What Seek Ye First?

Over the years I have believed and often said, that the essence of Americanism is the revolutionary concept set forth in the Declaration of Independence: “that all men . . . are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness.” This belief in divinely endowed personal rights is, in my view, the launching pad of our idea of limited government and the only creditable explanation of the genesis of the American miracle.

  The importance I attach to this idea is not generally shared; it has been understood by a few, and not much contested by the many. The Creator-sovereignty idea was the highest spiritual note struck at the time of our country’s founding; it gave tone to our country’s early days. In no other instance, to my knowledge, have the founders of any political agency heeded so scrupulously the Biblical injunction, “Seek ye first the Kingdom of God and his righteousness,” and history reveals no case where the promise, “and these things shall be added unto you,” has been so overwhelmingly verified.

  Today, the spiritual genesis of the real American revolution is all but forgotten; indeed, attempted refutations of the Creator concept assume the proportions of an epidemic. Many are now proudly affirming, as if it were a sign of enlightenment, “I am an atheist,” while a growing number of believers acknowledge their faith as if it were irrelevant to earthly concerns. Even from professors of religion we hear the refrain, “God is dead.” In response to the question, “What seek ye first?” the number is dwindling who will reply, “the Kingdom of God and his righteousness.” Nor need the dissenters reply in explicit terms, for their actions speak louder than words. The answer their actions proclaim is, “We seek first these things,” that is, wealth, affluence, fame, power, and the like. In a word, most people have become addicts of the additives! When the eye is on “these things” and not on the genesis, the priorities are inverted and “these things” might not be long for this world.

  The Question Each Must Answer

  Man has no more important question to answer than, “What seek ye first?”

  Numerous persons have said to me, “I don’t have to believe in God to believe in freedom, do I?” My answer is, “No, you do not have to believe in an Omnipotent Principle, or Infinite Consciousness, or God, to believe in freedom. Yes, you can be an atheist and, at the same time, believe in freedom. But a society of active, militant atheists will not be a free society.” This affirmation, I discover, seems incredible even to believers. Therefore, if it be valid, the reasons should be set forth. Is there a correlation between militant atheism and authoritarianism, on the one hand, and between the Creator concept and freedom, on the other? I think there is.

  Holbach (1723-89), one of the Encyclopedists and an opponent of Christianity, had written a book advocating atheism. The book fell into the hands of Frederick the Great, who asked Voltaire for his views. The book has eloquence but no proof, Voltaire declared, and contains matter pernicious to Prince and people alike. His letter closed with these words: “If God did not exist, it would be necessary to invent Him. But all Nature cries aloud that He does exist, that there is a Supreme Intelligence, an Immense Power, an Admirable Order, and everything teaches us our own dependence on it.”

  Voltaire’s statement falls into two distinct parts: (1) If God did not exist, it would be necessary to invent him, and (2) He does exist. I shall comment on the latter first, and only casually, because it is the former—the necessity of God—that I wish to examine in order to give my answer to “What seek ye first?”

  As to the existence of a Supreme Intelligence, there are atheists on the one side of the question, and theists on the other—with deists, agnostics, and other shades in between. Apparently, The Existence is as unthinkable to the atheist as his tenets of ultimate meaningless are baffling to me.

  I can only suggest that possibly his life thus far may be barren of certain perceptions or spiritual experiences that fall into the noncommunicable category—the kind that no one else’s word can be taken for. The mind barely outruns experience. Or else the would-be atheist is rebelling against a notion of the deity he should have outgrown in boyhood.1

  How Little Each of Us Knows

  Let’s pause for a look at ourselves as related to the Infinite Mystery. How difficult it is to appreciate the littleness of our private wisdom, awareness, perception, consciousness! The tendency is to compare one’s self with one’s fellows which, more often than not, leads to the conclusion, “What a bright boy am I!”

  Infinite time, space, consciousness, or whatever, cannot be fractionalized. However, to help with my point, assume The Infinite to be The Whole—all-there-is. Based on the incontrovertible fact that the more one knows the more is one exposed to the unknown, it would be an exaggeration for me to claim awareness of one trillionth of all-there-is. Now, for the sake of speculation, assume that you are fifty times as richly endowed as I. You would still possess only fifty trillionths of all-there-is!

  I am merely suggesting that no person is any more than an intellectual mite, a spiritual speck in the Cosmic Scheme. The political officeholder who recently intimated that he and his bureaucratic staff now had the will and the power to maintain an ever-expanding economy may be less a speck than you or I, for he doesn’t even know how little he knows. The oft-heard statement, “We have doubled our knowledge in the past decade,” means no more to me than a leap from one trillionth to two trillionths! Why, it is easily demonstrable that no living person knows anything, really, about himself; a few superficial observations are all that any person can rightfully claim.

  Parenthetically, being an intellectual and spiritual speck does not spell insignificance. The atom is significant!

  Three other facts about human beings that are relevant to this analysis: First, while each person is no more than a tiny speck, each is unique; there are no carbon copies; the variation is all-pervasive; no two souls are alike in any respect.2

  Second, we are extremely active specks, each being, to some extent, a self-steering entity. In a word, we have some control over what phases of our personalities will be active and, also, what directions the activities will take.

  And, third, each of us has the potentiality for growth in awareness, perception, consciousness.

  To summarize the above sketchy view of the situation, there are on this earth some three billion comparative know-nothings, not an exception! Each has the potentiality to grow in awareness; each sees but a fragment, but what is seen by any one is not seen precisely the same by any other; each possesses energy, but no two exert or direct it identically.

  Contemplate this host of energetic entities, differing in every respect, and then assume that not one of them is aware of a Creation over and beyond his infinitesimally small mentality. In short, reflect on a world of active, militant atheists; each one completely egocentric, which is to say, believing in his own omniscience—egoism in the saddle! Only I am right; all who do not agree precisely with me are off course; in a word, three billion abysmally ignorant individuals, each preoccupied with his own righteousness.

  We must bear in mind that these three billion energetic entities constitute an enormous force. But, a force to what purpose? Unless a Supreme Intelligence, an Infinite Consciousness, a First Principle be conceded, there is no integrative attracting center.3 These varied entities are propelled by their energies every which way, a societal situation at sixes and sevens; in a word, chaos!

  Man has no affinity for social chaos; as a matter of fact, he will pay about any price for social order, and order there will be.4 But how? All history attests to the answer: The cleverest and most energetic know-nothing will take over, not on a mutual-consent basis, because there is no mutuality of minds; the take-over will be achieved by the use of coercion. Some one know-nothing will forcibly impose his own concept of rightness on all the others. There can be no more freedom in this arrangement than in godless Russia, and for the same reason.

  Man with his built-in variations and lively energies cannot achieve his earthly destiny—his potentiality to grow in awareness, perception, consciousness—where all human energy exerts itself in helter-skelter fashion. Conceded, deviant forces are tolerable—there can be both passive and active atheists—but it is an absolute requirement that there be an integrative force—belief in God—more powerful than the deviant forces. Voltaire could have had no reason, other than this, for repeating the old saying: “If God did not exist, it would be necessary to invent Him”! Put another way, it is necessary that there be men, sufficient to establish a prevailing tendency, who are drawn to an Infinite Ideal. Lecomte du Noüy phrased it this way, “To really participate in the divine task, man must place his ideal as high as possible, out of reach if necessary.”5 God—Infinite Consciousness—is assuredly out of reach.


A Goal Worth Pursuing

  In what manner does the recognition of an Infinite Consciousness serve as an integrative force? First, it puts us, the creatures, in proper perspective. It is easily demonstrable that the individual consciousness is potentially expansible. But, regardless of progress, there is no end to achievement, for this Ideal, being infinite, is always and forever out of reach. Thus, humility is induced, the sense of know-it-all-ness demolished. It is axiomatic that the know-it-all cannot grow in knowing; only when one is emptied of such egotism can the individual grow in the direction of his potential uniqueness. The acceptance of God draws the individual toward the highest conceivable Ideal, this attraction being toward a harmony with Being or Natural Law.

  To assess the second way in which a recognition of the Creator concept serves as a harmonizing force, we need only acknowledge the central presupposition of the Infinite Consciousness idea: the immortality of the individual spirit or consciousness. Reduced to its essence, this earthly moment is only the beginning; consciousness, the reality, is eternal, retaining its growth potential. Once this is accepted and lived by, the individual seeks approval of the Eternal Ideal; his prime objective cannot be fame before men. Daily actions have a higher guide than momentary expediency; whatever one does is premised on his highest concept of rightness and righteousness. The accurate reflection, in word and deed, of one’s highest concept of Truth, is integrity in its highest form, this being the cohesive agent without which man in his variation and specialization cannot exist.6 Integrity’s integrative quality is a harmonizing force.

  The third manner in which this spiritual faith serves as a harmonizing force is its cultivation of tolerance.7 Once an individual grasps the idea that he, as all others, is a child of Creation, that each is varied, and is meant to be, all inclination to mastermind others dissolves; the notion becomes absurd. Those with varying systems of thought are no longer condemned but, instead, inspected for what light they may shed. If no light, let them pass; if some light, use it to grow by. To rule or to try to reform others is not to play God; it is to work against God. The Creator does not forcibly impose the Kingdom on anyone. Why, then, should I take unto myself a role that the Creator has spurned? Intolerance is a divisive, driving-away force; tolerance is a harmonizing, ingathering force. Daily experiences confirm this.

  One Nation Under God

  Man, among animals, being both social and individualistic, cannot be too much torn asunder from others. At stake in his relations with others is nothing less than survival, for man’s differences, specializations, variations must be more complementary than antagonistic—an economic fact of life. I repeat, the harmonizing forces must, to avoid disaster, be stronger than the combined divisive forces. This brings me to the fourth, and by far the most important, way that the Creator concept serves as such a force. Reflect on what might be called the intellectual love of God. Love, in this deepest sense, is a process which, in completion, spells enlightenment. The Supreme Intelligence is the source of all creation, of all Truth or enlightenment, even of all the little truths we come upon and call our own. Those of this spiritual faith have their eyes turned ever toward The Light that they may better find their way to enlightenment; it is this that is the love of God, the strongest harmonizing force there is. To the extent that one succeeds in the Divine Venture, to that extent does one share in Creation.

  The question, “I don’t have to believe in God to believe in freedom, do I?” is like asking, “I don’t have to believe in an end to believe in its means, do I?” For freedom is the primary means to the highest end; at best, it is a secondary end. The primary aim of earthly life, in the view of believers, is not “these things,” but “the Kingdom of God and his righteousness.” It is to expand individual consciousness into as near a harmony as possible with Infinite Consciousness. Freedom is the first and absolutely necessary means to this end. Anyone who in any way frustrates the freedom of another to act creatively acts against the Supreme Intelligence, this being the gravest of evils.8

  It is impossible for man to act consistently except as he reasons from a fundamental point of reference, a major premise. This is to be found in the answer to “What seek ye first?” If the answer be wrong, he will act consistently but in error. To act consistently and rationally, his answer must be correct. To act consistently, rationally, and correctly, it is my conviction that his answer must be, “the Kingdom of God and his righteousness.” For I share, unreservedly, what Voltaire observed, “All Nature cries aloud that there is a Supreme Intelligence, an Immense Power, an Admirable Order, and everything teaches us our own dependence on It.”

  Human Destiny

  Conceding the Kingdom to be the major premise, the one from which all lesser premises are deduced, it follows, then, that our dependence on the Kingdom is complete, and that our abiding by It is The Way, the only way. Get off course, as we say, and devolution—another dark age—will assuredly be our lot, this being the Cosmic signal to again get on course. Get back on, and there’ll be another upsurge in evolution—man growing, emerging, evolving in awareness, perception, consciousness. Human destiny!

  Perhaps the separation of Church and State—a necessary break-up of power—has been, in some measure, responsible for the popular fallacy that spiritual faith and earthly concerns belong in two distinctly separate compartments. Many people seem to think that it is enough to doff our hat to God on the Sabbath and ignore him during the work-a-day week; they feel that matters of the spirit are for the churches and matters of the flesh for secular educational efforts, that the Kingdom of God and “these things” are in unrelated realms, that a concern for one’s immortal soul is for the confessional, but not for the market place, that spiritual faith and political economy don’t mix.

  Man may separate or decentralize his organizations, often to advantage. But man’s soul is of a piece and cannot be “worn on the sleeve” without fracturing. One’s soul, the distinctive feature of being human, is exclusively spiritual in content. What else than spiritual are such qualities as integrity, belief, understanding, tolerance, kindness, charity, humility, conscience, perception, thinking, willing, intuiting? As a pool of water cannot be polluted at any point without pollution of the pool, so the soul cannot be corrupted here or there, now or then, without damage to the whole!

  A Spiritual Performance

  All human actions, as well as every artifact by which we live and grow and prosper, are spiritual in their roots.9 “These things” are the fruits; they are dividends, whose nature and abundance will be determined by how the souls of men are structured—not so much on Sundays, or only in the churches, or entirely in the hideaways of privacy but, even more, in the whole scope of every day, and every place, and every thing. Each precious moment gives a living answer to what the soul seeks first, be the firsts fickle, or inconsistent, or expedient—or, happily, the First of all firsts.

  What seek ye first? Actions speak louder than words; therefore, as for me, my daily living must testify before nonbelievers as in my prayers, as much during the week as on the Sabbath, in the market place as in a House of Worship: the Kingdom of God and his righteousness.

 

 
    This view, instead of being shied away from or mumbled apologetically, is announced openly and proudly once we glimpse, if ever so dimly, our place in Creation’s Design, what late-comers we are on the Cosmic Scene, how little we know, and what some of our startling problems are. An awareness of our unawareness helps mightily in recognizing that we are not gods but, instead, Creation’s children, that such consciousness as we possess is but an infinitesimal perception of Infinite Consciousness. So, let me try to view the human situation through that tiny aperture which is mine. . . .
 
 

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Look to the Stars

A man goes down from a blow to the solar plexus, and we say he’s had the breath knocked out of him.

  Every act of coercion in society—coercion being the forcible imposition of one’s will on others—is like a damaging blow that knocks the breath out of humanity.

  Nor does it make any difference whether the coercive act is accidental or deliberate, for a noble or an ignoble purpose. It is not the intention behind the act, but the nature of the act itself, that does the injury. Whether one be injured “for his own good” or “for the good of humanity” does not modify the extent of the injury. Erecting a Taj Mahal in the name of love with forcibly extorted funds or enslaved labor, or compulsorily expropriating people’s income to build hospitals or art centers, are no less coercive than compelling Negro slaves to hoe one’s cotton, or forcing workers into unions, or robbing others at the point of a gun.

  This is strong language when acts of coercion are proudly and widely advocated from platform, classroom, pulpit, and the editorial page; but can such a reading of the issue be logically challenged?

  Coercion imposed on others, whether to gain something for self or for those we love or pity, or to keep others from gaining for themselves by their own honest effort, is the crowning evil of our times. Coercion is anything but peaceful. Its practice on the grand scale is a crippling blow to our human potential.

  Nor does it make any difference whether the coercion is inflicted directly or indirectly through one’s agent, such as a personal accomplice, a labor union, a government, or whatever. I am personally responsible for any evil I support, encourage, or condone, regardless of who carries my banner. It isn’t the mob that strings up Joe Doakes; only individuals commit crimes; the hanging is done by each member of the mob. Nor is it the association that takes money from everyone in the nation to finance the local plaza; it is a coercive act on the part of the association’s members—each one of them! Individual absolution is not to be achieved by collectivization.

  Regardless of pretensions to the contrary, only now and then can a person be found who does not advocate some coercion, for some laudable end. Indeed, so pervasive is the coercive doctrine that most Americans are unaware of any acceptable alternative.

  After I had lectured recently in New Delhi, a reporter said to me, “Economic freedom is all right for you affluent Americans but not for an underdeveloped country such as India.” And at home I hear, “Economic freedom was all right for the simple, agrarian [underdeveloped] economy we had two centuries ago but not for a highly specialized, complex [affluent] economy such as we now have.” In a word—underdeveloped or affluent—there is no place for economic freedom but only for state socialism, that is, coercion. So decree today’s intellectuals.

  The coercive doctrine is highly publicized and accounts for much of the ideological noise we hear. “Let the government do it,” goes the deafening chant. But hark! At this very moment someone is exchanging the fruits of his labor for a tank of gasoline. Each party gains! Willing exchanges such as this occur by the billions day in and day out. Taken together in their enormity, these wealth-creating, poverty-destroying actions give us all our net economic gain, every last measure of material progress. Unlike the doctrine of coercion, these willing exchanges—economic freedom in practice—are commonplace, unheralded, unnewsworthy. Thus, they go unheard, unseen, unappreciated. So impressive is the noisy babble for destructive coercion and so quiet is the performance of creative freedom that coercion is thought to be the cause of the progress we enjoy. Such mistaken correlations can be the downfall of any individual or group, of any nation, economy, civilization.

  The Flow of Human Energy

  Facing the matter from another point of view, we see that man is an entity of radiant energies. Each individual is a composition of realized and potential energies—diverse, unique, ever-changing. Were all to go in accord with what appears to be the Cosmic Design, these individual specimens of the Universal Energy would exert themselves in an improving, creative direction. For certainly the Design must call for human emergence in awareness, perception, consciousness.

  But man, with his power to choose, can, and often does, turn his energies in a destructive direction. His energy cannot “stay put”; it has to expend itself. We observe some persons, having enormous energy, turning it inward to their own evolvement: Goethe, Shakespeare, and their kind. But others of unusual energy utterly fail in their own evolvement; their energy spins outward over the environment, in the form of coercive, dominating control of others: Napoleon, Hitler, and their kind. Of course, each of these two archetypes has its minor performers.

  But the lack of self-control is not all; there is another influence at work. Whenever coercive policies dominate the societal situation, inhibiting and prohibiting energies from manifesting themselves creatively, these energies, under the necessity of expending themselves, tend to turn destructive: moral laxness, riots, strikes, vandalism, wars, and so on. Coercion—even when backed by good intentions—must knock the breath out of humanity, totally, sooner or later. Coercive practices breed more coercion, and there is no remedy short of replacing these practices with freedom and willing exchange.

  In the name of doing good! To illustrate my point, let us consider an educated electorate as an objective. But how is universal education to be achieved? Surely, not by relying on freedom, as we do with religion! Freedom can’t be trusted for something as important as education! Here, runs the argument, coercion is necessary: compulsory attendance, government dictated curricula, and the forcible collection of the goods and services to pay the educational bill. To challenge this near-unanimous, deeply-embedded notion is to risk being classified as a “nut.”

  Yet, the application of coercion to education is turning out what a vast majority of us do not want: millions of “educated” coercionists, annually—exactly what any capable diagnostician would have predicted. It is unrealistic to believe that institutions founded on coercion can, in the long run, advance an understanding of freedom. The record is already speaking for itself.1

  Universal education may be a worthy objective. But when coercion is applied, compelling universal attendance, it becomes necessary to “scrape the bottom of the barrel” to find teachers. The qualified teachers are “watered down” by the unqualified, turning the trend away from excellence and toward mediocrity. The itch to teach, to project one’s views, takes precedence over eagerness to learn, and this is a perversion of the educational process.

  Granted that education ought to rank high in any rational hierarchy of values, it must also be conceded that there is no more difficult aim to achieve in the whole creative realm. It is precisely for these reasons that education should be divorced from coercion and left completely to freedom. While the free market or willing exchange way of life is necessary for the preservation of an affluent society, it is an absolute “must” for any growth or development. Especially when confronted with difficult or “impossible” problems, turn to freedom.

  Wisdom Will Not Be Forced

  It is a simple, obvious, self-evident fact that ideas, understanding, wisdom cannot be coercively injected into the consciousness of another. Yet, such is the presumption of persons who employ the coercive techniques.

  If human creativity is the goal, the reliance should be on freedom. And it matters not whether the anticipated area of growth or development be education, steel making, dress designing, or whatever. Creativity at the human level behaves according to the law of attraction. Attracted to what? To someone or to something better. Available to each of us are literally tens of thousands of “betters.” From among the millions of seemingly common men, stars appear—some tiny, some a little larger, and the relatively big ones: Socrates, Edison, Beethoven, Christian Dior, Pasteur, Madam Curie, Booker T. Washington, Menger, Adam Smith, Bastiat, Marshall Field, Mises, and perhaps your good self should be included. These luminaries—when freedom in transactions prevails—set the pace, lead us, if we so elect, into new and higher realms; they cut all the patterns for progress.

  Our human stars come from every walk of life—when not retarded by illusion or slumber or fear or coercion. They emerge from the oddest environments and circumstances, as if every new-born babe were a potential star. These talented ones shine for a moment, help to light the way, and then are gone forever except as they remain in book or memory. Together, and over the millennia, they serve to increase the over-all glow, this being the Universal Energy in its human manifestation.

  This human luminosity is as mysterious as life itself for, indeed, it is life in its richest form. For any one of us in our proximity to absolute ignorance to attempt its controlled management, that is, the coerced coalescence of this infinitely intricate profusion of minute energies, is to reactivate a notion as nonsensical as “the divine right of kings”; it is to say, in effect, “Only I can make a tree”; it is to ask for enthronement atop the Cosmos! The coercionist in us is this pretentiousness; as it asserts itself the glow dims—a dark age; when it lessens, the glow brightens—a renaissance. Infinitesimal human energies, as minute molecules, configurate naturally, miraculously, creatively when free to flow, when obstacles are out of the way.

  If we would improve ourselves, we will cast off our coercionist inclinations; we will look to the stars, which is to say, we will look to excellence in ourselves and others. This is what we do when we abandon our coercive ways and put our reliance on freedom.

 

 
    So, let us proceed with several speculations of what’s right and righteous in order better to discern what not to do. . .

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Causes Run Deeper Than We Suppose

And now remains

    That we find out the cause of this effect;

    Or, rather say, the cause of this defect,

    For this effect defective comes by cause.

    Shakespeare, Hamlet


  An ancient hindu myth has it that the earth is held up by a gigantic elephant. But what holds up the elephant? A still more gigantic turtle! And what holds up the turtle? Oh, it’s turtles all the way down!

  Or, refer to the Maya of Yucatan of some thirteen centuries ago. They “caused” the much-needed rain by weird offerings to their Rain God: tossing virgin maidens into deep wells.

  But let’s not laugh too heartily at the ancients for their childish conclusions as to causes. What causes high prices? Less than two centuries ago:


    The washerwomen of Paris, finding soap so dear that they could hardly purchase it, insisted that all the merchants should be punished with death; . . . Marat [Member, National Assembly] declared loudly that the people, by hanging shopkeepers and plundering stores, could easily remove the trouble.


  And only recently, newspapers across America displayed pictures of women toting placards, parading in front of stores as pickets are wont to do, demanding lower prices. As if the retailers were responsible for their budgetary problems!

  Parenthetically, suppose the chain stores were to yield to the pressure of such publicity and reduce their prices by 2 per cent (their average profit on sales is about 1 1/2 per cent), they would be forced out of business. The paraders’ victory would consist of round steak ground, for instance, at $1.22 1/2 instead of $1.25 per pound, but only for the brief period that a losing business could keep its doors open.

  Wrong Methods Widely Used

  But here again we must not be too harsh on les femmes of Paris or our own placard bearers. Politicians in high places, as well as Ph.D.’s, labor officials, clergymen, and even businessmen are guilty of the same offense; they refuse to probe below the surface; they ascribe as causes no more than “effects defective” and, by so doing, aggravate the very ills they would remedy. Price, wage, rent, interest, exchange, and production controls are all of the same pattern, as are the so-called “guide lines.” Economically, such measures are as inept and harmful as our women on parade with their placards, or as the demagogue’s plan of hanging the shopkeepers.

  The shopkeepers are far less responsible for high prices than are their customers; they are not the cause. The retailers are the ones who first confront the consumers with the bad news; they bear the sad tidings, the ill consequences, of uneconomic policies framed and carried out previously by others who, more than likely, received praise and votes for their unwise actions. Observe the politicians asking acclaim for bestowing this and that on everybody and then the merchants getting blamed for the inevitable aftermaths of the giveaways! Very well. If not the shopkeepers, who or what does, in fact, cause rising prices? How deep lies this cause?

  The high prices of the 1790’s in France, in Germany following World War I, in most Latin American countries during the last three decades, and the rising prices in the U.S.A. today are the result of a dilution of the medium of exchange, in a word, inflation.

  Spending and Inflation

  But merely knowing that our rising prices are caused by inflation isn’t all we need to know. We must probe deeper and ask, what causes inflation? The answer is simple enough: excessive governmental expenditures.

  The next underlying cause must be uncovered: why do excessive governmental expenditures cause inflation? The answer is no secret: whenever the costs of government—federal, state, and local—rise to that high mark where it is no longer politically expedient to defray the costs by direct tax levies, governments have throughout history resorted to inflation as a means of financing.

  To probe still deeper, the next logical question is, what causes governmental expenditures to reach that high point where explosive inflation ensues? The answer appears to be that those favoring excessive government spending exercise more political influence than do those people who oppose such spending.

  What, then, causes so many people of influence to favor excessive government spending?

  Any honest investigator must confess that he’s in trouble here. His plan of putting his finger on causes that underlie “effects defective” comes to a sudden halt. No longer can he precisely identify the next underlying cause. The problem, at this point, is to find out why human beings behave as they do. Here, instead of a single track to follow, the analyst is faced with literally millions and billions of more or less blind alleys. Why, for instance, will people who decry personal theft approve feathering their own nests at the expense of others, provided the government will do the looting for them? Is it a deficient sense of justice and, if so, why the deficiency? Or is it a stultified moral nature, faulty education, economic ignorance, an inability to see beyond the moment, materialistic mania, a declining self-reliance, spiritual arrestment, an inferior concept of human destiny, no sense of process,4 energies expended destructively because creative release is hampered, or what?

  Growth Comes Through Effort

  The case of rising prices and their causes has been used for illustrative purposes. Take any social ill—communism, crime, wars, or whatever—and pursue the causal sequence. Finally, in every instance, the investigator will come to an analytical wilderness. To go further in depth is speculative at best. For the whole cosmic enigma confronts him. The message he gets is almost one of defiance.

  To me, the message reads something like this: Go ahead with your attempts to unravel Creation’s Scheme. You will never find the answer; it isn’t within the ken of man nor will it ever be. But try, everlastingly try, for it is the trying that stimulates individual growth in awareness, perception, consciousness, conscience. While you will never discern precisely all the causes of things you think wrong, you will come upon ever so many behaviors and practices that are identifiable as things not to do.

  Things not to do! Some twenty-five years ago a dozen of us had gathered for an evening of discussion with Ludwig von Mises, our first meeting with the distinguished economist. As midnight neared, a guest posed the final question: “I’ll agree, Professor Mises, that we are headed for troublous times. Now, if you were the dictator of these United States and could impose whatever corrective measures you think wise, what would you do?” Quick as a flash came the evening’s final answer, “I would abdicate.”

  Dictating how another should live his life—authoritarianism—is a thing not to do.

  Self-Control Can Change the World

  Recently, a scholar of note recommended a technique quite at odds with FEE’s self-improvement methodology, but which he thought would assure putting our ideas into practice. Assume his claim to be valid. Should FEE make the change? No, this is a thing not to do. Were my ideas to govern the nation or the world, the situation would be tragic. No such wisdom exists in any person, and it seems unlikely that it ever will.

  Wisdom, such as mankind acquires, can be likened to an over-all luminosity that derives from a host of tiny, individual enlightenments in complex interchange over space and time. The brighter the glow, the more and better can each of us see his way. Neither I nor anyone else can manage the over-all luminosity, but I can attend to my own wee candle.

  Cervantes’ “The road is better than the inn,” should serve to remind aspiring men that there isn’t any inn for them, but only the road, now and forever. It is the effort along the trail that matters.




    The following chapters, all but eight of which have previously appeared in The Freeman and Notes from FEE, are small gleanings from one person’s search for understanding as he journeys on the road. And the next chapter explains why understanding has not been sought in that dark area of authoritarian or coercive arrangements. It is my conviction that what cannot be found in human freedom cannot be Truth. . . .

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The Psychotic Fed

Whether it is growing older and less patient or whether the world is actually becoming more stupid is an issue I wrestle with periodically. I suspect it is a bit of both.

Here is an example of the nonsense that increasingly riles me. This snippet comes from a Reuters report available at CNBC:

Dramatic action by central banks to counter a global financial crisis cannot be explained by traditional models of how monetary policy works, and the economics profession has got to go back to the drawing board.

Think about this for a moment. Re-read it. If it doesn’t strike you as stupid, it may be because you are not familiar with economics or logic. Let’s imagine the same thought process being used in another field. Try this example: 

Dramatic actions by a group of physicists to counter the law of gravity cannot be explained by traditional models in physics, and the physics profession has got to go back to the drawing board.

The paraphrase should provide perspective. The physics profession would not “go back to the drawing board” in this situation. They would likely expel the quacks impersonating physicists first and then seek professional help for them from psychologists or psychiatrists.

If we can easily conclude that physicists behaving in this manner must be psychologically troubled, why should we not conclude the same regarding the Fed? Isn’t the situation identical? Why does the author assume that the bizarre behavior by the Fed has anything to do with economic law?

Money was the first market variable studied. The use of money preceded Christ by about 1,000 years. Money was studied before the term economics came into being and likely shortly after its introduction.

Monetary theory or the theory of money evolved over more than a thousand years. People may question its validity, as I do. My reservations come from the belief of any aggregate(s) has value in economics. Regardless, if there is a better theory of money, it has not surfaced in the three thousand years that money has existed.

Apparently the writer of the article believes the Fed is acting according to some new theory that they themselves have discovered. I think not. Fed officials are flying blind with what they are doing and appearing increasingly desperate and irresponsible as time passes. Furthermore, they are not acting as economists but as agents of the Federal government. To believe that their action signals a breakthrough that demands a revision in economic theory shows amazing naivety.

The laws of economics have not changed just because the Fed chooses to ignore them. These laws cannot be repealed by the Fed nor can they be altered. For better or worse, they are what they are, just as the law of gravity is what it is. To pretend otherwise is foolish and has consequences. That is one reason why normal physicists don’t jump off buildings.

But the Fed’s monetary folly is just as dangerous as jumping off a building. Trying to appear relevant to a world that increasingly recognizes their inability to improve the economy, the Fed is trying anything. They cannot stop their interventions because without their assistance the federal government would be unable to pay its bills.

Hence, we get smoke and mirror economics. In order to keep doing what has already failed, the Fed and its apologists keep inventing new rationale for continuing the behavior.  about how the Fed is driving economists back to the drawing board.

In reality, instead of “diving economists back to the drawing board,” economists should be driving the Fed to the nearest psychiatric ward.

"Monty Pelerin" is a pseudonym derived from The Mont Pelerin Society. Friedrich Hayek, 1974 Nobel laureate in Economics, was the founder.
Subscribe to Monty Pelerins World by Email Readers in over 150 countries. 
Email: montypelerin@gmail.com

Socialism Destroys Slowly

As this country slowly sinks into the abyss of Socialism, all types of changes are beginning to appear.

Reader Ken in Tyler comments on the difficulties of investing:

The difficulty I have with the concept of “investing” these days is that the methods available have been so distorted along with the entire financial market, that there seems no avenue available wherein the risk can be accurately determined. So the traditional method of balancing risk with potential return is no longer valid.

• - Bank savings, or CD’s? Real returns are negative.
• - IRA’s? Increasing rates of taxation eliminate any advantage of deferred taxation and the government will soon likely “nationalize” the accounts anyway, leaving individuals with the same meaningless IOU’s that are piled up in the Social Security Trust Fund.
• - Stocks? Inflated, distorted, and increasingly dominated by alg0-driven computer trading that relies on public perception or rather deception.
• - Metals? Grossly manipulated by a few paper traders to the benefit of the government who wish to disguise the current state of the economy from the sheeple and maintain “public confidence”.
• - Offshore? Big Brother’s arm is reaching ever further to penalize, tax, seize or criminalize such activity.
• - Land? Because of “property taxes” you never own land, just rent it from the government with seizure of assets resulting from any taxes not paid. And if the land has been in your family for generations, it is likely now deemed to be much more valuable (in inflated FRN’s) so eventually the inheritance tax will prevent you from keeping it.

One by one our government is establishing ways to confiscate and control all real assets with the ultimate result that all citizens are reduced to being equally poor and dependent on the dole in one form or another.

As noted, both control and confiscation are at work. These are necessary by-products of Socialism.

Control is a prerequisite of Socialism. In order to achieve conformity, an orientation toward society and away from the individual is necessary. This control is generally advanced by regulatory edict.

The effects on investing and wealth creation reflect Lady Thatcher’s limit (running out of other people’s money), a condition eventually reached by all social welfare states. Conventional taxation is limited while the spending appetite of the political class is infinite. Eventually these two forces collide.

The history of the US tax code reflects this conflict. The country was founded and survived without an income tax until 1913, arguably a period of its greatest growth and wealth creation. When the income tax was applied, promises were made that it would never apply to most citizens and never become a burden to the wealthy. Anyone looking at how the US income tax levels and code mushroomed sees both the forces of plunder and the needs of Socialism at work.

At some point, tax rates reach levels that they negatively impact the incentives to work. At high levels of taxation, these disincentives threaten the well-being of the economy itself. It is the ever-increasing demands of Socialism that threaten the host upon which it depends. The golden goose begins to weaken, yet the need for more funding continues to grow.

The US has reached the point where Socialism’s perceived needs have outgrown the ability of conventional taxation to supply them. Higher income tax rates are likely to be counterproductive, slowing the economy. So, alternative sources of revenue are sought. Only the imaginations of the political class and their consciences restrict where they go from here.

At these desperate stages, “confiscatory” actions come into play. Taxation at higher levels than ever intended, broadening the base of what qualifies as taxable and movements toward actually confiscation of private wealth all characterize what is just beginning. James Quinndescribes one aspect of the predatory US tax laws:

… the US government is making it increasingly difficult to get out of Dodge, and those that have not already done so may well have left it too late. The government does not want its citizens living overseas, nor do they want its citizens having assets overseas. Currently there are some 6 million Americans living overseas, and they have assets and incomes that are difficult for the US government to control and tax, and the US government does not like that.

The US is the only country in the world (except for Eritrea) that has citizenship based taxation. No matter where you live, and no matter where you draw your income, the US taxes it. Every other country has residence based taxation – you are taxed only if you reside in the country or earn income in the country. For instance, if you are a Canadian working in the US, you will have no Canadian tax obligations, unless you have income from Canada. If you are an American working in Canada, you are liable for US tax on your Canadian income. If you are an “accidental American” – and there are potentially millions of these around the world – born to an American citizen overseas, or born to a foreign citizen who was travelling through the US at the time of the birth – you are a US citizen, and may not know it. The US does not care – and will happily seek you out and punish you for failing to file and pay US taxes. No leeway is given.

Does anyone believe that such claims are consistent with a pretense of freedom and liberty?

The Thatcher Point has been reached in the US, at least with respect to its existing tax code. Conventional tax sources have been exhausted. Desperation drives government to seek other sources of money. What Ken described above reflects the actions of a cornered and wounded animal (government) desperate to survive. Modern government was built on its ability to deliver an increasing supply of “free goods.” Without an ever-increasing supply of funds, this Ponzi scheme is over. The Emperor will be exposed.

The US has a decision to make. It must turn its back on Socialism or it must accept the increasingly totalitarian form of government that advanced states of Socialism requires. The population does not see this choice. Most are naive regarding history and economics. Few have ever lived under advanced Socialism.

As a result most citizens think that a lifestyle choice is being provided to them. At the individual level, this choice is seen as one between a comfortable life without too much effort or a wealthy life if you try hard and succeed. This trade-off is the great lie of Socialism. The US, with its now over-hyped “can-do” attitude, still believes that “fairness” and rising living standards are compatible. Up to a point that is true, but that point has been passed. The ideologues driving our government either don’t recognize the incompatibility of the two objectives or are unwilling to admit it.

As our economy continues to languish and perhaps even retrogress, the tensions between those who want others to support them and those who want to keep what they earn will continue to grow.

"Monty Pelerin" is a pseudonym derived from The Mont Pelerin Society. Friedrich Hayek, 1974 Nobel laureate in Economics, was the founder.
Subscribe to Monty Pelerins World by Email Readers in over 150 countries. 
Email: montypelerin@gmail.com

What Happened To All Of That Money?

By Jeffrey Snider

Since the first onset of systemic crisis in August 2007, as the eurodollar market shrieked in abject terror at the prospects of collateral repudiation, central banks in almost every major market have undertaken radical expansionary policies. The Bank of England actually leads the debasement race, having gone first and farther than her kindred peers. The balance sheet at the British central bank has grown about four and half times since that fateful month when financial innocence was violently lifted. The Federal Reserve, Swiss National Bank and European Central bank have come in just behind, debasing their asset collections by factors of about 4, 3, and 2.5, respectively.

The initial criticisms of each of these piecemeal expansions have centered on inflationary concerns, particularly in that most of that newly printed "money" has sat idly awaiting some prospective trigger to "unanchor" expectations and unleash the worst. On the other side, monetarists remain bewildered by the lack of follow through into the real economy - these money stock measures, according to orthodox theory, should be producing a global panacea of good economic fortunes.

Of course, those two sentiments are highly linked in that inflation and nominal GDP growth are one and the same in the context of textbook economics. Even the Federal Reserve's own vaunted models are confounded that inflation (narrowly defined) and GDP growth are not significantly greater. By most accounts, all of that new money should be doing something tangible.

Relatedly, European commission president Jose Manuel Barroso proclaimed an official end to the euro currency crisis. Unfortunately for Europe, crises, including those of a monetary nature, are not under the purview of unelected parliamentary procedures and conjectures. If it was in line of authority that central governments may outlaw reality, it would have been tried somewhere between iterations of quantitative easing and outright monetary transactions. For palpable results of all this monetary interference, however, the missing money is found in the wrong places under the wrong circumstances.

Automobile sales in France, for example, declined a not-at-all pedestrian 28% in November 2012 over November 2011. France, one of the expected pillars of the European economic "core", must have missed the currency proclamations, which should certainly have meant not a 28% collapse in industry sales, but to the same degree in the opposite direction. ECB promises to purchase unlimited quantities of Spanish debt must somehow have missed translation into French automobile purchases.

Opel, a GM subsidiary, confirmed in December that it was closing its plant in Bochum, Germany, the country's first plant shutter in decades. While it certainly could be attributed to the idiosyncratic lack of industry acumen at GM, I think it is far more likely that Opel's actions fit the reality of the European car market. Ford already announced in October that it will shutter plants in the UK and look to downsize operations in other countries. Peugot's financing arm was indirectly bailed out by the French government, suffering under the weight of nothing more than the fact that its parent is a maker of cars in this economic climate.

Even automobile markets in the UK and US have experienced a massive shock in the years since the financial bubble burst. Both markets have seen impressive rebounds since 2009, but in a wider context remain rather far below pre-crisis levels in terms of both production and sales. Cars are not being produced or demanded like they were, as if the global system has experienced a paradigm shift.

Governments all over the developed world are essentially broke and bankrupt by any rational standard. Tax rate increases are the order of the day, and everywhere they are tried they feel the wrath of Arthur Laffer's simplicity. Spain ups its VAT rate, and revenue from the VAT falls in almost perfect synchronicity. The UK implements a millionaire tax that finds fewer millionaires filling out tax forms. Whether they moved or stopped making millions (perhaps self-limiting taxable incomes to only 999,999), they disappeared from the realm of potential confiscations.

Despite all the oceans of "money", there is not a ducat to fill the tax coffers anywhere. Perhaps a platinum, multi-trillion dollar coin would do the trick. Maybe a multi-trillion euro coin made out of iron pyrite?

What ails all these bankrupted systems is not a shortage of money nor a shortage of wistful, imaginative and foolhardy monetary solutions. The lack of tax success and the reduced demand for automobiles are the symptoms of the same lacking element. What is missing is relatively simple and straightforward: wealth.

As hard as it is for most people in today's modern era to grasp, as evidenced by the coin gambit, money is not wealth. Money can represent wealth, and, at times, even become a workable but temporary substitute, but money will never be able to replace true wealth as the central object, subject and foundation of the capitalist system. Of course, the capitalist system has found itself fettered by this modern obsession with money (included in the usage of debt as a centralized lever of control) and the political approval of economic central management, but, by and large the developed world still finds itself in some hybrid form of capitalism. While every major system continues to move to disproportion away from free markets and into the heavy handed, centralized approach, what is needed is less hybrid and more capital.

The central agency of true wealth is that it distributes economic success without the need for nudging or control. Debt, on the contrary, is the very embodiment of economic slavery - the overconsumption of current needs at the expense of encumbrance on future prosperity. Unfortunately for the developed world, that encumbrance began collecting rent in August 2007.

Much of the balance sheet expansion sold as economic elixir has simply been used to pay the freight of a debt-addled system. The cost of debt is interest, but the penance to the interest rate system lies in the multi-national banking system's schizophrenic function. Comprised as nothing more than a cartel of interconnected behemoths, central banks have used these creations of debased monetary units to maintain the financial status quo. In the mechanics of central banking, these balance sheet expansions really amount to nothing more than risk transformations. Unusable financial collateral is exchanged out of the international banking system by central bank asset purchase programs, to be replenished by new issuance of "approved" security issues.

As an example, the ECB in its first OMT program bought up Spanish and Italian debt from the "market". Because these purchases were worrisome in the inflationary context, the ECB decided to "sterilize" the balance sheet expansion by offsetting weekly deposit auctions. For every euro used to buy "bad" government debt clogging the lines of rehypothecation, the ECB would extract an equivalent euro by offering a risk-free certificate of deposit paying some marginal rate.

In reality, the interbank market was flushed of some "bad" collateral now lingering on the books of the ECB, credit risk fully institutionalized, and substituted with these new deposit certificates (which were/are eligible to be used as hypothecation tools in repos). At considerable risk, the ECB managed the interbank money supply of acceptable collateral. The Fed's QE 1 was of similar purpose and function.

Behind every monetary tool and program is the textbook theoretical foundation that banks and debt are the primary pillars of the economic system. The cost of servicing banks that create debt is enormous in the case where fractioning "reserve" assets has gone way too far - done so because monetary flow depended on growth of collateral regardless of tangible relation to cash flow or "value". For the past few decades, the banking system has layered monetary and credit expansion on too many bad assets. The nature of these bad assets is not just that they are experiencing pricing difficulties (liquidity problems), but that there is not enough cash flow to satisfy obligations. This imbalance was hidden in the complexity of the interbank operation, but absolutely necessary for the rapid and global financial expansion before 2007.

Central banks see pricing and liquidity as permanent and workable solutions to the pyramid of debt over wealth, and thus expend an enormous amount of effort and "money" to maintain nothing more than pricing and liquidity. Balance sheet expansions, and the "money" that is "printed", simply disappear into the liquidity rabbit hole. Prices are firmed or reaffirmed and nothing changes except the size of the respective central bank balance sheets. Money seems to vanish into the opaque and complex ether of wholesale rehypothecation and synthetic credit systems. The Keynesian multiplier of all of these trillions in new currency units must be a small fraction, at the very least proving that current monetary efforts are supremely inefficient means to economic ends.

What is holding back recovery is not the recession of debt and credit, but the ongoing lack of genuine income streams and opportunities. Good assets, those that can and do generate positive and sustainable cash flow, are what remain in short supply. Recreating old channels for credit production does absolutely nothing to remedy that central economic problem. Sustainable jobs do not come from Wall Street speculation or London trading of derivatives and rehypothecated central bank certificates.

In the whole spectrum of possible economic projects and activities, those at the lowest end are solely dependent on the flow of new money and debt. At the highest quality level are jobs and income streams that can operate independent of monetary intrusions and disruptions because they perform a service or need that pre-exists the level of money. On the downslope of the housing bubble in the US, for instance, millions of jobs (construction, mortgage financing, real estate churning) were lost simply because money stopped flowing into the housing sector. They were unsustainable and any downstream economic activity (such as automobiles) that was dependent on them was susceptible to not only cyclical reversal but permanent structural decline in the absence of replacement monetary flow.

The central effort of central banks should not be to spend trillions on liquidity and pricing in order to restart low quality economic activity, but to allow high quality, sustainable activity to take its place. That would happen if pricing and liquidity were allowed to demonstrate value - the very signal capitalists use to allocate resources. Further, the monetary system should be allowed to reorient itself back toward actual intermediation instead of flow-addicted speculation. But that would mean disruption and change, two parameters not suited to modern central bankers. Incorporated into such disruptions would be an implicit admission of bad theory since aggregate demand makes absolutely no distinction between high or low quality activity. For a central banker, a housing bubble is indistinguishable from real innovation and advancement.

Even in the areas where monetary success has the greatest chance of engendering and fostering the right mix of high quality economic patterns, the very presence of overwrought monetarism spoils and sours the potential. Capital investment is the most efficient pathway of economic expansion and the central foundation of the capitalist system. Given that corporate profits have been extremely robust in this "recovery" period, it should follow that the economic system arrives in a new Golden Age of expansion. Yet we have seen the most uneven distribution of profitability (favoring large over small) and the continuation of the distressing trend toward "investment" of corporate "capital" into stock repurchasing and M&A activity; thus transforming potential good capital back into merely money for the churn of inefficient asset prices.

Corporate profits have not led to sustainable jobs through capital investment, but rather dividend payments under the thumb of ZIRP and the monetarist goal of rising stock prices over all else. And where there has existed a tendency toward good investment, the weak dollar and currency instability sewn into the fabric of current domestic economic management favors offshore investment (accounting translations of a falling dollar are powerful lures to the multinational corporate business). Prices may be rising, but wealth is left behind. The system appears, at least from a cursory perspective, to be regaining solid form, but it is all an unsustainable illusion.

The current global problem of taxation is fundamentally a problem of economic growth, as is the fractional pyramid of bad debt to good assets. Economies that are actually growing would not be fighting for the monetary scraps left in the wake of persistent instability. Balance sheet debasement is the stuff of currency crises and currency wars, the opposite of what is actually demanded by wealth generation. In trying to find the sclerotic textbook answer central banks find themselves in a zero sum game of currency chicken because central banks cannot, no matter how much they proclaim the opposite through their mathematically modeled multipliers, create real wealth.

While some, such as the unelected government figurehead of Europe, see the absence of obvious crisis as a signal of good fortune, the reality is that the symptoms of dysfunction carry onward ever-present and lurking. Maybe the economic collapse of entire industries or countries is unmoving because we have become numb to the decay or now prefer our crises to be presented only through asset prices, but the Siren's song of central banking does nothing to keep the economic ship from hitting the rocks; we are only distracted from the inevitable collision. Stock prices, like those in the middle of the last decade, cheer the hollowing of capital and willingly assist in the suicide of systemic wealth because managed speculation just feels so good. The most powerful of anesthesia can numb even the worst and most painful afflictions.

The economies of Spain, Greece and even France are warning what a world with decreasing wealth looks like, as does general labor participation closer to home. Because of the intentional stasis brought about by monetary interventions, the world's economic system actually goes nowhere, yet hardly anyone wants to notice until some academic agency of some government retroactively declares an official start date. Trillions of dollars and euros appear out of the thin air of academic monetary theory, but never make their way into either the real economy or the tax coffers of the fiscally profligate, a distressingly obvious signal that something very big is amiss and askew. The political powers are left in bewilderment to resort to the "easy" solutions of divide and confiscate to go along with de facto monetization through bond or coin.

Jeffrey Snider is the Chief Investment Strategist of Alhambra Investment Partners, a registered investment advisor. 

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Under Construction

No, not the site, but our new SOCOM facility is under construction. We finally have the flooring in and can commence fitting out our new office. We shall begin posting next week.
On the bright side, our new southern command was greeted by a overflight of 26 pelicans in formation today.
That is all.

The Slow Death of Western Civilization

Massive economic change is sweeping the world. But, like the movement of glaciers, the change is slow, subtle and almost imperceptible. Few people are even aware of the change, no less its implications.

In earlier writing I recommended that those under fifty explore alternatives to the US for living and working.  Western democracies are self-destructing under the weight of their self-chosen welfare states. No society in the world has prospered for long under such a model.

The level of benefits available to non-workers has reached the point where many consider them more attractive than toil. Once work becomes an option rather than a necessity the economy is doomed. Confiscatory taxation and the regulatory are imposed to support the unsupportable. Talent and employment begin to leave the country. A death spiral ensues.

In the following article, Simon Black sheds light on the unfortunate decline of the West. Oblivious to their decreasing role, Americans and Europeans continue to live at levels which they believe they deserve and are accustomed. But incomes have declined and no longer support the lifestyle. To maintain this lifestyle, Westerners now spend more than they earn. Living beyond what you produce can only be accomplished in two ways:

• Consuming the capital built up by previous generations (“eating the seed corn”).
• Stealing from the future via borrowing.

Neither method is sustainable. Both impoverish the future and both are at work in declining Western economies.

Here are Mr. Black’s observations:

Presenting the decline of the West in two easy infographics

by SIMON BLACK on DECEMBER 27, 2012

Two interesting infographics were published recently that make it so easy to see the decline of the West, even a caveman can do it.

The first is from the Brookings Institute, which has released an interactive map showing economic growth data for the largest 300 metropolitan areas in the world– from New York and London to Okayama, Japan and Wulumuqi, China.

The Brookings map ranks each of these cities based on economic performance over three distinct periods, measuring both GDP growth and employment trends.

The first time period is the last full year of data, 2011-2012. The second time period is that particular city’s economic low point since the global recession began in 2007. And the third period of time is a long-term view between 1993-2007.

The map then color codes each city by quintile. Dark blue represents the strongest economic growth over the three periods, orange and red represents the weakest.

Guess where most of the orange and red is? You got it. Europe, Japan, and North America.

Guess where most of the dark blue is? You got it. Asia, the Middle East, Eastern Europe… and right here in good ole’ Santiago, Chile.

If it weren’t already obvious at this point, I’d like to show you a second infographic, this one by Toshl Finance.

Toshl develops software to help people track and manage their finances, so the company has direct access to their customers’ earning and spending habits.

According to Toshl’s data, users in Western Europe earn an average of $2,062 per month, but spend $2,396. This is an average monthly deficit of $334 per person, or roughly 16% of income.

Toshl users in the United States are in even worse shape, earning on average $1,871 per month. But they spend $2,290 per month, an average monthly deficit of $419, or 22% of income.

So who in the world is living within their means? Australian, Brazilian, Russian, Canadian, Filipino, and Indian users all show positive surpluses each month. Chinese and Singaporeans are essentially at breakeven levels.

Both of these infographics point to the same conclusion: the west is living far beyond its means and is struggling with pitifully anemic growth. This is a long-term trend, and one that is only going to accelerate.

The shift of wealth and power from West to East is going to be one of the biggest stories of our lifetimes, just as the decline of Rome was the biggest story of the day over a thousand years ago. Future historians will look back on our time and say “duh, the warning signs were there…” just as we do today when we study Rome, the Ottoman Empire, the Bourbon monarchy, etc.

Yet as obvious as the indicators may be, few people will actually do anything about it. A lifetime of propaganda will plant many heads in the sand, ignoring the dangers and opportunities all around. Only a handful will see the writing on the wall and take sensible, rational steps to set up their lives and families for generations of success and freedom.

Which will you choose to be?

Monty Pelerin's World

The Flat Tax Solution

by Richard A. Epstein (Peter and Kirsten Bedford Senior Fellow and member of the Property Rights, Freedom, and Prosperity Task Force)

To step back from the fiscal cliff, we need to simplify our tax policy.

---

This past Friday, I gave the “Presidential Address” at the Southern Economic Association (SEA) in New Orleans, on the topic of what President Obama’s reelection means for the future of liberty in the United States. As a classical liberal, my outlook is best captured in one simple proposition: a system of sound governance needs to promote a mixture of individual liberty and private property in order to allow individuals to maximize the gains from individual effort and social cooperation.
A strong government that can protect these rights must, of course, backstop the market system by collecting tax revenues that are spent on the public goods that markets cannot easily or efficiently supply, such as defense and social infrastructure. The use of state power always opens up the path for general abuse because large doses of government discretion allow all political forces to secure factional gains that result in overall social losses. The central challenge for government is to incur minimum political distortions while allowing taxes to raise the revenues needed to discharge essential government functions.

    
  Illustration by Barbara Kelley

Taxation vs. Factions
There are two key methods by which to constrain the political risks of faction. The first is to adopt only a single instrument of taxation—most likely an income or consumption tax—in order to reduce the risk of political intrigue. There is, for example, no place under a sound system of taxation for special excise taxes like the 2.3 percent tax imposed on medical devices to help fund ObamaCare. The second is to make the system of taxes durable over time, so that the form and incidence of the tax is not subject to constant maneuvering. Our fiscal cliff has arisen because tax policy is revised every two years, provoking political crises.
Without question, the form of taxation that best meets these dual requirements is a flat tax on consumption—a position which enjoys virtually no visible political support today. My speech to the SEA was not optimistic in large measure because virtually every key tax policy initiative today lurches in the opposite direction. The constant calls for higher levels of progressivity; the short-shelf life for key tax rates that must be renegotiated every year or two; and the constant playoff between interested parties jockeying to shift wealth among income, death, and excise taxes, which only magnifies the amount of political mischief. Unless something is done to alter the direction of political discourse in the United States, the next four years will be a replay of the last four years. We will witness a slow decline in the standard of living across all groups within the United States. Tax policy is a key piece in that overall mosaic.
The Perils of Static Tax Policy
The President is obsessing about the increases in income inequality, which for him clinches the case for higher tax rates for privileged individuals that earn over $200,000 per year, or privileged couples that earn over $250,000. The President thinks that revenue growth from taxes can be reduced to a simple task of addition and multiplication. Start with the current tax base, and multiply it by the increased tax rates in order to determine the added tax revenues. That static thinking was also embraced in a New York Times editorial:

The special low tax rates for investment income are among the largest tax breaks in the code. They allowed investors to pocket some $100 billion in 2012 alone compared with what those investors would have paid if investment income were taxed the same as regular income.

What this editorial never asks is whether we would have had the same amount of capital gains revenue if capital gains rates were higher. The answer to that question is likely to be no. The lower rate of return will make it more likely that individual investors will hold on to their stocks for longer periods of time, which could reduce the total amount of gains in ways that more than offset the tax increase.
The slow down in the rate of capital turnover spells bad news to the economy because it reduces the efficiency of capital markets by making it more costly for investors to reallocate capital from weaker to stronger ventures. Both the President and the New York Times support a whopping tax increase in dividend income—from the current 15 percent to 39.6 percent—which will surely retard the mobility of capital.
The Virtues of a Flat Consumption Tax
A sound tax system has as few moving parts as possible. We should scrap the current system in favor of a flat tax on consumption.
Radically simplifying the tax system to a flat tax on consumption would facilitate two desirable economic changes. First, it reduces taxes to zero when capital is redeployed from one venture to another, which in turn would induce better investor monitoring of current firms. The ability of investors to sell out without adverse tax consequences thus provides an added incentive for efficient market behavior. Second, it eliminates the need to draw any distinction between ordinary income and capital gains, which is one of the weak points of the current system.
It is, of course, difficult to work an immediate transition from an income tax to a consumption tax. But it is possible to exempt all capital gains from taxation to the extent that it is reinvested in other capital assets. Right now, that approach is in fact tax policy with respect to an exchange of capital assets as part of a business reorganization, such as a recapitalization or merger. It takes little ingenuity to use the same system for any sale and reinvestment. Any short term loss in revenue is likely to be made up by the combination of higher wages, higher dividends (at least if the tax is kept low), and higher capital asset values, which would generate additional revenues when liquidated for other uses.
One advantage of introducing the flat tax on consumption is that its variation leaves the government the only degree of freedom that it needs to make necessary budget adjustments. It is commonly thought that during economic slowdowns, the government should engage in deficit spending, just as ordinary individuals try to even their consumption patterns by borrowing, while making up the gap by saving in good times. Any aggregate target can be achieved by just manipulating a single rate to achieve the desired revenue goals. At this point, the deliberations in question will become simpler, in sharp contrast to today’s bitter, protracted, and expensive negotiations.
Rate stabilization will also lead to more reliable and rational decisions in both capital and labor markets, by removing one gratuitous degree of uncertainty from business risk. These indirect benefits are typically ignored because they are so hard to measure directly. But they are ubiquitous, and should prove substantial because they operate quietly and reliably in both the long and the short run. The stability of social institutions was a great theme of such classical writers as David Hume and Adam Smith. It should not be forgotten today.
Private Responses to Public Mischief
Current tax policy puts items like income and deductions into political play, generating deleterious short-term consequences. Evidence of this can be seen in the rapid response of investors, who are anticipating the future tax hikes and scaling back on their investments. The adverse responses are not confined to large firms but also extend to wealthy individuals who will bear the brunt of any tax increase.
The proposed increase in the estate and gift taxes, targeted exclusively at high-income taxpayers, has set off an immediate flurry of tax planning efforts by well-to-do individuals to minimize the bite of these unknown and unwelcome tax changes. Typical of the common hijinks are the estate planning tactics recently reported in the Wall Street Journal by Annamaria Andriotis, which should belie the naïve belief that high-income taxpayers don’t respond to incentives.
It is not just that people go to extra lengths to alter their patterns of giving in order to take full advantage of the life-time exemption from the gift and estate taxes and annual exclusions (now $13,000 per each donor/donee pair); it is that they engage in the conscious destruction of wealth in order to minimize the impact of taxes. Thus one common scheme involves the transfer of a valuable asset—a family vacation home, for example—to a limited liability company (LLC) where it is then owned by several family members. This decision to complicate the state of the title reduces the marketability of the asset, and thus reduces the amount of tax that it will attract at the death of the senior generation. The cold-blooded calculation is that the tax savings for the family unit more than justifies the losses in market value.
Yet what possible social reason is there to spend tax deductible dollars in order to reduce social wealth? Moving to a system of taxation that looks to consumption only treats the transfer of wealth from one person to another as a non-taxable event. The result is the better mobility of capital, lower tax drag, and fewer wasteful tax planning expenses. It will also generate more income (or consumption) tax from more productive firms.
Choosing the Right Path
This sensible push for tax simplification and tax reduction does not look through the world with rose-colored glasses. Since the advent of the income tax in 1913, tax rates have gyrated from high to low and back again. AsStephen Moore has once again demonstrated in the Wall Street Journal, the typical response to these tax reductions is a spur in economic activity that results in the collection of larger amounts of capital gains taxes from wealthy individuals, who also prosper under the regime by their higher after-tax earnings. As Moore points out, strong revenue surges followed the tax cuts under John F. Kennedy, Ronald Reagan, and George W. Bush, as investors responded with higher levels of economic activities and more rapid turnover of investments.
What makes the situation more impressive is that these overall gains were achieved in a less than ideal tax environment. Tax rates were still progressive; multiple instruments of taxation were still in use; tax horizons were short; and special gimmicks were the order of the day.
There is a desperate need to get this nation’s fiscal house in order. The last way in which to achieve that goal is to double-down on the structural defects of the current tax structure in the hopes that it will generate some much needed relief to the middle class. If we sock it to the rich, we run the risk of impoverishing the nation.
Too many people agree with the implicit supposition of the President that taxation is a zero-sum game, whereby the rest of the population can gain amounts that are taken from the rich through taxation. Not so. The explicit tax increases on the rich will be passed on in a variety of ways to the population as a whole so that everyone is made worse off in the name of income equality. John F. Kennedy famously said that a rising tide raises all ships. A falling tide will leave many of these same ships grounded.

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Richard A. Epstein, the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, is the Laurence A. Tisch Professor of Law, New York University Law School, and a senior lecturer at the University of Chicago. His areas of expertise include constitutional law, intellectual property, and property rights. His most recent books are Design for Liberty: Private Property, Public Administration, and the Rule of Law (2011), The Case against the Employee Free Choice Act (Hoover Press, 2009) and Supreme Neglect: How to Revive the Constitutional Protection for Private Property (Oxford Press, 2008).

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