The Balance of Wealth,PT 2

The Balance of Wealth,PT 2

The Grand Subsidy

Think of all the rotten cheese gone bad in government warehouses. Think of the other government programs where the government has bought up food and destroyed it. By consuming farm goods, the government raises food prices to subsidize farmers at the expense of the hungry.

The government does the same thing for capitalists!

What do capitalists do but provide capital? That is, they save wealth and then loan it out for the tools laborers use to produce products for consumers. When governments run deficits, they are consuming capital. Therefore, they are raising the price of capital: interest rates. This raises corporate profit rates since a corporation’s profits must keep up with or exceed the interest rate of conservative investments or the corporation will not be able to receive financing. True, an old corporation can stay in business by having its stock price plummet and the investors are stuck with a sunk cost, but new companies and new ventures require new investment capital. So over time corporate profits will catch up to interest rates.

As I write this, the U.S. government has amassed a debt of nearly 6 1/2 trillion dollars! That is, 6 1/2 trillion dollars have gone to prop up the money lending class!

Some people say that this has occurred because of a grand conspiracy by the super rich, that the robber barons who met at Jeckyll Island to design the Federal Reserve system planned on turning their families into a new aristocracy by coaxing the government to go deep into debt.

Methinks it is a mistake to dwell on the actions of the “bad guys.” Such thinking leads to defeatism. The grand subsidy occurred because the Left was looking the wrong way. Once upon a time, low interest rates were known as the key to a progressive society. Unfortunately, many of the favored remedies of the past have been usury laws or inflation. Alas, the former reduces the supply of capital, while the latter is only a temporary fix, which results in even higher (real) interest rates in the long run, due to the extra risk. Further, the threat of inflation is a work program for the finance industry, as they try to second guess the actions of the Fed.

But the modern Left has been enamored by the economics of John Maynard Keynes. At the beginning of the Great Depression, he posited the idea that once the economy runs out of investment opportunities, it will go into a downward spiral as saved money rots in vaults and mattresses. The cure is to have the government “stimulate the economy” by deficit spending, creating artificial investment opportunities through research spending, and encouraging consumption in order to prevent excess savings. The legacy of Keynes can be heard every time an economic reporter talks of “consumer spending driving the economy.” (Environmentalists take note: blame the “consumer society” on the ideas of Keynes. I will have more to say on this in a later chapter.)

The Left embraced Keynesian economics because it called for more government “investment in the economy” and for welfare programs which increase consumer spending). Also, the theory justifies wealth redistribution on the hypothesis that the rich save more because their needs are satiated while the poor spend what they get to meet unfulfilled needs. (The second and later generation rich often have a negative savings rate as they either squander or give away what their ancestors have earned. The major error of Keynesian economics is that it fails to take time into full account.)

But while these progressive words are said and these “caring” programs are implemented, the core of the Keynesian program is the reduction of savings. The result is cuddly fascism: a right wing government that subsidizes the rich while doling out scraps to the poor and middle class. The appearance may be progressive, but the real result is a concentration of wealth and power to a small elite.

And there is more.

Further Reading
The debt figure given above includes money the government loans to itself. To learn more about the public debt, see The Bureau of the Public Debt web site.http://www.publicdebt.treas.gov/

========================================================================

“Paying Not to Plant”
Another way in which farm prices are artificially raised is that some farmers are paid not to plant. This reduces the supply of farm products, which puts more money in the hands of those still planting.

A similar program exists for those who save money: Social Security. Workers are encouraged to spend less by having the government provide for their retirement on a “pay as you go” basis. However, unlike the farm subsidy, workers pay a regressive tax for this benefit, giving them less money to save on their own behalf.

On the surface, Social Security appears to be progressive; many poor old people depend on it. However, many of these poor old people would have had a large nest egg had there been no Social Security. And less obvious, the process of having millions of laborers saving for retirement would have pushed down real interest rates and thus boosted labor rates – more tools chasing the same number of workers.

Some of the workers would have taken their retirement savings to start their own businesses during their careers instead of working for big corporations all their lives, and then sold their businesses upon retirement.

Upon death, many of these labor class retirees would have funds left over for their children, bringing them up to the next level of wealth. These children would have seed capital for starting their own business, continuing the family business, or living without a mortgage.

Of course, there is a downside to this alternative vision: some workers will invest poorly, or will lack the discipline to save at all. Such is the price of power: the need to take responsibility.

This is not to say that we need to let the unlucky or the irresponsible starve upon old age; it is that we should presume competence and responsibility for most and have some type of welfare program or charity for those that prove to the contrary. I will give some thoughts on how to do this in a later chapter.

A Different Retirement Path

With all my talk of “attacking” the investor class, I suspect I have worried a rather large class of people, people who may look rich on paper but in reality are not rich: the retired. A lower rate of return on investment means that one needs a greater retirement nest egg to get by.

If we move away from Keynesian economics back to the older idea of the virtue of thrift, people will need to save more in order to be able to retire comfortably. But worker incomes will be higher since less money is needed to finance the tools the workers use, so this will not be a problem for the next generation of retirees.

However, what about those already retired, or nearing retirement? Fortunately, the market automatically provides compensation for the changeover: when interest rates fall, the values of existing bonds and stocks rise. Suppose you pay $1000 for a bond that pays 10% interest. You have bought an instrument that pays $100/year. Now suppose that interest rates fall to 5%. Your $1000 bond now pays the same amount as a new $2000 bond. Your bond goes up to $2000 in price. The same holds for price/earnings ratios of stocks. Note that this is a one time jump. Unfortunately, many people will buy on momentum causing stock prices to go up even more, temporarily, followed by some type of crash as the market seeks the new equilibrium.

It would be nice if the average investor understood these things rather than blindly buying on momentum. I wonder if it would help if some lessons on basic finance theory were taught as part of high school…

One problem with private retirement savings is that many people don’t think hard about retirement until later in life. Another problem is that many people are not sophisticated investors. These problems run up against the standard model of retirement, where you are expected to contribute a small portion of your income over the course of life and expect market appreciation to do much of the work.

Consider a different model. Instead of saving for retirement when you are young, you put your excess wealth into learning jobs skills, starting a business and paying down debts. Later in life, the surplus goes into educating your children. Then, once the children become independent, you save like crazy. Is this reasonable? What about missed market appreciation?

Well, in a fully capitalized society, conservative investments will only provide 2-3% per year. If your job skills grow over time, your income will keep up with or outpace interest rates, so there is no advantage to saving earlier. Also, if you pay down your house quickly, you have a zero risk method of “investing.” The interest rate you earn is the reduction of mortgage interest not paid out. And if you pay for your children’s college as you go, there are no debts there.

So you hit your early fifties, and there are no children in your paid off house. You are in your peak earning years and have a major reduction in expenses. You could even sell your house and live in a smaller house. What fraction of your wealth could you save?

Such is not a plan for everyone, but I think it fits the psychology of many people better than the “start putting money into Wall St. when you are 20” life plan. And remember, in a low interest rate world, labor incomes will be higher, more money available for saving.