Standards of Living Are Falling; H. Sennholz

Hans F. Sennholz Standards of Living Are Falling ter future. Surely, our history text books tell us of hard times during the major wars in American history or during the Great Depression. But they are not yet comparing our present situation with similar ca lamities in the past. And yet, some similarities are beginning to emerge. The Great Depression was accom panied by a disintegration of the world economy. Economic national ism ran rampant, cutting off chan nels of trade and commerce and·im pairing the world division of labor. According to most economic histori ans' this disintegration was an im portant cause that aggravated and prolonged the Great Depression. Af ter World War II the trade barriers erected during the 1930s were grad ually dismantled, which led to a phenomenal improvement in world economic conditions. For a quarter of a century it provided us with ever more materials and supplies. Total output of goods and services rose 79 80 THE FREEMAN February rapidly and our standards of living improved steadily. During the 1970s unfortunately, governments the world over turned back the clock as they gave new life to economic na tionalism, especially in the devel oping countries, and brought radical changes of which most Americans are not yet aware.

Transferto OPEC In 1973-74 an Arab oil embargo and a doubling of oil prices thereaf ter dealt a devastating blow to all industrial countries. Since then siz able increases in the price of OPEC oil added new uncertainties to an al ready cloudy outlook. The net effect was a massive shift of income and wealth from the in dustrial countries to oil-producing countries. OPEC revenues rose sharply, as did production costs in industrial countries. The oil price increases not only dampened eco nomic expansion in such countries as Japan and West Germany, but even brought it to a sudden halt in many others. The effect of this shift of income and wealth was alleviated somewhat since much of OPEC un spendable income was recycled into investments in both government se curities and private banks in the United States and Europe. While OPEC countries were growing richer and the industrial countries becom ing poorer relative to the world, the day of truth was postponed through rising indebtedness of the latter. In fact, OPEC lending not only ob scured the shifting, but even helped to finance massive U.S. Government deficits for health, education and welfare that consumed capital en masse. In short, it helped to finance the American decline.

Government spokesmen always blame the sharp increase in petro leum prices for the rampant infla tion that has engulfed the U.S. But economists are pointing out again and again that the ultimate impact of the oil price increase depends on the reaction of individual govern ments. In countries that refrain from deficit spending and monetary ex pansion, there is little or no infla tionary impact at all. Increased spending by consumers on petro leum products necessarily leads, be cause of limited incomes, to reduced spending on other goods and to lower prices. Surely, the people in Japan and Switzerland suffered losses in income and wealth as a result of ris ing petroleum prices. But many other prices fell as other spending de clined. In the U.S. all prices rose at var ious rates because massive federal deficits were monetized, that is, the federal debt was used to increase currency in circulation. This was carried out essentially by the pur chase of Treasury obligations by the Federal Reserve System, thus re leasing Federal Reserve notes into 1981 STANDARDS OF LIVING ARE FALLING 81 circulation or creating bank re serves that permitted commercial banks to expand their credit even further. Obviously, the federal gov ernment alone conducted the infla tion and orchestrated the credit ex pansion. But it is extremely eager to point the finger of blame at some one else.

In fact, the federal government greatly aggravated the situation and accelerated the wealth transfer by shackling and crippling the domes tic industry so that the U.S. became ever more dependent on oil imports. In 1972, before OPEC intervened, we were importing some 6 to 7 per cent of our needs. Today we are im porting nearly 50 per cent. No pol icy sinisterly designed to promote the transfer of income and wealth to OPEC could have been more effec tive than that conducted by the U.S. Government. On August 15, 1971, the Nixon Administration imposed compre hensive price controls that were generating the first energy short age. The Ford and Carter Adminis trations perpetuated the controls and made matters worse with complex systems of allocation and distribu tion. In 1977 the Carter Adminis tration created a new U.S. Depart ment of Energy merging the Energy Research and Development Admin istration, the Federal Energy Ad ministration and the Federal Power Commission. It introduced a comprehensive national energy plan that emphasized conservation rather than production, and imposed the biggest single tax in U.S. history, the Wind fall Profits Tax. It is surprising in deed that domestic production, reel ing under such heavy blows, continues to meet one-half of our pe troleum needs.

From Producersto Almsmen Almost without exception govern ments are tempted to treat the symptoms while they eagerly ignore or even foster the causes. To fight the symptoms is always rewarding politically. It may even alleviate the problems in the short run although it does not solve them. It merely postpones the hour of reckoning. The economic expansion during the 1950s and 1960s permitted in terventionist governments to de velop massive transfer systems that favored some people at the expense of others. The federal government became a giant transfer agency that extracted ever more revenue from the economic activiti~s of the work ing people and bestowed its largess to a growing army of almsmen. From 1946 to 1980 nondefense spending rose from just $15.2 billion a year to an estimated $433.2 billion. (The Budget of the United States Govern ment, Fiscal Year 1981, p. 613) Despite the staggering burdens of government the American economy proved to be surprisingly resilient 82 THE FREEMAN February as long as some capital could be formed and economic activity be ex panded. But it was a fatal mistake to conclude that the economy could withstand any and all burdens which government chose to place on it.

A tax burden that is heavy during periods of expansion becomes de structive during stagnation and de cline. When OPEC began to raise our costs of production, the load of federal levies became increasingly painful. To counteract or even offset the detrimental effects of OPEC machinations, instant tax relief would have been in order. But 10 and behold, the federal government was not to be outdone by foreign ex tractions. It raised its own from $208.6 billion in 1972 to an esti mated $523.8 billion in 1980. Its an nual extractions now exceed the oil import expenses by one thousand per cent. The effects of this double-bar relled attack on economic activity could be readily seen. The returns of capital investments, that is, busi ness profits, fell to scanty levels. Many enterprises suffered losses which mostly were hidden by the thick veil of inflation. Surely, some business profits stated in shrinking dollars continued to rise, permitting governments to extract ever higher levies. But in terms of purchasing power and real wealth many busi nesses merely struggled along or even deteriorated. They formed no new capital for expansion or mod ernization, built no new facilities, and created no jobs.

The dearth of genuine profits forced business to cut back its ex penditures on research and devel opment. Againjobs were lost or fewer were created. When an industry thus falls behind technologically, it may encounter the fierce competition of foreign industries. It may be out produced and undersold and there fore may shrink even further, caus ing heavy unemployment of capital and labor. To correct such a di lemma is extremely difficult and painful. The situation becomes all the more tragic if it involves important in dustries that are employing hun dreds of thousands of workers. For political reasons the government cannot afford to let such industries collapse or wither away. It is ex pected to come to their rescue. Our steel and automotive industries are examples in case. The most popular rescue action consists of a dose of economic na tionalism. The steel industry in dis tress demands higher tariff barri ers' which would curtail the steel supply and permit it to raise its prices. The automobile industry suf fering losses clamors for import re strictions, which would force the American people to buy more do mestic cars at higher prices. Foreign trade is to be curtailed, interna1981 STANDARDS OF LIVING ARE FALLING 83 tional relations to be severed, and living conditions to be lowered so that the beleaguered industry may be permitted to continue its anti quated operations.

If no tariff protection can be granted because it would violate in ternational treaties, the industrial captains and labor leaders may clamor for financial aid and support. The taxpayers are called upon to support with tax extractions what they do not patronize with their con sumption dollars. Of course, the subsidies cannot restore the strength and viability of such industries. They tend to become a permanent burden to society which is impoverished not only by the subsidy but also by its loss of foreign products. In the end, the healthy industries that must carry the burden of support may be infected by the same dilemma, and the subsidized industries in search of ever more reliable support may beg to be taken over by the govern ment. In any case, the people will pay the price in the form of ever lower living standards. Cleanerbut Poorer During the 1970s national gov ernments throughout the world pledged a commitment to a cleaner environment. In the United States the administration of Jimmy Carter was especially sympathetic to the pleas of environmentalists. It sent wideranging environmental policy statements to Congress and made concrete legislative proposals to im pose more air and water pollution controls, and regulate strip-mining, wilderness preservation, and en ergy.

At this place we need not dwell on the ideological causes that gave rise to the policy. But we must observe that in nearly all cases of environ mental concern, the blame was laid on business concerns and the indi vidual enterprise system. And gov ernments always felt called upon to correct the situation through mas sive expenditures and severe pro duction restrictions. (Cf. ((Control ling Pollution," The Freeman, Feb. 1973,pp.67-77) The federal Environmental Pro tection Agency (EPA) is demon strating great perseverance against American industry. It not only is is suing countless guidelines but also setting rigid effluence limitations for many classes of enterprises. The Agency's persistence received sup port and encouragement by a num ber of favorable court decisions that made U.S. corporations install many millions of dollars worth of waste water recycling equipment and other anti-pollution devices. In nearly ev ery case the U.S. district courts and the U.S. Supreme Court ruled in fa vor ofEPA and strengthened its hand in dealing with industrial pollution.

It is difficult to estimate the total financial burden placed on Ameri84 THE FREEMAN can industry in order to secure a cleaner environment. Direct costs up to now probably .exceed half a trillion dollars. Indirect costs con sisting. of time and effort spent on cleaning operations, of factories not built and jobs not created because business capital was spent on envi ronmental devices, may amount to a trillion dollars. And this amount may double or triple again if we include all the production that was can celled or riot even attempted be cause the environmental costs made it unprofitable. Surely, the Ameri can people paid a high price for any improvement in their environment. Environmental costs are business costs like any other costs that limit economic undertakings. Govern ments imposing new costs are lim iting economic production, eliminat ing jobs and reducing incomes. It is dishonest to ignore the costs and deny the consequences.

The PeopleMust Choose A representative government like ours tends to reflect the choices of the people. During the 1970s the American people charted a course of policies that led to economic stag nation and gradual impoverish ment. The facts are undeniable and indisputable. But most Americans probably acted and voted in utter ig norance of the costs and conse quences of their choices, which af fords us new hope for the future. The surprising results of the re cent election seem to indicate that many Americans are awakening to the challenge of the future. They are rejecting the road of the 1970s and instead are opting for a new begin ning. If this means that they are choosing prosperity rather than stagnation, employment rather than doles, the road into the future is very clear: The federal energy poli cies must be reversed completely and the wealth transfer to OPEC be dis continued immediately. We must overcome and restrain the public hostility toward investment returns and business profits that are build ing plants and factories, creating jobs and raising wages. The count less restraints and restrictions on business activity and creative en ergy must be rescinded without de lay. And finally, environmental im provements must be weighed against all costs, direct and indirect. If the costs exceed the benefits they must be reduced or removed. The federal bureaucracy which has been sitti~g in judgment of such matters has failed conspicuously. It must be dis banded promptly, and all environ mental issues returned to the courts oflaw.

It is difficult to reverse public pol icies that are deeply rooted in popu lar ideas and beliefs. But it is possi ble through honest information and education. i BenjaminA. Rogge The Case for Economic Freedom My economic philosophy is here of fered with full knowledge that it is not· generally accepted as the right one. On the contrary, my brand of economics has now become Brand X, the one that is never selected as the whitest by the housewife, the one that is said to be slow acting, the one that contains no miracle in gredient. It loses nine times out of ten in the popularity polls run on Election Day, and, in most elec tions, it doesn't even present a can didate. I shall identify my brand of eco nomics as that of economic freedom, and I shall define economic freedom as that set of economic arrange ments that would exist in a society in which the government's only function would be to prevent one man from using force or fraud against another-including within this, of course, the task of national defense. So that there can be no mis understanding here, let· me say that this is pure, uncompromising laissez faire economics. It is not the mixed economy; it is the unmixed econ omy.