Economic Corona-geddon: American House of Cards Exposed

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In the US alone, we are approaching 20 million unemployment claims in just the last few weeks.  It has been observed this means the US labor market is contracting at the rate of one Great Recession every 10 days. The St Louis Federal Reserve recently predicted that by end of the year, the virus related closure of the economy could result in a 50% drop in GDP and a 32% unemployment rate. That could end up being over 50 million people out of work. It’s simply horrific.

At this time, we should be asking ourselves, why was the US economy such a house of cards that a virus came along and blew it all down overnight? How do we fix it, and how do we avoid this in the future?

To set the table for this rant, let’s start with some oversimplified, philosophical choices for the proper role of government in people’s lives.

Choice #1 Government’s purpose is to direct and control daily life with specific outcomes in mind.

Choice #2 Government’s purpose is to protect rights and property as individuals pursue their own outcomes.

While I am a passionate believer in #2, the American economy has been moving closer to #1 for decades and that centralized planning is a big reason why America is so unprepared for the economic blow dealt by the coronavirus outbreak. It’s also why this is going to be a years’ long economic recovery. Despite President Trump’s hopes, this economy is not going to flip back on in a few weeks because the fundamental flaws have been exposed, and it’s not an easy fix.

Constructing the House of Cards With Central Planning

A story we know: at the beginning of the coronavirus outbreak, private labs in Washington State had to defy government restrictions just to prove coronavirus had entered the US. Think about that. The US government was demanding all testing and information flow through their centralized apparatus or else no one could make decisions or take actions. This is an example of centralized control of the worst kind.

After the private lab defied government just to sound the alarm, other parts of the private sector started mobilizing to produce tests and supplies that would surely be needed across the country to identify and stop the virus before it got worse. Once again, long established testing and medical supply firms were told to “stop” by government agencies. They could not produce and distribute their virus tests, masks or anything else.

I summarize this now famous story, and disastrous bungling of the early spread of coronavirus in the US, so you can imagine that problem echoing through many parts of the American economy. With this specter of government permission, standards and mandates looming over most businesses, it becomes increasingly difficult to succeed. This should clarify why corporate cronyism has become the norm with the largest firms spending ever increasing dollars to lobby government for loopholes and protections that shield them from actual innovation and competition. From a cost/benefit perspective, it is a better investment to stack the bureaucratic rules in your favor than to actually innovate and compete in a free market. The central control system inadvertently created a crony corporate nightmare with a lot of small businesses unable to compete in this system.

Staying inside the general healthcare field for a moment because it’s one of the biggest parts of most household budgets, consider the central permission apparatus with two additional examples:

1. Healthcare access for providers: “Certificates of Need” are required by state governments in many states in order to expand the number of hospitals, clinics, imaging centers or even number of hospital beds at an existing facility.

– Crony angle: many of the government boards that approve new Certificates of Need are made up of your competitors, so existing hospitals and clinics can decide if they will allow new competition in their area or not.

2. Healthcare access for consumers: from the in-state monopolies that have been constructed to limit insurance competition and restrict sales across the US to federal mandates that limit variables in policies, your only options for insurance are the ones constructed through the finite lens of government and crony control.

– Federal restrictions on HSAs, inhibitors to health co-ops, lack of individual tax deductibility for premiums and most medical expenses, restrictions on tele-health, etc, etc. Government controls nearly every aspect of access to healthcare.

Moving beyond healthcare, with central planning and control as the common denominators and trillions of our own tax dollars funding this machine, imagine the affect on finance, education, housing, agriculture, energy, and various other sectors of the economy. Through taxes, we send money through a multi-trillion dollar filter so a fraction of that money can be given back to us with new rules and requirements consistent with the government’s central plan. And mind you, the people influencing the central plan the most are those who benefit the greatest from the central plan’s rules. Its cronyism on an almost dizzying scale.

A particularly important part of the American house of cards that is predicated on centralized control is monetary policy and the finance industry as a whole. Through coordination of the US Treasury and Federal Reserve, the centralized control of the economy is most easily witnessed. These entities control the amount of money printed, the supply of money, the Discount and Federal funds interest rates (which drives consumer interest rates), and the amount of debt monetized–especially in situations like the $6 trillion coronavirus bill that just passed.

Why does that matter? As a starting point, boosting liquidity of dollars has been a standard practice (often called quantitative easing), long before the coronavirus crisis. Just look at the W Bush and Obama response to the “great recession” of 2008-2009. Boosting the money supply was the primary tool employed to facilitate those bailouts and sure up the banks. But even before that time period, US banks depended on cheap rates of credit to offer extremely low interest rates for large consumer purchases of houses or cars. This cheap credit also allowed (and allows) those banks to offer credit cards to nearly anyone regardless of risk. At the investment bank level, large scale lending and multi-billion dollar projects and acquisitions also move forward thanks to a boosted money supply and cheap credit.

Couple these greased skids with gigantic Federal Housing Authority programs like Fannie Mae and Freddie Mac (which still fund or secure millions of mortgages in the US), and institutional incentives to loan money (even in risky situations) through government guaranteed backing of loans and financial institutions through programs like the Community Reinvestment Act and others and you quickly see the why lending institutions don’t have to evaluate risk appropriately.

Some of these programs morphed out of their original form (and failures) from FDR’s New Deal era. Some are from LBJ’s Great Society era. Some are just recent Presidents doubling down on the government induced stupidity of the past to find a way through the economic crisis du jour. All of them distort the economy, so that the credit and financial markets never find their true center. You think I am talking about the run up to the 2008 collapse, but these same dependencies and central planning exist today, and some on an even larger scale.

And it’s not just the US that relies on these methods of central planning to produce the desired outcomes of specific growth rates, unemployment rates, home ownership targets, consumer spending levels, GDP targets, etc, etc. Europe and Asia employ the same techniques to stimulate borrowing and spending activity, which, in turn, promotes economic growth. The very idea that the government has targets for these metrics shows how dependent the world has become on central planning.

Assets, credit worthiness, and business models should be far more important in the financial world. When credit is more difficult to access, saving money becomes more advantageous than cheap credit. Additionally, long term decision making and investments require weighing the risk more carefully. For a business owner, this means shooting for slightly higher margins, greater savings or being more conservative with expansions, employment decisions and capital investments. The larger affect is a more stable and sustainable interconnection of the economy.

On the consumer side, if credit was a bit harder to acquire, savings would be favored, and reckless spending would be discouraged. That very likely means smaller, less expensive houses. Fewer and cheaper cars. Far fewer credit cards, daily luxuries, travel, etc. Yes, all those things are fun. Absolutely, I enjoy them myself. Have I indulged in unwise spending and decisions? Unquestionably. I have definitely participated in the economic binge at times. Guilty as charged.

Politicians Keep the House of Cards Upright

But it’s all a façade. The economic boom isn’t real. The economy shouldn’t be as big as it was prior to the coronavirus induced crash. The economy is just propped up every time the bust happens with new, even bigger government programs that distort the economy even more. With multi-trillion dollar levers on the economy, government officials unendingly attempt to engineer specific outcomes, some of which they sell as the “American dream.” It feels like success as it’s happening, and we all ride the financial wave. Then, when the wave crashes on the shores of reality, we are surprised with the outcome.

With that completely artificially boosted economy running in the background, couple the ever-pending disaster with government priorities directed by politicians whose primary motives are re-election and personal glory. They are motivated by what makes them look good and what they can say was delivered for their election. They are selling anything and everything you can imagine that makes you feel safe and protected. If the elevated, all knowing politician can be directly responsible for making you feel safe and protected, their hope is you want to keep him/her around for a bit longer, or at bare minimum you remain complacent enough to stay on the sidelines because you are pacified.

Playing amateur psychologist for a moment, the basic need to feel safe and protected is a primary motivator for all humans. It’s something we all have in common. But, coming back to the points made on the real purpose of government – is it government’s responsibility to make us feel safe and protected? Or, do we hold that responsibility ourselves?

If you believe it is government’s role, who defines the boundaries of what safe and protected means to one person, but not another? Unquestionably, what satisfies me will not satisfy you. FDR actually codified his newly defined role for government in an Economic Bill of Rights, where he sought to not only engineer outcomes, but to provide government protection from fear itself.

Changing the Model

The philosophical starting point for eliminating the American house of cards is to move away from a mindset that only government can save us, that no one can think for themselves, and that only government has a solution to life’s problems, economic or otherwise. Depending on the centralized plans of government is a loss of self-ownership and self-responsibility on a truly catastrophic level. This is what we are seeing play out right now. Because we don’t own and control our own future, people have been thrilled to abandon their basic rights in a time of crisis. It’s not even controversial for most people to turn in a neighbor or for police to track and fine people not complying with social distancing recommendations. The average person has given every bit of self-ownership over to government, so in their minds – only government can fix the problem.

They are completely unaware that it is government intervention, ownership and control that led us to this very moment where people turn to the same flawed elected officials begging to be controlled, waiting to be saved. People are happily giving up their individual rights for a police state falsely promising to save them. This is the long standing recipe for disaster that is playing out before our very eyes.

The arrogant and fatal conceit, to steal a line from Hayek, is humans thinking that we can stop and overcome forces of nature or anything else with enough money and centralized power given to the right experts and elected officials. I think that’s shockingly arrogant and deeply flawed. Humans have come a LONG way, and society is very impressive in many ways. But moments like this should humble people to their core, especially central planners who think they can harness so much knowledge, money and power that they can protect people from pain and fear. They can’t. And they will never be able to do so.

So the long term solution is actually deconstructing the model that led us to this place. That top down, command and control model must be destroyed. People must embrace self-ownership and the peace and safety that comes with owning your own life. Yes, the outlandish spending and gigantic projects may be gone, but it would be replaced with a far more resilient and sustainable version of life which doesn’t depend on any central plan being led by some of the most self-serving humans society has to offer. Life doesn’t have to be predicated on coercion by these central planners.  It can be built on voluntary, mutually beneficial interactions that don’t have a predetermined outcome in mind. I willingly admit the long term, fundamental changes I am referencing are not going to be done this year. Maybe ever. I am not naive. I am just pointing out what needs to be done, so we aren’t continually surprised when the central plan fails time after time.

Philosophical concepts translated into public policy, ideas beyond the references to healthcare and monetary policy I made above.

Land use, zoning and restrictions of all kinds: housing costs skyrocket because of cheap credit and bad incentives, yes. But the costs are also up, especially in urban areas, because the supply of housing has been artificially limited due to strict controls and resistance to change. The housing supply is completely disconnected from the demand because the central planners don’t want the builders and developers to do anything outside of their plans. This makes change cost inhibitive in some instances, and completely impossible in others. Housing doesn’t have to be so expensive. Central planning distorted the market and caused this problem.

Continue doing a LOT more of what states have figured out during the virus crisis, drop the regulatory, red tape and licensure bureaucracies completely. Let people adapt as fast as possible to the market. If you want liquor delivered to your house, great, carry on! If you are a nurse or doctor and want to easily work in another state, wonderful – do it! As long as they aren’t harming someone in the process, let people choose their own path. Neither the local, state, nor federal governments should be imposing their central plans on people, inhibiting their right to provide for themselves.

Drop all tariffs now, moving to a completely free trade model. The whole world should do this. Trump has done this for key products necessary to fight the virus. Do it for everything, and keep it going forever. Why? Tariffs were one of the biggest contributors to the Great Depression. It actually slowed trade and commerce for the whole world. That’s exactly the opposite of what is needed right now. Global commerce needs to be as free and clear as possible right now. Government needs to stay out of the trade management business completely. Consumers and companies can handle all of that themselves. No central plan is needed to stimulate some sectors, while discouraging others.

Spending/Debt issues that need to be resolved because payments on the national debt (pushing $700 billion a year, and about to go WAY up) eclipse nearly every federal budget line item.

– Military spending and foreign aid – I don’t think anyone has a problem with a defense of the US, but that is very different than nation building and world policing. I am talking about bad policy that is spending trillions of dollars in long term interventions and nation building with no end in site. The US can’t be everything to every country. We are not the world’s police. It’s bad policy that puts good people in the wrong place, costing trillions along the way. End it all now.

– Departments of… fill in the blank. There are whole departments at state and federal levels that should NOT exist. They act as multi-billion dollar filters. Close those departments and replace them with nothing. Literally nothing. In education, as just a single example, local people are taxed, send money to states and DC for centralized planners to spend billions of dollars, create new testing and standards with no concept of local needs, then send a fraction of the money back to local people with new mandates to spend their own money. Thats idiotic. Now multiply that by all parts of life. It makes no sense. Dump this centralized model in its entirety.

– Entitlements: Social Security, Medicare and Medicaid. These are the largest parts of the federal budget by a long shot. If these are not reformed, the $6 trillion in this first coronavirus bailout is irrelevant. They are THE spending problems facing the nation. This is a whole discussion, just pointing out the reform and elimination of these programs would fundamentally transform the US in a very good way. There are plenty of solutions. Just too much for this list.

If you started changing these big ticket items, spending and debt could actually be reduced, taxes could be permanently cut, credit and financial markets could find a center, costs of healthcare, housing and other big ticket items would drop and the economy wouldn’t be quite so fragile. Without fixing these fundamentals currently controlled by government, the US can’t actually reflect economic reality and be robust enough to weather storms as needed.

Change is possible, but it’s painful. Are people ready to endure some pain to get to that place where self-ownership drives society and not government? Doubtful. But personal and economic freedom provide the alternative path. When embraced around the world, they produce real and lasting prosperity.