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The War On Cash: Why Now?

28 July, 2015 - 06:00
You’ve probably read that there is a “war on cash” being waged on various fronts around the world. What exactly does a “war on cash” mean?It means governments are limiting the use of cash and a variety of official-mouthpiece economists are calling for the outright abolition of cash. Authorities are both restricting the amount of cash that can be withdrawn from banks, and limiting what can be purchased with cash.These limits are broadly called “capital controls.”Why Now?Before we get to that, let’s distinguish between physical cash — currency and coins in your possession — and digital cash in the bank. The difference is self-evident: cash in hand cannot be confiscated by a “bail-in” (i.e., officially sanctioned theft) in which the government or bank expropriates a percentage of cash deposited in the bank. Cash in hand cannot be chipped away by negative interest rates or fees.Cash in the bank cannot be withdrawn in a financial emergency that shutters the banks (i.e., a bank holiday).When pundits suggest cash is “obsolete,” they mean physical paper money and coins, not cash in a bank. Cash in the bank is perfectly fine with the government and its well-paid yes-men (paging Mr. Rogoff and Mr. Buiter) because this cash can be expropriated by either “bail-ins” or by negative interest rates.Inflation and Negative Interest RatesMr. Buiter, for example, recently opined that the spot of bother in 2008–09 (the Global Financial Meltdown) could have been avoided if banks had only charged a 6 percent negative interest rate on cash: in effect, taking 6 percent of the depositor’s cash to force everyone to spend what cash they might have.Both cash in hand and cash in the bank are subject to one favored method of expropriation, inflation. Inflation — the single most cherished goal of every central bank — steals purchasing power from physical cash and digital cash alike. Inflation punishes holders of cash and benefits those with debt, as debt becomes cheaper to service.The beneficial effect of inflation on debt has been in play for decades, so it can’t be the cause of governments’ recent interest in eliminating physical cash.So now we return to the question: Why are governments suddenly declaring war on physical cash, the oldest officially issued form of money?Why They Hate Cash in HandThe first reason: physical cash has the potential to evade both taxes as well as officially sanctioned theft via bail-ins and negative interest rates. In short, physical cash is extremely difficult for governments to steal.Some of you may find the word theft harsh or even offensive. But we must differentiate between taxes — which are levied to pay for the state’s programs that in principle benefit all citizens — and bail-ins, i.e., the taking of depositors’ cash to bail out banks that became insolvent through the actions of the banks’ management, not the actions of depositors.Bail-ins are theft, pure and simple. Since the government enforces the taking, it is officially sanctioned theft, but theft nonetheless.Negative interest rates are another form of officially sanctioned theft. In a world without the financial repression of zero-interest rates (ZIRP — central banks’ most beloved policy), lenders would charge borrowers enough interest to pay depositors for the use of their cash and earn the lender a profit.If borrowers are paying interest, negative interest rates are theft, pure and simple.Why are governments suddenly so keen to ban physical cash? The answer appears to be that the banks and government authorities are anticipating bail-ins, steeply negative interest rates and hefty fees on cash, and they want to close any opening regular depositors might have to escape these forms of officially sanctioned theft. The escape mechanism from bail-ins and fees on cash deposits is physical cash, and hence the sudden flurry of calls to eliminate cash as a relic of a bygone age — that is, an age when commoners had some way to safeguard their money from bail-ins and bankers’ control.Forcing Those With Cash To Spend or Gamble Their CashNegative interest rates (and fees on cash, which are equivalently punitive to savers) raise another question: why are governments suddenly obsessed with forcing owners of cash to either spend it or gamble it in the financial-market casinos?The conventional answer voiced by Mr. Buiter is that recession and credit contraction result from households and enterprises hoarding cash instead of spending it. The solution to recession is thus to force all those stingy cash hoarders to spend their money.There are three enormous flaws in this thinking.One is that households and businesses have cash to hoard. The reality is the bottom 90 percent of households have less income now than they did fifteen years ago, which means their spending has declined not from hoarding but from declining income.While corporate America has basked in the glory of sharply rising profits, small business has not prospered in the same fashion. Indeed, by some measures, small business has been in a six-year recession.The bottom 90 percent has less income and faces higher living expenses, so only the top slice of households has any substantial cash. This top slice may see few safe opportunities to invest their savings, so they choose to keep their savings in cash rather than gamble it in a rigged casino (i.e., the stock market).The second flaw is that hoarding cash is the only rational, prudent response in an era of financial repression and economic insecurity. What central banks are demanding — that we spend every penny of our earnings rather than save some for investments we control or emergencies — is counter to our best interests.A War on Cash Is a War on CapitalThis leads to the third flaw: capital — which begins its life as savings — is the foundation of capitalism. If you attack savings as a scourge, you are attacking capitalism and upward mobility, for only those who save capital can invest it to build wealth. By attacking cash, the central banks and governments are attacking capital and upward mobility.Those who already own the majority of productive assets are able to borrow essentially unlimited sums at near-zero interest rates, which they can use to buy more productive assets. Everyone else — the bottom 99.5 percent — is reduced to consumer-serfdom: you are not supposed to accumulate productive capital, you are supposed to spend every penny you earn on interest payments, goods, and services.This inversion of capitalism dooms an economy to all the ills we are experiencing in abundance: rising income inequality, reduced opportunities for entrepreneurship, rising debt burdens, and a short-term perspective that voids the longer-term planning required to build sustainable productivity and wealth.Physical Cash: Only $1.36 TrillionAccording to the Federal Reserve, total outstanding physical cash amounts to $1.36 trillion.Given that a substantial amount of this cash is held overseas, physical cash is a tiny part of the domestic economy and the nation’s total assets. For context: the US economy is $17.5 trillion, total financial assets of households and nonprofit organizations total $68 trillion, base money is around $4 trillion, and total money (currency in circulation and demand deposits) is over $10 trillion (source).Given the relatively modest quantity of physical cash, claims that eliminating it will boost the economy ring hollow.Following the principle of cui bono — to whose benefit? — let’s ask: What are the benefits of eliminating physical cash to banks and the government?Benefits To Banks and the Government of Eliminating Physical CashThe benefits to banks and governments by eliminating cash are self-evident: Every financial transaction can be taxed. Every financial transaction can be charged a fee. Bank runs are eliminated.In fractional reserve systems such as ours, banks are only required to hold a fraction of their assets in cash. Thus a bank might only have 1 percent of its assets in cash. If customers fear the bank might be insolvent, they crowd the bank and demand their deposits in physical cash. The bank quickly runs out of physical cash and closes its doors, further fueling a panic.The federal government began insuring deposits after the Great Depression triggered the collapse of hundreds of banks, and that guarantee limited bank runs, as depositors no longer needed to fear a bank closing would mean their money on deposit was lost.But since people could conceivably sense a disturbance in the Financial Force and decide to turn digital cash into physical cash as a precaution, eliminating physical cash also eliminates the possibility of bank runs, as there will be no form of cash that isn’t controlled by banks.So, when the dust has settled who ultimately benefits by this war on cash, government and the central banks, pure and simple.

If Spending Is Our Military Strategy, Our Strategy Is Bankrupt

24 July, 2015 - 06:00
Even today, few deny the long arm of US military might. After all, the US military exhausted the Soviet Union, crushed Saddam Hussein, and drove Osama bin Laden’s al Qaeda into hiding.To what should we attribute these triumphs? Some would say US planning and foresight. Others would mention the hard work and dedication of US soldiers, sailors, and airmen. Still others would point to the application of superior technology. All would be correct to some degree, but each of these explanations disregards the fact that for more than a lifetime, the United States has wildly outspent its military competitors.For many years, the United States spent more on defense than the next ten big spenders combined. It turns out that’s no longer true, according to Jane’s and PPGF. But whether the current count is seven or nine, we must acknowledge that US dominance was purchased at a high cost.The High Cost of Big DebtsThe first cost is the accumulation of debt. While many will admit to the numbers, few will publicly concede the long-term threat they pose to national and international security. Among the few, Admiral Mike Mullen, former chairman of the Joint Chiefs of Staff, has for several years consistently declared that “The single biggest threat to national security is the national debt.” While US defense spending is currently declining, these charts illustrate that the US share of global defense spending has remained strong (1) regardless of the irregular ups and downs of external events and (2) largely independent of the debt burden.The second cost is the accumulation of commitments and expectations. Despite the drawdown of troops from Iraq and Afghanistan, senior US policy makers remain staunchly determined to maintain a high level of global engagement. If you doubt it, read the recently published 2015 U.S. National Military Strategy. Among other things, it underscores the US commitment to countering agents of instability, whether “violent extremist organizations (VEOs)” or nation states, the standout examples being Russia and China. Not surprisingly, the strategy has prompted headlines such as “China Angered by New U.S. Military Strategy Report,” “Pentagon Concludes America Not Safe Unless It Conquers the World,” and “Pentagon’s New Military Strategy Calls for Preserving US Dominion of the World.”Yes, these criticisms arrive from predictable quarters, but in this case the perception is reality, and the reality is that US policy makers continue to pursue a strategy laden with unavoidably expensive commitments — commitments guaranteed to antagonize Russia and China. (All of which stimulates a risky reinforcing feedback loop.) As Patrick Tucker at Defense One quipped, “The United States is preparing for never-ending war abroad.” Despite this, don’t expect to find any references in the published strategy to “debt,” an oversight that ignores Mullen’s warning and validates David Stockman’s statement that “We’re blind to the debt bubble.”Our Military “Strategy” Amounts to Little More than Big Spending PlansThe third cost — one we rarely discuss — is the dangerous yet unspoken conceit held by a generation of senior US officers and policy makers: the belief that they are innately superior strategists. Just ask the Soviet Union, Saddam Hussein, and Osama bin Laden! But what if in reality spending was the primary driver and arbiter of these outcomes?It is suggestive that in cases where the sheer weight of US firepower proved unable to secure a decisive victory (Korea and Vietnam are canonical examples), the United States’s cash-poor but tactically savvy opponents still managed to frustrate and confound front-line US forces. As H. John Poole, a retired Marine colonel, combat veteran, and prolific author, has remarked:For America’s wartime units, firepower has been and still is the name of the game. This game has some less-than-ideal ramifications. Since WWI, far too many units have not matched up well — tactically — with their Eastern counterparts. As unlikely as this may seem to today’s active-duty community, it is nevertheless well documented. (Global Warrior, 2011, p. xxii)On this count, “cyberwar” is a prime illustration of another domain in which spending doesn’t guarantee proportional dominance. The recent OPM hack is a painful example, and if practitioners like Richard Stiennon (There Will Be Cyberwar) are correct, more is coming.As a rule, US policy makers minimize these counterexamples. Commentators like John Poole who point out weaknesses and alternatives tend to be written off by Washington apparatchiks as well-meaning but misguided zealots. And to be fair, from the mainstream perspective Washington’s argument in support of the status quo is actually quite strong — as long as the money continues to flow. For those who discern the uncomfortable truth that the US debt addiction is unsustainable, the picture looks very different. Alternatives to spending-as-strategy exist, but they require policy makers and strategists to rethink their dearly held assumptions of economic and strategic superiority. It requires a unique mind and stout internal mettle to do this, and so far this decade, we have seen little evidence in Washington of this type of insight and character. Let’s hope that the anticipation of crises yet-to-be pushes hitherto overlooked reformers to the front of the national security debate.I’ll close by restating the problem via analogy: US global superiority in military affairs is actually the superiority of a rich kid who thinks he’s really smart but in reality is merely just rich. When the seemingly endless flow of money slows (as it inevitably will), the mask of cleverness will fall. Everyone who resented the kid will be waiting at the edge of the playground for this day of reckoning, and because no one else will have been so dependent on spending-as-strategy, the erstwhile rich kid will find it tough going.

Today's Anti-Capitalists Ignore the Fundamental Problems of Socialism

23 July, 2015 - 06:00
Anti-market and pro-socialist rhetoric is surging in headlines (see also here, here, and here) and popping up more and more on social media feeds. Much of the time, these opponents of markets can’t tell the difference between state-sponsored organizations like the International Monetary Fund and actual markets. But, that doesn’t matter because the articles and memes are often populist and vaguely worded — intentionally framed in such a way to easily deflect uninformed attacks and honest descriptions of what they are actually saying. In the end, they can all be boiled down to one message: socialism works and is better than capitalism.While most of it comes from the Left, the Right is not innocent, since the Right appears to be primarily concerned with promoting its own version of populism, which apparently does not involve a defense of markets. “Build bigger walls at the border,” for example, is not a sufficient response to “All profits are evil!”Instead of stooping to this level or simply resorting to “Read Mises!” (a more fitting response), we must show, yet again, that socialism — even under well-meaning political leaders — is impossible and leads to disastrous consequences.The Necessity of Profits, Prices, and EntrepreneursSocialism is the collective ownership (i.e., a state monopoly) of the means of production. It calls for the abolition of private ownership of factors of production. Wages and profits are two parts of the same pie, and socialism says the profit slice should be zero.The inherent theoretical problems of socialism all emanate from its definition, and not the particulars of its application. However, the supporters of socialism define “collective,” as no exchange of the factors of production. And without exchange, there can be no prices, and without prices there is no way to measure the costs of production.In an unhampered market economy, the prices of the factors of production are determined by their aid in producing things that consumers want. They tend to earn their marginal product, and because every laborer has some comparative advantage, there is a slice of pie for everybody.If technological changes make certain factors more productive, or if education and training makes a laborer more productive, their prices or wages may be bid up to their new, higher marginal product. An entrepreneur would not like to hire or buy any factor at a price that exceeds its marginal product because the entrepreneur would then incur losses.Entrepreneurial losses are more important than many realize. They aren’t just hits to the entrepreneur’s bottom line. Losses show that on the market, the resources used to produce something were more highly valued than what they were producing. Losses show that wealth has been destroyed.Profits give the opposite signal. They represent economic growth and wealth creation. A profitable line of production is one in which the stuff that goes into producing some consumer good costs less than what consumers are willing to pay for the consumer good.As such, profits and losses are more than just important incentives, or cover in a conspiratorial capitalist class system; they are the only way to know that wealth is being created instead of destroyed in any line of production.Under socialism, there is a single owner that does not bid factors away from some lines of production and toward others. Nobody is able to say, with any shred of certainty, that a particular tool or machine or factory could be used to produce something else in a more effective way. Nobody knows what to produce or how much to produce. It’s economic chaos.Without Markets, We Can’t Know What or How to ProduceProfits and losses guide and correct entrepreneurs in the process of producing things they expect consumers will demand. Without this information, including the costs of production specifically, entrepreneurs cannot engage in economic calculation, the estimation of the difference between future revenues and the costs of production necessary to gain those future revenues.Laborers are put to work in areas where they don’t have a comparative advantage. Farmers are sent to factories, and tailors are sent to the mines. Workers are in the wrong lines of production and have the wrong tools. Every morning, the economy looks like Robert Murphy’s capital rearranging gnomes just ransacked it.The Polish film Brunet Will Call lampooned situations like this throughout the movie, with consumer and capital goods in the most unlikely places. A butcher pulls an automobile’s clutch cable out of his freezer, and gives it to the main character, who pays for it with information on the whereabouts of a double buggy for someone’s newborn twins (at the flower shop, obviously).So the failure of socialism is not conditional on the culture, time, or place of the victims. Socialism is flawed at its core: the “collective” ownership of the means of production. As such, there is no way to enact a functioning, growth-inducing version of socialism anywhere. In practice, however, the theoretical problems of socialism give way to civil unrest, which is met with state force and results in a death toll higher than any official war ever fought.Without profit motives to produce, quotas must be put in place. With quotas, even in the cases where workers don’t lie about their production, chaos still reigns. For example, if a nail production quota is based on the number of nails, workers produce a lot of tiny, unusable nails. A nail quota based on weight would encourage workers to produce massive, but still unusable nails — a situation lampooned by this cartoon in Krokodil during the 1960s.Endless queues stretched across the USSR, filled with people looking for shoes even though shoe production in the USSR exceeded that of the US. The problem was all the shoes were too small, because shoe production was measured by number, with no regard for the sizes or designs consumers demand.The Wake of SocialismSome cases are funny; others are not. About seven million people died of starvation in the USSR just in 1932–33 (middle-of-the-road estimate based on manipulated data). The authors of The Black Book of Communism (1999) estimate the deaths of close to 100 million people are attributable to communist and socialist regimes. That’s more than 200 times the number of US deaths in WWII (and a case could be made that their deaths are attributable to socialism, too).Even today, in Cuba, the average wage is about $20 a month. In North Korea civilians are routinely rounded up by the dozens for public execution for the crime of watching South Korean TV smuggled into the country.When people are hungry and unhappy, the state cannot survive if the people know others are better off. The state uses propaganda, misinformation, and censorship to make an already captive citizenry even more confused and submissive.So count me surprised to hear fresh calls for socialism in 2015 — if the strong economic calculation argument and astronomical death toll haven’t turned the Left off of socialism, I don’t know what will. The idea is both bankrupt and deadly in both theory and practice.

Doomsayers Doomed in Washington State Marijuana Debate

23 July, 2015 - 06:00
Legal recreational marijuana use in the state of Washington is now two-and-a-half-years old and retail sales of marijuana have been legal for one year. What are the results of this experiment? Who was wrong and who was right on legalization?A new study has been released by the Drug Policy Alliance, a group that openly promotes “harm reduction policies” such as drug legalization, drug decriminalization, legal medical marijuana, and needle exchange programs. The study tracks several of the key social statistics connected with drug use.Less Government SpendingThe most obvious result, and one that everyone agreed on, was that arrests and convictions for marijuana violations would decrease. The number of arrests in 2012, the year prior to legalization, was 6,196, while in 2014 the number of arrests was 2,316, a decrease of 63 percent. Most of those arrests were for possession of more than one ounce of marijuana. Convictions for marijuana violations have also declined by 81 percent.The report notes that as a result of fewer arrests and convictions there have been millions of dollars saved in terms of police, prosecutors, courts, and jails. Just as important is that legalization has allowed people to save in terms of money, transaction costs, and stress. The most important result of all is that legalization has already saved thousands of law-abiding citizens from having a criminal arrest record.Washington has received $83 million in marijuana tax revenues which was in the general range of expectations. Most of this tax revenue is used by the marijuana tax bureaucracy and to finance drug treatment and education programs, so that there is no net revenue gain for the state. There are also revenues from licenses and fees, but these are user fees so that there is no net revenue gain in this case, either.The fact that marijuana legalization reduced the burden on the criminal justice system and funded drug deterrence programs was not in doubt. Nobody really questioned whether these results would be achieved. However, one area of disagreement was on the issue of crime. Opponents of legalization claimed that crime would increase. For example, law enforcement opposed legalization because of the potential impact on crime, in particular that it would increase organized crime. Proponents of legalization said that crime would decrease or be unaffected by legalization.A Decrease in CrimeIn terms of crime in Washington State, violent crime decreased by about 10 percent while property crime was about the same between 2012 and 2014. However, crime in both these categories has been falling steadily in recent years, so that the 10 percent decrease in violent crime could be because police were available to deter and solve violent crimes, or it could be other factors. The point is that there has been no spike in any type of crime since legalization began. The predictions of prohibitionists were clearly wrong.Law enforcement agencies in Washington also opposed legalization because they thought it would cause an increase in highway accidents and fatalities. With so little data available the Drug Policy Alliance report described the “crash risk” as “stable,” meaning little change from 2012 to 2014. However, I believe the available data clearly supports that legalization leads to safer streets.In 2008, the number of fatalities involving a drug or alcohol impaired driver was 255. By 2012 that number had dropped to 212 with the five year rolling average of 232. The goal for 2013 was set at 247, but the actual number was 182, beating all previous years and smashing the goal by a wide margin of 26 percent. In 2012 there were 501 serious injuries involving a drug or alcohol impaired driver, with a moving average of 509. In 2013 there were only 411 such serious injuries, easily beating all other years in the report and the previous year by 18 percent. Law enforcement position was clearly wrong when it comes to crash risk.Use Among Youths Not IncreasingLegalizing marijuana can be expected to make marijuana more available and subject to “diversion” to those twenty-one years of age or younger. That in itself is not a damning conclusion for legalization if young people are substituting marijuana for more dangerous drugs and alcohol. Relative to heroin, cocaine, synthetic narcotics, and pharmaceutical drugs, as well as possibly alcohol and tobacco, marijuana is safer and less addictive. However, according to the Drug Policy Alliance report marijuana use has not increased among the youth:Between 2012 and 2014 usage rates for 8th and 10th graders decreased slightly and similar rates for 12th and 6th graders remained unchanged.Marijuana use in this group is high at roughly twice the rate of cigarette-use, but this is largely due to government policies that have made alcohol and tobacco relatively difficult to obtain. Unable to obtain alcohol and tobacco at a reasonable price, these children turned to marijuana and found it to be relatively safe. Secretary of Health, John Wiesman seems to be clueless about this simple economic fact. According to him:We’ve got to ring the alarm bell because teens are telling us in their own terms that they don’t consider marijuana use to be risky. ... We’ve got to take the lessons learned about tactics that helped curb tobacco and alcohol use and put them to good use educating our kids about risks of using other substances.Wiesman fails to realize that the government’s own policies encouraged minors to switch from alcohol and tobacco to marijuana. Once they tried marijuana they realized that the government’s propaganda was highly misleading.In contrast to the prohibitionist propaganda messages, legalization has resulted in fewer arrests, convictions, and criminal records. More resources were made available for enforcing property and violent crime. The number of fatalities and serious injuries attributed to alcohol and drugs declined noticeably. As the statistics are clearly proving, the prohibitionist propagandists were wrong and the advocates of legalization were correct.

Immigrants Aren’t the Only Ones Who Shouldn’t Be Voting

23 July, 2015 - 06:00
Much of the current immigration debate in the United States centers around the issue of “amnesty,” which is a vague term that may mean anything from “we won’t deport you” to “let’s fast-track you to citizenship and voting rights.”From a laissez-faire perspective, the deportation aspect of amnesty — an increase in federal inaction — is one thing. The extension of voting privileges, though, is something else entirely.Indeed, the amnesty debate has helped to illustrate the difference between real, concrete property rights, and the much different political “rights” such as voting. Limiting property rights is always illegitimate. Limiting political rights, on the other hand, may sometimes be essential.Property Rights vs. Political “Rights”For example, everyone everywhere has property rights regardless of the type of regime they live under and whether or not the government recognizes the existence of those rights. These rights include the right to own one’s own body, to own property peacefully acquired, and to enter into peaceful contracts with other people, including contracts involving employment and housing. The foreign nationals known as “illegal immigrants” also have these rights.But property rights such as these should not be confused with political “rights” that are quite distinct from the right to self-ownership. In fact, in practice, political rights such as voting are often used to justify coercion against others in the form of expanding government spending, and government control over every aspect of daily life.Critics of amnesty who wish to further restrict the free use of property by employers, landlords, and laborers make a mistake when they try to limit immigration by restricting property rights. On the other hand, they are on more solid ground when they attempt to restrict the further expansion of government power by restricting the franchise and the number of people eligible (via citizenship) for government checks.The assumption behind this position on immigrants is that new arrivals tend to seek an expansion of government benefits, and that they are net tax receivers who get more in tax benefits than they pay in. This is an empirical claim that may or may not be true. But, it is no doubt true that some immigrants are in fact net tax receivers, and it is in that direction that we should direct our attention.Limiting Government Size by Limiting the VoteIn making their arguments against expanding the vote to immigrants, the activists who hold this position place themselves among the few who are actually confronting the problem of widespread voting rights in a society where large numbers of net tax receivers also have the ability to vote further benefits for themselves.However, when we really start to examine the sheer number of voters who benefit from expansions in government spending, immigrants begin to look insignificant by comparison. The legions of government employees, government contractors, and Social Security recipients all know that any significant cuts in government spending would hurt them personally. And they vote.So, if we’re going to take the position that those who benefit from tax funds should not vote, why limit ourselves to looking at immigrants?The Net Taxpayers vs. the Net Tax ReceiversIn his short book Bureaucracy, Ludwig von Mises examined this problem in the context of government employees. In a section titled “The Bureaucrat as a Voter” Mises explains:The bureaucrat is not only a government employee. He is, under a democratic constitution, at the same time a voter and as such a part of the sovereign, his employer. He is in a peculiar position: he is both employer and employee. And his pecuniary interest as employee towers above his interest as employer, as he gets much more from the public funds than he contributes to them.This double relationship becomes more important as the people on the government's pay roll increase. The bureaucrat as voter is more eager to get a raise than to keep the budget balanced. His main concern is to swell the pay roll.Mises went on to examine the rise of powerful interest groups in France and Germany in the years before “the fall of their democratic constitutions.” He explained:There were not only the hosts of public employees, and those employed in the nationalized branches of business (e.g., railroad, post, telegraph, and telephone), there were the receivers of the unemployment dole and of social security benefits, as well as the farmers and some other groups which the government directly or indirectly subsidized. Their main concern was to get more out of the public funds. They did not care for “ideal” issues like liberty, justice, the supremacy of the law, and good government. They asked for more money, that was all. No candidate for parliament, provincial diets, or town councils could risk opposing the appetite of the public employees for a raise. The various political parties were eager to outdo one another in munificence.Mises concluded:Representative democracy cannot subsist if a great part of the voters are on the government pay roll. If the members of parliament no longer consider themselves mandatories of the taxpayers but deputies of those receiving salaries, wages, subsidies, doles, and other benefits from the treasury, democracy is done for.The logic of this position is simple. If the voting taxpayers (specifically, the net tax contributors) are outnumbered or outcompeted by the net tax receivers, then, inevitably, the economic system will tend more and more toward economic profligacy, leading eventually to bankruptcy.Not surprisingly, many commentators who rightly point out the problem of government largesse and voting rights for immigrants also fail to mention all those more politically powerful and popular groups (i.e., builders of roads and weapons, and pensioners) whose incomes also depend on government spending. And of course, the “official” government employees all depend directly on a government check for their incomes, and in much larger numbers than any group of immigrants.Although federal law and the decisions of the federal courts mandate that all citizens be given a one-man, one-vote status, it remains abundantly clear that it is imprudent in the extreme to allow a person who depends primarily on government funds for his or her income to exercise a vote in any election that may have an impact on his or her paycheck.In any other context, this would be considered an enormous conflict of interest. Naturally, we would not approve of a city council member who votes on whether or not the city should hire his own firm to pave the city’s streets (although this surely happens anyway). And yet, we blithely accept that voters should be allowed to do something extremely similar.And while it may be correct, it is nevertheless politically easy to oppose voting rights and welfare checks for immigrants, because they vote in relatively small numbers. But such action will amount to little in the long run unless the net taxpayers begin to confront the reality that the voters who vote to keep the government money flowing will be well represented among those longtime citizens cheering the loudest at next year’s suburban Fourth of July fireworks show.

Central Banks and Our Dysfunctional Gold Markets

21 July, 2015 - 06:00
Many investors still view gold as a safe-haven investment, but there remains much confusion regarding the extent to which the gold market is vulnerable to manipulation through short-term rigged market trades, and long-arm central bank interventions. First, it remains unclear whether or not much of the gold that is being sold as shares and in certificates actually exists. Second, paper gold can theoretically be printed into infinity just like regular currency — although private-sector paper-gold sellers have considerably less leeway in this regard than central banks. Third, new electronic gold pricing — replacing, as of this past February, the traditional five-bank phone-call of the London Gold Fix in place since 1919 — has not necessarily proved a more trustworthy model. Fourth, there looms the specter of the central bank, particularly in the form of volume trading discounts that commodity exchanges offer them.The Complex World of Gold InvestmentsThe question of rigging has been brought to media attention in the past few months when ten banks came under investigation by the US Commodity Futures Trading Commission (CFTC) and the US Department of Justice in price-manipulation probes. Also around that time, the Swiss regulator FINMA settled a currency manipulation case in which UBS was accused of trading ahead of silver-fix orders. Then, the UK Financial Conduct Authority, which regulates derivatives, ordered Barclays to pay close to $45 million in fines against a trader who artificially suppressed the price of gold in 2012 to avoid payouts to clients. Such manipulations are not limited to the precious-metals market: in November of last year, major banks had to pay several billion dollars in fines related to the rigging of foreign-exchange benchmarks, including LIBOR and other interest-rate benchmarks.These cases followed on the heels of a set of lawsuits in May 2014 filed in New York City in which twenty-five plaintiffs consisting of hedge funds, private citizens, and public investors (such as pension funds) sued HSBC, Barclays, Deutsche Bank, Bank Scotia, and Société Génerale (the five traditional banks of the former London Gold Fix) on charges of rigging the precious-metals and foreign-exchange markets. "A lot of conspiracy theories have turned out to be conspiracy fact," said Kevin Maher, a former gold trader in New York who filed one of the lawsuits that May, told The New York Times.Central Banks at the Center of Gold MarketsThe lawsuits were given more prominence with the introduction of the London Bullion Market Association (LBMA) on February 20, 2015. The new price-fixing body was established with seven banks: Goldman Sachs, J.P. Morgan, UBS, HSBC, Barclays, Bank Scotia and Société Génerale. (On June 16, the Bank of China announced, after months of speculation, that it would join.)While some economists have deemed the new electronic fix a good move in contrast to behind-closed-door, phoned-in price-fixing, others beg to differ. Last year, the commodities exchange CME Group came under scrutiny for allowing volume trading discounts to central banks, raising the question of how "open" electronic pricing really is. Then, too, the LBMA is itself not a commodities exchange but an Over-The-Counter (OTC) market, and does not publish — does not have to publish — comprehensive data as to the amount of metal that is traded in the London market.According to Ms. Ruth Crowell, the chairman of LBMA, writing in a report to that group: "Post-trade reporting is the material barrier preventing greater transparency on the bullion market." In the same report, Crowell states: "It is worth noting that the role of the central banks in the bullion market may preclude 'total' transparency, at least at the public level." To its credit, the secretive London Gold Fix (1919–2015) featured on its website tracking data of the daily net volume of bars traded and the history of gold trades, unlike current available information from the LBMA as one may see here (please scroll down for charts).The Problem with Paper GoldThere is further the problem of what is being sold as "paper" gold. At first glance, that option seems a good one. Gold exchange-traded funds (ETFs), registered with The New York Stock Exchange, have done very well over the past decade and many cite this as proof that paper gold, rather than bars in hand, is just as sure an investment. The dollar price of gold rose more than 15.4 percent a year between 1999 and December 2012 and during that time, gold ETFs generated an annual return of 14 percent (while equities registered a loss).As paper claims on trusts that hold gold in bank vaults, ETFs are for many, preferable to physical gold. Gold coins, for instance, can be easily faked, will lose value when scratched, and dealers take high premiums on their sale. The assaying of gold bars, meanwhile, with transport and delivery costs, is easy for banking institutions to handle, but less so for individuals. Many see them as trustworthy: ETF Securities, for example, one of the largest operators of commodity ETFs with $21 billion in assets, stores their gold in Zurich, rather than in London or Toronto. These last two cities, according to one official from that company, "could not be trusted not to go along with a confiscation order like that by Roosevelt in 1933."Furthermore, shares in these entities represent only an indirect claim on a pile of gold. "Unless you are a big brokerage firm," writes economist William Baldwin, "you cannot take shares to a teller and get metal in exchange." ETF custodians usually consist of the likes of J.P. Morgan and UBS who are players on the wholesale market, says Baldwin, thus implying a possible conflict of interest.Government and Gold After 1944: A Love-Hate RelationshipStill more complicated is the love-hate relationship between governments and gold. As independent gold analyst Christopher Powell put it in an address to a symposium on that metal in Sydney, October 2013: "It is because gold is a competitive national currency that, if allowed to function in a free market, will determine the value of other currencies, the level of interest rates and the value of government bonds." He continued: "Hence, central banks fight gold to defend their currencies and their bonds."It is a relationship that has had a turbulent history since the foundation of the Bretton Woods system in 1944 and up through August 1971, when President Nixon declared the convertibility of the dollar to gold suspended. During those intervening decades, gold lived a kind of strange dual existence as a half state-controlled, half free market-driven money-commodity, a situation that Nobel Prize economist Milton Friedman called a "real versus pseudo gold standard."The origin of this cumbersome duality was the post-war two-tiered system of gold pricing. On the one hand, there was a new monetary system that fixed gold at $35 an ounce. On the other, there was still a free market for gold. The $35 official price was ridiculously low compared to its free market variant, resulting in a situation in which IMF rules against dealing in gold at "free" prices were circumvented by banks that surreptitiously purchased gold from the London market.The artificial gold price held steady until the end of the sixties, when the metal's price started to "deny compliance" with the dollar. Still, monetary doctrine sought to keep the price fixed and, at the same time, to influence pricing on the free market. These attempts were failures. Finally, in March 1968, the US lost more than half its reserves, falling from 25,000 to 8,100 tons. The price of other precious metals was allowed to move freely.Gold Retreats Into the ShadowsMeawhile, private hoarding of gold was underway. According to The Financial Times of May 21, 1966, gold production was rising, but it was not going to official gold stocks. This situation, in turn, fundamentally affected the gold clauses of the IMF concerning repayments in currency only in equal value to the gold value of such at the time of borrowing. This led to a rise in "paper gold planning" as a substitution for further increases in IMF quotas. (Please see "The Paper Gold Planners — Alchemists or Conjurers?" in The Financial Analysts Journal, Nov–Dec 1966.)By the late 1960s, Vietnam, poverty, the rise in crime and inflation were piling high atop one another. The Fed got to work doing what it does best: "Since April [1969]," wrote lawyer and economist C. Austin Barker in a January 1969 article, "The US Money Crisis," "the Fed has continually created new money at an unusually rapid rate." Economists implored the IMF to allow for a free market for gold but also to set the official price to at least $70 an ounce. What was the upshot of this silly system? That by 1969 Americans were paying for both higher taxes and inflation. The rest, as they might say, is the history of the present.Today, there is no “official” price for gold, nor any “gold-exchange standard” competing with a semi-underground free gold market. There is, however, a material legacy of “real versus pseudo” gold that remains a terrible menace. Buyer beware of the pivotal difference between the two. 

An International Austrian: A Conversation with Carmen Elena Dorobăț

20 July, 2015 - 06:00
THE AUSTRIAN: How did you first become familiar with the Mises Institute?Back in 2009, in my second year of undergraduate studies, I took an elective course in comparative economic policies. It happened to be taught by Vlad Topan, the president of the Ludwig von Mises Institute Romania, and a senior lecturer at my university. The syllabus contained readings from Mises and Rothbard, such as Economic Policy: Thoughts for Today and Tomorrow, and What Has Government Done to Our Money?, and a long list of links to the Mises Institute website. Until that day, I had seriously doubted my choice of major, but this fortunate encounter changed everything. I began to read the website regularly, and listen to the lectures, and economics finally started to make sense. Later that year, Vlad gave me my first copy of Human Action. That’s how it all started.MI: Why did you decide to pursue an academic career?CED: A career in education was on the radar from the beginning of my undergraduate courses. I had been influenced by my father, who had tried to leave Romania as a young man and study philosophy abroad, but was not able to because of the communist regime. And after I read Mises and Rothbard, who have repeatedly stressed the importance of ideas and economic education, I really wanted to make my own contribution to this goal, just like Vlad had done for me with that class. Now I believe I have made the right decision. I greatly enjoy teaching, and interacting with students is perhaps the most exciting part of the job. But I have also been fortunate to meet outstanding professors who have shown me how rewarding research can be.MI: What convinced you to apply to become a Mises Fellow?CED: The fellowship was a tremendous opportunity to work for a few months at the Mises Institute, and to read economic literature that was otherwise unavailable. Most importantly, it was a great chance to do research under the supervision of professors Joseph Salerno and Mark Thornton, as well as meet the rest of the Mises Institute’s faculty during the Rothbard Graduate Seminar and Mises University. So I did not have to think twice before applying, I knew that it was too good an opportunity to miss. Even so, when I arrived here for the first time in 2011, I was overwhelmed by the warmth and care of the staff, and by how quickly we all became good friends. Each year I have been a Fellow has been one of the most important and formative experiences, both professionally and socially.MI: What was your favorite part of being a Fellow?CED: The benefits of the fact that Professor Salerno’s office is just down the hall, and that his door is always open for the fellows cannot be stressed enough. He has this great capacity to understand your ideas even before they have become clear to you, and he can guide your research with just the right reading recommendations. We also had weekly research seminars where all the Fellows would present their ongoing work, and bounce around ideas, and we were fortunate enough to read and discuss Professor Salerno’s working papers. By the end of the summer, we could tell that our research process had become more structured, more focused, and even that we had new energy for new projects. No other academic experience has had this kind of impact on my development.MI: What topics do you now focus on in your academic work?CED: So far, I have done most of my research in international trade, both on theory and policy. And through the collaboration with Professor Guido Hülsmann (at the University of Angers, France), whom I met at the Mises Institute during my fellowship and who became my PhD adviser, my work has gradually expanded to incorporate monetary theory and international finance. For example, my PhD thesis analyzes the Cantillon effects of inflation in a global context, looking into the impact of monetary policies on trade, finance, and the distribution of wealth. I also currently work as a lecturer in international business at Coventry University in the UK, where I teach my students about international trade, globalization, and the challenges of operating in global markets. But in general, wherever my particular research interests take me, I always return to Mises’s works in search for the grounding framework.MI: How have your experiences with the Mises Institute affected your plans for the future and future academic work?CED: Through the summer fellowships, and the mentorship of Professors Salerno and Hülsmann, the Mises Institute has become my intellectual alma mater. The support network of peers and faculty that the Institute makes available every year, through its resident fellowships and conferences, was crucial to my academic efforts as a student, and now as a teacher. I learned what good research is, and how to strive to achieve it. I learned what a good teacher should be, and I can only hope to be half as good as my teachers. I am humbled and grateful by every renewed opportunity to be part of this wonderful community of scholars.

How a Labor Union Keeps Mixed Martial Arts Illegal in New York

20 July, 2015 - 06:00
This month, the Ultimate Fighting Championship (UFC) experienced one of its biggest Pay-Per-View events ever with “UFC 189,” live from Las Vegas, Nevada. Mixed Martial Arts (MMA) is widely considered to be the fastest growing sport in America and perhaps even the world. Thus, many different cities both inside and outside the United States have hosted MMA events. But in one state, New York, MMA remains illegal, and will likely remain that way for at least one more year. The sport is legal and regulated in the other 49 states.The inability of New York legislators to end the prohibition of MMA remained the norm once again this year after a legalization bill was not brought before the New York State Assembly for a vote. The New York State Senate has passed a legalization bill each of the past six years. There was more hope for 2015 after former speaker of the New York Assembly Sheldon Silver, a major opponent of MMA legalization in the state, resigned due to an arrest on federal corruption charges back in January. But alas, there was not even a vote on the bill despite this advantage.Who’s Against MMA?It’s tempting to think that the continued political resistance to state sanctioned MMA bouts is a simple case of government nanny-stating creeping into the world of sports. After all, it was former New York City Mayor Michael Bloomberg who banned trans-fats, public smoking, and extra-large sodas (amongst other things). So perhaps it would make sense that the elected officials in the state of New York would extend the same kind of heavy handedness that Bloomberg so regularly applied to NYC. However, the real story is far more complicated and reeks of far more corruption than do-good politicians who try to run people’s lives.The story of MMA’s continued illegality in the Empire State centers around two of the UFC’s owners, brothers Frank and Lorenzo Fertitta. In addition to the UFC, the Fertittas also own Station Casinos in Las Vegas. This puts them at odds with the powerful Culinary Workers Union since Station Casinos is non-union. This union’s parent organization is called Unite Here and encompasses several different union organizations throughout the country. Unite Here’s headquarters is in New York City, and the union has managed to flex its muscle more effectively in New York. As a result, the union has kept legal MMA out of the state as part of its effort to ensure that businessmen who hire non-union staffs are not allowed to expand their business into New York. Union-bankrolled politicians have apparently been happy to assist in the effort.Arbitrary IllegalityThe politicians who say they wish to ban MMA for safety reasons really have no leg to stand on. There has never been a life altering condition or death associated with the sport. Boxing can’t say the same, as anyone who has merely taken a glimpse of Mohammed Ali in the past twenty plus years can attest to. Football can’t say the same either, as Junior Seau, Dave Duerson, and Mike Webster all passed away long before their time. Both football and boxing are perfectly legal in the state of New York.Not only are the dangers of MMA overblown, but there’s actually even more danger in not legalizing the sport. Just as occurred with alcohol prohibition in the 1920s and early 1930s, alcohol consumption was driven underground and behind closed doors, resulting in increased instances of death, blindness, and organized crime; this is happening with MMA today. MMA activities have been driven underground in New York where it is far more dangerous. Many politicians never seem to learn the lessons of unintended consequences that come from banning something that people want.It appears the New York State Assembly is not only using dirty politics as a roadblock to prevent the expansion of a business which is legal everywhere else in the country, but their continuing prohibition of this business is actually harming those in the state who wish to engage in the prohibited activity. Combine these things with the revenue lost by New York to other states willing to hold sanctioned MMA bouts and it adds up to a very steep price to pay to keep the union bosses happy. So the politicians and the unions may have us believe that this prevented legality is somehow worth it, the reality of the costs tell us that this simply isn’t true.

The Fed’s Confusion Over the "Natural Rate" of Unemployment and Inflation

17 July, 2015 - 06:00
In May, the US unemployment rate stood at 5.5 percent against the rate of 5.3 percent for the “natural unemployment,” also known as the Non-Accelerating Inflation Rate of Unemployment (NAIRU).According to the popular view, once the actual unemployment rate falls to below the NAIRU, or the natural unemployment rate, the rate of inflation tends to accelerate and economic activity becomes overheated. (This acceleration in the rate of inflation takes place through increases in the demand for goods and services. It also lifts the demand for workers and puts pressure on wages, reinforcing the growth in inflation).By this way of thinking, the central bank must step in and lift interest rates to prevent the rate of inflation from getting out of control.Recently however, some experts have raised the possibility that the natural unemployment rate is likely to be much lower than the government official estimate of 5.3 percent. In fact, earlier this year, economists at the Chicago Fed argued that the natural unemployment rate since October last year has fallen to 4.3 percent.The reasons for this decline are demographic changes and an increase in the level of education. (The natural unemployment rate tends to fall, so it is held, with the rising age of the labor force and with its education.)Experts are of the view that these factors should continue to lower the natural unemployment rate for at least the remainder of the decade.It is held that a lower natural rate may help explain why wage inflation and price inflation remain low, despite the actual unemployment rate recently reaching 5.5 percent.Advocates for a lower natural rate also claim a lower rate would mean the Fed can keep interest rates lower for longer without worrying about lifting the rate of inflation.Why NAIRU Is an Arbitrary MeasureThe NAIRU however, is an arbitrary measure; it is derived from a statistical correlation between changes in the consumer price index and the unemployment rate. What matters here for Fed economists and others is whether the theory “works” (i.e., whether it can predict the future rate of increases in the consumer price index).This way of thinking doesn’t consider whether a theory corresponds to reality. Here we have a framework, which implies that “anything goes” as long as one can make accurate predictions.The purpose of a theory however is to present the facts of reality in a simplified form. A theory has to originate from reality and not from some arbitrary idea that is based on a statistical correlation.If “anything goes,” then we could find by means of statistical methods all sorts of formulas that could serve as forecasting devices.For example, let us assume that high correlation has been established between the income of Mr. Jones and the rate of growth in the consumer price index — the higher the rate of increase of Mr. Jones’s income, the higher the rate of increase in the consumer price index.Therefore we could easily conclude that in order to exercise control over the rate of inflation the central bank must carefully watch and control the rate of increases in Mr. Jones’s income. The absurdity of this example matches that of the NAIRU framework.Inflation Is Not Caused by Increased Economic ActivityContrary to mainstream thinking, strong economic activity as such doesn’t cause a general rise in the prices of goods and services and economic overheating labeled as inflation.Regardless of the rate of unemployment, as long as every increase in expenditure is supported by production, no overheating can occur.The overheating emerges once expenditure is rising without the backup of production — for instance, when the money stock is increasing. Once money increases, it generates an exchange of nothing for something, or consumption without preceding production, which leads to the erosion of real wealth.As a rule, rises in the money stock are followed by rises in the prices of goods and services.Prices are another name for the amount of money that people spend on goods they buy.If the amount of money in an economy increases while the number of goods remains unchanged more money will be spent on the given number of goods i.e., prices will increase.Conversely, if the stock of money remains unchanged it is not possible to spend more on all the goods and services; hence no general rise in prices is possible. By the same logic, in a growing economy with a growing number of goods and an unchanged money stock, prices will fall.

The Intellectual Intolerance Behind “Check Your Privilege”

17 July, 2015 - 06:00
A decade ago, no one had ever been told to “check your privilege.” Now it commands an appreciable “market share” in academia and social justice rhetoric. But it does so despite sharply opposed interpretations of its meaning. In fact, its expanded footprint is partly because of its ambiguity.It Could Be an Invitation to DebateIn a sense, “check your privilege” largely amounts to “check your premises” behind your views, and many are willing to recognize that such a reminder can be useful in advancing conversations about social issues.However, I question whether people are so bereft of concern for, or understanding of, one another that they need repetitive “check your privileges” reminders that imply they would believe more accurately and act more effectively if only they were more empathetic. I tend to agree with Adam Smith, in The Theory of Moral Sentiments, that:How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it ... we often derive sorrow from the sorrows of others.Further, repeatedly sermonizing to fix people as a way of “uplifting” them becomes little more than nagging, and any insight it may add gets crowded out. In the same way, repeatedly invoking “check your privilege” tends to destroy its usefulness leaving increased irritation and disharmony.But the Phrase Could Simply Mean “Shut Up”And when does “check your privilege” become code for “be quiet” rather than “evaluate your premises”? “Check your privilege” is about shutting down discussion when the user is making the assertion that you are hopelessly confused in your understanding, and that your opinions amount to aggression (whether “micro-” or “macro-”). This position was wellarticulated decades ago by Robert Heinlein, in The Moon is a Harsh Mistress:Where do you start explaining when a man’s words show there isn’t anything he understands about [a] subject, [but] instead is loaded with preconceptions that don’t fit facts and [he] doesn’t even know …?The assertion of your hopeless confusion then becomes the basis for claims that, unless you are a member of some accepted victimized class, you must be part of the oppressor class. Therefore, as Max Borders put it,Your rights and opinions are invalid and you have no real complaints or suffering because you belong to X group. Or, more to the point, you are obligated to pay because people who look like you in some ways did bad things at some point.In other words, others assert that they don’t need to listen to you, much less respect your arguments.The Ad Hominen AttackThat leap involves several logical failings. Included in that list is the idea that any guilt for what was true of some members of an arbitrarily defined class or group (rather than treating people as the individuals they are) at some point in time passes on to every current and future member of that class or group. In addition, it incorporates the ad hominem fallacy that because you are judged as bad or part of an oppressor class, your argument is false, while conversely, their self-defined goodness and non-oppression means theirs must be true, both of which are unrelated to the logical validity of an argument.Given that “check your privileges” could mean either “remember to be empathetic, so we can better understand and help” or “we can disregard your beliefs and violate your rights,” how can we tell which one is intended?Where confusion reigns, to better understand and help requires the confusion to be replaced with clear, accurate understanding. That, in turn, requires a serious, ongoing “give and take” conversation.However, when “check your privilege” is used to preemptively cut off conversation by stopping those who disagree from any chance to be heard, much less to rebut their demonization and targeting, no improvement in either empathy or results can result. So the key to evaluating “check your privilege” is to ask what would be entailed if it was intended to advance such a serious conversation.How Real Dialogue HappensImportantly, any conversation would not stop at “watch your privileges.” It would only begin there. By itself, the phrase says you are wrong in your understanding or views, but it leaves how completely unspecified, beyond having something to do with membership in some allegedly dominant or privileged group. Stopping the conversation there leaves “check your privileges” as an insult, without any ability to clarify understanding or reduce disagreements or disharmony.Progress toward better understanding and results would require several more steps.It would start by precisely specifying what faulty premises, assumptions, or arguments someone supposedly holds, either included or excluded inappropriately. Then it would explain why it is inappropriate for the issue being considered. It would lay out the correct or appropriate premise that would take its place and articulate the reasons why.Building on that foundation, it would show how the “new and improved” premises would change one’s conclusions. Consequently, it would lay out the appropriate remedy based on the alternative analysis. In the process, it would have to explain how the proposed remedy cannot be explained solely on a narrowly self-interested “more for me” basis, completely apart from the argument offered, as part of laying out the new special privileges that would be created for those put forward as victims. It would also have to explain how others will be affected in order to address the asserted problem, including whether there would be coercive impositions on members of the supposedly dominant or victimizer class who had nothing to do with the “sins of the fathers.”When “check your privilege” means think more carefully about others circumstances, which may be far different than yours, and to be empathetic, it can be useful in advancing our potential for mutual understanding. But it has to be only the beginning of a much farther-reaching discussion to bear fruit — a discussion which, carefully and earnestly pursued, would lead us back to the self-ownership and voluntary arrangements of liberty.In contrast, when “check your privilege” is used as a magic phrase to peremptorily end “social justice” discussions, it is the assertion of a special privilege for some to be allowed to define themselves as white hats and those who disagree as black hats, without ever having to make a real argument. It also allows users to turn it into an epithet of social demonization to try to impose their “solutions,” always at the expense of the supposed black hats. In the process, it undermines social cooperation by undermining the rights upon which it is built.

Jeb Bush’s Advice: Work Harder, Not Smarter

16 July, 2015 - 06:00
In a recent interview, Jeb Bush said that in order for the United States to reach a higher level of economic growth, “people need to work longer hours.”Leftists immediately jumped on this comment as proof that Bush is horribly out of touch with ordinary working Americans.Bush soon backtracked and attempted to explain that what he really meant was that there are too many people working fewer hours than they would like. In other words, Bush explained, work force participation is too low for a society in which many people would in fact like more gainful employment.It is, of course, impossible to know Bush’s true intent. And, the fact that Bush — who’s never had to worry if he’ll make next month’s house payment — is a member of the crony-capitalist powerhouse known as The Bush Family doesn’t necessarily prove that he is unaware that people can only work so many hours in a day.What Bush’s comment likely betrays however, is a lack of understanding about how economies actually grow, thrive, and become more productive. If Bush truly wanted to do what was necessary to spur higher rates of economic growth, he would be talking about slashing the power of the central bank, making draconian cuts to government spending, abolishing income taxes, and gutting government regulations. He would condemn all government bailouts and advocate for a return to hard money, such as gold.I won’t be holding my breath for Bush to credibly support even limited versions of these positions, however.Work Smarter, Not HarderBut Bush isn’t totally wrong, either. To a certain extent, working more hours can produce more wealth. Obviously, working eight hours chopping wood produces more chopped wood than can be done in only four hours. At least, this is true if all I have is an axe and some wood. So, in this case, more work means more production.But, if I can get my hands on a machine that can chop wood faster, I’ll be able to get the same amount of chopped wood in only a fraction of the time.The problem with the “work more to get wealthier” position is that it assumes a static world in which entrepreneurship and technical innovation can’t be used to produce more wealth without increasing the number of hours worked.On the other hand, when your thrifty grandpa told you to “work smarter, not harder” he assumed the possibility of labor-saving innovation.So How Do We Make Work More Productive?Studies have long shown that once workers work beyond fifty hours in a week, they become considerably less productive and even a danger to themselves and other workers in many environments. So there is a real physical limit to simply working more. The way we get beyond these limitations is to use techniques and technologies that allow for more production in less time.The first step, of course, is to think up new ideas for labor-saving strategies. Ultimately, though, implementing those ideas requires the use of previously saved wealth. In other words, we need money to build these labor-saving machines (assuming a money-based economy).And how do we get this money? Well, we have to save it up by refraining from consumption. Ultimately, then, the key components to having more productive workers is to save, and then to put those savings to good use. Mises explained the necessity of all these components (in The Anti-Capitalistic Mentality):Neither have capital or capital goods in themselves the power to raise the productivity of natural resources and of human labor. Only if the fruits of saving are wisely employed or invested, do they increase the output per unit of the input of national resources and of labor. If this is not the case, they are dissipated or wasted.Obstacles to More ProductivityUnfortunately, we have an economy and a government that are both oriented against all the necessary ingredients for sustainable growth in productivity, savings, and innovation.First of all, there is the regulatory state which favors large, politically-connected industry players at the expense of new products, new firms, and new innovations. New firms that endanger incumbent firms will be outlawed or penalized so as to make them less competitive. Advances in productivity will be lost.And then, of course, there is the central bank which, by artificially suppressing interest rates, reliably punishes saving and encourages spending on consumer goods. The end result is an economy geared toward consumption, and not toward saving and investment. This, in turn, stifles the creation of true loanable funds that can be put toward a production-based economy instead of a consumption-based one.And finally, there is the problem of inflationary fiat currency, and the effects of an inflationary economy on savings, investment, and real wages. Our present monetary situation of slow but relentless inflation leads to falling real wages while disposable income goes not into future production, but into present consumption.Rothbard explained how an economy based on hard money would be different:The gently falling price level [would] mean a steady annual rise in the purchasing power of the dollar or franc, encouraging the saving of money and investment in future production. A rising output and falling price level signifies a steady increase in the standard of living for each person in society. Typically, the cost of living falls steadily, while money wage rates remain the same, meaning that “real” wage rates, or the living standards of every worker, increase steadily year by year. We are now so conditioned by permanent price inflation that the idea of prices falling every year is difficult to grasp. And yet, prices generally fell every year from the beginning of the Industrial Revolution in the latter part of the eighteenth century until 1940, with the exception of periods of major war, when the governments inflated the money supply radically and drove up prices, after which they would gradually fall once more. We have to realize that falling prices did not mean depression, since costs were falling due to increased productivity, so that profits were not sinking.An economy based on sound money leads to increased productivity, increases in real wages, and investment in the future. What we have now, however, is the opposite of that. We have a consumption-based economy in which real wages for many fall due to price inflation, and what wages are earned are better spent rather than invested — which means less capital is available for productivity-increasing innovations.We Want a Smaller Work ForceIn his expanded explanation, Bush said that we need more people working more hours to increase productivity. That would be true if the only way of building wealth was to work more in a world devoid of improvements in productivity.Fortunately, we don’t live in that world, and in the world we do have, our goal should really be to achieve continued growth in standards of living while having fewer people work fewer hours.It was the Industrial Revolution, after all, that allowed much of humanity to escape, for the first time, the daily drudgery of working long hours with no relief in sight, and with little time left over for education, leisure, or charitable activities.Since then, thanks to a limited but meaningful victory of the ideology of laissez-faire, worker productivity has continually increased in the centuries since the Industrial Revolution first appeared, and today, we would hardly have to work more than a couple of days a week to achieve the same standard of living enjoyed by our ancestors in the eighteenth century. We don’t work more hours than our great-great grandparents. We almost certainly work fewer hours — by choice.Bush is right, however, that workers should have the opportunity to work more hours if they wish. He’s right that our present economy has forced many workers into part time work. But if more economic growth is what we want, we have to look beyond a goal of having more people do more work or the misguided idea that more employment is the key to a better economy. True economic growth comes from saving, investment, and an entrepreneurial economy that is becoming less and less possible in our present world.

How Student Loans Create Demand for Useless Degrees

15 July, 2015 - 06:00
Last week, former Secretary of Education and US Senator Lamar Alexander wrote in the Wall Street Journal that a college degree is both affordable and an excellent investment. He repeated the usual talking point about how a college degree increases lifetime earnings by a million dollars, “on average.” That part about averages is perhaps the most important part, since all college degrees are certainly not created equal. In fact, once we start to look at the details, we find that a degree may not be the great deal many higher-education boosters seem to think it is.In my home state of Minnesota, for example, the cost of obtaining a four-year degree at the University of Minnesota for a resident of Minnesota, North Dakota, South Dakota, Manitoba, or Wisconsin is $100,720 (including room and board and miscellaneous fees). For private schools in Minnesota such as St. Olaf, however, the situation is even worse. A four-year degree at this institution will cost $210,920.This cost compares to an average starting salary for 2014 college graduates of $48,707. However, like GDP numbers this number is misleading because it is an average of all individuals who obtained a four-year degree in any academic field. Regarding the average student loan debt of an individual who graduated in 2013, about 70 percent of these graduates left college with an average student loan debt of $28,400. This entails the average student starting to pay back these loans six months after graduation or upon leaving school without a degree. The reality of this situation is that assuming a student loan interest rate of 6.8 percent and a ten-year repayment period, the average student will be paying $326.83 every month for 120 months or a cumulative total re-payment of $39,219.28. Depending upon a student’s job, this amount can be a substantial monthly financial burden for the average graduate.All Degrees Are Not of Equal ValueUnfortunately, there is no price incentive for students to choose degrees that are most likely to enable them to pay back loans quickly or easily. In other words, these federal student loans are subsidizing a lack of discrimination in students’ major choice. A person majoring in communications can access the same loans as a student majoring in engineering. Both of these students would also pay the same interest rate, which would not occur in a free market.In an unhampered market, majors that have a higher probability of default should be required to pay a higher interest rate on money borrowed than majors with a lower probability of default. In summary, it is not just the federal government’s subsidization of student loans that is increasing the cost of college, but the fact that demand for low-paying and high-default majors is increasing, because loans for these majors are supplied at the same price as a major providing high salaries to its possessor with a low probability of default.And which programs are the most likely to pay off for the student? The top five highest paying bachelor’s degrees include: petroleum engineering, actuarial mathematics, nuclear engineering, chemical engineering and electronics and communications engineering, while the top five lowest paying bachelor’s degrees are: animal science, social work, child development and psychology, theological and ministerial studies, and human development, family studies, and related services. Petroleum engineering has an average starting salary of $93,500 while animal science has an average starting salary of $32,700. This breaks down for a monthly salary for the petroleum engineer of $7,761.67 versus a person working in animal science with a monthly salary of $2,725. Based on the average monthly payment mentioned above, this would equate to a burden of 4.2 percent of monthly income (petroleum engineer) versus a burden of 12 percent of monthly income (animal science). This debt burden is exacerbated by the fact that it is now nearly impossible to have student loan debts wiped away even if one declares bankruptcy.Ignoring Careers That Don’t Require a DegreeMeanwhile, there are few government loan programs geared toward funding an education in the trades. And yet, for many prospective college students, the trades might be a much more lucrative option. Using the example of plumbing, the average plumber earns $53,820 per year with the employer paying the apprentice a wage and training.Acknowledging the fact that this average salary is for master plumbers, it still equates to a $20,000 salary difference between it and someone with a four-year degree in animal science while having no student loans as a bonus. Outside of earning a four-year degree in science, technology, engineering, math or, accounting with an average starting salary of $53,300, nursing with an average starting salary of $53,624, or as a family practice doctor on the lower end of physician pay of $161,000, society might be better served if parents and educators would stop using the canard that a four-year degree is always worth the cost outside of a few majors mentioned above. Encouraging students to consider the trades and parents to give their children the money they would spend on a four-year college degree to put a down payment on a house might be a better use of finite economic resources. The alternative of forcing the proverbial square peg into a round hole will condemn another generation to student debt slavery forcing them to put off buying a home or getting married.Loans Drive Overall DemandThe root of the problem is intervention by the federal government in providing student loans. Since 1965 when President Johnson signed the Higher Education Act tuition, room, and board has increased from $1,105 per year to $18,943 in 2014–2015. This is an increase of 1,714 percent in 50 years. In addition, the Higher Education Act of 1965 created loans which are made by private institutions yet guaranteed by the federal government and capped at 6.8 percent. In case of default on the loans, the federal government — that is, the taxpayers — pick up the tab in order for these lenders to recover 95 cents on every dollar lent. Loaning these funds at below market interest rates and with the federal government backing up these risky loans has led to massive malinvestment as the percentage of high-school graduates enrolled in some form of higher education has increased from 10 percent before World War II to 70 percent by the 1990s. Getting a four-year degree in nearly any academic field seemed to be the way in which to enter or remain in the middle class.But just as with the housing bubble, keeping interest below market levels while increasing the money supply in terms of loans — while having the taxpayer on the hook for a majority of these same loans — leads to an avalanche of defaults and is a recipe for disaster.

How Student Loans Create Demand for Degree Programs

15 July, 2015 - 06:00
Last week, former Secretary of Education and US Senator Lamar Alexander wrote in the Wall Street Journal that a college degree is both affordable and an excellent investment. He repeated the usual talking point about how a college degree increases lifetime earnings by a million dollars, “on average.” That part about averages is perhaps the most important part, since all college degrees are certainly not created equal. In fact, once we start to look at the details, we find that a degree may not be the great deal many higher-education boosters seem to think it is.In my home state of Minnesota, for example, the cost of obtaining a four-year degree at the University of Minnesota for a resident of Minnesota, North Dakota, South Dakota, Manitoba, or Wisconsin is $100,720 (including room and board and miscellaneous fees). For private schools in Minnesota such as St. Olaf, however, the situation is even worse. A four-year degree at this institution will cost $210,920.This cost compares to an average starting salary for 2014 college graduates of $48,707. However, like GDP numbers this number is misleading because it is an average of all individuals who obtained a four-year degree in any academic field. Regarding the average student loan debt of an individual who graduated in 2013, about 70 percent of these graduates left college with an average student loan debt of $28,400. This entails the average student starting to pay back these loans six months after graduation or upon leaving school without a degree. The reality of this situation is that assuming a student loan interest rate of 6.8 percent and a ten-year repayment period, the average student will be paying $326.83 every month for 120 months or a cumulative total re-payment of $39,219.28. Depending upon a student’s job, this amount can be a substantial monthly financial burden for the average graduate.All Degrees Are Not of Equal ValueUnfortunately, there is no price incentive for students to choose degrees that are most likely to enable them to pay back loans quickly or easily. In other words, these federal student loans are subsidizing a lack of discrimination in students’ major choice. A person majoring in communications can access the same loans as a student majoring in engineering. Both of these students would also pay the same interest rate, which would not occur in a free market.In an unhampered market, majors that have a higher probability of default should be required to pay a higher interest rate on money borrowed than majors with a lower probability of default. In summary, it is not just the federal government’s subsidization of student loans that is increasing the cost of college, but the fact that demand for low-paying and high-default majors is increasing, because loans for these majors are supplied at the same price as a major providing high salaries to its possessor with a low probability of default.And which programs are the most likely to pay off for the student? The top five highest paying bachelor’s degrees include: petroleum engineering, actuarial mathematics, nuclear engineering, chemical engineering and electronics and communications engineering, while the top five lowest paying bachelor’s degrees are: animal science, social work, child development and psychology, theological and ministerial studies, and human development, family studies, and related services. Petroleum engineering has an average starting salary of $93,500 while animal science has an average starting salary of $32,700. This breaks down for a monthly salary for the petroleum engineer of $7,761.67 versus a person working in animal science with a monthly salary of $2,725. Based on the average monthly payment mentioned above, this would equate to a burden of 4.2 percent of monthly income (petroleum engineer) versus a burden of 12 percent of monthly income (animal science). This debt burden is exacerbated by the fact that it is now nearly impossible to have student loan debts wiped away even if one declares bankruptcy.Ignoring Careers That Don’t Require a DegreeMeanwhile, there are few government loan programs geared toward funding an education in the trades. And yet, for many prospective college students, the trades might be a much more lucrative option. Using the example of plumbing, the average plumber earns $53,820 per year with the employer paying the apprentice a wage and training.Acknowledging the fact that this average salary is for master plumbers, it still equates to a $20,000 salary difference between it and someone with a four-year degree in animal science while having no student loans as a bonus. Outside of earning a four-year degree in science, technology, engineering, math or, accounting with an average starting salary of $53,300, nursing with an average starting salary of $53,624, or as a family practice doctor on the lower end of physician pay of $161,000, society might be better served if parents and educators would stop using the canard that a four-year degree is always worth the cost outside of a few majors mentioned above. Encouraging students to consider the trades and parents to give their children the money they would spend on a four-year college degree to put a down payment on a house might be a better use of finite economic resources. The alternative of forcing the proverbial square peg into a round hole will condemn another generation to student debt slavery forcing them to put off buying a home or getting married.Loans DriveThe root of the problem is intervention by the federal government in providing student loans. Since 1965 when President Johnson signed the Higher Education Act tuition, room, and board has increased from $1,105 per year to $18,943 in 2014–2015. This is an increase of 1,714 percent in 50 years. In addition, the Higher Education Act of 1965 created loans which are made by private institutions yet guaranteed by the federal government and capped at 6.8 percent. In case of default on the loans, the federal government — that is, the taxpayers — pick up the tab in order for these lenders to recover 95 cents on every dollar lent. Loaning these funds at below market interest rates and with the federal government backing up these risky loans has led to massive malinvestment as the percentage of high-school graduates enrolled in some form of higher education has increased from 10 percent before World War II to 70 percent by the 1990s. Getting a four-year degree in nearly any academic field seemed to be the way in which to enter or remain in the middle class.But just as with the housing bubble, keeping interest below market levels while increasing the money supply in terms of loans — while having the taxpayer on the hook for a majority of these same loans — leads to an avalanche of defaults and is a recipe for disaster.

The Broken Window Fallacy and "Blessings" of Destruction in the Real World

14 July, 2015 - 06:00
In the early nineteenth century, Bastiat posed the story of a young man who throws a brick through the window of a baker’s shop. We’re told that this may have a bright side — that the baker must now pay a glazier to fix the window, who will then use that income to spend elsewhere, creating a ripple effect that benefits many.Such thinking is reminiscent of what would later be used to justify the logic behind the Keynesian multiplier. Keynes would later write in the General Theory, “Pyramid building, earthquakes, even wars may serve to increase wealth.”The Opportunity Cost of Fixing ThingsAs many readers already know, such logic fails to take into account the opportunity cost of the broken window. Had the window not been broken, the baker wouldn’t have paid the glazier, but maybe he would’ve spent the money on a pair of shoes instead. The shoemaker would then have income to spend elsewhere, and the same multiplier would take place — but society would be better off by exactly one window.Before diving into the modern real-world evidence that substantiates Bastiat’s brilliant essays, it’s important to distinguish between income and wealth. Destruction may boost income in the short run, but reduce a society’s net amount of wealth (the purpose of production in the first place). To play off an interesting piece by Ryan Young in the American Spectator, Suppose we have a small island, whereas all wealth is in the value of homes, personal property, business properties, and infrastructure, with a value of $10 million. Now let’s say that economic growth is slow, many are unemployed, and aggregate wealth is projected to increase to $11 million next year.Next, a violent natural disaster occurs, destroying the nation’s entire stock of wealth. Since economic growth was slow and many were unemployed, everyone on the island directs their attention to rebuilding from the disaster, and within a year, everything is back to normal. In the statistics, GDP is boosted by $10 million — ten times higher than it would’ve otherwise risen, yet the wealth of society remains unchanged.Such a scenario is reflective of what occurs in the short run. In May of 2012, Paul Krugman highlighted Japan’s superior first quarter economic growth relative to other nations, attributing it to increased government spending following the tsunami in 2011. But as Young noted, this doesn’t take into effect that natural disasters have on a nation’s stock of wealth.The “Benefits” of Deadly CyclonesNow, onto the real-world evidence. Published in the National Bureau of Economic Research, economists Solomon M. Hsiang and Amir S. Jina looked at the long-run economic effects of environmental catastrophe, focusing on destruction from cyclones in particular. Nearly seven thousand cyclones that occurred from 1950–2008 were studied. The conclusions were that the worse the disaster, the worse long-run economic growth suffered. According to their data, “fifteen years after a strike, GDP is 0.38 percentage points lower for every 1 m/s of wind speed.”While I constructed an example earlier where destruction would have positive effects on income in the short run, such effects disappear when the short run becomes the long run. Their research also found that a disaster in the 90th percentile reduced incomes by 7.4 percent two decades after. This led the authors to reject the “creative destruction” hypothesis in regards to natural disasters.Defenders of the supposed blessings of destruction also have to take into account another variable: the value of human life. Following an earthquake in May of 2008 that killed 80,000 in the Sichuan Province, the Chinese government’s State Information Center found a silver lining: economic growth would be boosted by an additional 0.3 percent that year due to money spent on rebuilding the devastated region. Even assuming that this growth wasn’t offset by slower growth in the long run, it’s still not a viable plan. Economic growth in China was 18.1 percent in 2009, growing by nearly five trillion yuan from the year prior. Assuming that the Chinese government is correct and 0.3 percent of that was attributable to rebuilding from the disaster, this means that GDP was boosted by roughly 5,300,000 yuan for each death, or roughly $860,000. To put that in perspective, the Environmental Protection agency in the US sets the value of a human life at $9.1 million, while the Food and Drug Administration pegs that figure at $7.9 million.The purpose of Bastiat’s essay on the broken window was to illustrate the concept of opportunity cost at a minor level, focusing on a minor act of vandalism. As we’ve seen from real-world evidence, the opportunity cost of destruction is seldom society being worse off by only a single window, but much worse when we take into account the long-run effects it has on income and wealth, and human life.

The Rise of the Medical Bureaucrat and Centralized Health Care

13 July, 2015 - 06:00
In contrast to the expected shortage of tens of thousands of physicians, there appears to be an abundance of health care administrators. Economists and physician-activists at Physicians for a National Health Program (PNHP) have invoked the below graph and the administrative bloat it shows as reason to promote a single-payer system. With a single payer, they argue, complexity will be greatly reduced, the administrative burden wiped out, and costs brought under control:For those who contend that administrative positions consist chiefly of make-work jobs soaking up a glut of workers otherwise destined to swell the ranks of the unemployed, this outcome could indeed be welcome. Unfortunately, if PNHP gets its wish, we may all discover that gluts and shortages are enhanced, not avoided, by the central planning process that would necessarily accompany the establishment of this program.A Hayekian Perspective on Centralizing Health-Care KnowledgeReflecting on the way by which scarce resources are allocated, Friedrich Hayek argued that coordination of economic activity ultimately depends on localized and dispersed knowledge, knowledge that no single person or authority can ever claim to possess.In his brief essay on “The use of knowledge in society,” Hayek wrote:the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is one of temporary opportunities, or the arbitrageur who gains from local differences in commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.Only in a decentralized system of decision-making, where price fluctuations can adjust to the reality of needs and provisions, are major gluts and shortages avoided. In contrast, a centrally planned economy typically relies on quantitative models to forecast supply and demand and set prices, and such models either overlook the importance of local knowledge or cannot adequately take it into account:If it is today so widely assumed that [experts] will be in a better position [to use knowledge], it is because one kind of knowledge, scientific knowledge, now occupies so prominent a place in public imagination that we tend to forget that it is not the only kind that is relevant.... a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. (emphasis mine)Of all economic sectors, health care should clearly rank among those most dependent on local knowledge. After all, how to best treat a patient is decidedly circumscribed in the here and now. Yet, lured by the idea that medicine is a scientific enterprise, we persevere in our attempt to manage health care with the same methods that would fail to optimize the construction and distribution of even a simple pencil.Codes and Data are Not KnowledgeIt is particularly noteworthy that the PNHP graph depicts the administrative workforce as shooting up in the early 1990s, for it is around that time that payment for medical services would become highly dependent on a byzantine scheme of codification, invented precisely to convey to central authorities in charge of health insurance crucial information about what is taking place in the privacy of medical offices, within the confines of operating rooms, or at hospital bedsides.In 1992, with the passage of the Medicare Fee Schedule, use of this coding system became mandatory. From then on, clinical care would be spoken in the lingua franca of CPT, ICD, and E/M codes, and the term “documentation” would take on a bitter significance for doctors.But translating the what, how, and why of local medicine into cryptic ciphers for remote bureaucrats does not make the business of health care any more intelligible to the central planner, regardless of whether the codes are transmitted by an archaic fax machine or digitized and made immediately accessible by means of mandatory electronic health records systems.Codes and data, of course, are not knowledge. Hayek’s shipper engaging in tramp trade can make a judgment about the significance of empty spots on a boat because the context associated with that information elicits meaning based on which he acts.In contrast, a CPT code 99204-21 (new patient visit, E/M coding level 4, prolonged service) associated with ICD-9 code 786.50 (chest pain, unspecified) hardly conveys any real knowledge and cannot possibly be a basis on which relevant decisions can be made or value established. These codes cannot help determine the needed supply of doctors, nor that of drugs and other material necessities. The only tangible effect of the coding scheme, then, is simply to require a massive influx of administrators charged with “interpreting” and acting upon its obscure data signals.And when price is divorced from value, shortages and gluts necessarily ensue. Although a single payer could conceivably reduce administrative burden and cut costs, its doing so will never be on the basis of “knowledge of the particular circumstances of time and place” that is at the heart of genuine medical care.

It’s Not Just Debt: Government Spending and Easy Money Fuel the Greek Crisis

10 July, 2015 - 06:00
The Greek government continues to negotiate with international creditors following its recent default on its 1.6 billion euro loan repayment to the International Monetary Fund (IMF).Consequently, Greece runs the risk of losing access to a 1.8 billion euro loan tranche and 10.0 billion euros for recapitalizing banks.Commentators are of the view that the key factor behind the troubles in Greece is high government debt, which as a percentage of GDP stood at over 177 percent in 2014 against 79.6 percent in 1990.But it is not debt as such that is behind the current crisis in Greece. Large government outlays and strong increases in the money supply are being ignored in most analyzes of the Greek crisis.Since early 2000, the underlying trend in the growth momentum of government outlays was heading up with the yearly rate of growth closing at 45.5 percent in March 2009. Since then, the trend in the growth momentum has been declining.Year on year the rate of growth of Greece’s monetary measure AMS stood at 20 percent in July 2004. It stood at a lofty 18 percent in August 2009 before sliding to minus 13.8 percent in April this year.Loose fiscal and monetary policies have been instrumental in the generation of various non-productive activities that have been squandering wealth.Easy Money Weakens the Wealth-Generation ProcessA fall in the growth momentum of both government outlays and the money supply is good for the wealth generation process.In other words, a decline in the growth momentum of government outlays and money supply (see charts) has arrested the diversion of wealth to non-productive activities from wealth generating activities.The current crisis is centered around non-productive activities that can no longer divert wealth from wealth generating activities on account of a fall in both government spending and the rate of growth in the money supply.From this perspective this is good news for the Greek economy, and what is now needed is a tight grip on government outlays and to allow the plunge in the money supply to continue.Greece’s wealth generating process has been badly damaged as a result of past loose fiscal and monetary policies. Thus, reverting back to loose fiscal and monetary policies, as suggested by various famous economists such as a Nobel Prize Laureate in economics Joseph Stiglitz, is going to make things much worse.Remember, neither more government outlays nor more monetary pumping can generate real wealth. Only the strengthening of the wealth generating private sector can do that.The Damage That Has Been DoneNow, since currently non-productive activities are likely to comprise a large portion of total activities, the effect that is generated from their demise appears to be very severe.After closing at 122 in April 2008, the industrial production index plunged to 91 by March this year — a fall of 25.3 percent. The unemployment rate climbed from 7.3 percent in May 2008 to 25.6 percent in March this year.Any threat to the financial systems of other European economies is not due to the Greek default, but instead is a result of loose fiscal and monetary policies that have damaged the savings bases of various European countries.Rather than continuing to support wealth-squandering activities and thereby making things much worse, a better way is to allow wealth generators to step in and let them restart the wealth generating process. This means that all the loopholes of money creation should be sealed and government outlays should be cut to the bone. Obviously such measures will be painful for various individuals employed in non-wealth generating activities. Failing to reduce non-productive activities however will only prolong the agony — it is not possible to create real wealth out of nothing.

Immigration Policy Must Be Decentralized

8 July, 2015 - 06:00
Last month, the United States Supreme Court declined to take up a case involving Arizona’s and Kansas’s attempts to require proof of citizenship to vote in federal elections. The two states sought SCOTUS review in an attempt to overturn a prohibition imposed by lower federal courts. Had the two states been allowed to impose more stringent citizenship requirements, the effect on the voting population would have likely been small, but the overall legal effect of the court’s decision is significant.The refusal of the Supreme Court to hear the case yet again sends a message to state and local governments that the federal government shall continue to centrally direct election and immigration law. As noted in The Hill:“This is a very big deal,” Rick Hasen, a University of California Irvine law professor, wrote on his election law blog. “Kobach had the potential to shift more power away from the federal government in administering elections toward the states.”Centrally Planning Immigration PolicyThe Arizona and Kansas voting restrictions had been efforts to affect national immigration policy via state laws. But, as has been the trend over the past century, the federal government has repeatedly asserted itself as the last word in policymaking in citizenship and immigration matters.Indeed, the Federal Courts explicitly declared the states powerless to attempt to control immigration within their own borders when Federal Judge Mariana Pfaelzer struck down California’s voter-approved Proposition 187 in 1994 and wrote:California is powerless to enact its own legislative scheme to regulate immigration. It is likewise powerless to enact its own legislative scheme to regulate alien access to public benefits.Naturally, this decision sent the message nationwide that states should not bother to limit access to taxpayer-funded amenities (with public education being a central issue) because the federal government will simply declare such efforts illegal.Thus, through these cases, federal courts have made it clear that no state (or anyone other than the feds) can meaningfully prevent participation by non-citizens in political activities such as elections, nor can the states limit the ways in which immigrants can access government benefits, even when those benefits are locally-funded. The net effect is an imposition of a migrant subsidy scheme across all states regardless of the local economic and demographic realities, while ignoring the fact that residents of certain states bear a greater tax burden in subsidizing migrants.The Answer Is Not More Government InterventionAt this point, it is important to note that the antidote to government subsidies (i.e., government intervention) is not more intervention. If the federal government insists that the taxpayers subsidize the immigrant population, then the proper response is to simply eliminate the subsidy. This is exactly what voters had attempted to do with Proposition 187 (and Arizona Proposition 200).This correct approach is to be contrasted with the draconian methods employed by other states which have centered on punishing employers and landlords (and the immigrants themselves, of course) for engaging in private contracts and non-violent market transactions.Such efforts only expand the size and scope of government, and they ultimately involve federal agents raiding private establishments and combing through lease agreements and payroll documentation to make sure that workers and renters bear an arbitrarily-assigned status as “legal” immigrants.When states turn to these methods, we end up with the worst of both worlds, since not surprisingly, federal courts have been relatively tolerant of state and local efforts to punish local businesses and employers while at the same time remaining steadfast in opposition to efforts to limit the scope of government programs.The Answer Is Decentralization and Smaller GovernmentThus, while states and local government are given a small space to act around the edges of immigration policy, all regions and states are tethered to a single national policy on citizenship and immigration. However, we can guess that, if they were given greater leeway to do so, states would offer a very diverse array of immigration-related policies.In research conducted by Huyen Pham and Pham Hoang Van, the authors attempt to measure the legal “climate” for immigrants for all fifty states by evaluating state and local legislative and legal efforts to limit (or encourage) immigrant activity in each state. The authors unfortunately do not distinguish between efforts that restrict private property (i.e., employment restrictions) and efforts that restrict government growth (i.e., limiting health care benefits). In the following chart, we find Pham’s and Van’s rankings: Source: Immigrant Climate Index from “Measuring the Climate for Immigrants: A State by State Analysis,” by Huyen Pham and Pham Hoang Van The legislative and legal climates differ broadly, and this suggests that ideology, economics, and demographics produce some areas (i.e., California and Illinois) that tend to favor and subsidize immigration while other areas (i.e., Arizona and Virginia) would thoroughly limit subsidies.If we took this a step further and gave states and localities the power to determine all eligibility to both state and federal benefits, such measures by themselves (assuming benefits were not transferrable across state lines) would serve to place the burdens of subsidized immigration onto the states that mandate it.And, of course, there’s nothing to say that the state level is the optimal level of decentralization. As with any truly laissez-faire proposal, the ultimate goal is complete privatization of immigration policy. That is, the ability of immigrants to relocate to a community would be dependent on the dispersed and individual decisions of employers and other property owners who can decide on their own to employ or house migrants in the community. This is, of course, the democracy of the marketplace described by Mises in which individual persons — by making decisions about whom to employ or sell property to — collectively determine who is a member of each community. Any employer who wished to fully staff his operation with so-called illegal immigrants would be legally free to do so, and his decision would be subject to approval or veto by his customers, not by arbitrary government fiat.But even in the absence of this ideal, movement toward more locally-focused immigration policy gives existing residents greater choice in where to reside and place their property. Without decentralization, the taxpayers (many of whom will want to live in jurisdictions with laissez-faire attitudes toward conducting business with migrants) are powerless to make meaningful choices in this matter without completely uprooting his life and leaving the country.The Problem with Imposing Top-Down PolicyThe goal of laissez-faire immigration policy is to both diminish the availability to taxpayer-funded programs for immigrants (on the way to eliminating these programs overall) while also avoiding anti-private-property regulations that prohibit owners from freely contracting with immigrants in general.As we have seen, there is no technological or practical barrier to decentralizing this effort immediately. As is so often the case, however, there is significant ideological and legal opposition.Among those who insist on a single nationwide policy are those who assert that the best way to ensure the protection of property rights (for both property owners and migrants) is to impose it from above.Unfortunately, we’ve seen this movie before on other issues ranging from eminent domain to drug policy. In each case, however, the more practical, enduring, and least-risky solutions come from decentralization.Following the Supreme Court’s Kelo decision in 2005, for example, many advocates for free markets condemned the court for not issuing a top-down prohibition on certain types of eminent domain. As Lew Rockwell pointed out, however, Kelo was one of the few cases in which the court was actually correct in deferring to local control. Even when the central government agrees with us, political decentralization remains the prudent choice:We are … opposed to top-down political control over wide geographic regions, even when they are instituted in the name of liberty.Hence it would be no victory for your liberty if, for example, the Chinese government assumed jurisdiction over your downtown streets in order to liberate them from zoning ordinances. Zoning violates property rights, but imperialism violates the right of a people to govern themselves. The Chinese government lacks both jurisdiction and moral standing to intervene. What goes for the Chinese government goes for any distant government that presumes control over government closer to home ...There are several reasons for [this position].First, under decentralization, jurisdictions must compete for residents and capital, which provides some incentive for greater degrees of freedom, if only because local despotism is neither popular nor productive. If despots insist on ruling anyway, people and capital will find a way to leave. If there is only one will and one actor, you cannot escape ...This is certainly true in the case of immigration policy. Those states that turn to raiding employers and fining landlords as “solutions” to perceived problems with immigrants will lose their most productive citizens and property owners to states that shy away from such interventionism. Moreover, those states that choose to heavily subsidize immigration will also suffer the loss of many of their taxpayers.In such a system, would some states still indulge in massive redistribution schemes and other unsustainable public policies? There is no doubt that would occur, but it’s best to limit the damage to a handful of states than to impose the same fate on everyone nationwide.

Portugal’s Experiment in Drug Decriminalization Has Been a Success

6 July, 2015 - 06:00
This month, Portugal celebrates fourteen years of drug decriminalization. The grand experiment is now considered a happy success considering it was adopted out of desperation and in the face of dire warnings from proponents of the global drug war.What Led to DecriminalizationDuring the mid-twentieth century, Portugal experienced fifty years of military dictatorship, and when leftist democratic control was reestablished in 1974, many expatriate Portuguese returned to Portugal from its colonies. Of course, many of these people were dissidents, outsiders, and outcasts, and many of them used illegal drugs.Over the next twenty-five years, there was a surge in drug use, drug abuse, addiction, overdoses, and eventually a very substantial prevalence of HIV/AIDS and other dirty-needle-related diseases. At the peak of this drug epidemic the rate of drug addiction and HIV/AIDS infection was “considerably higher” than the rest of Europe according to Dr. João Goulão, the longtime drug czar of Portugal.Goulão was on the eleven member anti-drug commission that formulated law 30/2000 which decriminalized all drugs starting July 1, 2001.The “grand experiment” seems to be the result of two factors. The first is that Portugal is a relatively poor European country and was unable to fight the war on drugs on every front.The second factor is that the commission was relatively non-partisan and simply adopted the common sense notion that drug abuse and addiction are not criminal problems for the police to solve. Drug abuse and addiction are medical and psychological problems that are better solved by the individual with the help of professionals and social pressures.Baby Steps Away from the Drug WarDecriminalization is just one baby step away from the war on drugs, and drug smugglers and dealers are still sought out and punished. Individuals are only permitted to possess very small amounts of illegal drugs without being punished as a dealer. Under current laws, you can still be arrested and sent to counselors, but you do not face imprisonment unless you are an uncooperative multiple offender.While certainly not ideal, decriminalization has straightforward benefits over complete prohibition. First, otherwise law-abiding citizens will not be criminalized for possessing illegal drugs. Second, drug addicts will be more likely to seek professional help when government treats addiction as a medical rather than criminal problem. Third, the police will have more resources to address real crimes and possibly to provide subsidies for drug treatment programs. Fourth, drug addicts will turn away from dangerous synthetic drug substitutes and turn more to the natural illegal drugs like marijuana and cocaine. Fifth, if needles are legal too, then you should see fewer cases of diseases such as HIV/AIDS and hepatitis. Sixth, junkie ghettos will shrink in size and visibility. In sum, decriminalization should result in fewer people dying and being sent to prison and more people living “normal” lives.Of course, the biggest concern prior to decriminalization was the quantity of illegal drugs consumed. That concern is even more dominant when discussing outright legalization of drugs. Back when Portugal was considering decriminalization, I was interviewed by the "Time Magazine of Portugal,” and the reporter stressed that this was the prime concern in Portugal at the time. I responded that you cannot know the answer to that question in advance, that you will never know the answer to that question, and that the question was unimportant.Too many factors impact the markets for illegal drugs to be able to say definitively that drug consumption will increase or decrease after decriminalization. Factually, statistics on drug consumption are necessarily imprecise. This is true for statistics prior to and after decriminalization. The existing statistics are based either on things like surveys and educated guesswork with the actual facts mired in the secretive world of the black market. Consumption aside, the real question is whether prohibition does more harm than decriminalization and the answer is yes.When I was pressed by the reporter for a guess, I responded that overall consumption would not change much; it might increase some in the short run and would decrease in the long run, unless the drugs were legalized in the future for medical or recreational uses. However, I stressed that there are undeniable benefits (listed above) and there is no reason that consumption would explode due to decriminalization.Many Still Refuse to See the SuccessIt is hard to blame the Portuguese for their concerns at that time. Decriminalization was considered a dangerous experiment and a dodge of the United Nations’ rules of the global war on drugs. However, mainstream drug policy experts remained “skeptical” of the Portuguese experiment even after nearly eight years of experience.Mark Kleiman, director of the drug policy analysis program at UCLA, claims that Portugal was an unrealistic model. Peter Reuter, another leading drug policy expert, claimed that despite achieving its central goal (decreased consumption) it could be explained by the fact that Portugal was a small country and that drug abuse is cyclical in nature.Remarkably, Dr. Goulão, who helped design and oversee the new law seems uninformed and perplexed at the positive outcomes even to this very day. He was recently quoted as saying: “it’s very difficult to identify a causal link between decriminalization by itself and the positive tendencies we have seen.”One picture that sums up the Portuguese success story shows that Portugal has the second lowest death rate from illegal drugs in all of Europe after experiencing one of the worst rates with prohibition.It is also interesting to note that the European Monitoring Center for Drugs and Drug Addiction (EMCDDA) is headquartered in Lisbon. One analyst who works at EMCDDA, Frank Zobel, calls Portugal’s policy "the greatest innovation in this field" and “that the policy is working. Drug consumption has not increased severely. There is no mass chaos. For me as an evaluator, that's a very good outcome."It is a happy anniversary for the Portuguese, but a scary one for all the drug warriors around the world whose incomes and power depend on continued ignorance about the effects of prohibition. 

Greece’s Biggest Problem Is Its Anti-Capitalist Culture

6 July, 2015 - 06:00
It’s considered politically incorrect to criticize culture these days, but whether using euros or drachmas, in or out of the European Union, Greece really has to, somehow, sort out its cultural dysfunction. I’m not talking about its customs, traditions, architecture or music, and I’m definitely not talking about its food. I’m talking about its cultural anti-capitalism. The negotiations, deals, counter-deals, referenda, protests and everything in between all mean very little if Greeks, by and large, don’t ditch their statist zeitgeist and rediscover Greek capitalistic exceptionalism.A perfect example is Argentina. A default and sovereign crisis is supposed to chasten a nation into a sensible, market-oriented direction as the folly of debt-addicted big state crony socialism gets utterly discredited. It’s a nice theory. But Argentina, thirteen years after its 2002 default, and after years of soaring inflation, dollar shortages, and economic malaise, clings to its completely clueless, hyper-interventionist, socialist overlords who continue to run the economy into the ground. The reason is the core culture never changed. When your culture is toxic, up is down, black is white, socialist failure is capitalist failure.In The Anti-Capitalistic Mentality Ludwig von Mises described this cultural anti-capitalism:As John Doe sees it, all those new industries that are supplying him with amenities unknown to his father came into being by some mythical agency called progress. Capital accumulation, entrepreneurship and technological ingenuity did not contribute anything to the spontaneous generation of prosperity. If any man has to be credited with what John Doe considers as the rise in the productivity of labor, then it is the man on the assembly line. ...The authors of this description of capitalistic industry are praised at universities as the greatest philosophers and benefactors of mankind and their teachings are accepted with reverential awe by the millions whose homes, besides other gadgets, are equipped with radio and television sets.The biggest risk to Greece is not austerity or fauxsterity or default or the euro or the drachma. And it’s certainly not the bogeyman of being frozen out of sovereign credit markets — it’s that Greek culture remains antagonistic to free, unfettered markets and is chronically state-dependent.Take another Latin American country: Venezuela. After suffering crippling inflation rates throughout the 1980s and 90s, the electorate went on in 1998 to vote in another central planning inflationist in Hugo Chavez. They re-elected him in 2000, 2006 and 2012, and his successor Nicolás Maduro in 2013, even while the country was in a hyperinflationary death spiral and heading toward outright economic collapse. Venezuela’s problem ultimately is not fiscal mismanagement — it’s an anti-capitalist culture.And so it is with Greece. After already securing debt relief and effectively being allowed to default by restructuring its debts over the next fifty years at subsidized interest rates — and after actually achieving economic growth in 2014 by cutting taxes and slashing the size of its sclerotic, bloated government — this toxic Greek culture prevailed once more and elected a team of socialist die-hards to drag it back into the mire. Of course it doesn’t help that on the other side of the negotiating table is another bunch of central planners in the EU, IMF, and ECB. Nevertheless, Greece sits stuck between two central planning negotiation parties because its people have been too busy demanding goodies instead of freedom.Most Countries Get Into Trouble — But Some Bounce Back Better Than OthersAny sovereign nation can overspend and get into financial trouble, and most have. It wasn’t that long ago that Britain was forced to go cap in hand to the IMF in 1976 and cede its fiscal sovereignty to that institution. By the latter half of the 70s, Britain was a downright mess. America stealth-defaulted on its international obligations in 1971 and suffered a rolling inflationary economic crisis for the rest of the 1970s. Both these countries bounced back. As did Chile, Uruguay, and the Philippines after their fiscal and financial turmoil of the 70s and 80s.But some don’t bounce back, and I believe this happens when the national culture is, or has become, fundamentally anti-capitalist and resigned itself pathetically to cradle-to-grave state-dependency. In addition to Argentina and Venezuela, we’ve seen prolonged economic and financial malaise following painful crises in the likes of Zimbabwe, Ghana, Bolivia, Nigeria, Russia, Turkey, and now southern Europe. These countries don’t seem to learn from their mistakes because they don’t seem to want to or can’t locate the lesson amid the intellectual haze of their cultural zeitgeist.But really the lesson is clear. An economic crisis can jolt a fundamentally pro-capitalist (or mostly pro-capitalist) nation that had lost its way back onto the straight and narrow. But there is no guarantee of recovery when the culture has descended into infantile anti-capitalism, dysfunctional statism, and an antagonism toward entrepreneurial dynamism and self-reliance. For these a crisis may not herald recovery but instead a longer, deeper national decline. Only a culture shift resulting from the spread of sound ideas can make Greece (and other countries) a fertile ground to accept real solutions. The need to spread the good news of liberty and free markets is clearly as urgent as ever.

In the fourth and latest installment of

6 July, 2015 - 06:00
In the fourth and latest installment of the Jurassic Park franchise, a theme park containing cloned dinosaurs plays host to horrifying scenes as visitors are preyed upon by reptilian attractions that have eluded the confines of their cages.The chaos begins after the introduction of a new, ahistorical dinosaur, the Indominus Rex, a chimera cooked up by the park’s scientists. This monster, the film makes clear, is the product of capitalism run amok: simple de-extinction no longer impresses the park’s guests; to keep drawing in paying visitors the dinosaurs must keep getting bigger and meaner — a trend which quickly proves unsustainable.If we in the real world ever become capable of reincarnating dinosaurs, should we leave the technology in government hands for fear that the profit-driven would, just as in Jurassic World, create overly hazardous attractions?How Private Dinosaur Parks Would Work: Balancing Conflicting ValuesPrivate owners assess an operation’s profitability by subtracting their opportunity cost (e.g., what they could earn by selling up and putting the money at interest) from its capital value. Importantly, the capital value is based on the sum of expected future profits. So no private dinosaur park could afford to be shortsighted in its strategizing: to maximize profits, it must strike a sustainable balance between conflicting elements (risk, “wow-factor,” cost). Far from resembling the inexorable outcome of a profit-and-loss system, then, Jurassic World is an exemplary illustration of what not to do if you are concerned by your bottom line.Instead, private dinosaur parks would aim at two society-pleasing equilibria. The first equilibrium is the profit-maximizing balance between safety and wow-factor. Imagine a placid leaf eater behind an eight foot fence. If we were to substitute this herbivore for a more impressive carnivore, say, a T.Rex, we would quite obviously be doing so at the expense of some safety. Wow-factor and safety move in opposite directions, but consumers value both. Therefore the two must be balanced, an endeavor in which private dinosaur parks would be guided by profit-and-loss signals. They would increase wow-factor and drive down safety only so far as this increased the number of tickets sold, in the process achieving the “optimal” balance between wow-factor and safety (viz., that one which persuades the maximum number of people to voluntarily part with the entry fee).The second equilibrium relates to balance between cost and safety. Factors of production (fencing, girders, armed guards) would be employed by the park until the marginal value of their contribution fell equal to the price at which they could be bought. The first unit of fencing would provide enormous value: it would allow a basic partition to be erected, without which the park could not hope to attract any visitors. Girders would reinforce the fence, and make escape very unlikely; the park could then foster a favorable reputation in the long term, thereby increasing its capital value/profitability. Additionally, the presence of armed guards would provide further assurance, and encourage still more paying customers to attend. However, beyond a point, additional security resources would provide such little value as to make them unprofitable to buy. They would of course still provide some value, but the price mechanism forces private actors to take heed of the bigger picture; other causes in the economy require these finite resources more urgently. The private dinosaur park, then, would strive to buy only as much security as could be justified by market data.Get Government Off Our Brachiosaurs!Governments, on the other hand, don’t worry about profit — they get their revenue not by providing goods and services, but via taxation. And this is why, the argument goes, they should provide dinosaur-amusement-park services: they would not ratchet up risk for profit’s sake; they could run a thoroughly stolid park and never go out of business.But, as we have already seen, the balance between wow-factor and safety struck by private dinosaur parks would be the one that pleases the maximum number of people. Therefore, if the government were to outlaw the private ones in favor of its own, less-impressive parks, it would override the peoples’ demonstrated preference in the process.To be sure, no one wants to be eaten by a dinosaur, but that does not mean that no one wants to run the risk thereof. Many parallels exist in our daily lives, but to choose just one: nobody wishes to die in an airplane crash; and yet, people constantly get on airplanes — they accept the risk as a cost worth bearing. So, too, would some people accept the risk of being eaten if it came part and parcel with especially cool dinosaur parks. Unless we also accept bans on flying, driving, skydiving, swimming, eating fast food, etc., we should not in principle accept interference with individual choices regarding dinosaur-viewing.On the issue of security: should no expense be spared? Impervious to profit and loss, the government dinosaur park could continue hoovering up security resources even after the marginal value no longer justified the price; the result would, of course, be a slightly safer park. However, only someone with a very myopic view could conclude this to be unambiguously good, for in the process of armoring their reptile attraction the government would unwittingly deprive other, more urgent causes in the economy of those same resources. As we have seen a private dinosaur park would instead equate marginal value with price, thereby unconsciously factoring conditions of supply and demand into its decision; it would take a more appropriate quantity of resources, given the relative importance of its end within the context of the wider economy.Mistakes HappenWe have argued that the incentive to make profit would impel private dinosaur parks to balance safety, wow-factor, and cost in the optimal manner described above. So how, then, do we account for the Indominus Rex of Jurassic World? After all, this monstrosity was concocted by a profit-motivated, private dinosaur park; does this mean that it was in some way optimal?It should be clear to anyone who watched the film that the Indominus Rex was a dinosaur too well endowed genetically: it presented a risk that was far greater than the majority of visitors would have tolerated ex ante. Therefore, Jurassic World’s operators made an “entrepreneurial error,” an attempt at profit-making gone awry. The balance between safety and wow-factor was ill-struck, and by no means profit-maximizing — Jurassic World will lose many, many prospective guests as a result of the Indominus Rex debacle.Importantly, the Indominus Rex must not be held against the market per se; we should assess the market not on the basis of individual case studies but rather by the equilibria it inspires. Non-optimal outcomes do occur on the market’s watch, but in spite of (and not because of) its carrot-and-stick regime. The market institutionalizes optimal outcomes; without profit and loss, optimal outcomes could come about only by a fluke.