Can Capitalism Survive

Matt McCaffrey offers here an interesting overview of Joseph Schumpeter's thesis that the success of capitalism is the very genesis of the destruction of capitalism. McCaffrey's article will be interesting to many readers of this blog, and a bit tedious to others.

I am not fond of the term "capitalism" because it carries so much negative baggage for so many people, due to their general ignorance of economics and philosophy, and due to their reliance on second- and third-hand accounts of what capitalism is and second- and third-hand accounts of why capitalism is good or bad.

For me, the very essence of capitalism is voluntary exchange. Any form of human interaction that is not mutually voluntary is immoral. That conclusion follows from the manifest immorality of compelling another human --- through force or deceit --- to the will of another human. As Kant put it, humans are ends, not means to ends.

Though shalt not compel; period. Voluntary exchange does not compel, hence, capitalism does not compel. It follows that capitalism is moral and any other form of social interaction is immoral.

Capitalism just is voluntary exchange. It is nothing more nor less. Those who oppose capitalism oppose human liberty and freedom. I propose that those who oppose human liberty and freedom are immoral, regardless of the end they hold out as the warrant for their compulsion of others.

Can voluntary exchange survive? Among us today are many working overtime to bring about the demise of voluntary exchange. Will they succeed? I propose that their temporary success will be the genesis of the survival of capitalism. I think that Schumpeter missed that idea.

SuperFreakonomics & Global Warming

WSJ columnist Bret Stephens offers here a great summary of SuperFreakonomics' analysis of global warming and what to do about it. Al Gore won't like this a bit, of course, since it gets into his pocket.

The Road to Serfdom

The WSJ reports here that Pelosi has told fellow Democrats that she's prepared to lose seats in 2010 if that's what it takes to pass ObamaCare.

In other words, what most Americans want doesn't matter. The anointed one intends to have it his way, and the majority in Congress is evidently willing to become the minority to make it happen. And why not. The Democrats know that once an entitlement begins, it never goes away. They also know that once in place, entitlement programs always grow.

America is at a serious crossroads. The most profound issue at stake is not about health care; ObamaCare is just the camel's nose in the tent. The profound issue is state control and socialism versus liberty and voluntary exchange.

Are we really prepared to give up our liberty and income to go down this road? Lots of folks evidently thought so last November, but now they're not so sure. No matter; Pelosi and her fellow Democrats know what's best for us.

We really need to read the Democrats' bill (all 2,000 pages of it). We need to do the math. We need to understand how much income and liberty we will have to turn over to the federal government to go down this health care entitlement road. Greg Mankiw gives us an assist here.

If 40 cents of every dollar we earn must be turned over to government, then government owns 40% of our labor. Does that qualify for serfdom? Maybe not. Maybe serfdom starts at 50%. No matter; if the Democrats have their way, we will be there soon enough.

Why Regulation and Regulators?

The Fed, FDIC, and Congress are wrangling ever more fervently about who should regulate what. Here's a question; why should the Fed, the FDIC, or any other alphabet soup agency regulate anything? Regulation is the problem, not the solution.

We all understand that human nature being what it is, we do need laws. We need laws that say simply and plainly, "thou shalt not lie, cheat, steal, kill, defraud (a form of lying), or in any other way compel another human being to do your will." Voluntary exchange must be the order of the day. It's moral; it works. No other form of human interaction is moral, nor does any other system of social interaction work.

Beyond rule of law --- and a system of justice to enforce that law --- why do we need regulators at all? In fact, history shows us over and over and over again that regulators fail and fail miserably. Witness the SEC and Bernie Madoff; witness the Fed and today's banking system with its massive failures.

Now, we are told by Congress and regulators like the Fed and FDIC that it is more regulation and ever more centralized regulation that we need. If that doesn't smell fishy to you, you just don't know a fish when you smell one.

No, we don't need regulators; we just need laws and law enforcement. We especially don't need financial regulators or regulations. We just need people not to lie, cheat, or steal. And when they do lie, cheat or steal, we need to put them so far behind bars that we have to shoot biscuits to them for breakfast in the morning.

We have no fewer than seven major acts of Congress that regulate the financial industry (Securities Act of 1933, Securities Exchange Act of 1934, Investment Company Act of 1940, Investment Advisers Act of 1940, Public Utilities Holding Company Act, Security Investors Protection Act of 1970, National Securities Market Improvement Act of 1996). On top of that, we have state Blue Sky Laws and a whole additional layer of financial regulators.

We have the SEC, FINRA, the Federal Reserve Board and the rest of the Fed, FDIC, the Comptroller of the Currency, 50 state regulatory authorities, and the Office of Thrift Supervision. We have bank examiners, both federal and state. And now, we are to have yet another regulator --- the Office of Financial Regulation proposed by BHO and his czars.

Will we the people never learn? Regulation and regulators fail. Laws and enforcement of laws to keep people from compelling each other works. Regulation and regulators actually make it easier for a small set of people to compel everyone else. I will argue that Bernie Madoff could not have swindled as he did without the SEC. Care to argue?

Who is ready to argue that regulation and regulators have preserved us, saved us, or helped us in any way? The evidence is all to the contrary.

The Next Crisis Is Right Around the Corner

Here, Matthew J. Novak writes about a disturbing future crisis in the commercial real estate market and its financing, which BHO and his henchmen will doubtless use to advance their vision of a socialist society. You know --- as Rahm Emanuel said, never let a good crisis go to waste.

We are beginning to hear main stream media report that the recession is over. I heard another such report just this morning. Evidently, the pundits and wags who think the recession is over have visions of the future that belie the financial condition of the commercial real estate market.

I personally recommend that folks keep whatever they have left of their wealth in the form of real stuff. I have very little confidence that those in power at the Fed and in Washington DC know the way out of these particular woods.

The purchasing power of your dollars will definitely be falling like that crippled satellite a few months back that the US military shot down. That means the value of fixed income streams --- as in bonds --- will also be falling down the road. What about stocks?

The more socialist our political economy becomes, the less valuable will be those certificates of ownership in companies --- that is to say, stocks. Would you like to own some GM or AIG stock? Make no mistake; this country has set its foot on the path of becoming ever more socialist. We the people elected BHO, didn't we?

Folks who are looking to Washington DC to solve problems that Washington DC created in the first place must be hoping for a mystical experience. History shows us amply the experience they will end up getting.

The Helath Care Reform Motherlode

Here it is.

Letter from the Boss

A good friend sent me this; I couldn't resist passing it along.


As the CEO of this organization, I have resigned myself to the fact that Barrack Obama is our President and that our taxes and government fees will increase in a BIG way. To compensate for these increases, our prices would have to increase by about 10%. But since we cannot increase our prices right now due to the dismal state of the economy, we will have to lay off sixty of our employees instead. This has really been bothering me since I believe we are family here and I didn't know how to choose who would have to go.

So, this is what I did. I walked through our parking lots and found sixty 'Obama' bumper stickers on our employees' cars and have decided these folks will be the ones to let go. I can't think of a more fair way to approach this problem. They voted for change...... I gave it to them.

I will see the rest of you at the annual company picnic.

Sincerely,

The Boss

Love That Fed

Here Allan Meltzer provides, clear and incisive analysis of what's wrong with the Fed's current monetary policies. Some parts of Meltzers' article may seem a bit technical, but most readers will understand well enough.

A Lesson Not Yet Learned

Here, from the WSJ is a clear lesson.

The lesson here is that spending on nearly all federal benefit programs grow (sic) relentlessly once they are established. This history won't stop Democrats bent on ramming their entitlement into law. But every Member who votes for it is guaranteeing larger deficits and higher taxes far into the future. Count on it.

But everyone already knows this simple truth, don't they? Of course they do. I guess it just doesn't matter.

Fair Tax, Flat Tax, or Value Added Tax?

Greg Mankiw provides here a nice summary for comparing the Fair Tax, a particular flat tax (Hall-Rabushka), and a value added tax (VAT).

Like professor Mankiw, if I were a benevolent dictator, I would replace the U.S. personal income tax, corporate income tax, payroll tax, and estate tax with a consumption tax --- a simple national retail sales tax (NRST). Mankiw prefers a VAT because he thinks a VAT reduces compliance problems compared to the Fair Tax.

I personally favor the Fair Tax because of its visibility, transparency, and efficiency. A VAT is out of sight, and therefore, out of mind --- pretty much like an income tax that's deducted by your employer before you ever get your paycheck.

Do you know how much federal income tax you paid last year? Most people have no idea. With the Fair Tax, you would see how much you pay in federal tax every time you made a purchase of a final good or service. You would also get your paycheck without a huge deduction for personal income tax and payroll taxes.

I think it's important that people understand how much federal taxes they are paying. The Fair Tax would accomplish that goal and would rid us of the ridiculous, unfair, despicable, abhorrent embarrassment called the United States Tax Code.

A good friend asked me to post in this blog a little bit of analysis about the NRST tax rate that would be necessary with and without the federal government being required to pay the NRST on its own purchases. The Fair Tax calls for the federal government to pay the NRST on its purchases. Some folks think that would be a problem. The analysis below shows it is not.

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Comparing the Required National Retail Sales Tax (NRST) Tax Rate for Budget Neutrality with and without Taxing Federal Government Spending.

Define the following economic variables:

C = Annual dollar value of households’ spending on final goods and services

T = Annual tax collections by the federal government

G = Annual dollar value of federal government spending on final goods and services

a = Percentage of annual household spending on goods and services subject to a national retail sales tax

b = Percentage of federal government spending on goods and services subject to a national retail sales tax (if federal government spending on final goods and services is subject to the NRST at all)

t = National retail sales tax rate

For simplicity, assume there is no federal budget deficit; then G=T, which says total federal government spending is equal to total federal government tax collections. This assumption has no effect on the analysis; it just makes the calculations less cluttered and easier to follow.

Assume also that all federal taxes are collected domestically, so we can ignore duties on imported goods and services. This assumption also has no effect on the analysis.

If federal government purchases are not subject to the NRST, then

T = (t)(a)(C), which implies that

t = T/(a)(C)

For example, using approximate numbers (dollars in trillions) taken from the 2003 National Income and Product Accounts for the United States, and from U.S. Department of Treasury reports, if federal government purchases are NOT subject to the NRST, then

t = T/(a)(C), where C=$9.267, a=90%, and T=G=$1.668 ,

t = 20.2 % tax exclusive =$1.668/(0.90)$9.267 =, which is a 16.67 % tax inclusive rate

Now, if a portion of federal government purchases of final goods and services are subject to the NRST, then tax collections will be

T = (t)(a)(C) + (t)(b)(G),

which says that tax collections come from households and from the federal government itself. But total tax collections can also be written

T = G + (t)(b)(G),

which shows that total tax collections must sum to the part that the federal government will spend on final goods and services (G) plus the part that the federal government will pay itself in taxes (t)(b)(G). Using algebra and the equations above we get

G + (t)(b)(G) = (t)(a)(C) + (t)(b)(G), which simplifies to

G = (t)(a)(C), or rearranging,

t = G/(a)(C).

For our example using 2003 data we get

t = $1.688/(.9)($9.267), or

t = 20.2 % tax exclusive =$1.668/(.9)$9.267 =, which is a 16.67 % tax inclusive rate

Conclusion: If the federal government also pays the NRST on a share of its purchases of final goods and services, the tax rate consumers pay for revenue neutrality stays the same. It does not rise or fall, regardless of whether the federal government pays or does not pay the NRST on its own purchases of final goods and services.

If the government pays itself taxes, this is really just moving dollars from one pocket to another pocket (i.e., robbing Peter to pay Peter) The NRST tax rate that consumers face must stay the same, since government cannot pay itself taxes without first collecting those taxes from households. That really shouldn’t surprise anyone, since households are the ONLY source of tax dollars available, provided we are not collecting taxes from the rest of the world

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Second Conclusion: Focusing attention on what NRST rate will be required for budget neutrality is something of a red herring. The household sector pays all the taxes that ever get paid---period, end of sentence, end of story. This is true whether the tax base is a portion of aggregate consumption or a portion of aggregate income, since households ultimately own all the real assets of businesses, and therefore own all the income generated by those real assets. Moreover, comparing the marginal tax rate paid currently on income to the marginal tax rate that would be paid on consumption under a NRST is also something of a red herring. Since the rates are applied to different tax bases, the rates are not directly comparable in any meaningful way. What does it matter if one or the other rate is higher or lower? What matters is how many dollars flow into the federal coffers.

Third Conclusion: Lower marginal tax rates are always more productive, regardless of whether the tax base is consumption or income. That’s because most dollars of federal taxes that are siphoned away from households in no way increase the nation’s stock of capital (real assets like technology, plant, equipment, and tools), which is the well-spring of growth in real gross domestic product. Growth in the nation’s stock of capital is in turn the well-spring of growth in the productivity of labor. Finally, growth in labor productivity is the source of growth in real wages of labor.

Fourth Conclusion: If we really want the fastest growth possible in real gross domestic product and labor productivity, we must reduce the share of gross domestic product spent annually by the federal government. But that’s another story.