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 →

Doomed

Dave Davis Commentary, Policy, Uncategorized , , , ,

In our neighborhood, or on our way to grade school, we couldn’t miss the stars in so many windows. We were told the blue ones showed a family member serving in the war. The gold ones meant they had lost a family member. Even at our young age, we were no strangers to crisis and loss.

Even after WWII ended, the sense of crisis and fear didn’t end. The Russians had the atomic bomb, and the Cold War was on. We all had seen pictures and movies of mushroom clouds. Our school, like the rest, brought it home with “Duck and Cover” drills. It seemed we were likely doomed:

Fortunately, the Cuban Missile Crisis showed the Russians, like us, had no interest in mutual destruction. The bombs never dropped, but the memories stayed.

At summer camp, spraying areas and the cabins with DDT was a normal ritual. Mosquitoes were nasty and spread all sorts of bad things. The good news then was we had almost eradicated Malaria, one of the world’s major killers. Then came Rachael Carson’s book, “The Silent Spring,” which told us in no uncertain terms that DDT was deadly to birds and probably to humans. Exposed repeatedly, we were doomed.

Later, our fears proved overblown. DDT wasn’t going to kill us after all. The chemical that had Malaria, which cost millions of lives worldwide yearly, on the run wasn’t so bad after all. Unfortunately, millions DDT might’ve saved were lost when most of the world, including us, took Carson’s overblown warnings to heart and banned DDT. Children were at the forefront of the deaths.

It wasn’t long before we faced the distinct possibility that, because there were too many of us, we would face famine. Even those who survived would face shortages of everything. A “Population Bomb” awaited us because Stanford Biologist Paul Ehrlich showed in his 1968 book that the Earth couldn’t sustain the massive population growth since the Industrial Revolution. Ehrlich became a fixture on TV, and the fear spread worldwide. We were doomed.

Continue reading →

Impending Crises Get Worse

Dave Davis Commentary, Policy, The Middle East, Uncategorized , , , ,

A little over a month ago, I pointed out two crises that aren’t getting the kind of scrutiny one might expect in an election year. Just because we’re talking far less about them than we are about hating Trump or socialism doesn’t mean our debt crisis and a losing war aren’t churning just below the surface. Like all impending crises, they can’t be ignored forever.

The Federal Reserve Board (FED) finally took minimal action, acknowledging the government’s longer-term bonds were yielding more than at any time in the last thirteen years. More than in 2022, when inflation was above 9%.-in fact, higher than at any time in the last 13 years. The Fed raised short-term rates by a whopping quarter point. While this is the first rise in years and shows a change of direction, it is the least it could do:

By reducing the amount of credit available, the Fed makes buying even more painful. In some cases, some consumers and businesses can’t borrow at all. Rather than increasing supply to arrest or lower rising prices, raising interest rates reduces demand. Less demand means less economic activity, slower growth, or, worse, a recession.

The quarter-point rise alone won’t change much. The rise in 10-year and 30-year government bond yields had already pushed up rates on mortgages and auto loans. The FED is just playing catch-up.

Still, President Trump has blasted the raise. He rightly sees it will only raise prices, and that further rises might slow the economy. No politician wants that, and Trump has always demanded lower rates no matter the conditions. He sent his trade advisor, Peter Navarro, to argue that rates should be down to one percent.

The problem is that the President tells us this is the best economy ever, but we will still run a two-trillion-plus-dollar deficit. If we run big deficits in good times, our $40 trillion deficit will keep growing rapidly. This situation means more and more Government debt on the market. With the looming shortfalls in Social Security and Medicare, the market can only see expanding supply, putting downward pressure on bond prices. Lower prices mean higher rates—plain old supply and demand.

These deficits come at a time when the Artificial Intelligence Revolution (AI) is consuming large amounts of capital, adding to pressure on the capital markets. AI will likely lower the cost of goods and services in the future, but right now, it uses gobs of capital.

In any case, the FED’s ability to affect the bond market is limited by its still-huge underwater portfolio of longer-term bonds accumulated through its previous actions. At the same time, interest payments continue to grow, adding to the deficit.

Continue reading →

Delusions

Dave Davis Commentary, Policy, The Future Party, The Long Journey to "More", Uncategorized , , , ,

“If the Republicans win the House of Representatives and the United States Senate, both of them,” President Donald Trump said at his midterm convention, “I will issue a dividend to every adult citizen in the United States of America for $5,000.” As the New York Times (NYT) tells us, in 2020, Democrats in Georgia pointed to $2,000 coronavirus relief checks if their party took control of the Senate. Politicians always promise more cash or other monetary benefits if you’ll vote their way:

The Socialist Party of America (DSA), which exerts more and more influence on the Democratic Party, promises either lots of free stuff or more cash in your pocket through things like greatly expanding the minimum wage. All these promises come against the backdrop of “The Affordability Crisis.”

The crisis is just a way of saying prices are rising faster than our ability to pay them. Both parties point to putting more dollars in everyone’s pockets as the answer. But does this make sense? Say ten people are in line to buy one of the ten parcels of necessities needed to survive. Each has $100; the necessities, to no one’s surprise, cost $100. Now President Trump, or Mayor Mandami, comes along and gives each $50. Everyone has more money in their pockets, but now the price of necessities has risen to $150. Unless supply increases, this is the only outcome.

Donald’s or Zohan’s largesse runs aground because of the Law of Supply and Demand. It still rules, as it has through the ages. Simply put, if Demand exceeds supply, prices will rise. Increasing Demand without more supply keeps prices rising.

Increasing supply to meet or exceed Demand stops inflation. However, this solution requires capital investment. Planting more acreage, building a factory, drilling wells, ships to bring in imported goods, or opening a mine- whatever is needed to increase supply demands capital.

Capital is forgone consumption, or put another way, savings, and the positive returns on them. If you lend at interest or invest directly in assets that grow in value, you have more capital, but you also face the risk of loss. Not every well finds oil, gas, or even water.

Continue reading →

What’s Radical

Dave Davis Commentary, Policy, The Future Party, Uncategorized , , , ,

When I talk with young people, I’m struck by how, whether they’re talking about Make America Great Again (MAGA) or Democratic Socialists of America (DSA) ideas, they’re sure they’re taking Radical, Revolutionary positions. Further, these ideas will pull a moribund America out of the morass.

They’re certain about tariffs, government control of or ownership of industry and commerce, severe restrictions on immigration or law enforcement, and that those in government know best. How we get our healthcare, or are educated, is best left to government determination.

Often, both extremes of the two dominant political parties are very close in their reasoning. They attack constitutional speed bumps or procedural impediments, such as courts or the Senate’s rules. Belittling or chastising judges at the highest levels is common to both. Even the makeup of the Supreme Court is on the table: change the number of Justices, or force some into retirement.

Get rid of the Senate’s filibuster rule, or the Senate altogether. Both say that when they’re the majority, nothing should stand in the way of their desires. Subsidies to those they favor seem never-ending—we see antisemitism in both.

People engaging in unfettered commerce can create wealth disparity or run counter to national aims. Government must regulate, or even own or control, the means of production, or any other part of the economy, for the public good. Markets are inherently unfair.

This coalescing of the parties has given rise to the horseshoe theory of politics; at the extremes, the parties are actually close together. Some people might see this as a good thing; the dynamic parts of each party are coming together in a new system that will improve humanity’s future. This idea seems to give some people a sense of purpose.

To those with more than a passing interest in history, this means a top-down government of rule by edict, avoiding imports in favor of domestic producers, the native over others, people are dealt primarily by their class, and acquiescence to government and its religious counterparts, as the font of knowledge; all this seems a throwback to another era. In fact, it could be any era before 1776. For thousands of years, agrarian-based societies worldwide were organized along these lines.

For all those years, human progress was glacial. Those in the lower classes rarely rose above subsistence, while those in the top educated class garnered most of the available goods. Those involved in commerce did so at the sufferance of the rulers.

As none of these younger people in the U.S. ever fully lived under such systems, it can’t be nostalgia, but they may long for some romanticized version. Somewhere in their education and their other sources of information, they formed conceptions at odds with reality. Unaware of their history, the bromides they espouse feel fresh and revolutionary, rather than reactionary to the modern world.

The most radical revolution able to complement and foster a rapidly changing world, breaking with the past’s near stagnation, is our own. I strongly suggest Gordon S. Wood’s Pulitzer Prize-winning “Radicalism of the American Revolution” to understand the radical break with the past our revolution wrought.

Continue reading →