Obama digging in the communist graveyard
By Noureddine Krichene
President Barack Obama recently stated that his highest priority is closing the income gap in the United States. Implicitly, he is admitting that his policies have hurt employed workers. Five years into his presidency, living standards in 2013 are far worse than in 2008.
Obama and US socialists aim at perfect income equality. The fervent communist belief in equality has incriminated the "bourgeois" salary earners and damaged wage earners exploited by the "bourgeois".
A vast amount of communist literature has been produced since
early the 19th century. In a nutshell, communist writers and leaders determined that the only model to produce income equality is to turn every citizen into a "proletaire" and create a "proletariat" class. The state confiscates all private property, including land, shops, and factories, and exterminates the "bourgeoisie". Any form of private property will lead to capital accumulation, profit, and income inequality; consequently, it should be outlawed. This revolutionary model was applied literally in many countries, notably in the former USSR, across Eastern Europe, China, Cuba, North Korea, and Vietnam, and even in Angola, Ethiopia and Mozambique.
Needless to say, millions of people perished in every communist revolution; millions fled as all property was confiscated by the state and a central planning agency managed every single decision in the economy. After decades of suffering, many communist countries reverted to capitalism and tolerated the law of nature - that is, "income inequality". Communist revolutions turned out to be futile. Nature decided that Utopia cannot become reality, and attempting to establish Utopia leads only to disaster.
Obama can learn how futile "income equality" was by hiring Russian or Chinese experts to narrate to him the suffering their countries experienced under the ideologies of Lenin and Mao. If Obama and the socialists consider wealth and an income gap as a crime, then let them set the example by surrendering their wealth to the state and accept a wage equal to that of the lowest paid worker. (Nobel Prize winner Aleksandr Solzhenitsyn (1918-2008), showed how the state leaders enjoyed tremendous wealth and the "proletaires" shared equally in misery.
If a farmer strives to produce 100 tons of tomatoes, 10 tons of meat, and 100 tons of corn, the state should not force him to produce nothing and sit idle; yet, if he goes ahead, he will produce wealth and inequality. If an entrepreneur constructs a plant to produce medical machines, the state should not order him to construct no plant and sit idle; yet, again, if he goes ahead, he will create wealth and inequality.
Likewise, the state should not close down the dentist’s office because he is creating income inequality. Nor should the state outlaw innovations and research just because they lead to new products and therefore income inequality.
Franz Oppenheimer, in his book The State (1922), maintained that man earns his income in one of the two ways: (i) through economic means that involve production and exchange; or (ii) through political means that involve confiscation and counterfeit of money. In (i), the producer of computers earns a car through exchanging computers for a car; in (ii), a person earns state subsidies or a car against nothing.
As long as earning wealth and income is through labor, sacrifice, and risk-taking, then there can be no objection to such gains. If income is earned through confiscation, there is an objection to such gain. Contrary to socialist belief, income inequality reflects growth; it is not a sin if wealth is created and not confiscated.
Neoclassical theory stipulates that income distribution reflects the respective marginal products of labor and capital. It becomes inequitable only if the state distorts it through corrupt policies. For instance, debtors get free wealth when they default; or speculators earn huge wealth thanks to zero-interest loans.
Poverty is a relative concept. Certainly, a poor person in the United States in 2013 is far better off than most wealthy people one century ago. He has safe drinking water, electricity instead of candles, far better medical services and effective and cheap medication; he may have a car - even two; he has a mobile phone and can Skype, for free, anywhere and at any time with his acquaintances anywhere in the world; he can travel from one continent to another inexpensively in a few hours. All these amenities were not available a century ago.
We must distinguish between social policies that are just and make everyone in society better off, and social policies that are detrimental and benefit wrongly beneficiaries at the expense of those who pay for those benefits. Social policies that provide free education, health, and infrastructure profit the poor as well as the rest of the society. The poor gain when their children become doctors, engineers, entrepreneurs, or when they have access to safe water, electricity, and roads.
State social policies that provide undeservedly lifetime food stamps, disability benefits to able people, unemployment benefits, free housing, and free-loans are unjust. They institutionalize unemployment, deprive millions of workers of part of their earnings, and deplete the capital and the productive capacity of the country.
If the chieftain in a village decrees that all his subjects receive free food, then everyone will applaud the chieftain; however, in a short time the entire village will starve simply because that decision, no matter how politically laudable, is against the law of nature.
President Obama and labor leaders in the US have recently reiterated calls for high wage increments. It is an obvious fact that workers' real incomes has fallen too much since 2000, while prices of essentials have risen steeply. For instance, gasoline, which cost $0.50-$0.60 a gallon in 1999, averaged about $4.30 in 2012; meat, cooking oil, eggs, fruit, vegetables and so forth are at least three times their level in 2000. Housing and property taxes are far more expensive. The Fed ignores totally this exorbitant inflation.
This fall in real income is an inescapable result of very costly wars waged by the US in recent years and Obama’s record fiscal deficits. The corrupt inflationary policies of Federal Reserve chairman Alan Greenspan and his successor, Ben Bernanke, caused huge credit expansion and immense wealth and income redistribution in favor of debtors, speculators, and recipients of government doles, at the expense of an employed worker. The Fed has been robbing workers for long time now. There is a heavy inflation tax and forced saving on employed workers who have no choice except consume much less in 2013 than in 2000.
The tremendous loss in real incomes, no matter how unfair that is, should not be repaired by a general increase in nominal wage rates. Nominal wages have to be set in the labor market according to demand and supply only. A government-decreed increase in nominal wages is an anti-market and distortive measure.
Experience everywhere shows that nominal wage increase will lead to very fast inflation, a wage-price spiral, a drop in real wages, and high unemployment. A nominal wage increase is instantaneously reflected in prices and transmitted to wage earners. The only way to restore a loss in purchasing power is reduce the fiscal deficit, remove government price distortions, expand production, and lower prices.
This cannot be achieved if the Fed keeps robbing workers through inflating prices with extremely loose monetary policy. To compel producers to invest and produce more, money has to be expensive. For instance, one orange in 2013 costs $1 compared with $0.05 in 2000. The producer previously had to sell 20 oranges to make one dollar of revenue; now he sells only one orange to make the same revenue. The cheaper money is, the stronger will be the fall in orange output since producers can generate much higher revenues with far less production.
The same principle applies to all producers. In hyper-inflation, producers sell nothing against worthless money. If money becomes expensive, the only way to generate higher revenue is through higher output and lower prices. Such was Ronald Reagan's policy. It removed inflation and brought about sustained prosperity.
The utmost priority for repairing the loss in purchasing power is to reduce the fiscal deficit by cutting unproductive expenditure and force the Fed to stop printing money and fixing interest rates. Any other policies, such as increasing nominal wage rates, increasing taxes and transfers, and increasing free loans will only destroy economic growth and impoverish workers.
The US has moved too far to the left, yet is impossible to persuade doctrinaires such as Obama, Bernanke, and other socialists to change policies no matter how penalizing for workers these policies are.
The 2008 financial crisis failed to dissuaded the Fed to renounce its cheap money policy. The Fed merely ignored any financial risk and responded with the cheapest money policy in US history and forced near-zero interest rates as required by communism.
Obama will never let interest rates rise nor will he restrain his wasteful spending. He does not and will not understand that his reckless fiscal deficits have robbed the employed worker; nor does he understand that the Fed spent the last decade robbing the employed worker.
With labor agitation underway and Obama’s strong quest for income equality and redistribution, wages, after lagging for so many years, will race upwards. The Fed will seize the opportunity to inflate more. A wage-price spiral is very likely. The dollar will keep falling rapidly, creating instability everywhere in the world, and a currency war.
Obama’s presidency may end up in sheer economic and financial disorder and severe impoverishment much worse than witnessed under the George W Bush Administration.
Noureddine Krichene is an economist with a PhD from UCLA.