A Triumph for Tyranny

Introduction

In 1831 Alexis de Tocqueville, along with his companion Gustave de Beaumont, traveled from France to the United States for — ironically — studying the U.S. prison system. Democracy in America, the book in which he recorded his observations from his nine-month tour, has provided background for many discussions about democracy even to this day.

In Democracy in America, de Tocqueville raises the possibility of a tyranny of the majority under democratic forms of government. Although he saw a risk of that form of tyranny in the U.S., he also observed elements of the Republic structure of the United States government that might mitigate the tyranny of the majority. In fact, he entitled one of his chapters “Causes Which Mitigate the Tyranny of the Majority in the United States.”

Over the years, and particularly in the 20th century, the U.S. Government — abetted by its citizens — has swept aside the protections against the tyranny spawned by democratic forms of government. The concerns expressed by Alexis de Tocqueville and the fears of many of the founding fathers have come to pass in ways they could only imagine. We have created the tyranny of the majority of the minority over the population.

I have chosen “healthcare” legislation as an outstanding example.

Healthcare Tyranny

In 2009, with a vote on The Affordable Care Act (Obamacare), the U.S. Government Congress enacted another triumph for tyranny. Two hundred nineteen people (in essence only eight people), not even elected by most citizens, place further limits on the liberty of over 300,000,000 Americans. In the original version, they had the audacity to force people to take actions they would not have chosen on their own.

I don’t see this as an issue of Democrats versus Republicans. Both parties believe in more oppression—they want to control the lives of other people. We just got the Democrat form of oppression rather than the Republican form. I favor neither.

Contrary to popular misconception, the United States of America does not need “healthcare” reform of any sort. It requires, instead, the repeal of all existing legislation that hampers the emergence of a free market in all forms of care for the sick and needy.

To those who argue that a free-market will not care for those people I have two from responses:

First, you cannot provide any empirical evidence to support your claim. A free market for these services — or any other for that matter — has never existed in this country. Without the interference of the federal government, American citizens have traditionally stepped forward to help those in need voluntarily.

Second, in a free market, both parties win in every voluntary transaction, for every product/service. In every government controlled market, the monopoly force of government picks winners and losers. In such a system — in which winners pick the pockets of losers — we all lose in the long run. These statements apply to “healthcare” as much as any other service.

If you favor any form of legislation regarding “healthcare,” you don’t favor liberty or economic efficiency. You favor the freedom of getting what you want and the freedom of others to get what you want them to get. You favor a misguided view of economic efficiency that practices stealing from healthier and more productive people to support less healthy and less productive people. These forms of freedom and economic efficiency will eventually make you less free, less healthy, and less productive.

Conclusion

Cloaked in altruism, tyranny and oppression in the U.S. of America takes on a particularly sinister character. It creates the unseen tyranny of one citizen over another. The atrocious legislation, known as “Obamacare,” provides only one example of the many and more frequent examples of tyranny within a “democratic” form of government. Many other examples, both real and proposed, of the tyranny of the majority exist.

Minimum wage laws, consumer “protection” laws, labor laws, etc., all provide living examples of a minority of representatives restricting the freedom of all citizens. Little hope exists in the trend of this legislative tyranny. Now, many legislators — and citizens — actually support the horrendously to hear radical proposal referred to as The Green New Deal.

Don’t enslave your neighbor; set him free.

Climate, Freedom, & Money

Introduction

“Climate change” represents the crisis de jure. We have no choice but to accept that human activity has created a crisis level of change in the climate of the world. To deal with this crisis, we must implement an unprecedented level of government intervention.

The complexity of this subject boggles the mind. How do we determine the validity of this problem, and what to do about it? To reduce the complexity, I will address only a couple of questions I have about this “problem” and the proposed intervention.

The Problem

Consensus

One reason people give for why we should believe in this crisis: 97% of scientists agree on calamitous findings regarding climate change.

Now I don’t have any certified credentials in science. I do, however, know enough to know that real scientists pride themselves on believing in the principle of non-confirmation. They do not believe in “settled” science. Even as a layman I know we cannot determine facts by popular vote. Those who believe otherwise must not have heard of Einstein, Copernicus, etc. Need I continue?

Carbon Poison

I have some important questions about carbon. Much of what I hear does not make any sense to me.

Believers in the impending climate crisis want to reduce the amount of CO2 created by human activity. They talk as if CO2 were a poison. Does that make sense?

I remember from high school biology that CO2 provides a food source for plants. Without enough CO2, plants would die. Without plants, we would die.

I admit my years in high school occurred a really long time ago. Maybe new technology has found a poisonous property in CO2. But, don’t people who run greenhouses add CO2 to the air inside?

Does it make sense to reduce our production of plant food?

The people who believe in the risk of climate change all think the solution will require some form of economic intervention. These interventions consist of everything from taxes on the use of carbon-based fuels to complete government take over of the economy.

Before I discuss the proposed interventions, I would like to make a general review of some of our current interventions. That might give us a clue as to the most effective interventions for the future.

Existing Intervention

I will reflect on the three categories of interventions: 1) monetary policy, 2) spending, and 3) regulation.

Money

Expanding the money supply has become one of politicians favorite ways to meddle with the economy. It’s stealthy—few people notice it. It taxes citizens without the painful process of passing tax legislation. It’s easy. But it has consequences.

Artificial monetary expansion distorts price signals. This misinformation leads people to misallocate resources. People spend money on goods they cannot afford. Investors acquire producer goods they do not need.

Monetary expansion leads to inefficient burning of carbon fuels.

Spending

Government officials have adopted the euphemism “spending” for a broad range of redistributions. In general, government redistributes resources from producers to consumers. “Spending” leads to less effective, efficient use of resources.

Government “spending” leads to more use of carbon fuels than would occur without redistribution.

Regulation

Regulation forces segments of the population to engage in activities which they would not otherwise choose. They must consume resources they would not consume if left to their own choices.

Similar to spending, regulation leads to the use of more carbon fuels than would have occurred without such regulation.

Proposed Intervention

Instead of examining the current political environment, the people with deep-seated concern about climate change propose additional government intervention. I will discuss those in the reverse order.

Regulation

Instead of trusting people to clean up their personal environments, politicians, as usual, think they can achieve a better result by forcing people to change their behavior. As a result, people will engage in behaviors in which they would not otherwise engage. In doing so, they will either follow the regulations or figure a way to work around the rules.

Spending

Politicians recommend massive spending programs in order to “clean up the environment.” Somehow, magically, they think they can do that without consuming additional resources or burning additional fossil fuels.

They have not learned that the redistribution of resources by government spending always leads to less efficient use of resources.

Money

When asked how they plan to pay for it, the people promoting green projects say that should not be a problem. That amounts to code for “we’ll just have the government print money.”

This attitude indicates they have not come to grips with the connection between monetary expansion and the wasteful boom and bust cycles in the economy. The malinvestments created as a result of monetary expansion create far more pollution than actors in a free-market would create on their own.

A Solution

Examine the Science

People making disastrous predictions regarding climate change should first go back and re-examine their science. Who knows; they might be correct. But, as long as one dissenting voice exists — and there are many — the science requires re-examination.

Answer, for example, the question I posed at the beginning of this article. Why do we consider carbon dioxide (a food for life) as a poison that could kill us?

Rollback Regulation, Spending, and Monetary Expansion

Instead of adding new interventions to the already ineffective interventions, rollback those that are already contributing to the ineffective use of resources and the excessive consumption of carbon fuels.

Conclusion

When you take a close look at the people promoting “Green New Deals” and Paris Accords, you realize that the majority of them either have political power or seek political power. Whether the people advocating these programs have the science correct or not, should we allow them to take further control of our lives?

This environmental scare, when you pull back the curtain, amounts to a great power grab, whether you agree with their desired results or not.

 

Green New Deal – 2030

Commenting on The Green New Deal would waste my time, except for the attention some influential people have given it. It would, if passed, lead to a life of misery that would make catastrophic climate change seem like a marvelous alternative.

I receive letters from strange people and strange places. Most of them, If they make reasonable comments, I respond to privately. Recently I received a letter from a rather different place: the future. Because it discusses a topic of present-day interest, I have posted it in its entirety.

Dear Jim,

Roughly 10 years have passed since the signing of the Green New Deal bill in 2020. Climate change hysteria rose to such a fever that voters elected Kamala Harris as President and Cory Booker as Vice President. The House of Representatives elevated Alexandria Ocasio-Cortez to the speaker of the House.

The rapidity with which they passed this legislation surprised many people except a few who remembered chants of,” Better off Red than dead.” I found it equally surprising how quickly they acted on the legislation. I guess people liked the Nirvana promised by the supporters.

I have nearly gotten used to having to make these entries by candlelight. I hardly remember the day before May of 2026 when we had to turn in our last smartphones. We just don’t produce enough power for recharging those devices and transmitting the messages we composed. I do have more time during the day to do my writing since I lost my job. But, I hear that pencil and paper will soon become in short supply.

Losing that job does not bother me so much, because the government sends me a check every month. I had planned, when I first heard of this change, of traveling a lot and seeing the world. I had to scuttle those plans when I found I could not get airline reservations. The airlines were not overbooked by people in my situation. They just could not fly because of the lack of fuel. You can still fly, if you need to, but you have to book your flight three months in advance, and it can cost millions of dollars-subject to increase at boarding time. That brings up the issue of inflation.

I have noticed, when I have an opportunity to walk to the store, that the prices of the few items available have increased dramatically. I get an increase in my government stipend every month, but it never seems to keep up with price increases. I have heard that price inflation amounts to 1,000% per month. I have no way to verify that because I get no regular news. I have to rely on rumor.

Someone told me that the central planners have adopted the strategies of the Modern Monetary Theorists. Having government “spend money into the economy,” according to them, will stimulate the economy. I have not seen the results yet. But, what can I do?

I would like to continue, but I have to leave to get to my Chinese language class.

The Chinese have done relatively well in the past ten years. Maybe not adopting their own “green new deal” has something to do with their progress.

Anyway, they allow a few immigrants each year, if they speak and write Chinese. I might get a job there that pays a lot more than my government stipend, or, I might get a job at one of the companies in the U.S. that the Chinese have acquired.

More later,
Roger

I hope Roger does better than this. We can change the future now, if we choose to.

 

Healthcare Economics

Government involvement in “healthcare” provides startling example of an incredible waste of resources that no one seems to notice. It shows how a current benefit causes a long-term drag on the economy.

In my last post I pointed out how a vote for government amounts to a vote for economic inefficiency.

In this post I will point out some important questions regarding a specific intervention of government in the market — the intervention in “healthcare.”

The complexity of this subject precludes me from covering it in any detail. I would simply like to point out some of the issues that people seem to ignore when dealing with the subject.

Terminology

How can we discuss the subject intelligently without using accurate terminology?

We have for years used the euphemistic term “healthcare” to refer to what should more accurately be referred to as “sickness-care.” In common usage, people normally use the term healthcare to refer to prescription drugs, hospital stays, vaccinations, etc. These topics, however, have a great deal to do with sickness and very little to do with health.

Most people also seem to deny that this sickness-care is a product or service that should have a normal market price. Some people claim that they have a right to healthcare. By some magical activity it should be given to them with no cost. They don’t seem to understand that healthcare consists of a service like many other services—not much different from the service of a plumber or an auto mechanic. Natural law gives you the right to life. It does not give you the right to health; that’s up to you.

To prevent confusion on your part I will continue to refer to sickness-care as healthcare. I don’t want you tripping over too many new concepts all at once.

Prices-Costs

Price plays an important role in the allocation of all resources—even those used in a service like healthcare. But, what mechanism tells bureaucrats what to pay providers for medical treatment services? They have no way to effectively and efficiently allocate resources to such a valuable service because they have no price mechanism to observe. If they want a resource, they give up nothing to get it—unlike a consumer would.

The willingness of people to pay for healthcare should determine the price of medical care in the same way that people’s willingness to pay for gasoline determines its price. How much do you value your own health? What sacrifice would you make to maintain good health?

The government does not — indeed cannot — know the answers to these questions. And, providing the service free, or cheap, creates another set of problems.

Demand

Economists don’t agree on very much, but they nearly universally agree that providing a good for free, or cheap, leads to more demand.

More demand almost always leads to higher prices for the entity paying the bills. When government takes on the role of providing any service for people, the price, ultimately paid by taxpayers, tends to rise. Look at the many activities in which government intervenes e.g. schools, union wages, postal service, real estate, etc. The prices rise faster than the rest of the market. The same thing happens to the cost of healthcare.

With free healthcare people tend to have more doctor visits, more visits to the ER, and more demand for prescription drugs. Since government does not know the value of any of these services, they have no way of knowing how much to provide nor at what cost.

Allocation

Ever-growing demand with the lack of an effective pricing mechanism leads to an inefficient allocation of medical resources. As with most government activities, providing healthcare amounts to a redistribution from the healthy and productive to the sick and less productive. This redistribution causes a drag on rest of the economy that affects all consumers. Without these pricing mechanisms, how can bureaucrats know who should get what treatment and when?

This principle—mis-allocation due to lack of price signals—applies particularly to what has become a political talking point: pre-existing conditions. Who defines the meaning of pre-existing conditions and determines who has them? Then, who pays for the treatment of those pre-existing conditions. As indicated above the healthy and more productive people pay for the sick and less productive.

The resources taken involuntarily from productive activities actually create a negative feedback for the sick themselves. The long-term source of the philanthropic support of those with serious conditions gets diminished by current taxation and transfers to the ill.

Enough resources do exist to help those who really need long-term financial assistance for their medical needs. Individuals, however, not the government should decide from where those resources come. The government, by confiscating people’s resources, insult the voluntary kindness of people and their willingness to help people in need. People with pre-existing conditions would not die in the streets without government stealing on their behalf.

Conclusion

Healthcare, like any other service, should be left to the participants in the market. Consumers should decide how much they value their own health, and generous individuals can and will help who need long-term medical care.

Government intervention in healthcare leads to at least three detrimental outcomes:

  • Higher costs—paid by tax payers.
  • Misallocation of resources—robbing more productive people.
  • A general drag on the economy—costing the healthy and sick alike.

Will legislators ever have the political courage to take the right and effective action and get government entirely out of the business of providing healthcare?

 

Election Day

Your vote today supports theft, tyranny, and disaster.

When you cast your vote today, think about what you have really done. You have really abdicated your responsibility for your life, liberty, and happiness, in favor of authorizing theft, tyranny, and disaster. You probably feel like you’ve done the responsible thing. Your friends, family, the Hollywood elite, and the news media, all tell you so. But you need to use language that accurately describes the economic result of a vote in what people erroneously refer to as a democracy.

When political power overruns an economic system, voters should describe it in language that accurately describes what voters have done.

Theft

Voters have been led to believe that they do the right thing for our citizens when they vote for a system that offers healthcare, Social Security, welfare, and infrastructure. These all seem like things from which citizens can benefit. This may be true, but voters need to consider what they give up for these benefits.

Government “spending” creates a mis-allocation of precious resources. Government does not bear the cost of its “spending,” as do individual consumers. It engages in theft, which we refer to as taxation, in order to redistribute other people’s resources.

Would you steal from your neighbor in order to pay for something you want? Then why authorize politicians to steal in your name — even for a good cause?

Tyranny

Most of us want to improve public safety, assure that citizens deal with each other fairly, protect public health, and protect the environment. But, do political means implement the best processes to achieve these objectives?

What we refer to as “regulations” really amount to tyranny and oppression. Voters engage the monopoly force of government to restrict the behavior of other people. They violate the rights of citizens by restricting their use of their own property.

Disaster

Most citizens desire a healthy and growing economy — one that supports sufficient jobs and income for people to live comfortably. They have grown to believe that rising prices are a sign of a healthy and growing economy. If the banking system must expand the money supply to accomplish this objective, voters do not object.

Economists and politicians refer to monetary expansion as a form of economic stimulus. Monetary expansion, however, disrupts the market’s healthy pricing mechanism. The misinformation created causes artificial booms, which invariably lead to economic disaster. Along the way many of the rich get richer — but not in a healthy way. They don’t make more money by providing more and better products for consumers, they do so in trading with the artificially expanded money supply.

Conclusion

Whatever your political philosophy, voting supports the economics of oppression. It legitimizes the system in which the monopoly power of government intervenes in the normally efficient operation of markets.

  • Government engages in theft in order to redistribute resources according to the preferences of politicians.
  • Government engages in tyranny by influencing people’s behavior through the threat of violent force.
  • Government sets up the economy for future disaster through artificial stimulation resulting from the expansion of the money supply.

Election day provides an opportunity for you to consider the negative influences of the political means on your economic well-being. The words theft, tyranny, and disaster evoke a different emotional response than the terms spending, regulation, and stimulus. But, shouldn’t voters use words that more accurately describe for what they’re vote.

Take the opportunity to learn why markets unfettered by violent intervention—Free Markets—will always provide more effective and efficient allocation of resources.

Free markets bear a similarity to life — difficult; but rewarding.

 

Nations Cannot Win or Lose Trade Wars

Nation-states have no resources of their own. They redistribute the resources of their citizens. Nation-states can neither win nor lose when they play with other people’s resources. Tariffs and other weapons of trade wars disrupt normal trade; helping one group at the expense of another.

Illusion of Trade Deficits

The concept of trade wars begins with the illusion of trade deficits. When looking at the economy as a whole, trade deficits simply cannot exist. An economy, as a single unit, does not exist. An economy consists as a network of individual transactions. Thus, any comments about “an economy” require that we look at the nature of those individual transactions.

When a consumer acquires any good or service, by voluntary means, he always gives something in exchange — something he values less than what he gets. Thus, because the parties to an exchange leave with more value than they enter, no deficit can exist in any individual transaction. To make an hypothetical accumulation of all consumer transactions in an economic system the same logic must apply.

Buyers will always give money for the products they buy, whether from a local supplier or from a supplier in another country. Consequently, no deficit exists.

What Happens to the Money?

If a buyer always pays money for goods that he receives from overseas, what happens to that money?

One of three different things can happen to that money:

  • That money pays for products from the country of origin. Those purchases count as exports from the country of origin and thereby reduce the trade “deficit.”
  • That money acquires investments in the country of origin. Those investments, although not included in the GDP, have future benefit for that country.
  • That money buys government debt, which provides money for government giveaways. Those giveaways add to consumption and thereby the GDP. Not a bad thing from the policy-makers’ perspective.

How Do Tariffs Help Nation States Win War?

Only nation-states engage in “trade wars.” Peaceful traders have no incentive to engage in unhealthy activities.

The people involved in actual exchange do so voluntarily and peacefully. If they don’t like the terms of the exchange, they either renegotiate or abandon the transaction.

Since nation-states have no resources of their own, their actions — either through trade restrictions or tariffs — simply redistribute the resources of their own citizens. Nation-states have no weapons of their own for the conduct of trade wars; thus, they have no way of either winning or losing.

Trade Wars Cause Economic Disruption

The trade wars between nation-states disrupt the economies that they profess to help. In an effort to assist one part of the economy they always cause disruptions in other parts of the economy. The policies used in “trade wars” ignore the complexity of the markets with which they deal. For every player their policies help, multiple parties get hurt.

A couple of diagrams will give a very simple idea of the disruption caused by trade wars using tariffs.

Before Tariffs

This first diagram shows the situation before the implementation of tariffs. The consumer buys good G from supplier F (a foreign supplier) instead of buying the same good from supplier A (an American supplier) because it costs less money.

With the money the consumer saves he can buy products from other suppliers. The money earned by those other suppliers can, in turn, buy additional goods from an undetermined number of other suppliers (depicted by the cloud at the bottom).

The consumer gets more benefit and part of that benefit gets passed on to the rest of the economy.

After Tariffs

After the imposition of a tariff, which makes the price of good G from supplier F higher than the price from supplier A, the consumer will have to pay a higher price for the same product. This causes a chain reaction of negative results.

The consumer no longer has the extra money saved. He reduces his spending with other suppliers. The revenue of these other suppliers declines, and they spend less money with their suppliers. An indeterminate number of people in the economy get hurt as a result of the imposition of tariffs.

Please keep in mind the extreme complexity of international trade. A small intervention at one point in the trade process will have effects that ripple throughout the national economy and the international economy. We have no way of measuring the effect of these interventions. Because they always cause a disruption the normal trade process, these interventions will always have negative consequences.

Conclusion

Nation-states can gain only one thing by engaging in trade wars: political power. Some politicians think they are doing good things for their constituents by engaging in trade restrictions and tariffs. They base the activities of “trade war” on the false premise that trade deficits actually exist and they must be cured.

International markets, just like to domestic markets, are entirely too complex to be effectively managed. Messing with otherwise free markets only causes damage to the participants. In particular, it causes damage to those the politicians have sworn to protect.

 

Economics of Invasion

More people added to the population of the country adds nothing to its economy, unless they bring capital. Invaders generally don’t bring capital, they consume it.

Television screens have been filled with images of a large group of people marching across Mexico with the stated intent of seeking asylum in the United States. Many of those people — in fact most of them — state that they will enter the United States by one means or the other. This does, in fact, make them invaders. No other word describes this group of people accurately.

Some people argue that the term invader seems a little harsh for people attempting to get into this country. For that reason, a good working definition would help.

Invaders consist of people who enter another person’s property to take stuff — by force, if necessary.

In addition to objecting to the use of the term invader, some people claim that these people coming to the United States will provide a net economic benefit. I want to question that premise.

Current Economic Drag

It seems that throughout our economy people have the mistaken assumption that increases in population actually add to a healthy economy. More people, in fact, do not strengthen an economy; they weaken it. Only the addition of capital contributes to economic growth and prosperity.

When people move to a new area their presence involves capital consumption. They consume resources that others could use to build businesses. Only when they move to areas that have idle capital do they have any possibility of making a net contribution. The existence of idle capital presumes no workers available in that particular area.

In addition to consuming capital, new residents in a country have a depressing effect on local employment — particularly where minimum wage laws exist. Because minimum wage laws actually reduce the number of low-paying jobs available, these new residents will frequently displace citizen workers.

Myth of Future Contributions

In addition to overestimating the current value of additional residence, people also tend to greatly overestimate the current value of the future contributions of invaders. Even though many migrants to this country have started successful businesses, it takes many years to realize that potential. That future potential has limited value in the present.

Whatever present value future potential may have, it becomes highly diluted by the great majority of unskilled workers who will remain unskilled in the future.

Betting on the probability that large groups of immigrants contain a few individuals with huge future potential makes as much sense as attempting to make a living by buying lottery tickets.

Violent Intervention

No one, including myself, has claimed that these people have any intention of mounting an armed invasion. The means at their disposal consist of using our own violent intervention against us. They will use the resources of the United States the steal the property of American citizens via the violent intervention of our tax system. Our own government confiscates the property of our citizens to pay for the resources used by these people after they cross the border.

Some people claim they have a beneficial effect because they are net tax payers. That assertion is at best subject to question and at worst factually inaccurate. Consider that roughly 50 percent of our own population does not pay income tax. What percentage of these new people will have incomes that require them to pay taxes?

When we include the repatriation of American dollars to the countries that these people left, it becomes even harder to argue that people who cross the border illegally actually make a positive contribution to our economy.

Conclusion

The political and economic plight of the many people attempting to come to the United States does not negate their intent for invasion. They plan — whether knowingly or not — to use the power of the federal government to “steal” the property of American citizens. They do not have the capability, with the resources they bring, to make a positive contribution to the United States economy.

The economic arguments in favor of invaders simply provides weak cover for the political motives of those who encourage them.

Federal Fiance Made Easy

It never ceases to amaze me how people misunderstand the process of financing the federal government. The ridiculous economic stimulus programs that the government frequently adopts provide just one example.

I thought that a simple explanation of the dynamics of government finance would help readers understand how this system works.

How the Government Spends Money

To understand government finance, you must first understand the meaning of what people generally refer to as government “spending.” Although I do use the word occasionally, I try to avoid “spending” when referring to the money government disburses. Spending implies voluntary exchanges of earned resources (or money) for goods and services. Governments do not earn money. We’ll see how they get it in a moment.

Despite the laundry list of programs that get money from the government, those programs fall into three general categories of disbursements: 1) transfer payments; 2) acquisitions; and 3) debt payments. This diagram depicts those general categories of disbursements from the Federal Government to the National Economy.

Transfer payments

As the term implies, transfer payments simply transfer money to individuals, who belong to some specific group or category of citizens (or even non-citizens). Examples of transfer payments include: Social Security, Medicare, Welfare Payments, and Economic Stimulus Payments. The government receives nothing in return for these payments.

Acquisitions

Acquisitions include all disbursements made in return for products and services. Unlike transfer payments the government gets something for the money it disburses. Examples of acquisitions include: Defense, Highways, Buildings, and Salaries for Legislators and bureaucrats.

Debt Payment

Debt payment includes all payments made on federal debt obligations. This includes principal and interest.

As many categories as the people in government invent, and as many hearings and debates the legislators have, the “spending” side of federal finance boils down to these three categories: money given away (transfer payments), money to buy stuff (acquisitions), and money to pay debt obligations (debt payments).

That, however, does not provide a complete picture. Every dollar that government disburses must come from somewhere. Government has no money of its own. And, it earns no money.

So, where does government get the money it disburses?

How the Government Gets Money

Coincidently and conveniently it comes from three sources. I have completed the diagram of government finance to show those sources of money: 1) taxes, 2) inflation, and 3) borrowing.

Taxes

Taxes—all forms of federal taxes—provide the primary source of money for the disbursements described above. (I have included fees with taxes because the market does not determine these fees.)

No matter how nicely you phrase it taxation amounts to the use of the coercive power of the government to take people’s private property. Plunder, thievery, and taxation all provide accurate names for this source of government money.

Borrowing

The nature and effect of government borrowing seems to confuse people. Most explanations of government borrowing tend to complicate the subject beyond comprehension.

First, why does government borrowing occur?

As depicted in the diagram, the government must have a source for every dollar it disburses. Taxes provide the money for most of those disbursements, but when the government spends more money than it collects in taxes it must borrow to cover the deficit.

Second, what effect does borrowing have on the national economy?

In simple terms, borrowing has only a slightly different effect than does taxation. It takes money, which has other uses, from the national economy. Just as with taxation, when the government borrows money from the economy, that money gets used as government authorities dictate, without the benefit of a pricing mechanism. That money is no longer available for any other purpose for which the free market might have used it.

Third, what secures government borrowing? Or, what provides assurance of repayment to lenders?

People don’t lend money without the expectation of getting paid back. When people lend money to a government they rely on the government’s ability to tax in order to repay those loans. The security for government debt comes from its ability to tax.

(I don’t have the space to elaborate here, but don’t get confused by people who talk about “borrowing against our kids’ future.” First, money borrowed by government gets redistributed in the economy today—not in the future, just like taxes. Second, when government makes debt payments in the future, government redistributes that money in the economy at that same time in the future. The government makes a transfer today. The government makes a transfer in the future. In addition, the “wealthy” lend money to the government; the “wealthy” pay taxes to repay that debt—not “our kids.)

Inflation

With the aid of the banking system, the government can create new money to “pay its bills.” The Government likes this method for “collecting” revenue for several reasons: it can do it unilaterally (with the assistance of banks), without people noticing, and people don’t feel the pain immediately.

I have described inflation as a receipt like the other sources of revenue because inflation takes value away from people in the economy—just as taxation does. When the banking system creates new money—from nothing—the value of money already in existence declines. But, the decline in value does not affect everyone uniformly. Those who get this new money first benefit; those who get it later suffer. Just like counterfeiting.

Although the banking system has the power to create money for any purpose, it frequently creates it to buy federal debt—frequently referred to as monetizing federal debt. That does not change the effect of inflation: transferring value from on group of people to another group.

(Because of the complexity of the concept of inflation, I will address it in more detail in future posts.)

The Books Must Balance

For every dollar the government disburses it must receive a dollar from somewhere. Disbursements and receipts must always equal. Simple. Keep this in mind whenever reading or hearing about government finances.

When your legislators propose wonderful sounding programs (e.g. healthcare, museums, homeland security, or economic stimulus) they must tax, borrow, or inflate to get that money. They cannot give you anything for free.

Similarly, when they propose tax cuts without equivalent spending cuts, don’t let that fool you. They must borrow or inflate to make up the difference.

This system looks rather benign. Doesn’t the government put back into the economy every dollar it takes out?

Yes, it does. However…

A Flaw in the Model

That last question exposes the flaw with the model I have presented here. The homogeneous entity that we refer to as “National Economy” simply does not exist. The economy actually exists as an interconnected, yet heterogeneous, collection of individual people and businesses.

Transfer payments, acquisitions, and debt payments do not go to everyone equally. The government makes those disbursements to specific people or organizations—based on the whim of legislators, not the desires of market participants.

Taxes, borrowing, and inflation do not come from individual people and businesses uniformly. Specific people or organizations pay taxes, lend money, or suffer from the effects of inflation.

The Wealth Redistribution Machine

In summary, the federal government acts as a gigantic wealth redistribution machine. In the aggregate, the government gives a dollar for every dollar it takes. The economy, however, does not operate as an aggregate. So, for every dollar the government gives to one group of individuals it must take a dollar from another group of individuals.

Government finance simply amounts to involuntary, coerced, exchange.

Flocking Markets

What does a flock of birds have to do with markets?

Probably not a whole lot.

But, they do have a lot to teach us about the behavior of markets and other complex living systems, e.g. individual humans, neighborhoods, markets and a flock of birds.

Flocks of birds, like the one in this video, consist of ten, hundreds, and maybe thousands of bird, each acting individually without external controls. Yet, they perform these amazing, intricate, maneuvers without crashing into one another. Does that mean that these bird-brains study massive instruction manuals full of rules? Do they have flight controllers in a tree near by, guiding their every move with broadcast signals?

It seems that very simple rules can guide these complex systems. Students of complex systems have built computer models that emulate the flocking behavior. Without the benefit of interviewing the participating birds, modelers have succeeded in building models that behave very much like flocking birds with only a few simple rules. One such model uses only three rules:

1. Separation – avoid crowding neighbors (short range repulsion)
2. Alignment – steer towards average heading of neighbors
3. Cohesion – steer towards average position of neighbors (long range attraction)

See description of Flocking Behavior.

Might the people who believe that markets require extensive regulation and supervision — to prevent crashes and collisions — have it all wrong? Could markets — composed of large numbers of individuals acting in their own self-interest, just like the birds — operate far more efficiently than the highly regulated markets we have today.

Consider three possible rules:

1. Live your life and allow others to live theirs.
2. Exercise your liberty by taking responsibility for your actions and expect others to do the same.
3. Do what you want with your own property and leave other people’s property alone.

Oh, of course, that would not work. People all have such self-destructive tendencies. Markets require outside intervention — and lots of it. After all, the market participants don’t have the mental capacity of birds.