Wednesday, September 17, 2008

America's Impoverishment Through Corporate Welfare

The United States became the wealthiest country during a period of laissez-faire, from about 1825 to 1900. The nation has retained elements of that system, but has allowed them to erode and disappear over the past century. As they have eroded, the American economy has become less friendly to workers and more friendly to four groups: the super-wealthy, corporate executives, service providers to large corporations and ultra-smart entrepreneurs. Big business executives', hedge fund operators', investment bankers and related professionals' pay has skyrocketed as average employees have seen hourly wages decline.

This process of wealth transfer from poor to rich is the result of Federal Reserve Bank inflationary policy since 1932, its subsidization of the stock market through low interest rates, and the resulting resiliency of stock prices to small increments in profit margins, for instance through overseas plant transfers. Because of low interest rates, inefficient large firms have been able to masquerade as efficient. Executives whose practices would destroy wealth in a competitive economy appear to increase wealth in an inflationary, Fed-supported one. Investment bankers who produce no wealth can be paid exhorbitant fees out of Federal Reserve Bank countefeit.

America increasingly has become a nation on government life support where those who produce subsidize the ultra-rich via government. Government does not produce wealth, as James Crum recently pointed out. The expansion of governmental systems, regulation, Federal Reserve Bank interference in markets, and high income tax rates on the middle class have squashed the ability of small and intermediate sized firms to compete. Inheritance taxes demotivate inter-generational transfer of firms that might compete with America's mismanaged large ones.

The result has been declining average real wages due to ongoing, systemic inflation. Non-wealth producing fields like law, consulting and investment banking have attracted away America's top talent from productive labor in engineering and manufacturing. This is justified through hollow arguments such as "traders improve efficiency". But such arguments would hold true only in cases where there is laissez-faire. Subsidization of traders through Fed interest rate policy can explain all of Wall Street's gains over the past 70 years.

Thus, big business has had several deleterious effects on the American economy, and it has done so through the Progressive/New Deal system that is the product of both Democrats and Republicans. This system has won the support of the average American, who has been willing to believe that government can produce wealth and that big business is more productive than competition. In a certain sense, the American public has voted for the nation's future economic decline and so future generations will pay for this and the past four generations' bad judgment.

The news this week reports attempts by firms that have paid high executive salaries for the past 30 years to obtain subsidies. These are on top of subsidies to Bear Stearns and Freddie Mac. In addition, in the past six weeks the Fed has intervened in the dollar market, causing the dollar to rise. This may be related to the current stock market correction (the Dow was down over 500 points on Monday, up 100+ points yesterday and as of this writing is down 350 points today). The dollar intervention may help consumers for a few months but it will also disturb the natural correction of markets.

The subsidization of large firms that do not produce value DOES NOT save jobs or preserve wealth. Rather, it creates a new welfare system. New York City DOES NOT NEED 8,000 additional welfare recipients under the employment of AIG Insurance who do not pay for themselves and drain wealth from other citizens. New York would be better off allowing inefficient firms like AIG to die and eliminating the regulation that stifles new job creation. You do not produce wealth by subsidizing inefficiency. It is only by allowing firms that produce wealth to survive that the American economy will prosper.

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