Friday, January 28, 2011

Why Children Don't Work in the US

I was at a rather ridiculous Anti-WalMart protest last week in Washington DC, where a handful of folks were actually at a developer's private residence shouting and disrupting his family and his neighbors at home. It was spectacularly rude, and wildly inconsiderate... Of course. But it was also filled with people who were quite confused on the history of labor & unions in the United States, and as a result, grossly exaggerate union accomplishments..

So I just wanted to take a second and drop a history-knowledge bomb on y'all about one thing in particular: Child labor.

Contrary to popular belief, labor unions & legislation did not bring an end to child labor in the United States. Prosperity did.

I know, I know... That's not what your high school history teacher taught you. I get it... I'm, yet again, going against the orthodoxy here... But the idea that labor unions ended child labor by getting laws written to force people to stop employing children lacks a good deal of basic logic, and betrays an unsurprisingly heinous lack of understanding of economics.

Why so, you ask? Well... Let me explain.

First of all, let's drop the notion that children work because some rich businessman chained them up to a machine & forced them to.

Aside from cases of actual slavery (which most certainly do exist, and are still a big problem today - but which are not part of our current discussion), this is not the case. The fact is, child labor is still a big issue around the world, and it's truly heartbreaking... But in order to understand how to end child labor, it's pretty crucial to understand WHY children work in the first place, don't you think?

Understanding the true cause of child labor around the world is the first step to sifting through the idiotic mythology that leads people to believe that unions or labor laws ended the practice.

I know how great a villain those Robber Barons are. But, as slick and pre-packaged a narrative as that might be, it's just not the monocled fat cat at fault here. The cause of child labor is run-of-the-mill, boring, unsexy, mundane... grinding... poverty.

Not that this shouldn't be an obvious point, but studies certainly confirm. In fact, the United Nations issues a journal called "Africa Recovery" and from Vol.15 #3 of that journal, issued in October of 2001, I bring you this excerpt from its page 14 article, Child Labour Rooted in Africa's Poverty:
"Child trafficking is only one of the more pernicious aspects of a much broader problem. Africa has the highest incidence of child labour in the world. According to the ILO, 41 per cent of all African children between the ages of 5 and 14 are involved in some form of economic activity, compared with 21 per cent in Asia and 17 per cent in Latin America. Among girls, the participation rate also is the highest: 37 per cent in Africa, 20 per cent in Asia and 11 per cent in Latin America.

It is no coincidence that Africa also is the poorest region, with the weakest school systems. And among African children, those from poorer families are far more likely to seek work. A 1999 Child Labour Survey in Zimbabwe, conducted by the ILO, found that about 88 per cent of economically active children aged 5-17 came from households with incomes below Z$2,000 (US$36) per month. As family incomes rose above Z$3,000, the participation rate dropped to less than 1 per cent. Parents and guardians of working children, when asked why they let their children work, most often responded "to supplement household income" or "to help household in enterprise.""
There is no doubt what-so-ever that there is still slavery and human trafficking, and that those crimes definitely do wind up forcing children to work when it's certainly possible that if they had not been kidnapped or sold into slavery, they would not have had such miserable lives. But that is a crime, and has been for a long time. Coercion is, I hope anyone who's ever read this blog realizes, not part of the free market - which is based on the interactions of free people. As such, I'm not going to talk much about trafficking in this essay... It is a crime, it is wrong, it's intolerable. End of story.

However, as the excerpt notes, child labor isn't actually mostly about trafficking. Mostly, it's about families being unable to support themselves without the full participation of every single healthy family member contributing to the group economically.

And you thought I made that story up!
Now, this information really shouldn't come as a shock to anyone, and if you've traveled at all to poorer parts of the world, you might even have seen this. During my own limited travel to South America, I certainly witnessed children working on the streets. A trio of 8-10 year old boys actually made my trip to Costa Rica a little more interesting by acting briefly as tour guides, sloth-finders, and coconut-beverage procurers.

Now, I'll grant you that these kids weren't in a sweatshop making shoes, but Costa Rica is a little higher up on the development curve than say... Nigeria... and, these young guys were still working instead of playing soccer or going swimming like I did when I was 10. There's no question that these boys had to work.

And instead of getting weepy about this, I just paid the kids for their services (and bought them fruit drinks as well) and wished them all the best when I had to go back to my own job... I also took note of why they had to work, and I can assure you, it wasn't because I came in and exploited them and forced them to do so. These boys were entrepreneurs, plain & simple. Instead of the lemonade stand, they were in the tourism business, and they did a fine job - and I was happy to reward them as best I could...

But they were in that business because even at 10 years old, they had to earn a living. They were poor... Not, maybe, poor by African or Indian standards - but by American or European standards... Yep. Poor.

And this is why most child labor happens around the world, and it's certainly why it happened throughout the early United States!

Parents aren't making their kids work because they're evil or cruel, and employers aren't accepting a child labor force in certain parts of the world because they're slave-drivers. Kids work because their families will not be able to eat if they don't contribute, and employers accept children for some jobs because they are obviously inexpensive and they too are quite poor. Exploitation is a word thrown around a lot in these situations, but it's usually a seriously over-simplified term and only has value as hyperbole.

Without children working, in some areas of the world, under current conditions, many families would not be able to survive.

So it should be that we have to remember our Ludwig von Mises:
"Action is an attempt to substitute a more satisfactory state of affairs for a less satisfactory one. We call such a willfully induced alteration an exchange."
"Most actions do not aim at anybodys defeat or loss. They aim at an improvement in conditions."
People's material prosperity is the determining factor regarding the conditions under which they will be willing to work.

If your choice is starving to death or picking through trash for food, most people will pick through trash. If your choice is picking through trash or working 20 hours a day in a factory at $0.30 an hour, most people will go for the factory job. If the choice is $0.30 an hour in a factory for 20 hours a day, or 16 hours a day for $0.40 an hour... You get the idea...

Unfortunately, in much of the world, the opportunities available to people are much more limited and comparatively crappy than they are in America or in other more developed nations.

But that was not always the case! The other thing people need to consider here is that the level of poverty people experience today in the 3rd world is exactly the level of poverty experienced by everyone in the world throughout its history. Poverty is the historical norm. Prosperity is what's bizarre...

Two excellent quotes from Thomas Sowell (who grew up remarkably poor) come to mind. First:
"When Western countries in the past were as poor as Third World countries are today, these Western countries nevertheless had one big advantage: There was no large and influential class of the intelligentsia to impede their progress with unsubstantiated theories and counterproductive propaganda."
...and, also...
"It would be devastating to the egos of the intelligentsia to realize, much less admit, that businesses have done more to reduce poverty than all the intellectuals put together. Ultimately it is only wealth that can reduce poverty and most of the intelligentsia have no interest whatever in finding out what actions and policies increase the national wealth. They certainly don't feel any 'obligation' to learn economics..."
Sowell always takes jabs at academia, but rightly so, I think! For so long, academia, and "the intelligentsia" has peddled the idea that child labor is just something that happens because evil people want it to happen, but they never bother to learn the true causes - and as a result, can't figure out the real solutions.

Going back to the beginning though, why can't labor laws fix the problem? Simple: Because laws cannot override economic reality.

If a nation is so poor that the only way to feed your family is to have every member work, including your youngest child, then your children will have to work - or you starve. No amount of law-writing will feed your children. Unfortunately, far too much law-writing can impede your ability to feed your family. And that's really what Sowell was getting at.

Most of 18th & 19th Century America did not have laws against child labor, and in fact, the first laws preventing child labor that cropped up in the 1830-1840s in some states were pretty limited in scope and some were even repealed on Constitutional grounds.

But more importantly, I want to draw your attention to Wake Forest University Professor of Economics, Robert Whaples, and his article, "Child Labor in the United States" - in which he contends:
"Most economic historians conclude that this legislation was not the primary reason for the reduction and virtual elimination of child labor between 1880 and 1940. Instead they point out that industrialization and economic growth brought rising incomes, which allowed parents the luxury of keeping their children out of the work force. In addition, child labor rates have been linked to the expansion of schooling, high rates of return from education, and a decrease in the demand for child labor due to technological changes which increased the skills required in some jobs and allowed machines to take jobs previously filled by children. Moehling (1999) finds that the employment rate of 13-year olds around the beginning of the twentieth century did decline in states that enacted age minimums of 14, but so did the rates for 13-year olds not covered by the restrictions. Overall she finds that state laws are linked to only a small fraction – if any – of the decline in child labor. It may be that states experiencing declines were therefore more likely to pass legislation, which was largely symbolic."
And honestly - this is so often the case with legislation, and few people actually bother to pay attention to it.

The culture and economic environment changes first, and then the laws change. And OF COURSE it works that way. Elected officials aren't instigators of societal change, and they really can't be, simply because they are representatives of members of society into the government. In order to get elected to public office on a particular platform of ideas, people already need to sponsor said ideas... And if they don't, and you get elected anyway, then democracy has pretty much gone horribly awry.

But, seriously... You can see this pattern repeatedly. For example, cigarette smoking was on the decline already, and most restaurants & bars had either banned smoking or provided designated smoking areas long before any legislation required them to do so.

The legislation reflects the changes after they've already happened. It's incredibly rare to find a situation where laws actually created meaningful change, rather than where they solidified or forced people to do something most were already choosing to do voluntarily.

Child labor disappeared in the United States not because of labor unions or anyone making laws that made employing children illegal, but because child labor was no longer economically necessary. The massive amount of prosperity generated by minimally "fettered" markets and robust productivity gave families the wealth to be able to afford a reasonable standard of living on the labor of just one or two members where before they needed the labor of everyone.

Academics today, who so often fail to understand economics, misunderstand the reasons child labor declined in the US, and so they push misguided remedies for child labor around the world. By restricting peoples' abilities to work, and to produce, the poorest countries on the planet are often condemning their citizens to remaining poor instead of going through the ugly - but often necessary - phases of economic development that enable true, lasting prosperity.

And frankly, all the laws do is compel people into black-market conditions - and that drives up people's cost of living and working even more, and winds up being remarkably counterproductive... Making people poorer.

As I noted before, if everyone in a family must work in order for that family to be able to afford to maintain a rudimentary standard of living, then everyone will work... Regardless of what words are written on which pages of which law books.

Child labor is not good. And it can be eradicated worldwide... But the way to eradicate child labor is through productivity, capital development, mechanization/modernization, and the creation of wealth. Markets can do this... If we let them.

Wednesday, January 12, 2011

A few thoughts...

From the kid claiming to be Loughner's "best friend" speaking with ABC News:

He mentions a number of things in there that I think are worth talking about briefly, in order of most importance, starting with the least.

FirstSalvia divinorum.

Jeesh... News media... Seriously... Can you for once do a story on something like this that treats it with respect without blaming some trendy but scary-to-old-people "drug"? Yes. It's a hallucinogen. It's been around for thousands of years, and was used by the Mazatec indians of Oaxaca, Mexico.

Plants are scary!!
Drugs aren't worth wasting your time on in my opinion, but they don't cause people to become homicidal!

How do I know? Because literally tens of millions of people use drugs of all kinds every single year in America and we do not have tens of millions of murders... We have tens of thousands.

Jacob Sullum, who writes on drug policy for Reason Magazine wrote an article in December of 2009 when Salvia bans started to become all the rage. It's a lengthy piece, but worth reading. Not worth quoting here though... Just, c'mon, ABC... Quit being the stupid fear-mongerers you are for like one minute and don't turn this tragedy into yet another opportunity for scapegoating drugs.

Second: Zeitgeist.

This is a "documentary" - and I use that term extremely loosely - about which I said the following to a friend who asked my opinion on the economics & history of the thing, way back on July 8th, 2009:
"There's no question that the World Bank & the IMF aren't helpful, or that many corporations are using governments around the world to keep out competition.  But it's global trade barriers that are keeping those little countries poor, not the liberalization that is making them poor.  It's basically making the same mistakes that people like Naomi Klein & Noam Chomsky do...  Partially because while they seem to grasp the origins of money ok, they don't grasp the rest of basic economic principles and the history is sorta shoddy when you start getting into which nations are doing better.  Hussein's Iraq, Chavez' Venezuela aren't examples to EMULATE!  They're miserable bullshit places where you're starving to death, tortured & actually enslaved."
This was excerpted from a personal email, so it was kind of haphazardly dashed off, but I stand behind every word. Zeitgeist gets a few things right about the history of money and the serious problems of a fiat money system and fractional reserve banking within its first 15-20 minutes...

And then... It goes completely bug-nutty.

Idea fail.
I don't even know where to begin, and I haven't watched it since... well, July 8th, 20009, so I don't really remember it in its entirety. What I do remember generally, was that it basically concluded that the answer to the problems of a central bank was some insane hybrid between full on socialism, nationalizing everything and emulating guys like Hugo Chavez (which, I must say, has only gotten better in the intervening year and a half, right?) - and - eliminating banking entirely. I could have the details wrong a bit here and there, but I am certain that I was never wrong about its conclusions being utterly asinine.

It was riddled with conspiracy theories about "banksters", like the Bilderberg Group and the Rockefellars, with the "New World Order" and it basically decides that because central banks like our Federal Reserve controlling the money supply causes disruptions in the economy through the business cycle (which it didn't fully understand) and therefore... We should chuck out "money" entirely.

No mention of the Calculation Problem, no real recognition that money is one of the single greatest inventions of man-kind purely because it enabled non-time dependent exchanges instead of straight barter, and it allowed for the division of labor which enabled us to produce wealth and grow materially - raising standards of living to the point that we have today... Just... Crazy. And a lot of it.

Anyway, enough about that...

Third: Friendship and Just... Being There for People.

Friendship is important... Just take some time
and be there for people in need.
Watching friends struggle with mental health problems is a scary business. I've had the misfortune of having a small number of once-close friends, starting in high school and into college, who demonstrated some of the symptoms that Loughner's friend describes.

They became depressed, often for reasons that they never shared with me or with anybody, and began engaging in more and more self-destructive behaviors like consuming drugs & alcohol in a decidedly non-recreational capacity. In each case, these friends began to detach themselves from other people...

The thing is, I know exactly how it feels to one day wake up and realize that you're no longer friends with someone anymore... Not because I didn't care about them, or because I didn't want to see them at their best, but because in many of these cases it's just impossible to know what to do or how to help. If you're like me at all, then you are not likely to follow those people down the rabbit-hole.

I don't drink, I don't do any kind of drugs at all (including pot, cigarettes, or even hookah) and I never have.

So, when some of my friends in the past have turned to those kinds of things and begun spending all their time drunk or high, and hanging out with unsavory people in bars and such... I won't join them. As a result, we lose touch, and as did the "best friend" in that video... I just... Forgot about them.

I didn't mean to, but you can't let people drag you down with them, and if they quit talking to you... If they disappear... That's just what happens.

But maybe it shouldn't always be that way... Maybe we should all try a little bit harder to help people like Loughner before they get to the point that they are considering harming themselves or others. There's no easy solution, or easy way to know how to help. No matter what, I always try to be responsive and give my time to people I know and provide a shoulder to cry on or an objective ear. To some extent I feel like it is the best I can do in many situations - but events like what happened in AZ make me wonder if that's true.

I've never called a hospital or someone's family. I've never suggested that a friend seek out serious psychological help... A few of my friends who I've lost touch with for these reasons are still unknown to me. Fortunately, however, a few have returned to the land of the living and are now better, generally happier people with a little baggage. One or two, I'm proud to say, I do get to talk to more regularly again.

So... Anyway... It's something to think about. Maybe we should all be a little better about being there for our friends & loved ones when they're experiencing mental distress... You never know how much a positive word, or a sympathetic, caring ear can help.

Perhaps if the many people, including the Sheriff who kicked off the politicization of this tragedy, who had known of Jared Loughner's unstable mental condition had expended a bit more effort trying to reach out to him and get him the help he needed... It's possible that several people's lives could have been saved.

Monday, January 10, 2011

Jared Loughner: Lunatic. That is all.

Not that anyone could escape the news, but a guy named Jared Loughner took a handgun and shot a bunch of people at a political event held at a Tuscon, AZ Safeway on Saturday. 20 people have been shot, including the Congresswoman holding the event, Gabrielle Giffords, who is hospitalized with a bullet wound to the head and is in what I must presume is mortal peril, and six others are dead.

It's pretty bad stuff.

But whenever tragic events like this happen, I am always reminded of two things. They are linked, but may seem strange to anyone without access to my trains of thought.
  1. Eric Harris & Dylan Klebold. Columbine High School, Colorado. 1999.
  2. Naomi Klein is an idiot.
I'll get back to that in a minute... But first, here's my point:

Tragic and shocking events are inevitably proceeded by a cadre of journalists, and now bloggers and pundits and basically anyone with the ability & inclination to opine on these kinds of affairs attempting to come up with a "rational" explanation for why the event occurred.

On the part of professional journalists, this is remarkably shoddy reporting - as they typically, and certainly did in this case, just latch on to whichever supposed "influences" fit their current narrative... Usually with little to no evidence, or at best with utterly cherry-picked information and ignoring everything else that might be contradictory. On the part of pretty much everyone, it is all incredibly bad thinking.

Already, people are coming up with their various theories on why Loughner did what he did.

Numerous people, such as Sen. Dick Durban and others, have brought up some dubious Sarah Palin connection. Yawwwwn. What's their evidence? A "crosshairs" map that Palin had promoted via her powerful social networking presence on Twitter before the mid-term elections last year with representatives who she (and others as it turned out) felt needed to be out of a job.

Palin's Map... 
The San Francisco Chronicle editorial blog had a bit of a hissy fit about even entertaining the idea that maybe... just maybe... that map wasn't the cause of Loughner's decision to spray bullets at a crowd of people:
"Louhner shot 14 people; six are dead. And some political anchors claim there's no direct connection with Former Governor Palin.

Like hell there's not.

Palin's helped extremist conservative groups attack and protest Giffords, planting the seeds for the idea that harm should come to the Congresswoman (and all over the Heath Care issue), and so much so that Giffords herself mentioned Palin's approach and it's possible consequences."
They also claim that the map is still up on Palin's Facebook page or whatever (which, as I am not a Palin fan or "Facebook friend", I do not plan on checking), and they demand:
"Sarah Palin, take down that damn map, NOW!"
Funny thing though... They haven't demanded that the Democrat Leadership Council take down their map, which they put up back in 2004 campaigning against Republicans and - at the time - incumbent President Bush's re-election bid. Check it out:

DLC map from 2004, which as of this posting is shockingly (!!) still up on their website.
But of course, according to other boring liberal pundits, it's impossible to find comparable rhetoric in years past. It's only this insane "Tea Party" moment that has everything unglued... Like this perfectly reasonable statement from our old friend Paul Krugman:
"Democrats had a lot of harsh things to say about former President George W. Bush — but you’ll search in vain for anything comparably menacing, anything that even hinted at an appeal to violence, from members of Congress, let alone senior party officials."
Yeah... It's SOOOOOOOOOOOO hard to find examples of Democrats promoting violence, using hyperbolic imagery or uh... creating political maps with bullseye targets on them.


Does not advocate the assassination of a president...
I guess I should be used to Paul Krugman being utterly wrong about everything by now, but he still has a job... So I guess I have to keep pointing it out.

Unfortunately, this has been the general meme of a lot of mainstream news on TV and certainly all over teh intertubez. Jared Loughner was "motivated" by the "extreme rhetoric" of the Tea Party... Olbermann & Maddow are blaming Sharon Angle and Glen Beck, of course... And since these same news outlets have been reporting on the "inevitability" of violence for about two years - first because of a "Black President" (ZOMG!!), then because of grassroots anti-tax/anti-spending movements, then because of the codified "Tea Party", and kicking it all into high gear during election-season last year - events like this are a perfect opportunity for confirmation bias.

That isn't to say that everyone has gone totally bonkers with all this stuff.

Most surprisingly to me, here's a more reasonable quote from Time Magazine pointing out that while he had posted numerous videos online ranting against "government":
"What is not clear is what role politics — and, in particular, the red-hot rhetoric of the mid-term elections — played in the shooting. Descriptions one of Loughner's high school classmates posted on Twitter only added to the mystery. "He had a lot of friends until he got alcohol poisoning in '06, & dropped out of school. Mainly loner very philosophical," @caitieparker tweeted. "As I knew him he was left wing, quite liberal. & oddly obsessed with the 2012 prophecy." And, most ominously, "He was a political radical & met Giffords once before in '07, asked her a question & he told me she was 'stupid & unintelligent.'""
And as the folks at Natural News pointed out:
"The shooting suspect Jared Lee Loughner, is, by any sensible interpretation, mentally deranged. Yes, he mentioned the Constitution among his various ramblings, but he also listed the Communist Manifesto as being among his favorite books. In addition, he released a YouTube video containing unintelligible ramblings of repeated nonsense phrases, including references to the government taking away "grammar," of having a colorful bird on his shoulder, brainwashing and what he called "conscience dreaming.""
There have also been a few reports about Loughner being a fan of Mein Kampf.

And herein lies the rub...

People like Loughner do not have a coherent political or ethical philosophy. They aren't meaningfully influenced by some stupid map drawn up by Sarah Palin's "Political Action Committee" in an election year - which by the way, I don't see anything wrong with at all (how else do you highlight the districts that need specific "political action" from your point of view?) - any more than it's J.D. Salinger's fault that Mark David Chapman shot John Lennon.

And here we come back to why I always think of Columbine.

When that tragedy happened, the instantaneous reaction of nearly everyone in the media was to find something to blame. The kids wore black trench coats, so we were told that signs of disturbed teens included wearing black. Never mind that half the kids I went to school with in the late 90's wore black all the time. Anyone who was into heavy metal or grunge music, a lot of rap and/or "goth" sub-culture was a prime candidate. And once pundits figured that out, they started blaming heavy metal, grunge, industrial, and rap music along with "goth" culture. Their favored target: Marylin Manson... Even though you'd be hard pressed to find anything remotely violent in virtually any of his songs or albums.

And this is after a massive drop since 1980!
But they didn't stop there!

Oh no, not only was it the fault of music & fashion statements - it was also the fault of video games! Yep... Loner kids who grew up during the spawn of the internet - just as I did, mind you - were violent because video games made them so.

Never mind that you can't throw a dart at a map without hitting the location of some kid playing Halo, Call of Duty or Gears of War anywhere in the United States - and let's also toss out the reality that according to Federal Government crime statistics, youth violence is at a 30-year low... Which, given the rise of video gaming as a well-over $10 Billion a year industry, seems odd, don't you think?

Never mind ALL of that. We found ourselves a scape-goat, and by god the media ran with it for weeks. And where did  it lead?

Exactly the opposite of where Naomi Klein told me it would!

Klein, you may remember, authored the book "The Shock Doctrine: Rise of Disaster Capitalism". From her own website (which you can google if you want to see it, as I have no intention of giving her any more hits than her sycophants already provide if at all possible), Klein says:
"The Shock Doctrine is the gripping story of how America’s “free market” policies have come to dominate the world-- through the exploitation of disaster-shocked people and countries."
Her broader thesis is that any time some kind of emergency of "shock" happens in a society, we miraculously become more economically "free"...

It would be positively astounding if Klein had presented a single shred of true evidence for her idea, but of course, she didn't... And she can't. Why? Because every single time there is some kind of crisis we all become LESS FREE, not more!

After Columbine, we got Zero-Tolerance and "Gun Free Zones". These policies, like virtually all political jive, tend to "sound" like great and sensible ideas, but in reality just wind up putting people in far more danger from the law itself and make us no safer from the kinds of things they're designed to prevent.

For instance - we recently saw the case of 17 year old Ashley Smithwick, who is among the many hundreds of people suspended and frequently prosecuted (and sometimes convicted & saddled with criminal records) for the violation of Zero-Tolerance laws in spite of all common sense. Smithwick was accidentally toting about a paring knife in her father's lunch-box, which he had intended to use to cut his own apple at lunch. There are many people who have their lives turned upside down in these cases in some blind, letter-of-the-law approach to "solving" school violence... And the "solutions" don't even work!

But the fact is, you're as likely to be shot via mass-shooting in a "Gun Free Zone" as you are basically anywhere else, and perhaps a bit more-so, given the tendency towards mass shootings near government buildings like post-offices (which have always been "gun-free" zones) and schools. In spite of presumably good intentions, these laws certainly did not help the people at Fort Hood, in Texas or the students of Virginia Tech. And gun-control certainly hasn't helped the residents of Washington, D.C.

Jacob Hornberger pointed out the obvious reasons why:
"As libertarians have pointed out, time and time again, would-be murderers don’t give a hoot for gun-control laws. At the risk of belaboring the obvious, if would-be murderers are willing to violate laws against murder, it is certain that they will have no reservations about violating gun-control laws.

Therefore, what gun control accomplishes is a disarming of people who would otherwise have the ability to defend themselves from would-be murderers. The peaceful, law-abiding citizenry is forced into simply dodging bullets from the murderer’s illegally possessed guns until the cops arrive."
But that's the legacy of our country's knee-jerk response to events like Columbine.

And it's happening all over again... But this time, the target isn't so much guns (although I have no doubt that the Safeway shooting will result in new calls for even more useless "gun control" laws) but something far more insidious.

Now - within two days of this tragic shooting - some people are calling for all manner of laws inhibiting people's freedom of speech!

Democratic Congressman, Bob Brady has announced his intention to introduce "new" legislation banning the:
"...use language or symbols that could be perceived as threatening or inciting violence against a federal official or member of Congress."
Past, Present, Future or Fiction?
And who, pray-tell, decides how imagery is "perceived", Mr. Brady? You? Some faceless bureaucrat at the FCC or some new speech-prohibiting agency your law dreams up? Will they be going out to political rallies and making people put away signs with shocking images of political figures with bullet-holes in their brains, or with coat-hangared fetuses? Will they be traipsing around the United States with flame-throwers strapped to their backs ready to burn the wrong books and magazines?

Credible threat? Or...
Badge of an idiot?
Is this "Kill Bush" satchel [on right] "threatening"?

Are Palin's or the Democratic Leadership Council's maps "threatening"? What about people who have no other substantial political voice... By using hyperbole to get attention, are they "threatening" anyone?

What precisely is so difficult to understand about the First Amendment?

It's one of the shortest... It's language is strikingly clear... And it's a really spectacularly good idea. Freedom of speech may very well be the best idea anyone has had in the entire course of human history. Look... Easy to understand:
"Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances."
See... Simple! No law. Done. Finite.

But the second some jerk shoots a Congresswoman we have even more (and in some ways, worse) jerks calling to abandon the principles of free speech that under-gird a legitimately free society. Jerks like Bob Brady - or like Rep. Jim Clyburn, who wants a new version of the "Fairness Doctrine", which would allow lawmakers or their bureaucratic lackeys to decide what constitutes "balance" in the media (and which, when it existed before, was unsurprisingly heavily weighted towards the government and against most outsider views).

This is why I always think of Naomi Klein when tragedies shock the nation... And it's why she is an idiot.

Extreme and shocking world events never make us more free or benefit "the free market" as she claimed... They are always used as an excuse for the leviathan state to grow and usurp MORE authority over the people. The state grows & liberty shrinks. We won't become more free as a result of this anymore than we became "more free" after 9/11.

Not economically, not politically and not socially.

We won't be more free to go out to places like Safeway and acquire material goods voluntarily & peacefully, especially not if there happens to be a public official anywhere nearby. We certainly won't be more free to buy firearms or to carry them in the places where the tools of life or death defense might be worthwhile (such as when randomly being shot at by an indiscriminate madman)...

We won't be more free to read & listen to networks & individual people of our own choice. And if Clyburn has his way, the individuals & organizations who promote news and commentary will be markedly less free to decide for themselves which views they want to espouse and for which reasons.

People in America are - and should be - free to state their case as they see it and in whichever way they want.

Palin's map wasn't a call for assassination any more than the DLC's map was, and there's no evidence that a guy like Jared Loughner even saw the map, much less that it remotely influenced his decision to shoot almost indiscriminately at a large crowd. People trying to politicize this issue want to blame whoever and whatever fits their pre-defined narrative, and politicians are already stepping up to exploit these events to further separate the ruling class from everyone else.

It's not "disaster capitalism" or "disaster free markets"... But disaster totalitarianism!

As usual.

Note that Brady's law wouldn't make it illegal to threaten "anyone", by the way... Just other people in Government. More special protections for him - and more ability for the people already in power to decide what constitutes acceptable speech.

Think it's wise to give these people the power to decide who is saying "the right things" or to be the arbiter of "tone"?

I don't.

Besides... Credible threats of violence are already illegal, and they can be used as evidence for obtaining warrants and restraining orders. However, for a threat to be "credible", it has to meet a specific legal definition and not the nebulous political whim of a Senator. That is to say:
The term credible threat means a threat that is “real and immediate, not conjectural or hypothetical.”
Kegler v. United States DOJ, 436 F. Supp. 2d 1204, 1212 (D. Wyo. 2006)
Real and immediate, not conjectural or hypothetical. So I guess that Kill Bush satchel doesn't count.

And that - I suspect - is precisely why people like Clyborn or Brady want more power. People speaking out against the actions of government are really hard to restrain. Calls to limit speech, and the inevitable calls on more ineffective restrictions on gun-ownership have got nothing to do with Loughner - who as far as I think anyone knows has no over-arching or particularly rational political motivation at all.

It's just about the expansion of the state, and this "shock" is going to be yet another in a long string of opportunities to further enhance the authority of the government and those running it against the actions of ordinary people.

And so it is that I will leave you all with one final question: Why exactly is Gabriele Gifford's life so much more valuable than everyone else's?

Why is it more valuable than Christina-Taylor Green's?

My heart goes out to that family, and to the families of the other 4 people who were shot dead, more even than to Gifford... This whole thing is a shame, but it would be a much greater shame to let this tragedy turn into yet another opportunity for fear-mongering and bad ideas to get the best of liberty in America.

Saturday, January 8, 2011

Info-Graphic! The Flow of Money

Here is a brand-new Info-Graphic, created by me in service of a point I've been trying to discuss regarding income inequality in America. The graphic is sub-titled:

How Fractional Reserve Banking Contributes to the National Debt, Economic Instability & Income Inequality

Check it out:

This should tie in nicely to the two exceptionally long blogs/essays I've done recently on the subject of myths & truths behind the widening gap of incomes in America. If you think I've gotten something spectacularly wrong here, by all means - let me know!

Also... If you find any typos, let me know that too ;)

Friday, January 7, 2011

Soft Tyranny

A brief clip from Stossel reminded me of a fabulous quote from Part 4, Chapter 6 - "What sort of Despotism Democratic Nations have to Fear" - of Alexis de Tocqueville's "Democracy in America"... Stossel pulled only the final paragraph, but since I have a blog and no network bosses, I think a small excerpt is worth posting:
"Above this race of men stands an immense and tutelary power, which takes upon itself alone to secure their gratifications and to watch over their fate. That power is absolute, minute, regular, provident, and mild. It would be like the authority of a parent if, like that authority, its object was to prepare men for manhood; but it seeks, on the contrary, to keep them in perpetual childhood: it is well content that the people should rejoice, provided they think of nothing but rejoicing. For their happiness such a government willingly labors, but it chooses to be the sole agent and the only arbiter of that happiness; it provides for their security, foresees and supplies their necessities, facilitates their pleasures, manages their principal concerns, directs their industry, regulates the descent of property, and subdivides their inheritances: what remains, but to spare them all the care of thinking and all the trouble of living?

Thus it every day renders the exercise of the free agency of man less useful and less frequent; it circumscribes the will within a narrower range and gradually robs a man of all the uses of himself. The principle of equality has prepared men for these things;it has predisposed men to endure them and often to look on them as benefits.

After having thus successively taken each member of the community in its powerful grasp and fashioned him at will, the supreme power then extends its arm over the whole community. It covers the surface of society with a network of small complicated rules, minute and uniform, through which the most original minds and the most energetic characters cannot penetrate, to rise above the crowd. The will of man is not shattered, but softened, bent, and guided; men are seldom forced by it to act, but they are constantly restrained from acting. Such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies a people, till each nation is reduced to nothing better than a flock of timid and industrious animals, of which the government is the shepherd." - Alexis de Tocqueville"
Surely that doesn't seem like an accurate portrayal of modern America, does it?

Nope... Not a bit.

Why Do We Have Income Inequality? Part II

In Part I of this set of essays, I discuss four of the different - and I think, incorrect - ideas that people often use to explain why there is a growing income inequality in America. This second half is about the good arguments.

The usual disclaimers apply: Specifically that freedom is more valuable than "equality", and that most of the disparity is about nominal money, not adjusted for inflation or with the understanding that actual wealth is about stuff - which the market has consistently made more accessible and less expensive in all areas that aren't particularly government controlled. "Wealth" is most certainly not about Federal Reserve Notes. And wealth for everyone in the United States has unquestionably expanded consistently, and that means that most of the talk about income disparities actually fully miss the point.

However, there are multiple structural impediments on the improvement in conditions for the poorest in the US, and special benefits that go to the wealthiest among us. These issues are a problem. So... With all that in mind, I bring you...

Why Income Inequality is Growing: The Good Arguments

If it's not Capitalism (properly defined), greed, tax-cuts or de-regulation... What is the problem? 

Well... In my view, the real problems are actually a mixture of several different limitations on freedom in the economy which are designed primarily to work in favor of certain well-connected special interests - but which have been falsely advertised & packaged over the years as being in the general/public economic interest.

The first, more "local", aspect of this is all about the specific intertwining of government & "private" business; broadly defined in this case to include many corporate organizations, including for profit & non-profits corporations and various unions. But there are broader issues as well, going right down to the very essence of our financial/monetary system. I will be attempting to explain both issues.

The problem for people who wish to understand these things (and for those, like me, desperately trying to explain them) is, as I see it, two-fold.
1. Blaming stuff like "greed" and people who symbolize greed (i.e. virtually all rich people) is much easier to explain, and is a much more successful appeal to emotion than blaming the long-term, extremely complex and often counter-intuitive results of bad economic & political philosophy.
As an added bonus, rich people are always a great foil, and provide a guaranteed, easily-manufactured villain for our culture's story-tellers to write into TV, movies, books, magazines, and everything else we fill our brains with. It's clean, it's simple, and it plays to most people's prejudices and baser emotions like envy. It works... Well.

Whereas... Trying to discuss complex, systemic problems that arise from bad premises and economic fallacies with few or no obvious villains is not simple at all. Throughout the rest of this piece I will be discussing at length the consequences of political actions and economic interventions developed over a century by hundreds of different politicians, bureaucrats & intellectual supporters.

As a result, I don't get to tell a broad, sweeping Hollywood movie story of "In a world... One MAN's unspeakable greed..." in the voice of Don LaFontaine. Which means, that the story I have to tell is, at least in some ways... Well... A bit boring.

At least to normal humans (i.e... not me).

The face of Terminal Boneitis.
Hollywood gets to tell the story of Gordon Gekko and his private planes, piles of money, cocaine and unlimited sex with gold-diggers... I get to tell the story of 78,000 pages of regulation, the central control over money supplies & interest rates and the favoritism for some companies over others in an ever-more complex cluster**** of subsidies, tax-breaks, tariffs and bailouts.

Are we really surprised when the easy, sexy story is the one viewed as "true", and the one that actually makes sense isn't even really "viewed" by anyone at all?
2. Bad economic policies are extremely frequently in the specific, special interest of a small group of people, but in nobody's "general" interest.
People have a serious problem seeing the secondary & tertiary effects of economic policy. Take for example, the high tariffs placed on foreign steel. Anyone can see that this benefits the employers and workers in the American steel industry. CEOs and Steel-Worker's Union officials hold press conferences announcing how many American jobs these tariffs are saving, how wonderful it is for their industry and how we should all feel patriotic about  News reporters can run stories about all that stuff...

But what almost no one sees is how - as a result of these policies - every product that is made with steel is suddenly a little more expensive to produce.

Sometimes, this is only a few cents more per unit, sometimes a few dollars... but the net effect is that consumer products become more expensive for everyone, and there is less money available in all these industries that use steel with which to hire new employees, create new jobs and pay salaries.

On net, economic protectionism is highly damaging to the overall economy, but because the negative effects are dispersed over such a huge group in small, almost unnoticeable increments - and the "positive" effects come in large doses and concentrated within a small, often visible group - few people are able to accurately assess the value of the policies.

So with that in mind, I wish to highlight two reasons for the increased income disparity between rich & poor in America.

1. Over-Regulation & Economic Control: Mercantilism, Corporatism & Socialism

People often employ the word "Capitalism" as the label for America's economic system - however, as noted in the first section, I'm not a fan of this label because it frequently ties the concept of free markets in people's minds with problems caused specifically by central planning and un-free markets.

As I demonstrated in the other essay, America absolutely does not have anything approaching a free market, so it is a mistake to blame free market ideas for the economic problems facing the US - and since free markets are linked to Capitalism in the view of most people, it's a bad word to use. Besides - there are much better words. Three, in particular.


The first word I would use is: Mercantilism
1. economics  Also called: mercantile system  a theory prevalent in Europe during the 17th and 18th centuries asserting that the wealth of a nation depends on its possession of precious metals and therefore that the government of a nation must maximize the foreign trade surplus, and foster national commercial interests, a merchant marine, the establishment of colonies, etc
Now... Granted, we need to excerpt the "precious metals" aspect of this and modernize our concept of the monetary ideas, but the rest of it actually fits quite well.

Consider that the US government's relationship with business, and international trade, is one where it attempts (successfully or not) to protect its "national commercial interests" through imposing tariffs and restrictions on all manner of free market competition, particularly from foreign producers.

Moreover, governments regularly select specific businesses internally on which to lavish many special privileges and benefits. The Federal government does this on one scale; but each state, and even many cities do this at smaller, local scales!

Many different methods of "fostering interest" are employed by all levels of government.

Ograbme = "Embargo" backward... Get it? Participants in the
War of 1812 probably did.
First, there are "negative" ways to promote special interests. For example, there is the issue of tariffs & embargoes, which keep less-expensive goods from foreign countries out by artificially making those goods more costly to sell in American markets. There are also specific regulations which directly prevent foreign businesses from competing in America (i.e. we are limited and often disallowed from purchasing medicine produced in Europe, Canada or Mexico), and regulations which even limit American businesses from competing with each other state to state (i.e. insurance companies).

Secondly, there are "positive" ways to promote special interests. These include subsidies - such as the $20 Billion a year going to the United States agriculture industry; unevenly distributed tax-breaks for favored companies or industries - like the auto-manufacturers of Detroit or the movie business in Los Angeles; and then there are also regulatory schemes that heavily favor existing, well-connected "big" players - like the way the FDA favors the biggest drug companies, or the FCC favors major networks or media companies.

Behold! The power of
corporate subsidies.
Now... Thanks to documentaries like King Corn, some people are slowly becoming more aware of some of the tertiary consequences of tariffs & subsidies in agriculture, like America's ridiculous overuse of inefficient or low-quality goods like ethanol and high fructose corn syrup. But even still, few people have fully grasped the scope of the problem or the myriad ways all of these practices combine to help big, well-connected businesses & individuals at the expense of all consumers.

Since everyone is a consumer, these practices definitely drag on everyone's purchasing power and standard of living, including the rich - but since very few people are buddies with congressmen & presidents or are able to employ lobbyists in order to direct the creation of new regulations, tariffs, subsidies and other laws in their favor, it's just the average & poor who are exclusively effected negatively.

But it should be easy to understand how all of this requires government intervention - and thus, how it is most emphatically not a part of a free market, or a truly "capitalist" system. In fact, they are the very kinds of ideas that Adam Smith (1723-1790) - who is always regarded as the grand daddy of Capitalism - wrote the Wealth of Nations mainly to argue against.

Why a "Tea" Party? The East India TEA Company,
of course!
Why so? Because they were absolutely part of the Mercantilist system employed by the British Empire at the time of America's founding... The favoritism directed towards British, state-protected, enterprises like the East India Tea Company was a big part of why American revolutionaries went to war for independence in the first place.

Of course, the joke of all of this was that Thomas Jefferson fairly clearly saw the problems associated with mixtures of the state & business, but Alexander Hamilton - often revered as the early United States' pre-eminent economic mind - wanted to institute the British economic system here in America. Jefferson, the soft-spoken Virginia farmer was never in a great position to influence the economic ideas of this country as compared with the more bold New Yorker and first US Treasury Secretary, Alexander Hamilton... And thus began America's struggle between free markets & and government-support of favored industries.

Hamilton's views lost some favor throughout parts of the 19th Century; including during the greatest periods of economic expansion & improvements of living conditions for the poor and the development of the middle class. But his ideas - and then those of John Maynard Keynes - really dominated the 20th Century, and we know how that's gone.

Now... I like the word "Mercantilism" the best, because - aside from hoarding gold in the Treasury (which we don't do now thanks to a fiat-money system) - it seems to me to be the right fit, and I think it more accurately describes the origins of the American economic system. The ideas are mostly all there, but they have been influenced heavily by a few other ideas over the last 100 years, and we need to talk about them too.


The second word that applies to America is a little bit darker: Corporatism
: the organization of a society into industrial and professional corporations serving as organs of political representation and exercising control over persons and activities within their jurisdiction.
From an economic standpoint, this literally means that the state deals not with individuals as individuals (i.e. evenly protecting individual rights to property & association), but rather with special interests seeking favors for themselves, and often limitations imposed on their competitors. This doesn't just mean that the government would be used to benefit big businesses & industries, but also with big labor unions and other conglomerated interest groups as well. The problem is... Unlike the market, government actions are zero-sum... When one interest group wins, competing interests lose - and in general, consumers at large and the "little guys" almost always lose.

Usually, all big government does is produce big anti-competitive monopoly businesses and through our old friends: Rent-seeking and Regulatory Capture.

Il Duce
The reason this word is "darker" is because it is fundamentally associated with Fascism, specifically the kind favored by Benito Mussolini in Italy. Now, of course, we look back on Fascism in Europe as some kind of unique, and supremely evil concept - often (I think mistakenly in several ways) associated with "right wing" nationalism. So we forget that it was in fact a pro-nationalist offshoot of Socialism, once quite popular here in America. For instance, in 1933, Franklin Delano Roosevelt had this to say about Mussolini's economic policies:
"There seems to be no question that [Mussolini] is really interested in what we are doing and I am much interested and deeply impressed by what he has accomplished and by his evidenced honest purpose of restoring Italy."
Deeply impressed... Consider that. FDR also once remarked to his friend, John Lawrence;
"I don't mind telling you in confidence that I am keeping in fairly close touch with that admirable Italian gentleman."
...Referring to Mussolini.

Bailouts: NOT part of free-market Capitalism.
Fascism, contrary to the popular mythology as the great evil defeated by the US military, was once a favored idea among world leaders & academics right here in America - especially in the economic standpoint. It was viewed as a way to control the economy and push the egalitarian intentions of Socialism without entirely losing the economic growth or nominal "freedom" of private ownership. It was the "third way" between laissez-faire Capitalism and Socialism... But it's no secret that the results were expanding gigantic corporate interests with a stranglehold on government and which enjoy the "private" benefit when their businesses profit, but who are able to pass their losses onto the increasingly-squeezed taxpayers. And ultimately, as tax-payers became impoverished and economic unrest developed, Il Duce implemented a police state to hold down those individuals acting against the various interests of the powerful and connected corporations.

Pollution: A result of the
lack of property rights.
This isn't a good thing, and everyone seems to know that in hindsight... But yet, instead of blaming Franklin Delano Roosevelt and others who added "Corporatism" to our Hamiltonian Mercantilist tradition, and the ideas of Fascists like Benito Mussolini, people blame "free markets" that don't exist.

Too often people blame free markets for the crimes of big business, because they believe free markets and Capitalism result in big bad businesses... But this is simply not true. Big businesses are most benefited by a big government environment.

My favorite quote of all time from Milton Friedman was from a Reason Magazine interview in 1978:
"Business corporations in general are not defenders of free enterprise. On the contrary, they are one of the chief sources of danger....Every businessman is in favor of freedom for everybody else, but when it comes to himself that's a different question. We have to have that tariff to protect us against competition from abroad. We have to have that special provision in the tax code. We have to have that subsidy."
Surely this is an easy lesson to learn.

But Hamilton & Roosevelt didn't get it at all... And unfortunately, neither do most ordinary people who buy the common myth that powerful governments are an antidote to bad behavior by big businesses. It just isn't, and never has been.

Free markets actually are, however, because low barriers to entry; real competition; and an unsubsidized, un-protected playing field pressure businesses to compete for consumers' dollars on the merits of the products they produce and not on their ability to manipulate the law.


The last word I want to discuss is possibly even more emotionally charged: Socialism

I know. I know. "Socialism" is one of those words that everyone balks at. Either it's a Godwin-like word misused by opponents to invoke Stalin & Pol Pot or it's a magic, unicorn-creating solution to all the world's problems.

Unlike Mercantilism, in which government regulates & controls market entry and supports favored businesses in the "national interest", and Corporatism which does even more of the same but which is more about competing groups and syndicates being helped or harmed by a serious intermingling of government & business, "Socialism" is the idea that government just simply takes over and the state owns all businesses.
"a theory or system of social organization that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole."
It's most certainly not worth going down the entire road of explaining why this is an utterly untenable way to manage economic resources. Friedrich August von Hayek and Ludwig von Mises handled that issue quite well ages ago. The key issue I do want to bring up, however, is that Socialism really shouldn't be viewed quite so literally. Government control of the means of production is not necessarily something that has to be accomplished by fully nationalizing industries as Hugo Chavez is busy doing. Control can be accomplished through heavy-handed rules, regulations and controls.

Socialist. Douchebag. Possible Hitler-lover?
There are many aspects of our economy in which the means of production are in fact owned by the US Government. Over the past century, an increasingly large subset of the economy is in this position, and it invariably benefits those most closely attached to the state at the expense of most everyone else.

I won't go into all of the myriad socialist failures in America - such as the US Post Office, road & traffic production/management, fish & wildlife management, and government "safety net" Ponzi schemes like Social Security or Medicare. But in each case, we have a socialist program - you can be sure that the ordinary people are the ones who are most negatively effected by the loss of efficiency and decline in supply/higher prices of socialist-provided goods & services.

Madoff's Ponzi Scheme: $7.2 Billion
Social Security Ponzi Scheme: ~$620 Billion
Just sayin...
But of course, the unseen effects are difficult to measure and are naturally hard for most people who have been so ingrained in broken window fallacy thinking to grasp. But rest assured, like its cousin Corporatism, Socialism is a constant drag on our standards of living.

However... Above all else, there is one instance of central planning in the US economy that is by far worse than all the others combined. I'm talking about, of course... Money.

2. Centrally Planned Money

Depending on the words you want to use, we have "Socialist" or perhaps "Fascist" money. Shocking terms, I know... But, accurate.

Consider that our money is created and its value is defined by the decisions of a central bank.

In the United States, this bank has been called the "Federal Reserve" since 1913, but Alexander Hamilton had instituted the First Bank of the United States, which lost it's charter in 1811, and then we had a Second Bank of the United States from 1816 until 1832, when Andrew Jackson and others managed to get that central bank's charter revoked. The chief concern of the Federal Reserve -backed by a charter from the US government - is the planning, creation & control of money.

They have three primary methods to accomplish an expansion of the money supply:
  1. Lowering interest rates by fiat
  2. Adding money to the Monetary Base (M2)
  3. Decreasing bank reserve requirements
In each case, the Federal Reserve (central bank) is able to add money into general circulation through the central banking system. Some economists, like the late Milton Friedman, argue that the central bank can be used "for good" in order to slowly & steadily increase the money supply over time. The theory is that we want to keep prices stable, and therefore:
If the Federal Reserve Board were required to increase the money supply at the same rate as real GNP increased, he [Friedman] argued, inflation would disappear.
The problem is, the Federal Reserve has (almost) never done this. Instead of taking on the mission of keeping the money supply tied to increases in real GNP, they've taken on the mission of increasing the money supply in order to bailout or aid friendly member banks, or in order to buy Treasury Bills and inflate away the national debt at the request of politicians seeking a way to avoid the personal consequences brought on by decades of reckless deficit spending.

Side Note: Murray Rothbard and others have pointed out the more disturbing link between fiat money created by central banks as a way for the government to inflate away the cost of our numerous wars at the expense of all consumers without actually raising many taxes directly.

CPI Inflation: I mean... It's probably no big deal, right?
Now, it should be clear that it isn't at all a sustainable action, because as we devalue our currency in order to pay for our debts, we are all losing purchasing power and eventually all those other countries who have loaned the US money aren't going to be very happy if they're paid back in money just a worth a fraction of the original value.

This road ends in Zimbabwe - and I hope everyone is clear on that.

But the thing is, significant inflation produces a number of serious problems for consumers and, I'm arguing, is possibly the single biggest and most important factor in an increasing gap in income.

The problems for ordinary consumers include the rampant misallocation of resources, and by extension, the boom & bust cycle - but that's an issue for another essay. The important consideration here is to discuss exactly why an expansion of the money supply benefits primarily those first-level recipients over the middle class & the poor.

First - Understand the basics:

When new money is created, it's created within the banking system. It is not created - typically - in cash by the US Mint and dropped out of the sky onto the masses. No, no... It's created in the form of credit on the books of the Federal Reserve banks, and then is loaned out to the major investment banks - who subsequently loan this money to businesses & other, much smaller, banks through various investment interests.

Eventually, the money makes it into general circulation as ordinary people are using it to buy houses, cars, new factories, etc.

But it first goes into the hands of the biggest and richest banks in the nation. And this is a crucial point! See the following graphic:

Click HERE for Full-Resolution Version

It should, I think, come as no major surprise to learn that when a major investment bank like Goldman Sachs gets a new $100 Billion added to their balance sheets thanks to a brand new expansion of the money supply, that flush of cash allows the company to make decisions with that money that may displease the general public.

For instance, because of the incredibly large amount of money involved, a company like Goldman Sachs can offer positively immense salaries, bonuses and (more importantly) stock options to executives and managers... And they can do all this before any of the newly-created money makes it too far down the line and goes into investment accounts. The unique position some high-level bankers are in at the moment money is created provides an equally unique opportunity to siphon off increasingly large sums for personal gain. This is something that would be impossible if inflation was limited by stability in the money supply. Moreover, since the Federal Reserve is run, influenced and/or controlled by these very same bankers - we should not be surprised that the track-record of the Fed keeping inflation rates low and stable has been abysmal over the past 100 years.

A graphic I did a couple years ago, showing the value of the $US.
Note the red line. It shows exactly how abysmal the Fed's record really is...
So... We all need to recognize that in any hierarchical structure, those with the most responsibility and those who are in control of the overall hierarchy are going to be paid the most for their work. Don't be upset by this, it's a perfectly sensible way to divide pay-outs. It is not the problem by itself, but it can be a problem when the money coming in is fabricated out of thin air at staggering rates and when the hierarchy itself exists in a system that is almost diabolically structured purely to prevent such organizations from feeling the effects of losses.

Secondly, understand the moral hazard created by economic intervention:

When Government-sponsored Enterprises like Fannie Mae, Freddie Mac and the Federal Deposit Insurance Corporation (FDIC) exist, bankers no longer have to worry about the legitimate fear of losses which would otherwise keep greed in check within an actually free market.

In some respects, free markets are kind of like walking a tightrope without a net. How high off the ground you set the rope is going to be entirely dependent on your skill & success at walking across the chasm. Everybody's risk tolerance is different due to innumerable personal & professional factors, thus levels of debt exposure are radically different. But, much the same as adding a net under the tightrope, and people's perceived risk tolerance suddenly changes dramatically.

Artificial Risk-Negation: Good for beginning circus
performers, BAD for big business.
Just as the inexperienced tightrope walker can attempt to walk across his wire suspended 30 feet in the air with a net, so too can banks take far greater risks with the money available to them when they are guaranteed to have their losses bailed out by the American taxpayers. And so it is that in the hight of the bubble years, Lehman Brothers, and other major financial firms had leveraged their assets (i.e. loaned out and attempted to collect returns on) at a rate of over 30:1

Though I'm simplifying a bit, this means that if their investments had paid off, the bank would have stood to gain 30 times (or more) what they held in reserves. But, the flip side is, if their investments didn't pay off (and they didn't...), then they would owe 30 times more than they actually had available.

Since much of the funds they are playing with are not "their money" - in that they have stock & account holders who are funding their operations - if their bets are so bad and their leveraging so high that it threatens to bankrupt the entire company, a lot of people are seriously harmed. We all know this already...

The government's "solution" to this (at the urging of bankers themselves) was to create an environment of "too big to fail" which put up a giant net under the tight-rope walkers of high finance. And of course, far from solving the problem - it just encouraged our biggest banks to take EVEN MORE risks with other people's money!

So you ask, what's the free market solution? NO BAILOUTS. No centrally planned money or interest rates. Let banks & other businesses make their own market decisions and succeed or fail on the merits of their choices - as judged by profits & losses provided by satisfied (or dissatisfied) consumers.

No bailouts is preferable because in such an environment, the risks of greedy behavior and immense leveraging are borne by the people who made bad decisions and not by people (taxpayers) forced to socialize the losses incurred by the greedy people who overextended themselves.

Uh... Duh.
Again... Greed isn't going anywhere. It can either be "self-regulated" by fears of loss and thus channeled into productive uses by a free market, or it can become a gigantic problem for consumers & tax-payers in an un-free market where risk is negated by government-provided special privileges to the well-connected.

The market balances the greed for reward against the very real risk of failure. Governments which engage in all types of Corporatist, Mercantilist and Socialist schemes eliminate the reality of risk. Thus pushing all profits onto the small group of people managing/controlling/owning the system and all losses on the dispersed masses.

Not centrally planning the money supply would require either a fixed commodity currency (i.e. a gold standard), a mathematical standard for monetary growth (like what Milton Friedman suggested), or no monetary growth at all - which would lead to slow price deflation.

Of course, Keynesians freak out about deflation, but the fact is that all we're talking about is having a currency that each year is worth more and has higher purchasing power than the year before. This is a good thing, in my opinion...

So... Let's recap:

Who benefits from massive credit expansions?
  • Bankers (who get massive salaries & bonuses)
  • Politicians (who get to fund every program imaginable and give away special favors to...)
  • Recipients of government contracts (such as defense contractors)
  • Companies & individuals with substantial lobbying power and major shareholdings in big investment banks
  • Recipients of government-funded pork that is only possible when no one cares about the debt
Who is hurt by massive credit expansions?
  • Everybody... In the form of rising prices and costs of living, misallocation of resources leading to comparative shortages of some goods and an overabundance of others consequent to the screwed up market signals presented by manipulating interest rates
  • Especially everybody who doesn't belong to any of the above-mentioned "benefiting" groups
So yeah... I get it... This kind of a discussion is boring, complex and to some may even seem "conspiratorial" - though I assure you it's not. I don't subscribe to any notion of the Iluminati or the Bilderbergs or any of that other nonsense and none is needed. 

I'm a big fan of Occam's Razor.

The system we have today is produced by a combination of economic ignorance and narrow-minded special interests of politicians - who wanted a way to fund everything they ever wanted to do without raising taxes (including paying for an awful lot of warfare, I should add!) - and of bankers who control the money supply to their extreme advantage.


Gini Coefficient measures income inequality... But it does
have significant limitations.
I've taken for granted that the gap between incomes of "the rich" and "the poor" in America is widening. I do have a few qualms about accepting that without qualification. While the charts make it clear that the gap between rich & poor earned income has grown over the last 30 years, the fact remains that - until recently, at least - everyone has seen substantial increases in real wealth. 

Relatively free markets (compared against the rest of the world) in most consumer goods have increased quality and reduced prices significantly, especially in areas which have been (actually) deregulated or which never experienced significant government intervention. Fortunately, this has included - again, until recently - most communications technology, such as internet, software, mobile communications & wireless, televisions and other areas.

One of the mistakes people make when they look at income in the US is
that they look only at wages, and not total compensation. People demand more compensation in "benefits" now, and less in direct wages.
Unfortunately, in areas where government intervention has increased and become substantial & burdensome, prices have risen and quality has declined. These areas include, for instance; health care, primary & secondary education as well as university education (due to subsidized tuition), and certain food crops.

Overall, real wealth has gone up substantially, and as Steve Horwitz pointed out in the video from Part I, the rate of increase in real wealth for the poor has actually exceeded that of the rich (and that, of course, only makes sense because poor people have farther to go). However, the shackles placed on the market have hindered progress and arguably resulted in far less prosperity, and thus far less of an improvement in living conditions for the poor, than are natural or necessary. It is quite clear that in all cases of more open trade and more free markets, the effect has been overwhelmingly positive - whereas the areas effected by government have become an increasingly heavy anchor around the legs of all consumers and most all producers.

Unfortunately, standards of living are beginning to stagnate in many ways and that is a problem. However, earned income divisions between the rich and poor in America are the consequence not a lack of regulation in a free market, capitalist, economy. Nor are they a consequence of "greed", which is constant, or of "tax-cuts" to the top marginal income rates - which can easily be shown to have a negligible effect on both government revenue and on poverty rates.

Instead, it is the mixture of government and business through regulations, subsidies, unevenly applied tax-breaks to favored industries, protectionist tariffs and special contracts which provide massively skewed and uneven benefits to favored recipients at the expense of consumers... And those "favored" are almost inevitably the richest people in America.

Most importantly of all... The monetary system itself produces incentives and opportunities for the wealthiest Americans to exploit the directional flow and velocity of money to their advantage. The benefits are concentrated in the hands of a very small group of well-connected bankers, political figures and their biggest allies.

The cost to everyone else is inflation, and rising consumer prices - in other words, continually growing stagnation in purchasing power. These costs are dispersed and borderline invisible.

So there it is.

If you want to blame something, blame our inflationary monetary policy and never-ending meddling into the American economy. 

And if you want to fix it... Then support free markets!

Not pro-industry Mercantilism, not pro-plutocracy Corporatism and not pro-ruling class Socialism.... But rather, actually free markets... There's your answer.