Freeman

ARTICLE

Standards of Living Are Falling

FEBRUARY 01, 1981 by HANS SENNHOLZ

Dr. Sennholz heads the Department of Economics at Grove City College in Pennsylvania and is a noted writer and lecturer on monetary and economic if-film. His latest book, Age of Inflation, describes our diorama and offers recommendations for restoring a sound monetary system.

It is a sad fact that most Americans have become poorer during the 1970s. They can no longer afford the amenities and luxuries to which they had grown accustomed. Many consumer goods are getting smaller or cheaper in quality although their prices continue to soar. We are urged to “conserve” and make do with less. Our new economic motto is “more conservation,” which is a euphemistic term for “more poverty.” Other industrial countries in Europe are experiencing similar difficulties. Their economies are stagnating or lingering in recession. Inflation is raging and unemployment is rising.

To most Americans the deterioration of living conditions is all the more incredible as their inborn optimism is calling for an ever brighter future. Surely, our history textbooks tell us of hard times during the major wars in American history or during the Great Depression. But they are not yet comparing our present situation with similar calamities in the past. And yet, some similarities are beginning to emerge.

The Great Depression was accompanied by a disintegration of the world economy. Economic nationalism ran rampant, cutting off channels of trade and commerce and impairing the world division of labor. According to most economic historians, this disintegration was an important cause that aggravated and prolonged the Great Depression. After World War II the trade barriers erected during the 1930s were gradually dismantled, which led to a phenomenal improvement in world economic conditions. For a quarter of a century it provided us with ever more materials and supplies. Total output of goods and services rose rapidly and our standards of living improved steadily. During the 1970s unfortunately, governments the world over turned back the clock as they gave new life to economic nationalism, especially in the developing countries, and brought radical changes of which most Americans are not yet aware.

Transfer to OPEC

In 1973-74 an Arab oil embargo and a doubling of oil prices thereafter dealt a devastating blow to all industrial countries. Since then sizable increases in the price of OPEC oil added new uncertainties to an already cloudy outlook.

The net effect was a massive shift of income and wealth from the industrial countries to oil- producing countries. OPEC revenues rose sharply, as did production costs in industrial countries. The oil price increases not only dampened economic expansion in such countries as Japan and West Germany, but even brought it to a sudden halt in many others. The effect of this shift of income and wealth was alleviated somewhat since much of OPEC un-spendable income was recycled into investments in both government securities and private banks in the United States and Europe. While OPEC countries were growing richer and the industrial countries becoming poorer relative to the world, the day of truth was postponed through rising indebtedness of the latter. In fact, OPEC lending not only obscured the shifting, but even helped to finance massive U.S. Government deficits for health, education and welfare that consumed capital en masse. In short, it helped to finance the American decline.

Government spokesmen always blame the sharp increase in petroleum prices for the rampant inflation that has engulfed the U.S. But economists are pointing out again and again that the ultimate impact of the oil price increase depends on the reaction of individual governments. In countries that refrain from deficit spending and monetary expansion, there is little or no inflationary impact at all. Increased spending by consumers on petroleum products necessarily leads, because of limited incomes, to reduced spending on other goods and to lower prices. Surely, the people in Japan and Switzerland suffered losses in income and wealth as a result of rising petroleum prices. But many other prices fell as other spending declined.

In the U.S. all prices rose at various rates because massive federal deficits were monetized, that is, the federal debt was used to increase currency in circulation. This was carried out essentially by the purchase of Treasury obligations by the Federal Reserve System, thus releasing Federal Reserve notes into circulation or creating bank reserves that permitted commercial banks to expand their credit even further. Obviously, the federal government alone conducted the inflation and orchestrated the credit expansion. But it is extremely eager to point the finger of blame at someone else.

In fact, the federal government greatly aggravated the situation and accelerated the wealth transfer by shackling and crippling the domestic industry so that the U.S. became ever more dependent on oil imports. In 1972, before OPEC intervened, we were importing some 6 to 7 per cent of our needs. Today we are importing nearly 50 per cent. No policy sinisterly designed to promote the transfer of income and wealth to OPEC could have been more effective than that conducted by the U.S. Government.

On August 15, 1971, the Nixon Administration imposed comprehensive price controls that were generating the first energy shortage. The Ford and Carter Administrations perpetuated the controls and made matters worse with complex systems of allocation and distribution. In 1977 the Carter Administration created a new U.S. Department of Energy merging the Energy Research and Development Administration, the Federal Energy Administration and the Federal Power Commission. It introduced a comprehensive national energy plan that emphasized conservation rather than production, and imposed the biggest single tax in U.S. history, the Windfall Profits Tax. It is surprising indeed that domestic production, reeling under such heavy blows, continues to meet one-half of our petroleum needs.

From Producers to Almsmen

Almost without exception governments are tempted to treat the symptoms while they eagerly ignore or even foster the causes. To fight the symptoms is always rewarding politically. It may even alleviate the problems in the short run although it does not solve them. It merely postpones the hour of reckoning.

The economic expansion during the 1950s and 1960s permitted interventionist governments to develop massive transfer systems that favored some people at the expense of others. The federal government became a giant transfer agency that extracted ever more revenue from the economic activities of the working people and bestowed its largess to a growing army of almsmen. From 1946 to 1980 nondefense spending rose from just $15.2 billion a year to an estimated $433.2 billion. (The Budget of the United States Government, Fiscal Year 1981, p. 613)

Despite the staggering burdens of government the American economy proved to be surprisingly resilient as long as some capital could be formed and economic activity be expanded. But it was a fatal mistake to conclude that the economy could withstand any and all burdens which government chose to place on it.

A tax burden that is heavy during periods of expansion becomes destructive during stagnation and decline. When OPEC began to raise our costs of production, the load of federal levies became increasingly painful. To counteract or even offset the detrimental effects of OPEC machinations, instant tax relief would have been in order. But lo and behold, the federal government was not to be outdone by foreign extractions. It raised its own from $208.6 billion in 1972 to an estimated $523.8 billion in 1980. Its annual extractions now exceed the oil import expenses by one thousand per cent.

The effects of this double-bar-relied attack on economic activity could be readily seen. The returns of capital investments, that is, business profits, fell to scanty levels. Many enterprises suffered losses which mostly were hidden by the thick veil of inflation. Surely, some business profits stated in shrinking dollars continued to rise, permitting governments to extract ever higher levies. But in terms of purchasing power and real wealth many businesses merely struggled along or even deteriorated. They formed no new capital for expansion or modernization, built no new facilities, and created no jobs.

The dearth of genuine profits forced business to cut back its expenditures on research and development. Again jobs were lost or fewer were created. When an industry thus falls behind technologically, it may encounter the fierce competition of foreign industries. It may be out- produced and undersold and therefore may shrink even further, causing heavy unemployment of capital and labor. To correct such a dilemma is extremely difficult and painful.

The situation becomes all the more tragic if it involves important industries that are employing hundreds of thousands of workers. For political reasons the government cannot afford to let such industries collapse or wither away. It is expected to come to their rescue. Our steel and automotive industries are examples in case.

The most popular rescue action consists of a dose of economic nationalism. The steel industry in distress demands higher tariff barriers, which would curtail the steel supply and permit it to raise its prices. The automobile industry suffering losses clamors for import restrictions, which would force the American people to buy more domestic cars at higher prices. Foreign trade is to be curtailed, international relations to be severed, and living conditions to be lowered so that the beleaguered industry may be permitted to continue its antiquated operations.

If no tariff protection can be granted because it would violate international treaties, the industrial captains and labor leaders may clamor for financial aid and support. The taxpayers are called upon to support with tax extractions what they do not patronize with their consumption dollars. Of course, the subsidies cannot restore the strength and viability of such industries. They tend to become a permanent burden to society which is impoverished not only by the subsidy but also by its loss of foreign products. In the end, the healthy industries that must carry the burden of support may be infected by the same dilemma, and the subsidized industries in search of ever more reliable support may beg to be taken over by the government. In any case, the people will pay the price in the form of ever lower living standards.

Cleaner but Poorer

During the 1970s national governments throughout the world pledged a commitment to a cleaner environment. In the United States the administration of Jimmy Carter was especially sympathetic to the pleas of environmentalists. It sent wide-ranging environmental policy statements to Congress and made concrete legislative proposals to impose more air and water pollution controls, and regulate strip-mining, wilderness preservation, and energy.

At this place we need not dwell on the ideological causes that gave rise to the policy. But we must observe that in nearly all cases of environmental concern, the blame was laid on business concerns and the individual enterprise system. And governments always felt called upon to correct the situation through massive expenditures and severe production restrictions. (Cf. “Controlling Pollution,” The Freeman, Feb. 1973, pp. 67-77)

The federal Environmental Protection Agency (EPA) is demonstrating great perseverance against American industry. It not only is issuing countless guidelines but also setting rigid effluence limitations for many classes of enterprises. The Agency’s persistence received support and encouragement by a number of favorable court decisions that made U.S. corporations install many millions of dollars worth of waste-water recycling equipment and other anti-pollution devices. In nearly every case the U.S. district courts and the U.S. Supreme Court ruled in favor of EPA and strengthened its hand in dealing with industrial pollution.

It is difficult to estimate the total financial burden placed on American industry in order to secure a cleaner environment. Direct costs up to now probably exceed half a trillion dollars. Indirect costs consisting of time and effort spent on cleaning operations, of factories not built and jobs not created because business capital was spent on environmental devices, may amount to a trillion dollars. And this amount may double or triple again if we include all the production that was cancelled or not even attempted because the environmental costs made it unprofitable. Surely, the American people paid a high price for any improvement in their environment.

Environmental costs are business costs like any other costs that limit economic undertakings. Governments imposing new costs are limiting economic production, eliminating jobs and reducing incomes. It is dishonest to ignore the costs and deny the consequences.

The People Must Choose

A representative government like ours tends to reflect the choices of the people. During the 1970s the American people charted a course of policies that led to economic stagnation and gradual impoverishment. The facts are undeniable and indisputable. But most Americans probably acted and voted in utter ignorance of the costs and consequences of their choices, which affords us new hope for the future.

The surprising results of the recent election seem to indicate that many Americans are awakening to the challenge of the future. They are rejecting the road of the 1970s and instead are opting for a new beginning. If this means that they are choosing prosperity rather than stagnation, employment rather than doles, the road into the future is very clear: The federal energy policies must be reversed completely and the wealth transfer to OPEC be discontinued immediately. We must overcome and restrain the public hostility toward investment returns and business profits that are building plants and factories, creating jobs and raising wages. The countless restraints and restrictions on business activity and creative energy must be rescinded without delay. And finally, environmental improvements must be weighed against all costs, direct and indirect. If the costs exceed the benefits they must be reduced or removed. The federal bureaucracy which has been sitting in judgment of such matters has failed conspicuously. It must be disbanded promptly, and all environmental issues returned to the courts of law.

It is difficult to reverse public policies that are deeply rooted in popular ideas and beliefs. But it is possible through honest information and education. []

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