Here is economist Milton Friedman in the NY Times (1/11/99) explaining how the Social Security "old age insurance" system works:
"Taxes paid by today's workers are used to pay today's retirees. If money is left over, it finances other Government spending—though, to maintain the insurance fiction, paper entries are created in a 'trust fund' that is simultaneously an asset and a liability of the Government."
Why would the government maintain a fiction, and how can a fund be both an asset and a liability? Well, an asset is something you own or are owed. A liability is something you owe. A trust fund is a number of assets being held for a client. If the assets were real money, say gold, then they would be assets of the government, and liabilities of no one. If the assets were corporate bonds, which are promises to repay lenders, they would be assets of the government, and liabilities of corporations. But if the assets are government bonds, then the fund consists of assets of the government which are also liabilities of the government.
Governments maintain fictions in order to protect the central economic fiction: play money. In economics, play money is known as "fiat money", which means a decreed money as against a chosen money. Modern fiat money is mostly debt.
If the idea of using debt for money is confusing, go back to the flea market and lend out a jade ring. Have your debtor sign a paper that says: "I promise to pay the bearer of this note one jade ring." Now pull a dollar bill out of your wallet and compare what it says: "This note is legal tender for all debts, public and private." That note is signed by somebody who represents the United States Government, so people trust it. If people trust the signer of your note, then you can use it like a jade ring as legal tender in the flea market.
You might notice a difference in favor of your flea market note. It promises something of value to the bearer. While it is only a promise to pay, it says what it promises to pay. So did the dollar bill, once. Many years ago, it promised to pay one twentieth of an ounce of gold. Then gold was confiscated, so the bills promised to pay "lawful money". But since "lawful money" had no meaning except the bills themselves, it was laughed off the note. Besides, it proved unnecessary. People kept right on using all that paper as money, even though it had become play money.
To issue play money, the government must maintain a fiction that the money represents established value, as once it did. The more nebulous the value, the more careful the fiction. No matter how careful the fiction, though, play money always loses value. Your social security contribution needs to be in a trust fund because that can be managed to compensate for the fact that play money loses value. It can earn interest to compensate for depreciation. Who in the world would use a pretend trust fund instead of a real one?
Who else but subjective thinkers? Since their play money does what it should, why would not fictional insurance do what it should, and a pretend trust fund do what it should? Of course, hoards of accountants, economists, and professors are busy pondering why these things do not do what they should, but subjective minds ignore that, and passive minds don't get it. The place to start pondering is the basic principle of markets: volition. But passive minds do not know that volition exists, and subjective minds think it means mind over matter.
Passiveman accepts what Subjectiman tells him, that government is the official protector of wish lists. The idea of the Founding Fathers, that government is the protector of rights, is meaningless to them, unless it means a right to the wish list. Subjective government assumes that its main function is to establish should committees. Police, courts, and armies are, to subjective government, not the means of protecting freedom, but the means of enforcing shoulds.
Examples of subjective governments are so numerous that the problem is not finding them, but believing them. In The Economist magazine for Jan. 9, '99, we read on page 45 that France is hoping to "create another 100,000 or so" jobs by "reducing the working week from 39 to 35 hours. But early indications are that employers will not respond by creating many jobs." Job creation is urgent, because unemployment is 11%. In other words, the government threw eleven percent of the workforce out of work by raising employment costs too much, and plans to cure that by raising costs some more.
On page 67, we read that "...…although Japan's economy is still flat on its back, its short rates are as close to zero as makes no difference, so they cannot be cut much more." In other words, when imposing below market interest rates failed to magically revive business, the government, in the face of failing banks, cut rates some more. And then some more. And then some more....
On page 32, we read about the Bolivian government's "bungled attempts to streamline" the "once proud tin industry", that was nationalized in 1952. Today, "even the mines that have survived are operating at maybe half their potential." Many displaced miners took to growing coca "to supply South America's burgeoning cocaine business." But the government, having ruined their old living, is now trying to ruin their new living.
If these examples seem too crazy to believe, ask how subjective thinkers make decisions. They consult the wish list. How would a group of such thinkers come to a consensus, so they could govern? They would find items common to all wish lists. So they would tend to cure every economic ill by first raising wages, and then lowering prices. It would not matter that this contradictory prescription could not work; it should work. Since we want employers to pay more out and take less in, we guess that they can afford to do that, and can be forced to do that. Of course, if we had truthful price data, we could find out if they could afford it or not. But we got rid of truthful prices long ago.
In another issue of The Economist (1/23/99 p.6), a letter refers to the European Union's privacy directive, "based on the idea that privacy is an inalienable right. However, the directive requires that member nations establish government-operated information authorities to oversee the personal data of all citizens." In other words, if a should committee is in charge of your personal data, you should trust them.
To see if you could, check on page 16, where are listed the two things that Brazil can do if things continue to go badly. "One is to restructure (in other words, default on) its public debt; the other is to erode the debt's real value through renewed inflation." When private banks act that way, bankers go to jail. But subjective government means well, and wants to do right, so passive voters reelect it.
Or try page 24, where is described our president's plan to invest some of the Social Security "fund" in the stock market. "Nothing that matters has changed, except one thing, and for the worse—the government has become a big investor on Wall Street." When you buy stock, you are buying a share of ownership in an industry. So the president is proposing to "privatize" part of Social Security by nationalizing part of industry. Subjective government really does count on passive minds.
How does the market deal with subjective government? By going underground, and by devising ways of trading that outsmart the government. A subjective government is one run by subjective thinkers, so it gets essentials reliably wrong. As a trader, you can be going essentially one way, and, to the government, be going essentially the opposite way. Thus the passive complaint that the richer people are, the less income tax they pay.
Government seems to get things backwards on purpose. People who receive welfare are called "clients". The income tax is called a "service". When an increase in spending is less than last year's increase, it is called a "cut". None of these seem backwards to subjective thinkers. If the yearly budget increases less than the usual increase, then subjectively it is essentially a cut. If your salary depends on a collection agency, that agency is, to you, essentially a service. If your budget depends on the number of people you are allowed to pass money to, those people are, to you, essentially clients. Things turn upside down when you get essentials wrong.
A proof that passive minds are not incapable of thought is found by looking at people who live off welfare. They have figured out, in some terms, that government people get essentials wrong, and act on the wrong essentials. So they are careful to be undeserving. It is undeserving people who make the most reliable clients, and are therefore in demand by welfare clerks looking for clients. As usual, a market springs into existence. Agencies are willing to pay for clients, so budgets will not be cut. Hoards of clients appear.
A market spurs the creation of whatever is traded on that market. When a government creates an artificial market trading money for shiftlessness, it spurs the creation of shiftlessness.
Subjective governments go farther than that. For those in charge, growth means having problems to solve. The essential to them is not solving problems, but having problems. They are eager to take money from taxpayers and trade it for problems. It is naïve to suppose that when government "throws money at a problem", it bungles the solution. Money is not thrown at the problem, but at the subjectivists. Problems are not to be destroyed by solution, but hoarded for the next election.
For examples, we can reopen the 1/23/99 The Economist almost at random. We can visit unsolved problems in the U.S., or Haiti, or Australia, or Korea. We can look at the $38 billion Three Gorges Dam in China (p.37). A new prime minister visited the building site, and expressed reservations. "Five days later, as if to support Mr. Zhu's concerns," a bridge collapsed, killing forty. Locals had awarded the project to a generous contractor. "Arrests have been made, and other projects by the same contractor have been suspended." An exception? Not exactly. "The latest tally of dodgy deals lists 95 cases, involving 105 officials."
The cure for subjective government is not to get rid of subjective minds, but to cure passive minds. It is passive minds that provide the support for subjective governments, by believing promises of magic solutions and unlimited largess. Passiveman outnumbers Subjectiman. Subjectiman tells the lies, but Passiveman believes them.
For example, Passiveman defends the government's "right" to tax him. A tax is a price paid by force, so it is not a trade. Trade is always voluntary. To take money by force is to steal it. The question to ask about tax is: could a government survive without stealing?
The method of establishing reason and rights in a society is to establish a government. The purpose of a government is to defend rights. Until this is done, no markets can exist, no division of labor can develop, no wealth can be produced. Nothing is more vital to society than a government. However, if a government violates rights, it has stopped defending them. It has given up on governing. A government that steals cannot be legitimate.
Passiveman does not do this reasoning. He is told that taxes are right. To him, that is the same as saying that the value of government must be paid for. He is told that the market cannot take care of that, that trading will not work, and only force will work. He believes it without proof. But there is no proof. The proof goes the other way. To see how, stop at the entrance to the nearest flea market. Why are you paying a dollar or two to get in?
What determines how much you pay to wander around a flea market and perhaps buy nothing? You have traded some effort not for goods but for the opportunity to look at goods. By making this trade, you have helped establish the objective value of entrance to the market. Why pay here, but not at the entrance to a much more valuable market, the supermarket?
Consider where the money goes. The flea market operator has to pay for the space, and pay taxes on it. That is, he has to pay his share for police protection, fire protection, and the court system. On top of that, since he does not make any profit from trades in his market, he wants to be paid for his effort in setting up the market. The supermarket has to pay all those things also, but it does it differently, by a profit on all trades.
Suppose the supermarket operator only got enough profit to pay for his effort in managing the market, and paid for the government part by charging you admission. Would this be a tax? Subjectiman would say so: he gets mad at having to pay to get in the flea market. Passiveman, once he got used to it, would pay no attention.
An active mind would reflect that the market can exist only because of the government defending property rights. Activeman would be eager to pay for that, since it makes him better off. He would consider it a voluntary trade, much to his advantage.
Then why would he refuse to voluntarily pay for government? How could it be argued that a reasonable man would not want his rights protected? Even Passiveman agrees that rights are good. Subjectiman demands them loudly. It is absurd to argue that people must be forced to buy what they everywhere clamor for.
Shopping malls normally provide private streets, parking lots, policemen, and emergency services. They pay for these things voluntarily. They want them. It is absurd to argue that what is being bought voluntarily cannot be paid for voluntarily.
Of course, if a government does not intend to deliver rights protection for money, then it has nothing to trade for the money, so it can't get money voluntarily. If it takes it upon itself to decide that I need some of your money, then it is deciding that you should be, for some part of your time, my slave. It assures you that "human rights are more important than property rights", which means that I am more human than you. It sees you trade effort for money, as a step in trading effort for goods. Instead of letting you complete your trade, it steps in and completes the trade in another way: your effort for charitable gifts. If you feel subjective guilt or passive indifference, you figure you probably should have given the gifts anyway. If you want to choose your own charities, you call what the government did stealing.
Looked at from the standpoint of an active mind in control of a self-regulated life, the purpose of subjective government is not to protect rights, but to steal money and pass it around. Another way to put it is: the purpose of subjective government is to waste effort. This eliminates any need to explain government waste. It is the whole point.
Our society is being made more efficient all the time by better machines. So we assume that wasted effort will hardly be missed. Only an active mind bothers to imagine how much better things would be without all that wasted effort. Passiveman lacks ambition to be better off, anyway. Subjectiman, as a way to be better off, demands a place in government.
Will subjective government stop at stealing half your effort? Will it stop before it wastes all effort, no matter how efficient? If stealing is its right, why would it stop?
That suggests a way to change subjective government back into rights protecting government. Take away the right to steal. Identify taxes for what they are. Remove your sanction of stealing. Since subjective thinkers go into government to steal, they will leave government when it is no longer allowed to steal.
Then the problem would be to find the best ways to voluntarily pay for protection of your rights. It is the kind of problem that markets solve all the time.
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