Disregarding the Constitution

In Article One, Section Eight of the U.S. Constitution are listed the things that Congress is allowed to do. In Article One, Section Nine are listed the things Congress is not allowed to do (more prohibitions were added in the Bill of Rights several years later). At the time of ratification, it was generally understood that the congress could not do anything except what was found in section eight, and in so doing could not do anything in section nine. Nowadays, for the most part, it's understood to mean that congress can do anything it wants, except what is in section nine.

"For the most part" because the House of Representatives just passed a law that is clearly in violation of "No Bill of Attainder or ex post facto Law shall be passed"—the new law on bonuses. They passed a law (the bailout) and later found out that they didn't like a provision of that law (maybe because none of them read the thing), so they're ex post facto fining people who made entirely legal decisions based on the law at the time. There's no conceptual difference between this and the government passing a law raising the 2007 tax rates and tossing you in jail if you don't pay.

This country was meant to be based on rule of law and the government was meant to be restrained, but in practice that's not the case any more. If you're in a minority that gets vilified by the press/government, you're going down, regardless of whether or not you did anything wrong. In this case, it's the people who agreed to risk their careers by sticking with shaky financial institutions in return for large retention bonuses. In the past it was crazy wackos or families who just wanted to be left alone.

This is what happens when you no longer have a working Constitution and instead have plain old democracy—two wolves and a sheep voting on what's for dinner.

Disillusion and collapse

What's wrong with a little inflation? Hazlitt points to a number of consequences:

Like every other task, inflation acts to determine the individual and business policies we are all force to follow. It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse.

Adam Smith on national debt

Hazlitt quotes Adam Smith on the topic of national debt and bankruptcy:

When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has even been brought about at all, has always been brought about by a bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretended payment.

Opium of the people

Hazlitt on the evil of inflation:

Inflation, indeed, throws a veil of illusion over every economic process. It confuses and deceives almost everyone, including even those who suffer by it. We are all accustomed to measuring our income and wealth in terms of money. The mental habit is so strong that even professional economists and statisticians cannot consistently break it. It is not easy to see relationships always in terms of real goods and real welfare. [...] Inflation is the autosuggestion, the hypnotism, the anesthetic, that has dulled the pain of the operation for him. Inflation is the opium of the people.

The roots of profits

Henry Hazlitt makes an important distinction regarding the origins of profits:

Contrary to a popular impression, profits are achieved not by raising prices, but by introducing economies and efficiencies that cut costs of production. It seldom happens (and unless there is a monopoly it never happens over a long period) that every firm in an industry makes a profit. The price charged by all firms for the same commodity or service must be the same; those who try to charge a higher price do not find buyers. Therefore the largest profits go to the firms that have achieved the lowest costs of production. These expand at the expense of the inefficient firms with higher costs. It is thus that the consumer and the public are served.

A function of profits

Price ceilings and taxes on windfall profits reduce market efficiency and prolong shortages, according to Hazlitt:

One function of profits, in brief, is to guide and channel the factors of production so as to apportion the relative output of thousands of different commodities in accordance with demand. No bureaucrat, no matter how brilliant, can solve this problem arbitrarily. Free prices and free profits will maximize production and relieve shortages quicker than any other system. Arbitrarily fixed prices and arbitrarily limited profits can only prolong shortages and reduce production and employment.

How to raise wages

The government implements minimum wage laws, subsidizes farmers, and allows unions to bulldoze employers. Herbert Hoover encouraged businesses to maintain high wages in the early '30s, and FDR forced them to. But does paying laborers more than the market would give them really make us all better off? Hazlitt says no:

The question is not whether we wish to see everybody as well off as possible. Among men of good will such an aim can be taken for granted. The real question concerns the proper means of achieving it. And in trying to answer this we must never lose sight of a few elementary truisms. We cannot distribute more wealth than is created. We cannot in the long run pay labor as a whole more than it produces.

The best way to raise wages, therefore, is to raise marginal labor productivity. This can be done by many methods: by an increase in capital accumulation—i.e., by an increase in the machines with which the workers are aided; by new inventions and improvements; by more efficient management on the part of employers; by more industriousness and efficiency on the part of workers; by better education and training. The more the individual worker produces, the more he increases the wealth of the whole community. The more he is worth to employers, the more he will be paid. Real wages come out of production, not out of government decrees.

The value of releasing capital and labor

Now in an economy in equilibrium, a given industry can expand only at the expense of other industries. For at any moment the factors of production are limited. One industry can be expanded only by diverting to it labor, land and capital that would otherwise be employed in other industries. And when a given industry shrinks, or stops expanding its output, it does not necessarily mean that there has been any net decline in aggregate production. The shrinkage at that point may have merely released labor and capital to permit the expansion of other industries. It is erroneous to conclude, therefore, that a shrinkage of production in one line necessarily means a shrinkage in total production.

Another fundamental economic truth from Hazlitt's Economics in One Lesson.

Let dying industries die

Hazlitt on the ebb and flow of industries in a healthy economy:

The idea that an expanding economy implies that all industries must be simultaneously expanding is a profound error. In order that new industries may grow fast enough it is usually necessary that some old industries should be allowed to shrink or die. In doing this they help to release the necessary capital and labor for the new industries. If we had tried to keep the horse-and-buggy trade artificially alive we should have slowed down the growth of the automobile industry and all the trades dependent on it. We should have lowered the production of wealth and retarded economic and scientific progress. [...] Paradoxical as it may seem to some, it is just as necessary to the health of a dynamic economy that dying industries be allowed to die as that growing industries be allowed to grow. The first process is essential to the second. It is as foolish to try to preserve obsolescent industries as to try to preserve obsolescent methods of production: this is often, in fact, merely two ways of describing the same thing. Improved methods of production must constantly supplant obsolete methods, if both old needs and new wants are to be filled by better commodities and better means.

Saving the X industry

Hazlitt on bailing out failed businesses:

The lobbies of Congress are crowded with representatives of the X industry. The X industry is sick. The X industry is dying. It must be saved. It can be saved only by a tariff, by higher prices, or by a subsidy. If it is allowed to die, workers will be thrown on the streets. Their landlords, grocers, butchers, clothing stores and local motion pictures will lose business, and depression will spread in ever-widening circles. But if the X industry, by prompt action of Congress, is saved—ah then! It will buy equipment from other industries; more men will be employed; they will give more business to the butchers, bakers and neon light makers, and then it is prosperity that will spread in ever-widening circles.

[...]

It is obvious in the case of a subsidy that the taxpayers must lose precisely as much as the X industry gains. It should be equally clear that, as a consequence, other industries must lose what the X industry gains. They must pay part of the taxes that are used to support the X industry. And customers, because they are taxed to support the X industry, will have that much less income left with which to buy other things. The result must be that other industries on the average must be smaller than otherwise in order that the X industry may be larger.

Unlimited work to be done

The spread-the-work schemes rest also, as we began by pointing out, on the false assumption that there is just a fixed amount of work to be done. There could be no greater fallacy. There is no limit to the amount of work to be done as long as any human need or wish that work could fill remains unsatisfied. In a modern exchange economy, the most work will be done when prices, costs and wages are in the best relations with each other.

Another forgotten and ignored truth from Hazlitt's Economics in One Lesson.

The evil of reducing labor

Hazlitt on the "evils" of job losses due to technological progress:

If it were indeed true that the introduction of labor-saving machinery is a cause of constantly mounting unemployment and misery, the logical conclusions to be drawn would be revolutionary, not only in the technical field but for our whole concept of civilization. Not only should we have to regard all further technical progress as a calamity; we should have to regard all past technical progress with equal horror. Every day each of us in his own activity is engaged in trying to reduce the effort it requires to accomplish a given result. Each of us is trying to save his own labor, to economize the means required to achieve his ends. Every employer, small as well as large, seeks constantly to gain his results more economically and efficiently—that is, by saving labor. Every intelligent workman tries to cut down the effort necessary to accomplish his assigned job. The most ambitious of us try tirelessly to increase the results we can achieve in a given number of hours. The technophobes, if they were logical and consistent, would have to dismiss all this progress and ingenuity as not only useless but vicious. Why should freight be carried from Chicago to New York by railroad when we could employ enormously more men, for example, to carry it all on their backs?

Overstimulation, overexpansion, and malinvestment

The following was written by Hazlitt in 1946, not 2008:

Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to “buy” houses that they cannot really afford. They tend eventually to bring about an oversupply of houses as compared with other things. They temporarily overstimulate building, raise the cost of building for everybody (including the buyers of the homes with the guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief, in the long run they do not increase overall national production but encourage malinvestment.

We're paying the price for years of exactly this type of malinvestment, and yet capitalism is taking the blame.

Risks too great

Why is it accepted that government intervention is required when risk is high? The first "bailout" was a perfect example of this—the attitude was no private investors would buy certain securities at the current prices; therefore, government had to. But Hazlitt exposes this:

The proposal if frequently made that the government ought to assume the risks that are "too great for private industry." This means that bureaucrats should be permitted to take risks with the taxpayers' money that no one is willing to take with his own.

Credit defined

Hazlitt on the monetary cranks politicians who cry about banks not extending credit:

There is a strange idea abroad, held by all monetary cranks, that credit is something a banker gives to a man. Credit, on the contrary, is something a man already has. He has it, perhaps, because he already has marketable assets of a greater cash value than the loan for which he is asking. Or he has it because his character and past record have earned it. He brings it into the bank with him. That is why the banker makes him the loan. The banker is not giving something for nothing. He feels assured of repayment.

Perhaps a negative savings rate has something to do with it...

Job "creation," government style

On the myth that government "stimulus" creates jobs, Hazlitt has the following to say:

For every public job created by the [state-initiated and funded] bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $10 million taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, television technicians, clothing workers, farmers.

"At best." More likely, unproductive bureaucrats receive some of the "created" jobs, and productivity suffers because of government employment and management practices. So while we see the bridge, and lack the cars, TVs, clothes, and food, we also fail to see losses caused by waste.

Expenditures require taxation

Hazlitt points out the obvious, which these days is sadly not obvious:

We shall have to say simply that all government expenditures must eventually be paid out of the proceeds of taxation; that inflation itself is merely a form, and a particularly vicious form, of taxation.

An entire generation of Americans (myself included) has grown up without any experience with serious inflation, nor have we seen the effects of marginal tax rates above 50%. Our ignorance isn't going to last long, by the looks of things.

Destruction creates jobs?

Conventional wisdom says that there's a silver lining to natural disasters and war—yes, there's a lot of destruction, but think of the jobs that will be created during the rebuilding process! Hazlitt debunks this fallacy as well:

The people of Europe [post-WWII] built more new houses than otherwise because they had to. But when they built more houses they had just that much less manpower and productive capacity left over for everything else. When they bought houses they had just that much less purchasing power for something else. Wherever business was increased in one direction, it was (except insofar as productive energies were stimulated by a sense of want and urgency) correspondingly reduced in another.

Each person recognizes that the destruction of his own property is a bad thing. So how then does large-scale destruction become a social good?

"Make it rain candy!"

And for a RCOB moment, here's an example of how well institutional brainwashing public education is indoctrinating our youngsters:

"Dear Mr. Obama, Please Make it rain candy!"

This from a first-grader. Only twenty-eight years until he can run for president!

(H/T Mises)

The Lesson

Henry Hazlitt's One Lesson is so simple and yet so disregarded:

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Comprehending this, apparently, is too much to ask of 60 senators and 246 representatives.