Saturday, November 19, 2011

Subsidizing stupidity

First a look at what happens with subsidies on the effects side, not the 'lets put them in place' side of things.  First off is China and gasoline from Chua Baizhen at Bloomberg News 09 JAN 2011:

The government introduced a new fuel-pricing mechanism in December 2008 that tracks global crude costs. A month later, it raised a gasoline consumption tax fivefold, pushing domestic pump prices above those in the U.S. and ending an era of cheap, subsidized fuel. The government has made 13 price adjustments since introducing the system, most recently on Dec. 22.

China has subsidized gasoline use for quite some time and the government has been feeling the effects of trying to provide a 'stable' price point for gasoline to the Chinese public.  I had looked at in part in a larger article on the Directivity of China that I put out in FEB 2007 as the subsidies were whipsawing the central government of China. 

Consider that when external prices are higher than the internally subsidized prices, then the Chinese government must pay the difference between world market prices and local prices if it wants to keep supply constant.  To do that requires incurring debt.  This also creates an unsustainable demand for product which, when not having to adjust for market prices, is used as if there was no change in the economic cost of the gasoline.  Thus the product loses its 'value' that is its perceived benefit per cost, because prices are artificially low.

If it lets supply float, however, and China is unwilling to pay market prices, then supply drops (long term supply contracts would still keep amounts flowing into China, but only to contract levels) because there is a delta between demand and the amounts supplied on the non-spot market.  This creates scarcity of product, although at a given price point.  The product is seen as having a set price but has a higher 'value' due to its scarcity and is used less.

Now in the 'salad days' when external prices are below the 'subsidized' prices, the government reaps a net gain either via companies selling gasoline paying more in taxes or, in the case of State purchasers, the government reaping a windfall between low purchase cost and high sales cost.  What happens in this scenario, as I outlined, was smuggling, as lower cost gasoline is smuggled in through the Chinese borders and sold at a cost lower than the subsidized, or set, fuel cost.  In this case the set price as compared to the market price changes the 'value' perception as well, and the higher 'value' gasoline is that which is smuggled in as it has a lower cost.

It is all the same gallon of gasoline, mind you.

Government interference in pricing structure changes not just the price but the perceived value of the good in question.

This I went over in a 2008 post on Bipartisanship the opposite of good government, which looked at the housing bubble and its bipartisan support, and then the US Senate ignoring testimony on how the world oil market could be gamed as pointed out by the US Senate Committee on Energy and Natural resources by Steve Layton, President and CEO of Equinox Oil Company, part of the Independent Petroleum Association of America.  I'll excerpt this part to show how the concept of 'subsidies' works here, as well:

First, world oil prices are essentially set by the last barrel sold. A year ago, Iraq exported about 700,000 barrels/day. In December 1998, it exported about 2.3 million barrels/day. By March it will have another 500,000 barrels/day of capacity on line. Iraq was the only OPEC country to boost its oil revenue in 1998. As other OPEC countries have reduced production to stabilize oil prices, Iraq has become the swing producer of world oil. The swing producer sets the price.

Second, Saddam’s objectives differ from other oil producers. He wanted higher oil prices when he invaded Kuwaitmoney he needed to build his military forces. Now, he can’t spend money to buy arms. But, he can – by keeping oil prices low – punish his enemies, first by reducing the income to Saudi Arabia, Kuwait, Iran, and others; second, by driving critical U.S. production to be shutdown and plugged forever.

Third, looking purely at demand and productive capacity, today’s surpluses should not drive prices to their historic depths. We estimate that worldwide production capacity currently exceeds demand by about 4 percent.

This had been exacerbated by problems in some Asian economies but put China in the seat of having the ability to draw in funds under bonds to boost industrial development via changing its investment climate.  In a very serious way Saddam Hussein was hurting the US domestic oil production system (that is the independent small producers) and due to consumption drops in places like S. Korea and Japan, allowed the Chinese central bank to reap a windfall between set pricing internally and external pricing that was aided by changes in investing law.  The Chinese economy picked up steam and increased its productive capacity and was able to roll over its 5 year bonds in 2002-3 by demonstrating continued production.  The problem was that those 5 year vehicles started coming due, again, after 2007-8  and some investors wanted their actual full face value of the bonds paid out.

As I wrote in 2007 China was undergoing the whipsaw from low oil costs to high ones and had to start inching prices up for gasoline then.

Now over to Iran which subsidizes its gasoline and natural gas industries.

Iran faced a major problem at the end of 2007, in that its major natural gas supplier (who supplies 5% of the domestically used natural gas in Iran) was Turkmenistan, which I examined in The shockwaves of 5%, where jihad meets economics.  Turkmenistan is a major conduit and supplier of natural gas which has not only normal economic ties, but ones to a Red Mafia outfit that wheels and deals in natural gas (as well as tv stations, hotels, and all sorts of other things).  Europe was seeing the need to meet natural gas consumption and was raising the price of natural gas on the global market.  Although Turkmenistan doesn't have a direct pipeline to get natural gas to Europe, it has intermediaries that could move it through Russia to Ukraine and then into places like Poland, Romania and Hungary, to sell it at a higher cost.

I have examined Iran's oil system in two previous posts:  Iran's Oil Problem and Iran's Oil Outlook.

Facing the multi-million if not multi-billion dollar price differential between fixed contract prices to Iran or fluid and higher prices in Europe, Turkmenistan was seeing potential dollars fly out the window.  It conveniently had 'supply problems' with Iran and trillions of cubic feet of natural gas wound up in holding facilities in Ukraine (although anonymously, no one 'claimed' it) and Iran faced a sudden and immediate supply problem for natural gas.  Its refineries have not been kept up since the revolution and can supply such a small portion of natural gas and gasoline, that Iran is forced to import both.  When sections of Tehran must go cold and dark to make sure bakeries can keep running, the government in Iran suddenly faced a major problem.  It caved and paid higher fees and the natural gas flowed again.  Presumably the amount siphoned off went to Europe so it was a 'win' for the anonymous holders of the gas in Ukraine, a 'win' for Turkmenistan, a 'win' for Europe and a 'loss' for Iran.

Iran got to this predicament through a multi-fold governmental problem that, primarily, refused to keep up the oil infrastructure in the country.  The refineries are the most complex part of the system and they are on their last legs and no one will invest in them as Iran keeps an insane contract policy of charging what it feels like charging for crude oil, without regard to market price.  If it needs more billions to run terrorists, it charges more.  Gazprom warned Putin about this and China found that their 'investment' wasn't going to get them better treatment or stable prices, so they yanked $10 billion out when they found this out.  After that, Iran subsidizes oil and natural gas use.

It is, therefore, priced below market cost and the delta is made up in crude oil sales.

With that said there has been no marginal expansion of the oil fields in Iran (to keep nominal production constant) and the infrastructure is losing oil in the pipelines through poor maintenance (not stolen as in the case in some African countries, just leaking out of the system).  Higher world costs helps a bit on getting income, but when gasoline prices go up faster than the rate of crude oil increases (it is a refined or value added product, after all, and has a production cost delta added in), then Iran must pay that cost.  Most oil producing nations with refineries are also natural gas exporters as natural gas is a byproduct of refining crude oil.  Iran must import BOTH gasoline and natural gas, which tells you what is about to happen to their oil system.  They can keep patching it up a bit, but without a major re-investment in new facilities, plus a major production expansion, Iran is facing a huge economic crunch.

What the subsidies do is to put a set, below market price on gasoline and natural gas, which means that it is not gaining a true 'value' perception by the population.  They then use it to the maximum of the low price, which is above what can be sustained and more is imported to meet demand.  Iran has slowly had to move away from subsidizing both products, because its faltering oil production is not meeting the cost of increased use of both products.

Now lets shift from China and Iran to the good old US of A!

Lord knows we love our subsidies!

We subsidize: home sales, retirement, medical benefits, student loans, 'clean fuels', agricultural products (both raw and refined)... and we get bubbles, lots of economic bubbles... You name it and our lovely Congress probably has a subsidy that comes in many forms: price supports, direct subsidies, rebates on taxes, and the ever lovable 'regulations' to support 'social causes'.  This goes far beyond Fannie/Freddie/Ginnie/Sallie, SSA, the M&Ms, ethanol, solar power, mortgage debt, student loan debt, unsustainable retiree benefits plans, IRAs, HSAs, and on and on and on.

Since we have all seen the housing bubble (and, btw, the laws and regulations that caused those have NOT been repealed, which means we can get ANOTHER one any time Congress feels like putting another few trillion on the debt) and, instead, go to everyone's choice for 'why the hell are we doing this?' which is the shifting away of cropland for producing food to producing ethanol.  This is done via regulations (mandating a certain amount of gasohol to be sold or ethanol added to fuel), direct subsidies to farmers and some payoffs on the tax side for use via equipment purchases.  All of these have created a problem because the US Big Agribusiness (which benefits immensely from this) has done damage to the global market for corn.  In particular it has hurt our NAFTA partner Mexico as I go over in Where is the international law with NAFTA? which looked at this phenomena.

Ahhhh... Free Trade!  The great panacea!  Unless you add subsidies, of course, and then you get unintended consequences as unsustainable and bolstered trade tends to hurt Free Trade.  In this case the victims are multi-fold but the main one is Mexico.  First off our subsidies to farmers makes our already low cost of production of crops even lower than any other Nation on the planet.  No one can compete with crop outputs like those in the US.  Don't worry, our government has a solution to that.  Mexico, with its relatively backwards agribusiness, soon saw the small and local farming communities having to compete with subsidized corn from the US produced from huge systems and farms that could utilize modern technology to the utmost to cut per acre cost of overhead beyond what any small farm could ever hope to do.  Well that was OK in the early days as, hey, those stupid Gringos were opening factories just over the border in Mexico!

Mexican workers flocked to them and the agricultural sector suffered as all those good, high paying jobs in the factories meant people could buy cheap corn from the US.

Those were the days, huh?

Remember Saddam Hussein and last barrel sold setting price from above?  Yeah, subsidized crude oil prices to keep prices low, globally.  Remember him?  Remember what happened in China?

Yeah, Chinese labor was cheaper than Mexican labor so the factories promptly went transnational and moved production to China.  All in the name of subsidies: in the US, in China, in Iraq.

And the Mexicans?  Well they still had cheap corn and many people went to work north of the border in farms which paid a bit better than the failing system in Mexico.

I'm not painting Mexico out as a 'victim' here: they have their own regulation and subsidy problems with crude oil which add no end to their internal problems.  Especially when you get all 'environmentalist' on those topics.  Mexico is in no way, shape or form a 'victim' save of its own corrupt system.

What we did in the grand old US of A was up the subsidy for ethanol via various means.

Farmers saw that you could make more, per acre of marginal income, by producing the corn that would be made into ethanol, which isn't a food crop nor a feed crop for animals.

There is a set amount of arable land in the US and when production of a subsidized crop increases it does two things: it reduces the yield of its similar counter-parts (feed corn) and it starts to look to expand its output by putting fallow land to use which raises the price of fallow farmland as it sees a demand increase.

What happens is that feed corn (both for cattle and human consumption) undergoes a price increase as less is produced, farmland property undergoes an increase in valuation due to increased demand, and we produce more of a product that is subsidized to protect it from lower cost producers overseas (mostly Brazilian ethanol but others also produce it cheaper).

In Mexico the price of corn for tortillas skyrocketed in 2006-09.

Elsewhere in the world food shortages started to appear in Egypt, India, and since China has done wonderfully Progressive things with its farming sector it has gotten a Progressive Dustbowl and a decrease in farm labor due to its subsidizing industrial output.

Everyone, and I do mean over 3 billion people, depend on the US of A for FOOD.

The US of A sets food prices like nobody's business because our subsidized Big Agriculture generally outcompetes everyone due to vast acreage put into production and modern farming techniques.

Our educational system, meanwhile, has been concentrating on the humanities and subsidizing those, so we don't produce many new farmers, agronomists, and even folks in the hard sciences and engineering have suffered in output because of subsidized student loans.  In the hard fields of maintenance blue collar jobs the US is no lacking a half million welders, alone.  This isn't talking about the other jobs necessary to maintain our infrastructure: pipe-fitters, bricklayers, sanitation personnel, road crews, ditch diggers... there are good jobs going begging because of the feeling of 'entitlement' to a good life without having to maintain it via our educational system.

And that elite education costs too much.

Well, it is subsidized, after all, and so you get a bubble economy in it.

If we were still training the maintenance people at a clip to maintain the infrastructure, this wouldn't be a problem for our civilization.  Maintenance and marginal expansion would help us get through tough times.  Iran doesn't do that to their oil infrastructure and is now paying a price in unrest and having to demonize external enemies for internal problems.

OWS isn't a disease, it is a symptom of rot to the very core of our society manifesting on its skin.

To that we can thank: subsidies put in by government regulation which now strangles every aspect of our economy.

Let go on with a bit from Vladimir Dvornikov's article On "Iron Laws" of Economics and this is not an endorsement of his full line of thought it is an illustration of where we are and he is coming in after talking about minimum wage laws:


It is important to notice, that the last time the absolute fatalism in the economic area is replaced by a liberal one. "Ironness" of the economic laws is accepted here, but, most probably, not as inexorabliness, but as heartlessness, hardness, and cruelty. "The laws of the market are cruel, but the society, by means of the state, can interfere with its actions, in order to bridle the passions and mitigate the consequences of the spontaneous market". Thus, in the given case, though the objective force of the economic laws is admitted, at the same time, it shows their moral defectiveness, which makes them rather alien and hostile for the majority of the people. Here, the government is offered a little comic role, as a "lubricator" of the iron laws (to keep them from clanking) without, indeed, any hope for improvement. The supporters of the "regulated market ", if I am to understand, are trying to remain seated on two chairs at once, and, as a rule, are falling from both.

The unsteadiness and ambiguity of the moderate fatalism induces the most active minds to pass to the following step - to reject completely the abstract economic laws and to declare government as a sovereign ruler and legislator of the economic life. Namely, the government, here creates and legally fixes "uniform rules of the economic game", which all of it's participants, managing in the given territory, are obliged to observe strictly. Thus, the once almighty economic laws receive the modest role of national customs or peculiarities, which should be taken into account while drawing up of rules of game. But who, tell me, presently may vouch for viability of any cabinet? As a result, the instability of a situation, connected with the changing of political tendencies and tastes of the government on the one hand, and the absence of the firm and objective goals in economic activity on the other, stimulates the most hazardous and vigorous players in "economics", either to bypass, or directly deny the governmental decrees. From here originates, and by it is fed, the powerful and well-organized sector of the "shadow" economy: not paying (in opposition to the "light" one) taxes, or even establishing it's own "rates", with which the state conducts eternal, ruthless, and, in the final account, a fruitless war for incomes.


The more government regulates the less it can adequately control and no one trusts that control as it sways only to its own wants for power via the forms of politics.  The very regulations that are meant to 'uplift' and 'protect' people become the instrument to use against them as the political winds blow.  All of those wishing for government to 'moderate' any economic ill then proceed to lobby politically to get that done so yet more falls under sway of government and out of kilter with economics.

Yes there are Iron Laws of economics.

Our entire world has been trying to deny this for decades due to the siren's song of subsidies, promising everlasting good and inculcating everlasting agony.  It isn't the only siren sitting amongst the rocks, but it is the easiest to succumb to and once the ship heads towards the rocks then others of its kind are then the focus of attention.

More subsidies!

More regulations!

The loss of freedom and liberty amongst those rocks?  Ah, those who listen never tell us about those, now, do they?

Thursday, November 03, 2011

The Process

From Rudyard Kipling's The Gods of the Copybook Headings:

When the Cambrian measures were forming, They promised perpetual peace.
They swore, if we gave them our weapons, that the wars of the tribes would cease.
But when we disarmed They sold us and delivered us bound to our foe,
And the Gods of the Copybook Headings said: "Stick to the Devil you know."

On the first Feminian Sandstones we were promised the Fuller Life
(Which started by loving our neighbour and ended by loving his wife)
Till our women had no more children and the men lost reason and faith,
And the Gods of the Copybook Headings said: "The Wages of Sin is Death."

In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: "If you don't work you die."

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.

A simple beginning going from water being wet, fire burning us and 2+2=4.

Do note that bound up in these are some of the major tenets of modern Progressivism:

- Handgun control will help everyone... not make us all victims for criminals.

- Loving thy neighbor allows free love... and then you end up loving his wife.

- Birth control, abortion and all those lovely things will free women in the name of population control... and soon the demographics will show that the Nation will not survive.

- A 'social safety net' will 'help' the old and poor... which means you must rob the young and rich to get it destroying the very fabric making up such a 'social safety net'.

- Really there is plenty of money to go around... just print it until the leaves of the trees are worth more than the paper in your pocket.

The Gods of the Copybook Headings are very real in that they are the way in which the world works once man attempts to create society and Nations, for these two go hand-in-hand.  Without restraining ourselves by utilizing reason to control our actions, we become savages towards ourselves, firstly, and our fellow man.  When this happens man moves ever closer to villainizing the few for personal gain and, by that discontent, upsetting the social order and process which then corrodes society.

With the establishment of reason and willing to love our mates and our children, we create the first bond of society that creates the Nation: we agree amongst those we love to put aside savagery and care for each other not as a collective but as individuals.  All our freedom and liberty is within us, no Nation holds any single thing that we do not as individuals and any government created is to look after our negative liberties and utilize them only to protect us. 

The personal form of 'wealth redistribution' is called robbery when done by individuals, and taxation when done by governments.  We agree to this minor evil to create the few things necessary to oversee those individuals who will not self-govern and become a threat to us all.

The personal form of offensive warfare when done by individuals is called piracy or terrorism or brigandage, when we put together a means to utilize it to go after a common foe we turn it into public warfare which requires a declaration if we are to attack and the reasons to do so.  Individuals cannot draft up articles of war as they do not hold themselves to be judged by any other entity, they assume full power for all actions against all mankind.  They can win only by pulling all of mankind down to their level, and then a long, long road back to being civilized ensues.

The personal form of restraint of others is called bondage or slavery, while the public form is called incarceration or imprisonment, and it has controls over it to protect the innocent from it.

In all of these things, and many more, government is described thusly by Tom Paine in Common Sense:

Some writers have so confounded society with government, as to leave little or no distinction between them; whereas they are not only different, but have different origins. Society is produced by our wants, and government by our wickedness; the former promotes our POSITIVELY by uniting our affections, the latter NEGATIVELY by restraining our vices. The one encourages intercourse, the other creates distinctions. The first a patron, the last a punisher.

Society in every state is a blessing, but government even in its best state is but a necessary evil; in its worst state an intolerable one; for when we suffer, or are exposed to the same miseries BY A GOVERNMENT, which we might expect in a country WITHOUT GOVERNMENT, our calamity is heightened by reflecting that we furnish the means by which we suffer. Government, like dress, is the badge of lost innocence; the palaces of kings are built on the ruins of the bowers of paradise. For were the impulses of conscience clear, uniform, and irresistibly obeyed, man would need no other lawgiver; but that not being the case, he finds it necessary to surrender up a part of his property to furnish means for the protection of the rest; and this he is induced to do by the same prudence which in every other case advises him out of two evils to choose the least. WHEREFORE, security being the true design and end of government, it unanswerably follows, that whatever FORM thereof appears most likely to ensure it to us, with the least expense and greatest benefit, is preferable to all others.

We form society with our fellow man and agreement with him on how to protect each other.  This simple means of agreement creates government which is then bound up in the Nation we have already created by ourselves.  We create government not to uphold the good but to restrain the wicked.  Morality in government is only in that wickedness and predation are kept at bay from our positive discourse and intercourse that creates society.  When government becomes the upholder of virtue and promulgator of that which is good, it then is given power to not only restrain the wicked but to punish the good to the dictates of said government which we call tyrannical: that which should be a boon to all is provided the whip and the carrot so that we are molded into what government wants us to be, not allow us to become the best people we can possibly be.

How can government become a pure evil?  By men putting aside their desire to practice good on their own and wish to make it something that government does.

In his farewell address George Washington first reiterated what had come before:

Interwoven as is the love of liberty with every ligament of your hearts, no recommendation of mine is necessary to fortify or confirm the attachment.

The unity of government which constitutes you one people is also now dear to you. It is justly so, for it is a main pillar in the edifice of your real independence, the support of your tranquility at home, your peace abroad; of your safety; of your prosperity; of that very liberty which you so highly prize. But as it is easy to foresee that, from different causes and from different quarters, much pains will be taken, many artifices employed to weaken in your minds the conviction of this truth; as this is the point in your political fortress against which the batteries of internal and external enemies will be most constantly and actively (though often covertly and insidiously) directed, it is of infinite moment that you should properly estimate the immense value of your national union to your collective and individual happiness; that you should cherish a cordial, habitual, and immovable attachment to it; accustoming yourselves to think and speak of it as of the palladium of your political safety and prosperity; watching for its preservation with jealous anxiety; discountenancing whatever may suggest even a suspicion that it can in any event be abandoned; and indignantly frowning upon the first dawning of every attempt to alienate any portion of our country from the rest, or to enfeeble the sacred ties which now link together the various parts.

Our union is made up by individuals which is stated via We The People.  While this is a collective it is not a collective that seeks to abolish individuality so that there is only a collective self, but that which is a collection of like-minded individuals that are willing to look out for each other and seek common governance and to always hold such governance under scrutiny.  The collective cannot perform such scrutiny, only individuals have that power and that right to do so.

In creating a republic George Washington then seeks to ask a most pertinent question that had vexed all of those who reviewed history because republics were prone to fail via their very size when grown large:

While, then, every part of our country thus feels an immediate and particular interest in union, all the parts combined cannot fail to find in the united mass of means and efforts greater strength, greater resource, proportionably greater security from external danger, a less frequent interruption of their peace by foreign nations; and, what is of inestimable value, they must derive from union an exemption from those broils and wars between themselves, which so frequently afflict neighboring countries not tied together by the same governments, which their own rival ships alone would be sufficient to produce, but which opposite foreign alliances, attachments, and intrigues would stimulate and embitter. Hence, likewise, they will avoid the necessity of those overgrown military establishments which, under any form of government, are inauspicious to liberty, and which are to be regarded as particularly hostile to republican liberty. In this sense it is that your union ought to be considered as a main prop of your liberty, and that the love of the one ought to endear to you the preservation of the other.

These considerations speak a persuasive language to every reflecting and virtuous mind, and exhibit the continuance of the Union as a primary object of patriotic desire. Is there a doubt whether a common government can embrace so large a sphere? Let experience solve it. To listen to mere speculation in such a case were criminal. We are authorized to hope that a proper organization of the whole with the auxiliary agency of governments for the respective subdivisions, will afford a happy issue to the experiment. It is well worth a fair and full experiment. With such powerful and obvious motives to union, affecting all parts of our country, while experience shall not have demonstrated its impracticability, there will always be reason to distrust the patriotism of those who in any quarter may endeavor to weaken its bands.

Here the warning is against not only differential favors that others would seek to bestow so as to turn States against each other, but to warn that the holding of an ongoing military establishment at the national level is also a threat to the republic and liberty.  The form of militia the States utilized were, thusly, a bulwark for the citizenry to express dedication to the union, and a benefit to the union during wars in that the voluntary citizen soldier would be summoned to perform for their nation and their fellow man during times of trouble.  States would not have the ability for external military ventures and as the forces were all volunteer operating under guidelines, the States would have no standing army to threaten its citizens.

From this system of making the national government weak in this realm and the States strong, but not overbearing, the nation would have the capability for local self-governance and direct means to hold the national government accountable via the militia structure.  The right to keep and bear arms goes far beyond the positive aspect of personal warfare (self-defense) and the derived right of property (defense of property) but here is given a further positive aspect as defending one's State against tyrannical national government.

From Kipling the lash is implied, from Paine it is seen as a necessary instrument and here George Washington points out its positive valuation in upkeep of liberty and republican form of government to allow a wide-scale support of a republic by its component parts.  From that the responsibility for national defense lies not in the national government, which only declares or responds to war, nor in the States, that only provide for guidelines and supervision of militia, but with the citizenry that must be armed and know the means and methods of warfare.  This describes a pyramid of troops that has a small cadre at the national level, an intermediate cadre that is formalized at the State level and all citizens for defense of the nation at every turn and place.  This is just as it should be as those rights and liberty to have a nation start with the individuals and they, therefore, are depended upon to exercise those positive liberties and freedom in defense of the nation.

All ability to have a nation that defends liberty then rests not upon government at the highest level but at the lowest level of self-government.  This is the premise of how to make a large scale republic work.

Within the next paragraph the problems that can cause this to fail are then reviewed:

In contemplating the causes which may disturb our Union, it occurs as matter of serious concern that any ground should have been furnished for characterizing parties by geographical discriminations, Northern and Southern, Atlantic and Western; whence designing men may endeavor to excite a belief that there is a real difference of local interests and views. One of the expedients of party to acquire influence within particular districts is to misrepresent the opinions and aims of other districts. You cannot shield yourselves too much against the jealousies and heartburnings which spring from these misrepresentations; they tend to render alien to each other those who ought to be bound together by fraternal affection. The inhabitants of our Western country have lately had a useful lesson on this head; they have seen, in the negotiation by the Executive, and in the unanimous ratification by the Senate, of the treaty with Spain, and in the universal satisfaction at that event, throughout the United States, a decisive proof how unfounded were the suspicions propagated among them of a policy in the General Government and in the Atlantic States unfriendly to their interests in regard to the Mississippi; they have been witnesses to the formation of two treaties, that with Great Britain, and that with Spain, which secure to them everything they could desire, in respect to our foreign relations, towards confirming their prosperity. Will it not be their wisdom to rely for the preservation of these advantages on the Union by which they were procured ? Will they not henceforth be deaf to those advisers, if such there are, who would sever them from their brethren and connect them with aliens?

The warning against the parochial geographic advantages is not even put just at the State level but that of the districts within States.  Here corruption is seen as starting not on high, at the national level, but at the lowest level, that which is most local to you.  A corrupt system does not arrive with an instant dictator but through a corruption of normal processes that allow for the corrosion of trust between the citizens and their government via partisan favoritism displayed by those elected to office.

Beneficial government at the national level prevents external gaming of the republican system at the lowest level, but this is no sinecure against the gaming from within.  Here, too, corruption is a source of problems:

All obstructions to the execution of the laws, all combinations and associations, under whatever plausible character, with the real design to direct, control, counteract, or awe the regular deliberation and action of the constituted authorities, are destructive of this fundamental principle, and of fatal tendency. They serve to organize faction, to give it an artificial and extraordinary force; to put, in the place of the delegated will of the nation the will of a party, often a small but artful and enterprising minority of the community; and, according to the alternate triumphs of different parties, to make the public administration the mirror of the ill-concerted and incongruous projects of faction, rather than the organ of consistent and wholesome plans digested by common counsels and modified by mutual interests.

However combinations or associations of the above description may now and then answer popular ends, they are likely, in the course of time and things, to become potent engines, by which cunning, ambitious, and unprincipled men will be enabled to subvert the power of the people and to usurp for themselves the reins of government, destroying afterwards the very engines which have lifted them to unjust dominion.

Towards the preservation of your government, and the permanency of your present happy state, it is requisite, not only that you steadily discountenance irregular oppositions to its acknowledged authority, but also that you resist with care the spirit of innovation upon its principles, however specious the pretexts. One method of assault may be to effect, in the forms of the Constitution, alterations which will impair the energy of the system, and thus to undermine what cannot be directly overthrown. In all the changes to which you may be invited, remember that time and habit are at least as necessary to fix the true character of governments as of other human institutions; that experience is the surest standard by which to test the real tendency of the existing constitution of a country; that facility in changes, upon the credit of mere hypothesis and opinion, exposes to perpetual change, from the endless variety of hypothesis and opinion; and remember, especially, that for the efficient management of your common interests, in a country so extensive as ours, a government of as much vigor as is consistent with the perfect security of liberty is indispensable. Liberty itself will find in such a government, with powers properly distributed and adjusted, its surest guardian. It is, indeed, little else than a name, where the government is too feeble to withstand the enterprises of faction, to confine each member of the society within the limits prescribed by the laws, and to maintain all in the secure and tranquil enjoyment of the rights of person and property.

Here the full-blown context of the problem of local government at the district level is played out as it leads to larger scale corruption at the highest level.  This is done by factions which we come to call parties political, that seek to divide the common interest into special interests and by that means co-opt a portion of the whole from the whole for partisan gain.  Government is via the delegates who are representative of the will of the people, not the actual organs of government.  When political faction seeks to make such organs that are not directly accountable to the people and that can be swayed by political faction, then ideology is put before the common good by the minority through the offices of government.

This is what Tom Paine meant when he said "our calamity is heightened by reflecting that we furnish the means by which we suffer."  The co-optation of government by the minority for their will done via the delegated means then becomes a system of unprincipled use of government power against the common good and the common man.  From this the corruption spreads from its lowest point, in districts seeking partisan favor and gain for factional supporters, upwards into the national government by seeking the means to put in unaccountable organs that are then swayed by delegates who are partisan.

Cunning and ambitious ideologues will seek to sell factional gain as a benefit to all and establish, as their means, changes to the Constitution.  This then changes the power and accountability structure of the Constitution, itself, to be amenable to partisan means rather than the common good.  Direct differential taxation was restricted away from federal powers by design, and by design that was changed in Amendment XVI which was promised never to create an income tax above 7% and which, within 7 years of enacting it, this had jumped to 70%.  This also removed the check and balance to federal spending by having the States act as intermediaries for collection of taxation apportioned by population size.  Similarly Amendment XVII had changed the structure of the Senate away from that of appointments by State government so as to form a State governmental check on the federal government, to one in which the popular vote was substituted so as to remove the balance of State input into the national system.  These two amendments, along with Amendment XVIII on the Prohibition of Alcohol, are all amendments pushed by the Progressive movement in America.

These Amendments have garnered the population a tax code filled with favoritism and partisanship, a rubber-stamp Senate for expansion of government bodies and power, and the requirement of some sanity to say that trying to stop alcohol use is too far, but to then say that use of other drugs  can be restricted as they are used by a very small faction within the nation.  Here the will of the majority is now played upon, beset by regulations and then utilized to demonize the use of medicinal agents that can be abused and are addictive.  Yet substances agreeable to the majority that also have those characteristics are left with only minor inflictions of power via taxation upon them.  This last is the imposition of morality via the tax code and taxation is, in every instance, a necessary evil only and not a moral good.  From such a tool no moral good can arise and only the demonstration that going against morality is punished be derived.  Do as you are told or else, not do what is good because it is good, is the maxim and it is used upon children.  Adults are moral agents for themselves and society and should know better and see punishment as the only recourse from when they can no longer govern themselves and protect society from their negative liberties.  If government could instill morality, then the prevention of the ability to distill liquor would have been a final and ending point to its use and abuse, and yet just the contrary happened.

Changes in government structure and power are, therefore, things to be done slowly and with due deliberation not only at the highest level but at the lowest: not something to be pushed forward in 7 years for political and factional reasons but something to be deliberated for decades, if necessary, to see if the necessary instrument for change is truly government or if it can be satisfied by some other industry by the people as a whole.  The positive liberties of the people are far more numerous and far more powerful than the oversight of negative liberties that we empower government to perform.  Government, then, is the last and least of our common tools to help society to flourish and to care for the sick, elderly and needy, not the first.  Government can only create via the subtraction of power and wealth from the people, while the people who are creative, can generate more power for good and wealth via their industry which is a benefit to all of society and allows others to flourish and prosper.  Prosperity is the absence of governmental oversight upon our selves, our bodies, our property and our work which is the manifestation of our liberty. 

Having freedom to work, alone, is of little value if government regulates the liberty at all turns and then determines what it is you may keep by your own work and what must be handed over to government as its due.  This is an ill when considering taxation, and needs to be restricted.  When it is used to determine when you work, how long you work, for how much you can work and what your working conditions are, then you are no longer the responsible actor in your own working life and government has usurped that role.  Tyranny does not come stamping in and crashing through the doors, but is invited in as a means to 'help' others by restricting them: the boot to the face forever starts with the helping hand which is also that of the pickpocket of government.  Once you gladly accept the petty tyranny upon an employer, you then make yourself the target for the greater tyranny of restriction of all your other liberties because you have handed over the means to do so to government via your personal and factional ideologies that see the restrictions of others as fine and never realize that they also are a restriction upon you, as well.

Would that this was just a particular problem and could be easily solved!  Unfortunately George Washington goes on from there to describe just where this arises:

I have already intimated to you the danger of parties in the State, with particular reference to the founding of them on geographical discriminations. Let me now take a more comprehensive view, and warn you in the most solemn manner against the baneful effects of the spirit of party generally.

This spirit, unfortunately, is inseparable from our nature, having its root in the strongest passions of the human mind. It exists under different shapes in all governments, more or less stifled, controlled, or repressed; but, in those of the popular form, it is seen in its greatest rankness, and is truly their worst enemy.

The alternate domination of one faction over another, sharpened by the spirit of revenge, natural to party dissension, which in different ages and countries has perpetrated the most horrid enormities, is itself a frightful despotism. But this leads at length to a more formal and permanent despotism. The disorders and miseries which result gradually incline the minds of men to seek security and repose in the absolute power of an individual; and sooner or later the chief of some prevailing faction, more able or more fortunate than his competitors, turns this disposition to the purposes of his own elevation, on the ruins of public liberty.

Without looking forward to an extremity of this kind (which nevertheless ought not to be entirely out of sight), the common and continual mischiefs of the spirit of party are sufficient to make it the interest and duty of a wise people to discourage and restrain it.

It serves always to distract the public councils and enfeeble the public administration. It agitates the community with ill-founded jealousies and false alarms, kindles the animosity of one part against another, foments occasionally riot and insurrection. It opens the door to foreign influence and corruption, which finds a facilitated access to the government itself through the channels of party passions. Thus the policy and the will of one country are subjected to the policy and will of another.

Here the cause is laid out for all to see: human nature.

When we create parties and factions along with that comes factional conflict of the civil form.  Civil factional conflict is known by many names over time as the faction types and societies change:  the War of the Roses, the Praetorian Guards, the Houses of the Hapsburgs, Sultans against Emirs, Emperor against Governors, Stalinists and Trotskyites, National and International Socialists... on and on and on throughout history all the way to Democrats and Republicans.  When factional ideology represented by a minority gains power it then rubs the other party the wrong way which has its own minority viewpoint.  In theory the common good should be represented but, in fact, both minorities have views of what is right and wrong via the institution of government and then seek to place their own priorities down upon them so as to inflict them upon the common people.   This doesn't matter if it is a Sun Emperor seeking to play favorites amongst relatives and Governors or the shifting alliances of Nobles during the 30 Years War or the imposition of Party Machines via the electoral process everywhere from Weimar to Tammany Hall.  The result of factional conflict is the spirit of revenge.

Again the corruption of the people starts not on-high but with the petty struggles between parties and factions, so that there is an emotional investment of individuals in their party above the common good.  When the seeking of power becomes an end in inflicting one's ideologies upon the public and to punish one's adversaries, then no matter how 'good' the rationale that is put forward it is always, and ever, the welcome of the tyrant to dinner.

Class warfare is just such a means, as it attempts to pit the putative rich against the desperate poor, and yet if the rich are pulled down where will jobs come from?  If prosperity for the individual is not protected, then how is wealth generation sustained?  And if there is not a diverse economy but one directed to the ends of government, how can that adapt to new events and times without having the benefit of depth of diversity within it that allows for adaptation at the lowest level of concern?  At each and every point when the power of government is utilized it is a negative factor as it impedes growth, diversity, and personal achievement and impoverishes all through the restriction of liberty and factional redistribution of wealth to no long term good ends at all.

How are these organs of government turned from those of the common good to such despotic and tyrannical ends?  This subject is simple due to the increasing complexity of government that is forced upon it by each faction, in turn:

It is important, likewise, that the habits of thinking in a free country should inspire caution in those entrusted with its administration, to confine themselves within their respective constitutional spheres, avoiding in the exercise of the powers of one department to encroach upon another. The spirit of encroachment tends to consolidate the powers of all the departments in one, and thus to create, whatever the form of government, a real despotism. A just estimate of that love of power, and proneness to abuse it, which predominates in the human heart, is sufficient to satisfy us of the truth of this position. The necessity of reciprocal checks in the exercise of political power, by dividing and distributing it into different depositaries, and constituting each the guardian of the public weal against invasions by the others, has been evinced by experiments ancient and modern; some of them in our country and under our own eyes. To preserve them must be as necessary as to institute them. If, in the opinion of the people, the distribution or modification of the constitutional powers be in any particular wrong, let it be corrected by an amendment in the way which the Constitution designates. But let there be no change by usurpation; for though this, in one instance, may be the instrument of good, it is the customary weapon by which free governments are destroyed. The precedent must always greatly overbalance in permanent evil any partial or transient benefit, which the use can at any time yield.

In our time we have seen the consolidation of numerous government agencies into larger ones.  The Dept. of Homeland Security is one such, the Department of Justice another, and while the Director of National Intelligence is not created as being powerful it has its ability to direct large swaths of the Intelligence Community both towards foreign problems and domestic ones.  Where there were once numerous and restricted agencies and departments there are now larger ones with less well defined purposes and goals.  It is this that erodes the distinction between what is legally constituted as a restricted set of powers and what is agglomerated to become something that has no proper Constitutional basis.  Government is given very few and special powers that are each of them distinct and defined: when those lines are blurred they become indistinct and oppressive in size, scope and nature.  In a prior post I went over this by utilizing a fictional setting created by Fred Saberhagen that described what this means via his Swords books and what it means to have discrete powers that are sovereign.  Here is the poem in that series that describes them:


Who holds Coinspinner knows good odds

Whichever move he make

But the Sword of Chance, to please the gods

Slips from him like a snake.


The Sword of Justice balances the pans

Of right and wrong, and foul and fair.

Eye for an eye, Doomgiver scans

The fate of all folk everywhere.


Dragonslicer, Dragonslicer, how d'you slay?

Reaching for the heart in behind the scales.

Dragonslicer, Dragonslicer, where do you stay?

In the belly of the giant that my blade impales.


Farslayer howls across the world

For thy heart, for thy heart, who hast wronged me!

Vengeance is his who casts the blade

Yet he will in the end no triumph see.


Whose flesh the Sword of Mercy hurts has drawn no breath;

Whose soul it heals has wandered in the night,

Has paid the summing of all debts in death

Has turned to see returning light.


The Mindsword spun in the dawn's gray light

And men and demons knelt down before.

The Mindsword flashed in the midday bright

Gods joined the dance, and the march to war.

It spun in the twilight dim as well

And gods and men marched off to hell.


I shatter Swords and splinter spears;

None stands to Shieldbreaker.

My point's the fount of orphans' tears

My edge the widowmaker.


The Sword of Stealth is given to

One lonely and despised.

Sightblinder's gifts: his eyes are keen

His nature is disguised.


The Tyrant's Blade no blood hath spilled

But doth the spirit carve

Soulcutter hath no body killed

But many left to starve.


The Sword of Siege struck a hammer's blow

With a crash, and a smash, and a tumbled wall.

Stonecutter laid a castle low

With a groan, and a roar, and a tower's fall.


Long roads the Sword of Fury makes

Hard walls it builds around the soft

The fighter who Townsaver takes

Can bid farewell to home and croft.


Who holds Wayfinder finds good roads

Its master's step is brisk.

The Sword of Wisdom lightens loads

But adds unto their risk.

(end of the song)

Each Sword is Sovereign within its domain with only one Sword able to cancel all, but one, itself.  There are checks and balances between Swords as there are within powers of republican government: each has its domain that is defined and cannot cross them without losing the cause and meaning of its direct power.  Even the most Omni-canceling Sword has, itself, a foil that will take it down as well, so that even the mightiest has counter and there is no counter to that one as its power is only positive, not negative at all.  Each negative power must have a domain as, at first, a sovereign power which is part and parcel of national government as seen in Law of Nations, and by republican form which casts separate powers into separate areas within national government.

Unlike other books on law, Law of Nations is a descriptive set of laws, not a prescriptive nor proscriptive set of laws. Law of Nations is universal to mankind by being man and having the ability to set aside negative liberties for common oversight and accept the necessary evil of government that forms the State to uphold the Nation.  Because it is universal, every government formed by individuals resides under it without regard to region, time period, ethnicity, religious affiliation, or any other thing.  You get Law of Nations by having marriage and creating families, not by having someone administer it to you.  Each of the sovereign powers we delegate to the nation is described in Law of Nations which is amenable to any form of government as they all have the same set of powers.  All of the Presidents at least up to Abraham Lincoln and, arguably, up to Teddy Roosevelt, understood the concepts embodied by this concept.

Washington sees that these powers are ones that are not just tools but weapons and they, like Saberhagen's SWORDS, can be used for ill within their domain and used by the few to subjugate the many.  We can not get rid of these powers unless we become savages and find ourselves willing to kill our loved ones and children for base personal desire.  Government is the organ of society that is created to stop this from happening, and yet when that organ turns toxic it becomes the weapon that is the ill to the body as a whole.  Once it starts to grow it can become cancerous and over-run the body and, finally, destroy it which requires the regeneration of a fresh body and set of organs by those who remain.

The main protection from this happening?  Knowledge.

It is substantially true that virtue or morality is a necessary spring of popular government. The rule, indeed, extends with more or less force to every species of free government. Who that is a sincere friend to it can look with indifference upon attempts to shake the foundation of the fabric?

Promote then, as an object of primary importance, institutions for the general diffusion of knowledge. In proportion as the structure of a government gives force to public opinion, it is essential that public opinion should be enlightened.

First off Washington performs the cart-horse order agreement by putting the horse, that is virtue or morality, before the cart, which is popular government.

The means of safety against corrupt and factional government?  Knowledge dissemination.  Here it must be noted that the institutions are not being delegated to the necessary evil, which is to say government, but to those things created by the people to create public opinion.  Public opinion cannot be created by government and the people remain free and with liberty as once it becomes the fount of opinion creation those who are in power will bend that opinion system to their will.

Edward Bernays in Propaganda (1928) put it like this in pp. 11-12:

It might be better to have, instead of propaganda and special pleading, committees of wise men who would choose our rulers, dictate our conduct, private and public, and decide upon the best types of clothes for us to wear and the best kinds of food for us to eat. But we have chosen the opposite method, that of open competition. We must find a way to make free competition function with reasonable smoothness. To achieve this society has consented to permit free competition to be organized by leadership and propaganda.

Some of the phenomena of this process are criticized— the manipulation of news, the inflation of personality, and the general ballyhoo by which politicians and commercial products and social ideas are brought to the consciousness of the masses. The instruments by which public opinion is organized and focused may be misused. But such organization and focusing are necessary to orderly life.

As civilization has become more complex, and as the need for invisible government has been increasingly demonstrated, the technical means have been invented and developed by which opinion may be regimented.

With the printing press and the newspaper, the railroad, the telephone, telegraph, radio and airplanes, ideas can be spread rapidly and even instantaneously over the whole of America.

The 'invisible government' are those who promulgate messages and ideology inside and outside of government to sway public opinion.  Previously described are political parties to give 'order' to our political choices otherwise we would be left choosing a multitude of people and then have this messy process to narrow down who is to represent us in government which he describes just prior to this:

It is not usually realized how necessary these invisible governors are to the orderly functioning of our group life. In theory, every citizen may vote for whom he pleases. Our Constitution does not envisage political parties as part of the mechanism of government, and its framers seem not to have pictured to themselves the existence in our national politics of anything like the modern political machine. But the American voters soon found that without organization and direction their individual votes, cast, perhaps, for dozens or hundreds of candidates, would produce nothing but confusion. Invisible government, in the shape of rudimentary political parties, arose almost overnight. Ever since then we have agreed, for the sake of simplicity and practicality, that party machines should narrow down the field of choice to two candidates, or at most three or four.

What George Washington describes, however, is just such a political machine and how it comes about and what it does.  The concept of 'political machine' is seen as new and progressive in the time of Bernays, and yet describes the machinations of every dictator, tyrant and monarch in history: they each promulgated propaganda to further themselves, their cohorts and their factions from Mayan stelae and temple inscriptions to Egyptian hieroglyphics that always tended to portray the current ruler as the greatest and closest to the deities to the politically directed religious dogmas of the 30 Years War amongst various sects that changed by whoever was in power all the way known to Washington (in whole or in part).  Indeed the most depressing thing reading Progressive Era ideas is how backwards they seem when they refer to political machines as modern institutions.

These tyrannical and despotic ideas were given a new set of clothes in the Progressive Era, but the nature of what they were put on soon seeped through them so that their horrific effects could be seen, anew.  These are not brand-new ills, just the same old ones visiting us with a different pitch-line supplied to them by those who seek to endow themselves at the cost of the public and to the benefit of the factional, chosen few.

It is this corrosive concept that the few need to herd the many and make basic decisions for them that now is the problem in modern life: not only are the political mechanisms not adapting they are not made to adapt to such rapidly changing circumstances while individuals are.  Indeed you are reading this through a system that allows access to either source documents either directly (via online content) or indirectly via purchase link.  The Bernays text, itself, has been pirated numerous times so only a bit of searching can help you find it.  Do note that this is necessary as the government has been used by partisan interests of corporations to extend the copyright beyond an original 10+10years or semi-modern 16+16 years to now go to life+some years, putting such texts outside of the public domain that Bernays said was insufficient to garner information.  If you don't think an author can or should benefit beyond their natural life or a very modest set period of time, then you have the influence of Edward Bernays to thank for that as these are the 'invisible governors' showing their hand.

This then moves me to where the article began and to give the last few lines of Kipling:

As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool's bandaged finger goes wabbling back to the Fire;

And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!

We are not destined to repeat history if we but bothered to learn it.