Monday, May 21, 2012

The Competition of the States

I post this image here not directly to comment on the problem that is federal spending and debt (and be sure, it is probably the greatest threat to national sovereignty that this country faces, despite the shill protestations of the war hawks who are ever-ready to consternate us with threats of terrorists). I instead want to point out a shift of the relations between the states and national government around the early 20th century. It is notably around this time that national spending begins to soar.

What does this have to do with federalism? Frank Chodorov wrote in his book The Income Tax: The Root of all Evil that the income tax is what has allowed the national government to become the behemoth that it is today. The main point of the argument is that before the 16th amendment, the US government was not able to do much because it did not have many revenues. Relying on excise taxes can only get you so far. Once the income tax was instituted through an amendment (this, incidentally enough, was not the first time that an income tax was imposed on the country), the direction of this country fundamentally changed. Rather than being a generally free market economy that espoused the principles of classical liberalism, the US would morph into an essentially fascist country (allusions to Hitler can be ignored, as this country started to look much like Mussolini's Italy in the few decades after the income tax was instituted). Since that time, the military has greatly increased, taxation has increased, regulation has increased, and the size and scope of the national government has increased. As a result, economic production is down, we are much less safe (due to resentment from our global presence), and the prospect for increased standard of living in the future is greatly diminished.

The competition between the states and national government, it could be argued, is what guaranteed a small government and personal liberty during the 19th century. Since it has been eliminated, the check on the growth of government has been all but eliminated. This is not a new argument. Frank Chodorov made it decades ago, and Tom Woods recently made it in his book Nullification. The question now is how to restore this lost competition and regain our liberty that we have been robbed of.

Monday, May 14, 2012

Create Jobs or Create Wealth?

This has been going on for years. All that we hear from politicians and their ilk is that we need to create jobs. It seems simple enough. We have high unemployment, so creating more jobs would help that. It sounds innocuous enough, and it is true that more jobs are better than less, but I think that we are focusing on the wrong subject. Yes, jobs are a problem, but what about production?

We could have full employment by paying everyone to dig holes in the ground and then refilling them. However, we would all be poorer in the scenario. Instead of those people eventually finding jobs and doing something productive, they would be creating new wealth and we would be paying them for it!

With investment, we measure success by seeing if we earn more than we put in. Thus, if we put $100,000 into a business, but get only $50,000 in value back, then we consider this a loss. Hiring someone, along these lines, is much like an investment. It is only worthwhile if you get more than you put in. So when we hire people for a freeway project or a rail project, are we getting more money back than we put in? I do not think that this is usually the case (at least we have no way to measure the success of this, so maybe government intrusion here has lead to the absolute failure of rational economic calculation).

So sure, we can create full employment, but we need to make sure that the investment is worthwhile. If not, then this focus on employment is just making us all poorer.

Time to End the FDIC

As most people are already aware, J.P. Morgan Chase lost some money. Well, maybe this is how the congress would put it, since $2 billion is chump change to them, but this is a big deal. Chase may go down for this one. They invested poorly and are now in pretty bad shape.

So what does this have to do with FDIC? Well, how many people who have money saved with Chase have looked into their business plan, their profit margin, their investments, or anything? They do not need to. Savers just put money into a bank and do not care how the bank is run because they are covered by FDIC. In essence, this allows banks to do whatever they want as long as the savers keep coming in. Banks then only need to market well to stay in business. Is it any surprise that the big banks have stayed as the big banks for as long as they have?

What does this mean for economic efficiency? If banks can do whatever they want, then they are not interested in making the best investments. This is a net loss for the capital structure of our economy. Instead of loans going to the best projects, it goes to whoever the banks like most. This is pretty similar to the problem that we have with government spending.

And the alternative? Without FDIC, savers would need to look at the business practices of banks to determine who is doing the best and where their money would be safest. This would ensure that at least we are tending toward optimal investment.

This is a great opportunity to open up a debate about the merits of FDIC. Without FDIC, would Chase have been big enough to have had this great of a loss? I doubt it. It is time for FDIC to end and allow for more competition in the banking industry.