A Look Over The Horizon At What Lies Ahead If We Continue Down The Central Planning Road.
Read this article titled, Greek Tax Hikes Backfire As Tax Revenues Plunge 16%, at Zerohedge.com, if you want to see what will happen in the U.S. if we continue to make economic decisions through the political process.
CENTRAL PLANNERS IGNORE THE FIRST RULE OF ECONOMICS
No matter how hard Government and politicians try to create a world of abundance, the reality that we live in a world of scarcity hits them square in the face. Their answer when their plans don’t work as advertised, is to ignore the reality of the first rule of economics, which is scarcity, and continue going ever faster down the same central planning road that created the problem in the first place.
CENTRAL PLANNERS WORK AGAINST ECONOMIC FORCES
As a Government starts its intervention, slowly at first, into the workings of the free market through regulation, and taxes, the economy will reach a point where it will not produce enough output to supply the revenues needed for the Governments continuing growth. Government policy makers don’t realize that economic forces are trying to correct for the original interventions. When the outcome isn’t what they had planned, they respond by doing more of the same thing. At a certain point they resort to counterfeiting money and artificially lowering interest rates in order to fund their own growth. They start slowly at first, than proceed at an ever-increasing rate as the injections of counterfeit money don’t produce the same high as was experienced before. The unintended consequence of funding your own debt using these two policies, is that they lead to more consumption and decreasing production. Read “What Comes First Production Or Consumption”. We start to consume our savings, (capital), and eventually the standard of living starts to slowly decline. As this process continues the Government tries to fund itself by raising taxes even higher, and borrowing and counterfeiting at ever-increasing rates. As the economy becomes less productive, people turn to the Government to be their savior. They either become a public employee with full benefits and a pension, a recipient of welfare, or a receiver of corporate welfare in the case of a private company. This downward spiral continues over time as an increasing number of parasites take more and more from the decreasing production of a shrinking private sector. In a normal market exchange, an individual exchanges what he has produced for what another individual has produced. But Government workers and welfare recipients produce nothing, while they receive real goods and services in exchange for the dollars they have been paid or given. These dollars are either taxes confiscated from people who produce, counterfeit dollars created out of thin air by the Fed, or borrowed dollars, which will eventually have to be paid back by taxing future production, or from future counterfeiting. At some point the people who produce real goods and services are worse off than the administrators of the welfare state, or the recipients of Government handouts, and a tipping point is reached. The only cure is a deflationary process either by choice, as Government rolls back its interventions, or an eventual collapse, if Government continues intervening. The deflationary process is the cure for the inflationary bubbles the Feds counterfeiting brought about. Read “Capital Consumption, aka Eating Our Seed Corn“.
CENTRAL PLANNING’S DEMISE
As more and more individuals become comfortable in their relationship with Government, they will not want to divorce the sugar daddy they have wed themselves to, and it becomes less and less likely that rolling back the size and reach of Government is even a possibility. The best case scenario is for the Government to default on entitlements and debt, cut its size, and get out of the money creation business. People will be kicked out of the Government nest and will be forced to relearn how to fly. The market will find a natural bottom as it liquidates the misallocated resources and assets which were brought about by the Government and the Fed. The worst case scenario is people will flock to their saviour, the Government, and we will become a true centrally planned economy, which will eventually collapse like the USSR did in the early 90’s. As the Austrian Business Cycle Theory states, the cure for the boom is the bust.
Believe it or not Keynes wrote this in 1919, “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a manner which not one man in a million is able to diagnose.“(1)
1) From “The Essence of Hayek”, edited by Chiaki Nishiyama and Kurt R. Leube, Hoover Institute Press (1984) page 6, footnote 2.