Hostile Takeover: Resisting Centralized Government's Stranglehold on America (24 page)

I STILL HAVEN’T FOUND WHAT I’M LOOKING FOR

I
NCENTIVES MATTER, AND SO DO TAX SYSTEMS.
A
S WITH ANYTHING
else, if you punish wealth creation (through the tax code), you will get less of it. If you punish the capital that drives innovation, and the wealth that rewards successful innovation, you will get less of it. Barack Obama and Warren Buffett apparently don’t buy into this economic law. But U2 certainly does. Wildly successful, the band U2 is known as much for the advocacy by its leader, Bono, on behalf of third-world debt relief as it is for its music. In 2006, the band responded with their feet to what would have amounted to a massive tax increase imposed by the government of Ireland on the group’s royalty payments (
profit
is such a dirty word I won’t employ it here). As you might expect, U2 picked up and moved a good portion of its business interests, reincorporating as U2 Ltd in the Netherlands. The shift, according to the band’s manager, Paul McGuinness, made economic sense. “Like any other business,” he said, “U2 operates in a tax-efficient manner.”
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Democratic senator John Kerry of Massachusetts, who along with his wife, Teresa Heinz Kerry, is estimated to be worth a total of $1 billion,
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also seems to understand the importance of tax systems. At least when it comes to protecting
his
family’s fortune, that is. In 2010, the Massachusetts resident registered the new family yacht in Rhode Island, which had repealed the Boat Sales and Use tax in 1993. According to the
Boston Herald,
“
Isabel
—Kerry’s luxe, 76-foot New Zealand–built Friendship sloop,” features “an Edwardian-style, glossy varnished teak interior, two VIP main cabins, and a pilothouse fitted with a wet bar and cold wine storage.” Here’s the catch: “Cash-strapped Massachusetts still collects a 6.25 percent sales tax and an annual excise tax on yachts. Sources say
Isabel
sold for something in the neighborhood of $7 million, meaning Kerry saved approximately $437,500 in sales tax and an annual excise tax of about $70,000.”
53

Soon after the senator’s “tax-efficient manner” of registering his new 76-foot toy was discovered by the press, the progressive, tax-loving Democrat agreed to “voluntarily pay $500,000 to Massachusetts tax collectors on his luxury yacht, a pledge made hours after state officials had begun inquiring into whether he had attempted to evade the payment by docking the boat in Rhode Island.”
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Senator Kerry is one of President Obama’s most reliable votes in the U.S. Senate. Bono, meanwhile, should “count himself as one of President Obama’s unofficial foreign policy advisers,” according to
Politico
.
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At a 2010 sit-down with the president at the White House, Obama got a download on the rock star’s vision for third-world economic development:

A recurring theme was innovation. We agreed that there are simple technologies that need to be made more available to transform not only public health, but also agriculture, helping farmers check prices and weather patterns. While acknowledging these are difficult times for donor economies, we discussed the President’s food security initiative and agreed to encourage other countries who signed up to keep their commitment to invest $22 billion over 3 years.
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Perhaps “tax efficiency” and the need for simple, low, fair, and honest tax systems could be added to the next briefing agenda? After all, a number of struggling nations—twenty-three at last count—have scrapped their punitive tax systems for a simple, low flat tax on income, and the results have been exactly what you might predict: more economic growth, more tax compliance, more freedom. To be sure, tax reforms do not substitute for sound money, strictly enforced property rights, and the rule of law that ensures other people won’t hurt you or take your stuff. But the simple logic of a tax system that does not try to socially engineer preferred behavior from the top down is undeniable.

Back here in the United States, too many wealthy, well-connected people are perfectly comfortable with big, expensive government and a tax code that punishes accomplishment, because they know, when push comes to shove, that their tax lawyer will find a way to work around it, or their man in Washington will just draft a brand-new carve-out.

The political marketplace for special provisions in the tax code is a particularly brazen example of the insider trading that takes place within the walls of the political establishment. Every year, a pitched battle over temporary, one-year tax provisions—so called “tax extenders”—becomes the most important occasion in Washington. There is no economic logic for the permanent uncertainty of not knowing, from one fiscal year to the next, what your personal or company tax treatment will be. It’s not the logic that matters here. The purpose of an annual battle over tax extenders is to sustain the symbiotic culture of members of Congress who sit on the right committee, feeding off the PAC dollars of any interest needing an extender, while the well-heeled interests most skilled in manipulating the tax-writing process feed off the political pull of the politicians whose attentions they just bought.

Days after the president’s massive health care bill passed in 2010, one lobbyist explained to me why it was that small businesses that own tanning beds ended up, at the eleventh hour, becoming a “pay for” revenue offset for new Obamacare spending. What on earth do tanning beds have to do with the funding of government-run health care? “They didn’t show up,” she said. The message is clear: Play the game, write the checks, feed the beast, or someone who is playing the game better might just put you out of business.

That tanning-bed tax, by the way, has so far only raised one-third of the revenue officially projected when it was proposed, as local salons shut down and customers seek out cheaper alternatives—like sunbathing.
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How do we break the cycle?
You have to show up.
Government goes to those who show up. We will only succeed in scrapping the tax code and replacing it with a simple, honest system when America beats Washington and all the interests aligned against honest tax policy. Once, this was a pipe dream. But today, all the tax lobbyists lined up outside the House Ways and Means Committee or the Senate Finance Committee do not have the privileged vantage of a closed system where the only people who know what is being drafted and debated and voted on are those inside the process. We the People now have millions of freedom-loving eyeballs and an army of citizen reporters who get the facts first and distribute them through chosen pathways and social-media outlets online. The lowered cost of the right information at the right time takes away much of the strategic advantage once enjoyed by the swarm of interests inside the Washington Beltway.

At some point, Thomas Jefferson believed, you have to choose “between economy and liberty, or profusion and servitude.” You have to show up. Otherwise, you might become the next “pay for” dropped into the small print of the next “shared sacrifice” tax hike legislation ostensibly targeting those among us who have been deemed, from the top down, to have already “made enough money.”

CHAPTER 9
A S
TANDARD OF
V
ALUE

Freedom of our currency is the fundamental issue; it is the keystone of a free society.

—Hans Sennholz,
Money and Freedom

D
R.
H
ANS
S
ENNHOLZ WAS THE CHAIRMAN OF THE ECONOMICS DEPARTMENT
at Grove City College when I was a student there. He was an intellectual mentor and his Austrian approach to economics was an important influence on my own way of thinking. Sennholz’s thought, in turn, was shaped by the work of Ludwig von Mises, Sennholz having received his doctorate in economics under Mises at New York University soon after the Viennese expat had arrived in the United States. Both Mises and Sennholz were known for their students’ as well as their own scholarly work in economics.

Before reading this book, you may never have heard of Sennholz or even Mises. But one of Sennholz’s most successful “students” is someone you probably do know. That’s Congressman Ron Paul, M.D., of Texas, who says that Sennholz’s ideas on money and the business cycle were “a tremendous influence.”
1

I think it’s safe to say that we would not be talking about the failures of top-down monetary policy in the United States without the uncompromising determination of Dr. Paul, and the attention he has brought to the issue of sound money through his presidential campaigns. We would not have access to revealing new information produced by the first public audit of the Fed. We would not be debating, in the mainstream media, the massive damage, from the top down, that the government’s grossly irresponsible manipulation of the dollar has wrought on our economy.

INFLATED SCRUTINY

T
HE GENERAL PUBLIC OFTEN VIEWS MONETARY POLICY AS A COMPLEX,
technical field that is better left to the experts. That’s exactly how the Washington establishment and its czar culture like it. But monetary policy came into the spotlight in 2008, when the financial collapse revealed, as long-battling reformers like Paul had been warning for years, that the “experts” were more concerned with protecting their interests and the interests of the crony capitalists of Wall Street than in defending the taxpayers. Suddenly the American people became interested in the complicated world of monetary policy, learning how it has been used over the years to manipulate markets for the benefit of big banks and big government. They’re focusing, correctly, on the Federal Reserve, demanding that the agency come under greater scrutiny, and that we abandon policies that use money as a tool for the elites, and instead pursue alternative monetary policies that focus on creating a standard of value.

Just a few short years ago, hardly anyone except Paul was questioning the Federal Reserve. The financial meltdown of 2008, and the decentralization of information, changed that, and not a moment too soon.

In the wake of a secretive trillion-dollar bailout by the Fed, where the central bank purchased toxic assets at home and abroad to save certain favored banks and shift the burden to taxpayers (and anyone who holds dollars, for that matter), the American people started to take notice. Congress ordered an audit—albeit a watered-down one. Suddenly the Fed saw the political need to be—or at least appear to be—more transparent, and Fed chairman Ben Bernanke claimed that increasing transparency and accountability would be the highlights of his chairmanship.
2
This was a response to public pressure, but it smacked of damage control, not a shift in policy. Regardless, the American people are now paying attention to the elephant in the room, Fed responsibility for the boom and bust of financial crises and the bailout culture that has grown over the past century.

The expansive monetary policies of government central banks have reaped disastrous consequences for both the U.S. and global economies. Europe, in particular, faces serious economic challenges brought on by an attempt to set monetary policy without regard to fiscal differences among member nations. Unfortunately, many U.S. banks have risky exposures in these debt-strapped countries and many are now hoping that the Fed and the International Monetary Fund will bail out their bad bets. Haven’t we been here before? Easy money and too much government spending and meddling and another financial crisis that will surely rival the 2008 meltdown. The boom and the bust, and American taxpayers are once again left holding the bag.

WHERE DOES MONEY COME FROM?

T
HOUGH WE ALL USE MONEY EVERY DAY, MOST OF US PROBABLY DON’T
often sit down and think about what makes money work. If you are like most folks, you might never have thought to ask the question until you saw Keynes and Hayek rap on YouTube. Or maybe you just knew, without anyone needing to point out the obvious, that creating trillions in money and credit out of thin air to pay for bailouts and unfunded government promises was a really bad idea. Something didn’t add up.

Against all plausible expectations, Ben Bernanke made it cool to debate monetary policy. Go figure.

Money comes from the same process of people acting and interacting that generates knowledge, coordination of plans, and societal progress. In order to understand the extent of the damage done by the Fed and our national monetary policies, we have to answer a seemingly simple question: “What is money?” The answer to this question immediately revisits a now common theme you will immediately recognize. Sound money emerges freely, from the bottom up. The destruction of sound money, and the collateral damage that ensues, is inevitably imposed from the top down.

At the simplest level, money is a medium of exchange. Forms of money used by different societies have changed over time, but the basic goal of money is to facilitate transactions in the market. You can trace the origins of money (and virtually every other good) back to the subjective values of individuals interacting in the marketplace. In essence, money is an unintended consequence of individuals pursuing their self-interest. Its use and purpose is defined from the bottom up, by people trading and interacting. We need money for markets to work. Remember that the Marxist conception of socialism was the complete elimination of money and exchange.

The first thing to notice about money is that it’s different from many other elements of the market in that it permeates the whole market order. Any changes in the money supply will have an impact on the entire economy. If an imbalance between supply and demand for money arises, the effect is upon the economy as a whole. This is different from the case of a commodity, where supply and demand can be adjusted by the individuals engaged in exchange without disturbing other markets. To use an example, a shortage of steel would lead to an increase in its price, signaling consumers to reduce their use, while encouraging producers to identify additional sources of steel or cheaper substitutes. The price mechanism forces people to adjust their behavior. An imbalance between the supply and demand of money, on the other hand, has far more significant implications for the economy, with the potential for creation of depressions or hyperinflations that dramatically affect economic output.

For Carl Menger, Ludwig von Mises, and others in the Austrian School, the value of money is determined in the same way the value of other goods is determined—subjectively. Individuals desire money because it facilitates the exchange process. Other standard characteristics of money—a unit of account, a store of value—are secondary to the importance of providing a medium of exchange. Money is valued for its ability to be exchanged for final goods. This poses a challenge for economists, because how I value money will rely on how others value money. I will value money because I know that others value it and will exchange goods and services for it. It appears that individuals value money because the group values money, but the group values money because individuals do. It’s a chicken-and-egg question with far-reaching ramifications.

So where does money get its value? For Mises, the individual’s subjective evaluation was the source of all value for all goods, including money.

To solve this quandary, Mises developed a “regression theorem,” drawing from Carl Menger’s insight into the origins of money.
3
Menger proposed that money emerged from a barter society, an inefficient process that forced people to seek out commodities that were highly tradeable.
4
In effect, money solves the problem of the double “coincidence of wants.” That is, in a barter system, I must find someone who has what I am seeking and who is also interested in obtaining my goods. But what if I can’t find such a person? It can be very inconvenient. But if there is some other thing that many people are willing to use as a medium of exchange, and if I have enough of that thing, then I will find it easier to obtain what I’m seeking. I should be able to find someone who will gladly accept
that
thing, in exchange for the thing I want. As a result of this indirect exchange process, eventually one commodity emerges as the dominant and most readily accepted commodity, and thus becomes a form of currency, or money, for the society. Thus, the ultimate source of value for money can be found by examining the original use value. For example, cattle were a form of money for many centuries. But cattle, though they make good wallets, unfortunately don’t fit into very many. Can you imagine buying a plane ticket with a cow? It could prove cumbersome.

While Menger claimed that money evolved from the bartering process, Mises worked backward, looking at the value of money today, and tracing its value back to when the money was traded as a commodity. Mises observed that we only know about money based on what it was worth yesterday. So, instead of a circular flow between objective exchange value and subjective use value, we have a spiral that goes back in time. Fortunately, this spiral does not regress infinitely; the spiral stops when a stage is reached where money has a use value other than as money. Gold, for example, may be used in jewelry and industrial processes, and is exchanged as a commodity for such purposes. This exchange process is where the value of money is generated.

In his classic book,
The Theory of Money and Credit,
Ludwig von Mises wrote that money is the most marketable commodity.
5
Many societies somehow found commodities that everyone accepted in exchange for whatever was sold. Throughout history, people have used countless commodity items as money, such as shells, beads, rice, and even alcohol. Cigarettes are still used as commodity money in U.S. prisons.
6
The most popular form of commodity money has always been precious metals.

The free market has repeatedly chosen gold and silver as money. These precious metals are seen to have value, and people easily accept gold or silver as payment. Gold and silver have been used as money for at least four thousand years.
7
One of the most attractive characteristics of gold and silver is that they cannot be manufactured on demand by government. “The amount of gold in the market is limited by the profitability of mining it out of the ground,” writes economics professor Richard Ebeling of Michigan’s Northwood University. When linked to gold, “the quantity of money, therefore, is controlled by the market forces of supply and demand.” This means that governments cannot manipulate the quantity or value of money as a means of financing more government.
8

This original use value and the spontaneous emergence of money solves the so-called circularity problem—money has a value that originates historically from the point where the commodity was used for other things. Money is a spontaneous order that evolves over time arising purely from free exchange among individuals as they pursue their self-interest. No government mandates or decrees are required to create money to facilitate exchange. Money is the unintended consequence of individuals all pursuing their self-interest.
9

THE BOOM AND BUST

L
IKE ALL ECONOMISTS,
A
USTRIANS AGREE THAT AN INCREASE IN THE
money supply can generate an increase in the price level; however, unlike monetarists, Austrians do not believe in a strict, mechanical relation between the price level and the money supply. There is a causal relationship, but that is all we can say. This difference leads to important divergent views on inflation. For monetarists, the money supply and money demand are aggregates, so their description of inflation leads monetarists to assume that a change in the money supply leads to a uniform change in the price level, affecting all market participants equally.

The Austrians offer a different view of the impact that changes in the money supply can have on economic decisions; this view examines the transmission mechanism for changes in the money supply. When new money enters the market, it is not introduced evenly across the board. There is an injection effect, with money entering the market at certain points and then spreading throughout the economy. Individuals close to the source of the injection will see the effects first, providing them with definite advantages. It is as if they are receiving new money for nothing. In turn, the spending patterns of these individuals will determine the next round of recipients, as the expansion pushes through the economy. These subsequent individuals may benefit from the “new” money as well, but as the process continues, prices are eventually bid up by people who believe that they are wealthier than they really are. Unfortunately, those at the bottom of this process will be paying higher prices without receiving any new money. Ultimately, everyone is paying higher prices and no one is better off, because the currency has been artificially inflated.