Demystifying the Gold Standard

On many issues, libertarians can find common cause with either conservatives or liberals. There are, however, at least two areas in which libertarians stand completely alone – the drug war and the gold standard. I may deal with the drug war at a later date. Given the recent economic news, we’re going to have to deal with the gold standard sooner or later whether we want to or not. As they say, just because you don’t take an interest in monetary policy doesn’t mean monetary policy won’t take an interest in you.

Take a moment to consider the scope of the recent nationalizations undertaken by Bush, Paulson, and Bernanke. Including the recent Citi bailout, the total comes to $7.76 trillion. When adjusted for inflation, the bailout will cost more than the following government programs combined (data provided by Jim Bianco of Bianco Research):

Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion

Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion

Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion

S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion

Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion

The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)

Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion

Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion

NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion

TOTAL: $3.92 trillion

President-elect Obama has already made it clear that he will both continue and expand this lunacy, much like FDR continued and expanded the plans initiated by Herbert Hoover (rebranding them as the New Deal). Given the disastrous consequences these nationalizations will have on our economy, at some point even mainstream economists and media pundits will have to start talking about a return to sound money. The only questions are how soon will that happen, and how much pain will we have to suffer in the meantime?

What is a gold standard?
Very simply, a gold standard is a monetary system that ties the value of money in circulation at any given time to gold. Technically, what we’re really talking about is a commodity-based standard. When we use the term “gold standard,” we’re making an assumption that gold will be the preferred commodity, but given the right circumstances a free market might choose silver, platinum, nickel, or any other commodity that meets all of the criteria for money. In order for a commodity to serve as money, it must be portable, fungible, durable, divisible, and widely accepted. For three thousand years, gold has performed these functions better than any other commodity.

The easiest gold standard to envision is one in which we all walk around with gold coins in our pockets, but a gold standard does not require actual physical gold to be used in practice. Although there should be no restrictions against using physical gold for everyday transactions, there are perfectly good reasons to use paper money. Gold has a high value to weight ratio, so even ridiculously small amounts of gold can have significant purchasing power. At today’s rates, a single gram of gold goes for $26, but a gram of gold is far too small to be practical for everyday use. Gold is a very soft metal, and the normal wear-and-tear would quickly erode smaller denominations like a gram. For these and other reasons, both silver coins and paper money have historically been used under various gold-based monetary systems.

In practice, a gold standard would function as a currency peg. Under a gold standard, the bank issuing the paper currency (either a central or private bank) would maintain parity with a fixed weight of gold. For example, the dollar could be defined as 1/30th of a gram of gold. It would be the responsibility of the issuing bank to maintain that ratio by inflating or deflating the supply of money in circulation as needed.

If too many banknotes are printed relative to demand, the nominal price of gold will increase. In our example, it will now take, say, $32 to buy a gram of gold. The issuing bank would have to retire the excess currency, reducing its supply relative to gold so that it returns to its parity rate. Similarly, if too few banknotes are printed relative to demand, the nominal price of gold will drop. It will now take perhaps only $27 to buy a gram of gold. The issuing banks would then have to issue more paper currency to restore the 1/30th ounce parity. Under this system, the issuing bank has an incentive to keep its money honest by maintaining the parity rate. Too few banknotes, and people buy cheap gold. Too many banknotes, and there’s a run on the bank as people suspect the issuer cannot maintain its exchange commitment.

The system itself is not terribly complicated, but the implications for the economy are tremendous.

Why is a gold standard important?
A gold standard provides stability in the value of a currency. In the United States, a dollar was defined as 1/20th of an ounce of gold for a full century (1815-1914). From roughly 1800 right up until WWI, a dollar bought roughly the same amount of goods and services (actually, it bought a little more as technological improvements enabled the cost of goods to fall while production increased).

During the Great Depression, FDR made private ownership of gold a criminal offense, punishable by a fine of up to $10,000 (not payable in gold, I presume) and up to ten years in prison. Executive Order 6102 commanded all Americans to surrender their gold in exchange for paper at the standard 1/20th rate. Roosevelt then devalued the currency by dropping the parity rate to 1/35th an ounce. This rate was honored, however, only in exchanges with foreign central banks. At the time, foreign banks held considerably fewer dollar reserves, and the break with the domestic gold standard set the stage for massive inflation.

By 1971, only the US maintained even a nominal tie with gold, and foreign central bank dollar holdings had increased significantly after WWII. The inflationary policies that had been put into place ever since the days of FDR made it clear that there was no way the US government could honor its commitment to pay foreign central banks in gold at 1/35th an ounce. France was the first to call the US government’s bluff, and began to convert its dollar reserves into gold. Realizing that the jig was up, Nixon “closed the gold window” and severed the last vestige of a gold standard. Freed of even the pretense of fiscal responsibility, the US government shifted into high gear, inflating the money supply at an astronomical rate. The destruction of the dollar’s purchasing power has been so great that a dollar today only buys 3-5% of what a dollar bought in 1913, when the Fed was created.

Most mainstream economists and every single politician (with the exception of Ron Paul) take great pains to soft-peddle the harmful effects of inflation. Even otherwise free-market economists such as George Mason University’s Russ Roberts claim that the Fed has done a pretty good job managing inflation. How they make that claim in the face of the data is beyond me. Evidently, “a pretty good job” just means that it doesn’t take a wheelbarrow full of dollars to buy a latte at Starbucks (yet).

The monetarists, following in the footsteps of Milton Friedman, believe that there is no problem with inflation as long as the destruction of the dollar is gradual and predictable. But in this I believe they are overlooking a number of issues relating to inflation. Inflation does not occur uniformly throughout the economy. Wages are usually the last to catch up. This is certainly harmful to those people living on fixed incomes and salaries.

One of the main functions of money is to act as a store of value. Since money is durable (not perishable), we don’t have to make all of our exchanges as soon as we get some coin in our hot little hands. We can delay consumption for the future by saving a portion of our money. But in order to do this, we need the value of that money to remain relatively stable. Money should purchase roughly the same (or even slightly more) goods and services in the future as it does in the present.

Inflation, however, distorts the store of value function of money. Under an inflationary fiat monetary system, a dollar today buys far more than it will in the future. This acts as a disincentive to savings, which reduces the capital pool available for sustainable economic growth (for more on this, see And Then What?). This is one of the reasons for the pitifully low savings rate in the United States – in an inflationary environment, the real return on savings can turn negative. Under those circumstances, it is completely rational to convert cash balances into tangible assets (like housing) or to favor current consumption over future consumption.

This probably seems straightforward to most people. Nobody likes inflation, right? Wrong. Lots of people like inflation – they’re the ones who either work in government or just worship government power. To these people, inflation is the best thing since sliced bread and sunshine because it allows government to literally create money out of thin air. It is this inflationary prestidigitation that enables politicians to promise something for nothing, because they do not have to resort to direct taxation to pay for things like war and multi-gazillion dollar bailouts. They just wave the magic government wand, say, “Abra-Bernanke” and poof! “Free” money to buy votes with! If the value of the dollar and your life savings gets destroyed in the process, so be it.

Because of the political advantages that derive from inflation, the pressure will always be to inflate the money supply under a fiat system. The best check on this inflationary pressure is a gold standard, which ties the value of the money in circulation to a commodity that cannot be created out of thin air. But this denies politicians one of their most potent weapons, which is why the gold standard is relentlessly attacked by government flunkies and their accomplices in the media and academia.

Nevertheless, the gold standard has a number of advantages that one should consider. First, it has the advantage of actually being Constitutional. Article I, Section 10 states, “No state shall …make anything but gold and silver coin a tender in payment of debts.” To my knowledge, this restriction has never been repealed by Constitutional amendment. Second, the stability provided by the gold standard (when maintained) has never been surpassed by any other monetary system ever devised by man. Monetary stability is as vital to economic calculation as stability in physical measurement is to engineering. Would you want to live in a house that was built by a contractor whose tape measure changed every time he used it? Neither would I. Why would economic calculation be any better with a continually changing currency unit?

Of course, we could just keep all discussion of the gold standard in the shadows where it has been since 1971. After all, there is one other check on the inflationary pressures engendered under a fiat system – reality. At some point, the inflation becomes so oppressive that it simply cannot continue. Even the short-term stimulus effects of inflation cannot be continued without a geometric expansion of the money supply.

So what will it be? Should we consider a return to the gold standard, even if it means accepting the fact that we can’t have something for nothing? Or should we continue on our current path and get the wheelbarrows ready?



Note: Obviously, there’s a lot more to this discussion than I can go into here. If you’re interested, check out the following titles and links:
Gold: The Once and Future Money, by Nathan Lewis
What Has Government Done to Our Money?, by Murray Rothbard
Gold, Peace, and Prosperity, by Ron Paul
“Forget Bretton Woods II – We Need a Gold Standard,” by Walker Todd (Christian Science Monitor)

A New Morning in America?

Barack Obama has spent the last two years on the campaign trail promising “change” (when he was not too busy promising “hope,” that is). So what steps does a once-in-a-lifetime transformational President-elect figure take to radically alter the Washington landscape and forever change politics as usual? To start, he promises a chicken in every pot, just like every other Democrat politician has done since the days of Huey P. Long. Then he fills his cabinet with former Clinton staffers, the likes of which haven’t been seen since, well, Clinton. And to top it all off, he names Timothy Geithner as Secretary of the Treasury. Mr. Geithner has been instrumental in helping Henry Paulson craft Bailout-palooza, the brilliant plan to nationalize large swaths of the economy and drown us all in dollar bills.

So after a hard-fought campaign spent deriding John McCain’s proposals as simply “four more years of the Bush economic plan,” Obama is setting the stage to continue four more years of the Bush economic plan. As far as I can tell, the only change in the offing is that the same economic nonsense that has characterized the last few years will now be delivered by a more eloquent speaker. The more things change, the more they stay the same.

Of course, Secretary Paulson has expressed his full confidence in Mr. Geithner. That fact alone should frighten anyone with any sense, but based on the effusive praise being heaped on Obama by the media it once again becomes clear that there is no one with any sense left inside the Beltway. CNN’s crack political news team has been all atwitter with the latest news of appointments to Obama’s economic team, and they can’t wait for Timothy Geithner and Larry Summers to enact Obama’s central plan – whatever that may be (he can’t give us any details).

Being excited about Barack Obama taking the reins of the economy is a lot like watching Deep Impact and cheering for the asteroid. Perhaps sensing this, Obama is now taking steps to lower expectations about the speed with which he will be able to turn water into wine and make the lion lie down with the lamb. This has prompted CNN Senior Political Analyst Bill Schneider to draw comparisons between Obama and Reagan, saying,

No sooner did Reagan take office than the economy began to get a lot worse.
Unemployment jumped to more than 10 percent, the highest level since the 1930s.
It's about 6½ percent now. By 1982, voters were getting anxious.
Republicans lost 26 House seats in the midterm election. President Reagan's
response? Stay the course. A lot of voters stuck with Reagan because he
had defined a course. By 1984, their confidence paid off. "It's morning
again in America. Today, more men and women will go to work than ever before in our country's history," a 1984 Reagan presidential campaign ad said. Obama
seems to be channeling Reagan's optimism.

Of course, there's one big difference between Obama and Reagan that the average CNN hack is incapable of understanding. Reagan was guided by free market economics, and was therefore able to chart a course that would actually lead to the desired destination. Obama is guided by socialist principles that have led to misery and suffering wherever they have been tried. Wherever Obama and his team are taking us, it’s nowhere we want to be.

So if you’re like CNN’s Bill Schneider and are expecting Obama to bring a new “morning in America,” you might be better off just hitting the snooze button.

Lagniappe

Melissa Etheridge – Tax Protestor?
Melissa Etheridge inadvertently stumbled over a good point recently. After Prop 8 passed in California, she fired off an angry blog post in which she threatened to withhold her state income taxes because the vote didn’t go her way. She backed off that threat in a later interview featured on the November 17th edition of Access Hollywood, but she did mention how bizarre it seemed that her right to marry the person of her choice had been put to majority vote. In this Ms. Etheridge and I agree. In fact, it’s almost as if she had read my last piece.

But I can’t help laughing at the irony. Melissa Etheridge is a proud “progressive” who has been outspoken in her support for the likes of Dennis Kucinich and Al Gore. So normally she’s all for putting things to a vote – like voting for new and creative ways to waste your money on some ill-conceived socialist plan. On any other issue, if you were the one who disagreed with the outcome of a vote and threatened to withhold your tax money because of a fundamental disagreement with the way in which it would be spent, I’m sure she’d be the first to condemn you for acting childishly and selfishly.

Now that she’s on the losing side, however, Ms. Etheridge is slowly coming to grips with the fact that direct democracy is a double-edged sword. Do you think this will be enough to get her to reconsider her lifelong worship of big government? Neither do I.

Pavlov’s Hog
The pigs are already lining up to the trough. City officials in Dallas are already jockeying for position to make sure that they find ways to get their grubby mitts on some of that “free money” the Feds are talking about throwing around in the next stimulus package. They’re like Pavlov’s hog - bureaucrats have become so accustomed to appropriating taxpayer dollars that now all it takes is a rumor of a stimulus package to get them salivating. But don’t worry – Dallas wouldn’t dream of tapping into the existing $700 billion bailout plan like they’re doing in Philadelphia, Phoenix and Atlanta. Dallas wants a completely new bailout plan to tap into. Soo-ee!

Buy American – Or Else!

American consumers have stated in no uncertain terms that they do not wish to support the Big Three auto manufacturers. They’ve done this by not buying cars made by Ford, GM, or Chrysler. Since the Big Three have been unable to persuade consumers to support them voluntarily in the free market, they’re now begging Congress to force the consumers to support them in the form of a taxpayer-financed below-market rate loan. The plan is stalled for the moment, but there’s little doubt that some type of bailout will eventually go through now that the federal government has decided that throwing good money after bad is the new national pastime.

Redefining Marriage

California’s Proposition 8, a constitutional amendment defining marriage as a union between a man and a woman, passed with 52% of the vote. The demographics show a clean split between the urban coastal areas that opposed the measure and the more rural interior areas that supported it, but at the end of the day the bluest of the blue states had voted to override a California Supreme Court decision that had previously recognized gay marriage in the state.

Protestors immediately took to the streets, vowing to overturn the results one way or the other. Keith Olbermann, the MSNBC reporter who wins my vote for “News Anchor Most Likely to Climb a Tower with an Automatic Weapon,” delivered an emotional editorial on the November 10th episode of “Countdown” saying,

“…to me this vote is horrible. Horrible. Because this isn't about yelling, and
this isn't about politics. This is about the human heart, and if that sounds
corny, so be it.

If you voted for this Proposition or support those who did or the sentiment they expressed, I have some questions, because, truly, I do not understand. Why does this matter to you? What is it to you? In a time of impermanence and fly-by-night relationships, these people over here want the same chance at permanence and happiness that is your option. They don't want to deny you yours. They don't want to take anything away from you. They want what you want—a chance to be a little less alone in the world.

Only now you are saying to them—no. You can't have it on these terms. Maybe something similar. If they behave. If they don't cause too much trouble. You'll even give them all the same legal rights—even as you're taking away the legal right, which they already had. A world around them, still anchored in love and
marriage, and you are saying, no, you can't marry. What if somebody passed a law
that said you couldn't marry?

I keep hearing this term "re-defining" marriage. If this country hadn't re-defined marriage, black people still couldn't marry white people. Sixteen states had laws on the books which made that illegal in 1967. 1967. The parents of the President-Elect of the United States couldn't have married in nearly one third of the states of the country their son grew up to lead. But it's worse than that. If this country had not "re-defined" marriage, some black people still couldn't marry black people.

It is one of the most overlooked and cruelest parts of our sad story of slavery.
Marriages were not legally recognized, if the people were slaves. Since slaves
were property, they could not legally be husband and wife, or mother and child.
Their marriage vows were different: not "Until Death, Do You Part," but "Until
Death or Distance, Do You Part." Marriages among slaves were not legally
recognized.

You know, just like marriages today in California are not legally recognized, if the people are gay.”

Normally I can’t stand Olbermann, but in this case I find myself agreeing with his main point. I have friends who are gay, and I certainly understand their desire to have their relationship recognized in the same way as heterosexual marriages, along with all of the legal rights and privileges that derive from that recognition.

Nevertheless, I think both sides of the gay marriage debate miss a fundamental point. The real question is not whether government should recognize gay marriage. The real question is “Why does anyone – gay or straight – have to ask government for permission to marry at all?”

When I proposed to my wife, the only two people in the world whose permission I felt I needed were my wife and her father. But for some reason, our marriage hinged on getting a license from some low-level bureaucrat in Lincoln County, Mississippi. Why? Because at some point in history, some genius decided that it would be a good idea to take a social institution that had existed since the dawn of human history and turn it over to government. Government involvement in defining marriage began in the United States in the 19th century as a way to prevent blacks from marrying whites. Although the original racist justification for a government-granted marriage privilege has long since been obliterated, the legitimacy of government involvement in the area of marriage remains unquestioned by all but a few.

Let’s imagine some lucky guy has just slipped an engagement ring on his fiancee’s finger. The happy couple then announce the news to their friends. Before their friends can congratulate them, though, they have to take a vote on whether they will allow the marriage to take place or not.

“OK guys, show of hands. Who here wants Bob and Sue to get married? OK, now how many oppose? I see. Bad news, guys. We all voted, and I’m afraid we just can’t allow this wedding to go forward. Sorry.” Would anyone allow themselves to be subjected to majority rule in that case? Of course not. But that is exactly what happened as soon as the state was granted a role in marriage. Americans imposed a public aspect over what should have been an exclusively private matter.

Proposition 8 is another illustration of the folly of turning to government to define, legitimize, or involve itself in any way with marriage. By allowing government to either recognize or restrict gay marriage, we further confirm the legitimacy of the state’s involvement in straight marriage as well.

A basic understanding of Lockean natural rights would go a long way in preventing these kinds of issues from ever becoming political battles in the first place. It would enable us to draw bright lines around those areas of life that should never be subject to majority rule. In the context of the current marriage debate, the result would be that the original definition of marriage would be restored. Marriage would once again be an exclusively personal decision between people who loved each other, sanctified by their own religious, familial, or cultural norms. The role of the state would be limited to enforcing the terms of the marriage contract, whatever they might be.

At first blush, one might expect this approach to be embraced by proponents of gay marriage, such as Keith Olbermann. But accepting the notion that many, if not most, aspects of life should remain outside the sphere of state control would undercut his big-government worldview. Somehow I doubt that his concern for the rights of gays runs so deep as to allow such a heretical thought to cross his mind.

So until Olbermann and other big-government supporters are willing to consider these fundamental questions, they’ll just have to live with the occasional disappointments that are the inevitable result of majority rule. Sometimes they’ll get their way, sometimes they won’t. The only things for certain are that the conflicts will be never-ending, and that the security of fundamental individual rights will always be subject to the whims of the electorate.

Lessons From the Campaign Trail

Election season is finally over. After months of filling out forms, attending party functions and candidate forums, and spending untold dozens of dollars, I can now sit back and reflect on some of the lessons learned in my very first political campaign.

For those of you who didn’t already know, I was the Libertarian Party candidate for State Representative for my district here in Texas. I had originally volunteered as a “paper candidate.” Basically I was the only person from my district they could find, so I threw my hat into the political ring in order to help the LP maintain its ballot access.

You see, the Republicans and Democrats in each state have set certain rules about who is and who is not allowed on the ballot – i.e., whom the voter may or may not vote for. The specifics vary, but generally speaking, the Republicans and Democrats get space on the ballot automatically, but every other party has to go through a time-consuming and wildly expensive process of obtaining signatures, verifying names and addresses, and fighting off legal challenges just so they can have their candidates listed as a choice for the voter to ignore come November. And should the voter ever pay more attention to these renegade candidates than the major parties might like, the number of signatures required to gain ballot access in the next election cycle is simply raised higher. And if for whatever reason the minor parties either don’t pull down enough votes or don’t have enough candidates to fill a certain percentage of the available races, they have to go through the whole ballot access process again.

So with that in mind, I decided to do what I could to help the LP retain its access. I submitted my name at the nominating convention, and was chosen by acclamation (and by the fact that no one else was there from my district to challenge me). After that, I was officially a candidate for State Representative. Truth be told, if I thought for a second that I could actually win, I never would have volunteered. State Representatives in Texas make $600 a month, and frankly I couldn’t have afforded the pay cut.

Nevertheless, I found myself wanting to represent the LP to the best of my ability, while staying within a budget of roughly nothing. So I participated wherever I could. I created a website, got some business cards, filled out voter questionnaires, gave phone interviews to the local press, and participated in whatever debates I happened to be invited to. At the end of it all I garnered a whopping 3% of the vote, but I have to say it was a good experience. Or at least an interesting one.

Ours was a three-way race. The incumbent is a Republican who was seeking her sixth consecutive term as State Representative (each term is two years, so she had been State Rep for this district for the past decade). The challenger was a newly minted Democrat. Prior to her conversion to liberalism (which took place immediately before the initial filing deadline), she had been a lifelong Republican. In fact, she had even been the Republican incumbent for three terms until she got knocked out of the box in a GOP primary ten years ago by the woman she was running against (the current Republican incumbent). In short, these two women have been fighting over the same job for roughly twenty years now, and the voters of my district had a choice between the current Republican incumbent or the previous Republican incumbent – or me.

I live in a district that is one of the reddest parts of this red state, so the outcome was never really in doubt. The woman with the “R” after her name won in a landslide. But the campaign wasn’t a total loss. I did manage to make a few observations along the way.

1) THE SPECIAL INTERESTS: As a candidate, you receive countless surveys from various special-interest groups. From what I can tell, these surveys all ask the same two basic questions:

a. “What’s your central plan to run everything?”
b. “Will you promise to funnel taxpayer money to our pet project?”

As I was preparing for the various candidate forums, I consolidated all of the surveys that I had received over the past few months. When I put them together, the underlying assumptions behind all the surveys became frighteningly clear. People really think that any elected official should have a complete central plan for absolutely everything under the sun.

For example, one issue on virtually every questionnaire is education, or more accurately funding for public schools. Although most use those terms synonymously, the two have very different connotations to a libertarian. Nevertheless, everyone wanted to know what Stephen Smith’s master plan for public schools was. My background is in international supply chain operations in Latin America. My faux-Democrat opponent’s background is listed variously as homemaker, consultant, and farmer. And the last time the Republican incumbent held a straight job it was in health care and pharmaceuticals. Why would anyone want to put control of their children’s education into any of our hands? Not a single one of us has any experience in education - we don’t understand the differences in educating primary, secondary, or university students. We live in North Texas – what do we know about the needs of schools in, say, Laredo? Nothing. So why would anyone want us to make these decisions? To the degree that these decisions should be decided by government at all, they should at least be handled at the lowest possible level. Unfortunately, that is flat-out not what the vast majority of voters want to hear. Everyone expects the candidate to have a central plan, and they want to hear you describe how you will be the one who finally makes central planning work. They might as well ask us to build a perpetual motion machine while they’re at it.

2) REPUBLOCRATS: I’ve discovered that there may even be less difference between the Republicans and Democrats at the state level than at the national level, believe it or not. Being a Republican in Texas these days seems to involve agreeing with the Democrats that the government should be involved in absolutely every aspect of life while spouting a lot of anti-immigration rhetoric. Democrats apparently just want to wave their magic government wand and make health insurance instantly cheaper. But beyond that, it’s just a question of presenting your grand plan to run everything out of Austin, and hope that the voters find your plan slightly less revolting than your opponent’s.

3) CAMPAIGN FINANCE: The Republican incumbent raised almost $200K and spent about $60K just to keep a job that pays her $600/month. Although I certainly defend her right to raise and spend as much money as she likes on a voluntary basis (unlike her party’s standard-bearer, John McCain), I do have to question the kind of cost-benefit analysis skills this reflects. It does go a long way to explain the state of government budgets across the country, though. (And just as an aside, last year the Republican incumbent was fined $5,300 by the Texas Ethics Committee for reporting violations – that’s almost ¾ of her total salary last year, but she still sailed into a sixth consecutive term.) Don’t worry about her, though – she’s been using campaign contributions to pay for a luxury condo in Austin for years. She’s going to be alright.

4) THE ISSUES: Democratic strategist James Carville once said, “You can’t beat something with nothing.” Mr. Carville has obviously never attended a candidates’ debate for a state office. Case in point, light rail.

I attended a forum hosted by the League of Women Voters. The question was, "Texas is one of the richest states in the country, but we rank dead last in light rail. Why is that?"

My answer: "Light rail is the most expensive and inefficient form of transportation this side of the Space Shuttle. A mile of light rail costs as much to build as a mile of 4-lane highway, but only carries 15% of the traffic. Light rail has never once delivered on its promises to reduce congestion, provide environmental benefits, or even run in the black. Politicians love light rail, because they get to throw lots of taxpayer dollars into a big government sinkhole, and they get to have their picture taken in front of a shiny new train. A much wiser investment in clean public transportation would be to add more natural gas or hybrid buses. They are just as clean as light rail, and they carry far more people. In addition, buses cost pennies on the dollar when compared to light rail, and they have the added advantages of being more flexible (because routes can easy be changed to reflect changing population dispersion), and scalable (you can add or subtract the number of buses on the road at any given time to reflect actual ridership needs). Light rail is one contest in which the winner is the one who comes in last. As State Rep, I will be much more careful in how we invest in public transportation."

Democrat’s answer: "I really like light rail. Last year, I rode the Dallas light rail to the Cowboys game, and it was really nice. So I want Texas to be number one."

At this point, I flashed back to an old Saturday Night Live skit thinking, "I can't believe I'm losing to this guy!"

5) WASTED VOTE SYNDROME: After the candidate forums, I had Republicans forming a line to tell me that I won the debate. My Democrat opponent said that I should run as a Republican so that I could win. It was kind of a back-handed compliment, but she meant it sincerely, telling me how well she thought I had done in the forum. Of course, I’m a small-government, free-market guy. There’s no room in the Republican Party for someone like me. I would not get the GOP’s nomination by espousing my free-market philosophy. Much better for me to run as the libertarian that I am, and get the chance as the Libertarian Party’s candidate to share an alternative view with the voters.

And despite the encouraging words, I’m quite sure most people who heard me voted for the Republican – even those who preferred my answers to hers. Fears of “wasting one’s vote” are very real, as well as very irrational. People like Mark Cuban apparently believe that the purpose of voting is to bet on who’s going to win, and not to take advantage of their one opportunity to express their opinion on what direction the government should take. These people think that voting for a dark-horse candidate they happen to agree with is wasting their vote, while voting for the well-known candidate they despise is not. It’s a bizarre pathology, but it’s out there nonetheless.

6) THE POLITICAL ZOO: The League of Women Voters hosted the forums, and they were really great. Very welcoming, and very excited to have participation from the Libertarian Party. After my panel had concluded, they moved on to the US Congressional race. The LP candidate was also participating in that panel, and in his introduction the LWV moderator said, “Don’t you just love it when the Libertarians attend? They are so interesting! I’ve never heard one before!” As if we were exhibits in the zoo or something, which may be a more accurate analogy than I care to admit. But she and the other members of the League were genuinely happy to have us there and they were actually quite supportive of what we had to say, which was a pleasant surprise. I had anticipated a much cooler reception, but the LWV really made the experience enjoyable.

7) A SLIVER OF HOPE: At one of the candidate forums, I got the best reaction of any candidate the entire night. When asked if I would support a statewide smoking ban I said, “No, but I might support a ban on smoking bans.” At that point, the entire room burst into laughter and cheers. A small thing, perhaps, but hope springs eternal…

And Then What?

Now that Halloween is over, the Christmas marketing season is already in full swing. I suppose that’s to be expected. After all, how many times have we heard that ours is a consumer economy? Joe Biden said so just last week during one of his cookie-cutter whistle stop speeches in some battleground state that escapes me just now. Something about sidekicks, taking money away from Exxon, and then my mind started to wander…

But this notion of a consumer-driven economy is so prevalent that it was the basic premise for President Bush’s economic stimulus checks that went out earlier this year. The stimulus package was opposed at the time by most Democrats, but now that Barack Obama understands the political advantage one obtains by promising free money, they’ve come to see the light and are now talking about a second round of stimulus checks. (Because the first round of checks did so much to improve the economy, you see). Sort of makes you wonder why the government doesn’t do this more often. I mean, if it’s such a great idea to put money in consumers’ pockets, why don’t we just get a weekly allowance from Uncle Sam?

Maybe it’s time we made the distinction between a consumer-driven economy and a consumption-driven economy. In a free market (and here is where I call upon the readers to use their powers of conceptualization), the consumer is indeed king. Businesses make money by catering to consumer demand. Those that do so in the most efficient means possible reap financial rewards. Those that do not get thrown out of business and their assets are placed in the hands of those entrepreneurs who can make better use of them. This is what Joseph Schumpeter called “creative destruction.”

However, this is not what is usually meant when the bubble-headed bleach blonde comes on at five to tell you about the stock market crash with a gleam in her eye. When the media or politicians speak of a consumer-driven economy, what they are really claiming is that ours is a consumption-driven economy. That is, they view consumption as the engine of economic prosperity. This is a very different, and very dangerous, concept.

But wait a minute, you say. Of course consumption drives the economy - if consumers don’t buy products, then businesses don’t make money, people get laid off, and it’s a downward spiral from there! Well, not exactly. The choice is not between consuming or not consuming. Human beings must consume in order to survive, so there will always be a significant level of consumption in any economy. And I’m not against consumption. Our ability to consume is what we call wealth, and I’m definitely pro-wealth. But when we talk about growing the economy, what we’re really talking about is the way in which we create more goods and services to consume. That is, what makes for sustainable consumption?

Sustainable consumption can only come from increasing our savings, not our spending. Although it may seem counter-intuitive at first, it begins to make sense once you break it down and take it step-by-step. This graph illustrates the trade-off between consumption and investment. If you’ve got $100, you can spend it all, save it all, or choose some combination of the two. Since your savings become funds available for others to invest, we treat savings and investment as synonymous. The Production Possibilities Frontier (PPF) is what those possible combinations between savings and consumption look like in graph form.

So what happens when the government prints or borrows money and sends us a nice fat check every time the stock market takes a dip? Well, if we all do what George Bush, Joe Biden, and Barack Obama suggest, we rush out to Best Buy and pick up a new plasma television. Fantastic! Best Buy reports a good quarter, and we’re all watching the election returns in vivid high-definition. Of course, as Russell Roberts once said, economics is the science of asking, “And then what?” So what happens next?

In short, nothing good. The money supply and the national debt are increased, so our current dollars will be worth less and our children will have to pay for our plasma TVs in the form of higher taxation. But are we wealthier as a result? Not really, because nothing has been added to the capital stock of the economy. That is, our capacity to produce the goods and services that make us wealthy has not increased one iota. We’ve managed to push ourselves beyond the PPF curve for a short period of time, but this is not sustainable. At some point, reality will reassert itself, and whatever minor gains the stimulus provided will prove illusory.

Now let’s imagine what would happen if we were to save our money and actually live within our means. Certainly, consumer spending would drop for a while and retailers would take a hit. And then what? The increased savings would grow the resource pool available for investment. This means that the capital stock would actually be increased as businesses use those funds to invest in new technology and new businesses. The economy’s capacity to produce goods and services would increase, pushing the PPF out to the right. More goods and services would be available to consume. This increase in the amount of goods and services available as a result of a greater productive capacity would be sustainable, since the increase in the capital stock reflects true consumer preference, and is not merely the result of a temporary monetary stimulus.

If this still seems counter-intuitive, look at it this way. When you sit down with your financial planner to discuss how to grow your wealth so that you have enough money for retirement, what advice does he give you? Does he say that in order to retire rich you need to a) control your spending and increase your savings and investments, or b) spend all your money on new cars and home theater systems?

The logic of stimulus check proposals and the consumption-driven economy lies in following Option B. The theory is that somehow we as a country can spend our way to prosperity. This is a Keynesian fantasy that many have come to accept as fact. It’s promoted by many in the media, government, and even some in the field of economics. But what would you tell your financial planner if he gave you that advice? My guess is that you would start combing the yellow pages for a new financial planner, because you would instantly recognize that you can’t get rich by spending all the money you have and then borrowing even more just to keep spending.

The Keynesian model simply confuses cause with effect. Consumption does not create wealth. Instead, our ability to consume to the degree that we do is the result of our savings and the accumulation of capital that we have amassed over the years. It is this capital accumulation that generates the incredible amount of goods and services that are available to us. Keep this in mind the next time you hear some talking head try to justify yet another plan to “inject liquidity” or “stimulate consumer spending” as a way to cure our economic ills.

As Adam Smith once said, “What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.” If spending wildly at the expense of saving and investment doesn’t make sense for you as an individual, it doesn’t make sense for us as a country.

Note: For a much more in-depth presentation of these ideas, check out Professor Roger Garrison’s incredible presentation entitled “Hayekian Means-Ends Analysis.” Come on, you didn’t think I came up will this all by myself, did you?