The Leaders Debate: Sifting the Truth from the Rhetoric

The UK’s political party leaders took part in a live televised debate yesterday, and the amount of falsehoods, delusion and rhetoric was staggering. So I decided to sift at least some of the most important truths from the nonsense and present my efforts here. I quote from the BBC’s summary of the debate.

“Mr Clegg…challenged Mr Miliband to apologise to the British public for “crashing the economy”. Mr Miliband said Labour had admitted getting it wrong over bank regulation.”

Here Miliband is tapping into the almost universally accepted narrative that regulation of the financial sector leading up to and during the financial crisis of 2008 was inadequate, and that a lack of government regulation of the activities of financial institutions was the primary cause of the global credit crunch.

This is not just false, but virtually the opposite of the truth. The financial sector in fact is the most regulated industry in the world and over the last few decades additional regulation has outstripped any deregulation. In short, deregulation within or a lack of regulation of the financial sector is a myth.

The reality, then, is that the financial crisis of 2008 happened in the most regulated, most government controlled and least-free-market in the world. Furthermore, this was not a freak occurrence or a coincidence, it happened precisely because the financial sector is the least free market in the world. Government regulations, as is almost always the case in any industry, lead to unforeseen and unintended consequences in the financial sector; they created incentives for massive misinvestments. Enabling this disaster on the scale that it happened was the very nature of the global banking system itself. This system, purposefully designed by the central planners of governments the world over, allows banks to lend out far more than they have in reserve as demand deposits.

Fractional reserve banking, as this form of banking is known, might still exist in a future financial sector free of government control and interference, but most banks would probably operate on a 100% reserve requirement. What makes this likely? The fact that in a truly free financial sector any bank that stretched the gap between its assets and its liabilities too far and made too many risky or mistaken investments would, unlike the current system, actually face the inevitable consequence, which is to go bankrupt.

Contrary to popular belief, preventing financial institutions from going bankrupt is neither necessary nor beneficial to society in the long-term. Bankruptcy and the liquidation of assets is the natural mechanism by which misallocated resources can be freed up and put to productive use elsewhere in the economy. When governments force tax payers to pay for the losses of irresponsible financial institutions they not only encourage further irresponsible behaviour, but also prevent or delay the adjustment of resources away from the unproductive owners to other productive owners.

The narrative that unrestrained capitalism or too much freedom caused the financial crash is what politicians like Miliband want us to believe or actually believe themselves, either way they’re scheming liars or dangerously deluded do-gooders. It only serves the interests of the political ruling elite when we accept their narratives and believe their promises.

This misleading/misguided explanation of the cause of the financial crash was unthinkingly disseminated by the mainstream media and accepted without question by the public. Probably because it seemed to offer satisfying confirmation of what the public, the intelligentsia and the media wanted to believe: that it was all ‘capitalism’s’ fault. Because if it was capitalism’s fault, then the solution seems obvious: just give government more power to control and regulate the financial sector. But that wouldn’t be a solution. On the contrary, it would lead to even worse and more frequent economic turmoil and wealth destruction; further impoverishing the masses.

Lastly, Miliband’s remark was also a fairly obvious attempt to portray the Labour Party as humble and honest public servants, and not the well-educated but unthinking, sociopathic men and women of hubris that they really are.

The next point of interest:

“Ms Sturgeon took a firm line against austerity and signalled areas, such as increasing the top rate of income tax. Ms Wood and Ms Bennett joined Ms Sturgeon in stressing their anti-austerity credentials.”

It’s nonsensical for Ms Wood, Ms Bennett and Ms Sturgeon to have “anti-austerity credentials” because austerity never happened; it’s a myth. The coalition government may well have shifted some spending away from the welfare State and into other areas, but David Cameron’s government has added over £500 billion to the national debt in just five years, which is more than Tony Blair and Gordon Brown added in 11 years.

Ms Sturgeon’s less than radical notion of raising the top rate of income tax suggest to me that she is confusing tax rates with tax revenues. She mistakenly believes that raising the former will increase the latter, and therefore enable the government to spend more on the things that she thinks it should spend more on. However, it’s well evidenced and proven that tax revenues as a percentage of GDP remain virtually the same regardless of whether the top tax rate is 90% or 40%, or anywhere in between. What actually leads to more money in government coffers is economic growth, but there’s precious little of that in the UK at the moment.

Government action is always redistributive. Stimulation in one area of the economy must come at the expense of growth in another. For every job or product created as a result of government pushing funds into a particular area of the economy there is always at least the same number of jobs or products (often more because of government overheads) elsewhere in the economy that never come into being as a result. These are the unseen consequences. The ghosts of government redistribution.

Now onto remarks made by Nick Clegg:

“Mr Clegg directly challenged Mr Cameron over his decision not to ask the richest to pay more towards deficit reduction, but instead to impose “ideologically-driven cuts”.

Ask the rich? The government never asks, it makes demands at the point of a gun.

The State owes its very existence to ideology. Every single decision about government action is driven by ideology. Politics is ideology. Thus Clegg’s remark about cuts, clearly intended as a criticism and a moral condemnation of the conservative party, really can only mean that cutting government spending on the welfare State, schools or the NHS is always wrong per se. Which is an ideologically-driven argument. To refrain from cuts would be just as ideologically driven as enacting cuts. Furthermore, to argue that there is no practical reason for a government drowning in debt to cut its spending is clearly absurd and driven by ideology. Clegg indulges in the very behaviour he condemns his opponent for, which is typical behaviour for a politician. They care not for integrity, only winning arguments.

Moving on to the next remarks of interest:

“Mr Miliband repeatedly described what he would do “if I am prime minister”, in raising the minimum wage, banning exploitative zero-hours contracts and “rescuing our NHS”.

This is where Miliband sets the economic alarm bells ringing. Raising the minimum wage benefits those currently being paid the minimum wage (assuming their employer can still afford to employ them at the new rate and still give them the same amount of hours), but it harms young people and everyone else whose efforts and skills aren’t worth this ever-increasing arbitrary wage rate set by men in government. They are prohibited from legal employment, permanently banished and left with no choice but to work illegally for ‘cash in hand’, or to live idle off government welfare or even into petty crime. The minimum wage creates permanent unemployment, which is not a feature of capitalism proper, but can only occur in a capitalist system that is fettered by government interference.

The minimum wage doesn’t just affect us an employment seekers, it also affects us as consumers whenever employers can only cover the cost of having to pay a higher wage rate by raising the cost of the goods or services they provide. A recent piece by Ben Southwood for the Adam Smith Institute discussed a research paper on this aspect of the minimum wage, concluding that: “most of those on the minimum wage are not earners for poor families; the goods produced by minimum wage workers make up a large fraction of poor households’ budgets; raising the minimum wage, even if it doesn’t cut jobs, hurts the poor more than it helps them.”

Let us now address Miliband’s fervent desire to ban “exploitative” zero-hours contracts. Using this adjective implies that people who sign zero hours contracts somehow lack the intelligence to understand what they’re signing up for and are therefore being unfairly exploited. This is rhetorical nonsense, which in itself is an attempt to shamelessly exploit the public’s economic ignorance. In reality zero-hours contracts exist because both the employer and the employee benefit or expect to benefit from the arrangement (just like any economic agreement voluntarily entered into by two parties). The proliferation of this kind of contract in recent years is not proof that they are being used to exploit workers in hard economic times as Miliband would have us believe, but merely evidence that zero-hours contracts are currently suiting the needs of many employers and employees better than other kinds of contracts once did in this rather uncertain economic climate.

Sadly, I think the Labour party will win the 2015 general election simply because Miliband and his minions seem to represent everything that the public believes the Tories and UKIP do not. The media-driven ideological backlash against the “austerity measures” coalition and the “racist” UKIP has benefited the Labour party a great deal, who haven’t really had to do much except say they want to save the NHS, look plausible and sufficiently oppositional.

As for “saving” the NHS. That can only mean one thing: more national debt. The NHS is facing a deficit for the forthcoming year of £2.5 billion, and that’s even after the Chancellor’s £1 billion cash injection for next year. Labour almost certainly won’t cut spending elsewhere, and raising taxes on the wealthy and corporations won’t raise nearly enough if it raises anything, and so the NHS will have to be ‘saved’ with borrowed money. ‘Saved’ in this context will mean perpetuate an inadequate, wasteful and inefficient medical care monopoly. All whilst worsening the nation’s debt problem. And here we arrive at the single biggest economic and social problem facing everyone, young and old, against which all others pale into insignificance.

The UK has a deadly debt problem, which must be resolved one way or another in the coming decades. How’s it resolved will affect us all. There’s only three ways it can be addressed, and none are pretty. The government can default on its debts, which is the most honest thing to do, but this would result in a wave of bankruptcies, banking failures, job losses and probably months of social unrest — riots, blackouts etc. Not fun.

The government can print enough money to pay off its mountain of debt, but this runs the serious risk of causing hyperinflation and rendering the purchasing power of the money in our pockets as zero. Even if it doesn’t do that it will certainly lead to a period of very high inflation.

The third option is that the government steals people’s money, which unfortunately in the past is how the majority of government debt crises have played out. It’s known as ‘wealth repression’ and it has been resorted to previously by the British government as recently as the seventies. This can include measures such as nationalising people’s pensions in return for a worthless government promise to look after them in their old age, extremely high tax rates, capital controls, which effectively prevent people from escaping the misery of very high inflation, and dividend limits. There’s plenty of ways a bankrupt government can come up with to take people’s money in the ‘interests of the nation’.

It is inevitable that the national debt will continue to grow regardless of which political party wins the next general election because debt is the only thing keeping the NHS and much of the public sector afloat. The national debt will probably grow the least under a conservative government and the most under a Labour government, which is why the former is preferable. The larger the debts, the harder and longer the bust is going to be for us all.

In an ideal world the first thing the next UK government would do is to default on the national debt by announcing to the markets that it cannot or won’t pay its debts. The sooner the economy hits rock bottom, and all the painful but necessary economic corrections and adjustments are allowed to happen, the sooner it can start to really grow again. Sadly, none of the UK’s current political party leaders seem to have the bravery and decency to tip this house of cards over. The national debt is not just a hot potato, it’s a flaming meteorite that every political party is cowering from as it looms ever larger on the horizon.

The very last people we can expect to resolve the nation’s biggest problem in the least damaging way possible are those who are so utterly convinced that they can run it. This was not a debate of leaders, but a debate of the deluded.

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Sources:
http://fee.org/library/detail/the-house-that-uncle-sam-built#axzz2LMqOFWN0
http://fee.org/library/detail/liberty-in-books-the-financial-crisis-and-the-free-market-cure
http://mises.org/library/some-additional-reflections-economic-crisis-and-theory-cycle
http://www.adamsmith.org/blog/economics/even-if-the-minimum-wage-doesnt-hit-jobs-it-hurts-the-poor/
www.debtbombshell.com
http://info.moneyweek.com/urgent-bulletins/the-end-of-britain/
http://www.bbc.co.uk/news/election-2015-32166354
blogs.marketwatch.com/fundmastery/2010/07/02/does-hiking-tax-rates-raise-more-revenue/