Natural Demand: The Frozen Cage

It is “Natural Demand” that ultimately fuels innovation and incentivizes exactly the type of risk taking that ignited the rapid growth from the late 1790’s through the 1890’s and early 1900’s.

The waning Norwegian winter air was crisp, and the afternoon was sunny and with a few distant clouds, altogether perfect weather for a ski excursion for three medical students. Following a familiar path down the ski slope near a waterfall, one of the doctors, a young woman named Anna Bågenholm, lost her balance and tumbled into the annals of medical history. She fell down the slope and landed on the icy river below. The ice beneath her was several inches thick but had been weakened by the warmer days, and it gave way, plunging Anna headfirst into the freezing waters beneath.

Average body temperature for a human being is 98.6° F. At just 95º F, a decrease of just 3.65%, the body is clinically suffering from hypothermia, causing shivering and shallow breathing. At 89º F, a mere 9.7% decrease of body temperature, the victim begins to suffer from moderate hypothermia, exhibiting increased slowness of breath, dizziness or confusion, loss of coordination or clumsiness, slurred speech, and rapidly onsetting fatigue. At 82º F, a 16.8% decrease of body temperature, the body begins to shut down as it enters severe hypothermia, and the patient may become delirious, suffer memory loss, and finally become comatose, as their heart and brain function slow and ultimately stop.

When Anna’s body hit the water the cold shocked the air out of her lungs, and the current wedged her body between the ice and rocky river bed below. Flailing desperately in the icy water, she found a pocket of air trapped beneath the ice and pushed herself against rocks and gasped in the freezing air. After forty minutes in the icy water, Anna lost consciousness. An hour and twenty minutes later, emergency responders finally managed to pull her limp and unresponsive body from the river.

Anna had no pulse and was not breathing, and rescuers began CPR immediately. By the time Anna arrived in the Tromso University Hospital operating room, she had been clinically dead for over an hour and a half. Nine hours and over 100 doctors and nurses later, Bågenholm was successfully resuscitated, though she remained in intensive care for two months until her organs regained function. She went on to complete medical school and practices medicine today.

“I don’t remember anything about the accident.
 I think that’s really good.”
-Anna Bågenholm-

The sluggishness of our economy is very much like a hypothermia victim, complete with the symptoms of confusion, lack of coordination, and rapidly onsetting fatigue, as the icy chill of government taxation leeches away precious heat. In the last two quarters, the United States economy has struggled at 0.8% and 1.1% in a precipitously declining growth rate since peaking in 2014 at 5.0%. The United States is not alone in this challenge. Just compare the US to the top ten European nations by tax revenue per GDP:

Data from wikipedia andtradingeconomics

In 2015, the United States government seized $1.445 trillion from the pocketbooks of its citizens in 2015, even after refunds, or about 7.79% of the total GDP of around $18.558 trillion. Coupled with roughly $276.7 billion from excise taxes (1.49% of GDP), $338.2 billion from corporate taxes (1.82% of GDP), and $1.015 trillion from payroll taxes (5.47% of GDP), and a total of 16.57% of our economy has been leached out of the economy through federal taxation alone. If we think of GDP is our nation’s economic “body heat”, then at 16.57%, our economic patient would be at the very precipice of severe hypothermia.

The European economies, including the much vaunted socialist Scandinavian economies, are all clinging to the barest margins of growth while burdened by tax revenues per GDP far and above the United States. Could these governments sucking so much from their economies be causing their own chronic stagnant growth rates? The answer to this question is central to the conservative economic theory and remains a matter of debate, but looking at this admittedly limited data subset certainly suggests an answer.

“Those of the left often act as if human beings are just like inert
blocks of wood or like chess pieces that you can move around
on the chess board… but, of course, people react to [taxation].”
Thomas Sowell

Briefly, the theoretical argument can be summarized thus:

1) Taking capital out of the economy and using it for nonproductive government expenses reduces the amount of capital available in the economy.
2) With less capital available in the economy, there is less elasticity in demand driven markets and less tolerance for failure.
3) With less capital in the overall market and less elasticity in demand driven markets, inefficient markets are more likely to be generated than efficient markets, because there is less excess capital to cover risks.
Conclusion: This creates recessionary scarcity, worse risk to reward trade-offs in the economy, and ultimately drives down aggregate growth potential.

In the case of the United States, by laying a relatively heavy tax burden on the private citizen, the government crushes Consumer Demand. While Supply Side Economics has been shown to increase economic growth, the true power of the economy is Demand for products and services presently available and, more importantly, those not yet available. It is “Natural Demand” that ultimately fuels innovation and incentivizes exactly the type of risk taking that ignited the rapid growth from the late 1790’s through the 1890’s and early 1900’s.

It starts when families have excess discretionary income, because they have the ability to spend speculatively, combined with competitive wages and salaries, even lower middle class American families were able to afford luxury and convenience goods such as radios, televisions, vacuum cleaners, dishwashers, dryers, cars, air conditioners, and even family vacations to Europe. They try a new restaurant, or a new expensive lotion, or perhaps a new type of home entertainment technology.

These purchases simply don’t happen, at least not with any consistency, unless families have excess discretionary income, and excess discretionary income only exists if it’s not artificially being “spent” in the form of usually wasteful taxation. It’s only when families are spending speculatively that the risk inherent in new and interesting products is marginal, because the chance to make at least some return on almost any investment is relatively high.

This is a subject that I’ve been wanting to right about for some time now, but the election and other economic and political issues have pushed it to the sidelines. I’ll continue this subject in the following article and demonstrate that there is no replacement for Natural Demand.

Be brave. Be free.

Liberty is For The Win!

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