Government Subsidies Drive Up Health Costs, Drive Out Private Capital

A simple graphic shows how government subsidies act on any given market.  Not only does they drive out private capital, which by its nature is more competitive, but subsidies also drives up cost.  It is important to remember that the competitive nature of private capital actually keeps costs down, as people naturally gravitate toward the best product for the best price.  When governments subsidize markets with endless supplies of money, costs begin to rise as consumption becomes undervalued.  The graphic below demonstrates this phenomenon well enough.

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The Financial Crisis, Foreseeable and Preventable

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When a government bails out  an auto company or any bank, it essentially charges the central bank (our Federal Reserve System) with transferring the risk from that company to the government, i.e. taxpayers.  We’ve known this and many other basic economic truths for many years. Yet despite all the claims to ignorance by Washington and the media conglomerates,  here are some other economic truths that should have tipped off policy experts to the financial implosion in 2008.

We’ve Known for Thousands of Years

We’ve known for literally thousands of years that debts need to be periodically written down, or the entire economy will collapse. And see this.

We’ve known for 1,900 years that rampant inequality destroys societies.

We’ve known for thousands of years that debasing currencies leads to economic collapse.

We’ve known for hundreds of years that the failure to punish financial fraud destroys economies.

We’ve known for hundreds of years that monopolies and the political influence which accompanies too much power in too few hands is dangerous for free markets.

We’ve known for hundreds of years that trust is vital for a healthy economy.

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Of particular interest is the last statement above, that trust is vital for a healthy economy.  While this may seem obvious, actually creating trust and confidence in a market becomes more difficult as government interventions increase.  Governments intervene in markets when they fail, but when a government fails due to market intervention (stimulus/deficit spending), one has to ask whether such actions are sufficiently warranted.  Adam Smith issued a solemn, yet practical, warning against misdirected government intervention and the interests behind them.

“The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public.  To widen the market and to narrow the competition, is always the interest of the dealers.  To widen the market may frequently be agreeable enough to the interest of the public; but tot narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens.  The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.  It comes from an order of men, whose interest is never exactly the same with that of the pubic, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it” (Wealth of Nations, 287-88. Modern Library Edition)

Despite the misconception that economics is an extremely complicated field, it essentially provides a methodology for examining human behavior, primarily how incentives contribute to individual choice.  Incentives, according  to Steven Levitt and Stephen Dubner (authors of Freakonomics), are at the root of economic analysis and provide a window into the economic, moral, and social musings of any society.  Although our so-called policy experts would have you believe that such complexities are not for the layman and should be left to them, nothing could be further from the truth.  Economic analysis such as this is simply a matter of aligning incentives with outcomes.  Whether they be of powerful interests, government officials, or the people, incentives govern behavior and the market bears that behavior to society and the people.

At this point, only one thing remains clear.  The more market distortions we see from government intervention, the more difficulties we inherit in trying to make rational decisions based on market factors and the overall position of our economy.   The implication is this: government intervention does more harm than good because it distorts market signals and creates misaligned incentives.

If you are not privy to this information, I suggest reading and rereading the article above in its entirety.  I first found this article on Monty Pelerin’s World, a very worthwhile site if you are attempting the daunting task of sifting through the lies and manipulation coming from Washington and the media.

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Capitalism’s True Legacy, Freedom and Plenty

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Anthony Gregory’s piece below exerts a passionate defense of our nation’s and the world’s namesake.  Indeed, capitalism has taken quite a beating over the past few decades. Yet, despite all the ideological debates among politicians, bureaucrats, and academics, one cannot deny that the fruits of capitalism are present all around us.  It was not government that provided us with our way of life. Rather, the twentieth century saw its progress forged from the furnaces of the human mind.   Ingenuity, entrepreneurship, and labor built the world we live in, not welfare, food stamps, social security, medicare and the myriad of state-funded programs that are now draining the coffers of Americans nationwide.

It is simply a fact that capitalism, even hampered by the state, has dragged most of the world out of the pitiful poverty that characterized all of human existence for millennia. It was industrialization that saved the common worker from the constant tedium of primitive agriculture. It was the commodification of labor that doomed slavery, serfdom, and feudalism. Capitalism is the liberator of women and the benefactor of all children who enjoy time for study and play rather than endure uninterrupted toil on the farm. Capitalism is the great mediator between tribes and nations, which first put aside their weapons and hatreds in the prospect of benefiting from mutual exchange.

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Gregory’s piece is not so much an argument as it is a simple reminder to the American people that capitalism works.  The primary debates coming out of Washington today are ideological, yet, it is the practical ideology of capitalism that produces. Capitalism’s three basic tenets of free-exchange, free-markets, and labor mobility are themselves based on freedom: the freedom to exchange my dollars as I see fit, the freedom for me to enter into any market absent artificial barriers such as government-mandated licenses, and the freedom to work where I choose.  What those in Washington do not have that proponents of capitalism possess in abundance is the substantive proof that our ideology is practical because it has produced the beds we sleep in, the food we eat, and a level of opulence that allows us leisure and the opportunity to raise responsible children who will continue in capitalism’s namesake.

Take a look at Gregory’s article, and remember that while capitalism is based on the ideology of freedom and production, its opponents will have you believe they can bring you the same degree of freedom, albeit from an ideology based on altruism, central planning, and the forced redistribution of wealth.

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Starbucks Job-Creation Campaign Embraces Altruism

via Mises.org

Perhaps a worn out, yet relevant, proverb – “Give a man a fish and he eats for a day.  Teach a man to fish and he eats for a lifetime.” – needs some re-emphasis.  If we look closely at our society today, it is not difficult to see this proverb shattered to bits.  Yet, we are often too busy with our day-to-day jobs and family responsibilities to see just how large a fissure is opening up in the social bedrock of America. Simply, it is one of ideology, and consequently, is often dismissed as such, as if ideology has no practical application in our lives. Starbucks CEO Howard Schultz echoed this sentiment during a recent CBS interview.  “And we need to literally put our feet in the shoes of American people. They’re not worried about ideology. They’re worried about schools for their kids, jobs, housing. This is a problem that is not based on partisanship. This is based on citizenship.”  Whether Mr. Schultz believes ideology plays no part in the American conscience or not, such a statement is worrisome.  For an ideology is nothing less than a set of perceptions, or moral rulings if you will, that we as individuals use to make decisions from what to feed our children, who to work for, or where to spend our money.  It is my contention that the most efficient way to diagnose many of today’s problems is to examine where ideologies conflict with reality.

As a Starbucks partner (employee), I was surprised at their recent job-creation campaign.  My initial shock came from its obvious association with government-backed funding (CDFI’s are funded by the U.S. Treasury Department, and the  Housing and Economic Recovery Act of 2008 authorized CDFI’s to become members of the Federal Home Loan Banking System, the latter being a government-sponsored banking institution). However, Adam Stover’s piece, highlights the fundamental contradiction of a “job-creation” campaign based on donations instead of profit creation.  After all, since when does the free market divorce job  growth from profit creation.  The following is an excerpt from Stover’s article.

While well intentioned, Starbuck’s zeal is misplaced. The microfinance firm that they have partnered up with uses donations rather than actual sales transactions to raise money. One of the key requirements for a “sustainable” job is a profitable business. Profit cannot be calculated without a value scale, which measures a good or service versus some quantity of money; donations do not provide this. Donations represent money without the value of profit and consumer need, both of which are vital to the sustainability of a job or business. When the donations cease, so will the job or business.

Perhaps a more interesting question enters the forum when one reads the Opportunity Finance Network’s mission statement: “Opportunity Finance Network® (OFN) is the national network of Community Development Financial Institutions (CDFIs)—private financial institutions that are 100% dedicated to delivering responsible, affordable lending to help low-income, low-wealth, and other disadvantaged people and communities join the economic mainstream.”  Two points are worth mentioning here.  First, any institution sponsored by government dollars cannot, by definition, be “private” as claimed.  Moreover, I call your attention to the last line concerning the “economic mainstream.”  The logical inference to be drawn from our discussion then becomes whether the “mainstream,” or status quo, has shifted from an economy based on profit and growth leading to job creation versus one dependent upon donations emboldened with the altruistic spirit of what our dear politicians term the “public good.”   And here lies the contradiction, for free-market job creation cannot exist in an economy based on donations and stimulus, at least not in a sustainable fashion.

While Starbucks rightfully claims the revered title of global corporation and the success inherent with that label, one has to wonder why Starbucks promotes values contradictory to those which paved its own road to success.  Examples such as these are warning signs of a society and an economy that is fundamentally at odds with itself.  For what this campaign concludes is that donations, charity, and altruism are as valuable in practical and ideological terms as profit, ingenuity, and the individual.  Yet to any entrepreneur,the backbone of American progress throughout the last century, these two sets of ideals are in direct opposition and cannot coexist.

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Congress and President Ignore Warning from S&P, Pass Meaningless Debt Package Anyway

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On 14 July, Standard & Poor’s explicitly warned Washington that passage of meaningless legislation would likely result in a sovereign downgrade.

From a creditworthiness perspective, we believe that failure to formulate a fiscal consolidation plan, even if the president and Congress were to agree to raise the debt ceiling in time to avert a potential default, would be materially less optimal than hypothetical scenario 1. Such a partial solution would essentially put before American voters in the 2012 presidential and congressional election the spending vs. revenue debate. Meanwhile, debt would continue to mount and the results of the election might not, in any event, resolve the issue.

Under this scenario, we might lower the U.S. sovereign rating to ‘AA+/A-1+’ with a negative outlook within three months and potentially as soon as early August.

Agreement on raising the debt ceiling without making any tough budget decisions would not be shocking, in our view, given the number of times Congress has done so in the past.

So Washington was warned and Washington ignored said warning.  The budget package failed to cut the minimum $4 trillion S&P felt was needed to begin getting our fiscal house in order.  Essentially, the Budget Control Act is meaningless.  It makes only $917 billion in cuts (but over the next ten years) and leaves an additional $1.5 trillion in cuts to be determined by an ad hoc bipartisan committee with far too much power.

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