Posts Tagged ‘government largess’

Executive Foolishness

Sunday, February 14th, 2010

Dear Friends,

It seems to me that If President Obama does indeed use his executive powers to force legislation/regulation on energy, environmental and fiscal matters, as is reported in this article in the New York Times, he will put us, in the US, on the same tracks the European Zone are on. We can read our future in the reports coming from Europe today. Like the devaluation of the Euro. The pending default of Greece and the eroding standard of living in the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) nations.

The New York Times article can be read here;

Milton Freedman claimed that the European zone wouldn’t work largely on the grounds it is failing today. That is there is no incentive for Nations within the Euro zone to keep spending in check. European nations have been on a spending and regulating binge. The chickens must come home to roost sometime.

It is no coincidence that the PIIGS nations are the ones that are in the most trouble. Spain for instance is the farthest along the path to controlling green house gas emissions. The resulting regulation has ham strung Spanish business. Millions and millions of green jobs created notwithstanding.

Greece has a strong Communist party presence in their legislature. Communist philosophy is in fashion at Greek universities. The communist led protest that accompany any cut in spending are testimonials to this fact.

Out of control spending and taxing is no way to improve an economy. Government spending necessarily sops up available investment capital. Doing so lowers the availability of capital for business to upgrade the plant. It is precisely plant upgrades that improve the productivity of the workers. This productivity increase necessarily drives up wages and lowers costs. Making the whole economy more competitive.

Think about two carpenters. One has a stone to pound nails the other has a nail gun. With a nail gun, level, tape measure and circular saw and precut lumber a good man should be able to frame a wall in, say, ten minuets. A man with only a stone, hand saw, string and measuring sticks can frame a wall in say a day. Can you pay the man who, as a result of not having the tools, the same as you can the man who has tools? Of course not. Moreover, as the man with few tools, amasses tools, he becomes more productive lending him a higher and higher wage for less and less effort.

Too much government spending also hurts the aggregate balance of trade. This happens because when government spends money it must tax or borrow. When it borrows it takes money from the available capital markets. If there is demand for capital to improve plant interest rates will rise. This rise will demand foreign capital to make up the difference. The inflow of capital is counted in the aggregate balance of trade. One dollar if capital inflow, to fund government spending, counts against one dollar of value in an export, say a kitchen magnate.

So when government borrows money to provide some good or service to the people, to buy their loyalty, it is like you or I borrowing money and spending it going out to eat. No one would argue this a wise use of borrowed money yet government does this all the time. Borrows money and essentially wastes it.

I have to laugh when people argue, “Well, see the poor guy there, he had no money to spend, now the government has provided him with free health care, free housing, and free food, all at your expense. Look at all the demand that is generated.” To argue that, one must believe that if government did not take money from people, they would burn it. Pile it like leaves and burn it. Because, of course, people will spend and invest money they make. If they spend it demand will rise, if they invest it capital will be available for enterprise to invest in productivity enhancements.

Another unintended consequence of government borrowing and spending on frivols schemes, is it lowers the money available for our children, to invest in tools and equipment (plant). They will necessarily have a lower standard of living as we spend money frivolusly and indebt them for it.

Obama has the ability to make this an American headline;

He has only to follow through…