By Bob Gore
Imagine a mansion which has stood for over two centuries and remains the grandest residence in a fine neighborhood. The owners have kept up its appearance--its stately facade impresses both visitors and neighbors alike. However, termites have devoured the mansion's wooden frame, dry rot has eaten at the walls, and subterranean subsidence eroded the foundation. Unable to withstand these multiple stresses, one day the mansion, to the surprise and terror of the neighborhood, collapses in a heap.
That, in a nutshell, is this newsletter's perspective on the United States of America. There is no shortage of grand and great people, places and things in this country, and there's no shortage of hosannas for anything that looks like good news. However, if you're tired of hearing about teenage volunteers changing bedpans, the three heroic survivors of a month's incarceration by the Serbian military, Hillary Clinton's run for the Senate, the late, great John F. Kennedy Jr., and you are looking for critical commentary on those important, but unmentionable issues-- the federal government's ever increasing share of the gross domestic product and the rising tax burden, the ineffectiveness of the war on drugs, Washington and the media's dive on the Clintons' scandals, corruption in other parts of the government besides the Department of Defense, the fate of IMF bailouts, and the manifest failures of taxpayer funded education, antipoverty programs, gun control, and fill in the blank, this might be the place for you.
Linear Logic will not reveal any sensational scoops and it will not make you a millionaire in a short period of time, although it will occasionally have something to say about the financial markets. It will attempt to analyze facts and events culled from the public record in a step-by-step, rational manner--hence the name Linear Logic, (also known as common sense, which would have been a swell name for the newsletter, but it has already been used). A century of taxpayer financed education is working exactly the way all government programs work. As the general ability to reason fades, the obvious remains ungrasped and questions that should be asked hang in the air like flatulence, ignored, but causing unspoken discomfort. While it will not have all the answers, this newsletter will attempt to both grasp the obvious and ask the right questions.
To state our premises, our perspective begins with the concept of individual rights. The story of history is the struggle to define, delineate, and protect individual rights. A right, properly understood, must be both universally held and its exercise by one individual must not preclude its exercise by another. The rights to "life, liberty and the pursuit of happiness" meet these criteria, so called "rights" to economic benefits (a "decent" job at a "decent" wage, medical care, education, etc.) do not. An individual who engages in productive labor either does or does not have a right to keep and dispose of the product of his efforts. To say that he does not have such a property right implies that another individual has a superior claim. We cannot all exercise claims to other people's wealth, because wealth must be produced before it can be redistributed, and if everyone is a claimant, there is nobody left to engage in production. If some are responsible for providing economic benefits to others, then such "entitlement rights" cannot be universal, and their exercise by the favored group precludes their exercise by the unfavored group.
As fundamental as one's property right to the product of his own labor are the associated right to voluntarily dispose of that product, either in exchange for other goods or services, or through bequest at death, and the right to contract for either present or future benefits in exchange for a corresponding benefit or a promise of a benefit. The central political problem throughout history has been how to subordinate government to the role of protector, rather than the destroyer, of these fundamental economic rights. Current jurisprudence places political rights in a more important position than economic rights, but if a government takes most or all of your income, it counts for little that you are free to complain about it. The framers of the U.S. Constitution made no such distinction, attempting to subordinate the federal government to the role of protector of both economic and political rights. Unfortunately, the Constitution contains a number of contradictions and ambiguities, which usually have been resolved in favor of expanding governmental power at the expense of individual rights. In many instances the plain language of the document has been ignored or invalidated by later amendment.
Once a government violates individual's economic rights through redistribution or interference in the free markets for goods and services, it becomes a kleptocracy--taking wealth from some individuals for the benefit of others, changing the terms of exchange which two parties otherwise would have set for themselves, or preventing exchange altogether. Somebody once said that those who rob Peter to pay Paul will always get Paul's vote. Even if a vote is all politician receives, the process is inherently corrupt, since it is based on the forcible extraction of wealth. Our own government keeps a large share of the wealth it steals before it redistributes it, amplifying the corruption. The invidious effects of regulation are not as well understood, but are just as inherent in the regulatory process. Somebody stands to gain and somebody stands to lose when government changes the terms of exchange, thus, there will always be an incentive for both parties to attempt to influence the government officials involved.
Since in a kleptocracy productive people's ability to produce is hamstrung by regulation, and their rights to keep, exchange and bequeath what they produce are neither recognized nor protected, while those who do not produce get the government to act for their benefit, the predominate political philosophy becomes the "something for nothing" philosophy of entitlement. In the U.S., one political party's implicit philosophy is that of entitlement, while the other party occasionally slows the redistributive trend, but never explicitly proclaims its support for individuals' economic rights.
The "something for nothing" philosophy has trickled down from the government and pervades every aspect of American life. Exhibits A through E are the explosive growth of gambling, the stock market mania, tort law, the Federal Reserve system and the self esteem movement. Something for nothing is self evident in the current gambling and stock market manias. Both manias are encouraged by government--the occasional large payoff distracts attention away from their own theft, and some of the money finds its way into government coffers. Once tort law allowed individuals redress for private wrongs, now it too has become a quasi lottery. It has become a means of legalized extortion, with legal rules that assign liability without regard to fault, and damage awards that bear no relationship to the actual damages suffered. The biggest beneficiaries have not been victims, but rather the tort bar. Not surprisingly, some of their newfound wealth becomes political payola, so the politicians will not change the rules of their game.
The Federal Reserve rests on the dubious assertion that all sorts of good things--full employment, rising financial markets, general prosperity--can be had when wise bureaucrats turn on and off the printing presses. The actual process is a little more complicated, but the basic premise of modern central banking is that real benefits (something) flow from fiat money (nothing) creation. One inarguable fact is that no central bank has been able, over a sustained period of time, to perform its basic function--preserving the value of the unit of exchange. All central banks depreciate their currency, the only variable is the rate of decay. In the U.S., the Federal Reserve has depreciated the currency roughly ninety-nine percent since its inception. Currency depreciation devalues debt and kleptocratic governments are generally debtors. Currency depreciation is another way kleptocracies extract wealth.
Self esteem used to be thought of as an effect, not a cause. Self esteem, a positive value, stemmed from integrity and the productive exercise of one's capabilities. The current self esteem movement reverses that formulation, maintaining that self esteem comes first. Criminals commit crimes and bums do not work because they lack self esteem, and until some outside agent, preferably a government program, establishes or restores their self esteem, they will continue their deleterious behavior. This may be the ultimate something for nothing shell game. All sorts of positive behaviors (something) will flow if our educational system or some other government program will impart self esteem to people who objectively have no reason (nothing) to esteem their selves.
Every government throughout human history has become a kleptocracy, and every kleptocracy has failed. Theft and fraud are neither moral nor durable foundations for government. The beneficiaries of coerced redistribution, government officials and redistributees, live parasitically off their host, productive workers. Information age technologies raise productivity of the productive in an unprecedented way. This has had the unfortunate effect of allowing the parasitic class to expand without killing the host. Federal government spending as a percentage of the gross domestic product is at a peace time high, yet the U.S. economy is apparently strong. However, if history is any guide, place your bets on the parasites. They suck their host's blood until they are forced to stop by the host's weakness or death. They die with the host or find a new one.
The parasitic class will never recognize the moral force of arguments that they have no right to the wealth they claim, and will quickly coopt or, failing that, destroy any perceived threat from within the political system. Ayn Rand's seminal insight was that only the productive efforts and moral sanction of the producers allows the parasites to survive. At this advanced stage of decay, working within our current political system only lends it an undeserved moral sanction and prolongs its life. The "apparent" strength of the economy will have to give way, revealing the intellectual, moral and financial bankruptcy of our government, before we will enjoy a renaissance of political and economic freedom protected by a properly subordinated government. In other words, things will have to get worse, much worse, before they can get better. Linear Logic will serve as a deathwatch on the status quo, providing insights that will help protect you and your loved ones during the coming upheaval. On a more cheerful note, Linear Logic will also serve as a beacon for better days. If this perspective makes sense to you, keep reading. If you are looking for the conventional wisdom, it is available from a variety of sources.
The Chamber of Horrors
Part 1-The Way In
Sometimes the transition from one period to the next is gradual; sometimes there is an abrupt point of demarcation. In either case, recognition of the change usually occurs some time after the transition. However, when a once-in-a-generation stock market mania grips the public, it is easy to predict that the end of the mania will herald a new era. The difficulty is finding people who believe that the mania will actually end. Undoubtedly the 1920’s mania had its Cassandras. The recent folly certainly did, most prominently Robert Prechter (At the Crest of the Tidal Wave, New Classics Library, 1995). Prechter predicted both the bull market of the 1980’s and our current bear market, each time to a chorus of derision. In fairness to Prechter’s critics, he was years too early with his bear market prediction. In fairness to Prechter, he claims that the current bear market will correct an upward trend from 1789, and his timing error is trivial given the magnitude of the ensuing downtrend (he predicts the Dow Jones Industrial Average will bottom out somewhere under 1000).
Linear Logic’s maiden column, The Pre-mortem, rightly termed the surging stock market a “mania” and said “the ‘apparent’ strength of the economy will have to give way” several months before the Dow topped out in January of 2000. If that column and Prechter are correct, then our society has entered a chamber of horrors that will rival or exceed the devastation of the Great Depression and World War II. This article, the first of three parts, will examine how we entered the chamber. The next article will illustrate what’s to come, and the concluding piece will answer the question: how do we get out?
The interplay in a society between philosophy, mass psychology, politics and economics is complex and little understood. Prechter has done groundbreaking work, and readers are encouraged to pursue his work. For our purposes, it suffices to say that historically, there have been epochs (upward, or bullish, waves, in Prechter’s terminology) that produce disproportionate political, economic, and social progress, while downward, or bearish, epochs produce stagnation and retrogression. The Renaissance was a bullish epoch, and the period since the American Revolution and the ratification of the Constitution, now drawing to a close, has been another.
The most revolutionary aspect of the United States’ break with Great Britain was the political philosophy that guided the founding fathers. For the first time, government was to be subservient to the people. Individuals had inalienable rights to life, liberty, and the pursuit of happiness, which the government could not abridge and had a duty to protect. The government would have the power necessary to secure the people’s rights. However, the Articles of the Constitution carefully divided the legislative, executive, and judicial powers and delineated an elaborate system of checks and balances to prevent a concentration of power in one person or entity. The Bill of Rights enshrined the idea of individual economic and political liberty.
Unfortunately, the Constitution contained a number of ambiguities and outright contradictions, foremost its acceptance of slavery. History is written by the winners, so it has been little noted nor long remembered that at the time the Constitution was ratified, the states retained the right to secede (three of the original thirteen states specified this right in their own state constitutions). Slavery was not the reason the Civil War began, although President Lincoln, in a desperate moment, seized upon the abolition of slavery as a goal of that war. Lincoln had talked out of both sides of his mouth on slavery, sometimes condemning it, sometimes condemning the idea of racial equality, sometimes accepting slavery if that was to be the price of “saving” the Union. However, he used the Civil War to promote the first wholesale assault on the principal of limited federal government. His consistent hostility to that principal is well documented in The Real Lincoln, by Thomas J. DiLorenzo (Forum, 2002).
Lincoln threw out the Bill of Rights—suspending habeas corpus and jailing without trial opponents of the war, closing newspapers that disagreed with him, deporting a member of Congress, Clement L. Vallandigham of Ohio, for criticizing his income tax proposal, censoring telegraph communications, confiscating private property (including railroads and firearms), establishing a secret police, and preventing opponents of the war in the Maryland legislature from attending legislative sessions. Again, history is written by the winners, and this aspect of Lincoln’s tenure (reign?) has been thoroughly whitewashed. What have not been whitewashed, because modern political dogma holds that economic rights are not as important as political ones, are Lincoln’s depredations in the economic sphere. Lincoln could sound like Adam Smith when he talked economics, but his agenda was pure Franklin Delano Roosevelt.
Why did the southern states secede? Not because of Lincoln’s opposition to slavery, which emerged later, but because he proposed to milk the southern states to promote northern industrial expansion. Lincoln supported high tariffs, which benefited northern industries, but were paid for by the agrarian south. With less than half the population, the South was paying about 87 percent of federal taxes. One plank of Lincoln’s platform was a 200 percent increase in the tariff. Simply put, the South could not afford Lincoln’s tariff and the North could not afford for the South to leave. The tariff transformed the contractual ratification of the Constitution, in which each state retained the right to opt out, into Lincoln’s “mystical,” “sacred” Union. What was sacred to northern politicians was the money flowing from the South into the Federal government’s coffers, and the development of northern industries behind high tariff walls. Most southern politicians were proponents of free trade, since their economy was dependent on imports. This explanation is at odds with popular history, but as noted historian Yogi Berra once said, “you can look it up.”
For what did Lincoln want to use all that money? One cherished scheme was a transcontinental railroad, America’s first great industrial boondoggle. Lincoln signed the enabling legislation, the Pacific Railway Act, in 1862. The tributes that have been written to the transcontinental railroad simply downplay or ignore the historical record. From inception to the golden spike to its subsequent operation, the first transcontinental railroad was rife with inefficiency, corruption and losses. It went bankrupt three times before E.H. Harriman brought it out of reorganization and made it profitable in the early 1900’s. It was at the heart of the Crèdit Mobilier political scandal of 1873. Its apologists claim that notwithstanding its manifest flaws, it was essential to the development of the United States and could not have been done without government aid. This tendentious nonsense ignores James J. Hill, who later built the well run, profitable, Great Northern Railroad across the northern part of the country without subsidies, in competition with the heavily subsidized Northern Pacific.
Lincoln also needed money to fight the Civil War, and tariff revenues were inadequate. Our road to hell is lined with the income tax and paper money. The Civil War served as Lincoln’s Trojan horse for these two essential sources of funding for the modern welfare state, or to call it by its correct name, the kleptocracy. Until the Constitution was amended in 1916, a direct tax on incomes was unconstitutional. However, the Constitution was a scrap of paper to Lincoln, and few challenged his wartime imposition of the first income tax, signed into law on July 1, 1862. The productive were enslaved to free the enslaved. The tax was eliminated in 1872, but the precedent had been set.
What Lincoln could not steal he printed. An important flaw in the Constitution is that it gives the federal government the power to “coin Money, regulate the Value thereof,” (Article I, Section 8). Government control of the currency is tolerable if the currency is either a set quantity of or is redeemable into real money—gold or silver. That requirement constrains the government. It constrained Lincoln, who suspended convertibility and began printing pieces of paper known as “greenbacks” (so named because of their green ink). Lincoln signed the Legal Tender Act of 1862, which authorized greenbacks and promised to redeem them with gold or silver at some unspecified time in the future (greenbacks were ruled unconstitutional after the war). Since no one of sound mind will accept a piece of paper, backed only by a promise by politicians to redeem it someday, over actual gold or silver, the Legal Tender Act also provided that any individual who refused greenbacks as payment could be thrown in jail. Not surprisingly, Lincoln’s paper depreciated rapidly—wartime inflation ran rampant. Lincoln also signed into law the National Currency Acts of 1863 and 1864, which created nationally chartered banks and imposed a ten percent tax on the states bank notes that competed with his new pieces of paper.
Could the problem of slavery have been addressed without war? It was, all over the world, primarily through compensated emancipation. Flawed though it was, the Constitution treated slaves as chattel, or personal property, of the owner. If slavery were to be outlawed, then the owners of slaves should have been compensated, pursuant to the “takings” clause of the Fifth Amendment. Such a course would ultimately have been far less costly in terms of money, loss of life, human suffering and damage to the Constitution than the one Lincoln pursued. 620,000 soldiers and thousands of civilians lost theirs lives, thousands more were maimed and crippled, 40 percent of the nation’s economy was ruined, and the South remained under a virtual Republican dictatorship for several decades after the Civil War. As Thomas J. DiLorenzo notes: “most Americans would likely have chosen compensated emancipation, which would have cost them a tiny, almost trivial fraction of the cost of the alternative: total war.” (The Real Lincoln, pg. 52). However, Lincoln never gave serious consideration to the numerous proposals for compensated emancipation. His Emancipation Proclamation was political symbolism; it did not free a single slave, since it applied only to territory still under Confederate control.
The elimination of slavery and the promotion of racial equality were not Lincoln’s reasons for pressing the Civil War. Why then, has Lincoln, the first Republican President, become an icon for those F.A. Hayek calls “socialists of all parties?" Socialists promote the expansion of government and an increase in its powers. Since government has such a miserable historical record, their aims must be obscured behind high sounding, but vacuous, rhetoric. So it was with Lincoln. He consistently promoted Henry Clay’s “American System”—protectionism, government control of banking and the money supply, increased taxation and subsidies to favored corporations for internal improvements. Because of his preoccupation with the Civil War, the only plank of the American System that Lincoln did not pursue was the expansion of an American empire, but a later Republican President would take care of that. The American people had repeatedly rejected Clay’s Whig vision, let by the states’ rights, free trade South. The founders considered a state’s right to secede an important bulwark against the kind of federal centralization that Lincoln desired. Before the Civil War, the belief was widespread that a state could leave the Union for any reason or no reason at all. Lincoln initially prosecuted his war with rhetoric about the sacrosanct Union. He envisioned a brief war to quell the southern rebellion. After two years of brutal conflict in which the South remained unconquered and the North grew restive, he added the abolition of slavery to his war aims. During the war, he promoted centralization of power in the federal government, at the expense of state’s rights and individual liberties. Much of what he did was by decree, backed by force. The Civil War was a war against limited government, democratic processes, and the Constitution itself.
Governmental power worshippers are animated by the noxious desire to tell others what to do, and to enforce their dictates with force. This desire has been with mankind since the first time one caveman clubbed another over the head. The lust for power, the belief that one must achieve one’s aims by force, is a psychological pathology, stemming from a sense of personal inadequacy. It is coupled with a belief that one’s productive and persuasive powers are incapable of securing one’s goals. It is no accident that many of our Presidents, including Lincoln, Theodore Roosevelt, Franklin D. Roosevelt, Truman, Johnson, Kennedy, Nixon and Clinton achieved nothing or were outright failures outside the realm of politics. Opposed to all systems based on force is a system based on a government whose use of force is limited to protecting individual rights. The economic system that flows from such a political arrangement is capitalism. Capitalism is what free people do when the government protects their contractual and property rights. It is based on productive ability—intelligence, creativity, thrift, initiative, hard work, risk taking—and voluntary exchange.
Since laissez faire capitalism rewards productive ability and allows government only a small role, the hostility exhibited by governing classes towards capitalism throughout its evolution is no surprise. The rewards and status that accrue to successful capitalists galls those with little or no productive ability. Since many of the unblessed also seek refuge in the academy, (those who can’t do, teach) the hostility from that quarter is equally understandable. Capitalism does not reward high-minded professions of concern about the welfare of one’s fellow man, although it creates the wealth that allows the truly charitable to help those in need. Adam Smith noted that capitalism rewards self-interested behavior. However, it only rewards a certain type of self-interest behavior, that which has a value to someone else. Even the most Dickensian employer, the caricature of the greedy, chiseling capitalist, must compete for labor against other greedy capitalists, and so must offer his workers more value than they can attain elsewhere. Smith concluded that the self-interested often do more for society than professed altruists, which explains the hostility towards capitalism from many professed do-gooders.
Contrary to Biblical injunction, the love of power, not the love of money, is the root of evil. The personal inadequacies that create the irrational desire to forcefully or fraudulently override other peoples’ judgment and choices are behind most of the terror and suffering that plague mankind. When capitalism, voluntary exchange, and the love of money flourish, with both political and economic rights fully protected, society progresses. Force produces nothing, and when control of economic decisions passes to the government, when coercion and fraud replace voluntary exchange, society stagnates. There had been proponents of a strong federal government role in the economy since the Constitutional debates, but Lincoln, under cover of an unnecessary war, mounted the first effective assault on the private economy. Although some of what he did was later repudiated, he set the precedents. The income tax, central banking, wholesale violations of civil rights, uncompensated property seizures, and extensive governmental interference in the economy had their genesis in his administration.
The last plank of Clay’s American System—the promotion of an American Empire—would find its midwife forty years later, Theodore Roosevelt. The many fraudulent treaties and widespread butchery the government practiced on Native Americans as the country fulfilled its “manifest” destiny certainly had an imperialistic component; Roosevelt was the first to take the quest to areas outside America’s shores. Roosevelt supported “westward expansion,” the term used for the war on Native Americans, but he also wanted the U.S. to assume what he considered to be its rightful position on the world stage. His position had psychological, nationalistic and racial dimensions. Roosevelt’s father had avoided service in the Civil War and Roosevelt, perhaps overcompensating, believed that military glory was man’s highest aim. Roosevelt argued that the U.S. had just as much of a right to colonize as the imperialistic powers of Europe. It was the duty of the white man to bestow the benefits of civilization on the black, brown, red and yellow peoples of the world, by force if necessary (see T.R., The Last Romantic, by H.W. Brands, Basic Books, 1997).
As Assistant Secretary of the Navy, Roosevelt pressed President McKinley to go to war against Spain in Cuba, then resigned his post and joined the army after it did so. He won the battlefield glory he craved when he led a successful charge up San Juan Hill. His fame catapulted him into the governorship of New York in 1898. In addition to Cuba, the U.S. invaded Puerto Rico and the Philippines. Filipino insurgents had battled Spain and its Catholic friars for years; they were not receptive to the idea of replacing them with new American masters. Roosevelt ignored his own arguments in favor of Cuba’s right to self-determination and pressed for ratification of the peace treaty with Spain, which would allow the U.S. to annex the Philippines. How would he deal with the insurgents?
“We must treat them with absolute justice, but we must treat them also with firmness and courage. They must be made to realize that justice does not proceed from a sense of weakness on our part, that we are the masters…. The insurrection in the Philippines must be stamped out as mercifully as possible; but it must be stamped out.
“If we refrain from doing our part of the world’s work, it will not alter the fact that the work has got to be done, only it will have to be done by some stronger race, because we will have shown ourselves weaklings.” (T.R., The Last Romantic, pgs. 386-387).
When Roosevelt assumed the Presidency after President McKinley’s assassination in 1901, the Filipinos were still fighting their new American “masters.” The U.S. learned the hard way a lesson that has bedeviled would be imperialists—it is difficult to win a war against committed guerillas fighting on their own turf. Generally the putative conquerors must resort to wholesale slaughter and torture, and inevitability innocent civilians lose their lives and property. The U.S. built concentration camps, used the “water cure” (forcing a prisoner to drink up to a gallon of water and then pounding his stomach until either he talked or his belly ruptured), and unleashed the barbaric butchery of General Jacob (“Hell-Roaring Jake”) Smith. 200,000 Filipinos were killed before the U.S. subjugated its newest territory. And so began an American Empire that stretched beyond America’s shores.
When Republicans bemoan a federal government that has spread its tentacles into every facet of life, that consumes over a fifth of the gross domestic product, that forces its most productive citizens to spend a third of their working lives in slavery, that forces all of its citizens to accept as a unit of exchange a piece of paper backed by nothing, that routinely robs some Peters to pay more politically influential Pauls, that acts as the world’s policeman, with troops stationed in over 100 different countries; they rarely acknowledge that the godfathers of this state of affairs were the two Republicans on Mt. Rushmore. Lincoln and Roosevelt were the first Charons ferrying the U.S. across the Styx, from the limited government envisioned by the founders to the Hades of today’s Leviathan. These two set the political precedents that provided the philosophical cover for the 20th century’s nonstop expansion of the federal government. Ideas have consequences, and Part Two of this series will examine those consequences.
Copyright ©1999 Linear Logic
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