Thoughts on the role of government and life

It would appear that Barack Obama will be the next president of the United States, and if the voting irregularities can be kept to a minimum that may even be confirmed this week (although my gut tells me this could drag on for a while). I am a Canadian, so I don’t have a vote this Tuesday, and if I did I would be tempted not to vote at all.

Americans are faced in this election with the same choice we Canadians were faced with in October: a bunch of people running for office that I would never hire to run my own company. In Canadian we had a wacky professor, a wacky socialist, and a "conservative" who has spent more than any socialist before him. (The "conservative" won). At least in Canada we are still running surpluses, although that will probably end this year.

In the U.S. you get to choose between a 72 year old former soldier, who actually thinks it’s in America’s best interests to be fighting wars in foreign countries, and a lawyer who believes in redistributing the wealth. The lawyer is very good with a teleprompter, and he will probably win.

Regardless, taxes will increase in America to pay for universal health care, more bailouts, and more redistribution. I have no idea whether or not it’s true, but many commentators estimate that 50% of the American public receives direct financial support from the government. In other words, half the people work to support the other half. I don’t see how a society can survive long term under those conditions.

Good luck, America. I don’t envy your choice.

As I sit and listen to the rhetoric coming out of Washington these days, I ask myself: “John, where did it all start?”

How did the once great nation of the United States of America, the land of freedom, opportunity, hard work, and reliance on self, become a nation where the only solution to our problems is a government bailout? A nation where everyone, Democrat and Republican, believes the government must save us from our problems?

The answer, of course, is that the direct dependence on government can be traced to March 4, 1933 in the Inaugural Address or Franklin D. Roosevelt. That speech started the trend in motion that resulted in the government bailouts of 2008, and is not done yet.

In my not-so-humble opinion, that speech was the start of today’s problems. FDR decided that the public could not solve it’s problems without government intervention. The government had no choice but to redistribute the wealth of the rich to the common man to create jobs.

Yes, that’s right, a President of the United States actually believed that a government could create jobs, which is of course ridiculous. Wealth is created by inventing something, designing, producing, marketing, and selling. Wealth is created by hard work, not by government order.

He believed that economic problems can be solved:

…in part by direct recruiting by the Government itself, treating the task as we would treat the emergency of a war, but at the same time, through this employment, accomplishing greatly needed projects to stimulate and reorganize the use of our natural resources.

In other words, it was up to the government, not the free market, to decide how resources should be used. Scary stuff. He also believed that government intervention could reduce:

the tragedy of the growing loss through foreclosure of our small homes and our farms.

Yes, people were over extended back then as well, and tragically were losing their homes. As we now know, the “New Deal” merely served to prolong the Great Depression, which did not end until the start of WWII.

He did say some good things, including:

Happiness lies not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort.

I agree. Unfortunately, he had other tragic ideas.

Here are some other things he believed:

Our international trade relations, though vastly important, are in point of time and necessity secondary to the establishment of a sound national economy. I favor as a practical policy the putting of first things first. I shall spare no effort to restore world trade by international economic readjustment, but the emergency at home cannot wait on that accomplishment.

In other words, yes, perhaps we have borrowed money from foreigners, but when push comes to shove, we will default and depreciate our currency, and put up trade barriers if needed. Yup, that’s a great long term strategy.

The scariest part, though, was FDR’s belief that “broad executive powers” outside of the Constitution were necessary to deal with the crisis:

Our Constitution is so simple and practical that it is possible always to meet extraordinary needs by changes in emphasis and arrangement without loss of essential form. ….

I am prepared under my constitutional duty to recommend the measures that a stricken nation in the midst of a stricken world may require. These measures, or such other measures as the Congress may build out of its experience and wisdom, I shall seek, within my constitutional authority, to bring to speedy adoption.

But in the event that the Congress shall fail to take one of these two courses, and in the event that the national emergency is still critical, I shall not evade the clear course of duty that will then confront me. I shall ask the Congress for the one remaining instrument to meet the crisis—broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe.

Scary stuff indeed. Sort of sounds like George Bush justifying the war in Iraq, and the spying, and the lack of Congressional oversight, doesn’t it? Now you know where he got the idea, and why I believe this speech was the start of many of today’s problems.

Lest you think that I have taken these quotes out of context, I have added a page to this site with FDR’s Fear Itself speech so that you can read the entire speech and judge for yourself.

Pat Buchanan wrote a great article today; his basic premise is that the party is over. For the last few decades we have lived beyond our means. We have financed everything with debt. We don’t save a dime anymore.

The left argues that this is a failure of conservative capitalism, that we need more government involvement in our lives. That’s ridiculous. Does anyone really believe that our problems were caused by Wall Street being cautious and prudent?

Living Beyond Our Means

No, our problems are caused by living beyond our means, and by believing that government can save us. Here’s Mr. Buchanan’s conclusion:

Hank Paulson of Goldman Sachs and Ben Bernanke of the Fed chose to bail out Bear Sterns but let Lehman go under. They decided to nationalize Fannie and Freddie at a cost to taxpayers of hundreds of billions, putting the U.S. government behind $5 trillion in mortgages. They decided to buy AIG with $85 billion rather than see the insurance giant sink beneath the waves.

An unelected financial elite is now entrusted with the assignment of getting us out of a disaster into which an unelected financial elite plunged the nation. We are just spectators.

What the Greatest Generation handed down to us — the richest, most powerful, most self-sufficient republic in history, with the highest standard of living any nation had ever achieved — the baby boomers, oblivious and self-indulgent to the end, have frittered away.

Sad, but true; you can read the full article here.

It’s been an interesting week.

Joe Biden, Democratic candidate for Vice President, said this week that:

“We want to take money and put it back in the pocket of middle-class people,” Biden said in an interview on ABC’s “Good Morning America.”

Noting that wealthier Americans would indeed pay more, Biden said: “It’s time to be patriotic … time to jump in, time to be part of the deal, time to help get America out of the rut.”

In other words, it is your patriotic duty to give your money to the government, because they know better than you where they should spend your money.

Sounds like socialism to me.

I wholeheartedly agree that we should each help those who are less fortunate than ourselves, and I do. But I prefer to help others by helping people directly (such as helping friends and family when they need a hand) and donating to charities I support (because they are much more efficient than a government bureaucracy).

Then, today, the SEC banned short selling on 799 financial companies. Short selling occurs where you borrow a stock and sell it. You hope that the price will drop, so that you can buy it back, for less than you sold it for, and return it to the original owner. Short selling has existed for centuries.

The SEC believes that short selling drives the price of stocks down, and to a certain extent they are correct; that’s the law of supply and demand. But here’s the rub: at some point the short seller has to repurchase the stock, and that drives the price back up.

If everyone is shorting a stock, at some point the smart money will start buying. It’s called a “short squeeze”, and it drives the price back up, sometimes very rapidly. That’s how capitalism works. We place our bets, and sometimes we win, and sometimes we lose.

But now, the government has said that they are suspending capitalism; you can only drive prices higher, not lower. This is a very dangerous precedent.

Sounds like socialism to me.

Then we have the Federal Reserve hard at work to “inject liquidity”. On Thursday:

The Federal Reserve plowed $55 billion of temporary reserves into the financial system on Thursday as part of a concerted global bid by central banks to free up frozen lending markets.

It appears now that the government will also be buying or guaranteeing everything else. You can’t lose.

Sounds like socialism to me.

Unfortunately risk is an essential element of capitalism. Sometimes you lose. The government, starting in the Clinton and Greenspan era, encouraged people who couldn’t afford it to buy homes. They couldn’t pay, the mortgages lost value, and people lost their homes. That’s what happens when you buy something you can’t afford. You can’t protect people against market forces.

So now, the government will take over everything. I guess they will start nationalizing the auto makers next, since they are also insolvent. Then the government will own everything, no-one will have any incentive to take any risk, innovation will be stifled, and we will be in for a long financial depression.

Sounds like socialism to me.

The argument is often made that we don’t really mind paying taxes. Unfortunately, we all have an incentive to not pay taxes.

Google, the owner of perhaps the biggest computer server “farm” in the world, is looking at ways to put their computer servers on barges 7 miles out to sea. Because they would be in international waters, they would not have to pay taxes. Here’s the Google story.

The point, of course, is that if taxes get to high, we will find ingenious ways to avoid them.

Gas Prices.

They are a hot topic these days, as they have been for the past year or so.

As I write this, Hurricane Ike has blasted through Texas, leaving 4 million people without power, and leaving the oil rigs and refineries in the area shut down. If oil can’t be refined into gasoline, there will be a shortage of gasoline, and as any first year economics student will tell you, a shortage of supply will increase prices.

Of course, as we now know, we are long past the point of Peak Oil. There have not been any new significant oil discoveries for decades. Oil is a finite resource. We are running out. It is projected that within two or three years Mexico will no longer export oil; they will need all they can produce for internal consumption. The giant Saudi Arabian oil fields are long past their peak. There is still lots of oil underground, but unfortunately a lot of it is in hard to reach places, or trapped in shale, so it will be difficult and costly to extract.

Practically speaking, we are running out of oil, and as the emerging economies of India and China switch from bicycles to cars, demand is increasing while supply is reducing. Oil prices will continue to increase.

So why, then, when I turn on the radio, do I hear the talking heads talk about how “consumers are being gouged” by the oil companies? Yes, it’s very frustrating that in advance of hurricane Ike the price at the pump in my part of Ontario, Canada jumped from around $1.20 per liter to around $1.35 per liter overnight. Does that mean consumers are being gouged? Perhaps, but as a consumer, I have a choice.

I don’t have to buy gasoline. Or, I can reduce my consumption. I don’t have to buy an SUV. I can buy a smaller car. I can drive less. I can car pool, or take public transportation.

Of course the talking heads want government to regulate the price of gasoline, so that we poor consumers won’t be gouged.

Not surprisingly, I believe that government regulation is a very bad idea.

First, how can you regulate the world price of a commodity? How can the Canadian or American government decree that the price of oil will be $X per barrel? They can’t.

Of course the government could pass a rule that the price of gasoline at the pumps can only increase by 1% in any given week. Or they could put a tax on the profits of oil companies. (Of course in Canada and the USA the price at the pump is largely made up of taxes anyway, so the government is already regulating the price; they are making it higher). But how would that help us?

In the short term, the price would go down, or at least not go up by as much. In the long term, explorers, refiners and sellers would make no money, so they would no longer explore, refine or sell, and there would be no gasoline.

Here’s a more bizarre way of looking at this: the average person pays, let’s say, $1,000 per year for gasoline. A doubling of the price will increase the cost of gas by $1,000 per year. The price of a new car, is, let’s say, $20,000. If the car lasts for 5 years, the cost of a car is $4,000 per year. If the government really wants to save consumers money, perhaps they could regulate the price of a new car; perhaps cap it at $1,000. That way instead of a car costing $4,000 per year, it would only cost $200 per year, so consumers have saved $3,800 per year. That’s a lot better for consumers than legislating the price of gasoline.

Of course that idea is idiotic. If car companies could only get $1,000 for a car, they could not sell cars. They would only sell bicycles, and eventually there would be no cars.

Alas, that’s the slippery slope we walk down when we let the government run the economy. So, next time you hear a commentator or a politician talk about how the oil companies are gouging consumers, remember that the solution is NOT to let the government regulate them, which will only serve to gouge us more. The solution is to take care of yourself: buy shares in oil companies if you think they really are gouging us, and drive a smaller car, and drive less. It’s better for you to be in control; it’s not good for the government to have more control.

On Sunday the U.S. government took control of Fannie Mae and Freddie Mac.

The two government-sponsored firms own or back about half the mortgage debt in the U.S., and have lost billions in the housing market collapse.

So, why is the federal government involved in the U.S. mortgage market?

It all started back in 1913, when the U.S. Income Tax rules were amended to make mortgage interest payments tax deductible. Of course back then the maximum tax rate was 6%, and everyone paid cash for their houses anyway, so it didn’t have any immediate impact.

But then, in 1938, Franklin Roosevelt’s “New Deal” created the Federal National Mortgage Association (Fannie Mae) to guarantee mortgages. This government guarantee made mortgages cheaper.

As income tax rates rose, mortgage interest deductibility became more valuable, so buying a house became a good tax savings strategy.

Then came 1968, when Fannie Mae became a public company, with directors, shareholders and a stock market listing. Since the government started the company, and since everyone assumed the government would never let Fannie Mae fail, there was an implied guarantee on all of Fannie Mae’s debt. This meant that big institutions could invest in Fannie Mae debt without fear of loss.

So Fannie Mae management, with access to cheap money, began using that leverage to write an increasing number of mortgages. The balloon kept getting bigger and bigger.

Unlike most bubbles that eventually burst, the housing bubble kept growing. Mortgage rates were cheap, and to save taxes and protect against inflation, buying a house made sense. And, when this millennium started, the Fed kept lowering rates, encouraging even more people to buy houses, blowing up the bubble even more.

Until now.

The sub prime crisis of 2007 meant that mortgages were harder to get. Fannie Mae’s books got so bad that the government finally had to step in. There are now over 1 million homes in the U.S. that are under foreclosure. Things look bleak.

So here’s the million dollar question: Would the bubble have gotten so big without the involvement of the federal government? If the feds had not encouraged excessive borrowing with the creation of Fannie Mae, and artificially low interest rates, the bubble would never have formed, and one million Americans would not have lost their homes to foreclosure.

Just one more example of why the government should stay out of our lives.

So here’s the thing:

I work very hard for every dollar I earn, and I believe that gives me the right to decide where I should spend each dollar.  I object to handing over a large number of dollars to the government in taxes, because I don’t believe the government is as smart as I am.

To be clear, I don’t object to taxes.  I realize that the only way for the government to be able to pay for essential services, like the judicial system, is by collecting taxes from me.  I just don’t want it done to excess.

But how, you say, can we help the unfortunate in our society?

Here’s a quote, taken from dooce.com:

But what about the family who cannot afford [medical] insurance for their child? The family who can barely make rent, and if they stretch the budget they can eat three meals a day all week, let’s hope nothing bad happens to their kids because then they’re screwed. Kids, go hug your father, he’s off to one of his three jobs, none of which provide him insurance. And it’s not because he’s lazy or unwilling to work, it’s that his family couldn’t afford to send him to college, or he came from a family that didn’t know they should encourage him to go to college because they were busy trying to survive. If giving up more of my paycheck could help get this family adequate healthcare, then PLEASE. TAKE MY MONEY.

And there’s the rub.  The tough guy in me says that the problem is lazy people, not the people who are working three jobs.  But what about it?  What about the person who works very hard, and still can’t make ends meet?

I’m afraid there are no easy answers.  I suppose if taxes were really low, we wouldn’t need to work three jobs to earn enough money to pay for things like insurance.

Here in Canada, where I live, health care is “free”.  But of course it isn’t really.  We pay for it with our taxes, and because health care is provided primarily by the government, there aren’t enough doctors.  There is no point in free health care if you can’t actually get health care.

The answer, I believe, is to have the government pay for health care, but have it provided by the private sector.  More on that in future posts.

Welcome.

If you want to read a bunch of jibberish, you have come to the wrong place.  On this blog I plan to discuss whatever strikes my fancy.  Specifically, I want to discuss what we need to do to get the economy back on track.

Why now?  Because we are getting ready for federal elections in both the United States and Canada this fall, so now is the time to discuss the issues that will effect us all.  Stay tuned.