One Size Fits All

An increase in the standard of living from trading depends on disagreement about traded value.

Each side of each trade has to come out ahead, which can only happen if they disagree.

A one-size-fits-all program, on the other hand, leaves half the people ahead and half the people behind.

The people left behind aren't given the option to decline the trade.

The standard of living of the nation does not rise.

It's automatically worse than a free market, even if it's a good program.

A typically bad program is a disaster.

Socialism fails because it can't convert disagreement into a rise of the wealth of the nation, even benevolent and competent socialism, if that were a stable possibility.

Bureaucratic incentives always make bureaucratic benevolence unstable.

Opportunity Denied

One of the amazing things in life is Chilean grapes showing up in Ohio supermarkets in early Spring, at the peak of ripeness, and cheap.

Some bunch of Chileans harvest them at the right time, load them on ships, sail to some coast, where they get trucked at the right time to Ohio and put out for sale.

I don't imagine that Chileans like Americans, or Americans like Chileans. Yet the Chileans get what they want out of their effort, not caring a bit for the Americans except that the Americans buy stuff for more than it cost to produce; and Americans care only that they get more value to themselves than they pay for.

Business doesn't care about liking and socializing, just that each side comes out ahead.

It would work that way with any disadvantaged domestic group, if their leaders didn't tell them it wasn't worth their while trying.

"High Wages Needed for Teachers"

Teaching should pay what it's worth to society, is the teachers' argument.

But you don't get paid for the value you bestow. Nothing would work if you did.

You get paid less than the value you bestow, and more than the value of the job to you.

Then both sides profit.

The value gap is why there is voluntary economic activity; and, added up over the nation, each such transaction raises the standard of living.

Wealth Comes from Disagreement

If you prefer something I have to somethihg you have, and I prefer that same something you have to that same something I have, we can trade and we both come out ahead.

We disagree about value.

Our combined wealth increases by the amount of the disagreement. This is miraculous, because there's only a rearrangement.

There's a story of a chaplin in a WW2 prison camp who would take his monthly Red Cross box and set out trading cigarettes, meat, jelly, and so forth, each trade reflecting the preferences of the other guy, say of jelly over cigarettes, and return to his bed with the equivalent of two Red Cross boxes. All he did was know who preferred what, and came away leaving everybody better off, yet with a profit also to himself. This is the vocation of the middleman. Disagreement is his melieu.

All voluntary trades raise the combined wealth. Trades that don't benefit both sides don't happen, at least not voluntarily.

Add up the voluntary trades over the nation, and the national standard of living rises by that amount.

The rule for generating the maximum amount of disagreement over value is: specialize and trade. The specialist values his output at much less than his customers do, and so he acquires a job. So long as the disagreements survive, his job is economically possible. The national economy booms.

For his needs, the specializer trades with other specializers.

Self-sufficiency, by contrast, is the route to extreme poverty.

Obama is the master of closing disagreement gaps, and with each closed gap a job disappears. Obama's is the economic policy disaster of the century.

The Rich, Tax Increases and Trickle-Down.

A ditch-digger with heavy equipment earns a lot more than a ditch-digger with a shovel.

The difference is capital. Somebody bought heavy equipment with capital.

Capital is extra money.

The ones with extra money are the rich.

Some rich guy figured out a way to make a ditch-digger more productive than he had been, to make himself richer.

But it also makes the ditch-digger richer.

The extra ditch-digger income is trickle-down.

Trickle-down is not dimes falling from the pockets of the rich but the return to wisely used capital.

When you tax the rich more, their living standard doesn't change. Rather, their investment declines. The extra money goes first.

A tax on the rich is a tax on the earnings of ditch-diggers, not a tax on the life style of the rich.

Think of capital, extra money, as seed corn. Seed corn is extra corn that's not eaten. It's what gives you much more corn next year.

Taxing away the seed corn to distribute it as food is disastrous.

If somebody says, "At some point, you have enough money," he doesn't understand that money beyond enough money is the seed corn.

Money Is Not Wealth

Money is not wealth. It is a ticket in line to say what the economy does next, presumably something for you.

If there are too many tickets outstanding for what the economy can do at once, the tickets bid up prices against each other, and prices rise.

If there are too few tickets outstanding for what the economy can do at once, pieces of the economy go idle for want of able buyers.

The Federal Reserve regulates the number of tickets by creating or destroying them, so that the number of tickets is matched to the capabilities of the economy.

The Fed meets every month or so and decides whether there are too many or too few tickets out there.

If there are too many, it sells Treasury debt for dollars, and burns the dollars.

If there are too few, it prints new dollars and uses them to buy back Treasury debt.

It is not creating or destroying wealth when it does this. It's just putting out or taking back tickets.

Clever detail:

The way the Fed controls its intervention is through the interest rate target.

The interest rate is an output from the economy. The Fed uses it to regulate itself.

The Fed, if it wants to destroy dollars, moves its target interest rate up a tiny bit. Then, for a month or so, it sells debt when the interest rate below its target, and buys debt when its interest rate is above its target.

The result is slightly fewer dollars out there relative to what the economy is capable of doing than before.

The market is producing the interest rate, not the Fed. The Fed just sets the target.

To increase the number of dollars, the Fed lowers the target instead of raising it.

Technical Detail:

The Fed uses leading indicators of inflation to decide whether there are too few or too many dollars out there.

The leading indicators have to be orthogonal to (=insensitive to) the interest rate, lest the Fed blind itself with its own action.

In today's (2012) environment, the Fed has pretty much thrown everything to the wind and is operating blind, doing monetary policy to try to fix a perverse and deadly economic policy.

Implications:

There can be no trust fund for Social Security. The government must instantly put back in circulation every dollar it takes in, lest the money supply fall. Tomorrow's retirees will be paid by tomorrow's workers when tomorrow comes.

Money in a mattress is a gift to the treasury. The Fed simply replaces it until such time as you take it out of the mattress and spend it. Then the Fed burns its copy.

Money overseas is a gift to the treasury as well, until such time as it's spent in the US economy either as purchase or investment.

Handing out free money to citizens will automatically be offset by issuing debt, to soak up an equal number of dollars from the economy and put them out of circulation. Otherwise too many tickets chase the available goods.