Author: Rodger Malcolm Mitchell

MBA Northwestern, business turnaround expert, economist

–Giving life to a lie

An alternative to popular faith

The May 15, 2010 issue of NewScientist Magazine included an excellent piece by James Giles, titled “Giving life to a lie.” I strongly recommend you read it. (See: LIE for the full article.)

It tells how a statement by John Houghton, former chair of the Intergovernmental Panel On Climate Change – “Unless we announce disasters, no one will listen” – supposedly was repeated in three books, 100 blogs and 24,000 web pages.

Despite this widespread circulation and belief, the statement never was made. It was created by conservative columnist Piers Akerman. It was a lie.

The article, with its subtitle, “In the battle for hearts and minds, a plausible falsehood too often trumps the truth,” goes on to explain how a lie can acquire almost universal acceptance. Here are a few quotes: “. . . a falsehood has to have at least a shred of believability.” “Any falsehood can acquire currency … so long as there are enough people inclined to believe it . . . Falsehoods can come to be believed simply because others believe them. . . This is an information cascade, a process described by the economist DavidHirshleifer . . .” “The mainstream media often participates in the cascade … the more often you hear something, the more likely you are to believe it is true.”

Today, the big lie in economics is, “The federal debt is unsustainable” (See: UNSUSTAINABLE ).

The word ‘unsustainable,” means unable to endure. What is the evidence the federal debt cannot endure? That is, what evidence shows the debt cannot continue, cannot continue to grow, cannot continue to be serviced by the federal government, or will cause economic hardship? Amazingly, no such evidence exists. It all is myth.

That is why you never will see such evidence provided by any of the newspaper or magazine articles making the claim, nor will economists provide such evidence. They all merely will make the claim and support it with other claims, also unsupported by evidence (i.e., “The debt is unsustainable. It will cause inflation. It will reduce the availability of lending funds. Our children and grandchildren will pay for it through higher taxes. Nations will refuse to lend to us. Eventually, we’ll be like Zimbabwe.”) As each lie begets additional lies, the entire package becomes impervious to fact. More and more believe it, until it seems to become solid truth – all without supporting evidence.

The U.S. is 225 years old, yet the federal debt has grown about 1500% in just the past 30 years – a truly amazing increase. Despite this unprecedented debt growth, the federal government never has trouble servicing its debt, nor do we have inflation beyond what the government specifically wants (about 2%-3%), nor is there any mechanism by which the federal debt, which actually is the main source of dollars, can reduce the availability of lending funds. Nor do taxes pay for debts, which is how the debt managed to grow so much. In fact, tax rates are lower today than 30 years ago. And, nations do not refuse to lend to us. Nor do we even need nations to lend to us.

Why does this lie, which the most easily obtainable evidence shows to be wrong, have such widespread following and persistence? First, it has the requisite “shred of believability.” We think of the federal government as being like us – an anthropomorphic misunderstanding. If my debts grow too large, they are not sustainable. I might not be able to obtain the money to service them, and I even can go bankrupt. The same can be said of you, your business, your city, county and state. It even can be said of the European Union nations. But it cannot be said of the U.S. government.

I cannot create unlimited amounts of money to pay my bills. Nor can you, businesses nor local governments. Even Greece and Spain cannot, for they are constrained by EU rules. The U.S. government however, has no such constraints, as it proves every day. It can pay any bill of any size, immediately, simply by crediting the bank account of any creditor.

Then there is the collection of taxes. Local governments use taxes to pay their bills, which is why local governments can go bankrupt if taxes do not support spending. The federal government does not use taxes to pay its bills, because it alone has the unlimited power to create money. For that reason, our children and grandchildren will not pay for the debt. No one will. The government pays its debts by creating money, ad hoc.

The notion that federal borrowing replaces private borrowing has a quasi-arithmetic logic about it. “There is only so much money to lend, and if the government borrows it all, the funds will be used up and there will be none left for the private sector.” In reality, lending facilitates more lending. When you lend to the bank, by depositing in your bank account, this does not reduce the bank’s ability to lend. When the government borrows, it merely exchanges one form of money for another. It does not “use up” lending funds. And when the government spends, it creates lending funds.

Many nations often are used as an example of what excessive debts cause: Zimbabwe, WWII Germany, Brazil, Italy et al. But, each had special circumstances, that were unlike those in the U.S. and not directly related to excessive deficits. For instance, in the case of Zimbabwe, wars, corrupt leadership (Robert Mugabe), stealing farm land from owners, loss of exports and other problems caused its economic disaster.

As the media broadcast the lie, and more people came to believe it, the lie became a cascade. It became a truth unto itself, a self evident statement requiring no supporting evidence.

Are you old enough to remember when “Stomach ulcers are caused by emotional stress” was such a self-evident statement. No one doubted it, and no one asked for evidence, until one day it was discovered the vast majority of stomach ulcers are caused by a bacterium (Helicobacter pylori). Even today, some people cling to that original lie about ulcers.

In summary, when someone tells you the federal deficit and debt are too large, ask for factual evidence in the form of data. They will not provide factual evidence. They merely will give you more opinions (inflation, taxes, children, eventually, etc.) also unsupported by data. If you would rather depend on facts than on myth, read through the various posts on this blog, beginning with SUMMARY, and do read that article.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity

–What can save California?

An alternative to popular faith

California is broke and billions in debt. It’s unlikely California can pay its debts with tax increases and/or spending cuts, either of which could destroy the state’s economy. Tax increases and spending cuts always cause national recessions; the same would likely happen to California.

The best solution for California, and for all the other states in financial trouble, is to have the federal government step in with the necessary billions, which it easily could do. The government merely would credit California’s checking account at the Federal Reserve Bank, and debit its own balance sheet — a step it can take as easily, as repeatedly and as endlessly as the Rose Bowl scoreboard changing a score.

However, that won’t happen under current circumstances. The debt hawk belief that federal deficits are a problem, makes such support politically toxic. There are, however, two events which could force the federal government’s hand: Bankruptcy or disaster.

If California were to announce it planned to declare bankruptcy, businesses world wide would be threatened with ruin. Remember, California is one of the largest “nations” in the world — reputedly the 8th largest ( CALIFORNIA ) ahead of Russia and Spain. The federal government could not ignore such a threat, and would have to pay some or all of the bills, by a direct infusion of money.

Or, it could delay the inevitable, by lending California money ala Greece. (Loans to GM and Chrysler et al do not provide a model, because California cannot lop off large sections of its business and turn away from its citizens as companies can. So such loans, or even loan guarantees, just would put California deeper in debt.)

The other “solution” for California, though having terrible human consequences, would be to undergo a sufficiently large disaster, the most likely being a huge Los Angeles, earthquake, perhaps in the 8.0+ range. The government would declare LA County, perhaps even Southern California, a disaster area, and step in with the billions necessary to rebuild. Many of those billions would spread around the state, allowing the economy to recover.

Yes, FEMA didn’t rebuild New Orleans as it should have, but Louisiana doesn’t have California’s political clout, with only 9 electoral college votes compared to California’s 55.

I don’t know whether Governor Schwarzenegger has begged hard enough for federal support. Perhaps he is waiting for “the Big One.”

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity

–Is gun control possible?

An alternative to popular faith

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Jesus: “all they that take the sword shall perish with the sword.”
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Recently, a Chicago off-duty policeman was shot and killed by four good-for-nothing bums, who decided it would be a lark to commit armed robbery. Ho hum. Another Chicago murder. Another good life lost.

Is there any way to stop the killing, or at least slow it? In answer to that question, we must consider a few facts:

  1. Most murders are committed with guns
  2. Millions of Americans want guns.
  3. The gun lobby is powerful.
  4. Even the Supreme Court ignores the first phrase of the 2nd Amendment, to make anti-gun laws unconstitutional.
  5. Gun manufacture, import and sales are quite profitable.
  6. Prohibition of something people want never works.
  7. There is widespread belief that anti-gun laws leave criminals armed and honest people unarmed.
  8. Chicago, and most other cities, do not have fully staffed, fully trained police. Money has gone elsewhere.

So, what to do? Here are a couple thoughts. Though none is a complete solution, a few worthwhile partial solutions could move us in the right direction:

Make each manufacturer, seller or provider of a gun liable for the use of that gun.

If you make or sell or give someone a gun that is used in a crime, you are responsible for that crime. Harsh? Unfair? Some states have “dram shop” laws, making a tavern responsible for damages where intoxication was at least one cause of the damages. Sell liquor to a drunk; the drunk commits a crime; you go to jail.

If you feed someone liquor in your home, and that drunk drives a gets into an accident, you could be found guilty of aiding and abetting a crime.

These laws are weak (they generally don’t apply to the manufacturer, importer, wholesaler or package liquor dealer), are different in every state, and are difficult to apply across state lines, but the point is, they do make sellers liable for a product they sell, even though they themselves didn’t misuse it. So even these woefully weak laws make bartenders a bit more cautious about selling drinks to doubtful people.

The precedent, of making a seller liable for the misuse of product he sells, could be extended to guns. Gun manufacturers, wholesalers, retailers, even private citizens, would be liable for crimes committed with guns. So you, the gun provider, better set up a system to prevent your customer, or your customer’s customer, from misusing the gun.

Rather than trying to outlaw gun ownership, which for the above-mentioned reasons won’t work, merely make gun ownership more costly. Sellers probably would have to buy expensive insurance, the cost of which would be added to the cost of the gun.

I visualize a clearing center that would track every gun sale in America. All manufacturers, wholesalers, importers, retailers and private citizens would be required to submit a report on the purchaser of every gun.

The clearing center could be financed by a tax on gun sales and ownership. Just as we tax the sale and ownership of homes, cars, liquor and cigarettes, we could tax the sale and ownership of guns. The tax also could be used to hire, train and equip more police, as increasing police presence deters crime.

Under the economic theory “money changes everything,” making gun ownership more expensive, and making gun sellers more wary about liability, and hiring more police could together reduce the availabiltiy and ownership of guns — and reduce the murder rate.

Would this eliminate guns? No.
Could honest people still obtain guns? Of course.
Could criminals still obtain guns? Sure.
But the increased cost, the clearing house and the added police represent a step from the current, insufficient control for the single most dangerous, easily available product the world has ever known.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity

–Undocumented immigrants

By now the world has seen the video: A little girl asked Mrs. Obama why the president was “taking everybody away that doesn’t have papers.”

“That’s something that we have to work on, right? To make sure that people can be here with the right kind of papers,” Mrs. Obama said.

“But my mom doesn’t have any papers,” the student said. In an interview conducted after the event, the 7-year old girl told a reporter: “I’m a big girl and I don’t want to be left with nothing. I could almost die.”

The right believes the law is sacred. The left believes people are sacred. Antonin Scalia and Clarence Thomas believe in “original intent.” Ruth Bader Ginsburg says the both world and the Constitution have changed markedly. The right feels law changes are Congress’s domain. The left feels Congress often violates the Constitution, which is the reason for the Supreme Court.

And while those august ladies and gentlemen debate arcane passages and footnotes and what Thomas Jefferson, John Adams, James Madison et al “really meant” in 1787, and whether or not those intentions apply to today’s world, and while Arizona will expend a great deal of time, money and effort to increase deportations, a little girl, an American citizen, worries that her mother may be deported.

And I wonder, why do we choose to hunt down and deport undocumented immigrants? Do undocumented immigrants cause more problems, commit more crimes, take more jobs, than documented immigrants from the same country? Why is gaining documentation so difficult? Does the many-year’s wait add to our wealth or security? Would America be a better, safer, wealthier, more productive place if we could get rid of undocumented immigrants?

Any thoughts?

Rodger Malcolm Mitchell