By Cambell Moyer, Senior Acct/Finance Major University of Nebraska-Lincoln
I’d like to provide some insight and reason in response to the “Occupy” articles that have run recently in the Daily Nebraskan newspaper.
Unfortunately, it seems the resounding theme is that of income inequality and the excesses of capitalism. The rich have too much and the poor have too little. So what do the protestors want? What are their demands?
Many protestors are opposing taxpayer bailouts of private companies and demand that money be returned. Fair enough, but most Americans (including the Tea Party) have the same position. Further yet, most of the bailout money has been returned (with interest). One major exception that hasn’t yet been paid back is President Obama’s historic bailout of the automobile unions.
Many occupiers also decry the influence of Wall Street money in campaigns and elections, but then again most of the American population (Tea party included) holds the same position. What’s new here?
One unique position of the occupiers is their cry for the wealthy to “pay their fair share,” but what constitutes fair? What constitutes wealthy? Saddening enough, two words can likely sum-up the entire movement and its demands: wealth redistribution.
Lesson No. 1: Socialism Does Not Work. That is an interesting concept, wealth redistribution. It reminds me of my friends Rob Peter and Pay Paul, and I think Mr. Madoff knew them, too. As if from the beginning of time there existed only one pot of gold and it has since been distributed unequally. Does anyone really believe that? Where do the occupiers think that wealth comes from?
Taking money from the productive sector and giving it to the unproductive sector makes society as a whole much poorer and also creates a dependent welfare-state, i.e. a group of people who take no individual responsibility for their well-being.
Look at the PIIGS today (Portugal, Ireland, Italy, Greece, and Spain). Flat broke. After being forced by the world community (IMF) to institute austerity measures in order to receive more loans and bailouts, violent riots and protests emerged as the “serfs” pled for what they had been promised by liberal socialist leaders. How can a country live above its means for so long? Which brings me to…
Lesson No. 2: Fiat Currencies Fail. Just like the PIIGS, the United States has lived above its means for far too long. Indications of such are a staggering $14 trillion federal debt, twenty straight years of federal deficits, hundreds of broke municipalities, and thousands of underfunded public pension plans, and not to mention the Federal Government almost shut down (shucks, so close!).
So how do nations live above their means? In addition to fiscally irresponsible politicians who develop excessive spending habits, we must first understand how our government is funded. Governments are funded in one of three ways: through mandatory taxes on its citizens, by borrowing through issuing debt (which must be paid back, with interest), or finally through a clandestine process of printing additional money (inflation, which leads to currency debasement). All three are bad news and drain a nation’s wealth, though I will focus on the third as it’s the most relevant to our current calamity.
Today, currency debasement is accomplished via central banks, in our case, the Federal Reserve. It is important to understand a central bank’s role in the economy because its actions affect the purchasing power of every dollar in your wallet.
Since the creation of the Fed in 1913 along with the unlinking of the U.S. dollar to gold (in 1933 and 1971), the value of the U.S. dollar has depreciated 98 percent. Think of your grandparents purchasing a Coke for 5 cents. What happened? Why does it cost us 29 times more to buy the same thing today?
Most people just write this off as happenstance. A phenomenon left for Ivy-League economists to figure out. But in reality it’s simple: this “phenomenon” is called inflation (and it has been giving the average American the shaft!). And unlike your textbook, Econ 101 definition, inflation is not an increase in prices. An increase in prices is a result of inflation, whereas inflation itself is the actual increase in the money supply.
Think of an auction for example. Assume each individual participating in the auction has a fixed amount of money in their pocket; let’s say $100. It’s not hard to conclude that the most a particular item can fetch at the auction is $100. Now let’s say a helicopter flown by the Federal Reserve flew over and gave every participant $50 new dollars to spend at the auction. What will happen?
Yep, now each individual has that much more money to expend and can bid up the price of items accordingly. The very same items sold at the auction will now bring a higher price simply because of the new additional dollars. This immoral and unethical process creates inflated prices; and guess who gets the newly created money first: (our “Occupy” friends will like this one) the BANKERS.
Lesson No. 3: Bailouts. The occupiers are pointing the finger at the wrong clowns! Yes, the unethical and unprincipled BANKERS accepted a handout (bailout). But who wouldn’t? The occupiers clearly would, since a resilient sound we here from them is for the government to forgive student-loan debt! Does that make them as unethical and unprincipled as the bankers?
The Real Clowns are the political class in Congress and two presidents who subscribe to this theory that they should pick winners and losers and can control the economy (think Karl Marx and the success of central planning). If Washington (Greenspan, Bush, Bernanke and Obama), acting as a bartender, would have cut-off our alcoholic friends in private-sector business a little sooner, maybe much of the damage from this economic mess could have been avoided.
I mentioned college tuition. Since it affects all of us reading this newspaper, let’s look into this topic a little deeper. As you have all seen first-hand, college tuition seems to increase every semester you’re enrolled.
Worst yet, like healthcare costs, tuition increases have far exceeded increases in the general price level of the U.S. economy (i.e. CPI). Have you ever considered what is causing this? This is one of the largest expenditures you will have in your lifetime! Isn’t this worth more scrutiny and attention than you give the inflated price of your daily Coke?
Well, let me help you and cut to the chase—the blame falls on the one institution, though well-intentioned, who mistakenly thinks subsidizing education was a good idea: The Federal Government.
Uncle Sam involved itself in subsidizing higher education with large federal grant programs and guaranteed student loan industry in the late 1960s. Its intentions were good: educate more people. Its consequences were bad: abnormally inflated tuition rates and huge student indebtedness.
Before government guarantees, commercial banks did not make a significant amount of student loans for obvious reasons. There was too much uncertainty surrounding the loan: the borrower’s payback ability, credit, collateral, age, and experience.
Like white-on-rice, the government took advantage of a “crisis” and swept in with its plan to make college affordable; the American dream. The Federal government proceeded to subsidize higher education by guaranteeing loans provided by lenders to college graduates in the event of default.
Bankers (as awful, greedy, and selfish as they are) soon realized that there could be great upside and very little downside by playing this game. They flushed kids/colleges/universities with money and the government picked up the tab when they failed to pay. And don’t forget, college administrators and faculty unions have been caught with their grubby hands in the cookie jar.
The foreseeable result of this non-market, government interference with post-secondary education is more students enrolling in college (many not college material), increased tuition rates (as colleges pass the buck), overly compensated college faculty and administrators, stronger unions, and an excess number of college graduates than cannot be absorbed in a real-economy (operating under a price-mechanism).
These are the foreseeable, predictable consequences of government intervention, but don’t let me decide—the jury may still be out. You, the reader, need to try to see these things, not only in higher education, but in healthcare, housing and any other industry that the government meddles in.
Lesson No. 4: Economics is Not above Your Head. In fact, it can be pretty simple: it is just a study of incentives. The same logic can be applied to explain every failed government policy from Roosevelt’s New Deal to Greenspan’s housing bubble to Obama’s (soon-to-be-failed) Jobs Bill.
The point of this message is to become informed. Understand that free-market capitalism created the most prosperous and free country in the world—it did not create the problems we have today. Take issue with those who portray capitalism to be about bailouts and picking winners and losers. Those policies represent crony capitalism, not untethered capitalism. Crony capitalists, like socialists, are dead wrong. Read Mises, Hayek, Rothbard, and Ron Paul. Arm yourself with knowledge.