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Hornberger's Blog is a daily libertarian blog written by Jacob G. Hornberger, founder and president of FFF.
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Facing the True Cause of Our Economic Problems


Last Sunday’s New York Times had a front-page story about how Americans of all ages have suffered from the difficult economic conditions. The article pointed out that young people are in debt, unemployed, and living with their parents. People in their 30s and 40s can’t afford to buy homes or have children. Retirees are earning virtually nothing on their savings.

The article points out that the group that has been hurt most consists of those Americans in their 50s and early 60s who are near retirement age but do not yet qualify for Social Security and Medicare.

These Americans … have lost the most earning power of any age group, with their household incomes 10 percent below what they made when the recovery began three years ago…. Their retirement savings and homes values fell sharply at the worst possible time: just before they needed to cash out. They are supporting both aged parents and unemployed young-adult children, earning them the inauspicious nickname “Generation Squeeze.”

The article, not surprisingly, blames the current recession for the economic suffering.

But there is actually another cause, a more fundamental one, the one that we libertarians have been warning people about for decades — the federal government’s massive welfare-warfare state, which has long entailed ever-increasing confiscation of wealth, welfare spending, warfare spending, debt, and inflation.

For decades, libertarians have been saying that ultimately the chickens would come home to roost. By abandoning the principles of economic liberty, the free market, and a constitutional republic in favor a system based on permanent welfare and warfare, people would ultimately have to pay the piper. And it might well be that that day has finally arrived.

Oh, sure, statist officials are scrambling desperately to give the body politic one more injection of inflation, hoping that it will “revitalize the economy.” It’s what they’ve done for the past several decades, as federal welfare and warfare spending and debt have soared. That’s why the paper dollar is now worth about 5 percent of what it was worth when the Federal Reserve, the engine of inflation, was established in 1913. Of course, it’s impossible to measure the damage they have done to people on fix incomes and others with their inflationary escapades.

Each time they have inflated the currency, they have succeeded in restoring the appearance of prosperity. But it’s always been fake and false. The only way genuine prosperity can occur in a society is through savings and capital accumulation. Inflation distorts the market signals and makes it look like there has been more savings and capital accumulation than what is actually the case. Thinking that economic conditions justify it, businesses and industries go into debt and expand operations. When the inflation bubble ultimately bursts, the suffering comes back and bigger than the last time. And then the cycle repeats itself, each time getting worse and worse.

This time, it’s obviously taking a lot longer to “revive the economy” with another inflationary jolt, an indication that things are much worse this time around.

One of the interesting aspects of this process is how liberals and conservatives respond to it. The liberals blame the out-of-control spending and debt on the warfare state and will not countenance even slight reductions, much less elimination, of their favorite welfare programs. Conservatives, on the other hand, blame the problems on welfare programs and will not countenance even slight reductions in military spending, much less dismantling the entire Cold War warfare-state apparatus.

But the truth is what we libertarians have been saying: The problem is both the welfare state and the warfare state.

When the federal government assumed the power to seize people’s income in order to give the money to others, that was the beginning of the end. At first, there was lots of money to seize, given that Americans had built up an enormous base of wealth and capital in the 125 years of so in which there was no income tax, capital gains tax, and inheritance tax. But over a period of several decades, the amount of people on the dole increased inexorably, along with the amount of money they demanded, while the base of wealth ultimately couldn’t keep up. That’s where we are now — with tremendous, non-negotiable demands for welfare and a taxpayer base unable to handle the welfare demands. That’s in fact why Greece is now bankrupt.

The process has been no different with the warfare state. When Americans abandoned the idea of a limited-government, constitutional republic that opposed militarism, empire, a vast permanent military establishment, overseas military bases, foreign wars and interventionism, and the CIA, the result was predictable: military spending would continue to increase inexorably, especially on a permanent military buildup to protect us from the threats that the national-security state was itself producing with its foreign policies.

So, Americans are now being squeezed by both sides of a tightening vise: the welfare side and the warfare side. And the problem is that no one on the receiving end of welfare or warfare largess wants to let go of his largess. The welfare recipients say that they have a right to other people’s money and could not survive without it. The warfare recipients say that “national security” depends on the continuation of the national-security state.

Interestingly, in the same issue of the Times, there was a book review of a book entitled “The Dawn of Innovation: The First American Industrial Revolution,” which talks about late 19th and early 20th century America, which I say was the most economically prosperous period in history. Based on the review, however, the author of the book unfortunately gets the causes of that unbelievably prosperous era wrong. He says that the prosperity was due partly to tycoons like Carnegie and Rockefeller but mostly to the fact that the country was just “too productive, too entrepreneurial, too inventive, too original not to burst into the front rank of world powers.”  He also points to public works as a principal cause of the prosperity, while the author of the book review points to protective tariffs as another cause.

Nonsense! Sheer nonsense! The real causes of the gigantic wealth and prosperity in that period of American history were the following: No income tax, Social Security, Medicare, Medicaid, farm subsidies, minimum-wage laws, price controls, paper money, Federal Reserve System, foreign aid, permanent military establishment, foreign military bases, public schooling, and immigration controls, and very few economic regulations.

When people were free to accumulate unlimited amounts of wealth and decide for themselves what to do with it, the result was the most economically prosperous nation in history, especially for those at the bottom of the economic ladder.

Today, as Americans continue to suffer economically, they need to confront the following discomforting fact: There have been two opposing economic systems and military systems in our nation’s history. Our ancestors chose a system based on economic liberty, free markets, and a constitutional republic. Modern-day Americans have rejected that system in favor of a massive welfare-warfare state.

As things continue to get worse and worse, hopefully the solution will become clearer and clearer to Americans. That solution is to dismantle, not reform, the socialism, interventionism, militarism, and imperialism that afflicts our nation and to restore our nation’s heritage of economic liberty, free enterprise, and limited government, and before things get worse than they already are.

This post was written by:

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.