The Irony of Ryan's Entrancement with Rand

I did the college thing of reading several of Ayn Rand's works. What struck me most was how much the landscape she was describing resembled nothing like the world I know. However, it seemed pretty obvious that she was working against the landscape she knew: Soviet Russia. Her descriptions of the difficulties for entrepreneurs, of mindless bureaucrats standing in the way, of the waste and inefficiency of a command economy all fit when you realize that is the world she is describing. And, like a school girl caught up in her first crush, Ms. Rand gushes blindly about the wonderfulness of the structure of her chosen country, America.

Although her creed, that acting out of selfishness results in the best outcomes, is neither a description of how we actually act and has been discredited as a proscription for how we should act, she does draw a clear and useful distinction between those who work and produce, and those whose actions are extractive. The bureaucrats of her old world produced nothing of use, worked to expand mini-empires with the command economy, and they were the ones who ended up with the summer homes, the cars, the better life-style, while many faced hardship enduring goods shortages (the images of the breadlines come readily to mind.)

These parasites, the one's who so steadfastly stood in the way of entrepreneurs like John Galt (from Atlas Shrugged), who condemned the working man or woman to a lifetime of ill-spent productivity by their miss-allocation of production (creating both vast waste and shortages as they ill-anticipated the needs and desires of the population); These mindless wasters of both the labor capital and intellectual capital of their countrymen: About them Ayn Rand heaped her derision. Galt's 50+ page speech in Atlas Shrugged is simply a condemnation of a command Economy and its flaws, interspersed with unchecked praise for an American-style Capitalist Economy.

The more we learn about the inner workings of the American Economy, however, places things in a new perspective. Reports about the influences and outcomes of the financial sector; reports about the actual results of applying Private Equity, keep enforcing the idea that we have built a purely extractive layer upon our vaunted production (ideas, manufacturing, services). What the entrepreneurs and laborers of America put in, our financial services (and corporate elite) take out for personal use, trading lobbying power for actual production.

American Capitalism has degenerated into a quasi-Command Economy: The Banking members of the Federal Reserve set the dollar and maintain it high to benefit those who lend (extracting great wealth for themselves along the way); Congress interests itself with passing laws that maintain wealth or provide easy avenues for those with wealth to build more; The massive corporations use their market position and power to squelch new ideas and new innovations (or buy them up and squelch them internally or, after the initial pay-out to the entrepreneur, hoard the future income from the idea for themselves, along with accounting control fraud to extract more from the economy than the production of the idea or product places in.)

Just as this parasitic behavior was detrimental to the well-being and expansion of old Russia, so, too, this parasitic behavior has profound negative consequences for America's future. As labor is squashed, less demand is created for the production of the entrepreneur, curtailing the advancements that can and will be realized. As the benefits of the productive classes flow more and more to the parasitic classes, the velocity of money slows, reducing the opportunities for new ideas to enter the market; as the money available to educate all decreases, the number of fertile minds (and hence the number of innovations) decreases, leaving America a second-(or worse!) class producer and member of the world stage.

The irony arises, then, because all of these self identified acolytes of Rand are members of this parasitic class: From Greenspan to Geithner, from Cantor to Bernanke, from Romney to Ryan: Each is a member of the extractive classes, producing nothing, but extracting greatly. None of them would be heroes in a Rand novel, but rather would be the derided antagonists, standing in the way (and ultimately failing) the onslaught of a true producing giant. I think that Galt would smite them with a snort!

The Real Meaning of the Deficit

I think there is a lot of confusion about the real meaning of the deficit. There is a lot of talk about the need to balance the budget, the need to pay down the deficit, to make the 'hard choices' – but no-one really talks about the why. There is some ambiguous talk about deficit vis a vis the future, but no specifics at what is at stake.

In simple terms, as long as others are willing to purchase and hold U.S. Dollars, thereby funding the deficit (or holding it in terms of bonds), the dollar remains strong, e.g., its purchasing power remains great. However, if conditions were to change, if others' confidence starts to falter, and U.S. Bonds are not seen as the low risk instruments that they are today, it would signal a weakening of the U.S. Dollar, and the purchasing power of the dollar would likewise fall.

A falling dollar translates, here at home, to inflation, as the amount of goods or services that can be purchased with a given amount drops. Everything starts to cost more, from food to clothing, services to labor.

Inflation isn't necessarily good, although it impacts different people differently. To truly understand the demagoguery surrounding the deficit, one needs to ask the question: Who will be most impacted by inflation?

The answer, of course, is lenders. Bankers. Wall Street tycoons. Anyone who lends money and derives their income from the resultant payments sees their income fall. And, if their money is tied up in a long-term, fixed rate instrument (think a 30-year fixed rate loan at 4%), there is a huge risk that such an instrument's yield will drop to near (or possibly, below) zero if inflation climbs high enough – that the payment flow is actually negative.

Now, a debtor or borrower is in almost the opposite position. While there was likely some initial pain as their income dropped relative to the goods and services they wished to purchase, since labor (i.e., wages) are a form of service and hence increase their cost along with inflation, labor typically sees their income keep pace with inflation, and the resultant pain is from the fact that there is no growth in their wages. Conversely, as inflation takes hold, the amount relative to their pay that their long term debts require is dropping, laborers are seeing an actual increase in their standard of living as a greater amount is free to purchase other goods and services!

So, who really cares about the deficit? Not likely you or I. In fact, it has been suggested that one of the best ways forward would be for America to gradually inflate her way out of the problem of a high deficit, and that the consequences are orthogonal to the current horror stories told about a high deficit.

So, the next time someone tells you it is imperative that we balance the budget and begin serious efforts to reduce the deficit, ask them “Why?”

And if the answer isn't because they have substantial money tied up lending to others at low interest rates and a future inflation risk may lower their income, they either have no clue or are lying to you.

And in either case, they have no credibility. So why listen to them?