11. A Grim Future

“I think we have more machinery of government than is necessary, too many parasites living on the labor of the industrious.”

-Sir Francis Bacon

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The current U.S. legal structure is not healthy and does not promote free enterprise. The government at all levels has invaded the lives of families and private business, and regulates all aspects of our lives. Here is where the problem lies. The U.S. has created a complex legal system that is to the point of being too complex to the little people but also too complex for the experts. Even the experts are hiring experts to help them understand the law. Then the federal, state, and local governments have created a multitude of regulatory agencies in order to enforce these complex rules.

We, the people, have a government that is out of control. This creates a severe problem, because government should be consolidating government programs, reducing bureaucracies, and controlling government spending. However, government continues to do the opposite. Government keeps expanding bureaucracies, raising taxes, and increasing the complexity of our laws. Thus, people work hard for their money and they will learn how to protect themselves, when invaders, like lawyers, bureaucrats, and tax collectors come knocking at the door. This chapter discusses some of the future consequences of an over taxed and over regulated economy.

Perpetual Bear Financial Markets

The first line of defense against an intrusive, cash-hungry government is people and businesses will use more cash transactions. Cash transactions do not create third party records. For instance, if a business uses a check to pay for its bill, then that business’s bank is a third party to this transaction and the bank has a record of it. Government can use bank records to piece together a person’s income and wealth. Moreover, regulators and tax collectors can easily seize bank accounts with one phone call. If a person is holding cash, government has to track him down and find the cash. Furthermore, government cannot verify a person’s or business’s income, if they use cash transactions. Even lawyers do background searches on people before initiating a lawsuit. Why sue a person if he appears to have no money? As a result, more businesses and people will avoid paying their taxes or protect themselves from lawsuits using cash transactions.

Holding large amounts of cash is dangerous. The second line of defense is people and businesses will move more of their wealth to off-shore accounts. An off-shore account is a bank account located in a country that has strict confidentially laws, low regulations, and low tax rates. The common places are Bahamas, Cayman Islands, Lichtenstein, and Switzerland. The real problem of off-shore accounts is the ability of people and businesses to hide income. For example, a person can work for a company in the U.S. and all the paperwork indicates this person is earning $30,000 per year in taxable income. The company could really be paying him $60,000 by using off-shore accounts to hide some of his income. The company could be making secret bank transfers from its off-shore account to that person's off-shore account. All the paper work is outside the United States and beyond the reach of the tax agents, scumbag lawyers, and bureaucrats.

U.S. law requires all Americans to reveal foreign bank accounts to the Internal Revenue Service (IRS). Of course, who in their right frame of mind would do this? Telling the IRS something that is very extremely difficult for them to find out on their own should guarantee an audit, because once money is in foreign accounts, it is literally beyond the reach of the U.S. government. The U.S. government is worried about tax evasion and is becoming more insidious about tracking down these foreign bank accounts. The IRS can scrutinize anyone’s VISA, MasterCard, and other credit card information and can check if people are traveling to countries that allow off-shore banking. The IRS views these people as potential tax evaders that require closer scrutiny. Further, the U.S. government can put pressure on the Cayman Islands and Bahamas in order to get these countries to reveal bank records, but it only takes seconds for a person to electronically transfer his funds to another bank in another country (Switzerland and Lichtenstein may be more difficult, because they are part of Europe).

A cash economy and off-shore accounts put a strain on a country’s financial markets. People are not investing the cash into bank accounts, stocks, bonds, and pension funds within the United States. Financial markets are extremely important for wealthy countries, because they link the savers to the borrowers. People deposit their money into financial institutions. In turn, financial institutions lend the funds to borrowers. The borrowers could be a business that uses the loan to invest in machines and equipment, or a family that uses the loan to buy a house, car, or appliance. Thus, the loans feed the money back into the economy and help perpetuate a society’s wealth. If people lose faith in the financial markets and start hoarding their cash or hide this cash in foreign bank accounts, then this money is not invested into the financial markets. This was a problem during the Great Depression. People hid money in mattresses or buried it in back yards. This money does not get re-invested back into the economy.

This is why the U.S. federal government panicked during the September 2008 financial crisis. The federal government offered a bailout package worth $700 billion. The purpose of the bailout is to prevent the financial markets from going under. A faltering financial system is the path to a third world country. Third world countries do not develop and become affluent. However, the bailout has several problems. First, everyone considers this free money and many institutions are getting into line for the handout, such as banks, insurance companies, automobile industry, school districts, and state governments. Even the porn industry, Larry Flint of Hustler and Joe Francis of “Girls Gone Wild,” is asking for a handout [1]. Second, the U.S. Treasury Department is not disclosing who is getting the money and how much. The public does not know where the money is going and how the money is used. Third, the U.S. government is not providing oversight on the funding. This is unusual because the federal government always likes to impose its authority and control. Finally, the public is outraged over the bailout. Taxpayers believe the government is bailing out companies that made bad investment decisions. In some cases, they are right. Adding fuel to the fire, some of the companies are inappropriately spending the bailout money. Some companies used the bailout money to buy other banks, pay bonuses to high-ranking executives, or hoarding the money. Remember, the bailout money was to get banks to start lending again; not hold onto the money!

One demographic that many financial analysts do not talk about is the retiring baby boomers. For stock prices to keep increasing, people have to invest more funds into the stock market. However, when the baby boomers start retiring, they will begin to cash in their stock portfolios. Hence, the U.S. stock markets may not be a good investment, when the baby boomers start retiring, causing massive withdrawals from the financial markets. Then this problem is compounded from people hiding their money from government, lawyers, and bureaucrats.

Fleeing Businesses

Businesses are fleeing the United States and relocating to Asia and Mexico. Many experts cite that China and Mexico have cheap labor. However, the United States has a punitive legal environment from a variety of excessive regulations, frivolous lawsuits, and high taxes. All these items increase the cost of doing business in the United States. Then couple these high costs with high wage rates, then the U.S. has a very crushing business environment. A business operating in the United States has to pay:

Income taxes: A business may have to pay federal, state, county, and/or city income taxes. Income taxes vary by state and locality.
Property taxes, which include machines and equipment: In some localities, these taxes can be quite high, especially for capital-intensive industries, like computer chips and automobiles.
Social Security and Medicare taxes: The federal government collects these taxes from the employer and employee. Workers pay approximately 8% of their wages to social security and 1% to Medicare and the employer matches the dollar amount of the taxes that the employees pay.
Workers’ compensation insurance: The state governments dictate the insurance rates. It seems many young people have a disability and are not working.
Unemployment insurance: Again, state governments set the rates for unemployment insurance.
Medical insurance and pension plans: Employers are required to pay full-time workers medical insurance and contribute to employees’ pension funds. The key word is full time, which is why some employers in the services industry rely on part-time workers.
Unfunded mandates: Federal, state, and local government impose numerous mandates on businesses. Government dictates a rule or regulation, but does not pay for it..
Lawsuits: Attorneys attack some industries such as the medical and pharmaceutical industries.

Governments in Asian countries do not subject their businesses to all these insurance programs and taxes. Further, lawsuits are rare and regulations are lax. For example, environmental laws tend to be weak and businesses can freely pollute. Further, Chinese workers earn a meager $10 per day for 12 hours of work and the Chinese companies ship the products to the United States. It has gotten so bad in the United States, our country actually ships scrap metal to China. Then China produces finished products that are shipped back to the United States.

Asian countries are still growing after the 2008 Financial Crisis, while the United States is sinking. The Chinese government is complaining about a 5% growth rate, because it was 10% before 2008. This causes a severe problem. If businesses are leaving the United States, who is going to be hiring workers? With tax revenues decreasing and governments at all levels having severe budget deficits, then government will have to stop hiring. Therefore, the U.S. unemployment rate will gradually increase over time. Margaret Thatcher summed this up best by saying, “First we produce, then we consume.”

The Collapsing U.S. Dollar

The U.S. free trade policies are insidious and are destroying our country. The correct definition of free trade is one country makes something and sells it to another country. However, the other country also makes something and sells it back to the original country. Thus, both countries produce something and sell the excess to other countries. The United States does not do that. U.S. companies are encouraged to close down shop here in the United States and relocate to Asia. Then they specifically produce products that are shipped to the United States. There is no mutual exchange of goods between countries. Thus, the manufacturing industry creates wealth and jobs outside the United States, even though the final products are sold to American consumers. Consequently, China has a quarter of the world's industrial space, is growing at a phenomenal rate, and wealth is increasing. With all this new wealth, the Chinese government has been able to finance a space program and recently sent an astronaut into outer space. This is great for the Chinese, but what about the plight of the U.S. workers? Our fellow Americans have been losing all these good-paying factory jobs in the rust belt. The rust belt is states like Indiana, Ohio, Michigan, and Wisconsin that experienced massive factory closures. Many of the factory buildings still remain, but are abandoned and are gradually rusting away.

U.S. consumers subsidize the growth of Asian countries through trade deficits. Our country has been plagued by large trade deficits since the 1960s. A trade deficit is U.S. consumers buy more foreign made goods than what they sell to foreigners, causing U.S. dollars to flow out to foreign countries. As foreign governments and investors accumulate these dollars, they have three investment options. First, foreign businesses and companies invest in their economies by purchasing machines and equipment from the United States. Investing in their own economy spurs future economic growth. Second, foreign governments and investors can hold onto the dollars. Usually, foreign central banks like holding strong currencies like the U.S. dollar. These foreign central banks can use these dollars to manipulate exchange rates. Finally, they can invest those U.S. dollars in the U.S. economy. Asian and Middle Eastern countries are buying U.S. government securities, U.S. businesses, and real estate. However, foreigners expect to earn a profit, which means future dollars will flow out of the country again. With the 2008 Financial Crisis, international investors are rethinking about their investments into the U.S. economy.

International investors are worried about the federal government issuing too much debt and the 2007 Recession may turn into another Great Depression. If investors drop the U.S. dollar, then its value can collapse. A weak U.S. dollar has a dual effect. A weak U.S. dollar hurts U.S. consumers by making foreign products more expensive, but also benefits U.S. businesses, because they make U.S. produced goods cheaper to foreigners and they buy more. A weak U.S. dollar could jump-start the U.S. manufacturing industry. However, a weak dollar may not be enough for manufacturing companies to overcome all the costs associated with regulations, taxes, and lawsuits in the U.S.

Foreign investors and savers, as a rule, hold strong currencies. Thus, their investments keep their value. If international investors stop holding the U.S. dollar, then the dollar may collapse in value. Thus, international investors will stop investing in the United States and stop buying U.S. government securities. Consequently, the federal government could not rely on foreigners to finance its massive debt. A good question is which other currencies out there in the world are strong? The Euro was strong and gaining in value against the U.S. Dollar until 2008. However, Europe is also having trouble with the 2008 Financial Crisis and the Euro quickly lost its value. With China still growing, the viable alternative may be the Chinese Yuan. (Of course, the price of gold shot up over $1,000 per ounce. During an economic crisis, investors like holding precious metals.)

Excessive Enforcement of the Laws

A large intrusive government requires funding. Where does the funding come from? The taxpayers! This is the problem of creating so many bureaucracies. They can be extremely expensive. With a punitive legal structure, people will hide their money and income from government. Businesses could bankrupt, relocate to a foreign country, violate the law, or evade taxes. All these activities cause a loss of tax revenue for government. An eroding tax base hurts government finance. The costs are:

As tax revenues continually decline, literally, government will have to contract. How can government pay for the army of bureaucrats, jails, prisons, and government buildings, if the government has no money? Government does finance good institution, such as libraries, schools, universities, and parks. All these institutions will experience severe budget problems and will have to reduce their programs. Usually, the good institutions are last on the funding list.
An eroding tax base may cause our government to rapidly increasing the number of laws with the sole purpose to create more violators. Then the state and courts depend on the police and regulators to write tickets and citations, bringing money into the government coffers. For example, government will pursue violators that they believe can pay fines or have assets to be seized. For example, code enforcement officers may comb through rich neighborhoods and measure the height of grass, citing any offenders for too-tall grass. However, these same officers avoid the poor neighborhoods, because those citizens may not pay the fines and may even attack the officers. Thus, the legal system becomes more arbitrary.
Judges, prosecutors, and police will not have the financial resources to go after real criminals and the mafia. Unfortunately, if government actually contracts, this could create a power vacuum and unfortunately, criminal groups like the mafia will fill this void. The mafia will supply products, which could be legal or illegal. As the mafia accumulates money and wealth, it can pay off the police, judges, and bureaucrats. If the police and prosecutors are not corrupt, then they still are impeded by a lack of resources.

Stupid laws and excessive enforcement of laws will fuel ill will and bitterness between the people and their government. Police officers have to follow orders from government or government will fire them. In order for police to do their jobs, they have taken an “us versus them” mentality. Each time a police officer clocks in, he is going to battle with the public. That is why they call every person of interest a criminal. The military uses the same mentality to train soldiers by defining the enemy as subhuman, making it easier for the soldiers to handle the intense emotions of war. Some long-run consequences of excessive enforcement of the laws are:

Government relies on violators to pay their tickets and citations. As police write more citations and enforce stupid laws, more people will become scofflaws and not pay them. Government will increase court and police power to seize assets and turn decent citizens into criminals. For example, a person refused to pay for his ticket for a violation he did not do. A court could suspend his driver’s license, or other licenses. Driving a car is essential in our society, so he may start driving illegally, not insuring his vehicle legally, and stop paying for car inspections and state car tags. Further, this person may even drive more junky cars on the road, if he knows the police will seize his vehicle, when caught. Overzealous enforcement of laws could create more criminals and scofflaws.
More people will avoid the police. Would you call the police or open the door for the police, if you know they are there to write tickets and citations? Remember, the police are the first contact with a government that is hungry for cash. Government switched the role of police from public safety to revenue thugs with guns. Even in Arkansas, citizens flash their car headlights twice to warn approaching traffic that police are up the road.
The police and court have to rely on the public for information. If many people hold their government in low regards and do not trust it, then people may not help it. For example, if a citizen discovered that someone is vandalizing police cars, the citizen may not report it.
The police may have no credibility during jury trials. Many people are learning that the police will lie, even for minor things like traffic citations and a police officers’ job is to write citations and arrest people. That is why judges do not offer jury trials for minor offenses or many states re-wrote their laws, changing criminal offenses to civil infractions. Courts do not have to provide jury trials for civil infractions. In most states, traffic, animal, and housing code violations are civil infractions.
Court abuse will become greater and bolder. The economy is in a recession, tax revenue collections are down, and many state and local governments are going broke. Thus, courts will try to collect as much money as they can. All defendants must be found guilty!

As the government drives more people into poverty, more and more people will attack their government. It can be as simple as vandalizing state property or actually physically harming the police or bureaucrats. For a recent example, an arsonist set the Texas Governor’s Mansion on fire, causing severe damage [2]. This book does not advocate that people should start attacking their government. The author merely presents long-term consequences when government fosters an acrimonious relationship between the government and the people.

The Growth of Crime and Black Markets

Black markets flourish in highly regulated and over taxed societies. A black market is where people engage in illegal activities and is also called the shadow economy or hidden economy. A black market exists from the following reasons:

Government deems certain products and services illegal. Unfortunately, the more products government makes illegal, the more black markets form. If consumers have a demand for the illegal products and services, then somebody will always supply them. That is why the War on Drugs can never work. The U.S. and state governments made marijuana use illegal. As government arrests more drug dealers, marijuana supplies dwindle, causing the market price to be higher. These high prices attract more people to this illegal market and more people become drug dealers.
People and businesses use the shadow economy to avoid laws and regulations. For example, some workers circumvent restrictions on retirement. Retired people receive social security and other benefits from government, but work “under the table” for extra income. If government knew about this income, they would reduce their benefits. Another example is foreign laborers who work illegally in this country, using fake names and social security numbers [3].
People use black markets to avoid high taxes. One method uses barter. Barter is two people trade goods or services with each other, and no money is exchanged. Thus, no value is placed on the trade, and hence no taxes. Other ways to avoid high taxes is people and businesses under report income and assets, or over state debt. For example, taxpayers in the United States can claim children on U.S. federal taxes. More children mean lower taxes. Before the 1990s, some people claimed their pets as children, in order to reduce their taxes. People no longer get away with this practice, because the IRS verifies children’s social security numbers.

Regulations and taxes cause people to perceive that they are over burdened by the government and choose to operate in the shadow economy. However, a growing shadow economy imposes the costs onto society:

A growing shadow economy leads to more corruption and bribery, because individuals engage in illegal activity try to bribe public officials, and thus, they can avoid regulations or avoid paying taxes.
A growing shadow economy erodes the tax base. A smaller tax base gives government smaller resources for public investment in infrastructure and education. Further, an eroding tax base may cause government to increase taxes, causing more firms and individuals to exit to the shadow economy, creating a vicious cycle. An eroding tax base may be good for governments that incarcerate a large percentage of its population.
Government collects statistical data and this data may not be accurate. For example, if a person works “under the table,” then he may not honestly tell the government that he is working. Consequently, the unemployment statistics would be higher than it should be. Some people working under the table receive money from disability or unemployment insurance.
A growing shadow economy leads to the growth of criminal groups. That is what criminals do; they commit crimes. Criminal groups thrive in highly taxed and regulated economies.
Government would have to build a larger prison system to incarcerate violators and criminals.

This has already happened to a large country. Black markets became ingrained into the Russian’s people psyche and crime skyrocketed after the Soviet Union broke up in 1991. The mafia, called “new businessmen” in Russian, spread to all parts of the post-Soviet economy like a cancer. The mafia created rackets, where they colluded together to sell products like cigarettes, sodas, and other products for high prices. The mafia is able to sell products for a high price and earn huge profits. Then the mafia would funnel some of these profits to government officials as bribes. The government officials would try to protect the mafia.

Foreign companies had trouble entering into Russian markets. For example, a foreign company wants to enter the country and open a factory and the mafia does not want any new competition. The mafia pays off the right people, so this foreign company could never get the licenses and permits to operate. In addition, the foreign companies have to follow all the rules, because they fear that the government will expel them for violations. Unfortunately, their local competition may not follow all the rules, giving them a cost and price advantage. Hence, the post-Soviet economies became riddled with criminal groups and consumers ended up paying high prices for everything.

Decline of Civic Loyalty and Political Corruption

A clear trend is government and its bureaucrats are taking over. The only things growing in the economy is taxes, regulations, and salaries for bureaucrats. The rapid rise in the State caused many people to give up on the political system. For instance, if we are the freest people in the world, why do only half the eligible voters vote? Further, a 2002 survey showed 43% of people in the U.S. have no or little trust in the government with the highest distrust being the young and elderly [4]. The converse is 57% of the population trusts the government, but this seems low since we are considered a democracy.

Many people have a negative opinion of their government. These opinions are not coming from criminals and drug dealers. Highly educated people, government employees, and former veterans of the armed forces are making some very harsh criticism of our government. Hearing harsh criticisms from veterans are particularly shocking, because veterans defended this country, putting their lives in jeopardy. They make the greatest sacrifice a person can give – their life. They could have as easily come back in a coffin from serving a mission in another country. When you hear veterans say harsh words about the government, then you know there is a problem.

Citizens develop opinions of their government through their daily dealings with it. If a citizen was burned from a new tax, violated a crazy regulation, or sued for a stupid reason, then citizens develop harsh views of their government. Moreover, excessive laws, and frivolous lawsuits destroy the market system. Incomes and wealth will fall and the job creation machine shuts off. As incomes fall, so does the tax revenue. If government perpetually has budget problems, then salaries for judges, police, and bureaucrats will decline. Furthermore, these people will become more corrupt, because people need to earn a level of income to pay for their lifestyle. If these salaries become too low, then you could see judges taking bribes to determine which party wins its court case. Police will accept cash fines; teachers will take bribes and pass failing students. This is no joke! Many former Soviet Union countries still have problems with corruption, even though the Soviet Union broke up in 1991. All their public servants are underpaid. When a policeman fines someone for a minor violation, they want the violators to pay a cash fine. Of course, the officer does not write any receipts and violators do not appear in front of a judge. (Foreigners are encouraged to keep at least $30 in the glove box with their car registration in Kazakhstan, ensuring the motorist has no problems with his paperwork when pulled over by the police.)

Widespread corruption has two problems. First, government has more trouble stopping the corruption, if all the public officials are taking bribes and stealing. Who is going to be the person to stand up and stop this, especially if this person is also stealing? This is one of the major problems cleaning up corruption in Louisiana. Almost all the political leaders are stealing and nobody wants to draw attention to themselves. Second, people start to lose respect for their government institutions. Thus, taxpayers do not feel bad when they cheat or lie on their tax returns. They believe government will waste their hard-earned money.

Conclusion

The 2008 Financial Crisis and recession are helping the U.S. government to takeover the economy. Their reasoning is capitalism failed and government has to come to the rescue. For example, the federal government re-nationalized Fannie Mae and Freddie Mac in September 2008. They were originally government public corporations, but privatized in the 1990s. Further, with the $700 billion government bailout, the government may accept some of the “toxic mortgages” and corporate stock as collateral. Government becomes a stockholder and foolishly believes it can profit with the taxpayers coming out ahead. However, prices for assets took 20 years to recover since the crash of the stock market in 1929.

All these smart people in government do not realize one important thing. Their goal is to improve society through state management of the economy. Another leader, Vladimir Lenin, had this same vision. Lenin used communism to build the Soviet Union. Communism was a way to build a perfect, Utopian society. Communism would eliminate the social classes and everyone would live in harmony. Of course, government had to completely control society and help during this transition. The Soviet Union did some amazing things, which were:

Russian was a backwards nation at the turn of the 20th century. The Soviet Union created a large education system and increased its citizens’ literacy rate to 99%.
The Soviet Union officially did not have any unemployment. The state created jobs for everyone.
The Soviet Union started the space race by sending the first astronaut into outer space.
Even though the Soviet Union was an extremely sexist society, it did allow women to hold high offices. Women could become judges, professors, and scientists.
Divorce rates were extremely low, because the Soviet Union had a shortage of housing. A divorced woman had two choices. She could live with her husband or live with her parents.

These are some great things. Even when the world went into the Great Depression during the 1930s, the Soviet economy was immune to the downturn. During the 1960s, the Soviet Union grew fast as government added new cities to the empire. However, the Soviet economy stagnated during the 1970s and 1980s. Furthermore, citizens of the Soviet Union had to pay some high costs for these benefits; some of the costs were:

Government set all prices and wages in society. Government probably set the wages and prices correctly during the 1960s, but severe shortages occurred during the 1980s.
The Soviet factories produced only several brands and products. Everyone had the same furniture, appliances, and TVs. Some of these products had quality problems. Soviet managers had production quotas; quality was secondary.
Government owned all property including cars and houses.
The Soviet Union created new social classes. Members of the Communist Party were at the top, scientists and academe came second, and everyone else was third. Communist Party members also had their own special stores. Their stores were stocked before all the other state stores.
Government controlled TV stations, newspapers, and book publishing. The state was the source of information.
Government created secret police, who arrested anyone who was viewed as a threat to the state. Also, the government created a massive prison system, Gulag, to house all the prisoners.
When Stalin seized power, he shuffled resources around to create the Soviet industrial economy. Thousands died from hunger as the state expropriated lands and live stock. Stalin also executed millions of people who were deemed a threat to the state.
Government restricted mobility of its citizens. A person needed permission to leave a city. All cities had outposts on the outskirts and the state regulated all traffic leaving and entering a city.
Soviet citizens were not allowed to leave the country nor socialize with outsiders.

Does this sound like a good place to live? Of course, it would be nice to get the Soviet benefits without the costs. However, when government controls society, we get the good, bad, and ugly of a government-controlled economy.

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References

[1] Hill, Catey. January 7, 2009. “Porn kings Larry Flint and Joe Francis go begging for a bailout.” Daily News. Available at http://www.nydailynews.com (access date 01/08/09).

[2] Robison, Clay and Janet Elliot. June 8, 2008. “Arson suspected at Governor's Mansion.” Houston Chronicle.

[3] Schneider, Friedrich and Dominik H. Enste. March 2000. “Shadow Economies: Size, Causes, and Consequences.” Journal of Economic Literature 38(1): 77-114.

[4] Decision Analyst. August 30, 2002. “As September 11th Anniversary Nears More Americans Trust U.S. government.” Available at http://www.decisionanalyst.com/publ_data/2002/trust.dai (access date: 12/24/08).