A Libertarian's Thoughts on Whatever

Thursday, April 24, 2003

 
This is an incredible article on American and British war crimes.
And this is an incredible piece on the US economy by Gary North:
WILL ATLAS (THE CONSUMER) SHRUG?

Pity the American consumer. He is holding up the entire American economy -- indeed, the world's economy -- on his sagging, debt-burdened shoulders. If he ever shrugs, we're all doomed. If he ever looks in his garage and says, "enough is enough; I've got too much stuff," the stock market will collapse, the Federal deficit will go to Mars (it's already well past the moon), and the Democrats will run Hillary Clinton. It's unthinkable.

So, the financial press watches for any sign of weakening, any indication that the American consumer will get out the scissors, pull out his credit cards, and start his own personal budget-cutting program. What if he tries to save $25,000 (over the next 10 years)? Would the rest of us survive? Would life even be worth living?

This is the basic pitch of the financial press today. We have been subjected to some version of this message since 1936, when John Maynard Keynes, the British economist who majored in math rather than economics, wrote THE GENERAL THEORY OF EMPLOYMENT, INTEREST, AND MONEY. Demand. Economic success is all a question of sustaining demand.

Have you ever given more than five minutes thought as to why this scenario is true? Because, if it isn't, then the world has been sold the equivalent of a portfolio of Enron and Global Crossing shares.


THE ECONOMISTS' WORST NIGHTMARE: THRIFT

Business economists are terrified of the short-term effects of thrift. At the same time, they cheer the long- term results of thrift, such as factories and corporate research & development programs. They think these are great. But the thought of you and me "tightening our belts" and not spending -- or even worse, not borrowing to spend -- sends chills down their collective spines.

We are told that in America, the consumer is king. Long live the consumer! The consumer is what keeps the economy growing. Every time there is any suggestion of a recession, the economists and the politicians join hands and sing the equivalent of the Beach Boys' chorus: "And we'll have fun, fun, fun till my daddy takes the T-bird
away!" They tell us -- I am not making this up -- "You auto buy now." That was the Eisenhower Administration's response to its second recession, in 1958. That was the adult world's version of the hit song in that same year (I am also not making this up): "Yip, yip, yip, yip, yip, yip, yip, yip; moom, moom, moom, moom, moom, moom, moom, moom. Get a job! Sha na-na-na-na, sha-na-na-na-na-na. Get a job!"

http://www.webfitz.com/lyrics/Lyrics/1958/531958.html

The two approaches to the 1958 recession made equally good sense, analytically speaking.

You have probably heard the phrase, "Everybody wants to go to heaven, but nobody wants to die." I suggest another, similar phrase: "Mainstream economists love economic growth, but none of them wants consumers to pay for it."

I am not trying to be clever. You want clever? Here's clever: Harry Truman's line, "What I need is a one- armed economist." He complained that all he ever got from his economic advisors were policy papers that concluded:

"On the one hand. . . ."
"On the other hand. . . ."

Or: "Where there are six economists, there will be
seven opinions."

Or: "If you laid all the economists end to end, they
would never reach a conclusion."

That's clever. But I'm not trying to be clever. I'm just trying to make sense out of what appears to be nonsense. That's a full-time job for anyone who studies the findings of modern economic science.

I find myself playing the role of the child who asked his father about the emperor's lack of fashion. The story says that the people all laughed at the emperor after the child asked his father the famous question. The story is naive. The government would have compelled the father to send the child to a special school for precocious but undisciplined students, and then on to one of the nation's premier universities. He would then have stopped asking such preposterous questions.


WHAT EVER HAPPENED TO THE JAPANESE JUGGERNAUT?

When it comes to understanding Japan's continuing economic sluggishness, we are assured that it's millions of Japanese housewives who are the problem. They save way too much money. They don't shop till they drop. They don't spend their days in the ginza. We can see the results: steadily falling prices (bad for business), rising bankruptcies (bad for business), and rising unemployment (bad for business). What the Japanese need, we are told, is a new way of thinking. They have spent far too much time and money mastering the skills of production. They need to become skilled consumers. They need to become more like Americans.

Every time I read this -- which is frequently -- I can hear Rex Harrison singing, "Why can't a woman be more like a man?"

So, you may ask, what is the problem with Japan's economy? The answer is easy: too much government. This includes the central bank. There are too many import quotas, which hampers consumers. There is too much government debt, which lures savers into dead-end, make- work projects. There are too many retirees, who are funded by taxpayers. There is too much fiat money, which creates false economic signals, such as a near-zero interest rate. There is too much business regulation, which hampers entrepreneurs. There is too much government protection of the intertwined banking, manufacturing, and securities
industries.

"Wait a minute," you say. "That sounds like the United States."

It does, doesn't it?

Then why is our economy growing, and Japan's isn't? My answer or the official answer? The official answer: "the Japanese housewife." My answer: "the Japanese cartel system." That cartel system is the product of government intervention, which protects the well-entrenched
participants from competition from start-up businesses and foreign competition.

The cartel system is far worse in Japan than in the United States. There is far more entrepreneurship here. The same criticism applies to Germany. The Japanese and Germans save more money than Americans. They have more rigorous education systems for the elite. They have more bureaucrats monitoring output. They have more emphasis on government-imposed quality control. What they don't have is a legal system that allows individual creativity in serving consumers to reap Gates-level rewards.

What America has that the rest of the world doesn't have to anything like the same degree is an entire culture -- an entire way of life -- that rests on four words (actually, five: one word is a contraction): "Let's make a deal."

American consumers get together with producers and say: "Let's make a deal." Consumers also get together with other consumers and say: "Let's make a deal."

America is not best understood by its factories, its banks, its insurance companies, or its universities. It is best understood by its yard sales (summer) and garage sales (winter).

What is the American economy? Ebay writ large.

Americans are the world's geniuses at ferreting out ways to make deals. They see an opportunity, and they do what it takes to make it happen. The American deeply believes in this principle: "Nothing good happens until there's a sale." For this, he is ridiculed in public ("greedy materialism!") and admired in private (illegal immigration).

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CONSUMERS OR PRODUCERS?

Ebay is perfect for consumers who are overloaded with stuff they don't use any more (the American way of life) and unknown producers who are accessing consumers apart from a government-certified distribution system.

This is why it is so easy to explain America's prosperity in terms of the consumer. The consumer really is king in America. He has so many ways to spend his money. What he says, goes. He walks down the street and shouts, "Does anyone want some of my money?" He gets lots
of takers. The whole world wants to immigrate here and cash in on the deal.

Now I am hearing Freddy singing, "On the street where you live."

But how did Americans get their hands on so much money and so much excess stuff? By first becoming producers. Their status as consumers rests entirely on their status as past producers or as present debtors who are selling legal claims on their future output.

Then what about debt? Is the American consumer about to pare back? Is he so overburdened with debt that mass bankruptcy is looming? In a word, no.

The key issue for the American consumer is household debt repayment. Is the typical American household facing an imminent disaster? Not this month. If you look at the figures for household debt repayment, you will see that it fluctuates in a narrow range between 12% of disposable income and 14.4%. The highest level since 1980 was 14.4%. That was in the 4th quarter of 2001. It has slowly gone down to 13.97%. This is one of the most stable statistics in American life.

http://www.federalreserve.gov/releases/housedebt/default.htm

This tells me that the American consumer is a rational fellow who can make a budget and stick to it. He doesn't need a government bureaucrat to tell him how to spend his money. In 1980, he paid 8.78% of his disposable personal income for debt repayment for consumer goods. He paid 4.38% on his monthly mortgage. Then the government took away income tax interest payment deduction from consumer debt but retained it for mortgage interest. In the latest quarter (4th, 2002), the consumer paid 7.66% of his disposable income on debt service for consumer debt and 6.31% on his mortgage. I wonder why mortgage debt
repayment is increasing in comparison to consumer debt repayment. It's just so inscrutable. Maybe we need a government-funded study. Maybe five. Then again, maybe not.

You may think these figures are unreliable. Maybe they don't correspond to the reality that most of us think we know. The figures seem too low. But remember: some people have little debt: the poor, who can't get loans (at least not from outfits that report to the Feds); older people, who are close to retirement or retired; and very
rich people, who own a large chunk of the country's capital (Pareto's law). The people with large debts own valuable assets. They had to, in order to qualify for the loans.
Here's a boring but informative article on household debt, as of 1995:

http://www.federalreserve.gov/pubs/oss/oss2/92/bull0495.pdf

What I don't doubt is this: the pattern of consumer behavior doesn't change much. Year after year, American households stay with the program. In recession years, boom years, and average years, they stay with the program. It's their program. They make their own decisions as individuals, yet when the statisticians at the Federal
Reserve System get through crunching the numbers, millions of Americans turn out to be staying with the same program.

My message to Washington and to Wall Street: stop worrying about what the American consumer is going to do. He's going to do next month pretty much what he did last month. He is going to see to it that debt repayment doesn't exceed 14% of his disposable income or drop below
13%. Count on it.


THEN WHAT ABOUT THRIFT?

What if the consumer changes his mind? He won't change it much. He will reallocate income slightly: a couple of percentage points. So what?

Say that consumers began reducing debt. Slowly – and it will be like a glacier -- households cut back on spending and start saving. The economists will shout, "Red alert! Red alert!" But why?

Say that 10% of Americans who are in the market for a new car decide not to buy a new car this year -- a wise decision, in my view. They buy used cars and put the extra money in a money-market fund or even a bank. Where will this money go? To borrowers. Because of a shift in opinion, more borrowers are business borrowers (paying 8%) than credit card users (paying 18%). The banks may get caught in a squeeze: less profit per loan on the 1.5% they pay to depositors. So, send your banker a "get well soon" card and then forget about it.

If I understand basic economics, every expenditure is someone's income. Employers pay wages. They buy raw materials. They bear the agony of costs, while those an the receiving end rejoice. We have all seen those circular flow of funds charts, none of which we can remember. But what those charts are supposed to show is that income equals output. There is always "entropy" -- waste. (It's never in the charts, which is why they aren't of great use.) Some things get lost. Some things wear out. But all of the money is in someone's possession.

When a spender shifts from consumer goods and services to production goods and services, the same amount of money flows into someone's bank account or hoard of currency.

The economists know this. Then why all the hand- wringing about the threat of the fearful consumer, who will stop spending? It's all nonsense. He will not stop spending. He will merely reallocate the flow of funds. Someone else will get his hands on the money.


WINNERS AND LOSERS

Some entrepreneur has guessed that a handful of consumers will spend money on his product or service. Bill Gates has a larger number of consumers in mind than I do -- sadly. But we producers are all in the same game: trying to get each other to buy from us.

When consumers make a marginal shift in their budgets in order to raise their savings rate from (say) zero (July, 2000) to (say) 4% (this month), some entrepreneurs will lose, but others will win. We spenders say that we're now willing to postpone consumption. That's what a pension fund is, after all -- and we all know what would happen to the stock market if pension fund investors decided to cash in their accounts and spend the money on a new car. Crash!

But we are also told by economists that by allocating a little extra money to a pension fund the economy is at risk. Result? Crash!

Well, which is it? Which threatens the stock market more, saving or spending? Whichever answer you prefer, some economist will sell it to you.

The way to get rich is through capital accumulation, both personally and collectively. The economy needs thrift. Then why all the cheering for the consumer? Why all the hoopla about "home buyers have saved the American economy"? In short, are economists nuts?

Considered as a group, the correct answer is: "yes."

Individually, they are very smart. Collectively, they are quite mad, in the nutty way. (Some of them are mad in the ticked-off way -- Paul Krugman, for instance.)
Conclusion: "If you laid all the economists end to end, it would be a productive use of scarce resources."

When people shift their budgets, some businesses win, and others lose. But the money always winds up in another consumer's bank account.


AGING

As we age, we get more productive for a while, then less productive. (This law may not apply to Warren Buffett and Michael Caine.) But saving makes us more productive, if we invest in productive assets. That's why the habit of thrift is economically vital. It is even more important than the habit of hard work. Asians have always worked hard, but it was not until they adopted free market
capitalism that they got productive.

The Japanese housewife saves heroically, but she invests unwisely. Her government has gained her trust and has restricted her options, both as a consumer and a saver. She is throwing too much of her money down government- regulated rat holes.

The American entrepreneur also saves heroically. As a group, most of them lose. A few of them win big. We consumers are the long-term winners. We determine which entrepreneurs win big. We vote with our money.

American consumers don't save enough. Our government has fooled us, too. "Social Security will always be there. Medicare will always be there. The Federal Reserve System will always be there. Trust us." Millions of Americans have believed this message. They have "gone long" in government-promise futures. (I have always sold this market short.) Alternatively, the public has bought government-promise "call" options. The government has sold "puts," and fully intends to put it to us.


CONCLUSION

What this economy needs is a huge tax cut. It needs millions of unemployed government ex-workers. Call this "the supply-side private labor market." Call it "the reserve army of the unemployed." Call it "freedom."

This economy needs more saving, more consumer spending, and more freedom to choose between the two.

Mainstream economists worry about the American consumer. I worry about the regulated American consumer. I worry about the American consumer in his status as taxpayer. Our money will eventually wind up in someone else's account. Let it wind up in the pockets of people who come to us and say, "Let's make a deal."

Maestro 11:25 PM