Miraj Patel: Free markets, Freedom, and Peace

Cap and trade is nothing more than inefficient regulation and tax

Today was the House vote on the cap and trade energy bill. Sadly, it passed by only a few members with 219 for and 211 against. The bill will now move to the Senate, where we really must work to try to stop it. This bill has the potential to severely hurt the economy for years to come and may not even be able to reduce pollution much. It is coming at a time when we really can’t afford it (not that it is beneficial during prosperous times either) and the ideas behind it are littered with logical fallacies.

The way cap and trade works is that each firm in the market is given permits, each which allow a certain amount of heat-trapping gas production. These firms cannot produce more emissions than what their permits allow them to. Firms are allowed to buy and sell permits in order to gain extra allowance or extra cash for permits they need/don’t need. Upon economic analysis and scrutiny it is clear that this system poses several problems and is yet another short-sighted and economically imprisoning proposal.

No matter what way you look at it, cap and trade is essentially a tax. Any companies that are currently producing more emissions than the amount their permits will allow them to will have to spend money to either buy more permits, cut production, or buy more energy-efficient means of production. These costs could be in the billions for some companies and there is no doubt that a lot of that cost will be passed on to the consumer, just as with any tax in a market with elastic supply. Several companies have already hinted at massive price hikes should the legislation go through. More taxes will only hurt production and hurt job growth.

Those in favor of cap and trade say that the legislation will create thousands of jobs, but that response is the result of a failure to see the big picture. With more financial burden on firms, everyone won’t simply upgrade to energy-efficient systems. Some will buy new permits, which will take a lot of capital, which could otherwise have gone to labor. In this way, it could actually hurt employment. Other firms may simply cut production in order to fall under their permit allowances, which could also mean jobs lost. Then, there are those firms that will simply leave the market as this legislation may be the tipping point for them on the Laffer curve. They may instead opt to move somewhere else like India or China, where pollution control is almost non-existent and where it would be a lot cheaper to operate. This possible outcome would also hurt jobs.

For the companies that do upgrade to more energy-efficient equipment, they may produce a few jobs in the short term, but after the new gear is in place, a lot of those jobs will be lost. Furthermore, the high costs of this equipment will mean prices hikes for consumers.

Basically, those that go ahead and upgrade their systems will end up charging consumers a lot more. Those that decide to simply cut production will end up cutting jobs as well as hurting the economy due to the lower production. They will also indirectly drive up market prices as supply goes down with the production. Those that decide to leave the market altogether will create a lot of unemployment and a lot of production losses. Either way, there isn’t a great scenario.

Unfortunately, even those inevitable circumstances are not the end of it. Considering that energy-producing firms produce a lot of emissions, cap and trade would mean less energy production in the United States and higher energy prices, and with the demand for energy growing once more, that could mean record-high prices for consumers in the near-future.

Not only would we have to suffer the cost of higher energy prices during a recession, but there is also the issue with where the government sets the allowed pollution rate. As we know from history, the government is inefficient and often incapable of setting such regulative rates because it is too hard to gauge the market. If the cap is set too high, then this bill will simply create more bureaucracy and pollution won’t be reduced. If it is set too low, we will see severe cutbacks in production and further troubles in the markets. In this way, cap and trade could even be worse than a simple tax.

From every standpoint, this bill has the potential to be disastrous. There are better ways to reduce pollution, such as allowing nuclear power and letting the free market find new alternate sources. By cutting regulations and taxes on energy companies, they would have a lot more capital to use on R&D towards new technologies, which would also mean new jobs. When there is demand for something, the market always meets it and with the recent green movement, it wouldn’t be long before the market would naturally find more energy-efficient and environmentally-friendly ways of doing business. The difference would be that the private sector would be able to do that without hurting long-term production and without distorting markets. This is why it is so important that we stop this bill in the Senate before it becomes law. Call or email your Senator and let him/her know that you oppose this bill. We really owe it to ourselves to take our government back and to make it for the people once more.

Remember the Laffer curve

As President Obama continues to push the expansion of government, his plans to raise taxes may not be too far off. Obama has had his eyes of raising certain taxes from the moment he began his campaign and he will surely try to follow up on what he said. He believes that these tax increases will help reduce the deficit by paying for his massive programs. There is one problem though: in many cases they won’t.

It all comes down to the Laffer curve and the fact that increasing taxes does not always mean tax revenue increases. In fact, it can often decrease tax revenue by forcing some firms to leave the market, hence reducing the overall market production by whatever those firms produced and in turn, actually reducing tax revenue by the difference in the amount that firms which decide to stay in the market pay subtracted by the total tax amount that the firms who left paid with the previous, lower tax rate.

One of the taxes that Obama plans to increase is the capital gains tax. That tax though, is past the optimal tax revenue mark on the Laffer curve, or at best is sitting right at the peak with the 15% tax. This is evident because when Bill Clinton reduced the tax rate from 28% to 20% in 1997 the capital gains tax revenue actually increased. The same happened when George W. Bush further reduced it to 15%. On the other side, the tax was increased in the 1980s and the tax revenue from it actually decreased.

Obama has been questioned about this before and he still chooses to increase the tax for purposes of “fairness.” First of all, not only is he punishing the 100 million people in this nation who own stocks, but he is also decreasing government revenue. The logic behind it? He claims “fairness.” How he figures hurting about at third of Americans during a time like this and at the same time decreasing tax revenue and increasing spending is justified? I don’t know.

The worst part of this situation is that it is not only the capital gains tax that is in this situation. Many of our taxes are beyond the optimal tax revenue amount they should be at and increasing them will only hurt how much the government can take from taxes. In fact, many companies are already threatening to leave American markets if Obama imposes tax hikes on them. Among them is Microsoft, who’s CEO Steve Ballmer recently said that the company would move some employees offshore if Congress enacts the President’s proposal to increase taxes on foreign profits. Ballmer isn’t alone in the software industry, with nine other software executives also fighting back the hikes.

These tax increases will only hurt our economy and in many cases they will even decrease government tax revenue. Dan Mitchell of the Cato Institute recently said, “Even if all of Obama’s tax wishes comes true, the revenues won’t come close to satisfying his appetite for bigger government”- figure in the fact that many firms will even leave the market and production and sales will suffer as a result, and the argument that these tax hikes will make things worse is very reasonable.

Gm files for bankruptcy, start subsidizing autos?

The free market capitalists told them over and over again that bailing out the auto industry was a bad idea, but did they listen? No. What happened in the end? GM is still going bankrupt, but this time after taking billions in taxpayer money with them.

The Obama administration has failed to “fix” the auto industry after several futile attempts, yet they refuse to give up. They continue to ignore the principles of economics and they continue to meddle in the markets. The latest move is a suggestion to subsidize auto purchases. I have one question: how much taxpayer money and how many failed attempts will it take to get the people in Washington to say, “enough is enough, we will leave the market alone”?

These moves will only continue to distort markets and throw taxpayer money down the drain. It is really scary that this administration refuses to budge on their ideas even after they are proven wrong. What will it take? I really can’t figure it out. The only silver lining I see in this whole thing is that the Senate version would take the money for this out of the stimulus package, so atleast it isn’t new spending. It will still be a waste though…

Consequences of the welfare state

“The state is the great fiction by which everybody seeks to live at the expense of everybody else.”

Fredric Bastiat’s words could not have been more relevant right now. With the nation in economic despair, people across the nation are losing their jobs as some businesses are forced to cut costs or shut down. The government’s response to unemployment is to subsidize workers who don’t have jobs with money to help pay their bills. These welfare benefits, though, are only encouraging irresponsible behavior just like the Fannie and Freddie backings did in the housing market and just like most other government interferences in the market do. This video really shows the destructive side of socialism, the side which Bastiat so lucidly points out:

There is 11.5% unemployment in that town, yet this guy can’t find enough workers. It is ridiculous and it is a sad reflection of our society which is driven by the government and its welfare policies. These policies subsidize those that don’t work, hence efficiently taking away the driver to work for many people. Those that do work are taking these lazy people on their backs and supporting them and it will only last so long. As history has shown, the welfare state does not work and this is a large reason why.

Some may claim that this sort of work is not going to be done by business men and people of “higher social status,” but I guarantee that the day they start to starve they will be willing to do any sort of work in order to support themselves and their families. Any human will do what is necessary in order to survive- it is instinct. The government only provides a socially destructive benefit that takes away that instinct and makes people think they are “too good” to do certain jobs. Ironic how the people for equality actually create this sort of class separation, isn’t it?

This nation needs to instill personal responsibility into the people once more by returning to what it used to stand for- small government, freedom, and free markets. It needs to move away from the welfare state. The words of Bastiat ring loudly today, but sadly, if the Obama administration has its way, then his words may be even louder tomorrow.

End the Fed

The Federal Reserve was created in 1913 with the primary purpose of avoiding a chain of bank runs, also known as a bank panic. On March 11th, 2008 Bear Stearns suffered a bank run. Exactly four months after that, IndyMac bank went through the same thing and on September 25th, 2008 Washington Mutual had to temporarily shut down in order to avoid a full out bank run. With several other banks now at risk of similar fates it is evident that the Federal Reserve system has failed to do what it was created for. So why should we uphold this failing institution? We shouldn’t. It is time to end the Fed.

The system currently plays an integral role in the markets through setting the interest rate and controlling the monetary supply. These powers were given to it in order to maintain a stable market. It obviously hasn’t worked. Not only has it failed to do its job, but it has actually harmed the markets by making the economic climate less stable in the long run. Here’s how:

Setting the interest rate
One of the jobs of the current Federal Reserve is to set the interest rate. The rate plays a huge role in loans because higher rates mean less loans and less credit created, whereas lower rates do the opposite. This has a titanic effect on the modern, credit-based economy. There is a problem with the current system though: the market is far too big for anyone to accurately gauge it and set the rate for it. This is because so many variables play a part into it and no one can measure all of them (especially emotions and confidence.) What ends up happening when the Fed sets the rate is that bubbles and economic stagnation are created when the rate is too low or too high respectively. This has played a big part in the recession-boom business cycles we have seen in the 1900s. Perhaps the most drastic example of the destruction caused by the Federal Reserve setting the rate is in the current economic crisis- which almost all experts, Keynesians and free market capitalists alike, agree was largely driven by Alan Greenspan’s low rates. Greenspan, the former chairman of the Fed, ushered in an era of historically low rates and as a consequence really drove the housing bubble to levels it would have never reached had the rate been higher.

The better alternative would have been to simply let the market set the interest rate through competition. The institutions and people that actually lend and borrow would compete for the best rates. The whole scenario would be driven by the omnipotent laws of supply and demand and lead to fair rates for both borrowers and lenders that are also sustainable in the market.

Controlling the monetary supply
Another major power that the Federal Reserve has is controlling the monetary supply. The Fed currently controls the creation of money in two ways: having its hand in how much money is printed and by being the driving force behind the fractional reserve banking system. In theory, the Federal Reserve would use its control over the monetary supply in order to keep prices stable, so that there is not excessive deflation or inflation. It is also supposed to use this power in order to maintain an elastic currency, so that there is always enough money to fuel the fractional reserve banking system, so that bank runs don’t happen (which obviously didn’t work out how it was supposed to.)

By again taking a look at the current crisis as well as history, it is clear that the Federal Reserve has not and cannot maintain a sustainable or healthy monetary supply. Currently, the Fed is printing tons of money in order to make up for the money that the government cannot raise through the sale of securities (i.e. bonds.) This is creating monetary inflation, which is essentially a tax on the people because the buying power of the dollar falls when it occurs during periods of slow economic growth. The system is not fair to the people, nor is it sustainable.

Fractional reserve banking is also very unsustainable, especially with our current reserve requirements, because it essentially demands unlimited exponential economic growth. If there is not exponential economic growth, then the monetary supply inflates because there is still exponential growth in the monetary supply. Trying to have unlimited exponential growth is obviously impossible and trying to create unlimited exponential growth actually ends up making bubbles that eventually pop, like the housing bubble that created this crisis.

Exponential growth forever is not possible and the other alternative in the current system, inflation, is not fair. So why do we put up with it? A better alternative would be to end the Fed, which would almost certainly bring down the fractional reserve banking requirements and hence, create a more stable system. It would also lead to less inflation as less money is created.

A disastrous institution
This current Federal Reserve system has hurt the market more than it has helped it and if it continues the way it is operating, we Americans face severe consequences. Aside from the unstable environment it is creating, we also face the risk of something even worse due to the Fed’s control over the monetary supply. That worst case scenario is hyperinflation.

The Federal Reserve, a group of men that isn’t even elected by the people, has the tools in its hands to inflate the currency as much as they want to. Central banks usually try not to inflate currency too much, but when the country in question is in massive debt and continues to spend massive amounts of money (like the United States is currently doing) they usually do end up inflating the currency a lot and the citizens of the country have to pay for it. It is the tax that the politicians never talk about. Inflation reduces the buying power of the dollar and with that we have to pay more dollars to buy the same things we used to pay less for. It works out to be just like a tax. Sometimes it gets out of hand to the point where the money is worthless and that is the day when the economy collapses. For those who think this won’t happen to us, it is important to look at history and the numerous cases of hyperinflation. It might just surprise you how many times entities that control a fiat money supply (such as the Fed) have destroyed the currency.

The examples can be seen throughout history and most of these cases were at the hands of national banks or similar entities: Angola and Argentina in the early 1990s, Austria in the early 1920s, Belarus in the mid 1980s, Brazil from the mid 1980s to 1994, Bulgaria in the early 1990s, Chile in the early 1970s, China in the late 1940s and early 1950s, the Free City of Danizig in the early 1920s, Georgia in the mid 1990s, Germany in the early 1920s (the Weimar Republic,) Greece in the early 1940s, Hungary in the mid 1940s, Israel in the 1970s and early 1980s, Japan in the early 1940s, Krajina in the early 1990s, Madagascar in the mid 2000s, Mozambique in the 1990s and early 2000s, Nicaragua in the late 1980s, Peru in the late 1980s, the Philippines in the early 1940s, Poland in the early 1920s and again in the early 1990s, the Republika Srpska in the early 1990s, Romania in the early 2000s, Russia in the early 1920s, Turkey throughout the 1990s, Ukraine in the mid 1990s, Yugoslavia in the late 1980s and early 1990s, Zaire in the early and mid 1990s, Zimbabwe currently, and the United States in the early to mid 1880s.

And these examples are only of hyperinflation- it does not include inflationary struggles not classified as hyperinflation. Is it really crazy to think it can’t happen to us?

End the Fed
The Federal Reserve literally has the power to destroy this nation’s economy. It can tax us at will with inflation. It can control the demand for loans. It can create as much money as it wants to. Despite all of these very potent powers, the Federal Reserve is a very opaque institution, in that there is very little transparency to it. They recently even refused to release information about the whereabouts of some of the bailout money to Congress. They refused to respond to Congress, so why would they bother to even report to the people? AIG ended up releasing some of the information that the Fed refused to give out.
It is a very secretive and unjust institution and it must be ended. The organization affects every single American and has the power to make us richer or poorer, yet it refuses to report to us. Is this acceptable?

The Federal Reserve has too much power and it has not even been able to do what it was created for. We need to abolish the system before it makes things even worse with even more market distortions. Congressman Ron Paul recently sponsored HR 1207, which would allow Congress to audit the Fed. It is a step in the right direction because it will really make the people aware of the misdoings by the central bank. Paul and other free market capitalists are for abolishing the Federal Reserve all together, but this is a means of really convincing others of the damage that the institution is causing. It is time to act on this together as citizens by contacting your Senator and Representative and letting them know that you want HR1207 passed (as well as maybe suggesting the abolishment of the Fed altogether.) It is time to audit the Fed, so that one day we can finally end the Fed.

Don’t blame capitalism, embrace it

Many people seem to be quick at pointing the finger at capitalism for this economic crisis. What these people fail to realize is that the United States was not truly capitalist in the years leading up to this mess and hence, capitalism is not at blame- anti-capitalism is. In fact, we have been far from the capitalist economy that our founding fathers envisioned ever since the Federal Reserve was created in 1913.

Since 1913, also the year that the income tax was made permanent, this nation has been creeping away from capitalism with more government intervention, taxes, and regulations. Capitalism DOES NOT support any of this. Capitalism is all about having the market in the hands of private individuals, not the government. This nation was once about laissez-faire markets, but it is no where near that right now with Keynesian policies interfering in virtually every market in this country.

The Federal Reserve has been manipulating markets since its creation by setting the interest rate and having control over the monetary supply. It has created bubbles and stagnated growth because in reality it is impossible for any group of people to gauge the whole market and set the rate for it. Most people, including Keynesians, blame Greenspan’s low rates as one of the causes of this crisis. The fact that Greenspan and his people even had the power to set the rate is not capitalist. So how can you blame capitalism for that? If anything, Keynesianism to blame in this case because the Fed was given these powers.

Fannie Mae and Freddie Mac are a another part of the system that are often blamed for this mess. These two entities are GSEs (government sponsored enterprises) and were created in 1938 and 1970 (respectively.) Their purpose was to make the housing market more efficient by improving the flow of credit. They essentially backed the loans made by the banks, no matter how risky the loans the banks made to the people were. This is not capitalism because again, the government got involved in the markets. In a capitalist economy, these companies would have been privatized like their counterpart Sallie Mae, which deals with student loans. Not only would Fannie and Freddie probably have performed better under private ownership like Sallie Mae has, but banks would also know that the government wouldn’t back the two since they were private and hence, they would not have made as many risky loans. The fact that they knew the government would back the two led to riskier loans being made because the government backing essentially turned a “high risk, high reward” situation into a “high risk, high reward and government backing if the move failed” situation. So how can you blame the banks either? They were just trying to do what is in their best interest. It is the banks’ job to care for themselves, not the American people. It is the government’s job to care for the American people, which is why a private Fannie and Freddie would have been better. The government wouldn’t have to back them with taxpayer money and if they failed, it would only be because of bad decisions made by the individuals running the company, not because of government intervention in the process.

On top of the Federal Reserve’s extensive control over the markets and the GSE’s involvement in lending, the government has also had many regulations on the markets that added to the crisis. The unsustainable fractional reserve requirements are playing a big part right now with the bank failures because so many banks are facing the risk of bank runs, like Washington Mutual and IndyMac recently did. It is government policies that have hurt us and it is these same policies that continue to hurt us. The policies that I have mentioned in this post are only a few examples of how disastrous government intervention in the markets has been. The government is distorting markets and creating problems through a plethora of utilities including laws, regulations, and taxes. It is time to move away from these nationalist and socialist movements and to return to capitalism, freedom, and prosperity.

Many Americans have grown too accustomed to the government being involved in every aspect of the market and in turn their lives as a means to establish “equality.” It is time to realize that most of these moves only hurt us in the long run, especially when it comes to the market and money because it is hard to make choices that effect millions of people, each of whom are different and have their own things to worry about. The power to control the markets should be left to the people who are in the market: the buyers and the sellers because every individual knows what he or she wants and he or she will made decisions based on that. It is just too hard to have the government do this for everyone. The government has tried doing it over the last 100 years and we can clearly see how that has turned out. Don’t blame free market capitalism, embrace it because not only will it protect your freedoms, but it will pave the way for true fairness.

GM and Chrysler need more

GM and Chrysler are now asking for about $30 billion more, which they claim is necessary to their survival. Does anyone see anything wrong with this? What have these two companies done in the past few months? They have again failed at selling their product and they are back again asking Uncle Sam to give them the money instead.

The free market capitalists and even Congress were against the first automaker bailout, but it was passed anyway by simply taking the money out of TARP. We don’t have TARP this time around, so what’s next, taking it out of the stimulus plan? It wouldn’t surprise me at this point.

We are really in a sad state of affairs. The Keynesians continue to push their irresponsible logic by trying to make sympathy pleas and not looking at the whole picture. We are rewarding failure and if we don’t stop the whole system will come crashing down. They didn’t realize that the auto bailout was bad the first time around, but hopefully they will have some sense this time (I am not holding my breath though.) They need to really think about it before just throwing money here and there. These companies failed- let them go under.

While GM and Chrysler were burning through government funds, not doing anything productive, and continuing their feud with the naive and greedy UAW, their counterparts continued on. Who says that since a company isn’t American that they won’t help America? The superior competitors of the American automakers do care about the American market as they sell and produce here as well. Many big foreign automakers, including Toyota, Hyundai, and Honda have plants in this country as well. Thousands of Americans are employed by these plants and letting GM and Chrysler finally go under will open up more jobs in those plants as the companies over the market of the “Big Three.” This is not an anti-American thought. In fact, in many ways it is a pro-American thought as the roots of this nation are wrapped around the ideas of capitalism and the failing companies going under is capitalism.

Speedy stimulus- why it is a bad idea

There has been much controversy over the proposed stimulus plan recently and it is with due cause. The proposal is huge in terms of both money and scope. Yet, many supporters of the plan are saying that we should just pass it quickly because it is an emergency. Is this really the way huge government decisions should be made? That is like saying a doctor should quickly give a suffering patient any medicine he or she sees because it is an emergency. Obviously, that is not a good choice because there could be side-effects, which could be avoided. It is the same thing with this plan. We can’t jump into a near-trillion dollar expenditure just like that.

Some of the money in this plan is just ridiculous, going to things that really aren’t important at all. It has been loaded with pork spending and thankfully Senate Republicans are fighting it to reduce the cost. Meanwhile, a lot of the opposition, including the President, insists on passing it as soon as possible. Do these people really think we have an unlimited supply of money? Trying to boost the economy is one thing (I don’t agree with many of their plans on that either, but that’s another story,) but adding billions in random costs really isn’t acceptable considering our immense debt and financial condition. We need to learn fiscal and monetary responsibility as a nation if we hope to return to prosperity.

Even if you want to spend the money, please at least take the time to think over where all the money is going. As we saw with the TARP, speedy stimulus often leads to money basically disappearing. You can make the argument that waiting a week or two to further review the package would mean a week or two of more grief in the marketplace and more job cuts (although that is still going to happen sooner or later,) but even then, wouldn’t you rather have that then realizing a month later that most of the money was wasted and it really hasn’t helped with the problem? To everyone fighting for a fast stimulus: think about it first for the sake of not losing the money.

Update 2/06/09 (later the same day): Apparently, the bipartisan group of Senators working to reduce the cost of the plan have agreed to a new $780 billion plan, which will go up to vote sometime tomorrow. All of the details have not been released yet, but atleast they cut it down. Of course, personally I still oppose most of the money being spent, but at least it was cut a little. I still think more time should have been spent on reviewing and cutting down the bill, but I doubt that will happen again as it will probably pass this time around (although I’m still hoping it won’t.)

“Mexico City policy” reversed

Today, President Obama reversed what is known as the “Mexico City policy,” which prohibits U.S. money from funding international family-planning clinics that promote abortion. President Reagan had originally put the policy into place, only to have it reversed by President Clinton, then restored by President Bush, and now again reversed by President Obama. I understand that these decisions were made based on where these presidents stood on the abortion issue, but have we forgotten the other aspect of it?

Whether you are pro-life or pro-choice, this is U.S. taxpayer money, so don’t you think that we should spend that for doing good in our own nation instead of funding abortions internationally? We are currently in trillions of dollars of debt and this only allows for more U.S. money to go abroad for a cause that isn’t nearly as important for the United States government as is solving the nation’s domestic problems. I understand that by revoking this policy, the U.S. won’t necessarily spend more money on international clinics, but it does mean that some of the current money going over can now be used for abortions. It is not like there will be an epidemic or something else horrible if someone can’t get an abortion, so is it really necessary to spend even part of the money on that? It is not the job of the United States government to fund abortions internationally. This is U.S. taxpayer money. Then why is it being sent abroad for a procedure that isn’t really necessary for America or its people and one which doesn’t even help solve any major health problems?

A more transparent government

Well, I didn’t expect this, but I am actually happy with President Barack Obama’s first day in office. For those of you who have read my earlier posts, you probably know that I am pretty conservative fiscally and hence, many of my viewpoints differ with the new president’s. I doubt he will cut back on spending (even though he has said it) and I probably won’t be happy with him everyday, but today I am due to the new executive orders concerning a more open government.

In a press conference, the President spoke about how the government should be more transparent and open to the people. Although he obviously can’t talk about everything within government, it is a good move to be more open with the people that he and the government represent. He has also taken a quick stance against lobbyists, by cutting down on their rights and influence on government officials by banning gifts to his administration and setting firmer restrictions on what lobbyists can and cannot do. It is certainly a good move, as lobbyists have grown to have way too much power in government. The government represents the people, not the lobbyists. Thanks to President Obama on a good first move.