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FREE
MARKET
THE
The Keynesian AbyssRON HERA
S
VOL. 30, NO. 8, August 2012 THE MONTHLY PUBLICATION OF THE LUDWIG VON MISES INSTITUTE
Ron Hera is founder of Hera Research, LLC, and
the principal author of the Hera Research Monthly
newsletter. Ron’s articles have appeared on GoldSeek.
com, 321gold.com, King World News, Seeking Alpha
and in other professional economics and investment
publication venues. (Email: [email protected])
Perhaps the greatest modern champion o central economic planning
was the twentieth-century English economist John Maynard KeynesKeynes advocated the idea that the government should play a large
active role in the economy. Among the consequences o Keynes’ economic theories, whether intended or unin-tended, is the act that Western economies today are char-acterized by large, central governments, central banks, andmassive debts.
Government policies based on Keynesian theories and
the institution o central banking orm a nexus o centraleconomic planning. Control o the central planning pro-cess is a winner-take-all proposition or businesses. In theU.S., the result is an unholy alliance o the U.S. ederalgovernment, the Federal Reserve (along with the largestU.S. banks), and the largest U.S. corporations. The logi-cal chain beginning with Keynes’ undamental idea thatgovernment, supported by a central bank, should play a large and active role in the economy sets the stage or a centrally planned economy and ultimately produces a cor-porate state.
The U.S. economy is locked in a downward spiral o economic decline. By growing in size, and by engaging
in ever-larger economic interventions, the U.S. edera
government became itsel a material cause o the recession that began in 2007. By attempting to grow the econ
omy through monetary expansion, the Federal Reserv
destroyed savings and ueled a series o disastrous economic bubbles, culminating in the housing bubble.
Following Keynesian economic theories, the policresponse o the U.S. ederal government to the recessio
that began in 2007 and o the nancial crisis that beganin 2008 was to expand the government urther and at
more rapid pace. In other words, some o the root cause
o the economic imbalances that led to the recession annancial crisis (the relative size o the government and th
resulting economic distortions) were compounded. As consequence, the so-called “double dip recession” in th
U.S. that began in the second hal o 2011 will be longeand ultimately more severe than the economic downtur
o 2007–2009.
Leviathan: The Size of the State
Government encroachment on the private sector, lika sel-ullling prophecy, oten magnies the reasons wh
government intervention was originally believed to be necessary. For example, when the U.S. ederal gov-
ernment became involved in education throughederally guaranteed student loans, the result was
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2 August 2012 The Free Market
Mises.org Ludwig von Mises Institute
Governments redistribute wealth and manipulate economic activity through taxes,subsidies, guarantees, and regulations, but they do not produce new wealth.
Copyright © 2012 by the Ludwig von Mises Institute. Permission to reprint in whole or in part is gladly granted, provided full credit is given.
Editor: Daniel J. Sanchez | Contributing editors: Thomas J. DiLorenzo, Jeffrey M. Herbener, Robert Higgs, Mark Thornton | Publisher: Llewellyn H. Rockwell, Jr.
The Free Market is published 12 times a year. Note: the views expressed in the Free Market are not necessarily those of the Ludwig von Mises Institute.
Ludwig von Mises Institute, 518 West Magnolia Avenue, Auburn, Alabama 36832-4501 Phone: 334.321.2100; Fax: 334.321.2119; Email: [email protected];
Web: mises.org
that the cost o a college education rose toward the limit o what students could borrow and repay during their careerssimply because the loans were guaranteed by the govern-ment. The guarantees produced more and riskier loans,larger loans, and higher education costs.
When the U.S. ederal government promoted homeownership or minorities and the poor, mortgage loanguarantees resulted in higher home prices and contributedto the sub-prime lending debacle where banks originatedloans to unqualied borrowers in order to sell them togovernment sponsored entities (GSEs), i.e., to Fannie Mae
and Freddie Mac, and to investors as collateralized debtobligations (CDOs) and other mortgage backed securities(MBS).
Governments redistribute wealth and manipulate eco-nomic activity through taxes, subsidies, guarantees, regula-tions and so orth, but they do not produce new wealth.Government spending unavoidably avors businesses withclose ties to the government over those that are taxed butthat do not benet. Government programs that overlapthe private sector divert economic resources to businessesthat have the avor o politicians minus the cost o govern-
ment, thus producing economic distortions and a net losso wealth or society.
How the Government Destroys Jobs
While politicians extol the theoretical benets o evermore government control o the economy, e.g., throughincreased regulation, rom the standpoint o individualentrepreneurs, businesses and private investors, the govern-ment is a nuisance, an impediment to wealth creation, andthe source o countless costs and risks. The larger the gov-
ernment becomes relative to the size o the economy, themore it tends to discourage economic activity. Although
roughly 70 percent o U.S. jobs are created by small busi-nesses, ranging rom amily owned businesses to high tech-
nology startups, the burden o government alls dispropor-
tionately on them because they have ewer resources with
which to administer and to demonstrate compliance with
government regulations.
When large companies are audited or investigated by
any o several government agencies, their accounting, legal,
and compliance departments are well equipped to deal
with such matters. However, when a small company aces
the same hurdles or seeks government permits, licenses or
certications, its operations are directly impacted and theassociated accounting, legal, and regulatory compliance
costs can cause the business to lose money or to ail. In
the event o an audit or investigation, small business own-
ers in the U.S. generally seek to comply immediately and
oten pay nes or penalties without contest in order to end
the government’s intererence. While large companies can
aord to dispute the government, small businesses ace the
equivalent o extortion.
As a practical matter, small businesses in the U.S. are
permitted to operate at the sole discretion o government
bureaucrats that can eectively shut down small businesses without any evidence o wrongdoing. Setting aside the act
that small business owners live in constant and well-justi-
ed ear o their own government, the result is a stifing
o economic activity and a net loss o jobs. For example,
traditional small businesses in the U.S., i.e., sole propri-
etorships, increasingly avoid hiring employees.
Free-market competition and the inherent uncertainty
o economic conditions provide ample risk or startup
businesses. A disproportionately large government rela-
tive to the size o the economy damages economic activ-
ity and discourages investment in new businesses. The
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The Free Market August 2012 3
Ludwig von Mises Institute Mises.org
aggregate overhead o government regulations and regula-tory compliance, along with taxes and potential penalties,e.g., the 2010 Patient Protection and Aordable Care Act(“Obama-care”), increases business costs, amplies busi-ness risks, and urther increases the burden o regulatory
compliance. The result o systematically increasing thecosts and risks o doing business—in lock step with thesize o government—is to reduce the rate o business or-mation and to encourage investors to look elsewhere tond returns.
I the U.S. government, currently almost 45 percent o GDP, desired to create jobs, the correct policy would beto greatly reduce the countless regulations, taxes, and eesthat encumber small businesses. The path to job creation isor the government to reduce job destruction.
Central banks, such as the Federal Reserve, are exam-
ples o central economic planning, i.e., they control themoney supply and exercise centralized control over thevalue and cost o money through interest rates, bank reserve ratios, monetary infation and by other means. TheFederal Reserve engages in central planning or the beneto banks. Like the U.S. ederal government, the FederalReserve, through monetary mechanisms, distorts spend-ing and investment patterns, redistributes wealth and pre-empts the nancial and economic decisions o households,individual entrepreneurs, businesses and private investors.
Keynes and The Corporate StateThe U.S. economy is anything but a ree market today.
In act, the U.S. government increasingly resembles an oli-garchy in which the oligarchs are large corporations, i.e.,a “corporatocracy.” Thus, the illegitimate ospring o thegrand government envisaged by Keynes and the institu-tion o central banking is a corporate state.
Without a large government, businesses have littleincentive to infuence it, but with the government (local,state, and ederal) representing nearly hal o the U.S.
economy, infuencing the government is a mission-criti-cal objective or every company. The size o governmentimplied by Keynesian economics provides motive andopportunity but only the largest corporations have themeans to succeed.
The goals o businesses seeking to infuence the govern-ment include winning government business, mandating consumption o products and services (rom child car seats
to health insurance), avoiding taxes, guaranteeing prots,creating regulatory loopholes, protecting markets, elimi-nating competition, socializing losses, and so orth.
The infuence o Wall Street over Washington D.C.through political campaign contributions, corporate lob-
byists, and revolving doors (where the same individualsalternate between closely linked private sector jobs andgovernment posts) is almost absolute. Lobbyists are inti-mately involved in writing legislation that is oten rubber-stamped by the U.S. Congress, i.e., passed without readingor meaningul debate. The largest corporations supportpolitical candidates through campaign contributions andby unding political action committees that, among otherthings, use corporate public relations tools or politicalpurposes, i.e., propaganda. Key government posts are con-sistently held by individuals with clear conficts o interest,
and the existence o such conficts is routinely ignored.The current reality o the United States is
that the largest corporations have hijacked theKeynesian central planning powers o the ederal
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government and have used these powers to encourage ever
larger and more direct interventions in the economy or
their own benet, as well as laws and regulations that serve
as a barrier to ree-market competition. U.S. regulators,
such as the Securities and Exchange Commission (SEC),
Commodities and Futures Trading Commission (CFTC)
and the Food and Drug Administration (FDA), appear to
have been captured by the industries they are intended to
regulate. Government regulators selectively enorce regula-
tions, oten against small businesses and growing compa-
nies, such as organic dairy armers, protecting the interests
o the largest corporations rom small businesses, ree-mar-
ket competition, and consumer choice.
The largest U.S. corporations (including oil companies
like ExxonMobil and Chevron; drug companies like John-
son & Johnson, Pzer, and GlaxoSmithKline; agribusiness
companies like Archer Daniels Midland, which are heav-
ily subsidized by the U.S. ederal government; agricultural
biotechnology companies like Monsanto; military contrac-tors like Lockheed Martin, Northrop Grumman, Boeing,
Raytheon, and General Dynamics; and banks like Bank
o America, J.P. Morgan Chase, Citigroup, Wells Fargo,
Goldman Sachs, and Morgan Stanley) have not only
been the beneciaries o government expansion, decit
I n s i d e : “ T h e K e y n e s i a n A b y s s ”
b y R o n H e r a
L u d w i g v o n M i s e s I n s t i t u t e
5 1 8 W e s t M a g n o l i a A v e n u e
A u b u r n , A l a b a m a 3 6 8 3 2 - 4 5 0 1
F R E E
M A R K E T
T H E
T H E M O N T H L Y
P U B L I C A T I O N O F T H E
L U D W I G V O N M I S E S
I N S T I T U T E
A D D R E S S S E R V I C E R E Q U E S T E D
N o n p r o f i t O r g . U . S . P o s t a g e
P A I D
L u d w i g v o n M i s e s I n s t i t u t e
spending,and central economic planning, but, consider
political campaign unding practices, have become the de aoligarchs o America.
Sliding Into the Keynesian Abyss
The decline o the U.S. economy is the logical outcome
Keynesian economics, which enshrines central economic pl
ning and embraces central banking. The unholy alliance o ederal government, the Federal Reserve, and Wall Street
all but eliminated capitalism and has transormed the UniStates rom a burgeoning ree-market economy into a ail
corporate state.The U.S. ederal government, the Federal Reserve, and W
Street each played a role in the progression rom central e
nomic planning and central banking to a corporate state. Pticians used Keynesian economics to justiy big governmen
welare state, and budget decits. The Federal Reserve souto grow the economy through monetary expansion, ther
crippling it. At the same time, Wall Street sought higher prothrough infuence over the government. The resulting cor
rate state undermined capitalism and the ree market in United States and produced a downward spiral o econom
decline rom which there is no escape without undamen
reorms. ¾