Will Anything Change?

Dave Davis Commentary, Policy, Uncategorized , , , ,

While we wait for the midterm election results, I’ve been struck by how the election has largely focused on one issue: “affordability.” Everyone knows prices have risen sharply, starting in the Biden administration. Since January 2021, prices have risen 28.32% cumulatively. Wages during the same period rose only 22.7%, at best. No wonder people feel they’re falling behind at month’s end:

What we’re not hearing is how we first arrest the rise and then bring prices down from either major party. “I feel yor pain,” worked for Clinton; we need more now.

I’ve pointed out that the Law of Supply and Demand tells us that when demand exceeds supply, prices rise because too many dollars chase too few goods and services. The Federal Reserve (FED) can tighten the money supply until demand falls. FED Chairman Paul Volcker did that to stop the Great Inflation of the 1970s, but it caused a painful recession, with unemployment hitting almost 11%. Cutting demand in this way can feel worse to many than the inflation.

It wasn’t until we eased supply constraints by lowering capital taxes and deregulating key areas that supply met demand, real growth followed, and inflation was tamed. I’ve written about all this before, but have our two major parties seen the light?

Subsidizing everything from groceries to healthcare only increases demand. Price controls on basics such as rent distort supply. Yet that seems to be the bedrock of Democratic policies.

Republican policies are nothing if not contradictory. Cutting taxes on capital and cutting regulations will encourage supply growth, but tariffs disrupt supply. Constant tariff changes create confusion and stop business planning. If someone, like farmers, is really suffering from retaliation, send them money. Sounds like the Democrats.

The one area both seem to agree on is ending the Iran War. There’s no doubt the conflict has added to inflation, with a sharp rise in petroleum-based products and natural gas. However, neither has a plan to obtain an acceptable peace.

Beyond knocking off much of Iran’s leadership and destroying a lot of its military assets, the administration in the beginning lacked a coherent plan for what came next. The resulting standoff, with two major trade routes in constant jeopardy, keeps prices high.

Now we hear the administration is planning heavy attacks after the midterms. Another carrier group is on the way, possibly to add more firepower. It is fair to ask: to what purpose?

Operation Epic Fury in February showed a serious absence of planning. Without any land component, regime change wasn’t in the cards. As I assumed at the time, arming and training an uprising within the Islamic Republic was a mandatory piece.

Continue reading →

Election Twists

Dave Davis Commentary, Policy, Uncategorized , , , ,

One week out from the midterm elections is a good time to see how things are perceived, so we can judge what happens when the votes are counted.

Early on, most experts thought Republicans could lose the House, with Democrats needing only to flip a few seats. The Senate, however, looked safe for the GOP with a favorable map. Now polls show Democrats in a good position to take both houses.

This change may lead to a very contentious future. While the House can give an administration a tough time, losing both Houses can cause real pain. Confirming appointments for itself and the judiciary will be difficult, and in many cases impossible. If the two houses of Congress disagree on legislation, they go to conference for possible compromise. With both houses Democrat, that’s far less likely.

Facing opposition legislation, Trump can only veto—anything he proposes is a dead letter. He has more leeway in foreign affairs, but even there he may run up against the power of the purse. The administration will face endless congressional hearings.

An impeachment may be in the cards. The Democrats may think the third time is the charm. Trump could be the lamest lame duck.

Trump has only himself to blame. When he took office, inflation had declined to 3% year over year. Still high, but down from a whopping 7% under Biden. While the Big Beautiful Bill had some questionable stuff, like no tax on tips, it had enough supply-side elements, when paired with regulatory reform, to help supply meet demand—a proven way to bring inflation down:

*The latest inflation data (12-month based) is always displayed in the chart’s final column.

Then came Trump’s “Liberation Day,” when he slapped big tariffs everywhere. Tariffs raise prices. How did this square with Trump’s promise to bring them down? It didn’t. It contradicted it. Even though the Supreme Court found the tariffs illegal and refunds are going out, Trump doubled down with new tariffs. Confusion reigns. Businesses don’t invest much when they’re confused.

Not content with his tariffs adding to prices, last February he decided to attack Iran. Claiming it would be a short war, here we are with trade restricted in two of the world’s most important trade routes. This situation is raising prices worldwide. Still without a workable war plan, there is no end in sight. Instead of falling to the Federal Reserve’s 2% goal, we’re at 3.7% and likely heading toward 4%.

Continue reading →

Capitalism Under Fire III

Dave Davis Commentary, Policy, Uncategorized , , , ,

I probably should’ve started here. Any discussion of capitalism assumes people understand the role of capital. This may be a false assumption. Ask your friends or others to define or describe capital. You might get a blank stare, or something like, “Oh, that’s stocks and bonds.” Can you define or describe it?

Apparently, this lack of awareness is widespread. I asked AI whether many Americans could describe economic capital. The answer is that very few can. On the other hand, surveys show that at least 17% can define socialism, and many more have some idea of it. This knowledge includes Karl Marx’s concepts like his convoluted labor theory of value:

However, capital, unlike Marx, isn’t hard to understand. The easiest way to understand capital is to think of it as foregone consumption. Eons ago, our hunter-gatherer forebears would forage for grains and fruit over distance. At some point, they brought some back closer to the cave. Maybe some dropped on the ground, and new plants grew. Someone noticed and, rather than eating everything on later forays, planted some of the seeds instead. When the crop ripened, the planter saved some of the harvest for the next crop, again foregoing consumption; in agriculture, we called the saved amount seed corn. In economics, we call it capital.

If you want similar crops in the future, you save a similar amount of seed, but to grow more, you need more seed, more capital. Growing the tribe’s economy requires ever-expanding seedcorn-capital.

Of course, risk is ever-present. Rats may eat your saved seeds. A flood may wash away the crop. Drought or locusts may loom. Thieves and hostile governments, both foreign and domestic, are ever present. So capital is also a bet on the future. It stands to reason that the most successful farmers can take the biggest risks. Through their knowledge and resources, they have the best chance of overcoming the risks.

Properly assessing the risk-reward ratio is often key to moving forward. The old saying, “nothing ventured, nothing gained,” is true for people and societies. Refusing to take a chance guarantees you won’t make progress.

Continue reading →

Capitalism Under Fire II

Dave Davis Commentary, Policy, Uncategorized , , , ,

No monopoly lasts without government sanction. That’s just a fact. If you can think of one, I’d like to know. In competitive free markets, dominance is fleeting; look at American Online, Sears, IBM, or Microsoft.

You might ask, what about the Gilded Age Robber Barons? Didn’t Standard Oil and U.S. Steel use their dominance to gouge the public? Even then, both competed in the world market and faced plenty of competition. Instead, out of fear of competitors and to reach lower price points that expanded their markets, they lowered their product prices during the period.

Given the thousands of years of government favoritism, patronage, monopolies, and corruption, pointing to Capitalism’s so-called moral deficiencies is laughable. If Government didn’t control so much of the economy, we wouldn’t need the vast army of lobbyists encamped in Washington. All seek some favor or try to prevent others from using Government favor against them. We now mimic a Royal Court, attracting those seeking benefits:

The recent Skydance-Warner Bros merger illustrates how far down the road to corruption we’ve come. The Government, with its power over “monopolies ” and “restraint of trade ” at various levels, seems to have extracted large sums from the Ellisons and their company, Skydance, to ensure completion of a merger they had already committed large sums to.

No one in their right mind thinks the merger could create a media monopoly or meaningfully restrain trade. At 27%, its largest share of any media sub-market, Motion Pictures is hardly a monopoly—just a large entity in a vast market. Still, the Ellisons contributed 45 million dollars to the Trump ’24 election campaign, and more to other Trump-favored endeavors.

Then many states jumped in through their attorneys general, forcing Skydance to commit huge sums for favored constituencies. Doesn’t this sound more like doing business in a banana republic than in the U.S.?

Adam Smith was, in fact, a moral philosopher; he saw greater virtue in businesses serving their customers rather than their rulers. A business that loses its customers’ confidence will go out of business, but if the Government protects it from competition, serving the public matters little. The invisible hand sorts the trustworthy from the rest.

If you order from Amazon today, you expect it to arrive on time at the agreed-upon price. Even as big as it is, it works hard to keep your trust, knowing that if it doesn’t, someone else will. Do you feel the same when you deal with the Government? How about the IRS or the motor vehicle department?

Continue reading →

Capitalism Under Fire I

Dave Davis Commentary, Policy, Uncategorized , , , ,

It is widely reported that Socialism is more popular than ever in the U.S. and is gaining on Capitalism as our preferred economic system. This shift is most prominent among young people, many of whom claim that Capitalism just hasn’t delivered for them. Because of Capitalism’s failures, we are in the middle of an affordability crisis.

While this may make some sense on the surface, a closer look is warranted. Affordability is just another way of saying prices are too high and rising. In other words, Inflation. Economist Milton Friedman famously stated that “inflation is always and everywhere a monetary phenomenon,” arguing it results from the money supply growing faster than economic output—too much money chasing too few goods.

Capitalism means the least government interference in the economy. Private enterprise has no control over the money supply. Only the Government, through the Federal Reserve (FED), has that power. The FED is a 1913 progressive creation with a poor record on Inflation:

Except for wars, sustained rising prices were virtually unknown before the FED. In fact, during the Gilded Age, a period with little government interference but amazing growth, prices consistently fell, increasing real wages. Inflation, then, is a government phenomenon. Blaming Capitalism is misplaced. Looking to the Government for solutions flies in he face of experience.

This situation led me to look more closely at the other prevalent criticisms of Capitalism. The first thing you find is this: Adam Smith and his followers, moving away from the government-controlled mercantilist and feudal systems then in existence, never used the term Capitalism. Instead, they used free markets or free enterprise. Smith himself called it a “system of natural liberty.” French socialist Louis Blanc used the word capitalisme around 1850 to mean “the appropriation of capital by some to the exclusion of others.” He obviously meant it as a pejorative.

Maybe this explains why the media and academia use Capitalism rather than free market or free enterprise when referring to an economic system relying on markets to direct investment and set prices?

The Gallup poll shows Socialism’s favorability rising to 43% vs. Capitalism at 53%, while Free Enterprise in the same poll sits at 77%. Yet Capitalism and Free Enterprise are considered synonyms in every dictionary, meaning essentially the same.

Curious, I asked AI what the major failures of Capitalism were touted. They centered on five general n deficiencies. Unequal distribution of Wealth, market failures, prioritizing demand over morality, environmental degradation, and labor exploitation make for quite an indictment.  

Since we aren’t gods and aren’t perfect, a reasonable inquiry into this bill of particulars should ask: compared to what? Has any other system done a better job in these areas?

Continue reading →