Over the life of this blog, I have, when discussing monetary policy or various reasons for the state of the economy, linked to a small number of Dr. Paul’s writings, mostly on his economic beliefs, presented in articles and speeches before Congress. Not wanting to change the point of the blog to examining deeper political issues, I had chosen to remain institutionally neutral in terms of political positions. Thankfully, though, Dr. Paul has published a new book, entitled Pillars of Prosperity: Free Markets, Honest Money, Private Property, which contains an extensive compilation of his thoughts on economics and presents an excellent opportunity for a special book review. As a series of special posts, over the next few days (as time allows), I will attempt to examine each part of the book and present a summary of his positions, which have been woefully underrepresented to most Americans. “Part 1 – The Economics of a Free Society” is discussed here.
In the first part of the book, Ron Paul’s overall economic thoughts are outlined, starting with is long-held belief that the path the government has been on for decades is a crisis in the making. This is due to the out of control spending, high taxes, regulation of the market, inflation, invasion of privacy, massive welfare spending, massive military spending, and interventionism overseas.
Paul is obviously concerned that the crisis will have much to do with the destruction of the dollar, which will lead to higher prices. The government will feel the need to intervene in the economy, resorting to “Nixonian-Keynesianism” in the form of wage and price controls. The currency destruction will also create a rush out of the dollar as foreign governments dump the dollar in favor of more sound money.
The role of government in general is also examined. Should the US government be the protector of life, liberty, and property; or should is be the ultimate provider and policeman of the world? Paul strongly argues for the former, with a government based on a constitutional foundation, as opposed to the current system of authoritarianism. As he states, “Current problems that we now confront are government-created and can be much more easily dealt with when government is limited to its proper role of protecting liberty, instead of promoting a welfare-fascist state.” Taking aim at the failed Drug War, he argues that it is based on the concept that the government needs to protect us from ourselves and throw nonviolent drug users in prison, and even curtail the rights of individuals and healthcare professionals to utilize alternative medical practices. On the other hand, he also argues that the government, while infringing on the right to liberty with these types of laws, also infringes on the right to life by legalizing and subsidizing the practice of abortion, both in the US and in other countries. This he sees as dangerous and ironic, which is also a somewhat accurate description of nearly every action governments take.
The theme of international interventionism is also discussed at considerable length, as the move toward more centralized, world government is viewed by Paul with extreme caution. “For over 50 years, there has been a precise move toward one-world government at the expense of our own sovereignty,” he writes. Extra-governmental, international institutions such as the International Monetary Fund and World Bank are funded by the American people, who have no say in what their money is used for, and where it is applied. Poor Americans have their money taken from them and given to an international, unaccountable institution, where it is then given to corrupt leaders in other nations in the form of kickbacks.
Of course, this trend of government giving out favors is nothing new, according to Paul. He mentions former Congressmen who, once they leave office, team up with members of the opposing party in lobbying for special interest groups. After all, the entrenched interest groups need the support of both parties to obtain their handouts from the government in the form of taxpayer money. But government benefits, either to corporations, interest groups, or welfare recipients, causes two problems at once: it takes away money from someone else, and it makes the receiver dependent on government.
The main culprit in this corrupt system, according to Dr. Paul, is the banking system itself, with the Federal Reserve as the head of the snake. The Federal Reserve and the government has undertaken a form of central economic planning, through the tools of fixing interest rates, subsidizing credit, attempting to stimulate the economy, aiding the sick, federally managing education, and creating other welfare programs. This system allows the government to administer these enormous programs and wage perpetual war anywhere in the world whenever the interests of America are involved. The Federal Reserve manipulates interest rates and creates credit out of thin air, allowing us to live well beyond our means with low and negative savings rates, resulting in the fact that “we have abandoned a necessary part of free-market capitalism, without which a smooth and growing economy is unsustainable.” The bubbles in the economy, such as the recently burst housing market bubble, are created from the Federal Reserve creating easy credit; and the nonexistent savings rate, a key driving force of true capitalism, is allowed and encouraged by the system.
In fact, Paul argues that the market system now in place has no evidence of capitalism at all. It is instead a form of “Keynesian inflationism, interventionism, and corporatism.” “A system of capitalism presumes sound money, not fiat money manipulated by a central bank.” According to Paul, this will have to come to an end one day, and it is up to us to determine if it ends gracefully or in a full-blown crisis.
Because of the standing of the dollar as the reserve currency of the world, we have been able to get away with this on such a large scale for so long. Due to the Bretton Woods agreement, the world accepted the dollar as if it was as good as gold until 1971, when the US defaulted on the gold exchange rate. Luckily, though, by this point the dollar was the established reserve currency, which allowed the government to continue its policy of credit creation and inflation.
The manipulation of the gold price itself for many years, as well, contributes to the ongoing belief in the system. Paul cites the fact that, from 1945-1971, the US sold nearly 500 million ounces of gold for $35.00, in order to prop up the value of the dollar. This manipulation still exists today and is practiced by many more governments than just the American one, and is a well-documented occurrence.
But all of this manipulation and intervention can not last forever. Eventually, inflation will catch up with the system, and no amount of government-rigged indicators of “low inflation,” such as the CPI or PPI, will prevent the crisis. Even now, the value of the dollar has been declining, as resources costs and food costs are increasing. Yet, the Federal Reserve stays quite about terms such as “inflation” or “recession.” But inflation is not just rising prices; it is more accurate to define it as an increase in the supply of money and credit, evidence of which is abundant in the market over the past half year, from the Fed injecting billions of dollars into the subprime mortgage bond market, to the new proposal to send millions of Americans tax rebate checks while doing nothing to decrease government spending.
Amidst all of these dire warnings, Paul offers one solution after another in an effort to prevent the potential crisis. Many of the solutions he presents focus primarily on a return to a smaller role for government which protects private property and equal rights and promotes free markets and a sound monetary system. This include returning to a sound money system, reduction of federal spending, lowering income taxes, abolishing taxes on savings, dividends, and capital gains, reducing regulations, ending subsidies to special interests, and no protectionist policies for certain sectors of the market.
Cutting the size of government is integral to all of the policies that Paul discusses. Both domestic welfare to special interest groups and military spending should be ended, as well as doing away with subsidies to various industries or corporations. As well, cutting government does not mean token cuts in the proposed increase of the size of government, according to Paul. The result of decreasing an increase is still a net increase, which does nothing to save the individual or promote the cause of liberty with less government intervention.
These solutions, though, would require the Congress to put a stop to the seemingly endless sideshows of investigating corruption and fraud in the market. These “excesses of capitalism” are presented as failures of the free market, when they are actually the logical consequences of constant government intervention in the market. Billions of dollars have been spent and tens of thousands of pages of regulations have been written on regulations, and more of them will not solve the problems caused by the ones already on the books.
If Congress actually desired to end the largest source of fraud and corruption, it would investigate itself, according to Paul. Shifting the blame onto markets, corporations, or capitalism is missing the real source of the problem; namely, easy credit created by the Federal Reserve, along with interest rate manipulation.
After the near-complete loss in faith of the government by the American people, less than 20% of whom actually cast a vote for the winning president, more government is clearly not the answer. This is central to Paul's argument in this first section of the book, as well as his faith in the individual to act logically and ethically in a free market. It is the passing out of favors, welfare spending, and the loss of individual liberty that are at the heart of this current loss of faith in big government. The government can not create trust in markets. Only trustworthy people can do that.
Part I - The Economics of a Free Society
Part II - Mises and Austrian Economics: A Personal View
Part III - Reforming Social Security
Part IV – Giving Money Back to the Taxpayers
Part V - Money and Banking: Gold versus Fiat
Part VI - Free Trade: Real versus Phony
Part VII - International Affairs
Part VIII - How Government Distorts the Housing Market
Part IX - Spending, Taxes, and Regulations
on January 28, 2008, 2:46 pm