It is astonishing that this should be taking place, especially at a time in which three billion people around the globe have rejected the poverty, want and shortages of their command economies to begin the experience and blessings of abundance. It is not as though object lessons are wanting. China’s stunning economic growth, its modernization and rising living standards are the result of nothing more complicated than freeing the command economy. Although lessons abound, Americans are choosing—or perhaps failing to choose and therefore letting the choice be made for them—to go in much the same direction as the command economy of postwar Great Britain. That period saw the nationalization of entire sectors of the British economy, a currency crisis and prolonged economic decline including crippling unemployment and choking inflation. The reasons that the United States would choose to follow a pattern that hollows out economies the way it did the British are many. But as a symptom, although not a cause of this self-inflicted harm, look to the modern American politician. For today’s breed of politician, power is their very passion. Their every concern and the entire public debate about politicians centers around the use of power. How may power best be exploited and aggrandized? Who is to be bailed out, who is to be plundered to pay for it? Who is to be subsidized, who penalized? Who shall be taxed and who shall be paid? In contrast, the founders looked upon power very differently: How can it be kept in check? In yielding to the former and to their command economy, the current generation of Americans, blessed with so much, will be the shame of the ages.

Anyone believing the evidence for the looming command economy is being overstated need look no further than the speed at which American finance has been nationalized in the current crisis. Legislators voted an initial $700 billion bailout package, but in no time the taxpayers ended up with more than eighteen times that, $12.8 trillion in loans, spending, and guarantees. And to make clear who is really in charge, the giveaways are accompanies by a refusal of the authorities to disclose who is getting what and what kind of collateral, if any, is being given. The trend was dramatically illustrated in October 2008. In a development that played out like a scene from The Godfather, the CEOs of the nine largest banks in America, dealmakers and negotiators in their right, were ushered into a room at the Treasury Department in Washington and handed a one-page document agreeing to sell preferred shares to the government. They were told by Henry Paulson, according to the New York Times account, that they must sign it before leaving. The chairman of Wells Fargo protested that his institution didn’t have problems with toxic mortgages and didn’t need a bailout. Too bad. “It was a take it or take it offer,” said one insider. An online writer for The Wall Street Journal favorably likened Paulson’s commandeering of the banks to Reagan at the Berlin Wall. “History often carries an air of inevitability,” he gushed.

If there is inevitability to America’s becoming a command economy, it is a sorrowful day for human freedom. The Central Plan of the command economy is incompatible with dissent, disagreement, individual preferences, and your own plan, whatever it may be. If the Central Plan is to prevent foreclosures on homeowners who can’t pay, then the plans of individuals whose resources will be used to prevent those foreclosures must give way. If your individual plan and the Central Plan are in conflict, you will have to give up your plan. As we have noted, a free economy rests on agreement, but a command economy is constructed of coercion. One of the reasons (among many to which I refer in my book The Dollar Meltdown) that a command economy produces poverty has to do with the diversion of productive human effort. In a free economy people provide services that are sought by others and they are rewarded for doing so. Each individual’s own wants and needs are met to the extent he finds ways to serve others. But in a command economy enormous amounts of human effort are expended in attempts to influence or control the Central Plan. This activity produces no new wealth. It only seeks to divide what wealth already exists.

The command economy is not the exclusive province of either the left or the right, Republican or Democrat, Communist or Fascist, Stalinist or Nazi, Pol Pot, Mao, Chávez, or Ahmadinejad. It is what they all have in common. Just as war is the health of the state, economic turbulence is the state’s opportunity for self-advancement. As the unseen and destructive consequences of each new command and initiative unfold, new plans are created and commands issued to undo the latest harm. In the current sequence, the Fed used its monetary monopoly to create artificial credit conditions; the cheap money fueled a housing boom, which, like all bubbles, popped; the monetary and fiscal authorities rushed in to bail out the banks; the only means they have of bailing out the banks is to borrow or print more money.

Regards,
Charles Goyette

December 23, 2009

The Command Economy was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Most seem to think so, as the word on everyone’s mind is “stagflation.” In “Flationed Out,” I dismissed stagflation from an Austrian perspective, but let’s look at things from a then versus now perspective to see what the similarities and differences are.

This is a practical exercise, as opposed to a monetary exercise.

Similarities:

1. War in Vietnam then vs. war in Iraq now.
2. Rising oil and commodity prices.
3. Fed trying to crush inflation.
4. Rising interest rates.
5. Oil shock.
6. Social mood.

Jim Puplava made a case for similarities in Historical Rhythms, and perhaps you can find some items to add to that list.

Differences:

1. Spiraling wages then vs. declining wages now.
2. Wage and price controls.
3. Debt levels.
4. Housing down payments.
5. Two family incomes.
6. The power of unions.
7. Pricing power of manufacturers.
8. Globalization.
9. Outsourcing.
10. Productivity.
11. The Internet
12. Wealth concentration.
13. Fighting the last war.
14. Oil shock.
15. Declining credit standards.
16. Downfall of communism.

Rising commodity prices and a “guns and butter economy” are, of course, the most common parallels. Unfortunately, most seem to stop right there and say, “Yes, this is a rerun” without even bothering to look for differences. The differences noted above are staggering.

Are there any threats of “wage controls”? How many times did John Snow tell us that rising wages were just around the corner? Flashback: My first job out of college was as a computer programmer for Chicago Title, followed by another job at Harris Bank. 10% raises back then were common. Tack on another 6% for promotions. Seriously, when was the last time “common folk” got a 16% raise?

In the ’70s, it took a single wage earner to support the family. If that person lost his or her job, the other could get a temporary job and hope to make up some of the difference. Now both partners work, and if EITHER of them has a problem, there are enormous implications.

In the ’70s, you had to put 20% down on a house and prove where you got that down payment. Now you can put down a negative 15% (borrowing the down payment and then more to furnish the place) with few problems.

Unions in the ’70s had enormous power compared with today. Defined benefit plans were the standard then. GM, Ford, IBM, Caterpillar, and others are doing everything in their power now to scrap them.

Was there an Internet in the ’70s? How about global wage arbitrage? How about outsourcing manufacturing? How about outsourcing R&D? How about shipping X-rays over the Internet to India for diagnosis for treatment to take place in the U.S.?

What about productivity? China is now actually losing manufacturing jobs because of increased productivity.

Yes, we had an oil shock in the ’70s. That oil shock was caused by an embargo. The oil shock now is caused by Peak Oil. Is there a difference? Yes, there is: In the former, wages rose to meet rising costs. Are wages rising now because of Peak Oil? I think not. That is why I have “oil shock” in both columns above.

The downfall of communism is an interesting item. We pressured Russia and China and other places to “do as we do” and support the freedom of capitalism. How odd is it that we are fighting more with China than ever before since they have embarked on free market policies? Yes, we get cheap goods, but the result is we lose jobs. No longer can the U.S. get the best of both worlds, and we simply do not like that fact. Like it or not, outsourcing has NOT come to its logical conclusion. That means pressures on wages we did not see in the ’70s will remain in play for quite some time.

Uncertain

Quite simply, I do not know how to categorize this one. Yet I feel it is extremely important. Of course, I am talking about the gold standard.

It was not the gold standard that was removed by Nixon; rather, it was the “gold exchange standard.” Only foreign central banks were allowed to demand gold for their dollars. In exchange, they all agreed to keep dollars as their main reserve asset, and agreed to the IMF rule that forbade IMF member nations to introduce a gold standard. This leads us to an important difference for U.S. citizens. In the first half of the ’70s, owning gold was illegal for private citizens of the U.S. (one of the worst scandals that remained as a legacy of FDR, aside from the welfare/warfare state).

The “closing of the ‘gold window” was a major factor in destroying the dollar’s credibility in the period. Thus, dollar-based prices (and eventually prices in all other fiat currencies) began a sharp rise, so oil was subject to a double-whammy, if you will. As of now, private citizens can at least guard against the coming debacle by owning gold outright.

Inflation Targeting

B.C. on Silicon Investor had these thoughts as well as a question that I want to share:

“The trouble with targeting inflation or price levels with interest rates is that interest rates shift both aggregate demand and aggregate supply in the same direction simultaneously. Lower interest rates stimulate demand by increasing debt-based consumption, but they also stimulate supply by encouraging investment. Higher rates stifle demand, but also supply by cutting back on investment in factories and equipment.

“Perhaps this is obvious, but for some reason, I never see it stated. If one wants to control prices, one needs a lever that shifts one or the other, not both. The real problem with this present system is in guessing which factor of price is going to dominate. I guess you could tie it into Kondratieff here. In the first three K-seasons, debt is low enough that the demand-side pull on pricing dominates. Lower rates result in higher prices, and higher rates in lower prices. However, when debt levels become unsustainably high and K-winter takes over, demand becomes relatively inelastic and unresponsive to shifts in interest rates. However, supply still responds via increased investment when rates are lowered. So, lower interest rates no longer support higher prices in K-winter. In fact, they make prices decline by boosting supply in the face of inelastic aggregate demand.

“Why am I so alone in seeing this? Shouldn’t the Ph.D.s spending their days pondering this stuff have come to this conclusion long ago?

“B.C.”

23 Skidoo

B.C., that was a very good point, but all you are really doing is stating in a roundabout way that the Fed is forever chasing its own tail. The Fed can NEVER reach the natural interest rate, as its rate manipulation itself constantly shifts this natural level. The lagging effect of their actions ensures they will miss the obvious.

You are not the first with this idea. However, what is new is the attempt to tie this into the K-cycle. As much as I am in favor of those cycles, the evidence suggests that K-cycles are NOT “natural events,” but rather very long-term cycles created by interventionism of the Fed and governments. In short, inflationist policies work until they blow sky-high. That time is here, which, of course, means that everyone playing That ’70s Show reruns is going to instead see a rerun of the “23 skidoo small change” scenario.

Please remember the Fed always fights to the death the last major battle. The battle they should be fighting is the one before the last. The last major battle was against inflation in the ’70s and ’80s. Fighting the last minor battle (against deflation) in 2003 created the largest property bubble in the history of mankind. It also sealed the Fed’s fate. What we see now is more like 1929 than 1979, and the differences noted above prove it.

Regards,
Mike Shedlock ~ “Mish”
July 3, 2006

23 Skidoo was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.