By Jack Swift

(Editor's note: This piece is one of the most brilliant analyses of our economic problems I have read.)

What
is Sustainability?

The
recent election focused upon the American voter’s dis-satisfaction
with the state of our government and the state of our economy. Each
campaign played upon this angst by pitching “change” but
neither candidate articulated a vision of what is wrong or what might
be an effective cure. The national change required is far more fundamental
than anything suggested by the politicians. The problem is one of sustainability.

“Sustainability”
is the great buzz word of the day. It describes a concept. In an economic
context, the concept is to provide for the reliable funding of our social
and economic well-being both now and in the future. In political thinking,
it is a plan to provide for the continuation of our economy and government
which will sustain those activities forever.

Sustainability
is not a new concept. It is what conservation is all about. It first
appeared in Washington politics during FDR’s administration as
the concept of “sustained-yield” and was applied by law
to the management of our publicly owned natural resources, most notably
timber. Economically, it is a mandate that one not use more assets than
one can replace and do not use at a rate faster than one can replace.
It is a logical and practical approach, reflecting the essential elements
of good stewardship.

Modern
neo-environmentalists have perverted traditional conservation strategy,
replacing the steward’s concept of conservative utilization with
goals of pure preservation. Going a step further, they seek a regeneration
of the past, sacrificing utilization today in an effort to replace that
which was (in their minds) squandered a century ago. In their zeal to
provide posterity with the opportunity afforded our forefathers, they
are foreclosing current utilization. Such an investment might be desirable
and commendable, if it is affordable, and if undertaken on a scale which
is sustainable.

The
question is whether that approach is itself sustainable. The answer
depends upon our need for current production in the economy.

Politicians
speak a lot about sustainability. Their concern is for reliable and
predictable funding for government operations, services, and social
programs in a world of expanding government and escalating costs of
operations. They need funding which is, in a word, certain. The only
certainties in life are death and taxes. Accordingly, traditional politicians
associate sustainability with taxation.

That
squarely presents the question of whether the escalating costs of ever
expanding government are, in fact, sustainable . Again, the answer depends
upon production. Government produces nothing of consequence to the economy.
It facilitates commerce. It regulates against abuse and it provides
a predictable and reliable background of law. But it produces nothing
and can sustain itself only as a parasite upon a productive economy.

Production
is the essence of sustainability, for the economy or for the government.

Production
and Currency

Our
economic and political well-being, if they are to be sustained, depend
upon production. That is because the grease of the economy is currency.
It is an exchange medium that allows a universal system of barter. Currency
can be taken or given in exchange for anything: a product, a service,
or an asset. It has no inherent value in its own right. It’s worth
is measured purely in terms of what it can purchase. It’s value
is directly related to the productivity of the issuing economy. The
more production of desirable products, services, and assets, the greater
its exchange value.

That
simple fact establishes the burden upon any member of an economic system
to be productive. One must take a natural resource (even if that resource
is nothing more than the individual’s capacity to labor) and by
exercise and wit transform that resource into a marketable commodity:
a product that can be exchanged for currency. It is not possible to
sustain any economic system that delivers currency for nothing. Production
is the essence of economic sustainability.

The
essence of our national economic crisis is a fundamental failure to
produce. Since the days of Johnson’s “Great Society”
we have adopted a national policy of providing currency in compensation
for an individual’s lack of capacity to produce. This makes for
excellent charity but lacks inherent sustainability.

Because
this funding is predicated upon taxation of production, it not only
provides something for nothing, it also presents a drain upon production
which is in no way compensated.

Also,
from the days of Kennedy and Johnson, we have seen the rise of neoenvironmentalism
driven by the concepts of Rachel Carson (“The Silent Spring”)
and Paul Ehrlich (“The Population Bomb”). These parents
of the neoenvironmental movement have made themselves immensely popular
over issues of the environment and ecology. Capitalizing upon public
concerns about pollution, visual blight, and the needs of exotic endangered
species, the neoenvironmentalists have managed to directly curtail production
in vast sectors of our economy: be it in the prohibition of drilling
for petroleum, mining, timber harvesting, or simple water management.
Indirectly, they have managed to impede profitable production with ecological
regulation. The result has not been pretty and it is not sustainable.

The
United States, going into World War II was the manufacturing giant of
the world, called by Churchill the “arsenal of democracy.”
One need only observe the unemployment problems in the old industrial
heartland of our nation to recognize that we have de-industrialized
the nation. We have literally dismantled our manufacturing capacity
and shipped it to Asia. This has been done in the name of the environment,
but it has destroyed our productivity and that in turn is destroying
the value of our currency. Contrary to the visions of Clinton and Bush,
small business is small because it produces less.

The
political fervor to achieve sustainability in the form of taxation has
also led to the departure of “big business” from these United
States. Big business in the United States is burdened with the second
highest tax rate in the world. Is it any wonder they choose to go offshore?

When
businesses relocate, they take not only their production capacity with
them, they also remove the opportunity for the individual to be productive.
This is a double hit on our productivity.

In
politics and economics we have the famous Laffer curve which shows that
tax revenues rise when tax rates are cut. The message is that with lower
taxation, there is more production to tax. Escalating taxation necessarily
results in declining productivity. Taxation is a burden upon production
and escalating taxation is not sustainable.

Our
economic problem at present derives fundamentally from two national
policy decisions. Initially there was the election to de-industrialize
and reduce our production capacity. That was followed by a second election
to escalate taxes (and produce a burden upon production) so as to allow
the reward of non-production. It is questionable whether either policy
could work standing alone. In combination, the system is unsustainable
and that is what we are discovering.

Lack
of Production

The
end result of the drive over the past fifty years to preserve and lock
away our natural resources, the governmental compulsion to reward non-production,
and the concurrent escalation of taxation has all but put the United
States out of business. We are not producing anything the world wants
in exchange for our currency.

By
failing to recognize self-imposed limitations on production capacity
as the fundamental weak point in our present economy, the government
has by default resorted to two monetary manipulation policies: managed
inflation of the currency we already have and stimulation of the consumption
end of the market equation.

For
forty years we have had a remarkably adept manipulation of the value
of our currency by the Federal Reserve. Essentially, this has been a
matter of managed inflation by way of interest regulation and the issuance
of currency based upon debt. All this amounts to is an expansion of
the currency we earned yesterday when we were producing and a loan from
our future when we hope to be producing again. The problem is that this
strategy generates a depreciation in the exchange value of the subject
currency.

Since
the Federal Reserve began operations, the purchasing power of the dollar
has depreciated by 95%. As for inflating our assets by borrowing, issuing
new currency is not an inflationary problem so long as the amount of
currency issued is correlated to an increase in production. When production
does not follow, the process is not sustainable.

The
artificial inflation of the value of assets and the stimulation of internal
consumption will work in a closed economy. When these tactics are undertaken
in a global economy, they are not sustainable because foreign holders
of our currency want something for that currency other than air.

In
the absence of product to exchange for currency, the holder is confronted
with the problem of how to realize any value from it. In the days before
Carter, the DOW hovered around $1000. With the Federal Reserve manipulation
and the attendant depreciation in purchasing power holders of currency
are largely constrained to invest in the stock market. This is especially
true when the Federal Reserve minimizes interest rates and curtails
the returns to be gained by way of traditional savings investments.
Thus, the Federal Reserve has done a marvelous job of shoring up the
stock market and the appearance of well-being for our economy.

However,
given our lack of production, foreign holders of our currency do not
value it in terms of the products and services we have to sell. We are
producing less and less of anything they demand. Accordingly, they too
have been constrained to trade that currency for assets. Initially this
was by way of investment in our stock market, proving again the apparent
wisdom of the Federal Reserve. Then, back in the 1980s, a trend arose
of foreign investors purchasing our real estate and our successful businesses.
This induced a real estate boom which masked our lack of productivity
with more inflation of the value of the currency we had already earned.
Unfortunately that balloon has burst and it is remarkably difficult
to re-inflate a burst balloon.

President
Carter and his senate provided the fuse to explode the balloon. Carter
signed onto the UN Convention on Human Rights although he never submitted
it to the senate for ratification. A key provision therein is the assertion
that every human, productive of not, has a right to housing. To honor
this right Carter sought, and the senate provided, the Community Reinvestment
Act of 1977. The key provision therein was the requirement that mortgage
lenders provide loans to borrowers in a proportion that was reflective
of the demographic mix of the community, regardless of the individual’s
capacity to pay. Economically, this was but another provision of a government
reward for the individual’s failure to produce.

This
was a very popular scheme in Europe and also became the practice there.
Thirty years later, those chickens came home to roost and the entire
banking system of the western world is tottering on collapse, proving
once again, an economic system not based upon productivity is not sustainable.

Sustainability
founded upon the sequestration of resources and the termination of production
is an oxymoron. Ever-escalating taxation of producers is inherently
unsustainable. The provision of currency for anything other than production
is likewise unsustainable. In the absence of production there simply
is no economic system that can be sustained.

Our
current politicians do not comprehend the problem. In their zeal for
societal reform and preservation of the planet, they are walking all
around the fundamental problem. Quite literally they do not see that
the emperor has no clothes. The treasury’s bailout plan cannot
work. That is treating an insolvency problem as a cash flow difficulty.
A government bailout program of writing $5.2 trillion more units of
currency that is not backed by $5.2 trillion of new production may delay
the inevitable but it cannot provide sustainability.

We
need to re-evaluate “sustainability” in terms of reality.
Our government needs to allow the return this economy to big production.
That means a return to industrialization. That means government investment
in the infrastructure required for that production. That means utilization
of resources on a sustained yield standard and it means taxation that
is incentive to production.

If
we do not do these things, we can only continue to degenerate into another Third World country.

               ©
2009 Jack Swift – All Rights Reserved