Sunday, June 6, 2010

The Middle-Class Conundrum and the Dim Prospects of the Tea Party Movement

What we have in the Tea Party movement is something of a "middle-class revolt," which shouldn't be very surprising, given the way that government has consistently given the middle class the finger for the past few years when it has come to fiscal policy. First it was bailouts for the financial sector which began under the Bush administration and continued into the present one that enraged the voting public, who, after all, were quite aware that ultimately they would be asked to shoulder the burden as taxpayers, and a significant fraction of which were in need of a bailout themselves.

But I think that with time, the public would have forgotten that episode, however much anger there was when it passed. The massive and grotesque spending binge in which every leftist social and political cause got a hearty gurgling slurp at the public trough that followed, however, was unforgivable.

This hefty helping of government spending now appears to have established an inescapable trillion dollar perpetual deficit. ‘Structural deficit,’ it is called; if removed, it would have the effect of shrinking GDP dramatically, and so has become a permanent fixture of our economy. Karl Denninger has produced an excellent chart showing just what the intended effect was (well, in addition rewarding political cronies) --

The way to understand this graph is to keep in mind that, despite Keynesian protests that Friedmanites/Monetarists have taken control of the monetary debate since the election of Reagan, to the contrary, almost all governments become Keynesian in the breech, the Bush and Obama administrations included. And the Keynesian approach to economic disaster is for government to spend like mad. So, the government simply spent whatever was necessary to fill in the 10 percent drop in GDP so that the number would come out basically flat.

One of the brighter spots of Vox Day's Return of the Great Depression is where he asserts that government economic models do not actually predict economic activity, and aren’t even designed to do so. They are designed to predict what other government agencies which collect the statistics will eventually report. This may not seem odd, except for the fact that the statistics, when reported, are themselves estimates and subject to revision and updating as further data come in. So, the economic models are actually being used to predict what government agencies will say about the economy, rather than what the economy is actually doing, so that there is a sort of ‘statistical incest’ involved.

As you might guess, this means that there is a lot of modeling and statistical self-reinforcement going on that virtually ensures that there will be catastrophic blindness built in to the system, since discrepancies are practically mandated out of existence and there are no checks on the data being supplied by each agency. But in the meantime, it does help to ensure that the bureaucrats who report statistics all agree and look like they know what they are doing, and nobody in particular can be blamed when they are all caught flat-footed by the disaster their collective system was designed not to see.

All of which – Keynesian deficit spending, models to predict other people’s statistics instead of the economy itself, graphs like Denninger’s -- point to an absurdity in which governments do not collect statistics to actually describe the economic situation at hand. They form projections and take action to ensure that the collected statistics will eventually show what the government would like to see. In other words, they need to know just how large an intervention it will take to get the numbers to look favorable, but are in reality meaningless. Hence, the fiscal free-for-all; GDP in the short term would have contracted approximately 10 percent without the spending binge, as Deninger's graph clearly shows. It took government prodding to get people to buy houses and cars they otherwise would not have bought, and the creation of vast new government boondoggles to fill in that 10 percent hole so that things came out relatively flat.

Such behavior reinforces the veracity of the principal Austrian accusation against modern economics – that the economists do not really believe their statistics are valid and meaningful descriptors of the economy at all and hence do not even believe in the most basic principles of their own subject, but that the economy is driven by irrational ‘animal spirits’ that respond to statistics. If the statistics don’t look good, simply lie and manipulate things, and eventually the economy will recover. The image is the reality, so that manipulation of things like interest rates and GDP actually makes things better, rather than creating further dilemmas in which the response to incorrect statistics squanders real wealth and makes things worse. But I guess that it is nice to believe a theory that basically says that you are God and other economic actors are primitive idiots to be corralled into proper behavior by presenting them with shiny beads. Nobody seems to bother them with the obvious question – if the interest rate etc. may be anything we, I mean You, oh exalted economic gods at the FED, like to make it, what is the purpose of money and balance sheets and the whole lot to begin with? Why even bother to ‘keep score’ at all? Why doesn’t everybody just do whatever they like so long as everybody stays busy?

But back to the discussion at hand…It would not surprise me in the slightest to find out one day of a meeting in which Obama's handlers came to him and a few Congressional representatives and said "OK. We need to spend about a trillion dollars over last year's budget in order to get these GDP statistics to look right. So what's it going to be?" I can only imagine that their eyes grew to the size of saucers and drool ran from the corners of their mouths as the Great Obama Boondoggle was born, to our eternal chagrin.

Middle Class Culpability

Methinks, however, that this analysis in many ways lets the middle class itself and its role in the present mess off too lightly. When an economy is on a fast track to the bottom of a ravine, the question any sitting politician who would like to keep his seat, and often his head, must ask himself is whether the deficit or the impending disaster is going to make the masses angrier. It is easy to see what the Tea Partiers have to say today in response to the deficits, it is harder to know what would have happened had the financial crisis been allowed to take its natural course, such is the present aversion to even the slightest and most temporary of economic pain. There are reasons so many economic managers and regulations have accumulated over the years. (Show of hands for abolishing the FED and SEC?) As Roepke notes, few are the politicians who find themselves hanged for the charge of monetary profligacy, but more than a few have had their necks stretched for the crime of being perceived as stingy during a ‘crisis.’

More importantly, one would have to be blind not to notice that governments have bent over backwards to accommodate middle class economic concerns and spending priorities for decades. From subsidies in virtually every emotionally charged market with even the mildest possibility of being priced-out, such as and especially housing, education, and medicine, to intrusive regulation of said markets, to the "third rail issues" of Social Security and Medicare, government has consistently catered to the whims of this class in the interest of, well, politicians remaining in office. Fannie Mae and Freddie Mac did not suddenly appear on the scene in 2008, and seriously, how about a show of hands for who would like to see an end to the mortgage interest deduction, or the health insurance deduction for businesses?

The middle class often likes to complain about welfarism, but who is it attending the state universities? Inner city minorities? Milton Friedman once pointed out that if the money spent on welfare programs were simply divided up and handed out equally among the recipients, they would have moved clear up well into the middle class themselves. As it was, most of the money was being spent on administration. Who made up this administration? Middle class bureaucrats. To Friedman's discredit, he made a habit of involving himself too much with government, such that the net result of many of his activities was to help big government accomplish leftist policies more efficiently. Despite his strident libertarianism, we have him to thank for such things as monthly IRS withholdings and the Earned Income Credit, which is basically welfare without additional administration designed after the system he described in Free to Choose. We can, of course, forgive him in recognition of his other contributions to free market philosophy, but let that be a lesson for anyone who chooses to involve himself with government.

The point is, from public schooling to tax deductions and often to their very employment and a million other forms of government entanglements, the middle class finds itself up to its ears in government dependencies, with very few souls confident enough in their own positions that they are willing to scrap the entire thing and start over. Cutting the other guy's subsidy is one thing, but you'd better not threaten mine! My agency/job/transfer payment/industry is too critical.

The Poorly Understood Conundrum

As a result of the economic artificialness such transfer payments introduce, and more importantly in response to ‘monetary policy,’ the economy itself has grown into a malformed and malignant structure which does not function to serve the needs of real consumer demand, but purely in response to the warped economic signals its actors receive. When I hear people complain about the recipients of welfare and transfer payments, and how they would like to extricate themselves and receive their 'fair share' by simply stopping payment of their taxes, I want to laugh at them, very hard.

To the point of crying, really, because it isn’t actually funny at all, but immensely sad and hopelessly pathetic. Can anyone possibly think that it's that simple? Is it possible that they do not recognize the taxes and interventions built into the prices they pay, both to their detriment and to their benefit? Can they not recognize that their businesses and industries are in up to their gills in transfer payments and warped pricing, so that their salaries in all likelihood do not even remotely reflect the actual market value of their efforts? Need I even bother with the calculation of the value of their accumulated assets? Do they not understand that, at this point, everyone is on welfare, and that was the purpose from the very beginning?

If anyone can look at the economy and extricate the 'correct value' for even a single transaction, let alone his overall 'fair share,' I say he must have the powers of the divine. For my part, it is so far and away beyond my abilities as to be a completely laughable exercise. But needless to say, not paying your income taxes is as likely to increase the discrepancy as reduce it, and it really is almost impossible to know.

This is perhaps the saddest aspect of the whole rotten mess. I hear so often the complaint that people are working so very hard, but just can't seem to get anywhere financially. They cannot understand why. Where does it all go? “To government,” presumes the Tea Partier. To be fair, that is true, but what goes into government also comes back out again, and this fails to take into account at all the other effects of government action in guiding money through the economy. That any one particular actor is a net loser is only a presumption, and likely as not to be incorrect in any particular individual’s case. And if markets are so badly distorted, how can one even know if his efforts are producing wealth at all? Profit-and-loss calculations should render the verdict, but clearly they can't be trusted in a world of artificial prices and a manipulated money supply. How can he know that his efforts are worthwhile? Does he manufacture cars, or just go to work every day and waste materials producing things that aren't really needed? Is he perhaps himself a ward of the state, through roundabout means? The market won't tell him. Not anymore.

Maybe he’s running and running in a hamster wheel to support someone else, or maybe he is actually being supported by others, or maybe he is doing it for nothing at all, and might as well stay at home to collect his paycheck, as that at least would save the costs of commuting. The tendency is to assume the first scenario, since for most people a feeling of resentment is preferable to feelings that one might actually be in debt to others. After all, if a guy is working his tail off, how can anybody say he owes anybody anything? A man deserves better for working so hard!  If there's any chicanery going on, he must be the one owed!

Of course, that isn't the way things work, as the labor theory of value was long ago disproved. But as irrational feelings go, resentment is to be preferred to helpless despair, anyway. But again, there really is no way to know where one stands with such distorted economic signals. Maybe we are all just running and running, pushing things around in circles and accomplishing nothing as capital and resources waste away.

The Entitlement Trap

On the other side of the ledger, by the time you are done paying taxes for all the things and programs you don't want and didn't ask for, and received your paycheck (as well as your entitlements,) you can't be bothered to decide what was worth what, both because you couldn't possibly know anyway and because there really isn't much choice about it. That's just the way it is. Is public school best for your kids? What does it matter? By the time you're done paying for it, you can't afford anything else. How could you turn it down?

Do you want to own your own home? Even if you prefer the freedom and flexibility of renting, you can hardly afford not to buy a home. Mortgage interest and property taxes are deductable while rent isn't, and you are competing for purchasing power with all the rest of us. Those who fail to conform to the preferred lifestyle of the middle class will watch taxes eat up their paychecks, while the Jones's outbid them in the marketplace for scarce goods. Nonconformity can be expensive.

Otto von Bismarck, pioneer of the modern welfare state, understood the ensnaring effects of transfer payments all too well. By tangling the middle class up with entitlements, he was assured of their loyalty to the state. Without their entitlements, where would they stand?


Not much has changed since his time. For this reason, much as I like to see treacherous political vermin like Arlen Specter get run out of town, it is a little difficult to take the Tea Party all that seriously. It would be one thing if its leadership were openly advocating for realistic solutions like the abolition of Social Security and Medicare, but that is not the case. These two programs alone will, not might, not could, but will, bankrupt the government if they are not more or less dropped. The scalebacks required to make them work realistically would be tantamount to not having them at all.

What is funny/patently hopeless is that the position I am articulating is considered "unrealistic," principally because it is politically unthinkable. For modern America, political considerations have taken precedence over things like mathematics. Politics is more important in considering a course of action than physical reality. I realize that this has been the case for some time, as nations generally arrive at such crises through a process of prolonged ignoring of reality, but on the other hand, reality has become far too clear for the supposed realists to be proposing half-measures. The Tea Party is not just too little too late, it is only slightly less unrealistic than the Obama administration itself. It is not enough to vigorously oppose new spending, or even to return to pre-Obama spending levels. The US needs a new monetary system and a clean-cut default on about half it's obligations. Anything less only delays the inevitable by a few scant years. That's how bad the situation is.

The Conning of the Middle Class

The middle class finds itself caught in a vise, partially of its own making. They've bought into the lies of the con men, or at least have gone along with things they didn't understand but should have known better than to dabble in, and now can't make heads or tails of economic reality. Thanks to the accumulating distortions of government intervention and monetary policy which the con men have instituted, the economy is a wreck and resources and wealth are being flushed away even as people work harder than ever, or at least feel that they do. Meanwhile, political jealousies and deluded half-understandings prevent meaningful reform. The con men play one side off against the other.

The middle class has separated itself so far from the old ways that had kept it safe from such schemes, like a precious metal money system, sanctity of property, a healthy fear of government, and the older customs that governed interpersonal transactions that they can't imagine returning to them. They are left with two unpleasant choices -- to turn back to the con men themselves for answers, or else to plunge into the unknown that some suspect is "right" but is a departure from the type of behavior which they have been "programmed" to think prudent. It is a hard step to take.

Its members are trapped, by the entanglements of an increasingly confused and incomprehensible system of rules and power wielding institutions, and worse by a mentality that views this way of life and its corruptions as "normal."

But let everyone remember what the entrapment looked like -- maybe something like this --

Middle Class Ernie only cares about 'what's in it for him' -- a 'bargain!'  The suspicious behavior of the con man and the fact that something might not be completely above-board doesn't bother him in the slightest. And what finally prevents the con? Ernie has already been conned out of all his money by some other shyster and this con man isn't even remotely interested in trading in his own kinds of wares.

Cue the sarcastic remarks about Congressional non-participation in Social Security.

And watch out for shifty looking muppets offering supposed bargains.

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