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A Strong Opportunity State: The Conservative Answer to Krugman's "Weak Welfare State"

Monday, March 23, 2015

In his latest blog post, Paul Krugman asserts that the “not crazy” conservatives are lonely.  He – as he tends to be wont to do – draws a convenient caricature of conservatism – especially conservative monetary policy.  What the caricature does, though, is open up some of the underlying philosophical divides which are anything but ‘crazy’.  We see this in how Krugman views the macro economy through a lens of either a ‘Strong Welfare State’ or ‘Weak Welfare State’:

(Krugman’s View)
Strong Welfare State
Weak Welfare State
Pragmatic Macroeconomics
Democratic Party
Fantasy Macroeconomics
Macroeconomic Populists
Republican Party

First let’s dispense with the $10 vocabulary of the faculty lounge.  Macroeconomics is basically what policies are pursued with respect to the money supply (monetary policy) and how/by whom that money is spent (fiscal policy).  Conservative monetary policy generally calls for a restrained money supply.  Conservative fiscal policy then follows: That money exists first for objectively productive uses in the private sector – also known as the creation of wealth.  It exists only secondly as a tool of the State to accomplish political goals.

I'll add something here that I argue, against conventional conservative rhetoric.  The money supply should not exist at all for the card-counting at the Blackjack table that is speculation.  I write more about that here.

But Krugman’s matrix is actually very helpful because it opens the opportunity to succinctly explain the conservative alternative: The Strong Opportunity State vs. The Weak Opportunity State.

(Conservative View)
Weak Opportunity State
Strong Opportunity State
Other-Centered Macroeconomics
Liberals (center-left)
Conservatives (center-right)
Self-Centered Macroeconomics
Progressives (far-left)
Progressives (far right)

In order to understand this, we do need to enter the world of the faculty lounge for a moment.  But this would be the Philosophy faculty.  We do not, however, need much of their $10 vocabulary.

First Principle

The most significant unit of society is the individual (not the State) in whom reside rights which precede the State, “…among which are Life, Liberty and the pursuit of Happiness.”  For the philosophy student, the difference is immediately recognized as that between John Locke and Thomas Hobbes.  Locke provided Thomas Jefferson with the underlying rationale for much of what we find in the Declaration of Independence.  Hobbes (in his Leviathan) believed the State was sovereign (and thus its people were subjects).  This manifests itself in different ways.  In a monarchy, the sovereign is obviously the monarch and the power of the State is wielded by the palace.  In Progressive Statism/Corporatism, the sovereign is a combination of bureaucracies (sovereign in their own sphere) and favored corporations.  But in ‘Statism’ more broadly the same thing is true of the people – they are subjects rather than citizens.

Second Principle

Progressives are not the same as Liberals (or Conservatives).  Woodrow Wilson (D) and Theodore Roosevelt (R) were both Progressives.  What marks Progressivism as a political philosophy is an overt rejection of the idea that the Constitution is (and should remain) a declaration of ‘negative liberties’ – in other words what government cannot do to you.  Progressives would have it be a declaration of ‘positive liberties’ – what government must do for you.

The Origin and Purpose of Money

These two fundamental principles (the State vs. the Individual & negative liberties vs. positive liberties) then determine how one views money.  It is either first a tool of the State (for professor Krugman – to assuage the “Conscience of a Liberal”) or a utility contrived by the people to facilitate transactions in the economy.  Here is where we have to look to history.

After shooting his wad (the Crown’s wealth) on the First Bishops War, King Charles I wanted to go fight the Second Bishops War (over who got to appoint bishops in Scotland).  But having no more money to pay his soldiers, the king summarily confiscated the gold in the Royal Mint – which belonged to the English merchants, not the Crown – as a forced loan.

He paid it back, but the merchants grew tired of being dragged into these fights.  So they looked to trusted goldsmiths to hold their gold.  They received ‘promissory notes’ from them in return.  Soon those notes began circulating in the economy in place of the gold – it’s a lot easier to carry around a ‘note’, after all. This is the origin of our Federal Reserve Note.  (It also has a lot to do with why we do not have a king.)

The goldsmiths, though, were not immune to temptation.  They noticed that the notes were not coming back for redemption but rather circulating in place of the gold.  So they issued ‘extra’ notes and lent them out at interest.  This is the origin of our ‘fractional reserve’ banking system.  But back then it was a dirty little secret.  Imagine: were this to get out, there would be a run on the gold because no one wants to be behind the guy who gets the last of it.

The Vietnam War and the Great Society in the 1960s was simply a replay of this.  Other countries had dollar reserves.  But we started issuing more of them in the form of credit to the government for “guns and butter.”  Other countries started to question whether $35/oz. of gold actually meant anything since it did not seem possible the Treasury had enough gold to ‘back’ this expansion of the money supply.  (Credit, or loans, is part of the money supply.)  And so – not wanting to be behind the guy who gets the last of the gold – a run on our gold started until Nixon stopped it in 1971.

This produced a number of effects, all of which are tied to this one simple truth Progressives refuse to recognize: Banks are largely owned by shareholders, who demand management return value for their investment.  And banks do this – in fractional reserve banking – by lending out ‘notes’ at interest.  So the more ‘notes’ which are out there (the larger the money supply) the more profits are made.  This is why the money supply cannot be controlled by the banks (as it is today under the Federal Reserve System).

It isn’t that fractional reserve banking is bad.  It isn’t that banks making profits are bad.  It isn’t even that shareholders enjoying those profits as dividends are bad.  It IS that all of these things, together with human nature, conspire to ensure that an unrestrained money supply will lead us to a place where the banks end up legally obligated to lie to us – just like the English goldsmiths of old.  This is where we are today.

Credit vs. Innovation in Economic Growth

It also leads us to a place where credit becomes the main driver of the economy instead of innovation.  In order to understand this, we first have to understand that wealth is created by improving things.  If someone builds a better mousetrap, the profit she makes on its sale are an example of new wealth because she has improved something.  Now she might take out a loan to stand up a factory and hire employees to produce, deliver and sell her better mousetrap.  But economic growth here is about the better mousetrap, not the loan!

But with an unrestrained money supply, credit increasingly replaces innovation as the main driver of economic growth (or contraction).  All one has to do is watch how the stock market reacts in three-digit swings to what may or may not happen with interest rates to see that this is where we have brought ourselves.

The Inexorable Rise of Money in Politics

Lastly, it ends up with ever more money going into politics.  This should not be hard to grasp: The politicians see the banks doing quite well under ‘fiat money’.  They turn to them for two things: 1) to buy Treasury bonds so they can make promises to voters which otherwise could not possibly be kept; and 2) for campaign cash so they can keep making those promises.  And, of course, they are quite happy to allow the money printing to continue.  Far from the Fed being independent of politics, 1971 guaranteed the Fed will never be independent – the best example of such was Chuck Schumer looking over his reading glasses in July 2012 and telling then Chairman Ben Bernanke to “get to work, Mr. Chairman!”  And so now we know who the “one percent” really are: the financial sector and the political sector who have now conspired to be the ‘Crown’ and to confiscate the money supply as a forced loan to keep the politicians in office and the shareholders in line.  The current administration’s recent floating of the idea of mandatory 401(k) investments in Treasuries is nothing if not obvious proof of this.

The Strong Opportunity State & Sound Money

And so the “Strong Opportunity State” for the conservative is 1) a State with a properly restrained money supply so banks make profits by way of sound banking rather than expanding things like derivatives; 2) a State which exists first to secure rights which precede it and belong to its individuals; and 3) a State which remains constrained by a declaration of what it cannot do (the Constitution), doing only those things germane to its enumerated authorities.  These limits ensure the people have a maximum amount of opportunity to innovate and improve things, and to freely exchange the wealth thus created.

The Strong Opportunity State is not a call for everyone to be on their own.  It is not even opposed to a social safety net.  It is a State which believes that civil society is always superior to political society for most of the problems that face us – and for all of the problems which are social in nature (e.g. poverty).  When people are free to create wealth, and when the money which measures that wealth is oriented toward objectively productive uses (wealth creation) instead of politically preferred uses (a political system built on a foundation of debt) and speculation (banks and their derivatives), there is more than enough for civil society to look after the needy.  And those needy then enjoy the dignity of being lifted up by someone who knows their name.

There is only one way to get back to this.  There is only one way to have a truly independent Federal Reserve.  And this is to tie our money to something held by the Treasury in reserve – held on our behalf.  Again, we do not have a monarch who would lay claim to the nation’s money supply.  That is by design, of course.  That design was meant to ensure that our money supply be a utility to allow the efficient exchange of the wealth of the nation – which it used to measure.  Fiat money – the child of Progressive ideas of the State – only means our money supply now measures the public debt instead, the wealth of the few who own that debt, and the ambitions of politicians whose jobs depend on that debt.

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