“Jobs and Trade,” July 1996

Unemployment is the great puzzle of our time. It perplexes politicians, confuses officials, and even entangles economists. It persists and continues to grow despite all the government programs that mean to reduce it and the tax dollars spent to alleviate it.

Some writers continue to echo the teaching of Karl Marx. For them, capitalism always creates an “industrial reserve army of labor” consisting of the mass of wage-earners who are exploited and then thrown out of their jobs. Most economists are at one with John Maynard Keynes, the economic guru of our time, who viewed unemployment as a symptom of insufficient spending. Politicians continue to cling to the Keynesian view because it supports their spending predilection.

Some old-guard politicians and writers explain unemployment in protectionist terms which are among the oldest and most controversial in economics. Unemployment, they blaze about, is the price we pay for our participation in a global economy with millions of unemployed and under-employed people who are willing to work for 25 cents an hour. “Free trade” is “unfair trade” for Americans who are condemned to the indignities and hardships of unemployment.

If foreign trade actually were responsible for the corporate layoffs, the phenomenal rise of imports and exports in recent years should have disemployed most Americans. According to U.S. Department of Commerce statistics, U.S. general imports in 1950 amounted to $8.954 billion. By 1960 they had nearly doubled to $15.073 billion. By 1970 they had risen to $40.356 billion. During the 1970s they soared to $244.871 billion, and during the 1980s to $495 billion. This year they may exceed $700 billion. Surely, if imports would destroy jobs, this 7,800 percent rise in imports since 1950 should have thrown most Americans out of work.

It is difficult to imagine our present working conditions and standards of living if the U.S. government had turned inward and closed its borders in 1950, as the Hoover administration managed to perpetrate in 1930. Even if the disruption of trade and immediate foreign retaliation would not have brought another depression, the crushing burden which radical liberal administrations placed on the economy during the 1960s and 70s would surely have depressed the economy and drastically lowered American levels of living. Similarly, if there had been no foreign investments, the staggering budget deficits of the 1980s and ’90s would have drained the capital market and paralyzed the economy.

Employment always is a phenomenon of productivity and cost. In a market economy, in booms and depressions, there is an unlimited demand for labor that makes productive contributions. Labor that costs more than it is expected to produce, whether it is unskilled or armed with triple degrees, is devoid of any demand. In the eyes of potential employers, it is utterly “unproductive.” This applies to actors and administrators, systems analysts, software programmers, automatic engineers, and aeronautical scientists. If young Ph.D.s in mathematics are unable to find employment, employers believe them to be rather “unproductive” considering their cost and productivity.

Much university-educated labor remains unemployed because it is not in touch with the labor market. It is government-directed and taxpayer-financed. Graduating from mammoth state universities and guided by Pell grants, Work-Study grants, Stafford loans, Perkins loans, and numerous other federal and state support programs, many graduates are ill-equipped for useful employment. In nearly all fields of economic activity employers provide most of the productivity training. But they are reluctant to offer it if the expenses of the trainee are prohibitive and the final results of the training are not expected to cover the outlays.

Businessmen continually adjust to changes in demand, supply, transportation, technology, cost of labor and capital, government levies and obstacles, domestic and international competition. Every member of the market order is under pressure to adjust in order to stay productive. Of course, a person is free to ignore the pressures; the typist may continue to pound the typewriter. But she cannot justly insist that she be subsidized by fellow workers and employers. The same is true of a university-trained aeronautical engineer who has learned to build great military planes. In times of war and preparations for war he is in great demand. In peace he will have to learn peaceful pursuits. He does not have the natural right to live off the labors of others.

International competition is as beneficial as domestic competition; it forces sellers to outdo one another by offering better and cheaper goods and services and forces buyers to outdo one another by offering higher prices. Protective tariffs and other trade restrictions effect the very opposite; they permit the protected producers to offer inferior products at higher prices. They cause production to shift from places in which the natural conditions of production are more favorable to places in which they are less favorable. They force labor to move from export industries paying high wages to the protected industries that generally pay lower wages. In short, trade restrictions hamper production and thus lower the standards of living.

The competitive position of an enterprise in domestic as well as international markets is determined by its total costs of which labor costs merely are one of many components. In capital-intensive industries, such as the pharmaceutical, chemical, aeronautical, steel, tool-and-die industries, the cost of capital tends to determine competitiveness; in labor-intensive industries the total cost of labor is decisive. There are no labor-intensive American industries that compete with foreign labor. Our service industries which render valuable labor services need not fear foreign competition; they are protected by onerous immigration restrictions.

Free trade is fair trade; those who deny it to others do not deserve it for themselves.

* * *

“You Cannot Get Even,” June 1978

Government affects individual incomes by virtually every decision it makes. Agricultural programs, veterans’ benefits, health and labor and welfare expenditures, housing and community development, federal expenditures on education, social insurance, Medicare and Medicaid programs, and last but not least, numerous regulations and controls affect the economic conditions of every citizen. In fact, modern government has become a universal transfer agency that utilizes the political process for distributing vast measures of economic income and wealth. It preys on millions of victims in order to allocate valuable goods and services to its beneficiaries. With the latter, transfer programs are so popular that few public officials and politicians dare oppose them.

The motive powers that drive the transfer order are as varied as human design itself. Surely, the true motives are often concealed, and a hollow pretext is pompously placed in the front for show. And yet, man is more accountable for his motives than for anything else. A good motive may exculpate a poor action, but a bad motive vitiates even the finest action. Conscience is merely our own judgment of the right and wrong of our action, and therefore can never be a safe guide unless it is enlightened by a thorough understanding of the implications and consequences of our actions. Without an enlightened conscience we may do evil thoroughly and heartily.

An important spring of action for the transfer society is the desire by most people to get even in the redistribution struggle. “I have been victimized in the past by taxation, inflation, regulation, or other devices,” so the argument goes, “therefore I am entitled to partake in this particular benefit.” Or the time sequence may be reversed: “I’ll be victimized later in life,” pleads the college student, “and therefore I want state aid and subsidy now.”

This argument is probably the most powerful pacifier of conscience. It dulls our perception and discernment of what is evil and makes us slow to shun it. After all, we are merely getting back “what is rightfully our own.” With a curious twist of specious deduction the modern welfare state, which continually seizes and redistributes private property by force, is defended by the friends of individual liberty and private property. “Man is entitled to the fruits of his labor,” they argue, “we are merely getting back that which is rightfully and morally our own.” They borrow the arguments for the private property order to sustain the political transfer order.

Surely getting back that which is rightfully and morally our own is a principle that is rooted in our inalienable right to our lives. It is a property right that springs from our human rights and from the right to life itself. It is the right to restoration of the fruits of our efforts and labors of which we are deprived by deceit, force, or any other immoral practice. It is a specific right to recovery or compensation from those who are wronging us or have injured us in the past.

This right to restoration does not beget the right to commit the very immoral act from which we seek restoration, to imitate others in acting immorally, or to seek revenge against the trespassers or innocent bystanders. But this is precisely what the “get-even” advisers urge us to do.

In an unfortunate automobile accident we are hurt or injured, or our vehicle may be damaged, because of the negligence of another driver. This gives us the right to demand restoration and compensation from the guilty party. But it does not give us the right to seize another car parked in the neighborhood, or return to the road and injure another driver. Or, our home is burglarized and we suffer deplorable losses in personal wealth and memorabilia. This does not bestow upon us the right to do likewise to others. But the “get-even” advocates are drawing this very conclusion.

He who is desirous of “getting even” in the politics of redistribution longs to join the army of beneficiaries who are presently preying on their victims. They would like to get their “money back” from whomever they can find and victimize now. Like the victim of a burglary who becomes a burglar himself, they are searching for other victims. But in contrast to the new burglar who may be aware of the immorality of his actions, the “get-even” advocate openly defends his motives while he is pursuing his political craft.

We cannot get even with those individuals who deprived us of our property in the past. They may have long departed this life or may have fallen among the victims themselves. We cannot get even with them by enlisting in the standing army of redistributors. We merely perpetuate the evil by joining their forces. So we must stand immune to the temptations of evil, regardless of what others are doing to us. The redistribution must stop with us.

The redistributive society has victimized many millions of people through confiscatory taxation, inflation, and regulation. Government, acting as the political agency for coercive transfer, seized income and wealth from the more productive members and then redistributed the spoils to its beneficiaries. Although many millions of victims and beneficiaries were involved, which often obscures the morality of the issue, the forced transfer took place between certain individuals. It is true, the beneficiaries, who used political force to obtain the benefits, cannot easily be recognized in the mass process of transfer. But even if we could identify them, and establish a personal right to restoration, our property has been consumed long ago. A vast army of beneficiaries, together with their legions of government officials and civil servants, consumed or otherwise squandered our substance. There is nothing to retrieve from the beneficiaries who probably are poorer than ever before, having grown weak and dependent on the transfer process.

When seen in this light, the get-even argument is nothing more than a declaration of intention to join the redistribution forces. It may be born from the primitive urge for revenge against government, state or society. But it is individuals who form a government, make a state and constitute a society. By taking revenge against some of them for the injuries suffered from the hands of others, I am merely reinforcing the evil.

Revenge is a common passion that enslaves man’s mind and clouds his vision. To the savage it is a noble aspiration that makes him even with his enemies. In a civilized society that is seeking peace and harmony it is a destructive force which law seeks to suppress. But when the law itself becomes an instrument of transfer, the primitive urge for revenge may burst forth as a demand for more redistribution. It becomes a primary force that gives rise to new demands or, at least, reinforces the popular demands for economic transfer. The common passion for revenge, no matter how well concealed, undoubtedly is an important motive power of social policy that leads a free society to its own destruction.

No wealth in the world and no political distribution of this wealth can purchase the peace and harmony so essential to human existence. Peace and harmony can be found only in moral elevation that reaches into every aspect of human life. A free society is the offspring of morality that guides the actions and policies of its members. To effect a rebirth of such a society is to revive the moral principles that gave it birth in the beginning. It is individual rebirth and rededication to the inexorable principles of morality that are the power and the might. The example of great individuals is useful to lead us on the way, for nothing is more contagious for greatness than the power of a great example.

To spearhead a rebirth of our free society let us rededicate ourselves to a new covenant of redemption, which is a simple restatement of public morality. In the setting of our age of economic redistribution and social conflict it may be stated as follows:

• No matter how the transfer state may victimize me, I shall seek no transfer payments, or accept any.
• I shall seek no government grants, loans or other redistributive favors, or accept any.
• I shall seek no government orders on behalf of redistribution, or accept any.
• I shall seek no employment, or accept any, in the government apparatus of redistribution.
• I shall seek no favors, or accept any, from the regulatory agencies of government.
• I shall seek no protection from tariff barriers or any other institutional restrictions of trade and commerce.
• I shall seek no services from, or lend support to collective institutions that are creatures of redistribution.
• I shall seek no support from, or give support to associations that advocate or practice coercion and restraint.

We do not know whether our great republic will survive this century. If it can be saved, great men of conviction must lead the way—men who with religious fervor and unbounded courage resist all transfer temptations. The heroes of liberty are no less remarkable for what they suffer than for what they achieve.

* * *

“Beware of Despair,” July 1994

Many lovers of freedom love to despair. They complain of regulation, regimentation, taxation, inflation, confiscation, expropriation, bureaucratization, and politicization. They cry out against legislators, regulators, tax collectors, judges, and bureaucrats who annoy and anger them every day. Some look askance at all manifestations of government.

Yet no man who is mindful of the past should take a morose or despondent view of the present. The past surely was no better than the present; the past days were not what they should have been. In our own century, man’s inhumanity to man reached unprecedented magnitudes in brutality and barbarity, in bloody wars between the great Western nations, the massacre of countless millions of innocent people in the Soviet Union, Germany, China, and many other places. No present calamity, whether political, social, or economic, can be compared with those evils.

Social and economic policies in the United States are no worse today than they were in the past. When compared with the 1930s and 1960s they may even be more circumspect. During both the 1930s and 1960s the country suffered major breakthroughs of political and economic radicalism which paved the way for an economic command system. . . .

The fears of the pessimists in our midst are natural and logical. If we project the trend of the last sixty-five years into the future, we will in time arrive at a political command system, at first at democratic socialism of the British variety and later at a Soviet brand. The road on which Presidents Hoover and Roosevelt first embarked leads straight to authoritarian socialism.

Fortunately, history never moves in a straight line. The trends of policy change as the ideas which guide man are ever changing. Ideas are the factors that shape policies and guide Presidents in a way they lead all other individuals. In most parts of the world the trend of policy has already changed fundamentally and is visible as a movement toward “privatization.” A free-market counterrevolution is rising in all corners of the world; the old order of political economy is retreating everywhere. The revolution of ideas has swept away the Communist system, discredited all forms of socialism, and is bringing hope to many poor countries. All over the world governments are being downsized, public enterprises are privatized, and taxes are lowered. The houses which Marx and Keynes built are being razed and replaced by houses designed by Adam Smith and Ludwig von Mises.

The light of economic freedom is shining brighter now than at any time in this century. Even old-guard socialists readily concede that the market order is more productive than the command order; socialistic parties all over the world are introducing market reforms. Communist China, the last stronghold of Communism, has launched a vigorous market order.

The United States may very well be the last country to reform and depoliticize the economy. A giant does not readily learn from a puny neighbor; a superpower does not cheerfully emulate a country without power; a victor does not gladly follow in the steps of the vanquished. Yet the size of a country and its military might do not annul economic law; disregard and disobedience of economic law in time stifle military might and weaken a country. . . .

It is difficult to convince a pessimist that the future belongs to people who are free. He spends all his time worrying about tomorrow’s misfortunes which may never come. He peers into the future wearing dark glasses and sees only darkness. Despondent and forlorn, he is bogged down with discontent and unhappiness, calling himself a “realist” and being proud of it. But even realists need the promise of success in order to be active and energetic. Few people readily give their time and strength to a hopeless cause even if it should be noble and desirable. Without the hope of success and ultimate victory the pessimist can muster little support for the cause he may represent. His fears are likely to become self-fulfilling.

Virtue and justice may not be enough to achieve victory for a noble cause. It takes effort and leadership which builds on reason, judgment, and hope. A habitual pessimist is incapable of leading the way.

We know where we are, but we do not know where we will be in the future. God does not suffer man to have knowledge of things to come. Yet we always look to the future; our ideal, whatever it may be, lies further on. Henry Wadsworth Longfellow, the nineteenth-century American poet, who wrote some of the most popular poems in American literature, responded to all forms of pessimism when he wrote: “Look not mournfully to the past—it comes not back again; wisely improve the present—it is thine; go forth to meet the shadowy future without fear, and with a manly heart.”

Editor’s Note: With the federal deficit expected to reach $500 billion or more this fiscal year, Congress on a spending binge unequalled in recent times, and the President without a veto pen, it’s a good time to revisit this FEE Timely Classic on budget deficits.

Politicians and officials in high places are telling us that government debt does not matter; after all, we owe it to ourselves. As long as government borrows funds internally and expenditures are financed from internal sources, so the notion goes, no real cost is incurred. Interest payment on debt merely represents transfers from taxpayers to bondholders. Debt to foreigners, by contrast, is seen as a wholly different matter because it necessitates interest payments to outsiders. It is analogous to private debt.

The recurrent notion that “we owe it to ourselves” springs from the doctrines of mercantilism. It was very popular with European monarchs during the sixteenth, seventeenth, and eighteenth centuries because it placed them in the center of economic life and made them the promoters and guardians of national prosperity. Kings and princes who looked upon the economic lives of their subjects as mere extensions of their own economic activities viewed their debts as both accounts payable and accounts receivable. After all, if the subjects belong to his lordship, also their property is his. The debt he may owe them he owes to himself.

The so-called Keynesian revolution during the 1930s revived the doctrine and promoted it to a great principle of economic knowledge. Economists throughout the Western world accepted it almost universally. And yet, it is as fallacious today as it was when the kings and their ministers proclaimed it. It is the rationale of spendthrift governments ever eager to run into debt.

The federal government debt now exceeds $2 trillion and is expected to reach the $3 trillion mark by the end of the decade. We do not owe these sums to ourselves, the U.S. government owes them to individual savers and investors. Surely, in a command system such as communism or fascism, government owns and controls everything and everyone and, therefore, may be said to owe it and simultaneously own it all. But in our free order, individuals do have rights and may own property. They may own treasury bills, notes, and bonds and expect to be paid; the fact that they, too, may be taxpayers is irrelevant for the claim. They expect to be reimbursed by the debtor, the government, which in turn depends on taxpayers for payment. It does matter to every individual whether he owns such obligations or merely owes taxes that service the debt.

The core of the fallacy lies in the holistic way of equating individual action with community action as a whole. If individuals were part and parcel of the collective whole and personal property an integral part of government property, it would not matter how the credits and debits are listed; they all would balance out. But in our free order, private property is not government property and government property is not private property. This is true no matter whether the individual owner is a native or foreigner. The law protects both from government infringement and transgression.

Deficits Curtail Investments and Are Tax Liens

Government debt usually signals the consumption of individual savings and economic resources. It is a rare exception for government to invest its funds productively, applying property for future income or benefits. Politics tends to favor present use and enjoyment at the expense of the future. A huge debt signals huge consumption of economic resources for political ends, incurred in the past at the expense of the future. It speaks of factories not built, stores not opened, businesses not started, and jobs not created.

Deficits consume funds that otherwise would be available for private investment; they represent a direct transfer from investment to consumption. The deficits of the U.S. government curtail the rate of economic expansion, keep productivity and labor income lower than they otherwise would be, impede international competitiveness, and cause American levels of living to fall relative to those in other countries where people save and invest more.

It may be argued that other governments throughout the world incur similar deficits and, therefore, exert similarly restrictive effects on their countries. But such an argument is badly misleading because the savings rate is much higher in many other countries. Where the investment rate exceeds 20 to 30 percent of income, the impact of a 5 percent deficit is less adverse on investment than in the U.S. where the savings rate barely reaches 5 percent. Americans cannot afford any further reduction in investment through government deficits.

Deficits and debts also signal future tax exactions. Having incurred the debt in the past, government, in order to repay the funds or just pay the interest, must levy taxes in the future. In essence, therefore, a government debt is a government claim against private property—an unpaid tax bill so to speak—that will fall due in the future. Like all other business taxes, it is bound to depress labor productivity and the value of productive property.

To most people government spending is a panacea for all economic evils and difficulties, a cure-all for human woes. Where economic stagnation impedes progress and prosperity, government is expected to stimulate through deficit spending. Where there is unemployment, government is expected to supplement private demand and thus create jobs. Where there is poverty it is expected to provide affluence through more spending and debt. But nature forgives no debt and grants no benefit without cost.

There can be no beneficiary of government largess without a victim of exaction. Government cannot pile up debt without ever paying it off; all government expenditures must ultimately be paid out of tax revenues or be repudiated through inflation, which is merely another form of taxation. Either immediately or ultimately every dollar of government spending is taken out of the pockets of taxpayers. When seen in this light, the supposed benefits of government spending are rather questionable. To build a pyramid of Federal debt is to delay the inevitable and pay interest thereon.

Inflation Reduces Debt

Politicians point out that over the decades the Federal debt has actually declined in terms of purchasing power as well as relative value. If growing budgetary deficits are accompanied by shrinking real debt and rising ability to pay the debt, the happy spenders may indeed be right that Federal debt no longer matters.

True, the Federal debt has actually declined both in purchasing power and relative value. But this decline in itself is a great evil that is spawning many other evils. Most of it is the handiwork of inflation, the willful policy of currency debauchery, which enriches one class of people at the expense of another. It deprives creditors of their rightful claims and enriches the debtors, primarily politicians and government officials who incur the debt and place it on the people. It breeds economic and political conflict as it pits the economic interest of one social class against another, jeopardizing peaceful social cooperation and endangering the democratic process. Surely, debt and depreciation do matter.

Depreciation of debt by inflation is repudiation pure and simple. It is deceit, wicked and desperate; its consequences can never be foreseen. When deceit has been practiced in matters where all should be fair, confidence cannot be easily restored. In financial terms, interest rates signal the dangers of repudiation; they cannot be expected to return to normal as long as deceit can be expected. In this sense, the deceiver is bound to pay a price for his evil ways.

The rising burden of interest on the Federal debt illustrates the point. In fiscal year 1986 the U.S. government is estimated to pay $196.095 billion in interest on its debt; in 1987 it is scheduled to pay $206.855 billion. In terms of Federal revenue the interest is expected to consume some 25 percent of estimated receipts, in terms of gross national product some 4.5 percent, which is the highest in U.S. history. Even in 1945 when the Federal debt amounted to 133 percent of GNP, the burden of interest consumed less than 10 percent of net receipts and barely 2 percent of GNP. If government expenditures on goods and services were deleted from GNP figures because government revenue merely consists of exactions from private production, the interest burden on every American would be seen to be even greater. Surely, debt and interest do matter.

Deficits Disrupt Foreign Trade

Federal budget deficits cause interest rates to be higher than they otherwise would be, which may induce the American people to save more and foreigners to move funds into the United States. The foreign investments alleviate the savings shortage, permitting the federal government to continue the deficit spending and the American people to maintain their levels of living. But the foreign investments also serve to drive up the value of the dollar, which causes American goods prices to rise in international markets and American firms to become noncompetitive. In other words, the inflow of foreign capital leads to an overvalued dollar, which leads to more imports of foreign goods and to what is commonly called balance-of-trade deficits. The imports, in turn, keep the price inflation low but also hamper American competitiveness, depressing competing industries and causing the loss of jobs in those industries.

If the budget deficits continue, American competitiveness may be damaged permanently. The consumption of capital in the United States and the formation of capital abroad may necessitate permanent adjustments in patterns of production and international trade. Capital-intensive industries may contract in the United States but expand wherever capital continues to be formed. American wage rates may fall while some foreign rates continue to rise.

As budget deficits continue, the U.S. dollar must ultimately fall not only in purchasing power but also in the money markets of the world. When foreign investors finally conclude that they have enough dollar liquidity and enough investments in the United States, the dollar must fall. In fact, it may plummet when foreigners lose confidence in U.S. economic and monetary policy, when willful dollar depreciation inflicts painful losses on their dollar investments, and causes them to liquidate rather than invest. When foreigners become dollar sellers rather than dollar buyers the international situation is bound to change. The American dollar will fall, American competitiveness will improve, the flood of imports will cease, competing American industries may relax, but goods prices will soar. After all, if the rising dollar stimulates foreign imports and investments, a falling dollar tends to bring forth the opposite. Smaller supplies signal higher prices. Moreover, as foreign imports decline the American firms that compete with imports can now, in turn, raise their prices. In the end, large Federal deficits are bound to generate serious inflationary pressures.

Even Keynesians Object

Large budget deficits usually induce monetary authorities to engage in massive credit expansion in order to finance the deficits. They conduct what Keynesian economists call “an infusion of aggregate demand” which in time is said to add to inflationary pressures. The inflation effects are said to be rather slow, though, given idle plant and equipment and a high unemployment rate. Nevertheless, Keynesian economists recommend that budget deficits should be avoided as the economy approaches full employment. Federal deficits, Keynesians reassure us, are the appropriate remedy for recessions; they are inflationary at other times. If they are already very large at the beginning of a recession, public policymakers may be reluctant to pursue yet larger deficits during the recession. They may be reluctant to prescribe Keynesian remedies so that, according to Keynesians, recessions will be deeper and larger than they otherwise would be.

One may disagree completely with the Keynesian rationale, and yet agree with the conclusion that government budgets should be balanced. In fact, they should be balanced all the time, not just during periods of “full employment,” which may be slow in coming. Government deficits consume economic substance and wealth; by their very nature they depress economic activity. The stimulation that may be observed in the wake of deficit spending is the result of willful currency and credit creation; it is the effect of the injection of monetary funds that lower interest rates and misguide businessmen in their investment decisions. When interest rates are lower than market rates and goods prices are made to rise faster than wage rates and fringe costs, the demand for labor tends to rise and unemployment may fall. This morsel of economic knowledge constitutes the secret ingredient of the Keynesian recipe.

Keynesian deficit spending during recessions is destined to fail whenever goods prices don’t rise faster than labor costs. Workers and their trade unions may see through the inflation machination and readjust their demands to the willful depreciation, demanding cost-of-living clauses and other compensation adjustments to offset the inflation losses. When the workers no longer can be made to suffer reductions in real income the Keynesian recipe loses its power. Moreover, when deficit spending is given in large doses in recessions after large deficits were suffered in a boom period, deficits may turn into a prescription for deep depression and mass unemployment. A 20 percent inflation rate may cause a 20 percent unemployment rate because productive capital may no longer function; it may join other assets in the flight into inflation hedges.

Deficit spending is the mother of debt, which is the prolific mother of folly and despair. A small debt may be cleared off in a little time, whereas a large debt may never be repaid. A debtor who owes a great deal may despair of ever being able to pay and, therefore, may be tempted to default. As the U.S. government debt soars past the $2 trillion mark, the possibility of default looms ever larger.

A prominent political institution in every country is the central bank. In the United States, it is the Federal Reserve System, the 1914 masterwork of the Woodrow Wilson Administration. It is the federal moneybag which can finance any government expenditure and come to the rescue of any number of banks and financial institutions, it can create new money with the speed of a computer command and transfer it in seconds by high-speed modern. It can create deposits of one dollar as efficiently as it can create one million, one billion, or even one trillion dollars. The Fed derives this magical power from its position as money monopolist, from the legal tender force of its money, and from its regulatory powers over financial institutions. Its power is purely political, created and granted by the United States Congress, sanctioned by the courts, and enforced by the police.

The eyes of the economic profession, of the media, bankers, businessmen, investors, and speculators are glued on the Fed. Economic reporters on radio and television hasten to report on every move of the Fed. “Did it add liquidity today or did it abstain from creating credit?” When the Chairman speaks the financial world holds its breath. An encouraging remark may lift stock prices hundreds of points and add one trillion dollars to equity wealth. A critical remark may cause the bond and stock markets of the world to plummet. Woe to the investor who fails to listen or interpret correctly the words of the Chairman!

The powers of the Federal Reserve System reach to all corners of the world. It is the “lender of last resort” not only to the U.S. Government and American financial institutions but also to foreign central banks. It watches over and comes to the rescue of banks in distress from Mexico to Malawi. Its vast international powers rest on two foundations: the central position of the American financial market in the world and the central role of the U.S. dollar as the reserve money of the world. The Fed manages the international dollar standard.

Most economists view the vast powers of the Fed with favor and applaud its managers. Unfortunately, they seriously overestimate the Fed’s power and take no heed of the fateful role played by the Fed. Their blind faith in political power cannot bear to look.

As the monetary arm of the Federal government, the Fed suffers from all the temptations, foibles, and uncertainties of politics. Its primary purpose is to finance government and conduct money and credit policies in accordance with the general plan of the administration in power. Ultimate control over the System rests in the hands of the President of the United States. He appoints the seven members of the Board of Governors and the United States Senate confirms them. His Secretary of the Treasury and his Treasurer sign all Federal Reserve currency from the one dollar bill to the $100 bill which is the largest denomination now being issued. These signatures alone make a farce of Federal Reserve independence.

While the Fed wields monopolistic power over U.S. money markets, it faces potent competition in international markets. The Japanese yen and the German mark are “hard-money” competitors to the U.S. dollar, setting limits to the inflationary powers of the Fed. To ignore them is to invite dangerous dollar crises and the demise of the world dollar standard. Therefore, the U.S. dollar must always remain competitive in purchasing power and worthy of the trust of its owners; Fed policies must remain in step with the policies of the competitors.

Despite its vast powers the Fed’s ability must not be overrated. It has limits which are visible in the dollar-yen and dollar-mark quotations in the money markets of the world from London to Tokyo. The limits also make their appearance in rising consumer prices which reveal the consequences of the countless additions of Federal Reserve credit. When consumer prices rise beyond the margins of public tolerance, the Fed is caught in a bind. Its function to provide liquidity for multifarious purposes conflicts with the function of “fighting inflation.” The problem is that the Fed has only one tool–adding or reducing its own liquidity. To fight inflation, it must cease and desist from adding liquidity, from inflating the currency and expanding its credits. In short, it must not pour more fuel on the fires of inflation which it ignited.

Americans may soon experience the limits of Fed power when the Bank of Japan or the Bundesbank raise their interest rates or when consumer price inflation raises its ugly head. The Fed would have to raise its rates in order to remain competitive with the Bank of Japan and the Bundesbank or to call a halt to the consumer price inflation. The raise would cause financial markets to tumble. In loss and suffering, Americans may finally realize that their faith in the Fed was painfully misplaced and their reliance on political money management a standing invitation to disaster. They may even learn that the creation of the Federal Reserve System by the Congress radically altered the political and economic order. It built a political command post over the people’s money and banking which in time was to become the money monopolist. The law which created the System provided a federal fountainhead which in time was to become the paterfamilias of the trillion-dollar welfare state. It built a powerful engine of inflation and rendered the economy highly vulnerable to business booms and recessions. In the end, the American people may even regret the creation of the Fed and want to abolish the Wilson monster.

At this time, a wise man will not trust three things: the solemn promises of central bankers to “fight” inflation; the bluster of politicians to “balance” their budgets, and the chatter of Fed governors about the stabilizing effects of their policies.

Such deceptions when practiced by bankers and businessmen undoubtedly would be felonious and punishable with fines and imprisonment. In politics, deceit and hypocrisy often are the royal road to success on which political statistics are assembled and propagated.

The politicians who practice this deception are using trust funds, in particular, Social Security revenue, to finance some of the deficits. The small budget deficits they are gloating about merely are the deficits which are not fully covered by trust fund surpluses. The federal government spends more than ever before, but uses trust funds that are set aside for certain purposes. In fiscal year 1997, the Social Security Trust Fund is expected to have surpluses of about $70 billion which the government will spend, leaving only more IOUs. Altogether the federal government has spent some $550 billion of Social Security money. The spenders use these funds to help subsidize agriculture, health and human services, housing and urban development, labor, and numerous other federal activities. But can Social Security be expected to help finance these outlays indefinitely?

The growing federal indebtedness to trust funds is tantamount to growing trust fund surpluses which the intended beneficiaries are itching to spend. Pointing at the surpluses, they are clamoring for ever greater outlays on their behalf which tends to increase federal spending and deficits. The years of trust fund surpluses are followed by years of deficits, which in time raise the specter of trust fund bankruptcy and call for more tax boosts. The chronic fears of Social Security bankruptcy call for ever higher Social Security taxes.

The new angle in federal financing should not surprise us; all administrations since the Great Society of the 1960s readily turned against future generations in order to bolster their own image and popularity. The Balanced Budget Amendment, introduced as S.J.Res.1, which is a big issue of the new Congress, even would sanction the use of trust fund revenue for any spending purpose. Section 7 reads: “Total receipts shall include all receipts of the United States government except those derived from borrowing. Total outlays shall include all outlays of the United States government except for those for repayment of debt principal.” In short, the amendment would permit the spenders to incur trillion-dollar debts to the trust funds, call their budgets “balanced,” and ignore the soaring national debt.

This observation of growing federal indebtedness to trust funds must not be interpreted as a defense of the Social Security system in any form. It constitutes the very cornerstone of the American welfare system on which all other programs rest. it also reveals the poisonous handicraft of politics which seizes income and wealth by majority vote. The Social Security surplus consists of payments by workers recently and presently employed and taxed for the benefit of retirees, most of whom did not contribute a penny to the surplus. Having received many multiples of what they paid in, some aged never tire of demanding their cost-of-living adjustments. In the halls of politics, their voices drown out all calls for reform and warnings of ultimate disaster. Social Security and Medicare always are “off the cutting table.”

You can judge the craftiness of a politician by his or her behavior at the cutting table. You can judge the moral fiber of a political party by the way it vies with others for the votes of the elderly. If Social Security as the oldest, most expensive, and most inequitable transfer system is untouchable, all others following in its footsteps can be expected to stubbornly resist attempts to place them on the table. They merely need to repeat the Social Security rationale and join the transfer coalition to repel the would-be reformers.

To restore a commonplace truth and realism to the transfer system and enhance the prospects for balanced budgets, we must reject all transfer schemes. They breed social conflict and gnaw at the root of democratic institutions. They have made youth the primary beast of burden and victim of transfer; the most monstrous burdens, Social Security and Medicare, have been placed squarely on the shoulders of young people.

Genuine budget control necessitates an early abolition of all political transfer programs. There are several roads that lead back to a free society. One would first lead to genuine privatization of all welfare functions; all social services would be transferred from politicians and bureaucrats to private producers. The privatization of federal health and human services alone would balance the budget.

Another road would lead to a temporary freeze of all transfer expenditures at the present level. Economic expansion together with price inflation would raise tax revenues which, in just a few years, would catch up with the frozen expenditures. The temporary freeze would have to be followed by a permanent freeze of both revenues and expenditures which would shrink the transfer system at the annual rates of inflation. In just a decade or two the inflation would rescind all but a few traces of the welfare state.

On yet another road to fiscal responsibility and stability the welfare system would be made to respect the religious and moral principles of conscientious objectors and allow them to withdraw. It also would grant relief to the primary victims of the system, to young people, and permit them to choose between joining the system or remaining free, independent, and self-reliant. A system which allows its victims to go free is no longer a transfer system.

Despite all the noise about the federal deficits and the Balanced Budget Amendment, there is no indication that the American public and the Congress are serious about the importance of balancing the budget. Public pressures for ever more transfer benefits signal the coming of ever larger deficits.

The countries of Eastern Europe continue to suffer the pains of transformation from communist tyranny to Western-style democracy and the private property order. They are straining to reshape their political and economic structures. With their public sectors dismally unproductive and in utter disarray, the governments are incurring huge budget deficits which cause them not only to inflate and depreciate their currencies but also to bleed the fledgling private sector. If it were not for the “informal sector,” that is, the underground economy in which people labor without license, permit, taxation, and political approbation, many would suffer grievously.

In Central and Western Europe the old welfare states are choking on their own “social progress.” They are transferring more income and wealth than ever before, bestowing costly favors and privileges on labor and extracting the means from entrepreneurs and capitalists. Business is forced to invest heavily in labor-saving machines and equipment, or seek economic survival abroad, or simply evade the social burdens by going under ground. Many employers are refugees in their own country, dismayed and frightened, and dreaming about escaping to the U.S.A.

According to a Morgan Stanley analysis, the hourly labor costs in manufacturing are calculated at $31.88 in Germany, $19.34 in France, $16.48 in Italy, $13.77 in Britain, and $12.70 in Spain. These rates compare with $17.20 in the United States. Yet, no matter how high the labor costs may be, they do not cause unemployment provided they do not exceed labor productivity. The soaring rates of unemployment in Germany, France, Italy, Spain, and other European countries clearly indicate that labor costs are excessive and taking their tolls. European unemployment rates are more than double the U.S. rate.

The root cause of Europe’s economic predicament is the oppressive burden of fringe benefit costs imposed on business during the 1970s and 80s. Social Security benefits were increased significantly, which is hailed as “social progress,” and employer extractions were raised accordingly, which is acclaimed as “social justice.” The new levies lifted marginal labor right out of employment; new regulations rigidified the labor markets and rendered adjustments painful and difficult. They caused the national economies to stagnate, which in turn aggravated the budget deficits and the capital consumption, which in turn aggravated the stagnation, etc.

Hope ever tells us that tomorrow will be better. But unless hope turns into delusion, it must be based on rational expectation, building on sound public opinion which after all shapes social policy. What the multitude says is so, soon will be so.

European public opinion fills us with deep pessimism. The Europeans we know proudly and defiantly cling to their notions of “social progress” no matter how many millions of workers they cast out. Guided by social compassion for the disemployed, they favor ever more “progress” which actually crushes the very people it is supposed to help.

A few European economists are vaguely aware that the labor mandates of the last two decades are the prime cause of the mass unemployment. They nevertheless are quick to defend the social policies as the greatest virtue of modern democracy well worth the social costs. They wax eloquent about democratic virtue while millions of working people walk the streets in idleness and despair. And they turn politicians vying for popularity when they oppose reforms for being tantamount to “political suicide.”

Most disturbing yet are a few old discredited economic notions which becloud the minds of many Europeans. These notions are akin to the ideas which guided the gangs of English workingmen who, early in the 19th century, destroyed knitting machines and power looms which they blamed for unemployment and low wages. Their intellectual descendents now condemn the computer technology for devouring millions of jobs. They would like to return to the old technology or at least compensate the workers for the loss of their jobs. The costs of compensation hopefully would discourage the modernization.

Other Europeans fall back on new versions of old protectionism. They blame cheap foreign labor for devouring domestic jobs. They never tire denouncing countries which, in their judgment, do not protect the environment, or worse yet, which exploit women and children. There is mass unemployment in France and Germany, they are convinced, because Chinese women and children earn low wages.

Radical youth is quick to blame poor immigrants for the loss of jobs. It’s the fault of immigrants who in more prosperous times were invited by the millions. While young people are demonstrating and rioting, the governments are enacting laws and regulations discriminating against immigrants or even expelling them under various pretexts. Yet, the rate of native unemployment continues to rise. It now exceeds 12 percent in France and Germany and 21 percent in Spain, the most socially progressive country of Europe.

Desperate politicians and labor leaders would declare “war on unemployment.” They are demanding fair and square “job sharing.” To make room for the unemployed they would force employers to allow their employees to work shorter hours, take longer vacations, take more sick-leave, and seek earlier retirement. In Germany, they already succeeded, in reducing the industrial work week to 35 hours; in France they managed to advance the retirement age to 55. All over Europe the workers are told: “Slow down, don’t work yourself out of a job. Leave some to the unemployed.” And middle-age workers are urged to retire: “Make room for the young!” They all are to live by a new theory according to which the demand for labor increases as labor output decreases.

Weary of the economic stagnation and fearful of the declines expected for 1997, many European commentators, finally, blame their “strong currencies” for the faltering economies. The expensive Swiss franc, French franc, German mark are said to price domestic products out of the world market. Tight monetary policies are blamed for shrinking exports and rising imports although the central banks are expanding their currencies at rapid rates. Switzerland and Germany, the two leading hard-currency countries, already reduced their discount rates to 1 percent and 2.5 percent respectively. They are inflating as fast as they can without raising apprehensions.

Many Americans who do not learn by inference and deduction have an opportunity to learn from European experience. Unfortunately, most people learn only from their own experience.

Welfarism is bound to die from its innate venom and virus. Sired by the doctrines of labor exploitation and class conflict, born of social and economic conflict, nursed on progressive taxation and confiscation, feasting on deficit spending and monetary depreciation, and saddling its trillion dollar debt on future generations, it embodies all the social ills that men may endure. It is bound to end ignominiously as the growing burden of the welfare state is grinding more and more people into dependence and poverty. With more than $5 trillion in debt, which is expected to rise to $8 trillion in a few years and half a trillion in annual interest costs, with Medicare and Medicaid spending doubling every few years, it is destined to self-destruct, it may implode rather suddenly, like Soviet communism. Or it may disintegrate slowly, perhaps over decades, as is evident in the old industrial countries from France to Germany, Italy, and Britain.

The sweeping federal welfare act of August 22, 1996 is an indication of many more reforms to come. The legislation transfers control of much of the nation’s welfare system from the federal government to the states and imposes many new restrictions on aid. It requires workfare for most recipients, imposes strict time limits on benefits, and cuts back on benefits for immigrants. It affects millions of people for whom welfare has become a way of life.

The reform is bound to bring some confusion, pain, and condemnation. The transfer of control from the federal government to the states removes its monolithic structure and introduces a measure of flexibility and competition among the states. In time, it will lead to differences in state legislation and regulation which will give rise to large differences in welfare benefits and tax burdens. Facing economic stagnation and decline, the states most generous in benefits and most severe in tax burdens can be expected to lament the reform and call for an immediate return to the old system.

The new system of state-run workfare builds on the assumption that the recipients can actually be led to forego the dole and return to the labor market. It completely overlooks and ignores the numerous institutional obstacles which the reformers themselves have erected. Surely, some people are lured to the dole by generous benefits which may approach or even exceed the wages they could earn in the labor market. Assistance payments plus housing allowance, food stamps, and free medical care may exceed the wages an unskilled laborer may earn, which is a powerful incentive for shunning employment. But even if all such inducements were removed, real obstacles to gainful employment would remain.

Unskilled workers face formidable barriers to the labor market. Federal and state laws regulating minimum wages, child labor, and working conditions legally bar poor people from securing employment. Minimum wage legislation may be the worst barrier which millions of unskilled workers, old and young, are unable to clear. It is tragic, and yet so typical of politics, that the very legislators who enacted the workfare reform recently raised the minimum barrier to the labor market. Lifting it to $5.15 an hour to which the mandated fringe costs must be added, such as Social Security levies on employers, workman’s compensation, unemployment taxation, paid holidays, and other mandated employment costs, raising the employment costs to some $8 an hour, government is blocking countless workers from reaching the market. At $8 an hour, many welfare mothers are searching far and wide without meeting a single employer.

Other legal barriers stand, in their way. The Davis-Bacon Act of 1931 commands contractors performing work for the government or with government assistance to pay their workers “prevailing” wage rates, that is, union rates. Such rates are even higher than an $8 minimum, which makes it rather unlikely that any welfare recipient will ever clear it.

The Employment Retirement Security Act of 1974 (ERISA) and its several supplements erected unsurmountable barriers for many elderly workers. The law made pensions for elderly workers a cause of political concern, prescribing rules of eligibility, vesting portable pension benefits, and giving pension claims the same status as tax exactions. The financial burdens and the bureaucratic hazards cause many employers to be rather reluctant to engage elderly welfare people and soon thereafter pay them a pension.

Similarly, the Equal Employment Opportunity Commission (EEOC) which was created by the civil rights acts of 1964 and 1967 aims to ensure that employers do not discriminate against anyone on the basic of race, age, gender, religion or country of origin. It makes the employment of public-assistance people doubly hazardous. Prevented from entering the labor market and unable to clear the obstacles built by government, they are likely to lay the blame on employers. After all, it is they who deny employment. A simple charge of “discrimination” is easily made and rather difficult and costly to refute.

The welfare reformers are laboring to roll the welfare stone up the mountain to the barriers they themselves erected. Their inevitable failure may reinforce the very system they are seeking to abolish. A true welfare reform would eliminate the political barriers to the labor market.

He is seeking to be secure in his life, to be left alone so that he may become what he would like to become. To be free and independent, to be happy, to do what he pleases without restraint and coercion, that’s probably the most important single force in the world today.

Yet this force faces the reality of complete dependence of every individual on the cooperation of other individuals. Our food, clothing, shelter, transportation, and education are provided by other individuals working together in meticulous division of labor. We depend on our fellow-men for our very survival. How free and independent can we be with neighbors all around us and coworkers with us for most of the day?

This question of the limits of freedom has occupied theologians and philosophers throughout the ages. Some tell us that modern society cannot tolerate much individual freedom because of a limitation of space and resources; others demand a wide margin of freedom because of the complexities and intricacies of man’s cooperation and division of labor. One answer which is rather persuasive is based on the very definition of freedom itself. If every man seeks to be secure, to be happy, to do what he pleases without restraint and coercion, and every man is to have the same measure of freedom, my own must be limited by everyone else’s freedom as everyone else’s is limited by mine. I must always be mindful of others. I must not diminish anyone’s freedom, I must not inflict harm on other people.

Most of us are considerate of the rights of our fellowmen. In our personal relations we try to be careful, thoughtful, courteous, and judicious. We may assist each other in many ways, and be Good Samaritans, offering aid to people in need; yet in our political lives we may act like thieves and highwaymen. We readily seize other people’s income and property without remorse. Indeed, there seem to be two modes of behavior, two yardsticks of morality: one for our personal relations and one for the body politic.

Politics is strife of interests masquerading as contest of principles. To be a lawyer you must study law; to be a physician you must study medicine; to be a carpenter you must learn your trade; but to be a politician you need only to know your own interests and those of your electorate.

As voters we ourselves live by a similar yardstick of morality in our political choices and decisions. We seize as many benefits and privileges as we possibly can—always at someone else’s expense. And we impose as many restraints and restrictions on our fellow citizens as we possibly can.

When death comes to our neighbor, we may weep with the widow and her children. We honor the dead and comfort the living. We deem it our special duty that, if they need our help, we give it to the utmost of our ability and our power. But as members of the body politic we dispatch our estate sleuths and collectors to seize most of their belongings. For many years we expropriated as much as 77 percent of their possessions through the Federal Internal Revenue Service; at the present we seize only 55 percent. We grab various percentages through our state revenue departments.

As members of a political party, professional association, or a labor union, we seek our own good at the whole world’s expense. We act like hungry tigers in our own cause, preying on widows and orphans, women and children, and various minorities by majority vote. We plunge into politics to make our fortune. We join an association to fight for license and privilege, and sign up with a labor union in order to earn more and work less. In a labor dispute we may man a picket line and use brute force against fellow workers, employers, and their customers.

The difference between personal and political lives is clearly visible in the behavior of a teamster who, as a faithful member of his congregation, attends mass on Sunday and, as a member of local 1678, blocks traffic on Monday, throws bricks at passing trucks, and slashes the tires of scab automobiles. Similarly, the organized steelworker, longshoreman, bus driver, or coal miner may attend church on Sunday but waylay independent workers on Monday. The hospital worker may care for the sick throughout most of the year but harm them at bargaining time.

In our personal lives we love our children. They are a mother’s pride and a father’s joy. We instruct them in virtue and labor and bind them to us through care and protection. Yet, as members of the body politic, we burden them with our debt, trillions of dollars, which we force them to pay or be dishonored in bankruptcy. We enjoy the productivity of the magnificent apparatus of production which our forebears left to us, yet it is insufficient for our enjoyment. Our deficits eat into the substance of the apparatus so that our children must work with less and subsist on less. We inflate and depreciate our currency, which erodes the purchasing power of all claims to money, including the savings of our children. As parents we may create a legacy for our children; as members of Medicare we drain it and fritter it away.

Indeed, there are two modes of behavior, two yardsticks of morality. In our personal lives we try to be charitable, which is to will and do what is just and right in every action. We may lend a hand to a stranger, stand by an orphan or widow, and give bread to the hungry. As members of the body politic we may act like a gang of highwaymen lurking in the highway for the purpose of robbing passers-by.

Hans F. Sennholz

What these Americans call “sweatshops,” the workers in those workplaces may actually hail as “opportunity shops”; and what Americans call “slave wages,” foreign workers may welcome as “living wages.” The descriptions seem to vary according to the height from which the earnings are viewed. Americans whose wage rates and standards of living are among the highest in the world always look down on the lower earnings of other nationals. Their lofty perspective invites hasty and disparaging explanations. Looking down on poor and primitive workshops they see “sweatshops” paying “slave wages.”

A little historical knowledge would help these critics to come down from their lofty perches. During the last century and earlier our forefathers labored long hours in shabby factories and dangerous mines with primitive tools and equipment, earning wages even lower than those paid in poor countries today. It took many decades of economic development to arrive at current levels of productivity and income. It took several generations of Americans to save and accumulate the productive capital that built our modern apparatus of production. The savings of the people and the business profits that were reinvested by capitalists together with the technological improvements by inventors built the economy as we know it today.

Politicians who always labor for the next election are quick to take credit for the improvements. The phenomenal rise in American wage rates and working conditions, they declaim, was the sweet fruit of their own efforts, their labor legislation and regulation. Wise and courageous politicians, they want us to believe, fought valiantly for higher wages and better working conditions. The chorus of these politicians is often sounded out by the agents of labor unions who are singing the praises of their efforts in the form of collective bargaining, violent strikes, and costly boycotts. Both groups often cooperate and give credit to each other for pointing the way and forcing greedy employers to pay American wage rates.

The main activity of politicians and labor leaders is criticizing their opponents. If they actually could improve the working conditions of all workers, they could eradicate the hunger and want of this world, purge all poverty, and bring prosperity to everyone. American legislators and union organizers could bring American working conditions to every corner of the world, from Burundi to Bangladesh.

In reality, working conditions and wage rates depend on labor productivity, which is a direct function of the stock of capital invested per worker. Unless they themselves made investments in their equipment, American workers made no contribution whatsoever to their high standards of living. Wherever they opposed the introduction of modern equipment, or their union agents and political representatives fought or taxed it, they actually resisted the rise in productivity and improvements in their own working conditions.

It was rising labor productivity and increasing levels of living that liberated women and children from the early sweatshops. In the industrial countries, labor legislation merely sanctioned the improvements brought about by capital investments. Naturally, legislators, regulators, and union officials claimed credit for the changes.

Their loud denunciation of child labor in poor countries usually produces unintended consequences. It may actually hurt the very people it is intended to help. The children who are dismissed or never hired usually do not return to school. On the contrary, they are likely to seek new employment in the underground economy that pays lower wages and makes more physical demands than the “sweatshops.” Many children manage to return to the shops by buying fake documents that make them older than they actually are.

Few American critics of “monstrous sweatshops” are motivated by their concern for foreign children. They rarely offer to house, clothe, and educate the children after they have been driven out, or merely inquire into the fate of those who have been given the gate. This glaring lack of concern clearly indicates that many critics of foreign child labor are more interested in protecting jobs in the United States than in improving the lot of foreign children. They are old-fashioned protectionists who seek to disguise their odious intentions in the sweet talk of great love for children.

Their protectionist agenda also is visible in their open hostility toward “the new world order.” No matter what we may think of the new order, it is preferable by far to the old order of war or preparation for war. The cataclysmic polarization between the democratic and dictatorial worlds, which generated two world wars and numerous lesser wars, has given way to the worldwide dominion of democracy under the leadership of one world power, the United States. The new order created a world of unprecedented interconnection and economic interaction. National trade barriers have come down significantly, which has led to a great extension of international cooperation and division of labor. The new information technology has brought the light of individual enterprise and the market order to all countries, and a new transportation technology has drawn them closer together than ever before.

Many millions of people in the developing countries now are laboring diligently and joyfully for Americans. Foreign and American capitalists have built thousands of assembly plants giving employment to people who heretofore had depended on charity or had toiled for mere survival. In exchange for their efforts, several million American workers have found employment in efficient American export industries. Both parties to the exchange, Americans as well as foreigners, benefit visibly from the trade. In fact, the new world order with its great improvements in the international division of labor has helped to offset the horrendous burdens placed on the American economy by the New Deal, Fair Deal, New Republicanism, New Frontier, and all other new political calamities. If it had not been for the phenomenal expansion of world trade with its new “sweatshops,” many of us would be unemployed and all of us immeasurably poorer.

Hans F. Sennholz

Some Americans eagerly take an “activist” line. They would use the full weight of the political apparatus to mandate, coerce, punish, tax, spend, engage in deficit spending, and print money in order to attain their ends. They call on government to actively pursue the economic ends. Other individuals, while equally committed to the same goals, would seek to improve conditions by relying less on politics. They would reduce involvement of government in the economy, remove the political constraints, and shun artificial government stimulants. They place their confidence in the free and efficient operation of the competitive market order.

The difference between the two camps springs from different perceptions and conceptions of social life. According to the most popular social philosophy of our age, the market order is torn by an irreconcilable conflict between the interests of “capital” and those of “labor.” Private property in the means of production and individual enterprise benefit only a small class of capitalists while they harm the large majority of working people.

This conflict philosophy which owes its great popularity to the writings of Karl Marx and his American admirers is espoused not only by card-carrying Marxians, but no less by many professed anti-Marxians and self-styled champions of free enterprise. It is the official social philosophy of the major political parties and their candidates. They may disagree on basic problems of abortion and drug abuse or on some incidental issues such as the capital gains tax or the allowable rate of depreciation, but they all espouse the thesis that the economic system breeds economic conflict and, therefore, should be abolished or at least be carefully managed in the name of social justice. The communists and socialists seek to abolish the system summarily; their ideological cousins readily accept the conflict doctrine, but deplore the presumed conflict, and want to alleviate it with the reforms they recommend.

In recent decades the economic conflict dogma has provided the intellectual wherewithal for derivative doctrines of racial conflict, gender conflict, and the youth conflict of the 1960s and 1970s. They, too, divide society in distinct classes of exploiters and victims who form vocal organizations that press their charges and plead their cases in the halls of Congress. To listen to the economic debates in the Congress of the United States is to give ear to furious exploitation charges and the wailing of an assembly of victims.

We reject and repudiate the conflict dogma. The private property order, we believe, is a harmonious order devoid of social and economic conflict. In the words of Adam Smith, it is guided by an “Invisible Hand” which turns everyone’s pursuit of private gain into public benefit and thereby harmonizes the interests of all members of society regardless of class, race, gender, or age. What makes for this harmony is the higher productivity of cooperation and division of labor. Two individuals working together are more productive than two working alone. Two hundred million Americans working together, specializing in their productive tasks and engaging in large-scale production, are more productive per head than a smaller number. Thanks to their cooperation, the supply of goods and services tends to multiply, which improves their living and working conditions. It removes all traces of social conflict.

It is in the interest of every individual to preserve and extend social cooperation and division of labor. In freedom and the private property order, everyone earns the money equivalent of his contribution to the production process. Even in the employ of a profit-seeking capitalist, the competition among employers, the freedom of workers to sell their labor to the highest bidder, and the freedom to be self-employed, all these characteristics of the market order assure that everyone receives his or her full and fair wage. There can be no exploitation in an unhampered labor market.

The “activists” who would use the political apparatus to command and direct economic life summarily reject such explanations. They usually liken economic life to life in a jungle in which one creature preys on another and only the strong survive. To speak of inexorable economic principles that guide human life and of the harmony of interests of all human beings, to the activists, is to suffer from an illusion, engage in wishful thinking, or even wink at cruel exploitation of the weak and sick. They are quick to question the very motives of anyone who casts doubt on the advisability of the use of the political apparatus in economic life. Their spokesmen in the media do not hesitate to cast slurs upon the disciples of harmony as the foes of economic growth and prosperity, as the partisans of inflation and unemployment, the advocates of a polluted environment, and the enemies of peace and harmony. To disagree on the means to be employed is to stand condemned also on the ends sought.

The conflict reporters who may call themselves “liberals” or “moderates” may go even farther. They may spurn the unhampered market order also on ethical grounds as an unfair and amoral system. To them, the criterion of morality is the people’s will, wish, and intent as they manifest themselves in majority votes. They place a high value on individual obedience and on restraints equally imposed on individuals by majority decision. The state is their instrument of coercion, the supreme arbiter of fairness and morality.

In reality, the opinion and judgment of the majority are not the final proof of what is right. Wisdom and justice are not always on the side of the majority. In fact, individuals usually live in greater danger of having their rights invaded and their freedom restrained by the commands of an overweening and self-righteous majority than by the machinations of entrepreneurs and capitalists. Evil is evil; it is none the better for being committed on behalf of the majority.

Hans F. Sennholz

Most legislators and regulators are puzzled and alarmed by this widening income disparity. It’s the very opposite of what they hoped to achieve. They spent trillions of dollars since President Franklin Delano Roosevelt found “one-third of a nation ill-housed, ill-clad, and ill-nourished” and President Lyndon B. Johnson declared “war on poverty.” President Bill Clinton discovered that “the rich are not paying their fair share,” which in 1993 led to stiff tax increases for upper-income Americans. Yet, the gap continues to widen.

It is ironic that the spenders create the very pressures that cause interest rates to rise and capital income to soar. They incur huge budgetary deficits which crowd out business investments, consume capital, and raise interest rates. Simultaneously, they cause wage rates to stagnate or even fall. After all, it is the amount of capital invested that determines productivity and wage rates; to consume capital is to destroy jobs and depress wage rates. The U.S. government is consuming capital en masse, which makes it a driving force for the growing inequality.

The United States enjoys a great stock of productive capital created in the past. But it is one of the worst cases of current saving in the industrial world. U.S. net savings, which are the sum of personal savings and retained business earnings minus total public-sector deficits, amount to less than two percent of gross domestic product. This compares with some seven percent until the late 1970s when the federal deficits were relatively small. Consequently, interest rates have risen steadily as has capital income. Thirty-year treasury bonds now yield more than seven percent, mortgages and mortgage-backed securities more than eight percent.

The Federal Reserve System is adding its weight to the disparity. For several years it conducted easy money policies that pushed stock and bond prices to dizzying heights and created a financial bubble, perhaps the biggest ever. While real hourly wages have fallen since the mid-1970s and many high-paying jobs in manufacturing have disappeared, stock market investors have reaped extraordinary profits. The lion’s share of these profits obviously went to the top 20 percent of households. As long as the bubble lasts they are likely to enjoy the disparity.

The rising burden of corporate taxation and regulation has the same effect. It makes it rather difficult to build plants and factories, stores and warehouses, office buildings and other structures. It forces corporations to embark upon a course of downsizing which consists primarily of labor shedding, asset shuffling, and merg ers. It depresses wage rates while it provides profit bonanzas. Moreover, when government makes expansion well-nigh impossible business may struggle to remain profitable by computerizing operations and releasing unneeded labor. The phenomenal advances of computer-assist-ed technology using much high-skilled and highly educated labor have contributed to the income disparity.

A demographic change, finally, may have contributed its share to the growing inequality in household incomes. As labor incomes decline many wives and mothers feel compelled to enter the labor market and supplement the family income. Many are well-educated and highly-skilled. Being married to well-educated professional men, they form households with very high incomes. They have increased the income gap between affluent Americans and all others.

No matter how we may look at the growing disparity of incomes, it confirms a well-known economic principle: political intervention in economic life is bound to make matters worse. It usually brings about the very opposite of what the legislators and regulators had in mind. In order to attain greater economic and social equality they burden the more affluent members of society. But the extractions consume productive capital, which reduces labor productivity and wage rates while it raises interest rates and the returns on capital owned by the rich. Both effects increase the inequality.

Any policy that seeks to deny or defy human nature is bound to disappoint. Designed to reduce or even eradicate economic equality, it must come to grief at the vast differences in human nature. Some individuals are highly productive, rendering extraordinary services to their fellow-men as scientists, inventors, poets, com posers, entertainers, athletes, and entrepreneurs; others may be unable or unwilling to render valuable services. In economic terms, some have million-dollar productivity, others have little or none at all. In a competitive economic system, they all tend to earn incomes directly proportionate to the value of their services. Government may forcibly interfere with this process through tax-and-spend “redistribution,” but human nature tends to adjust to the force. Making its appearance in the laws and principles of the market, it enlarges the income disparity in order to restore the natural inequality. In recent years, the growing disparity has become another example of the supremacy of economic principle over political force.

Hans F. Sennholz