Cult of Cons

There are no contradictions.  If you think you have found one, check your premises.  One of them is wrong.

Ayn Rand

The economic application of Rand’s dictum is that good economic policy is good for the environment.  Specifically, an unhampered market economy is a superior system for maintaining environmental sustainability compared with the economically based social engineering we suffer under today.  In fact, a true free market economy is the only system that has any chance for achieving sustainability.  Here we focus on the effect of policy designed to create the so called consumer driven economy.

At the root of environmental and sustainability debate or discussion is consumption.  The more we consume the greater the pressure on the environment and the sharper the reduction of sustainability.  Since saving is defined as deferred consumption, the more we save the less we stress the environment in the present and at the same time increase sustainability both in the short and long term

Deferring consumption by saving not only reduces environmental stress today; it is also the source and foundation of increases in productivity in addition to scientific and technological discovery that reduces environmental stress in the future.  It is ironic that the political parties and interests most often supported by environmental activists are the ones which most enthusiastically promote the fundamental economic policies that turbocharge consumption and discourage saving.

Left to their own devices, people will save a significant portion of their productivity and only consume their earnings after considerable thought. What short circuits this process of high saving along with thoughtful consumption is the deliberate macroeconomic policy of punishing thrift via monetary inflation, currency debasement and government indebtedness which results in generalized and persistent increases in consumer prices.

For example, it is the specific policy of the Federal Reserve to create general increases in the consumer price index of one to two per cent per year.  To be fair, both sides of the political aisle generally concur with this objective.  In my posts on “Innumeracy” it was shown that even this seemingly small level of consumer price inflation is very bad over the long term.  In the short term of our lifetimes this inflation policy not only discourages thrift and encourages consumption; it promotes thoughtless spending.  Would the Twinkie be such a big seller if people habitually put careful thought into their spending decisions?  I wager that each of you could come up with a very long list of similar examples – and far better and more important ones at that.

Promoting thoughtless consumption is deliberate policy with its genesis in Keynesian economics that lead to the enshrining of the consumer and what I call the cult of consumption.  You hear it all the time that the consumer is 70% of the economy, as if healthy production and productivity (the true sources of prosperity) can exist only when the consumer spends at ever accelerating rates.

There are many fallacies in Keynes’ theories, but most important here is what he called the paradox of thrift.  In short, saving is not good and too much saving was a key cause of the great depression.  The paradox of thrift has limited application only when there is a sudden change in the economy and consumer behavior.  Such sudden changes can be caused only by government and acts of God like earthquakes and hurricanes.  Actually, policy makers’ obsession with the paradox of thrift is nothing more than the childish desire to avoid the painful consequences of bad behavior, like borrowing and spending too much.

The result of the universal adoption of Keynesian policy is that the entire western world eschews thrift and worships the false god of the consumer with disastrous economic and environmental impact.  It reached its painfully laughable peak with the nittiest wit ever to occupy the White House exhorting us all to go out and shop for the health of the economy.  Take one for the team, borrow some money and buy that Buick!  The current occupant is little better, though more articulate.  His mantra is get out there and overpay for that oversized house!

Monetary inflation is only one drug used to dull consumers’ senses to the need for thrift and keep them in consumption crazy haze.  Tax policy punishes thrift and productivity by taxing income from business activity and double taxes the dividend distribution of business profits.  The consumer is taxed on interest earned and on the gains in value of any investment assets.  All of this amounts to punishing productivity.

It is bad enough that saving is so savagely suppressed by government policy.  On the other side of the ledger, consumption is strongly subsidized by policy that reduces taxation if you buy things you cannot afford now.  The most egregious subsidy is for housing.  First we reduce one’s income tax by allowing a deduction from income for mortgage interest.  Then, we artificially force the mortgage interest rate below the normal market rate via government loan guarantees subsidized by the taxpayer.  These loan guarantees cover virtually the entire mortgage market today.  To cap it all off, government policies and programs allow home purchases with virtually no down payment, even after the recent financial meltdown.  No need to save for a house, just step right up and sign here!

The result of these policies is a colossal misallocation and waste of resources for housing.  The size of a new home nearly tripled in the fifty years leading up to the popping of the bubble.  Worse, these policies also contributed heavily to our urban and exurban sprawl.

In fact, our savings rate collapsed to nearly zero in the twenty-five years leading up to the popping of the housing and credit bubbles.  We are starting to save more (though not nearly enough) again in the aftermath of the first stage of our current great recession.  Unfortunately, today’s deferred consumption is not paying for future spending, but for past profligate spending.

The saving collapse was facilitated by massive extraction of home mortgage equity.

As you can see, the ascendancy of the cult of consumption is very real.

If I cannot convince you that government has no moral or ethical right to intervene in the economy and that it is horrific economic policy to do so, at least let us have policies that are good for the environment.  Tax consumption not productivity (income)!  Here I highly recommend FAIR TAX: THE TRUTH: ANSWERING THE CRITICS by Boortz and Linder for a detailed analysis of a well crafted consumption tax.  The one change I would make to the analysis you will find there is that the consumption tax rate need be no higher than 10%.   Another key policy change is to cease creating consumer price inflation.  For more detailed discussion please see my post on this site “Gold Is Green”.

Absent government intervention in the market there would be no cult of consumption.  Sprawl would not exist.  Thoughtless consumption, waste and cavalier disregard for the environment would be miniscule compared with today.

My next post will tackle how government regulation along with government ownership of valuable assets increases both wasteful consumption of those assets and raises the odds of environmental disasters like the BP blowout in the Gulf of Mexico.

Read the original story at SedonaCyberLink