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Can Politicians Help Us?

Politics / Government Intervention Sep 29, 2010 - 08:39 AM GMT

By: Kel_Kelly


Diamond Rated - Best Financial Markets Analysis ArticleThe word "politician" usually comes with a negative connotation. It often brings to mind thieving, lying, corruption, and malfeasance. Nonetheless, most people seem to look to politicians to manage their world for them, to protect them, and to make their lives better. In every instance of local or national elections, citizens are deeply focused on choosing the politician they think will do the best for their community or nation. They seek politicians with experience, knowledge, insights, and ideas. They seek a leader.

But can our elected officials, even if honorable and well-intentioned, really improve our lives? Let's take a look at the various possible avenues of assistance.

Currently, the main demand placed upon politicians is to create jobs for us. But, since it is companies — not the government — that create jobs, such a task is impossible. Government can expand and draw more workers into its ranks, or it can directly finance the creation of specific jobs in a specific marketplace with taxpayers' money. In either case, a destruction of wealth is involved, and the jobs — unlike private-sector jobs — do not pay for themselves but in fact require ever more taxpayer funding each year, which further reduces capital in the economy.

If jobs are not profitable — if they are not part of a production process that results in creating at least the same amount of sales revenues as the costs that went into generating those revenues — then they use more resources than they create; they destroy wealth. That ultimately means fewer goods available for each person, and at higher prices.

But even if the government subsidizes unprofitable jobs (e.g., green jobs) and "funds" (i.e., subsidizes) that work to make up for its lack of profit, there is still a net destruction of wealth. This is because subsidies come directly from what would otherwise be our incomes.

When money is taken from us through taxes to pay the extra costs required to produce something that we would not voluntarily choose to purchase on our own at that higher total price (i.e., the selling price plus the subsidy we paid out of pocket to make the item "worth" producing), our money is wasted. Other goods we would prefer will not become available because the resources used to make those goods were instead used in making the product we didn't want.

Except for building space stations, military bases, or other government-funded, wealth-destroying activities, government creates and builds nothing. It thus has no power to create real jobs in the marketplace; it can only "manage" and regulate.

To repeat, only individuals and individual companies produce and create; their ideas and capital are what profitably creates jobs.

Year by year, most of the currently existing companies would hire more workers if only they were allowed. For example, suppose a company has $100 to pay out in wages. Suppose further that it has hired 9 people for an average wage of $11.11 per hour each ($11.11 × 9 people =$100). If there had been a tenth person available to perform work at the company and help increase its production, why wouldn't the company have hired that person and spread the $100 across 10 people, instead of 9, at a wage of $10 per hour each ($10 × 10 people = $100)?

"Other goods we would prefer will not become available because the resources used to make those goods were instead used in making the product we didn't want."

It is because the government prevents people from being hired below a certain price, primarily through minimum-wage laws. Since unskilled workers' productivity is low and they are not (yet) capable of bringing in as much in sales revenues as the company would have to pay them for their work, they are unprofitable at the minimum wage level and thus not hired.

Right now, specifically, unemployment is unusually high because the economy is imbalanced. This imbalance was caused by the government's credit expansion, which gave economic incentives for companies to transfer capital and labor to locations where it was revealed unprofitable once the credit expansion ceased (e.g., the home-construction industry).

Currently, the imbalance still remains because the policies of stimulus spending, subsidies, and the printing of yet more money — money that has artificially sustained bank balance sheets but has hardly made it into the real economy — have prevented prices from falling, losses on bad investments from being realized, and thus capital and labor from returning to where they're profitable. If the economy were actually allowed by our politicians to right itself, banks would lend and the surviving companies would become more stable, more profitable, and more eager to hire more workers.

Another way people think that our elected officials can help us is by supporting us financially. Voters accept politicians' proposals for government unemployment insurance, subsidies, and transfer payments of many stripes. But in order to redistribute wealth, wealth must first be taken from someone else. Voters don't usually mind this, since they know that the money they'll receive comes mainly from the rich, who, in their eyes, already have too much.

But what they don't know is that most of the wealth of the rich is not in the form of houses, cars, and boats, but in the form of factories, machines, tools, technologies, and labor payments. Through their ownership of stocks, bonds, private investments, their own companies, and other assets, the wealth of the rich is mainly in the form of capital goods. In other words, the wealthy own most of the tools we use in our jobs to produce the very goods and services we create for ourselves to consume. On top of this, these owners of capital pay us money to produce these things we'll consume!

The more money we allow to be taken from the rich — by way of both higher taxes and the government's inflation — the less capital we ordinary people have to work with, and the less we are able to produce. This means fewer goods and higher prices; it means lower real wages.

The effects of our current "stimulus" packages are similar in nature. Just when companies need as much capital as they can get their hands on, we are taking it from them to give to others to consume. If investors and their companies instead kept this capital, they would be able to provide us with more jobs, more goods, and a higher standard of living. Capital kept by the wealthy will produce more capital and more consumer goods.

Capital taken from the wealthy and given to others to consume is not only destroyed but also represents new, additional wealth that will never be created.

Politicians are also elected for the purpose of protecting citizens from supposedly evil businesses — the entities that have given us virtually every physical thing we have. The first way they do this is in the form of regulation. But what actually protects us are laws defending our property and person from aggression — regulations mostly just allow one group to benefit at the expense of another. Regulations do not benefit individuals.

Regulations such as antitrust laws prevent less-competitive companies from facing new competition.

"If the economy were actually allowed by our politicians to right itself, banks would lend and the surviving companies would become more stable, more profitable, and more eager to hire more workers."

Healthcare regulations that are claimed to help provide us with only the most competent doctors in fact reduce the supply of doctors and raise healthcare costs. To address this problem, the government pays — and prods big businesses to pay — for our healthcare. The overall result is an artificially reduced supply and increased demand for healthcare services, which raises costs at twice the rate of inflation, making healthcare unaffordable to many.

Energy and environmental regulation prevents us from using safe, clean nuclear power; it prevents oil companies from owning and drilling on land, and incentivizes them to drill in less safe territory far offshore, resulting in oil spills. It has also led to intermittent gasoline shortages and higher oil prices in general.

FAA and airline regulation results in delayed flights, hours-long airplane traffic jams on the tarmac, and government-run monopoly airports with security lines sometimes out the door. It also gives fliers much higher airfares due to the prevention of competition: domestic airlines are prevented from foreign competition; and airlines based in some large cities are protected from other domestic competitors by local city councils — such as in my home town of Atlanta, where the city shields Delta from competition from the likes of Southwest and JetBlue.

Similarly, government regulation of the water industry results in water shortages in many states. In many countries, government regulation of power, light, and telephone services bestows on residents constant outages and wait times of weeks or months to get service.

The examples of harmful regulation go on and on for thousands of pages (in the national register). Were it not for these regulations — since they all result in fewer things being produced — we would have many times the goods and services we currently have, and a much higher quality of life.[1]

Another way politicians help "protect" us from businesses is in "managing" the economy. One example: instead of allowing markets to control interest rates, the government chooses a better rate for us so that it can (supposedly) stimulate economic growth and "even out business fluctuations."

In order to do this, it creates new money out of thin air and inserts it into the economy. The new money pushes up consumer and asset prices (most recently housing prices), and gives companies artificial incentives to take on loads of debt and invest in areas they wouldn't otherwise, if guided by market prices. The result is economic booms and busts, financial crises, capital destruction, recessions, and general despair. Citizens, in the end, are "helped" by having been given unemployment, higher prices, fewer savings, and an uncertain future.

Time after time, we choose local and national politicians who we think can make our lives better — but they can't. The very problems we want them to solve are the ones they previously created in trying to manage our lives for us.

"Capital taken from the wealthy and given to others to consume is not only destroyed but also represents new, additional wealth that will never be created."

The truth is that the politicians themselves have no earthly idea how to help us; they have no clue as to what they are doing. But it's of no importance to them, because they are in it for the votes and for the glory of "leading the nation." In fact, the way they get elected is by selling other people's wealth — the means of producing prosperity — for votes.

Therefore, both to win votes, and to appear to be helping us, they engage in the same tired actions over and over — printing money, taxing the rich, offering new social programs, "investing" in new industries, engaging in stimulus spending, raising the minimum wage, etc. On and on it goes, decade after decade, depleting our capital structure and reducing our ability to create wealth and raise real wages.

The irony is that even though voters, over time, don't see these policies alleviating poverty, eliminating unemployment, lowering prices, increasing their real wealth, or giving them increased economic stability, they vote over and over for the very same people who promise more of the very same thing. And at every new election cycle, they earnestly assess the new crop of politicians offering the same old "plans" and try to determine which one can better help them.

We should be able to see now that an "experienced" politician is one who has thorough knowledge of how to buy votes, destroy wealth, and manipulate the economy for the worst. We should see that when we vote for a "leader" with "ideas," we will merely get a good actor who proposes ways to employ the traditional socialist-oriented policies, but with a new twist, such as a new penalty (tax) on producing wealth, or a new program (wealth-redistribution mechanism) to help the "disenfranchised."

We should also now understand that a politician seen as having "knowledge" or a "track record" is simply one who has been around the block and knows how to do these things in a smooth, efficient fashion — and one who has been thieving, lying, and harming citizens for a longer time.

Unbeknownst to the average voter, the thing that can best and most safely improve their lives is what they vote for politicians to protect them from — the free market.

A free market would bring about in an increased amount of capital per person and therefore increased per capita productivity, which in turn would grow the volume of goods and services, thereby lowering prices relative to wages. But to achieve this, it would be necessary for owners of capital to be able to keep their property.

Then, workers would not need government assistance because there would be plenty of jobs available for everyone — along with low-cost health insurance that individuals would purchase for themselves — since there is always more work to be done than there are workers available (and since there would be no wage controls preventing workers from accepting jobs). Transfer payments and government "services" would be replaced with new and increased wage payments.

"The economy works only though individual decisions and choices."

Most importantly, every worker's real wages would increase year over year, as productivity and output increased (and those who contributed more to producing things consumers wanted would earn proportionately more money).

Similarly, in a free market, we would not need government "protection" because we would be protected by tough competition in the marketplace. If one company tried to underpay or overcharge us, there would be many more companies we could turn to that were offering higher wages and lower prices (i.e., market wages and prices) in order to attract us. Companies would therefore find ways to produce with lower costs, a goal they could more easily accomplish with more capital available to them. The more capital they employed and the greater workers' corresponding productivity, the higher the market wages.

And without the government's manipulation of interest rates and the printing of money, there would be no wide-scale malinvestment, and therefore no recessions and financial crises. In this case, prices would fall instead of rise most years, and our lives would generally improve through time.

No politician can improve our lives.

No central planner can determine what is best for each of us individually or in the aggregate. The economy works only though individual decisions and choices.

No politician can help companies produce more efficiently or in a way that better pleases consumers. By using market prices and rates of profit, businesses generally best determine what we individuals want for our lives. If they judge correctly and produce what we need and desire, they succeed; if they don't, they die.

Government, on the other hand, dictates what it wants us to have, and has no system of profit and loss to determine whether it is succeeding in pleasing its "customers," or whether it is producing or destroying wealth in the process. Since it can't determine its success or failure in money terms, it is necessarily always destroying wealth on a net basis. And since government is a monopoly, it does not allow competitors for us to turn to.

Voters always want politicians who will "do a good job." But what is a good job? We seem to think politicians are doing well if the economy seems to be doing well. But this is often an easy illusion to create by means of printing money and artificially — and temporarily! — pumping up asset markets, GDP, and employment levels.

The only real test of whether a "good job" is done is whether or not it has become easier for people — all people — to achieve an increased living standard from one year to the next, given the same amount of labor hours performed.

Indeed, almost any politician can appear to do a decent job just by showing up, since it is companies and individuals instead of politicians who run an economy — except to the extent that politicians stick a wrench in the turning economic wheels.

The only way politicians can really improve the economy — and our lives — is by (1) getting out of the way, and (2) undoing the policies they've previously implemented that hamper it.

In fact, we don't need politicians at all — only laws protecting us and our property. And until one of them comes to us asking to be elected in return for instituting free markets and freedom in general, there is no reason we should assign a politician any value or recognition, and should certainly not take part in voting for them and their harmful proposals.

[1] In Cuba, regulation intended to protect and help citizens includes making air conditioners, toasters, and microwaves illegal. In Belize, citizens are protected by a regulation that gives one company a monopoly on cell- phone service, making its owner very wealthy, but telephone calls very expensive.

Kel Kelly has spent over 13 years as a Wall Street trader, a corporate finance analyst, and a research director for a Fortune 500 management consulting firm. Results of his financial analyses have been presented on CNBC Europe, and the online editions of CNN, Forbes, BusinessWeek, and the Wall Street Journal. Kel holds a degree in economics from the University of Tennessee, an MBA from the University of Hartford, and an MS in economics from Florida State University. He lives in Atlanta. Send him mail. See Kel Kelly's article archives.

© 2010 Copyright Kel Kelly - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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