Over the weekend I watched several episodes of Band of Brothers on the History Channel. I always find the generation of World War II intriguing. With all they went through, the death of millions of young men, the deprivation at home—sacrifice unlike anything before or after—one can see why they are known as the Greatest Generation. When you compare our generation, it is obvious there is much they could teach us.

Over the last few months, we’ve heard a din on deficit spending, earmarks and economic class warfare. Plenty point fingers and call names. Everyone blames someone; everyone demands someone pay; no one wants to be that someone. Unfortunately, those deserving most of the blame seldom get any. I am not talking about congress nor the president, though they are culpable. Neither do I intend greedy corporations and executives. In a land like ours ultimate responsibility rests with the people of the United States. This goes not only for government action but corporate action as well. Most Americans are aware of the Lockean argument that government derives from the will of the governed. However, few seem to understand our part in market forces so I will begin here and come back to our responsibility in the actions of our representatives.

Economic Class Warfare

Today, President Obama is discussing caps on executive pay for heads of publicly traded companies. The argument is that the compensation packages for many executives is so excessive that it harms the company, the shareholders and the economy. For this reason Mr. Obama is espousing government involvement in executive pay. Not only would we have a minimum wage, but a maximum wage would be set by the government for certain companies or industries.

The fact is overlooked that executive pay is a matter of market conditions. Companies set their salaries in competition with others to draw the best and the brightest. Sometimes the system fails by producing excess, but the publicly traded companies are able to correct this. Shareholders have the right to vote for leadership. How many American investors get these notices in the mail and simply dispose of them? They not only have the power to cast a vote they also have a form of individual veto through a Sell Order. If you feel a company that you own stock in is mismanaged sell the stock. If large numbers start selling, the company will take notice and make changes. Do you really want the government to exercise these rights for you?

The government would make sure the company does certain things and not others so the shareholder can simply dump their money in a stock and disengage from the duties of an investor. This is already available to you in a simple bank account. Of course, these do not earn as much because the risk is less. Increase the potential return on an investment and your risk goes up; increase the risk, and your chance of loss goes up; increase the chance of loss, and your need to actively manage goes up. Do you want to reform the companies you invest in? Then cast your proxy votes while being more involved in investment decisions. Government intervention in the market is little more than subsidizing poor investor choices. Will Mr. Obama cap dividends? How about mandating a minimum stock price, or even a maximum?

Right now the loudest battlefield of class warfare is the foreclosure crisis. Who is responsible for the collapse of the housing bubble? First, there is the responsibility for the bubble itself. Hello, super low interest rates and maximized borrowing. Because of unnaturally low interest rates those who would not normally be able to buy a home were allowed to. This was made possible because low rates means a lower payment. Those unable to afford a payment at 7% may afford a loan at 5%. Add to this the loose money condition caused by such rates and you have the banks making far riskier loans because rates are cheaper. Not only did the banks loan to people who were simply able to afford less, but they were encouraged to loan to unqualified borrowers. Who is responsible? Are the banks and mortgage companies responsible? In a way, but they are doing what banks do: seeking to maximize returns in market conditions influenced by federal action within the limits of federal regulation.

The culprit for the foreclosures are the home buyers who bought foolishly. Those who gambled with their futures, hoping against hope that their adjustable rate mortgages would not blow up. Why would a bank want to encourage a flat rate mortgage at 5%? When rates go up they find themselves locked at the lower return. If they can encourage the buyer to do an adjustable then the buyer takes the risk of interest increases. The buyer, rather than looking at that carrot rate dangled in front of their face, should have realized that record interest rates could not last. They wanted into the house, even foolishly and now they want the government to take action and save their home. One correction needs to be made to this emotional appeal: until you pay back the bank, it’s not really your home, you are the tenant.

Earmarks and Deficits

So what about government foolishness, like earmarks and deficit spending? Once again the American people are to blame. People all over the country are in an uproar about earmarks and pork-barrel spending. This is understandable, because such projects are poorly disguised efforts to buy votes back home with federal tax dollars. No one wants earmarks, right? Actually, no one wants earmarks except for their own. What do you think are the chances of your Congressman getting re-elected if he swears off earmarks, refusing to support even those that would profit his own constituents? He would not last very long in office. It is amazing how many anti-earmark congressmen will point out to their constituents how many federal dollars they bring home for various projects. Earmarks will stop when constituents stop demanding their place at the federal teat.

Deficit spending is the same. Most of us get concerned about a huge federal deficit, but the numbers willing to take the action and make the sacrifices to keep it down are few. No one wants to be know for deficit spending but still want to reap the short-term benefits of such spending. This is the reason for the resurgence of Keynesian economics. The base of those currently in power want social projects that require huge spending, but raising taxes would destroy the economy (not to mention re-election efforts). In strides John Maynard Keynes to the rescue. The shout goes forth throughout the capital: “Spend your way into re-election with deficits.”

The Challenge
Until the American people get so angry that earmarks, even for the home district, get one ousted from office we will have run away government waste. Until the people decide the deficit has gone far enough and demand spending cuts even at the cost of social programs, we will have run away spending that our grandchildren will pay for. Most generations sacrifice to leave the next one better off. Our parents and grandparents did that during World War II. They fought and sacrificed to liberate our world from a tyrant. We spend and borrow with little concern for the future and those who will occupy it. Who are the tyrants now?