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As this fall's presidential election
takes shape as a contest between Barack Obama and Mitt Romney, the rhetoric
out of both camps is becoming sharper and more ideological. Looking to
exploit Governor Romney's increasingly close association with Wisconsin
representative Paul Ryan (who has been mentioned as a potential vice
presidential nominee), the President dedicated a lengthy address earlier this
week to specifically heap scorn on Ryan's budget plan (Ryan is the chairman
of the House Budget Committee). The attack lines used by the President not
only reveal a preview of the fall campaign but also offer a glimpse of
Obama's skewed views of the social and economic history of the United States.
The President laid bare his beliefs that
America's source of economic strength has been her historical embrace of
collective action, wealth redistribution, and government policies that have
protected workers from the ravages of the wealthy. To reiterate, he was
talking about the United States, not Soviet Russia. He asserted that
prosperity "grows outward from the middle class" and that it
"never trickles down from the success of the wealthy." Accordingly,
he concludes that our recent struggles stem from the Republican-led
abandonment of these successful policies.
In reaching these conclusions Obama
relies on classic "wet sidewalks cause rain" reasoning, and assumes
that an effect can be the father of the cause. But as we debate how to move
the American economy out of the rut in which it is trapped, it's important to
know where to put the cart and where the horse.
To illustrate his point, Obama singled out auto pioneer Henry Ford, who
famously paid among the highest wages in the world at that time his company
began churning out Model T's. By paying such high wages Obama believes Ford
created consumers who could afford to purchase his cars, thereby giving
business the ability to grow. Based on this understanding, any program that
puts money into the pockets of the average American consumer will be
successful in creating growth, especially if those funds can be taxed from
the wealthy, who are less likely to spend. Obama
argues that Republican proposals that reign in government spending, and cut
benefits to the middle or low incomes, are antithetical to this goal.
While it is true that the American middle class rose in tandem with her
economic might, it was the success of the country's industrialists that
allowed the middle class to arise. Capitalism unleashed the productive
capacity of entrepreneurs and workers, which brought down the cost of goods
to the point that high levels of consumption were possible for a wider cross
section of individuals. While Henry Ford, as Obama noted, paid his workers
well enough to buy Ford cars, those high wages would never have been
possible, or his products affordable, if not for the personal innovation he,
and other American industrialists, brought to the table in the first place.
The economists that Obama follows believe that business will only create jobs
once they know consumers have the money to buy their products. But just as
wet sidewalks don't cause rain, consumption does not
lead to production. Rather, production leads to consumption. Something must
be produced before it can be consumed.
Human demand is endless and does not need to be stimulated into existence.
Suppose you want a new car, but then you lose your job and you decide to
forgo the purchase. Has your desire (or demand) for the car lessened as a
result of your diminished employment circumstances? If you are like most
people, you still desire the car just as much, but you may decide not to buy
it because of your reduced income. It's not that you no longer want the car
(if someone offered it to you at 90% below the sticker price, you might still
buy it). It's that you have lost the ability to afford it given its price and
your income. The best way to transform demand into consumption is to lower
prices to the point where things become affordable. Efficiently operating
industries increase supply and bring down prices. This is what Ford did 100
years ago and Steve Jobs did much more recently.
But by introducing revolutionary manufacturing processes for the mass
production of low-end vehicles, Ford was able to drastically lower the price
of a product (cars) that were previously available only to the wealthy. Ford
didn't create desire to buy cars, that existed independently. But he greatly
expanded the quantity of inexpensive cars which allowed that demand to be
fulfilled through consumption. In the process he created wealth for himself
and his workers (his efficient techniques meant that workers could demand
high wages) and higher living standards for society as a whole.
Obama believes that prosperity came only in the 20th century after the
government began redistributing wealth from rich people like Henry Ford to
the middle and lower classes. He ignores the fact that America's greatest
growth streak occurred in the 19th rather than the 20th century, and that
America had become by far the world's richest nation before any serious
wealth redistribution even began.
The unfortunate part for the President is that wealth must first be produced
before it can be redistributed. But redistribution always creates
disincentives that result in less wealth being created. All societies that
have attempted to create wealth through redistribution have failed miserably.
This should be obvious to anyone who spends more than a few minutes studying
world economic history. But the President is on a mission to get reelected
and his ace in the hole is to fan the flames of class warfare. It's a tried
and true political strategy, and he looks ready to ride that hobby horse
until it breaks.
Peter Schiff is CEO
of Euro Pacific Precious Metals, a gold and silver dealer selling reputable,
well-known bullion coins and bars at competitive prices. To learn more,
please visit www.europacmetals.com or call (888) GOLD-160.
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