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  • The Unseen Cost of Government Largesse

    The US government recently hit its $31.5 trillion debt limit after years of careening baseline spending on entitlements combined with emergency COVID-19 spending in the last few years to produce record-busting deficits. The new Republican majority in the House of Representatives, elected largely on economic concerns like inflation and runaway spending, now faces an obstinate Senate and White House. A showdown appears likely as does the ritual brow-beating of all those who object to simply raising the debt limit “without conditions,” as President Biden demands.

    To those who will inevitably cry, “Don’t use the debt ceiling as a negotiating tool!” over the coming weeks and months, it should be pointed out that it is the only tool that has been even remotely effective at taming Congress’s appetite for spending. In the same way that an intervention is only possible when a drug addict is in crisis, debt limit negotiations are the only context in which Uncle Sam has accepted even modest constraints on government spending in recent decades.

    Conservatives and libertarians rightly decry the rapidly-expanding national debt as an embarrassment, a threat to the nation, a root cause of inflation (as the Federal Reserve must expand its balance sheet to purchase the Treasuries that finance these huge deficits, as happened most clearly in the pandemic’s peak), and a promise of higher future taxes. While all these are accurate observations, one effect of massive government spending and deficits is often overlooked in the standard conservative critique: the forgone private investment of capital and therefore forgone economic growth, often termed the “crowding out effect.”

    The basic idea is that there exists a total sum of money, or financial capital, that individual and institutional investors are willing to loan out or invest. Most economists call this the “loanable funds market.” The supply of loans, as with any supply curve, slopes upward and to the right. In other words, as the interest rate (the price of a loan) rises, more people will be eager to supply loans. In contrast, the demand for loanable funds slopes, like a normal demand curve, downward and to the right. That is, as the interest rate goes down, more people are interested in borrowing money. Just think of any normal supply-demand graph, but with the good in question being a loan rather than a physical good or a service, and the vertical axis labeled “interest rate” rather than “price,” as in other markets.

    The demand for loanable funds is a function of how much capital investment businesses need (which is itself a function of how profitable those capital investments are), what quantity of money consumers need for purchases like homes and new vehicles, and how much money the government needs to borrow. In a game where the total supply of loanable funds per year is set, say at $5 trillion, every $1 trillion the government runs up in deficits is $1 trillion less available for private investment in the innovations that improve quality of life, bring us new medicines, and create new jobs.

    Increased government deficits shift the demand for loanable funds to the right. As any student of elementary economics knows, this increases the price, or in this case, the nominal interest rate. Many private sector projects that make sense at 4 percent interest are no longer acted upon if the government runs such a large deficit that the interest rate must increase to 7 percent for investors to shell out the cash necessary to finance that deficit. Increasing the supply of loanable funds through monetary expansion, as happened in the COVID pandemic with breathtaking speed, can temporarily hide this effect. However, this spurs inflation that reduces real returns and hampers economic growth (the stock market’s dismal returns since runaway inflation started in late 2021 is one example of this result).

    In contrast to the Keynesian “money multiplier” theory, which insists that government spending stimulates the economy by circulating money via transfer payments that otherwise would have remained in savings and uncirculated, savings in nearly all developed countries are not locked away gathering moths and rust, but invested. Of every dollar put in the bank, more than 90 percent is invested in loans for commercial enterprises, in home loans, and in bonds, and this doesn’t account for the fact that a larger and larger share of surplus savings in the United States are not in the traditional banking system, but in brokerage accounts, 401(k)s, and elsewhere.

    Government spending does not multiply the economic power of money, it diminishes it. If the opposite were true, Cuba, North Korea, and Venezuela would be among the wealthiest nations on the planet, since nearly all economic activity is facilitated through government spending in those nations. That they are not, but that nations with relatively free markets such as the United States, Singapore, the United Kingdom, and Japan punch above their weight economically suggests that private investment in the innovations and technologies of tomorrow everywhere and always beats government transfer payments in facilitating economic growth.

    Every dollar the government must borrow is a dollar not available for private businesses or individuals to borrow, and that reduces future economic growth and job creation. With America’s debt now hovering near 125 percent of GDP (before netting for debt held by government entities) and deficits topping $1 trillion yearly as far as the eye can see, we can no longer ignore this drag on the American economy.


    Nathan J. Richendollar

    Nathan Richendollar is a summa cum laude economics and politics graduate of Washington and Lee University in Lexington, VA. He lives in Southwest Missouri and works in the financial sector. 

    This article was originally published on FEE.org. Read the original article.


  • Price Controls Should Remain on the Ash Heap of History

    With inflation hitting Americans at the highest level in forty years, the debate over price controls, a policy tool long considered defunct, seems to be reigniting. As prices surge, many prominent economists including Robert Reich, the former US Secretary of Labor, and Todd Tucker, Director of Industrial Policy and Trade at the Roosevelt Institute, have recently come out in favor of government-imposed price controls.

    Even the UK’s new conservative prime minister, Liz Truss, announced a plan to fight inflation by capping household energy prices.

    Regardless of whom you blame for the inflation, there could not be a worse way of fighting it than with interventionist price-control measures. As any Econ 101 student could tell you, prices naturally settle at the point where supply meets demand in a market economy. But when the government imposes an artificial cap on prices, supply declines and demand increases, creating a shortage. After all, companies are less inclined to create and distribute products if they can’t get a good price for them. In a survey of forty-one academic economists recently conducted by the University of Chicago’s Booth School of Business, sixty-one percent said that price controls like those imposed in the 1970s would fail to “successfully reduce U.S. inflation over the next twelve months.” Just 23 percent of those who responded said price controls could reduce inflation (and all reported lower levels of confidence in their prediction).

    For older Americans, the price control debate is nothing new. In August of 1971, President Richard Nixon announced a 90-day freeze on most wages, prices, and rents. It was a short-sighted attempt to combat the rise of consumer prices that had reached their fastest pace since the Korean War. Following Nixon’s announcement, markets rallied, and seventy percent of Americans backed the plan in polls. However, Nobel-Prize-winning economist Milton Friedman predicted Nixon’s plan would end “in utter failure and the emergence into the open of the suppressed inflation.” As predicted, prices soared as soon as controls were lifted, exposing the frailty of government interference with pricing.

    Among the many bizarre and tragic consequences of Nixon’s price controls was the appalling specter of farmers drowning millions of baby chicks (or gassing them).

    As the price for chickens was controlled, but the price of the grain used to feed them was not, they could no longer be sold profitably. Sadly, this meant that the only way for the farmers to avoid losses was to kill them. This is but one example of the unintended consequences of excessive government intervention that prevents market forces from operating.

    When left to their own devices, prices tell us vital information about our economy. They pinpoint scarce resources, indicate consumers’ wants, and drive entrepreneurship and innovation. But when the government attempts to cap prices to “protect” consumers, this information becomes distorted.

    On an emotional level, the impulse for price controls is understandable. It’s easy to look at your surging gas station or grocery store bill and long for the temporary relief that lower prices would bring. However, avoiding this misguided extreme will allow for a much clearer picture of the state of our economy moving forward and allow us to focus on responses that will actually bring down inflation.


    Aadi Golchha

    Aadi Golchha is an economic commentator and writer, proudly advocating for the principles of free enterprise. He is also the host of The Economics Review podcast.

    This article was originally published on FEE.org. Read the original article.


  • DC’s Stance on Ukraine Is as Divorced From Reality as Its COVID Regime

    Theirs not to make reply,

    Theirs not to reason why,

    Theirs but to do and die.

    Into the valley of Death

    Rode the six hundred.

    From, “The Charge of the Light Brigade” by Alfred, Lord Tennyson

    I was a fourteen-year-old freshman at St. Joseph’s Collegiate Institute in Kenmore, N.Y. when I was assigned my first term paper for Mr. Chaya’s World History class. The list of topics included the Charge of the Light Brigade. That’s the one I picked.

    Like any boy that age, I still retained a belief in the glory of war, something Tennyson seems never to have outgrown. This despite being trained in grammar school to scurry from my desk and duck against the wall under the classroom window when the air raid siren sounded.

    The possibility of being nuked by the Soviet Union at any moment had been a fact of life for all of my life at that point and would be for twelve more years.

    The term paper assignment was the first time I was asked to research a historical event, rather than just read a textbook summary about it. By the time I finished, I had my first inkling that “military intelligence” might just be an oxymoron and perhaps war wasn’t the glorious affair Tennyson had cracked it up to be.

    To this day, when I hear the lyrics, “a good old-fashioned, bullet-headed, Saxon mother’s son” in the Beatles song “Bungalow Bill,” I think of James Brudenell, 7th Earl of Cardigan, who led the aforementioned six hundred light cavalrymen into the teeth of Russian artillery.

    The Charge of the Light Brigade occurred during the siege of Sevastopol during the Crimean War (1853-56). Despite the Light Brigade disaster, the port city finally fell to the British and French allies, but not before the Russian Empire sank its entire Black Sea fleet in the harbor to prevent it from falling into enemy hands.

    That desperate act should provide a warning to Washington.

    The Russians had to fight for Crimea again during the Russian Civil War following the Bolshevik revolution. It fell to the Germans during WWII after a bitter 250-day siege, only to be regained by the Red Army in 1944.

    I never dreamed I’d be writing about the same port city thirty-six years after that first term paper. In 2016, the new global empire, the United States, having successfully orchestrated a color revolution to oust Ukrainian president Viktor Yanukovych, was in a stare down with Russian Federation president Vladimir Putin over his annexation of Crimea.

    Yanukovich had been falsely portrayed as “pro-Russian” by NATO in its haste to bring Ukraine into the European Union. The coup was the last straw for Putin after watching the U.S. break its promise to Gorbachev not to advance NATO “one inch eastward” in exchange for Gorbachev’s agreement to the 1990 reunification of Germany.

    A look at a map of NATO in the ensuing 30 years since that promise puts a somewhat different light on Russia’s troop buildup on the Ukrainian border and at least calls into question just who is the aggressor in this situation.

    As I wrote back in 2016, Sevastopol is one of the few reliable Russian ports that remains ice-free all winter. Syria is home to another. If that doesn’t inspire skepticism regarding Washington, D.C.’s humanitarian motives for orchestrating regime change operations in both countries—while remaining bosom buddies with the brutal regime in Saudi Arabia—then, as my friends in the American southeast would say, “bless your heart.”

    President Biden told Reuters on New Year’s Eve that he had warned Putin, “if he goes into Ukraine, we will have severe sanctions. We will increase our presence in Europe, with our NATO allies, and there will be a heavy price to pay for it.”

    Sanctions don’t sound too ominous if one has zero historical perspective, including, say, the “sanctions” against the Japanese Empire in 1941. It doesn’t really matter who was right or wrong. Sanctions eventually lead to war if their consequences become dire enough.

    It doesn’t matter so much who is right or wrong on the matter of Ukraine, either. The reality is this: The Russians are never going to give up that port. They’ve bled for it in the past far more than any American army has ever bled for anything. It is an existential matter for them.

    In 1856, they sank their entire Black Sea navy before giving up Sevastopol. What would they be willing to do today?

    Meanwhile, it would make not one iota of difference to Americans living in the United States if Russia annexed all of Ukraine, much less Crimea. Washington’s interests in the region are purely imperial and contrary to those of most U.S. citizens. It is also questionable that the U.S. could win a limited conflict in the region against Russia, given the logistics.

    It is equally unrealistic that Russia could win a full-scale conventional war against NATO. The U.S. alone had a military budget in 2020 more than ten times that of Russia. That would leave Russia with only one alternative before surrender.

    Since the dissolution of the Soviet Union in 1991, Washington has thought of itself as the “shining city on the hill” leading a “new world order” of democracy and peace. Considering its recent exploits in the Middle East and Ukraine, in 2021 it more resembles a drunk bully stumbling around the world slurring its words and picking fights with smaller opponents.

    That Russia can be treated likewise is as divorced from reality as Washington’s belief it can stop the spread of a respiratory virus with lockdowns and vaccine mandates. But as damaging as the COVID Regime has been to American society, Washington’s delusions about bringing Russia to its knees could result in far worse.

    This article was republished with permission from tommullen.net.

    Tom Mullen

    This article was originally published on FEE.org. Read the original article.