The Proof’s in the Pudding/Results – Socialism Simply CANNOT Work.....

We’ve seen the failure of the Command Economies of the former USSR and Mao’s China, and today we’re seeing the failure of big government, Keynesian economic policies and the vaunted "Public/Private Partnership" called Corporatism.

Sad economic experience has shown us over and over and over again that, as well-intentioned as they may be, public sector/government workers can’t grow food, produce clothing, cars, housing, etc, at even half the efficiency of the private sector...because the private sector is CONSUMER-driven (focused on benefiting the customer), while the public sector is worker-driven (focused on benefiting the worker)...and THAT is why the command/government-run economy CANNOT work.

It’s not the workers fault, it’s the fault of the orientation of each system. The most motivated private sector worker would probably become a “me-first”, “pay me more, for doing less” public sector worker if he/she wound up working for the government, where there are no incentives for those who work harder and smarter and work isn't anchored to productivity and generating wealth.

And yes, under the right conditions an unmotivated public sector worker could become a highly motivated private sector worker, if given both the motivating incentives and the fear of losing one’s job should you fail to produce, but all too often we see many potentially good workers debilitated by the “worker-driven ethos” of the public sector.

Of course, today in America, as in most of the West, we have a “private sector” that is so tethered to and partnered with government that this semi- or pseudo-private sector has adopted most of that public sector ethos and that is the disaster we're seeing all around us today.

Commerce is merely another term for a mutually beneficial exchange, generally a sum of money/currency in exchange for a given product or service. Commerce is predicated on buyer and seller being able to come to a consensus or “meeting of the minds” in regards to things like quality and price.

Ideally, every customer would like goods of the highest quality at the lowest possible price (approaching zero) and likewise, the merchant or seller wants to get the highest quality price for the least quality (cheapest to produce) goods and services. The same sort of dynamic goes on when each of us looks to buy and sell a house...as buyer, we want the most (or highest quality) house at the lowest possible price, while as seller, we want the reverse, we want the highest possible price for our home regardless of its relative quality or value.

In that regard and for that reason, every would-be worker is a salesperson of an inanimate commodity (his skills or labors) and each job, or skill has its own “optimum price”, the price at which the most exchanges will take place, sustaining consumer demand and maintaining an optimum profitability for both the worker and the entity he/she works with/for producing specific goods and/or services.

As an example, if a farmer grows peas, for instance and can sell 100% of his peas at 68-cents/pound, when he pays his field workers (pea-pickers) $5/hour, or 92% of his peas at 88-cents/pound when his workers are paid $6/hour, or 80% of his peas at $1.04/pound when his workers are paid $7/hour and 64% of his peas at $1.27/pound when his workers are paid $8/hour...his workers are really WORTH somewhere around $5/hour as that’s the optimal price of their labor that’s most beneficial to their primary customer (the farmer) and his customers (all those pea consumers).

In that light ANYTHING that raises the cost of that farm labor (and subsequently the price of peas, and thereby decreasing demand for those peas) is “BAD”.

It’s bad for the farmer (because fewer of his crops get sold), it’s bad for the pea consumers (as the price of peas and dinner goes UP)...and ultimately its bad for all those pea-pickers who’ll soon see a decrease in the number of pea-picker jobs, as pea production falls in response to that falling demand.

That should illustrate why every worker is merely a salesman of an inanimate commodity called labor (the sum total of the skills and effort that worker can bring to the job).

Given that, it follows that no worker has a “right” to any job or any set salary UNLESS that’s agreed upon as “optimal” by those buying that labor so that they can maximize the sales of the end product that they provide.

A worker selling a commodity called skills/labor can no more demand that his commodity be bought at a given price over the duration of his/her choosing, any more than the local merchant demand that his customers buy all those peas at whatever price they’re being sold at. In each case the customer (the pea-shopper in the store and the labor consuming business) has a right to “refuse to buy” at the elevated price.

If consumers didn’t have that freedom to use their money as they see fit, then even jobs that no longer need doing would be protected by unilateral “worker demand”!

For instance, let’s say that Jay is an expert saddle maker...his father was an expert saddle maker and so was his grandfather, but Jay (unfortunately for him) lives around the turn of the last century, when cars are quickly replacing horse-driven transportation.

Jay is working for the Acme Saddle Company, which has been paying top dollar for saddle makers (the equivalent of $110,000/year in today’s currency), but cars are eroding demand...and government has piled on lots of new “safety regulations for saddles”...and lots of “workplace safety” regulations, as well, so even IF cars weren’t dampening demand, all those costly regulations have combined to DEVALUE Jay’s commodity – his expertise in saddle making.

How so?

Because again, there is an optimal cost to Jay’s labor at which the amount of saddles produced by the Acme Saddle Company can be sold. As the cost of Jay’s commodity (his skills/labors) rises, either through his own salary demands or via “outside influences” (ie. government regulations, taxes, etc.), the demand for what his labors produce diminishes. That means the Acme Saddle Company needs less saddle makers...in that case it sucks to be Jay!

But while the Acme Saddle Company has every right to adjust to changing market conditions (lower demand due to competition and innovation, added costs from government, added worker demands, etc), poor Jay DOES NOT have any “right” to a job. Jay does not have any more “right” to demand that the Acme Saddle Company pay him whatever salary he needs to survive, whether they need his labors or not, any more than our local retailers can force us to buy things we neither want nor need.

Jay’s employment, like that of all workers is contingent upon him producing more value to the entity purchasing his labor, so that the final product that entity sells can be sold at a price that keeps both them in business and completely sells out their inventory.

IF Jay thinks of himself as “a victim of the Acme Saddle Company” or worse yet, “a co-owner” he’s going to wind up very unhappy and unemployed man.

IF however, he realizes that he’s really an independent seller of an inanimate commodity (his skills/labors), then he’ll quickly realize that just as the business he works for must please its customers by delivering the best value at the lowest possible price...he must do the same for the entity he works for. Jay must find ways to “work smarter” to help innovate new saddle ideas, etc., to keep Acme profitable...that’s IF he wants the saddle making business to stay viable and he wants to continue to find work there.

In other words, as competition erodes Acme Saddle Company’s market share and government adds costs to his existing labor costs, Acme will have to shed cost to compete (actually, to even stay solvent), so they’ll trim the workforce, reduce work-hours AND pay!

Other than just docilely accepting all that, Jay’s got few other choices. One would be learning new skills so he can get a job making those new fangled cars, another would be to innovate the saddle to such a degree that sales don’t fall off...OR perhaps going into business for himself making vintage saddles, BUT one thing’s for sure, Acme has no obligation to Jay once their exchange is no longer mutually beneficial.

The consumer-driven economy is what provides intrinsic value to any given work. It’s also why some skills (patent law, for instance) are valued very highly and others (like agricultural work, as one example) are valued very cheaply.

But that’s not, in and of itself, a bad thing and Jay’s way of looking at things is the key. If he sees himself as a victim of malicious “others” he’ll seethe with an indignant rage that’ll ultimately sap and distract his mental strength and acumen and erode his natural ability to innovate.

If, however, he sees how markets work and how changes in competition and other outside factors can change his own viability, he’ll be more involved to make sure government doesn’t overstep its bounds and he’ll also be freer to innovate and create and see new opportunities when old ones disappear.

Once a person understands this dynamic...everything else about the employer/employee dynamic falls easily into place.

Why the Command (Government-run) Economy DOESN'T Work...

A friend, Pela, from Sweden recently noted, "The state owned postal office has decided to "be more effective" here; which means that I will get my mail two hours later." (Pela)

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To which, I responded, “Oh yeah! That's called "increased efficiency" in government speak.

“The reason for that?

“Well, the government is worker-centric, as opposed to the market, which is consumer-centric.

“When you put the focus on the consumer, your goals tend to be delivering the highest quality at the lowest price for all....when you put the focus on the worker, you tend to get deliver the least amount of work/productivity for the highest pay/price.

“That's why the government-run economy DOESN'T work - it consistently delivers fewer goods and services, at lower and lower quality and at higher and higher prices.

“That’s why the customer really IS always right...while the worker, rarely is.”

Need PROOF that this is right?

Look no further the average annual Misery Indexes of the most recent Keynesian and Supply Side periods;


Misery Indexes: The Keynesian Years (1970 – 1980) Vs. Supply Side Years (1995 – 2006)


LBJ, like G W Bush, found himself involved in an increasingly unpopular, while over-burdening the domestic economy with all kinds of Keynesian (Big-government social spending). Ironically enough, the height of Keynesianism came during the Republican administration of Richard M. Nixon, with the closing of the gold window, wage and price controls and numerous other Keynesian programs. The U.S. continued on with a Keynesian path until the economy imploded under Jimmy Carter.

Looking back at some of those incredibly high Misery Indexes, especially through a prism of fifteen straight years of single digit Misery Indexes, it seems doubtful that America would accept that kind of economy today.

1970: 10.82
1971: 10.25
1972: 8.97
1973: 11.02
1974: 16.67
1975: 17.68
1976: 13.45
1977: 13.55
1978: 13.69
1979: 17.07
1980: 20.76

 

1970 – 1981 = 14.2

While Ronald Reagan ushered in the Supply Side era, by replacing Paul Volcker with Alan Greenspan, a Democratic House still spent $2 for every $1 they cut back in taxes. Reagan’s successor, George Bush-41, moved away from strict Supply Side tenets and cooperated with Ted Kennedy in breaking his “Read my lips, no new taxes,” pledge. As a result, Bush-41 was only the second post-WW II American President to preside over four straight years of double digit Misery Indexes. It wasn’t until 1995 that the Supply Siders, with Newt Gingrich, took over Congress and, in the process, cut federal spending, along with the Capital Gains rate to deliver some of the lowest Misery Indexes in over four decades, along with the first budget surpluses in decades.

Since Speaker Gingrich left Congress, Congressional Republicans largely abandoned Gingrich’s small government policies and America has turned slowly and inexorably back toward Keynesianism over G W Bush’s tenure.

Still, due to the Supply Side across the board tax rate cuts early in G W Bush’s first term, the increased tax revenues from those cuts masked many of the spending increases incurred during the Bush administration.

The Misery Indexes over this largely Supply Side period were;

1995: 8.40
1996: 8.34
1997: 7.28
1998: 6.05
1999: 6.41
2000: 7.35
2001: 7.59
2002: 7.37
2003: 8.26
2004: 8.21
2005: 8.48
2006: 7.87

1995 – 2006 = 7.6


This pretty much says it all!

As you can see, if you take the most recent Keynesian period and compare it to the most recent Supply Side period, the differences are stark. The Keynesian period had an average annual Misery Index of 14.2, while the Supply Side period had a Misery Index nearly half that – 7.6!

How come the past two years have been so bad?

Why has the Misery Index creeped upwards since 2003?

The post-Gingrich Republican Congress abandoned the small government, low tax principles that Gingrich used to deliver some of the lowest Misery Indexes in over four decades!

G W Bush’s ONLY Supply Side action was his across the board tax cuts early on in his administration. Along with that he embarked on one of the largest federal spending programs in history!

The NCLB Act, the prescription drug boondoggle, the massive Homeland Security apparatus that sucked in huge amounts of federal spending all helped to increase government spending and balloon the national debt, although NONE of those nearly as much as his signing onto last spring’s “stimulus package and the current bank bailout!

The Bush administration has spend like Keynesians and were fortunate that the across the board tax cuts increased tax revenues to such an extent that until 2006, they’d actually halved the deficit over the previous three years!

The credit crisis itself was caused by over-regulation – the re-tooled or turbo-charged CRA (Community Reinvestment Act) that actually forced banks to make subprime loans to high-risk borrowers. In 1994 Barack Obama helped Calvin Robeson (an ACORN volunteer) sue CitiBank in Chicago for “not making enough subprime loans available to poor and low income borrowers.

That lawsuit against CitiBank was won and that’s because the turbo-charged CRA did exactly what I just said it did – forced banks to make subprime loans available to high-risk borrowers. This “creating credit out of thin air” (or “credit socialism”, as I call it) is as dangerous as to allow banks to simply print U.S. currency in their back rooms, thereby inflating the money supply and devaluing the currency.

That’s what this “credit-creation” did, it hyper-inflated the real estate market.

At any rate, the irony is that a heavily Liberal, Democratic media, with few people at all versed in economics, reported the credit crisis as a “failure of de-regulation,” when in FACT, it was exactly the reverse!

As a result, we’ve turned toward some of the people most responsible for the current crisis (Barack Obama, Barney Frank and Chris Dodd) for relief from the problem they helped create!

We’re about to embark on MORE regulation, MORE government spending, MORE misguided government intervention and HIGHER taxes, when the credit crisis we’re reeling from was CAUSED BY over-regulation, outrageous government spending, misguided government intervention and the ONLY thing that had helped stabilize the economy previous to 2008 was the INCREASED tax revenues that resulted from those across the board tax cuts!

How important successful have Supply Side policies been?

Well, when Ronald Reagan took office, and helped a GOP Senate usher in the Supply Side era, the Misery Index dropped from America’s post-WW II high of 20.7, in Carter’s last year, to 17.97 in 1981, Reagan’s first! Those Misery Indexes continued downward each year to a low of 8.91 in 1986 and they stayed under double digits for the remainder of the Reagan administration’s tenure.

That makes it all the more remarkable that when George Bush Sr. flirted with Keynesian Democrats, like Ted Kennedy, the Misery Index rose to double digits AGAIN! In fact, Bush-41 became only the second post-WW II American President to preside over four straight years of double digit Misery Indexes.

But the heart of each era makes the case even more starkly.

There were two periods that marked the heart of the most recent Supply Side period and the most recent Keynesian period.

The “Gingrich years,” marked the most recent Supply Side period and that period would certainly include 2001, G W Bush’s first year, in which he outlined a very Supply Side (tax-cutting) agenda.

The period from 1974, the end of the Nixon administration (during which Nixon infamously intoned, “We are all Keynesians now”) through the end of the Carter administration, the last dedicated Keynesian administration, which served along with a decidedly Liberal-Democratic (Keynesian) Congress that America suffered under.

The difference in the Misery Indexes those periods delivered is astounding;


The prime Supply Side years:

1995: 8.40
1996: 8.34
1997: 7.28
1998: 6.05 *(LOWEST Misery Index since 1956)
1999: 6.41
2000: 7.35
2001: 7.59

SEVEN YEAR Supply-Side AVERAGE ANNUAL Misery Index = 7.34


The prime Keynesian years:

1974: 16.67
1975: 17.68
1976: 13.45
1977: 13.55
1978: 13.69
1979: 17.07
1980: 20.76

SEVEN YEAR Keynesian AVERAGE ANNUAL Misery Index = 16.12


With the second straight year of our new Keynesian age, 2008's, Misery Index creeping toward double digits (it looks certain to top 10.0 by year's end, the above results from these periods could very well give us a prelude as to where we seem to be heading, economically.