• Tom Cleary

The Fugazi Economy


Any mafia movie fan worth their salt knows what a Fugazi is. It’s a phony, a fake, and imposter; fooorgeeet about it. That word perfectly captures the state of the U.S. economy today. It is a false economy, increasingly disconnected from economic reality.


The thing that sets a true economy apart from a Fugazi economy is the presence or absence of freely formed prices. Freely formed prices are the most important part of a functioning, progressing economy. These prices, first and foremost, provide the means by which we can rationally allocate scarce resources. For example, we have the technology to build skyscrapers out pure titanium. Prices tell us that would be a very bad idea.


Also, prices provide information to both producers and consumers. If something is in higher demand or shorter supply, the prices rise, and this tells consumers to conserve and tells producers to make more of this good. Prices also provide the incentive to both producers and consumers to act in ways that maximize their material benefits.


However, when prices are false, so is the economy. Distorted prices create all sorts of dislocations and misallocations of capital and result in less of the needs and wants of the populace from being satisfied; that is, less material wealth is produced. In economic parlance, false prices retard capital formation and wealth creation. This focus on freely formed prices forms the core of the greatest argument against socialism, the book of that name by Ludwig von Mises.


False prices are nowhere more damaging than in distorted interest rates. Interest rates are the key price in a modern economy. Interest rates coordinate current activity and future needs by telling entrepreneurs whether a project is viable. Interest rates reflect the amount of capital available in the economy (capital being just a fancy word for tools). If entrepreneurs think that there are more tools available than there really are (which is what low interest rates communicate) then they will undertake projects that cannot be completed and were never really wanted in the first place.


This means that the resources committed to these projects are wasted. This distortion of the capital structure creates the wastage of an obscene amount of productive potential that could have been used to create more of what consumers actually wanted and made the human condition less onerous.


This also has the effect of creating the boom and bust cycle and unrighteously enriching the banking class, as I detailed here. This also is the primary reason why we have seen the wealth gap increase since the 1970s as well as the increasing financialization of the economy and the aging of the capital stock of the nation. These distortions in the interest rate are creating a situation whereby we are eating our proverbial seed corn. If allowed to continue this will have enormously damaging effects in the decades to come.


While this is the most damaging Fugazi in the economy, it is far from the only one. Another key area of distortion are tariffs. These taxes on imported goods raise costs, distort production decisions and create the conditions for domestic concentration of business and the rise of monopolies. I have detailed the economic case for trade here and here. In a nutshell if a foreign nation cannot sell their goods here, they do not have the wherewithal to buy our goods in return. Distorting prices and the economic decisions that flow from prices only serves to diminish our material wealth because we end up producing fewer goods using more resources, all because the economy has been falsified.


There is a myriad of other ways that prices and therefore the economy are falsified, some large others small. Taxes and government spending are obvious areas of falsification as they change the course of economic activity from what consumers freely want to what the politicians and their clients want.


Laws of licensure and occupational certification are another means of distortion. Limiting entry into professions arbitrarily raises costs and distorts economic production making the whole economy poorer. I discussed this in the context of health care here.


Local zoning creates tons of distortions throughout the economy. As does various local restrictions and economic activity, primarily centered on real estate and land development. On top of that local and state level subsidies and job incentives distort the real economy and falsify prices to affect a political outcome rather than one based on the free interaction of market participants.


The list is practically endless, but you should see the point by now. All of this serves to line the pockets of those who game the system and rig the market to the deadweight loss of the entire economy of producers and consumers. We are already paying a high price for this today in the form of more violent boom and bust cycles, sluggish productivity growth, an expanding wealth gap, and an aging capital base. All of this means a lower standard of living than we could have had and if this continues much longer it will result an absolute lower standard of living.


Correcting this is politically difficult but economically simple. All we need to do is reverse the government intrusions into the economy. Return the money supply to a sound market driven commodity money instead of one controlled by the government. This will allow interest rates to be set freely and provide accurate information to market actors. This alone can reverse much of what ails us.


Going further we need only lower the tariffs and reap the benefits of free trade. Next, deregulate the economy by the elimination of all laws of licensure and certification as well as ending the government picking winners and losers in the local real estate development market and local job market via incentive programs.


The pain in doing this will be real but relatively short lived. The open question is whether the populace can break from an ideology that claims to be able to give them everything all at once, right now without cost. We know there is a real cost being paid. We simply have to get people to understand that the pain of ending the Fugazi economy is much less than the pain of allowing it to continue. God’s people should be in the forefront of this demand to free the economy of these false measures.


Praise Be to God

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