The government is in the process of making a big mistake in trying to buy the confidence of the American people and at the same time stimulate the economy with a “tax rebate”. This is a bad idea. Most of us are so excited with the idea of getting back some of our money that we will take it no matter what form it may come in. But this is just the sort of Neanderthal short term thinking that gets us into these kinds of jams in the first place.
We have a very serious problem here and the government solution, as they so often do, is to throw money at it. But if you stop and think about it for even a moment you start to ask yourself, where is this money coming from. We are already way in over our heads as a country trying to pay for a bloated government that doesn’t function well, overly rich social entitlements that are eroding our social fabric, military actions that don’t seem to be working out the way they should, and politicians running around promising more of the same if elected. If they have done so well with all our countries other ills, why not let them take a stab at fixing the economy?
The fact of the matter is that economies move by market forces that have been studied for many, many years by very highly educated individuals and institutions all trying to figure out how it works and how to control it. If there is one thing we should have learned by it all it is that we can’t control it. But many of these forces have been observed and named and given terms like supply and demand. We understand how markets are supposed to work for the most part even if we can’t control it. So if we can’t control it should we even be trying to? The concepts of market forces seem simple enough. So simple in fact that if Congress can set policies and enact legislation that will control more and more facets of our lives why then not the economy.
The economy like most things in nature tries to seek balance and harmony. When forces are applied that push it out of balance it can only take so much until like a rubber band it will return to its natural state. The word bubble is often used to describe an out of balance situation, such as when prices expand too rapidly. The bubble will continue to expand as it is filled with air until the pressure exerted on the surface is too great and the bubble collapses. Bubbles can be maintained for a long time but only so long as the pressure does not exceed the bubbles ability to contain it. Once that is reached it will collapse.
Likewise, prices can continue to go up on things like houses but only so far as there is enough cash flow to support those prices. Once that point is past, then the prices will have to fall back to a point where the cash flow can sustain it again. Economist term this market cycles and you can generally see it happen on the prices of most goods. Everything seems to follow these trends. Even the price of Beany Babies will rise and fall as the fad comes and goes. Many people have gotten rich by studying these market cycles and buying and selling accordingly. Many have also lost a lot of money because it is not as easy to call these market cycles at just the right time. It is referred to as timing the market or market timing and there is a lot written on the subject.
If prices get out of line, there are natural market forces that will come into play to bring those prices back to a normal state. If the price of red apples goes too high we start to buy green apples until the price of red apples comes back down. Or if the price of all apples goes up, we might buy grapes or pears or bananas instead. If the price of wheat was high last year, more farmers will grow wheat this year in the hopes of taking advantage of the high price but when too many convert to growing wheat the supply will go up causing the market forces to kick in and the price will come down to the point that all the new wheat will be bought by the market. In any case the market does this on its’ own and it does it fairly well.
The trouble starts when the government steps in. In its desire to ‘fix’ things what generally happens is the government tries to place mandates on the market through artificial means using subsidies or price floors and ceilings. This will give the appearance of doing something and will seem like a fix but it is only a short term band-aid solution. With this approach, the market forces become even more out of balance than before and this means when it is time to return to its natural state it will have farther to go and will do it with more force.
Think of a rubber band on your wrist that you pull out and let snap back. The farther you pull it out the more you will feel it when its time to let go. Governments think they can control how slowly to let it go but it always seems to be slipping out of their fingers. Only thing is it is our wrist they are pulling the rubber band on.
RULE # 1. Any time you subsidize something you do it at the expense of something else.
When the government passes out funds or subsidies in any form, remember this, it is never free or without costs. Just who will pay the costs? The going attitude is if it isn’t me I don’t care. But it is me, and it is you. It is all of us. Whither directly or indirectly we are paying for the actions our government is taking on our behalf.
We have been criticized for not taking care of our own household finances for a long time. We are told that we don’t save enough, and that we don’t plan for our future and save for retirement. We are living on too much debt, and placing too much of a burden on our children. Yet we are on a small scale compared to the example our government has been to us. This tax rebate is continuing to spend our country into a debt that has become too expensive to support and too large to ignore. Adding to it will not solve anything.
It is time for us to get our financial houses in order and that goes even more so for our governments, local and national. Spending needs to be brought under control in all its forms. The tax laws need to be overhauled so that they are simplified and equitable. It is so bad that they should through nearly the whole thing out and start again. That is not easily done but I will tell you how easy things could be in another entry.
For now suffice it to say that we as a nation are in need of a real change, not just the ones the presidential hopefuls are spinning, and not one most people are ready or willing to make because they continue to buy into the hype that is passed to them by politicians through the media. If we are to make a real difference, we will have to face real change. Without it, we will continue this slide and the longer the slide the harder and more painful the recovery will be. When you borrow, eventually the debt must be settled, and the longer the term the higher the costs.
We don’t need this rebate check now. We do need permanent and meaningful tax reductions and equalization. We do need fiscal responsibility in our government. Until that happens, we will all pay a price.
This is Ed Nef with a view from the Farr West.
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