There is something disturbing about the current crop of Keynesian economists. They increasingly resemble World War I generals who, when faced with staggering losses of men and material decided that the only solution was to double down and try again. The difference is that World War I generals had a better excuse for their failures – new technology had created a battlefield that no one had experienced before. Economists, on the other hand, have no one to blame but their own arrogance. The world has very obviously changed since the Great Depression, but Keynesians insist that their ideas don’t need any modification.
Generally, economists don’t distinguish between types of jobs. If they ever do, they will make the obvious observation that high paying jobs as preferable to “flipping burgers.” But there are only three types of jobs in any national economy and the balance between these types of jobs will determine when a recession occurs, how the recession should be remedied and what the quality and duration of the subsequent recovery will be.
The three types of jobs are:
• Wealth Creators - Jobs which create wealth, that is, products capable of resale: jobs like farming, manufacturing, software design and the entrepreneurial skills that turn the creation of these products into going concerns;
• Wealth Protectors - Jobs which protect or preserve wealth: jobs like firefighting, policing and the military profession and, when you count human capital, the medical and teaching professions; and
• Wealth Redistributors - Jobs which redistribute wealth: pretty much the rest of all jobs.
The first two categories are far smaller than we think. Wall Street likes to believe that it creates wealth, and it does for individual customers on a microeconomic level, but not for the economy as a whole. On a macro scale, Wall Street professionals merely redistribute wealth from losers to winners (with a healthy chunk of it to themselves). Similarly, the insurance industry protects the wealth of individuals, but it does so by taking money from those who haven’t suffered a loss and distributing it to those who have. On a macroeconomic level, insurance is a redistributor of wealth, not the protector of it.
Wealth creation is what the entire economy depends on in order to function, yet its distinctive importance is rarely recognized, even by Creators themselves. Bill Gates has more in common with Joe the Plumber than he has with Warren Buffet although it is doubtful that he recognizes that fact. Wall Street and the legal profession get the lion’s share of rewards in the United States today and no one in those industries create any sort of wealth at all. Outside of a few protected industries, Creators get short shrift when rewards are meted out. For every Bill Gates, there are a dozen Creators struggling to meet the next payroll.
Redistributors are important in an economy, but they can’t grow the macroeconomy by themselves and if they dominate the economy, they create a fragile, unbalanced economy, because they are all struggling to redistribute a stagnant pool of wealth. Ideally, Redistributors should be facilitating wealth creation, but they have become a power of their own with an agenda which benefits no one but themselves.
We have, for instance, an enormously complicated tax code the primary purpose of which is to force people to hire tax lawyers and accountants to do their taxes. We have product liability procedures which do little to compensate victims or make the country safer but do a great job of making product liability lawyers rich. Wall Street finds more and more complex ways to package wealth created by other people, but they just get the economy into a deeper and deeper bind.
The country since 1933 has expanded the power of the Redistributors at the expense of the Creators. The result is that only the sectors of wealth creation that are protected in some way (construction because no one has figured out how to economically build a structure overseas and ship it here, computer technology and entertainment because they are shielded by intellectual property laws and because lawyers haven’t figured out how to apply product liability laws, etc.) survive in the United States. Even large manufacturing companies become Redistributors in the macroeconomy as they shut down U.S. plants and manufacture their products overseas. With an excess of Redistributors, too large a segment of the economy is trying to redistribute too small an amount of wealth. Our economy has become the equivalent of an army consisting of supply sergeants but no infantrymen.
A balance between the three types of jobs is necessary. If any one of the three categories of jobs dominates, a disruption becomes inevitable. The Great Depression was almost certainly caused by an excess of Creators in the economy. Did a country of 120 million really need the more than 60 domestic automobile marques that it had in 1929?
Today, it is an excess of Redistributors which has the same damaging effect on the economy. Without enough wealth to legitimately redistribute and with too many Redistributors chasing too little wealth, Redistributors resort to manufacturing specious wealth which soon becomes a bubble and, when the bubble bursts, leaves nothing. Hence we suffer the dot com bust of 1999, Enron, the subprime mortgages of in 2008 and the new bubbles being formulated before we even recover from the losses of the last one. Even now, we are only setting the stage for the next collapse, and if recent recessions tell us anything, the next recession will be worse than this one, will occur sooner than expected and will linger even longer. Can a country with only two automobile manufacturers really sustain the 1,160,000 lawyers that the United States currently has?
To determine how to assist a recovery from a recession, it is necessary to determine where the imbalance lay and create incentives to bolster alternative job categories. In the Great Depression, the New Deal pulled people off the unemployment line and put them to work building roads and post offices. The unions were not powerful enough to prevent nonunion labor from taking these jobs, so the unemployment numbers dropped.
The people employed by these government programs were not earning enough to buy a house or even an automobile, but they would buy clothing and shoes and household goods, thus opening up assembly lines in North Carolina and New England and the industrial Midwest. The New Deal didn’t end the Depression – only the demands of World War II reemployed the excess facilities for wealth creation - but it reduced the unemployment rate somewhat and alleviated suffering, at least temporarily.
After World War II, the growth of Redistributors and the slow economic recovery of the rest of the world created a sort of Indian Summer for American wealth Creators, but since the 1960s, the job category of wealth creator has declined while the Redistributors have increased in power and wealth. Today, the Redistributors are the new Robber Barons, and unlike the original Robber Barons, they create no wealth to spread to others.
The solution is to create incentives for wealth creation. Here the Democrats are entirely clueless, pushing for the redistribution of funds to Redistributors, without expanding the pie by creating more wealth. They are fighting today’s economic problems with yesterday’s solutions. It is normal for people to stick to the solutions they have been taught, but reality changes and outdated doctrines do not.
In the Great Recession, following standard Keynesian advice, President Obama chose to direct his stimulus program to preserve the jobs of government workers, each and every one of them a Redistributor. Because unions would not tolerate nonunion labor on government jobs, no one was pulled off the unemployment lines. A bureaucrat whose job was saved by this program, understanding that his job was only temporarily saved, would not be buying a house, or even an automobile, but would buy clothing (made in China), shoes (made in Indonesia) and electronic goods (made in Japan). The stimulus did a great job of propping up the East Asian economies, but did precious little to alleviate suffering in the US. Wealth was neither created nor preserved.
We only saved the jobs of Redistributors to redistribute a declining stock of wealth.
But if the Democrats’ rigid adherence to outdated doctrines is reactionary, the Republicans are only offering half a loaf at best. Tax cuts across the board, to Creators and Redistributors alike, do little to change the dynamics of the economy.
Why should the quintessential Redistributor - a lobbyist, let’s say, making $500,000 a year who employs a single secretary – be paying the same taxes as an entrepreneur making $500,000 a year with his factory which provides jobs for 300 people?
The entrepreneur pays more than the lobbyist, actually, since the lobbyist does not have to pay the “regulatory tax” that manufacturers have to pay – that mass of employment laws, product liability laws, environmental laws, real estate regulations, securities laws, tax laws and so forth that requires the entrepreneur to hire expensive advice from Redistributors who usually make more money than he does without taking any risks or creating any jobs.
Spending limited resources to prop up Redistributors is only prolonging and deepening the Great Recession. The Keynesians who proposed the stimulus package to the President in 2009 managed to take resources from wealth Creators in the form of higher taxes and government competition in the credit markets. They gave these resources to Redistributors who managed to reduce job creation by stripping wealth from the Creators.
But it is now no easy solution to liberate the economy without costing the jobs of hundreds of thousands of Redistributors. There are too many Redistributors and while many of them engage in make-work projects, they nevertheless have to make a living. The most efficient solution would be to exempt small manufacturers and their employees from all Federal regulations and taxes. This would employ the huge expensive bulk of laws and taxes against the recession the way an expert in jiu-jitsu uses his assailant’s weight to gain an advantage. By freeing a small, powerless but crucial segment of Creators from the dead hand of the Redistributors, we could grow our way out of the Great Recession without jeopardizing the jobs of the Redistributors.
This would not be a complicated reform; we would need only to restore the Commerce Clause of the Constitution which for most of the country’s history, found that small businesses were exempt from federal oversight. State law is sufficient to control the sins of the average small business and the reduction in costs, both in taxes and the regulatory burden, would launch a renaissance in wealth creation. There is no reason for Redistributors to profit from any reforms. Let the Redistributors deal with the deficit – they created it in the first place – while Creators go about the business of restoring the country’s economic strength.
To sum up:
1. There are only three types of jobs: wealth creators, wealth preservers and wealth redistributors;
2. An imbalance between these jobs creates a different form of economy, so too many wealth creators produce too many products and too many wealth redistributors create bogus definitions of wealth, from dot-coms to subprime mortgages;
3. Recessions caused by too many wealth creators requires a different remedy than recessions caused by too many wealth redistributors;
4. The Keynesian idea of throwing money at a recession works when there is too much wealth creation, but it is useless when there is not enough wealth creation, serving only to prop up those foreign sources of wealth at the expense of the local economy;
5. Faced with a recession caused by too many wealth redistributors, government efforts at an economic rescue should be directed at creating more wealth;
6. The best and only way to create wealth instead of government boondoggles is to create a protected class of wealth creators.
Just don’t expect any economist to realize any of this. The current sheep-like consensus of economists brings to mind the last time the economic Best and Brightest all agreed with each other and concluded, in the summer of 1929, that stocks had reached a “permanently high plateau.”
It isn’t only generals who fight the last war.
Thomas F. Berner
www.WeThePeopleBlog.net
comments@wethepeopleblog.net
