10 Economic Myths That Need To Be Corrected December 20th, 2011
1. This is capitalism. We live in a capitalistic country.
We can argue over the best label for the economic system in the United States of America, but there can be little argument that “capitalism” or “free market” are among the worst and most inaccurate labels for what we have in America today. With quantity and price controls rampant throughout multiple, major U.S. markets, regulations galore, and some of the highest corporate tax rates in the world, the United States is a heavily controlled, heavily regulated, and heavily taxed mixed market economy. Of the ten planks in the Communist Manifesto, seven have become policy in the United States, and the government is working on the remaining three! Can that be fairly characterized as capitalism? Take a look at this list of U.S. government agencies, notice just how unbelievably many of them there are, and observe just how many aspects of life in America they regulate. It’s a Soviet commissar’s dream, and any true capitalist’s nightmare!
2. Deregulation in the 90s led to the recent economic crash.
Okay, Clinton signed one law in the 1990s that lifted federal regulation of one aspect of financial markets, and critics of deregulation like to say “We deregulated financial markets in the 1990s,” as if we completely overhauled the entire federal regulatory system, but that’s a big stretch and very misleading. Booms and busts themselves are actually caused by government intervention into the economy. Libertarian economists who understand this (many of them belonging to the “Austrian School of Economics”) have been incredibly accurate predictors of economic booms and busts. They predicted the Great Depression, the stagflation of the 1970s (that their opponents had always claimed was impossible), and the most recent credit and housing collapse. Their predictive powers are the result of their accurate theories and understanding. Here, I’ll let “F.A. Hayek” rap it for you.
3. We need more regulation to keep big corporations in line.
If that were true, why don’t more big corporations support deregulation? Instead they seem to support more big government. Go ahead, browse OpenSecrets.org for yourself and see which politicians get the most donations from big corporations. The fact is, regulations– like most laws in this country– are written by corporate lobbyists to give big corporations an advantage over small businesses that do not have the resources or money to comply with costly regulation, putting them out of business and handing over their market share to the big companies, all by way of government regulation. Critics of moneyed corporate interests contradictorily believe that these interests pull the strings of government and that more government regulation will reign in these interests. Which one is it?
4. We need government stimulus to kickstart the economy.
It is easy to correct this myth with one simple analogy and a few historical examples. Besides, government spending is almost always, if not always less efficient than private spending, which results in a net economic loss, or at least less net economic gain than would be possible without the government spending.
The one simple analogy:
Imagine a swimming pool. You take a bucket to one side of the swimming pool and fill it up with water. Then you walk to the other side of the swimming pool and empty it there. How many times would you have to repeat this to raise the total level of the swimming pool? Answer: It is impossible to raise the level of the swimming pool by removing water from one end and pouring it into the other.
5. The TARP Bailouts were necessary to prevent the economy from crashing.
When conservatives make this argument, ask them why they think free markets would have failed to do a better job of resolving this problem than government. Ask them why they support socialism and point out that the TARP bailouts socialized corporate losses by spreading them out to the rest of society. Also ask them why they support welfare and point out that the bailouts were an example of welfare, and that they incentivize more unproductive behavior the same way conservatives feel that welfare for the poor does.
When social democrats make this argument, ask them how they could support taking money from the working middle class and poor to give to rich, Wall Street banks. When they answer, as Obama did in one 2008 presidential debate, that it was necessary to keep businesses running so they could continue to employ the working middle class and poor, say: “So you’re arguing that if the government gives money to the wealthy, it will trickle down to the poor?? Now you sound like a right-wing Republican!”
6. Don’t free market supporters want to bring us back to the gold standard?
First of all, even if this were true, what would be so bad about that? Free market critics will act as if proponents are backward and unsophisticated for supporting a gold standard currency, but we should point out that fiat currency is nearly as ancient as currency itself, and that centralized governments have been inflating currency for centuries with the same result each time: monetary collapse, often followed by civil disorder. But secondly, this is a myth. Most free market proponents do not advocate some kind of government monopoly gold standard like we had over a century ago because it can be all too easily manipulated; they actually prefer what can be called a free market of currency that allows individuals to decide for themselves what currency is and how much they trust it.
7. We need to protect American businesses from foreign competition.
Because protectionist economic policies force American businesses and consumers to pay higher prices for certain things (like steel or sugar) than they would have to pay in a free market, most economists agree that such policies have the effect of a net economic harm to the domestic economy and are overtly anti-consumer. And it is actually protectionist policies that put Americans out of work by causing this net economic harm to the growth of the domestic economy.
8. Capitalism exploits labor.
Actually, since the advent of more capitalist economies, the rate of return on capital (how much profit you can make by investing in capital) has remained steady, as has the rate of return on land (rents from real estate) when compared to the explosive growth in the rate of return on labor (hourly pay). Do workers in more capitalistic countries work harder than their counterparts in less capitalistic ones? They probably work less hard, for fewer hours, and in better conditions. So why are they paid more? Because capital has made each hour of their labor vastly more productive. Capital and capitalism have done more for the laborer than any other development in human history.
9. We need government to provide things that free markets can’t.
Wrong. No we don’t. Not for lighthouses and national defense. Not for dikes. “Public goods” is simply a concept that has been used as the theoretical basis to justify a transfer of wealth from hard working, enterprising small businesses and laborers to moneyed special interests who can provide these so called public goods on the terms set in their super sweet, lobbyist-written government contracts.
As for “negative externalities,” the argument that negative externalities are examples of market failure does not necessarily prove the necessity for government intervention, and does nothing to address the possibility unavoidable reality of government failure. Just one example of government failure, for instance, is unintended consequences. There is a free market solution to negative externalities, however, which is using our system of civil law to enforce and protect private property rights.
10. We need government to prevent monopolies from forming.
This is a final shot that critics of free markets will always throw out at you when they have nothing else to go on because they’re sure you’ll agree or have no answer. The very best answer to it I have ever encountered is in Ayn Rand’s book: Capitalism, The Unknown Ideal. In it, a very young Alan Greenspan (before he sold out) wrote an essay called “Anti-Trust” which demonstrates how theoretically and historically, it is actually only government intervention that can create a true, coercive monopoly, not the free interaction of individuals in an unregulated market. You can listen to the first half of this essay in audio format here. Those of you with no scruples about copyrights can read the entire essay here (but I highly recommend you buy the entire book– I daresay it’s one of the most important economic books ever written). Milton Friedman also makes his case here, listing multiple examples of monopolies created by government intervention.
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A fair enough writeup on many points, but according to some critics, Alan Greenspan himself is one of the authors of bailouts during his tenure- putting in place various structures that facilitate such policies. See:
Last Thursday, the government reported that the Consumer Price Index was running at 5.6% year over year, the highest rate in about 16 years. Given that inflation is as high as it is, many folks are probably puzzled as to why, at the same time, home prices are collapsing.
That confusion became clear to me last week when I did an online chat. It is an odd mixture, one that was not only preventable but foreseeable.
In the shameless-self-promotion department, this is exactly why I wrote "Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve."I would encourage folks who are still puzzled about how these terrible problems can coexist to pick up a copy. Not because I need the book royalties but because I think it might be helpful.
The sorry state that we find ourselves in is a function of the Fed's interest-rate-targeting policies. More specifically, it was caused by the policies of Alan Greenspan, the Fed chief from 1987 to 2006. Just as this column was being filed, he graced the front page of The Wall Street Journal with some, shall we say, interesting observations. Time for a new eyeglass prescription In an article headlined "Greenspan sees bottom in housing, criticizes bailout," he said, "Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009." (He did leave himself some wiggle room, as he also noted that "prices could continue to drift lower through 2009 and beyond.")
Of course, we shouldn't forget that this is the same man who in October 2006 opined, "I think the worst of this (housing problem) may well be over." As I also note in the book, while Greenspan was in office he went to great lengths to suggest that housing couldn't experience a bubble. And, as The Journal pointed out, he also tried to make the case in 2004, when many of us were already certain a disastrous bubble was in full bloom, that "a national severe price distortion seems most unlikely in the United States, given its size and diversity."
This illustrates my strongly held (and well-documented) view that when it comes to matters of economics, Greenspan is utterly clueless and unable to learn from his mistakes. 'Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve' by Bill Fleckenstein
However, what really sent my blood boiling was his criticism of the government bailouts of Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs). Now, you might wonder why I'd be angry that he said something I agree with, especially: "They should have wiped out the shareholders (instead)," referring to the bailout of Bear Stearns as well as that of Fannie and Freddie.
The reason I'm so angry is his logic, which The Journal paraphrased as follows: "The Fed-financed takeover of investment bank Bear Stearns also made government backing of Fannie and Freddie debt 'inevitable'" (his adjective, my emphasis). Then Greenspan went on to tell the newspaper: "There's no credible argument for bailing out Bear Stearns and not the GSEs (government-sponsored enterprises)."
Own up to your bubble The problem with that line of logic: Greenspan made the Bear Stearns bailout inevitable when he set the precedent of rescuing Wall Street during the collapse of hedge fund Long-Term Capital Management in 1998.
Of course, those actions led to the massive blowoff to the stock bubble, the response to which led to the real-estate bubble. Thus, had he not bailed out Wall Street, I don't believe we would ever have been in a situation in which a Bear Stearns bailout would have been required or even considered.
In sum, it was Greenspan who set this train wreck in motion, with his specific policies regarding Long-Term Capital, dramatically altering the financial landscape by creating what's known as the "Greenspan put." Making matters worse, in the wake of that "warning shot," he advocated the deregulation of the financial system and championed securitization at every chance he got. While in charge, he never tried to put a stop to any dangerous policy but, rather, pursued it aggressively.
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quote: 10 Economic Myths That Need To Be Corrected December 20th, 2011
1. This is capitalism. We live in a capitalistic country.
We can argue over the best label for the economic system in the United States of America, but there can be little argument that “capitalism” or “free market” are among the worst and most inaccurate labels for what we have in America today. With quantity and price controls rampant throughout multiple, major U.S. markets, regulations galore, and some of the highest corporate tax rates in the world, the United States is a heavily controlled, heavily regulated, and heavily taxed mixed market economy. Of the ten planks in the Communist Manifesto, seven have become policy in the United States, and the government is working on the remaining three! Can that be fairly characterized as capitalism? Take a look at this list of U.S. government agencies, notice just how unbelievably many of them there are, and observe just how many aspects of life in America they regulate. It’s a Soviet commissar’s dream, and any true capitalist’s nightmare!
Rather than busting myths, this guy is actually reinforcing them.
He ought to look up the basic philosophy of capitalism: Putting the accumulation of private wealth before the basic social needs of the greater society.
Tax-break loop holes have been put in place, which only the wealthiest layers of society have been able to take advantage of. It has gotten to a point whereby the super-wealthy and big business go from paying little to no taxes at all. Case in point, GE practically paid no taxes quite recently, due to the taking advantage of tax-break loop holes, while many wage workers, bringing in income that is measly by far, paid their share. Even Warren Buffet had acknowledged that his secretary had proportionately paid more taxes than he had, because he was able to take advantage of tax-break loop holes that enabled him to keep much of his income to himself.
quote:2. Deregulation in the 90s led to the recent economic crash.
Okay, Clinton signed one law in the 1990s that lifted federal regulation of one aspect of financial markets, and critics of deregulation like to say “We deregulated financial markets in the 1990s,” as if we completely overhauled the entire federal regulatory system, but that’s a big stretch and very misleading. Booms and busts themselves are actually caused by government intervention into the economy. Libertarian economists who understand this (many of them belonging to the “Austrian School of Economics”) have been incredibly accurate predictors of economic booms and busts. They predicted the Great Depression, the stagflation of the 1970s (that their opponents had always claimed was impossible), and the most recent credit and housing collapse. Their predictive powers are the result of their accurate theories and understanding. Here, I’ll let “F.A. Hayek” rap it for you.
3. We need more regulation to keep big corporations in line.
If that were true, why don’t more big corporations support deregulation? Instead they seem to support more big government. Go ahead, browse OpenSecrets.org for yourself and see which politicians get the most donations from big corporations. The fact is, regulations– like most laws in this country– are written by corporate lobbyists to give big corporations an advantage over small businesses that do not have the resources or money to comply with costly regulation, putting them out of business and handing over their market share to the big companies, all by way of government regulation. Critics of moneyed corporate interests contradictorily believe that these interests pull the strings of government and that more government regulation will reign in these interests. Which one is it?
There is no evidence the big business support regulations.
Oil companies, for instance, sure heck do not support the government restricting the huge profit margins attained from rising gas prices, which have in turn helped drive up prices of goods that require transportation into the market or else quarters that require oil as fuel. Nor did/do the oil companies support safety-related government regulations of their practices of offshore deep-sea oil drilling (case point, the recent BP oil spill).
Big Banks did not object to deregulation that allowed them to diversify sources of their revenue, by restricting them from big mergers that involved other previously "separated" segments of the market. The aforementioned Clinton's "deregulation of 90s", which this guy kinda just brushes aside as not considerable, had played a significant role in this, and thus, its subsequent implications.
Big business did not object to deregulation on speculation and predatory lending and mortgage practices, which have had their fair share of bringing about the recent financial collapse, culminating in the bail out of banks, not to leave out driving up prices of commodities and mass lay-offs.
Big business did not object to the dismantling of social instruments that traditionally put restrictions on obscene exploitation of wage workers and the accompanying attainment of revenue by big business; such as, union-busting, cuts in employee benefits and safety nets, wage-cuts, or environmental protection regulations.
Big business have had few regulations in shipping jobs oversees and evade taxes at home, while taking advantage of cheap labor abroad.
Big business did not object to lack of government oversight in CEO bonuses, after they had been bailed out with taxpayer money.
quote: 4. We need government stimulus to kickstart the economy.
It is easy to correct this myth with one simple analogy and a few historical examples. Besides, government spending is almost always, if not always less efficient than private spending, which results in a net economic loss, or at least less net economic gain than would be possible without the government spending.
The one simple analogy:
Imagine a swimming pool. You take a bucket to one side of the swimming pool and fill it up with water. Then you walk to the other side of the swimming pool and empty it there. How many times would you have to repeat this to raise the total level of the swimming pool? Answer: It is impossible to raise the level of the swimming pool by removing water from one end and pouring it into the other.
It is easy to make this analogy when it big business is on the receiving end rather than workers. Neither the banks or the big car companies saw anything wrong with government spending, when taxpayers' money was being doled out to bail them out.
The super-wealthy did not see anything wrong with extension of tax-breaks, which too takes away from the government budget.
Nor did big business and the rich see anything wrong with diverting and wasting taxpayer money on fruitless wars, and unnecessary & constant buying of military hardware, some of which end up being scrapped anyway, while they claim there are no funds for social spending on victims of mass lay-offs and unemployment.
The rich saw no problem with government stimulus on offshore drilling, or subsidization of aerospace and military industry.
The wealthy see no problem with wasting of taxpayer money of do-nothing politicians, who call themselves congress or senators for example, including that which goes towards their travelling expenses and extravagant feasts that they hold during so-called "conferences".
They see no waste in spending taxpayer money on things like lightening trees and decorating streets during Christmas, but tell workers that they have no funds for schools or social safety nets like unemployment checks, which many especially rely on in times of mass unemployment.
quote:5. The TARP Bailouts were necessary to prevent the economy from crashing.
When conservatives make this argument, ask them why they think free markets would have failed to do a better job of resolving this problem than government. Ask them why they support socialism and point out that the TARP bailouts socialized corporate losses by spreading them out to the rest of society. Also ask them why they support welfare and point out that the bailouts were an example of welfare, and that they incentivize more unproductive behavior the same way conservatives feel that welfare for the poor does.
When social democrats make this argument, ask them how they could support taking money from the working middle class and poor to give to rich, Wall Street banks. When they answer, as Obama did in one 2008 presidential debate, that it was necessary to keep businesses running so they could continue to employ the working middle class and poor, say: “So you’re arguing that if the government gives money to the wealthy, it will trickle down to the poor?? Now you sound like a right-wing Republican!”
On this point, I agree, only to the extent that bailouts have mainly been done to the benefit of big business. So, if there is any socialism here, it is the capitalist-"socialism" for big business...or big business social welfare.
quote:6. Don’t free market supporters want to bring us back to the gold standard?
First of all, even if this were true, what would be so bad about that? Free market critics will act as if proponents are backward and unsophisticated for supporting a gold standard currency, but we should point out that fiat currency is nearly as ancient as currency itself, and that centralized governments have been inflating currency for centuries with the same result each time: monetary collapse, often followed by civil disorder. But secondly, this is a myth. Most free market proponents do not advocate some kind of government monopoly gold standard like we had over a century ago because it can be all too easily manipulated; they actually prefer what can be called a free market of currency that allows individuals to decide for themselves what currency is and how much they trust it.
The problem of gold-backing was bound up with how well the U.S. economy was doing. Apparently, the U.S. economy had been undergoing a slow downward spiral for some time, while dollar possessions overseas outstripped the U.S. gold reserves, leading to the demise of gold backing of U.S. currency under the Nixon administration. Still, U.S. is on the decline, and the latest financial collapse is an expression of this decline. Unified "free market" currency has not saved European countries from decline either.
quote: 7. We need to protect American businesses from foreign competition.
Because protectionist economic policies force American businesses and consumers to pay higher prices for certain things (like steel or sugar) than they would have to pay in a free market, most economists agree that such policies have the effect of a net economic harm to the domestic economy and are overtly anti-consumer. And it is actually protectionist policies that put Americans out of work by causing this net economic harm to the growth of the domestic economy.
Yet these are the same policies that the capitalist-driven markets of Europe and America have resorted to, so as to develop their industries to the point whereby they have grown to become global transnationals. They seek to deny so-called "developing" or "emerging economies" from doing the same, however; not untypical of them.
quote: 8. Capitalism exploits labor.
Actually, since the advent of more capitalist economies, the rate of return on capital (how much profit you can make by investing in capital) has remained steady, as has the rate of return on land (rents from real estate) when compared to the explosive growth in the rate of return on labor (hourly pay). Do workers in more capitalistic countries work harder than their counterparts in less capitalistic ones? They probably work less hard, for fewer hours, and in better conditions. So why are they paid more? Because capital has made each hour of their labor vastly more productive. Capital and capitalism have done more for the laborer than any other development in human history.
What is a "less capitalist" country, where labor is not exploited primarily in the attainment of profit of a company and thereof, the accumulation of wealth by those on the top of the corporate ladder?
Workers in the "west" may be relatively better paid than their counterparts in many so-called "developing economies" around the world, because they fought for it and made a few gains. It wasn't given to them on a silver platter, as our author here is suggesting. If capitalists had their way, wage workers will be paid the same amount as say, wage workers in China; why do you think they move companies to hubs of "cheap labor"?
Capitalism had replaced feudalism in Europe, which was a social order of hierarchy that worked to the advantage of the top rungs of society. Though capitalism is relatively progressive in treatment of laborers, it has essentially maintained that order of society.
Members of hunter-gatherer communities have more egalitarian relationships with one another than those of a capitalist hierarchical society have with one another.
Capitalist-sympathizers like to brag about how "capitalism has done more for the laborer", presumably as a vehicle of technological innovation. However, what they miss, is that technological innovation of humanity has always primarily been driven by necessity before taking care of merely leisure considerations, and that the industrial revolution had effected to only make this prolific; some observers contend that that this revolution preceded capitalism, as it is understood today. In this sense, capitalism therefore cannot be given credit for the proliferation of technological innovation in the modern era.
In fact, contrary to serving as a vehicle of technological innovation, capitalism has at times served as a vehicle of counter-technological innovation. Take for example the use of the internal combustion engine through to the present; the internal combustion engine had already been obsolete shortly after its introduction; electric-driven motor vehicles had already been invented and where around as early as the mid-19th century, while solar-operated vehicle technology had been around at least since the 50s. Capitalist priorities had also for another example, impeded the U.S. establishment from replenishing levies with more robust modern ones.
quote: 9. We need government to provide things that free markets can’t.
Wrong. No we don’t. Not for lighthouses and national defense. Not for dikes. “Public goods” is simply a concept that has been used as the theoretical basis to justify a transfer of wealth from hard working, enterprising small businesses and laborers to moneyed special interests who can provide these so called public goods on the terms set in their super sweet, lobbyist-written government contracts.
As for “negative externalities,” the argument that negative externalities are examples of market failure does not necessarily prove the necessity for government intervention, and does nothing to address the possibility unavoidable reality of government failure. Just one example of government failure, for instance, is unintended consequences. There is a free market solution to negative externalities, however, which is using our system of civil law to enforce and protect private property rights.
"Free markets" have been shown to be incapable of dealing with the current economic crisis around the globe, as exemplified by that afflicting Europe and other so-called traditionally advantaged capitalist markets around the world. in recent times. What better quick example is there than that!
The problems already noted above, are the workings of the so-called "free capitalist market".
quote:10. We need government to prevent monopolies from forming.
This is a final shot that critics of free markets will always throw out at you when they have nothing else to go on because they’re sure you’ll agree or have no answer. The very best answer to it I have ever encountered is in Ayn Rand’s book: Capitalism, The Unknown Ideal. In it, a very young Alan Greenspan (before he sold out) wrote an essay called “Anti-Trust” which demonstrates how theoretically and historically, it is actually only government intervention that can create a true, coercive monopoly, not the free interaction of individuals in an unregulated market. You can listen to the first half of this essay in audio format here. Those of you with no scruples about copyrights can read the entire essay here (but I highly recommend you buy the entire book– I daresay it’s one of the most important economic books ever written). Milton Friedman also makes his case here, listing multiple examples of monopolies created by government intervention.
He says Greenspan "sold out", who continues to be an unwavering champion of capitalism and free market, because even Greenspan could not shield himself from the objective reality unfolding before him; courtesy of an older, wiser and experienced Greenspan, who spoke based on what experience has taught him:
"I made a mistake in presuming that the self-interest of organizations, specifically banks and others, was such as if they were best capable of protecting their own shareholders"
...let alone the society at large. In other words, "free interaction of individuals in an unregulated market" is what has led us into the financial mess that we find ourselves today. "Free interaction of individuals in an unregulated market" was what cultivated these individuals to put their personal monetary gains ahead of needs of others and give inconsideration for the plight of others. It is what has led BP, for example, to give us one of the worst environmental catastrophes of recent times and leave the victims to pick up the pieces and fend for themselves. It is what has led to the institution of slavery as a cheap labor pool for fueling the economy. It is also what has led to the Enron debacle, the subprime mortgage crisis, and bankruptcy of banks and elements of the auto industry, among other examples.
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