Stengel would say, "You could look it up".

Anyone who would put any anti-trust law on a list of great laws is unlikely to have made any more than a superficial inspection of the theory and practice of antitrust. Dominic Armentano has written the best books available on the subject: Antitrust and Monopoly: Anatomy of a Policy Failure and the shorter Antitrust: The Case for Repeal. Both are accessible to the intelligent layman as this even shorter summary, "The Politically Incorrect Guide to Antitrust Policy".

By thoroughly debunking the competition models of modern microeconomics upon which the rationale for antitrust enforcement lies, Armentano pulls the rug from under it. Antitrust is special interest legislation that has been used by less efficient companies to cripple more efficient ones. The classic examples of evil monopolists like John D. Rockefeller always expanded output and lowered prices. Armentano concludes:

Antitrust theory and history are both a myth and a hoax. The laws were never intended to help consumers...and their long historical track record is that they have not helped consumers. They have, instead, punished innovative and efficient business organizations while protecting less efficient competitors and every state-sanctioned monopoly. They have tended to make consumers poorer and the overall economy less efficient and they deserve to be repealed, not reformed. That the antitrust paradigm still can find support among a majority of economists, lawyers, and the public is a testament to intellectual laziness, to the power of special interest, and to decades of successful myth making."

There are monopolies out there and every one is "state-sanctioned"; there is no workable definition of a monopoly without the force of government to support it. While legal and medical professions are cartelized by anti-competitive licensing laws, the biggest state-sanctioned monopolies never have been and probably never will be subject to antitrust enforcement. I speak of the United States Postal Service and the Federal Reserve system, which hold monopolies on mail delivery and money creation, respectively.

The postal monopoly loses money year after year while its shortfalls are paid for by taxpayers. This monopoly depends on postal statutes which make it illegal to compete with the post office. FedEx and UPS are allowed to compete only based on the urgency or size of their deliveries or both. The Constitution allows Congress to establish a system of "Post Offices and post Roads". However, the Constitution does not prohibit competition. The postal monopoly could be broken easily without antitrust laws by simply repealing the postal statutes that make it illegal to complete with it.

The same could be said for the fiat (paper) money of the Federal Reserve. Federal Reserve notes could still circulate as money but people would be free create and choose whatever kind of money they wanted to use. This would a be great check on the well-established propensity of all central banks to inflate a currency (indeed,inflation is the very raison d'etre of central banks).
As Ron Paul concludes:

...allowing for competing currencies will allow market participants to choose a currency that suits their needs, rather than the needs of the government. The prospect of American citizens turning away from the dollar towards alternate currencies will provide the necessary impetus to the US government to regain control of the dollar and halt its downward spiral. Restoring soundness to the dollar will remove the government's ability and incentive to inflate the currency, and keep us from launching unconstitutional wars that burden our economy to excess.With a sound currency, everyone is better off, not just those who control the monetary system. I urge my colleagues to consider the redevelopment of a system of competing currencies."

Freedom to make peaceful agreements is a fundamental part of a free society. Those who think antitrust laws are good idea should be consistent and apply them in the only way they can do any good--against the government itself. The flag of Cornelius Vanderbilt's famous New Jersey-based steamship that broke Robert Fulton's government-granted steamship monopoly in New York waters read "New Jersey must be free". We could all benefit from a renewal of that kind of entrepreneurial spirit: "America Must Be Free".