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Can Europe Recover From Its Easy-Money Obsession?

12 February, 2015 - 07:00
The announcement of the euro-QE was not the start of Europe’s monetary Dark Age. That started many years ago with Chancellor Kohl’s undermining of the “hard deutsche mark Bundesbank” in the late 1980s. The darkness further descended when the newly created European Central Bank (ECB) implemented monetary frameworks which essentially tied Europe into a global 2-percent-inflation standard, following the US Federal Reserve.The darkness continues unabated with the ECB’s decision in January to pursue its own version of the “Great Monetary Experiment” (GME), launched first by Obama’s architect-in-chief Professor Ben Bernanke and his fellow travelers in the Federal Open Market Committee (FOMC). One would have thought that before this could happen there would have been exhaustive hearings both within the ECB and the German and French parliaments about just how successful, or not, the GME had been. They should also have looked at the record of Abenomics in Japan. And even as the final hour approached, with the die all but cast, no one at the ECB press conference asked the question:Signore Draghi, why are we in Europe embarking on a monetary experiment which has already failed in the US and Japan? I mean by failure, the fact that this is the weakest economic expansion ever following a Great Recession in the US. And we are already witnessing the bursting of a huge oil and commodity bubble with, yet unknown but almost certainly, severe consequences, whilst in Japan there has been a second recession, not economic renaissance as Prime Minister Shinzo Abe promised.The Easy-Money Enthusiasts are EmboldenedBut no, there was none of that. Instead on the eve of the launch, even more monetary nonsense was to emerge. First, from Rome there was socialist Prime Minister Renzi calling for the euro to make its smooth descent to parity against the US dollar — its “natural level.” And then, ex-ECB board member Professor Lorenzo Bini-Smaghi, in an editorial for London’s leading Keynesian financial newspaper, The Financial Times (January 20), admired how the ECB was about to repudiate political interference from Berlin in defense of “price stability” (meaning 2 percent inflation). The ECB was establishing its “independence,” Bini-Smaghi wrote, just as the Bundesbank had done against Chancellor Adenauer in raising rates by 2 percentage points when he had demanded no rise at all. In the monetary cult, 2 percent inflation forever and a recurrent deadly plague of market irrationality (what Keynesians describe as “animal spirits”) represents the ideal resting place.Now that the monetary barbarians have finally sacked Frankfurt, with the incredible cooperation of Chancellor Merkel, it is not too early to ask when a system based on stable money might return. The answer is: don’t look to Rome! Although both improbable and risky, one option is a political earthquake in Germany which would lay waste to the current system, and thrust that country out of the European Monetary Union and toward the resurrection of the “hard deutsche mark.”Are Central Banks Too Weak?But let’s take one step back and review Kenneth Rogoff's recent comments from Davos. In spite of himself, Rogoff managed to utter some truth about the likely future for long-term inflation. In a January 21 Bloomberg TV interview with Tom Keene, Rogoff gave a gloomy warning, though it’s unclear whether or not he would view it as gloomy. The long-term bond markets are now assuming that central banks in the US, Europe, and Japan will be unsuccessful in achieving their 2 percent inflation targets, and that inflation will remain well below that level, even in the long-run. That is foolhardy. The central banks may seem weak for now, but do not underestimate their power to achieve inflation in the long-run! Professor Rogoff did not go into details about how this ability might return, but in technical terms we could say that will happen when the neutral level of interest rate rises — whether (optimistically) due to blossoming of investment opportunity or (pessimistically) due to growing capital shortage (in the worst cases triggered by war or other disasters). At that stage, the massive excess reserves now in the various monetary systems would feed a wider monetary and lending boom.That is how the failed Roosevelt QE policies of 1934–36 ended — after the Crash and Great Recession of 1937–38 came the war and high inflation. Let’s hope the sequel to Obama-Merkel-Abe QE is different.Image source: iStockphoto.

How Truly Free Markets Help the Poor

11 February, 2015 - 07:00
Discussing poverty as an advocate of free markets is tricky business in today’s world. If one takes poverty seriously and points out the very real plight of the impoverished, it is often assumed that one must therefore be advocating for government “solutions” to the problem. The knee-jerk reaction of many defenders of free markets is to simply deny that poverty exists much at all, or that if the poor just try a little harder, or aren’t so lazy, they won’t be poor anymore.This sort of reaction is natural for one who labors under the mistaken impression that the American economy is a free-market economy. Since the American economy is so free and filled with opportunity, they think, there’s really no excuse for being poor.But, of course, the American economy isn’t even a mostly free economy. The entire financial sector is heavily subsidized and regulated. The regulatory costs imposed on small businesses are enormous. Trade of all types is regulated, and many goods are prohibited outright. Minimum wages make many entry-level jobs illegal, and one can’t even drive people around for money without facing a bevy of government regulations — and sanctions.With all these millstones tied around the necks of poor and low-skilled workers, it’s a bit nonsensical to declare that poor people should just try harder. Perhaps they did try, and the government sent them the message loud and clear: “just give it up, because we’ve made everything you’re qualified to do illegal.”Yes, it’s true that, to the extent markets are still free, they have led to an abundance of conveniences that even the poor can afford: air conditioning, television, household appliances, cell phones, and more. But at the same time, it would be wrong to sit back and say “they have enough” when an even greater abundance is to be had if the poor were simply given the freedom to work and own businesses without navigating a myriad of government requirements and regulations that often pose an insurmountable opportunity cost.There are several ways that a turn to freer markets would open up a whole world to low-income families and unskilled workers immediately.End the Minimum WageThis is one of the worst offenders since it renders jobs illegal for the most unskilled workers, and hits the poor the hardest. As explained in the pages of mises.org here, here, and here, the primary effect of the minimum wage is to make the lowest-skilled workers legally unemployable. In other words, if the minimum wage is $10 per hour, and a worker only produces $8 of goods or services per hour, he will never be hired. Naturally, with a little experience, an unproductive (in the economic sense of the word) worker becomes more productive with job experience. But with a minimum wage, how is the worker supposed to get his first job? He can’t. As a result, many workers caught up in this catch-22 become long-term welfare recipients or they turn to black markets where they are branded criminals by the legal system.Abolish All Income Taxes (Including Payroll Taxes)Even low-income wage earners pay taxes on income. Social Security and Medicare taxes are nothing more than income taxes that go straight to the general fund — the “social security trust fund” does not exist. That claim by Mitt Romney that half the country doesn’t pay income taxes was never anything more than disingenuous political hair-splitting. Payroll taxes are income taxes, and we all know they take a big bite out of our paychecks, at all income levels.Thus, even the poor pay taxes to finance TARP and various bailouts of the ultra-rich. As if this insult were not enough, the federal government then punishes the poor further with a central bank that punishes them for saving what little they can.End the FedThe Federal Reserve — and central banks in general — have in recent decades functioned largely to push down interest rates and devalue the currency.The Federal Reserve — in addition to giving us the gift of the boom-bust cycle — has been key in bailing out huge too-big-to-fail corporations and has facilitated endless government spending on wars, corporate welfare, and social programs. Whether the amount of money poured into low-income households via social programs rivals the amount of money sucked out of them — in the form of devalued currency and below-inflation interest rates for low-income savers — remains to be seen.What we do know is that the Fed’s commitment to low interest rates has made it almost impossible to save money through savings accounts and other low-risk traditional investments. Once upon a time, it might have been possible to put money in a savings account or CD and receive a respectable amount of interest on those funds, and at least earn an interest rate that exceeded the inflation rate. That certainly isn’t possible today. If you’re poor and try to make any returns off a savings account or CD, you’re out of luck. You’ll be very lucky to get 0.9 percent, and you’ll probably get lower than that. Meanwhile, the official low-ball inflation rate is well above that. So, your savings lose value in real terms constantly. You might as well keep that money in your mattress — where your money will also constantly lose value. On the other hand, if you have $100,000 to put in a CD right now, you might be able to get 1.5 percent at some banks. But poor people rarely have that kind of money lying around. People with more money are able to hire financial advisors and stock brokers and better keep up with an inflationary economy. The poor are just on their own.Stop Regulating Small BusinessesStarting small businesses are often the preferred way for low-income, non-white workers to find work and build capital. Immigrants often turn to small businesses because they offer flexibility and work for people who are unattractive to larger established operations. While the wages and incomes associated with small businesses are often lower than they are in larger businesses, many turn to small business employment because they offer many non-monetary advantages over other types of income.Governments work to crush small businesses on a daily basis. Every small business owner must deal with a myriad of government agencies from the IRS, to OSHA, to the EEOC, Obamacare, and beyond. Every new regulation and every new tax makes it harder for a small business owner to make payroll and to turn a profit. The net effect, of course, is to both restrict growth of small businesses and to restrict the number of small businesses. The decrease in competition then lessens benefits for both consumers and wage workers in the communities where these businesses are likely to spring up — in low-income communities. Instead, governments make sure that only large, well-capitalized companies can afford to open new businesses in many cases — probably miles away in higher-income areas.Legalize PovertyEverywhere the government intervenes to “help” we find not more choice, but less. Not more jobs, but fewer. Do you want to start up your own taxi service by driving people around? Forget about it if you have not obtained all the applicable (and costly) government licenses. Do you want to rent out your converted garage to tenants for cash? Too bad. Zoning laws don’t allow it. Do you want to get a job at five bucks per hour for your teenage son who has no skills? Sorry, that’s illegal too. Do you need a loan, but you’re a high risk borrower? Get lost. We’d have to charge you a high interest rate. That’s usury, and it’s not allowed.We’re told every day that the only solution to poverty is more government power, more government regulation, more central planning, bigger deficits, and less freedom.The true solution, however, is better described by a left-wing slogan: “Legalize Poverty.” The left usually says this when homeless people are being thrown off government property, but it’s better applied to the many types of free enterprise that are placed out of reach to the poor by government edicts. So many low-income workers must turn to black markets and low-wage semi-legal work because that’s all that’s open to them. It’s simply illegal for them to find entry-level work in mainstream enterprises, keep all of their meager wages, or start up small enterprises. Needless to say, these assaults on free markets help no one but the government agents paid to enforce them.Image source: iStockphoto.

Bad Idea: Devaluing Currency to Help Exporters

11 February, 2015 - 07:00
The European Central Bank's (ECB) decision to shortly print over 1 trillion euros has reignited concerns over currency wars. The euro has dropped almost 20 percent over the last six months after endless hints from the ECB.We are in a currency war, and have been since 2008. Our current global monetary system is deeply flawed in spite of the International Monetary Fund (IMF), which was supposedly created to foster monetary cooperation and financial stability. Yet, the IMF has been eerily silent lately, which has not gone unnoticed by those who butter the IMF’s bread.The current unwritten rule on exchange rate policy is that direct intervention is frowned upon, but indirect intervention is acceptable if the exchange rate was not the initial objective of policy. The thinking here is similar to that used when dropping a thousand pound bomb on a terrorist, wiping out a preschool, and then saying “it’s no problem since our primary target was the terrorist.”It is simply irresponsible to look only at the direct and not indirect effects of economic policies. The US’s quantitative easing over the last six years has forced emerging market countries to impose capital controls and other currency restrictions, and ramp up their own printing presses. Current Japanese monetary policy, which is driving down the yen, is causing serious consternation to its Chinese and Korean neighbors. The People’s Bank of China recently lowered reserve requirements and is planning to widen the trading band on its currency. Let’s call this what it really is — retaliation and escalation of worldwide currency wars.Does Devaluing Currency Really Help Exporters?Of course, these actions are based on another popular misconception promulgated by economists: that a depreciating currency will allow exporters to reduce their prices overseas, helping them capture market share, thus boosting profits with positive ramifications for the domestic economy. The mistake in this logic is that it looks at the direct effects while totally ignoring other direct and indirect effects.A simple example will make this clear. Suppose the exchange rate is one dollar for one euro. The European exporter is selling his product for $100 in the US which he converts into 100 euros to cover his production cost of 80 euros. Now suppose the euro depreciates so that it takes 1.5 euros to get 1 dollar. The exporter can now lower his price to $66.66 since this will bring in the same number of euros as before the depreciation. He has gained a competitive advantage over his foreign rivals, with benefits to the domestic economy.The first problem with this story is that with new financial instruments such as swaps and financial futures, many exporters can hedge their foreign exchange risk long term, and may have already committed themselves to the rate they swap dollars for euros.The second problem with this story is that many exporters today import many of their inputs. A BMW has parts coming from all over the world. Its engines may come from the UK. The leather seats may come from China and the steel may come from Brazil. If the depreciation causes input prices to rise from 80 euros to 120 euros, the exporter will be unable to lower his dollar prices, and, therefore will not gain in competitiveness. Of course, not all costs are imported inputs. This, however, highlights how depreciations really help exporters.Workers Don’t Benefit from DevaluationIf domestic cost, mostly labor, does not adjust to the higher import prices resulting from the depreciation, exporters will gain, but this gain comes from reducing the real incomes of domestic workers. If these workers ultimately negotiate an increase in nominal wages to bring their real wages back up to before the depreciation, the gain to exporters will disappear. The depreciation has created only a temporary gain.Few journalists seem to understand that a policy to reduce the foreign exchange value of a currency is, in reality, a policy to transfer wealth from workers — the middle class and the poor — to the wealthier owners of export industries. It is another example of the central bank acting as a reverse Robin Hood, taking from the have-nots to give to the haves.Furthermore, there are many other indirect effects that make depreciating your currency a very bad policy objective. Mises explained that standard balance-of-payment accounting cannot be used when the unit of account is being distorted. Even if exporters are more profitable, this is not something to cheer if a higher nominal profit means lower real profit.Of course, other economic actors are also hurt by a beggar-thy-neighbor policy. Consumers will bear the brunt of higher prices on foreign products. Domestic firms who import their inputs and sell on the domestic market will also likely be hurt.Distorting Prices Hurts an EconomyA depreciating currency reflects a country’s central bank printing money faster than its neighbors. Yet, this printing hurts all firms, including exporters. Printing money alters absolute and relative prices. It interferes with the critical signals that prices send across time about what and how society wants goods and services to be produced.What Europe needs is not a weaker euro, but significant structural reform. Europe should learn from Latvia’s experience with reform. In 2009–2010, Latvia cut government spending from 44 percent of GDP to 36 percent. It fired 30 percent of the civil servants, closed half the state agencies, and reduced the average public salary by 26 percent in one year. Government ministers took personal wage cuts of 35 percent. The Latvian economy initially dropped 24 percent, but rebounded sharply with yearly real growth of nearly 5 percent over the last three years. Yet, Latvia did this without using currency as a weapon since it kept its former currency, the lats, fixed against the euro. Image Source: iStockphoto.

You Can’t Create More Savings by Printing More Money

11 February, 2015 - 07:00
Savings has nothing to do with money. For instance, if a baker produces ten loaves of bread and consumes one loaf, his savings is nine loaves of bread. In other words, the “savings” in this case is the baker’s real income (his production of bread) minus the amount of bread that the baker consumed. The baker’s savings now permits him to secure other goods and services.For instance, the baker can now exchange his saved bread for a pair of shoes with a shoemaker. Observe that the baker’s savings is his real means of payments — he pays for the shoes with the saved bread. Likewise, the shoemaker pays for the nine loaves of bread with the shoes that are his real savings.What Is Savings?The introduction of money doesn’t alter what we have so far said. When a baker sells his bread for money to a shoemaker, he has supplied the shoemaker with his saved, unconsumed bread. The supplied bread sustains the shoemaker and allows him to continue making shoes. Note that the money received by the baker is fully backed by his unconsumed production of bread.Yet without the medium of exchange, i.e., money, no market economy, and hence, the division of labor, could take place. Money enables the goods of one specialist to be exchanged for the goods of another specialist. In short, by means of money, people can channel real savings, which in turn permits the widening of the process of real wealth generation.Also, in a world without money it would be impossible to save various final goods like perishable goods for a long period of time. So the introduction of money solves this problem. Instead of storing his bread, the baker can now exchange his bread for money.In other words, his unconsumed production of bread is now “stored,” so to speak, in money. There is, however, one proviso in all of this: that the flow of the production of goods and services continues unabated. This means that whenever a holder of money decides to exchange some money for goods, these goods are there for him.Having Money Is Not the Same as Having SavingsMoney can be seen as a receipt, as it were, given to producers of final goods and services that are ready for human consumption. Thus when a baker exchanges his money for apples, the baker has already paid for them with the bread produced and saved prior to this exchange. Money therefore is the baker’s claim on real savings. It is not, however, savings.Now what about the case where money is used to buy unprocessed material — is the unprocessed material real savings? The answer is no. The raw material must be processed and then converted into a piece of equipment, which in turn can be employed in the production of final goods and services that are ready for human consumption. In this sense, the buyer of unprocessed material transfers his claims on real savings to the seller of material in return for the prospect that the transformed material, some time in the future, will generate benefits far in excess of the cost incurred.Furthermore, the buyer of the material also buys time (i.e., by having the material readily available, he can proceed immediately with the stages of making the final tool). If the material weren’t available he would have to extract it himself, which of course would delay the making of the final tool.Once real savings are exchanged for money, the recipient of the money can exercise his demand for money in a variety of ways. This, however, will not have any effect on the existent pool of real savings.An individual can exercise his demand for money either by holding it in his pocket, or in his house, or by placing it in the custody of a bank in a demand deposit, or even in a safe deposit box.Also, whether he uses it immediately in exchange for other goods, or lends it out, or puts it under the mattress, it does not alter the given pool of real savings. Thus by putting the money under the mattress, an individual doesn’t engage in the act of saving. He is just exercising a demand for money. What individuals do with money cannot alter the fact that real savings are already funding a particular activity. Whether individuals decide to hold onto the money, or lend it out alters their demand for money, but this has nothing to do with savings.Whenever an individual lends some of his money he in fact transfers his claims on real goods to a borrower. By lending money, the individual has in fact lowered the demand for it. Note that the act of lending money (i.e., the transferring of the claim) doesn’t alter the existent pool of real savings. Likewise, if the owner of money decides to buy a financial asset like a bond or a stock he simply transfers his claims on real savings to the seller of financial assets. No present real savings are affected as a result of these transactions.How Does Money-Supply Expansion Affect Savings?Now let us examine the effect of monetary expansion on the pool of real savings. Since the expanded money supply was never earned, goods and services therefore do not back it up, so to speak. When such money is exchanged for goods it, in fact, amounts to consumption that is not supported by production. Consequently a holder of honest money (i.e., an individual who has produced real wealth), that wants to exercise his claim over goods discovers that he cannot get back all the goods he previously produced and exchanged for money.In short, he discovers that the purchasing power of his money has fallen — he has in fact been robbed by means of loose monetary policy. The printing of money therefore cannot result in more savings as suggested by mainstream economists, but rather to its redistribution. This, in the process, undermines wealth generators, thereby weakening over time the pool of real savings. So any so-called economic growth, in the framework of a loose monetary policy, can only be on account of a private sector that manages to grow the pool of real savings despite the negative effects of the loose money policy.We can thus conclude that savings is not about money as such, but about final goods and services that support various individuals that are engaged in various stages of production. It is not money that funds economic activity but the flow of final consumer goods and services. The existence of money only facilitates the flow of the real stuff. Image source: iStockphoto.

Government Loans: Risky Business for Taxpayers

10 February, 2015 - 07:00
Obtaining a loan from the government now seems perfectly normal to most Americans, be the loans for education, business, healthcare, or whatever else.Examples include Small Business Administration loans, where a potential business owner goes to the government to get startup cash, and student loans, where a college student borrows money for tuition or even living expenses. These loans can often be paid back with interest over the course of what is often several decades.Other examples might include Federal Housing Administration (FHA), Veterans Administration (VA), or Rural Housing Services (RHS) loans, which differ from the former in the sense that they are government insured loans, yet the fundamental principle behind them remains the same: government is taking upon itself (via taxpayers) the risk behind making the loan.Of course, private loans are also available, though those that do not employ government insurance or other subsidies usually come with higher interest rates. The higher interest rates in the purely-private sector come from the fact that the private entity making the loan must take on all the risk, instead of externalizing it to the taxpayers.So, the reality of lower interest rates in government and government-subsidized loans means they are vitally necessary, right?First of all, the government doesn’t “make money,” in the way that private entities do. There is only one way in which states initially accumulate revenue, and that is through taxation. This extorted wealth is originally made in the private sector. So, in order for a government to make a loan back to the private sector, that money must first be removed from the private sector via taxation.Government Knows How To Best Spend Your MoneyFor private entities, however, when they make a loan and determine who qualifies for it, and at what interest rate, the private firm making the loan is basically determining at what price (i.e, interest rate) the firm feels adequately compensated for the risk of lending out this money, and for giving up direct control over that money for the duration.To claim, therefore, that the government should be in the business of making loans because private loans are generally too costly or too inaccessible for buyers, is no different than saying that government must take individual’s money and use it in a way that the original owners (i.e., the taxpayers) themselves would determine to be reckless and irresponsible. While it is true that occasionally a government loan may be paid back with interest at the appropriate time, it would be absurd to suggest that politicians would be more knowledgeable about how a person’s money should be used than the person who originally created and owned the wealth in the first place.But Government Should At Least Prevent Usury, Right?Moreover, there are those who will say that private firms making loans should be restricted from charging “excessive” interest on their loans (i.e., usury). This is an example of a very well-meaning, but utterly damaging regulation. It is crucial to note the differences in time preference displayed by both the lender and the borrower. The lender’s time preference (in this case) is lower than that of the borrower’s, meaning that the lender prefers a larger sum of money in the future, and the borrower prefers a smaller sum now. To get money now, however, the borrower must pay for it in the form of interest.This represents a healthy balance between lenders and borrowers. It is why loans are made. Laws passed that prohibit certain interest rates on loans are far more likely to hurt those who need the loans, than anyone else. As was previously stated, a firm or person making a loan must feel compensated for the risk of making the loan, and that compensation manifests itself in the interest rate. To restrict a firm from charging a certain percentage of interest on their loans will only reduce the amount of loans it gives out.Taking Away Your ChoicesIf a potential borrower who is determined to be a rather high risk asks for a private loan, then their interest on that loan will be quite high, but at least in that situation, the borrower has the choice of taking the loan, or to not take the loan. In the end, the borrower will choose what he or she believes will most benefit him or her. Yes, the borrower might miscalculate and the loan might turn out to have been a bad idea, but at least the borrower had a choice.On the other hand, if the amount of interest that could be charged on the loan were to be forced down via government regulation, then the firm or person making the loan would simply not offer the loan at all, as he or she would not feel their risk is justified by the legally-allowable interest rate.Faced with a lack of loans, risky borrowers may then look to government and government-subsidized loans as an option, but we find here just another case of government offering itself as the (taxpayer-funded) solution to a problem it caused in the first place. Image source: iStockphoto.

The Swiss Franc and

9 February, 2015 - 07:00
Philipp Bagus, author of The Tragedy of the Euro recently spoke with the Mises Institute about recent developments in Switzerland and the European Monetary Union.Mises Institute: In January, the Swiss central bank unpegged the franc from the euro. What does this mean for the future of the Swiss franc?Philipp Bagus: The Swiss central bank admitted a huge and costly error by unpegging the franc from the euro. First, they chained the Swiss franc to the sinking ship that is the euro. Then, once they found themselves under water and half drowned, they decided to cut the chain. Moreover, the Swiss national bank endured important losses on euro-denominated investments. These losses, borne by all Swiss franc users, in a sense reflect the hidden subsidies given to the Swiss export industry in recent years. Now, the Swiss franc will likely appreciate compared to currencies that are being inflated, such as the euro.MI: Why was the Swiss National Bank (SNB) chained to the euro in the first place?PB: By establishing a fixed rate for the franc against the euro, the SNB had committed itself to follow the European Central Bank. So the ECB, managing the crisis of its own poorly constructed currency, was indirectly determining the Swiss monetary policy as well.MI: Why do you describe the euro as a sinking ship?PB: The euro is badly designed. There is one central banking system that can be used by a wide variety of governments to finance themselves. This is the tragedy of the euro: governments can finance their deficits indirectly through the central bank as their debts are pledged as collateral for loans to the banking system. Or they can be directly purchased by the central bank.The effect of this policy is to externalize the costs of this monetization of the deficits on all users of the euro, some of them living in other countries. There is therefore an incentive in the euro countries to make deficits and accumulate debt, while externalizing costs on foreigners. They wanted to prevent this with the rules agreed upon within the Stability and Growth Pact, but no one feels bound by those anymore.MI: Could this lead to the downfall of the euro?PB: It has already led to an enormous debt for most countries. Add to that the expansionary monetary policy of the European Central Bank, which is always coming up with new tricks that put more money in circulation, such as their recently-announced quantitative easing.As the number of euros increases, the value of each euro is diluted. The Swiss National Bank had decided to tie the franc to this depreciating currency, but apparently, by January, the Swiss had had enough.MI: So does that mean we can now buy more goods with fewer francs?PB: Well, you can buy fewer francs now than you could have when the franc was stronger. In a well-functioning economy, though, if you had economic growth and if people actually paid back their loans, the prices of goods would actually fall and people could buy more for their money. But, as it is, we do not benefit from strongly falling prices, because of this expansionary monetary policy. What we are experiencing with the falling gasoline prices or in the electronic goods sector, we could have witnessed in recent years in virtually all goods and services. But we didn´t. Thanks to central banks printing new money wildly.MI: Who benefits from such a policy?PB: You will benefit some players who get the newly created money first, and those who create the money themselves may benefit as well. These are people in the financial system, particularly banks, and within the state itself. Then, those who get the money first can shop with lots of new money, but at old prices. Then prices rise and the ordinary people can, for example, no longer afford real estate. The cost of living increases, but wages do not rise or not so fast as the cost of living. The benefits of economic growth are reaped mainly by the first recipients of the money and not by all.MI: How does the state benefit?PB: States can go further and further into debt thanks to this monetary policy, and they can further distribute the borrowed money to the civil servants and subsidized entrepreneurs. Because the initial recipients of paper money (i.e., the financial and banking sectors) benefit most from this, they are the ones who advocate it most loudly.MI: How to correct such a monetary system?PB: As long as you can create money by pushing some keys on a computer, nothing will change. We could simply add a zero to every franc and every euro. Then the money supply would be ten times greater, but we’d be no richer, because prices would also increase tenfold. Of course, the way monetary policy is done now is not like that. The new money is not injected equally to everyone in the economy by adding zeros to euros or francs. If it were done that way, no one would be interested in it anymore and no one would be shouting for more money printing.To correct the system we need a money that cannot be produced by touching a key on a keyboard. As long as money can be produced at almost no cost, the temptation is great and the political pressure to do so is huge. We see this over and over in history.MI: In what kind of system would this be possible?PB: A system with full gold backing, is one example. Gold can not simply be created from scratch, you have to dig for it.MI: How long will the paper money system last?PB: If I knew that I could be very rich. It depends greatly on the monetary policy. And the financial and political elites will try to save the system because they benefit from it. They could try to reset the system. What is clear is that the debt held by so many states cannot grow much more. It is unlikely that you can pay back this debt through growth. Most countries are in a monetary trap. When interest rates rise, the states are bankrupt because they cannot pay the interest.MI: How will the current system end?PB: There are different ways and none of them are good for savers. Central banks could let the printing presses run faster and thus completely devalue the money. Then they could confiscate or tax away assets; a wealth tax as has been proposed by the International Monetary Fund. Or proceeding as in Cyprus, where there was a bail-in which bank creditors have been converted into shareholders. Or you take a haircut — the creditors must give up a large part of their claims. Or there is monetary reform. This is something like the reset button. You can then start all over again.MI: Will new currencies emerge to replace the old ones?PB: First of all, competition between currencies must be maintained, because people then can use the currency that they find most suitable for their purposes. A few currencies might then prevail. Gold or silver, and there might be even good electronic currencies such as Bitcoin. As a transition you could first, with the gold of the national bank, create a fully covered gold currency and then open up the market for other competitors.MI: Is a gold standard a solution?PB: I'm not fixated on the gold standard. In the competition between currencies, gold and other precious metals have historically proven to be good money. In 1914, governments nationalized our gold in Europe. After some back and forth the last bond to gold was abolished in the 1970s because it limited the governments in their spending orgies. Now we have a pure paper money system. We should set our monetary system back to the pre-1914 period. This time with a one-hundred-percent-backed gold standard — and open the competition in alternative currencies. Then people can choose freely. The big advantage is that these currencies are truly independent of politics. Gold cannot be politically manipulated. Un-manipulated money is better money than state money ever can be.Image source: iStockphoto.

How Economic Aggregation Hides the Problems of Interventionism

6 February, 2015 - 07:00
I was going through the textbook for my economics principles course recently, thinking about how I could better reconcile the fact that since only individuals choose, the logic of economics is about individual choices facing the fact of scarcity. Yet macroeconomics is generally presented directly in terms of aggregates and how to control them, as if aggregates were the relevant measures.The Limits of MacroeconomicsPerhaps in over-reaction to the paltry discussion such issues received in my undergraduate and graduate training, I spend a substantial amount of class time on the limitations of macroeconomic aggregates. For instance, I emphasize that not a single macroeconomic variable measures what we would like to know accurately. This is why we often evaluate more than one imperfect measure to see if the “story” they tell is consistent. We do this to estimate how much confidence can be placed in a particular “fact” (like what the official unemployment rate or a measure of inflation-adjusted output did over a given period). This is why I feel the need to drive home problems aggregation can cause more clearly to my students.With that in my head, I read the textbook’s introduction to “net taxes.” It struck me how “looking behind the curtain” at that category illustrate how aggregation can hide information and distort important conclusions.“Net taxes” equals taxes paid to the government minus transfer payments from the government to recipients, for the household sector as a whole. It is a useful category for looking at the net effect of government programs on the disposable income of the sector as a whole. But it can paper over massive amounts of income redistribution and substantial supply-side effects on productive incentives.Say that the government taxes one subset of the population $3 trillion, and provides $2 trillion in transfer payments (food stamps, unemployment insurance, Social Security, etc.) to another subset. The net effect on households’ aggregate disposable income is a reduction of $1 trillion. But to consider only that net number in an analysis is to ignore very important considerations.What’s Behind The Big Numbers?Most obviously, the net number ignores what can be vastly different treatment of different households. And that is crucial to any moral or ethical evaluation of the effects. That is particularly true when we want to know the extent to which government offers “liberty and justice for all,” as we say in the Pledge of Allegiance — that is, how much it honors individuals’ self-ownership and their derivative rights to their own production. A state that steals from Peter to pay Paul on a massive scale violates our inalienable rights in ourselves, but aggregating the effects into “net taxes” hides those effects from view.The adverse supply-side effects that such policies have also disappear from view when we overlook the redistribution. The reason is that when we “tax the rich and give to the poor,” we reduce both parties’ productive incentives. The higher tax rates faced by higher income earners reduces the fraction of the value they produce for others that they take home, so they shelter more and earn less income. That is, they do less for others with the resources at their disposal than they otherwise would have.Less noticed is that the aid given to the poor is also conditional on them staying poor. For instance, people lose 30 cents in food stamps for each dollar of earnings counted by the program. They, too, therefore keep a smaller fraction of what their efforts produce for others, and will also produce less for others than they would otherwise.Hiding redistribution — and the extent to which it reduces jointly-beneficial production by focusing on “net taxes” — is not the only way in which aggregation distorts. For example, it is notable that those who back policies such as higher minimum or “living” wages because they will “help the poor,” primarily argue for it because they assert lower income earners, as a group, will have greater incomes.Now, there are a host of issues involved in deciding whether that is true, but a focus on that question ignores that there will be a substantial number of lower skill workers who will lose their jobs and/or hours worked, fringe benefits, on-the-job training that builds future income potential, etc. They will be worse off. And arguing that the group in the aggregate might have higher incomes, which only means one subset’s increased earnings will be at least somewhat greater than another subset’s decreased earnings, in no way justifies harming large numbers of that group who are also poor, in the name of helping the poor.Aggregation Provides Little Useful KnowledgeAs Friedrich Hayek notes in “The Use of Knowledge in Society” (and elsewhere), the aggregation that is part and parcel of central planning by its nature throws away a great deal of valuable information. The “particular circumstances of time and place” which enable value creation and that only some individuals know (i.e., not the central planner), can be utilized only by decentralizing decisions to those who are most expert in those details, in combination with the information others provide via their market choices. But such knowledgeby its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form. The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the “man on the spot.”Aggregates used in constructing gross domestic product (GDP) have severe limitations as well. They rely on prices paid to assign values to goods or services exchanged. This demonstrated preference approach makes sense for purely market driven behavior, as the value for each unit would have to be greater than the price paid for self-interested individuals who make the purchases. Even here, however, the excess value over what was paid that motivated the purchases (termed consumer surplus) is ignored. But where government intervenes, accuracy is severely degraded.For example, if government gives a person a 40 percent subsidy for purchasing a good, all we know is that the value of each unit to the buyer exceeded 60 percent of its price. There is no implication that such purchases are worth what was paid, including the subsidy. And in areas in which government produces or utilizes goods directly, as with defense spending, we know almost nothing about what it is worth. Citizens cannot refuse to finance whatever the government chooses to buy, on pain of prison, so no willing transaction reveals what such spending is worth to citizens. And centuries of evidence suggest government provided goods and services are often worth far less than they cost. But such spending is simply counted as worth what it cost in GDP accounts.Other Aggregation SinsThese aggregation issues do not do more than scratch the surface of the problems that arise with aggregation. There are plenty more once we dig into the details. For instance, the way employment and unemployment data are aggregated and reported, it is possible to have a job but not be officially employed or unemployed (e.g., workers under age 16), to have a job but be officially unemployed (e.g., workers in the underground economy), and to be officially employed but not currently working (union members on strike). Further, one person can be counted as multiple employees and employment and unemployment rates can move in the same direction at the same time.The main point, however, is that to rely on aggregates as the focus moves attention away from individuals, who are the only ones who choose, act, and bear consequences. Even without further complexities and problems, that approach can hide everything from income redistribution between different groups (net taxes) to income redistribution within groups (minimum and living wage laws) to supply-side effects on production (taxes and means tested government benefit programs) to the impossibility of central planners directing an economy efficiently (with statistics that throw away details that are crucial to the creation of wealth) to the ambiguity of measures of the value of output (government production assumed to be what it cost). That is a lot to disguise or misrepresent, and such issues provide more than ample reason for suspicion whenever someone puts forth an argument from a major premise that “government aggregate X did Y, therefore we know that Z follows.”Image source: iStockphoto.

Yes, Minimum Wages Still Increase Unemployment

6 February, 2015 - 07:00
Raising the minimum wage has become the cause célèbre for many on the progressive left. Most notably, Seattle has passed a $15 per hour minimum wage. In addition, California lawmakers are trying to pass a state-wide $13 per hour minimum wage and President Obama is supporting the increase of the federal minimum wage from $7.25 to $10.10.The general public has generally been pretty ignorant regarding economics, so it’s understandable that many would fall for hollow populist appeals. However, a series of new studies on the minimum wage purport to show a low or non-existent impact on unemployment. Seventy-five notable economists even signed a petition to President Obama to raise the minimum wage.This would seem at odds with basic economic theory. After all, demand curves are downward sloping, aren’t they? At some point, an increase in the minimum wage has got to cost jobs. If the minimum wage was increased to $100 per hour, obviously that would cost a lot of jobs. No one would disagree with this. So in that case, why wouldn’t increasing it to $10.10 per hour cost some jobs, right?Revisionist StudiesBefore the latest wave of revisionist studies, the idea that minimum wage hikes don’t cause unemployment received a substantial boost in 1994 from a study of New Jersey-Pennsylvania fast food workers. However, David Neumark and William Wascher re-evaluated the evidence and found that the “New Jersey minimum wage increase led to a 4.6 percent decrease in employment in New Jersey relative to the Pennsylvania group.”More recently, the old consensus was challenged again. Robert Murphy summarizes these economists approach as follows,If we include regional-specific trends indexed by time period, the influence of the minimum wage begins to disappear and, in particular, using their preferred control group method (of contiguous county pairs) completely obliterates the textbook finding. The minimum wage may even have a positive impact on employment.However, as Murphy notes, these adjustments “might mask the policy’s true effect.” As a recent working paper from Jonathan Meer and Jeremy West finds,Using three separate state panels of administrative employment data, we find that the minimum wage reduces net job growth, primarily through its effect on job creation by expanding establishments.Jonathan Meer and Jeremy West, "Effects of the Minimum Wage on Employment Dynamics," December 2013, pg. 1.In essence, minimum wage increases make it more likely that firms won’t hire new people than that they will fire current employees. For example, movie theaters have stopped employing ushers almost entirely. And many companies are moving toward more automation, at least partly because of minimum wage increases.Furthermore, there is another major problem as Robert Murphy’s points out,… careful analysts will often summarize the new research in a nuanced way, saying “modest” increases in the minimum wage appear to have little impact on employment. But the proposed increase from $7.25 to $10.10 an hour is a 39-percent increase, which can hardly be characterized as “modest.” Such an increase, therefore, could well destroy teenagers’ jobs, notwithstanding the revisionist studies.It should also be noted that according to the Bureau of Labor Statistics, only “4.3 percent of all hourly paid workers” work at or below the minimum wage and “… workers under the age of 25 … made up about half of those paid the federal minimum wage or less.”Bureau of Labor Statistics, Characteristics of Minimum Wage Workers, 2013, March 2014, pg. 1. Studies focusing on modest increases in the minimum wage are of course not going to show much of a difference. However, even with only modest increases in the minimum wage, effects can be found. As a review of the literature by David Neumark and William Wascher describes,Our review indicates that there is a wide range of existing estimates and, accordingly, a lack of consensus about the overall effects on low-wage employment of an increase in the minimum wage. However, the oft-stated assertion that recent research fails to support the traditional view that the minimum wage reduces the employment of low-wage workers is clearly incorrect. A sizable majority of the studies surveyed in this monograph give a relatively consistent (although not always statistically significant) indication of negative employment effects of minimum wages. In addition, among the papers we view as providing the most credible evidence, almost all point to negative employment effects, both for the United States as well as for many other countries.David Neumark and William Wascher, "Minimum Wage And Employment: A Review of Evidence From the New Minimum Wage Research," November 2006, pg. 2.Indeed, even the Congressional Budget Office estimates that increasing the minimum wage to $10.10 per hour will cost 500,000 jobs.Hurting Those It’s Meant to HelpThe minimum wage is constantly sold as good for workers, or minorities or women. In truth, it hurts the most vulnerable and those its well-intentioned sponsors intend to help.A study by Jeffrey Clemens and Michael Wither evaluated the effect of minimum wage increases on low-skilled workers during the recession and found that minimum wage increases between December 2006 and December 2012 “… reduced the national employment-population ratio by 0.7 percentage points.”Jeffrey Clemens and Michael Wither, "The Minimum Wage and the Great Recession: Evidence on the Employment and Income Trajectories of Low-Skilled Workers," November 24, 2014, pg. 36. That amounts to about 1.4 million jobs. And more noteworthy, that “… binding minimum wage increases significantly reduced the likelihood that low-skilled workers rose to what we characterize as lower middle class earnings.”Yes, it’s hard to make ends meet with a minimum wage job and such jobs certainly aren’t enviable. That being said, cutting out the bottom rung from people just makes it all the harder to get by. A bad job is better than no job and it is often the first step to something better. This is further shown by an illustrative chart provided by economist Mark Perry comparing the minimum wage with teenage unemployment. The two are almost perfectly correlated.And while the large majority of those pushing for an increase in the minimum wage have good intentions, this has certainly not always been the case. Much like rent controls, increasing the minimum wage reduces the price of discrimination by creating a surplus of laborers for employers to choose from. Whereas many have noted the odd alliance of “Bootleggers and Baptists” when it came to Prohibition, another odd alliance of “Populists and the Prejudiced” could just as easily be applied to the minimum wage.When Apartheid was collapsing in South Africa, the economist Walter Williams did a study of South African labor markets and found that many white unions were seeking to increase the minimum wage. He quotes one such union leader as saying “… I support the rate for the job (minimum wages) as the second best way of protecting white artisans.” By pricing out less educated black laborers with a minimum wage, white unions were able to insulate themselves from competition.Indeed, the Davis-Bacon Act, which demands that private employers pay “prevailing wages” for any government contracts, was explicitly passed as a Jim Crow law in order to protect white jobs from cheaper black competitors. And while the minimum wage is supported with much more pleasant rhetoric these days, the effects on black employment, particularly black teenage employment, have been devastating. As Thomas Sowell observes,In 1948 … the unemployment rate among black 16-year-olds and 17-year-olds was 9.4 percent, slightly lower than that for white kids the same ages, which was 10.2 percent. Over the decades since then, we have gotten used to unemployment rates among black teenagers being over 30 percent, 40 percent or in some years even 50 percent.It’s hard to imagine that black unemployment was actually less than that of whites. But that is the effect minimum wage laws can have.In 1948 there was a minimum wage, but because of a high inflation during that decade, it was so low as to be irrelevant.Ending poverty and giving people additional income are praiseworthy goals, but there are no free lunches in this world. And trying to force prosperity through a minimum wage simply creates a whole host of negative and unintended consequences especially for those who are the most vulnerable.Image source: iStockphoto.

Is Russia Planning a Gold-Based Currency?

4 February, 2015 - 07:00
The “perfect-storm” of geopolitical instability, diplomatic isolation, severe currency depreciation, and economic decline now confronting Russia has profoundly damaged Moscow's international standing, and possibly for the long-term. Yet, it is precisely such conditions that may push the country’s leadership into taking the radical step that will secure its world-player status once and for all: the adoption of a gold-exchange standard.Though a far-fetched idea at first glance, many factors suggest that remonetization in gold may be a logical next step for Moscow.First, for years Moscow has been expressing its unwillingness to remain at the monetary mercy of the US and its NATO allies and this view has been most vehemently expressed by President Putin’s long-time economic advisor, Sergei Glazyev. Russia is prepared to play strategic hardball with the West on the issue: the governor of Russia’s central bank took the unusual step last November of presenting to the international media details of the bank’s zealous gold-buying spree. The announcement, in sharp contrast to that institution’s more taciturn traditions, underscores Moscow’s outspoken dismay with dollar hegemony; its timing suggests coordination with the top rungs of government to present gold as a possible currency-war weapon.Second, despite international pressure, Russia has been very wary of the sell-off policies that led the UK, France, Spain, and Italy to unload gold over the past decade during unsuccessful attempts to prop up their respective ailing economies — in particular, of then-Prime Minister Gordon Brown’s sell-off of 400 metric tons of the country's reserves at stunningly low prices. Moscow’s surprise decision upon the onset of the ruble’s swift decline in early December 2014 to not tap into the country’s gold reserves, now the world's sixth largest, highlights the ambitiousness of Russia’s stance on the gold issue. By the end of December, Russia added another 20.73 tons, according to the IMF in late January, capping a nine-month buying spree.Third, while the Russian economy is structurally weak, enough of the country's monetary fundamentals are sound, such that the timing of a move to gold, geopolitically and domestically, may be ideal. Russia is not a debtor nation. At this writing in January, Russia’s debt to GDP ratio is low and most of its external debt is private. Physical gold accounts for 10 percent of Russia’s foreign currency reserves. The budget deficit, as of a November 2014 projection, is likely to be around $10 billion, much less than 1 percent of GDP. The poverty rate fell from 35 percent in 2001 to 10 percent in 2010, while the middle class was projected in 2013 to reach 86 percent of the population by 2020.Collapsing oil prices serve only to intensify the monetary attractiveness of gold. Given that oil exports, along with the rest of the energy sector, account for 45 percent of GDP, the depreciation of the ruble will continue; newly unstable fiscal conditions have devastated banks, and higher inflation looms, expected to reach 10 percent by the end of 2015. As Russia remains (for the foreseeable future) mainly a resource-based economy, only a move to gold, arguably, can make the currency stronger, even if it does limit Russia’s available currency.In buying as much gold as it has, the country is, in part, ensuring that it will have enough money in circulation in the event of such fundamental transformation. In terms of re-establishing post-oil shock international prestige, a move to gold will allow the country to be seen as a more reliable and trustworthy trading partner.The repercussions of Russia on a gold-exchange standard would be immense. Above all, it would mean the first major schism in the world's monetary order. China would quite likely follow suit. It could mean the threat of a severe inflation in the United States should rafts of unwanted dollars make their way back across the Atlantic — the Fed's ultimate nightmare. Above all, the country will avoid the extreme debt leverages which would not have happened had Western capitals remained on gold.“A gold standard would be politically appealing, transforming the ruble to a formidable currency and reducing outflows significantly,” writes Dr. Enrico Colombatto, economics professor at the University of Turin, Italy.He notes that the only major drawback would be that the imposed discipline of a gold standard would deprive authorities of discretionary political power. The other threat would be that of a new generation of Russian central bankers becoming too heavily influenced by the monetary mindset of the European Central Bank (ECB) and the Fed.As Alisdair MacLeod, a two-decade veteran of off-shore banking consulting based in the UK, recently wrote, Russia (and China) will “hold all the aces” by moving away from any possible currency wars of the future into the physical gold market. In his article, he adds that there is currently a low appetite for physical gold in Western capital markets and longer-term foreign holders of rubles would be unlikely to exchange them for gold, preferring to sell them for other fiat currencies.Mr. Macleod cites John Butler, CIO at Atom Capital in London, who sees great potential in a gold-exchange standard for Russia. With the establishment of a sound gold-exchange rate, he argues, the Central Bank of Russia would no longer be confined to buying and selling gold to maintain the rate of exchange. The bank could freely manage the liquidity of the ruble and be able to issue coupon-bearing bonds to the Russian public, allowing it a yield linked to gold rates. As the ruble stabilizes, the rate of the cost of living would drop; savings would grow, spurred on by long term stability and lower taxes.Foreign exchange also would be favorable, Mr. Butler maintains. Owing to the Ukraine crises and commodities crises, rubles have been dumped for dollar/euro currencies. Upon the announcement of a gold-exchange, demand for the ruble would increase. London and New York markets would in turn be countered by provisions restricting gold-to-ruble exchanges of imports and exports.The geopolitics of gold also figure into Russia’s increasingly close relations with China, a country that also has made clear its preference for gold over the dollar. (Russia recently edged out China as the world's top buyer of the metal.) In the aftermath of the $400 billion, 30-year deal signed between Russian gas giant Gazprom and the China National Petroleum Company in November 2014, China turned its focus to the internationalization of its own gold market. On January 15, 2015, the Shanghai Gold Exchange, the largest physical gold exchange worldwide, and the World Gold Council, concluded a strategic cooperation deal to expand the Chinese gold market through the new Shanghai Free Trade Zone.This is not the first time the gold standard has been seen as the ultimate cure for Russia’s economic problems. In September 1998, the noted economist Jude Wanninski predicted in a far-sighted essay for The Wall Street Journal that only a gold ruble would get the the country out of its then-debt crises. It was upon taking office about two years later, in May 2000, that President Putin embarked upon the country’s massive gold-buying campaign. At the time, it took twenty-eight barrels of crude just to buy an ounce of gold. The gold-backed ruble policy of those years was adopted to successfully pay down the country's external debt.As a pro-gold stance is, essentially, anti-dollar, speculation about how the US would react raises the question of whether an all-out currency war would follow. The West would have to keep Russia regionally and militarily marginalized, not to mention kept within the confines of the Fed, the ECB, and the Bank of England (BOE).Nor is that prospect too far-fetched. As Dutch author Willem Middelkoop has written in his 2014 book The Big Reset: War on Gold and the Financial Endgame,A system reset is imminent. Even before 2020 the world's financial system will need to find a different anchor. ... In a desperate attempt to maintain this dollar system, the United States waged a secret war on gold since the 1960s. China and Russia have pierced through the American smokescreen around gold and the dollar and are no longer willing to continue lending to the United States. Both countries have been accumulating enormous amounts of gold, positioning themselves for the next phase of the global financial system.Image source: iStockphoto..

The Folly of 1845: Texas and the Evils of Annexation

3 February, 2015 - 07:00
This year marks the 170th anniversary of the annexation of Texas by the United States government. Although Texas militias had gained de facto independence from Mexico in 1836, negotiations between Mexico and the United States continued for another nine years as the Texas government attempted to work out a long-term strategy for Texas. Most Texans (especially the Anglo ones) wanted union with the United States, and American settlers looking to move to Texas also wanted union to ease emigration and legal issues. Moreover, American slave owners saw the opportunity to admit another slave state to the United States to counterbalance the addition of northern free states from the Louisiana Purchase.In 1845, Congress approved annexation, significantly enlarging the size of the United States, but the annexation also brought with it many unresolved issues including ongoing border disputes with Mexico and simmering issues over the balance of slave states and free states in the electoral college and Congress. Obviously UnconstitutionalBy 1845, the fact that the enumerated powers obviously nowhere empower congress to annex new territories was apparently not a problem for most. Even today, people who claim to be “strict constructionists” will defend the Louisiana Purchase and other annexations in spite of the lack of constitutional authority. Arguments in favor of annexation rarely rise above crude consequentialism, but this didn’t stop Jefferson — that alleged defender of decentralization — from massively enlarging the size and scope of the US government with the Louisiana Purchase. Others argue that the populations in the new territories demanded annexation. But, this is irrelevant since there’s no legitimate reason why foreigners (i.e., Texans before annexation) should be dictating policy to Americans.Annexation Extends and Grows Government PowerOf course, the constitutionality of a government act tells us nothing as to whether or not it expands or restricts human freedom; constitutionality is hardly synonymous with expanding freedom. Annexation, on the other hand, regardless of its legal status, is an extension and consolidation of a state monopoly. Moreover, the problem of annexation in general, and thus in the Texas case specifically, is that it is damaging to the freedom of the residents of the annexing country just as much as it is for the residents of the annexed territories. As Max Weber noted, a state is an organization with a monopoly on coercion within a certain territory. We know that government can increase the size and scope of this monopoly in a variety of ways. It can raise taxes and tighten its monopoly on coercion by limiting private ownership of weapons.At the same time, one of the easiest ways to expand this monopoly is to simply expand the physical territory over which the monopoly extends. In the past, when financial markets and money-based economies were undeveloped, land (especially land fit for agriculture) remained one of the few reliable sources of wealth. Thus, governments regularly fought over physical parcels of land that could be distributed among favored supporters and citizens. Today, land is only one type of wealth, although even today, governments seek to extend themselves over new lands whenever the opportunity arises, and new territories often mean new taxpayers who can be exploited in perpetuity. New lands can offer strategic military advantages, and nowadays, there might be oil there. Not all annexations are financially lucrative, but, they will endure if they offer at least some advantage to states whether in the form of military strategy or political prestige.These reasons are behind why China is in Tibet, why Israel is in the West Bank, and why Russia is in the Crimea. The US government, a typical state, behaves similarly. It seizes territories wherever possible, including Guam, the American West, Alaska, Hawaii, Texas, the Floridas, and the Philippines. The way in which these areas are annexed differ, but they all increased the size, scope, and power of the United States government.Today, annexation has become largely taboo, as the Russian annexation of the Crimea illustrates. Most states opt for de facto annexation instead. It’s much more acceptable to install a puppet government and merely occupy a territory than to fully annex it. In some ways, occupation is preferable to annexation because the occupying state need not concern itself with the welfare of the local population. The occupying state need only exploit the territory for its military advantage or its usefulness in extracting natural resources. Such was the strategy of the British in Egypt and Sudan, and the United States in Iraq and Afghanistan.But full-blown annexation is the most dangerous because there is a finality in it, and it offers the ruling state a more complete and enduring monopoly of force over the territory in question.Annexation Is the Opposite of SecessionThe political realities of the time suggest that Americans of the nineteenth century were less concerned with limiting the power of the state than they were with using the power of the state to execute an Anglo-ethnic nationalist agenda of expansion. We see this everywhere in the attitudes of the settlers themselves and in the acts of politicians in DC. Had they been concerned with limiting the power of the state, they might have stopped to think twice about the implications of extending the reach of the central government ever outward.With Texas and with all cases of annexation, the arguments that exist in favor of secession apply equally well in opposition against annexation. If we wish to truly limit states, we need to limit the extent to which they can exercise a monopoly. A vast unified state over a large territory offers few choices for its residents. Those wishing to escape to somewhere else must move hundreds, if not thousands, of miles away to build a new life under a new government. It was, as Ralph Raico has explained, the lack of any widespread single-state in Europe that made the Europeans more wealthy and free than other civilizations. There is no reason to believe that North America should be different.For an illustration of the day-to-day implications of living under a geographically huge state — if we could time travel — we could ask a slave under the fugitive slave laws in 1850 America if he would welcome a foreign border with a non-slave state fifty miles away. Or would he prefer that the United States extend 1,000 miles in all directions? It’s an easy question to answer, and the slave drivers certainly knew the answer, too.Just as we know that consumers are better off when retailers compete with each other, so it is with the productive classes when governments are forced to compete with each other. More states mean more choices and weaker monopolies where they exist. Fewer states mean fewer choices and stronger monopolies.Choosing Among Many American Republics With the Louisiana Purchase, it was claimed that without the purchase, the lands west of the US would forever be ruled by hostile governments. This was never more than fear-mongering. Indeed, any serious analysis of the demographic realities of the time makes it clear that it was only a matter of time until the region was going to be peopled by migrants from the United States anyway. No European country was in a position to offer migrants on a scale that could rival the numbers of American settlers pouring into Texas and other nearby lands. Had the United States government actually been restrained by its constitution, or by its people, those lands would have become independent states run largely by former Americans and their descendants. Certainly, the declining Spanish Empire or Revolutionary France was in no position to re-conquer a region populated by English-speaking former Americans.Were annexation not on the menu, the history of North America would be a history of numerous independent states (probably republics), most of which would share a significant ethnic, religious, and cultural bond with Americans. Most would even share a common language. Some of these republics would be more French and Spanish in flavor, and some would be less so. And all the while, should one of these republics, the United States included, become too contemptuous of its own taxpayers, they would have numerous other republics nearby — with similar cultures, legal systems, and languages — from which to choose.Moreover, for those who argue that such a situation would lead to more frequent international wars, the burden of proof is on them to demonstrate that these conflicts would be worse than the blood-soaked American Civil War, which was a direct result of the constitutional and political conflicts stirred up by westward annexations. And of course, the United States would never have been pulled into the Mexican War had it not annexed Texas first.What About National Defense? Under such conditions, there is nothing preventing these independent republics from enacting treaties of mutual defense. All states could enter into agreements governing free trade, migration, and military defense. Such international agreements do not require political union, and yet this dubious claim of the necessity of unity was behind the great bait and switch that was the new American constitution in 1787. That massive expansion of government power was sold to the voters as necessary to increase the military capacity of the American states. The framers wanted much more than that, of course, as is illustrated by the fact that the constitution is filled with a myriad of unrelated government powers such as coining money, creating federal courts, forming post offices, and regulating trade.The great problem of mere mutual defense agreements, from the state’s perspective, is that they are temporary and easily malleable in nature. Under such conditions, each state must work to ensure that both its native population and the foreign states in the agreement are pleased with the treaty. In other words, temporary and changeable agreements are far more high-maintenance and limiting on states than if the state simply annexes bordering territories. In that case, as we know from experience, the territories are locked in, and efforts to change the terms of the deal are deemed “treason,” as was the case when Texas attempted to secede from the Union it had joined a mere sixteen years earlier. As we look back on the nineteenth-century American obsession with uniting, centralizing, and homogenizing everything in the path of the American state, we would do well to remember that the American state’s ability to tax, spy, regulate, coerce, and control everything over a vast continent has been greatly enabled by territorial growth. When combined with American naïveté and faith in the weak reeds of democracy and “checks and balances,”  we’re in deep trouble indeed. Image source: wikimedia.

The ECB Fears Deflation, But You Should Not

3 February, 2015 - 07:00
The European Central Bank (ECB) is planning to pump 1.1 trillion euros into the banking system to fend off price deflation and revive economic activity. The ECB president and his executive board are planning to spend 60 billion euros per month from March 2015 to September 2016.Most experts hold that the ECB must start acting aggressively against the danger of deflation. The yearly rate of growth of the consumer price index (CPI) fell to minus 0.2 percent in December 2014 from 0.3 percent in November, and 0.8 percent in December 2013.Many commentators are of the view that the ECB should initiate an aggressive phase of monetary pumping along the lines of the US central bank. Moreover the balance sheet of the ECB has in fact been shrinking. The yearly rate of growth of the ECB balance sheet stood at minus 2.1 percent in January against minus 8.5 percent in December. Note that in January last year the yearly rate of growth stood at minus 24.4 percent.The Fear: People Might Save Instead of SpendWhy is a declining rate of inflation bad for economic growth? According to the popular way of thinking, declining price inflation sets in motion declining inflation expectations. This, in turn, is likely to cause consumers to postpone their buying at present and that in turn is likely to undermine the pace of economic growth.But, in fact, in order to maintain their lives and well-being, individuals must buy present goods and services. So from this perspective a fall in prices as such is not going to curtail consumer outlays. Furthermore, a fall in the growth momentum of prices is always good for the economy.A Fall in Prices Can Mean an Expansion of Real WealthFor example, an expansion of real wealth for a given stock of money is going to manifest in a decline in prices (remember a price is the amount of money per unit of real stuff), so why should this be regarded as bad for the economy?After all, what we have here is an expansion of real wealth. A fall in prices implies a rise in the purchasing power of money, and this in turn means that many more individuals can now benefit from the expansion in real wealth.What If Prices Fall As a Result of a Bust?Now, if we observe a decline in prices on account of an economic bust, which eliminates various non-productive bubble activities, why is this bad for the economy?The liquidation of non-productive bubble activities — which is associated with a decline in the growth momentum of prices of various goods previously supported by non-productive activities — is good news for wealth generation.The liquidation of bubble activities implies that less real wealth is going to be diverted to malinvestments from wealth generators. Consequently, this will enable investors to lift the pace of wealth generation. (With more wealth at their disposal they will be able to generate more wealth.)So, as one can see, a fall in price momentum is always good news for the economy since it reflects an expansion or a potential expansion in real wealth.Hence, a policy aimed at reversing a fall in the growth momentum of prices is going to undermine — not strengthen — economic growth.We hold that the various government measures of economic activity reflect monetary pumping and have nothing to do with true economic growth.An increase in monetary pumping may set in motion a stronger pace of growth in an economic measure such as gross domestic product. This stronger growth, however, should be regarded as a strengthening in the pace of economic impoverishment.It is not possible to produce genuine economic growth by means of monetary pumping and an artificial lowering of interest rates. If this could have been done, world poverty would have been erased by now. Image source: iStockphoto.

How Government Helped Create the Coming Doctor Shortage

2 February, 2015 - 07:00
For the last five years, attempts to reform America’s health care system have focused primarily on the demand side of the market, and specifically on the market for insurance. Yet, these reforms have not achieved significant improvements in health care outcomes, nor reductions in cost. As health care specialist John C. Goodman has pointed out in Forbes, the slowed growth of health care spending in the United States is a trend that correlates most closely with supply side reforms such as the availability of health savings accounts. Reductions in spending or costs are certainly not an effect of the Affordable Care Act.One of the most critical supply side issues in health care is the supply of qualified doctors. The Wall Street Journal has reported that the number of doctors per capita is in decline for the first time in two generations, and the American Association of Medical Colleges has predicted a shortage of 45,000 primary care physicians and 46,000 specialists by 2020.In light of these statistics, it would seem prudent to adopt policies that streamline entry into the health care market, while keeping regulatory costs to a minimum. Regrettably, this is far from the case, with states erecting numerous barriers to would-be health care providers that contribute to the high prices and limited access currently set to cripple the American market. While some of these are familiar and even seem natural to most people, some of the ways in which governments act to restrict doctor supply will come as a surprise to many.Monopolistic Medical BoardsWe are generally brought up to believe that monopolies are bad. The very word conjures up images of tight-fisted tycoons in top hats and monocles squeezing employees and consumers alike for all they are worth. While natural monopolies resulting from superior business models get an unfairly bad rap, people’s capacity for critical thought seems to inexplicably switch off when confronted with those monopolies which are created and supported by government.The case of health care regulations is an interesting one, as state governments have empowered private medical boards with unilateral authority to set the rules for the medical profession, including the issuing and revoking of medical licenses. These boards effectively function like government regulatory agencies, with the important difference that they lack the opportunity for public comments, and thus are immune from any political pressure from citizens.If the EPA or the IRS implements a regulation that the public doesn’t like, there is a political process by which they can voice their discontent and theoretically make an impact on the decision. In fact, this happens rather frequently, and although there is still too little accountability for regulatory czars, at least the opportunity exists for political action.With state medical boards, no such process exists, and there is little transparency in the rule-making process that determines how doctors must operate. If a particular regulation is harmful, doctors and patients have no real alternative other than moving to a different state with different requirements, an impractical solution to say the least.The fact that these medical boards are private rather than public entities is supposed to make us feel more free, but in fact, most members of these boards are appointed by state governors. When state laws forbid competition among regulators, and signal that the government will regard as binding anything the medical board decides to do, the distinction between public and private becomes meaningless.For example, the California Business and Professions Code (Section 2220.5) states that “The Medical Board of California is the only licensing board that is authorized to investigate or commence disciplinary actions relating to physicians or surgeons” and charges the board with investigating any and all complaints from the public, other doctors, or health care facilities, or from the board itself. Although the board is technically private, the government sanctioned monopoly on enforcement stands as a barrier to entrants of the medical profession, who are forced to comply with a monolithic set of “take ‘em or leave ‘em rules,” with which they have no choice but to comply, or risk being barred from practicing their trade.Limits on Nurse PractitionersNurse practitioners represent a less expensive alternative to fully licensed doctors for patients with minor, day-to-day complaints. Frequently operating out of walk-in clinics or pharmacies, these health care providers offer convenience, competition, and innovation in a market in desperate need of all three. In response to the Affordable Care Act, many states have been loosening regulations on nurse practitioners, which is a step in the right direction, but more needs to be done if we are to truly encourage competition and increase supply.Midwives, physicians’ assistants, and other alternative practitioners also have a key role to play in medical care, and should be permitted to practice without physician supervision. Midwifery in particular was once a vibrant industry, that has since been crippled by costly regulations.Restrictions on Retail ClinicsRetail clinics, pharmacies, and even supermarkets are capable of offering routine medical services to patients with a convenience and regularity impossible in traditional physicians’ offices. Unfortunately, the American Medical Association (AMA) has aggressively lobbied against the availability of this type of facility.In this, the AMA has been mostly successful. While pharmacists are permitted to administer injections to patients in Louisiana, the vast majority of states still have strict prohibitions on this sort of thing. Still, where retail clinics are permitted to operate, the effects have been dramatic. Wal-Mart has recently begun opening a series of in store clinics in a handful of states. The big-box store is boasting charges of just $40 for an office visit, about half of the industry standard, and has expanded its services to treat chronic conditions as well as the acute complaints in which most retail clinics have exclusively specialized. Additionally, the company has driven the cost of generic prescription drugs down to just $4.Wal-Mart is leading the way in this area, by offering primary care services in fairly rural locations, where access to quality medical care can be particularly problematic. Retail clinics simply offer another option to patients, and restricting those options will always result in higher costs. Wal-Mart’s efforts offer only a glimpse at the potential for cheaper, more available medical care if states would relax their restrictions on retail clinics.Licensing RequirementsEvery student wishing to practice medicine must pass the United States Medical License Examination, and all states impose additional requirements from state licensing boards. These are frequently lengthy and expensive procedures. Medical organizations such as the AMA have an incentive to limit the number of licensed doctors practicing in the marketplace, in order to protect high wages for established incumbents.Just as the system of taxi medallions has long hindered the transportation industry, burdensome licensing requirements are still another barrier standing in the way of expanding the doctor supply.There is an argument to be made that stricter licensing requirements result in higher quality doctors. Whether or not this is true is debatable, depending on which studies you read, but regardless of what the answer is, there is no reason not to allow various gradations of quality in the health care market. A system, or multiple systems, of voluntary certification instead of, or in addition to, traditional licensing would offer consumers a broad array of services with corresponding differences in price.In virtually every other market, from food, to clothing, shelter, to transportation, consumers are permitted to select a level of quality appropriate for their budget constraints. If every car was mandated to be of Cadillac quality, a lot fewer people would have the means to drive. The availability of beat up old jalopies allows consumers to trade quality for affordability and expands access to transportation for everyone. There is no reason why medical access shouldn’t work the same way.Importing DoctorsMany nations other than the United States turn out qualified physicians, but American Licensing Boards do not fully recognize the credentials of doctors immigrating from abroad. This means that a fully capable physician from the United Kingdom or Germany will still have to serve a four year residency and go through the onerous licensing procedures.About 15 percent of residency positions go to foreign medical graduates. If there were an alternative method of recognizing existing credentials, these slots could be filled by domestic medical students, resulting in more practicing doctors.The Length of Schooling and the Small Number of Medical SchoolsThere are currently only 129 accredited medical schools in the United States, too few to turn out enough doctors to meet the demand. In order to gain accreditation, a school must undergo an eight-year process overseen by the U.S. Department of Education.The number of residency positions available is only 110,000, a number which is determined by the way Congress chooses to fund Medicare. But directly tying the number of available residencies to Medicare funding ignores the economic realities of the health care market, and fails to provide any measure of adaptability to changing conditions.The deficit of residency slots also contributes to the length of time it takes to become a doctor. It can take as many as ten years from the time someone begins studying medicine to when they are allowed to practice. The result of this is a remarkable lack of flexibility for the health care market to adapt to changes in demand.ConclusionAll of these supply side restrictions make it more difficult for the labor market for medical providers to respond to consumers’ needs. When a change in demographics occurs, such as the Baby Boomer generation entering retirement, or when legal reforms such as the Affordable Care Act alter incentives, it can take decades for supply to catch up to demand.By reducing the regulatory burden on physicians, providing more competition among medical boards, and permitting more autonomy for alternative practitioners, patients could see both relief from the coming doctor shortage, as well as lower prices across the board for medical care. Image source: iStockphoto.

Europe Joins the QE Party

30 January, 2015 - 07:00
The European Central Bank (ECB) finally pulled the QE trigger by committing to purchase 60 billion euros of government debt and other assets every month until September of 2016 or until inflation gets closer to 2 percent.The made-up excuse for this legal counterfeiting is that Europe is dangerously close to having (a very flawed) index of consumer prices drop below zero; as though calamity would strike Europe if the index were to register a negative number. The ECB claims it needs to print money because lower oil prices and — previous to that — a stronger euro were causing average prices to deviate from its 2 percent inflation target. It’s like having your supermarket run a 50 percent off sale on steak one weekend, and then having the ECB try to make all other prices in the supermarket go up so your total bill at the cash register goes up.The 2 percent inflation was never meant to be a target, but a ceiling. The problem has never been too little printing but too much printing. Deflation has never been a real problem (see here, here and here), but bouts of inflation have regularly led to chaos and social upheaval.Don’t Fear Price ChangesThe drop in oil prices is creating a change in relative prices that are part and parcel of a capitalist economy. Such changes are critical to guide resources and production in the direction of where they are most needed. They occur constantly and are not to be feared. They should be embraced as a necessary adjustment to guide limited resources to produce output that best meets society’s demand. A central bank interfering with the measuring stick of prices to alter absolute and relative prices to reach some non-meaningful target shows just how much mainstream economics has become nonsensical. By targeting an aggregate number, central banks distort individual prices and interfere with the efficient allocation of resources and goods and services.But What About Deflation?The reality is that deflation is being used as an excuse for the ECB to bail out spendthrift governments to save itself from the executioner’s ax. It recognizes that a break-up of the European Monetary Union is a forgone conclusion if current trends continue.So what exactly is the purpose of this quantitative easing? It can’t be to spur investment or consumption spending by lowering interest rates. Such rates are already close to zero.Is it to lower the value of the euro? Possibly, but this would go against the international unwritten rule that countries should not gear monetary policy to gain a competitive advantage through a devaluation of their currency. Also, the gain is likely to be small and very short lived, since nowadays exporters import many of their inputs, and labor unions are keenly aware of the inflationary impact of a depreciating currency.Furthermore, such a policy begets retaliation. As Mises foresaw, "A general acceptance of the principles of the flexible (exchange rate) standard must therefore result in a race between the nations to outbid one another. At the end of this competition is the complete destruction of all nations’ monetary systems."The only possible reason left is to generate some type of wealth effect. In other words, the goal is to make rich bankers richer at the expense of the middle class and the poor, so that the bankers’ extravagant lifestyles trickle down benefits to the rest of the economy.CPI and GDP Targets Are a MistakeTargeting the CPI or even nominal GDP is misleading. Mainstream economists, today, structure their policy advice on two fundamentally flawed hypotheses: the equation of exchange and the Cambridge equation. (See here). They should instead be using the original quantity theory of money.According to this theory, the money supply is related (albeit not related by any fixed ratio) to the prices of all transactions. This includes anything money can buy: stocks, haircuts, bonds, refrigerators, housing, cars, paintings, coins, etc. Classical economists defined inflation as an increase in the money supply. However, if one wishes to accurately observe the economy-wide relationship between money supply changes and changes in prices, one needs to observe the prices of everything, and not just a few goods, as with the CPI. Of course, an index of all these prices is impossible. By focusing on the CPI, or even nominal GDP, economists have been looking at what they perceive is a healthy set of trees while the forest has been burning around them. As in the 1920s, between 2001 and 2007, and even today, a stable CPI is blinding central bankers to the distortive effects of their policies on all other prices.The distortions have been massive, and the coming adjustments will be horrendous. If you had an employee who constantly screwed up and cost your company millions, wouldn't you fire him? Would you wait until his repeated mistakes led you to bankruptcy? It is time we had a serious discussion about developing a new monetary order: one without a central bank. Image source: iStockphoto. 

Why the Government Hasn’t Yet Managed to Destroy the Economy

30 January, 2015 - 07:00
Pierre Lemieux wrote an indispensible book (Somebody in Charge: A Solution to Recession) for anyone who wishes to understand the before, during, and immediate aftermath of the “Great Recession.”The book’s importance is greater than just his analysis of the crisis. He thoroughly exposes the underlying weaknesses and fallacies of the whole Keynesian policy-activism agenda driven by the “animal spirits,” the irresistible urge to action of those who wrongly deem themselves in charge.Lemieux concludes, “[t]he causes and legacy of the economic crisis of 2007–2009 reveal a deeper underlying crisis, which is a crisis of authority” (p. 162). As I concluded in my detailed review essay of Lemieux’s book, “If this book were widely read in and out of classrooms, it might be very useful in awaking more of the public to the fact that we do not need somebody in charge.” A free economy will do just fine if left to its own devices, and if agents are left relatively unhindered by government actions. Such economy-impairing actions include — but are not limited to — Fed and fiscal mis-direction of production, regulatory burdens, and misguided policies that distort incentives.In the winter 2014–2105 issue of Regulation, Professor Lemieux returns to the same theme but in a slightly different guise, when he asks (and answers) “Why hasn’t regulation crushed the American economy?” His answer: markets are resilient. Regulation is to entrepreneurs as putting barbed wire on a banister is to keeping grandma from sliding down; it slows her down but doesn’t stop her. In the process of answering his question, he also provides an explanation of why the aftermath of the 2007–2009 crisis is often referred to as the Great Stagnation. According to Lemieux (p. 15), “regulation is quite probably the invisible elephant in the room.” I would look broader to Higgs’s regime uncertainty, but that is a small quibble.David Henderson and Peter Boettke provide the insight into both why markets are resilient and under what circumstances markets most enhance prosperity. Henderson makes his contribution from his Ten Pillars of Economic Wisdom. The one most relevant here and one that should be more broadly understood is “Pillar #10: “competition is a hardy weed, not a delicate flower.” Boettke makes a similar point with two addendums; first, even minimal economic freedom provides people a way to make their lives better under even the most trying of circumstances, and second, markets lead to prosperity when embedded in an appropriate institutional setting. His summary:Markets are like weeds. They are impossible to stamp out. Markets emerge wherever and whenever there exist opportunities for individuals to gain through exchange. But not all markets are equal. Market exchanges in the absence of property rules take place, but possess characteristics which are not desirable for long-term economic growth.Markets do not need de jure sanction to exist, but for market activity to serve as the basis of general economic prosperity in a given society, they must exist within a body of law. … The rules of the game are probably the most significant determinant of economic performance. (p. 198)While regulation has retarded — but not crashed — the economy, just how much damage has regulation perhaps done long term? Relying on a study by John W. Dawson and John J. Seater (“Federal Regulation and Aggregate Economic Growth”), Lemieux answers that, counterfactually, the impact is more significant than one might think:Dawson and Seater thus claim that if federal regulation had remained at its 1949 level, 2011 U.S. GDP would have been $54 trillion instead of its actual $15 trillion. Seen from another point of view, the average American (man, woman, and child) would now have about $125,000 more per year to spend, which amounts to more than three times GDP per capita. If this is not an economic collapse, what is? Dawson and Seater’s estimates suggest that total factor productivity has been negatively affected by regulation during the whole 57-year period they studied, but with a higher negative effect from the mid-1960s to about 1980, a somewhat less negative effect from then on to the late 1990s, and a large negative effect again in the early 2000s. (p. 15)Overall, it’s a slow steady decline from potential of just over $2,000 per year, per captia.Supporting data comes from studies that examine not just the effect of regulation on growth, but the size of government on economic growth. Results from Gwartney, Holcombe, and Lawson ("The Scope of Government and the Wealth of Nations") and Vedder and Gallaway ("Government Size and Economic Growth") imply that the losses from even a small increase in federal government spending are big. Writing in 2009, I estimated that an increase in spending from 20 percent to 22 percent of GDP over a ten year period might reduce real GDP per person by about $4,400 in just the tenth year alone.Lemieux concludes:The marginal cost of regulation must rise as its stock increases. Moreover, the market rigidities caused by regulation increase the cost of adapting to the creative destruction brought by technological change. The role of regulation could explain why Europe, where the labor market is more regulated than in America, is stagnating even more.The resilience of markets, especially in a rich and sometimes still flexible economy like the United States, has dampened the effect of regulation. However, it is reasonable to believe that, over the more than six decades since World War II, regulation has deleted a big chunk of potential prosperity. It has not actually cut into the average standard of living, but this is only a consolation prize, for worse could come if the regulatory bulldozer is not pushed back.Unless we solve the “crisis of authority,” the current stagnation is likely to continue for the foreseeable future. As I concluded in 2009, while the impact to prosperity and innovation is significant, “the cost in lost freedom may be immeasurable.”Image source: iStockphoto.

Post Mortem on the Swiss Franc’s Euro-Peg

30 January, 2015 - 07:00
On January 15, 2015 the Swiss National Bank (SNB) announced an end to its three-year-old cap of 1.20 franc per euro. (The SNB introduced the cap in September 2011.) The SNB has also reduced its policy interest rate to minus 0.75 percent from minus 0.25 percent. The Swiss franc appreciated as much as 41 percent to 0.8517 per euro following the announcement, the strongest level on record — it settled during the day at around 0.98 per euro.With Money Creation, It’s All RelativeWe suggest that the key factor in determining a currency rate of exchange is relative monetary pumping. Over time, if the rate of growth of the money supply in country A exceeds the rate of growth of the money supply in country B then that country’s currency rate of exchange will come under pressure versus the currency of B, all other things being equal.Whilst other variables such as the interest rate differential or economic activity also drive the currency rate of exchange, they are of a transitory and not of a fundamental nature. Their influence sets in motion an arbitrage that brings the rate of exchange in line with the influence of the money growth differential.We hold that until now the rise in the money growth differential between Switzerland and the European Monetary Union during July 2011 and April 2012 was dominating the currency rate of exchange scene. (It was pushing the franc down versus the euro.) The setting of a cap of 1.20 to the euro to supposedly defend exports was an unnecessary move since the franc was in any case going to weaken. The introduction of the cap however prevented the arbitrage to properly manifest itself thereby setting in motion various distortions. (Note again the money growth differential was weakening the franc versus the euro.)A fall in the money growth differential between April 2012 and April 2013 is starting to dominate the currency scene at present, i.e., it strengthens the franc against the euro. So from this perspective it is valid to remove the cap and allow the arbitrage to establish the “true” value of the franc. (This reduces the need to pump domestic money in order to defend the cap of 1.20.) Observe that as opposed to 2011, this time around, by allowing the franc to find its “correct” level the SNB — it would appear — has decided to trust the free market.Note that since April 2013 the money growth differential has been rising — working toward the weakening of the franc versus the euro — and this raises the likelihood that the SNB might decide again some time in the future on a new shock treatment.We hold that by tampering with the foreign exchange market the SNB sets in motion fluctuations in the growth momentum of money supply (AMS), and this in turn generates the menace of boom/bust cycles. (Note the close correlation between the fluctuations in the growth momentum of foreign exchange reserves, the SNB’s balance sheet, and AMS.)Also, observe that by introducing the cap and then removing it — contrary to its own intentions — the SNB has severely shocked various activities such as exports. Note that the SNB is supposedly meant to generate a stable economic environment.Image source: iStockphoto.

Secession Begins at Home

29 January, 2015 - 07:00
[This article is adapted from a talk presented at the Houston Mises Circle, January 24, 2015.]Presumably everyone in this room, or virtually everyone, is here today because you have some interest in the topic of secession. You may be interested in it as an abstract concept or as a viable possibility for escaping a federal government that Americans now fear and distrust in unprecedented numbers.As Mises wrote in 1927:The situation of having to belong to a state to which one does not wish to belong is no less onerous if it is the result of an election than if one must endure it as the consequence of a military conquest.I’m sure this sentiment is shared by many of you. Mises understood that mass democracy was no substitute for liberal society, but rather the enemy of it. Of course he was right: nearly 100 years later, we have been conquered and occupied by the state and its phony veneer of democratic elections. The federal government is now the putative ruler of nearly every aspect of life in America.That’s why we’re here today entertaining the audacious idea of secession — an idea Mises elevated to a defining principle of classical liberalism.It’s tempting, and entirely human, to close our eyes tight and resist radical change — to live in America’s past.But to borrow a line from the novelist L.P. Hartley, “The past is a foreign country, they do things differently there.” The America we thought we knew is a mirage; a memory, a foreign country.And that, ladies and gentlemen, is precisely why we should take secession seriously, both conceptually — as consistent with libertarianism — and as a real alternative for the future.Does anyone really believe that a physically vast, multicultural, social democratic welfare state of 330 million people, with hugely diverse economic, social, and cultural interests, can be commanded from DC indefinitely without intense conflict and economic strife?Does anyone really believe that we can unite under a state that endlessly divides us? Rich vs. poor, black vs. white, Hispanic vs. Anglo, men vs. women, old vs. young, secularists vs. Christians, gays vs. traditionalists, taxpayers vs. entitlement recipients, urban vs. rural, red state vs. blue state, and the political class vs. everybody?Frankly it seems clear the federal government is hell-bent on Balkanizing America anyway. So why not seek out ways to split apart rationally and nonviolently? Why dismiss secession, the pragmatic alternative that’s staring us in the face?Since most of us in the room are Americans, my focus today is on the political and cultural situation here at home. But the same principles of self-ownership, self-determination, and decentralization apply universally — whether we’re considering Texas independence or dozens of active breakaway movements in places like Venice, Catalonia, Scotland, and Belgium.I truly believe secession movements represent the last best hope for reclaiming our birthright: the great classical liberal tradition and the civilization it made possible. In a world gone mad with state power, secession offers hope that truly liberal societies, organized around civil society and markets rather than central governments, can still exist.Secession as a “Bottom-Up” Revolution“But how could this ever really happen?” you’re probably thinking.Wouldn’t creating a viable secession movement in the US necessarily mean convincing a majority of Americans, or at least a majority of the electorate, to join a mass political campaign much like a presidential election?I say no. Building a libertarian secession movement need not involve mass political organizing: in fact, national political movements that pander to the Left and Right may well be hopelessly naïve and wasteful of time and resources.Instead, our focus should be on hyper-localized resistance to the federal government in the form of a “bottom-up” revolution, as Hans-Hermann Hoppe terms it.Hoppe counsels us to use what little daylight the state affords us defensively: just as force is justified only in self-defense, the use of democratic means is justified only when used to achieve nondemocratic, libertarian, pro-private property ends.In other words, a bottom-up revolution employs both persuasion and democratic mechanisms to secede at the individual, family, community, and local level — in a million ways that involve turning our backs on the central government rather than attempting to bend its will.Secession, properly understood, means withdrawing consent and walking away from DC — not trying to capture it politically and “converting the King.”Secession is Not a Political MovementWhy is the road to secession not political, at least not at the national level? Frankly, any notion of a libertarian takeover of the political apparatus in DC is fantasy, and even if a political sea change did occur the army of 4.3 million federal employees is not simply going to disappear.Convincing Americans to adopt a libertarian political system — even if such an oxymoron were possible — is a hopeless endeavor in our current culture.Politics is a trailing indicator. Culture leads, politics follows. There cannot be a political sea change in America unless and until there is a philosophical, educational, and cultural sea change. Over the last 100 years progressives have overtaken education, media, fine arts, literature, and pop culture — and thus as a result they have overtaken politics. Not the other way around.This is why our movement, the libertarian movement, must be a battle for hearts and minds. It must be an intellectual revolution of ideas, because right now bad ideas run the world. We can’t expect a libertarian political miracle to occur in an illibertarian society.Now please don’t get me wrong. The philosophy of liberty is growing around the world, and I believe we are winning hearts and minds. This is a time for boldness, not pessimism.Yet libertarianism will never be a mass —which is to say majority — political movement.Some people will always support the state, and we shouldn’t kid ourselves about this. It may be due to genetic traits, environmental factors, family influences, bad schools, media influences, or simply an innate human desire to seek the illusion of security.But we make a fatal mistake when we dilute our message to seek approval from people who seemingly are hardwired to oppose us. And we waste precious time and energy.What’s important is not convincing those who fundamentally disagree with us, but the degree to which we can extract ourselves from their political control.This is why secession is a tactically superior approach in my view: it is far less daunting to convince liberty-minded people to walk away from the state than to convince those with a statist mindset to change.What About the Federales?Now I know what you’re thinking, and so does the aforementioned Dr. Hoppe:Wouldn’t the federales simply crush any such attempt (at localized secession)?They surely would like to, but whether or not they can actually do so is an entirely different question … it is only necessary to recognize that the members of the governmental apparatus always represent, even under conditions of democracy, a (very small) proportion of the total population.Hoppe envisions a growing number of “implicitly seceded territories” engaging in noncompliance with federal authority:Without local enforcement, by compliant local authorities, the will of the central government is not much more than hot air.It would be prudent … to avoid a direct confrontation with the central government and not openly denounce its authority …Rather, it seems advisable to engage in a policy of passive resistance and noncooperation. One simply stops to help in the enforcement in each and every federal law …Finally, he concludes as only Hoppe could (remember this is the 1990s):Waco, a teeny group of freaks, is one thing. But to occupy, or to wipe out a significantly large group of normal, accomplished, upstanding citizens is quite another, and quite a more difficult thing.Now you may disagree with Dr. Hoppe as to the degree to which the federal government would actively order military violence to tamp down any secessionist hotspots, but his larger point is unassailable: the regime is largely an illusion, and consent to its authority is almost completely due to fear, not respect. Eliminate the illusion of benevolence and omnipotence and consent quickly crumbles.Imagine what a committed, coordinated libertarian base could achieve in America! 10 percent of the US population, or roughly thirty-two million people, would be an unstoppable force of nonviolent withdrawal from the federal leviathan.As Hoppe posits, it is no easy matter for the state to arrest or attack large local groups of citizens. And as American history teaches, the majority of people in any conflict are likely to be “fence sitters” rather than antagonists.Left and Right are Hypocrites Regarding SecessionOne of the great ironies of our time is that both the political Left and Right complain bitterly about the other, but steadfastly refuse to consider, once again, the obvious solution staring us in the face.Now one might think progressives would champion the Tenth Amendment and states’ rights, because it would liberate them from the Neanderthal right wingers who stand in the way of their progressive utopia. Imagine California or Massachusetts having every progressive policy firmly in place, without any preemptive federal legislation or federal courts to get in their way, and without having to share federal tax revenues with the hated red states.Imagine an experiment where residents of the San Francisco bay area were free to live under a political and social regime of their liking, while residents of Salt Lake City were free to do the same.Surely both communities would be much happier with this commonsense arrangement than the current one, whereby both have to defer to Washington!But in fact progressives strongly oppose federalism and states’ rights, much less secession! The reason, of course, is that progressives believe they’re winning and they don’t intend for a minute to let anyone walk away from what they have planned for us.Democracy is the great political orthodoxy of our times, but its supposed champions on the Left can’t abide true localized democracy — which is in fact the stated aim of secession movements.They’re interested in democracy only when the vote actually goes their way, and then only at the most attenuated federal level, or preferably for progressives, the international level. The last thing they want is local control over anything! They are the great centralizers and consolidators of state authority.“Live and let live” is simply not in their DNA.Our friends on the Right are scarcely better on this issue.Many conservatives are hopelessly wedded to the Lincoln myth and remain in thrall to the central warfare state, no matter the cost.As an example, consider the Scottish independence referendum that took place in September of 2014.Some conservatives, and even a few libertarians claimed that we should oppose the referendum on the grounds that it would create a new government, and thus two states would exist in the place of one. But reducing the size and scope of any single state’s dominion is healthy for liberty, because it leads us closer to the ultimate goal of self-determination at the individual level, to granting each of us sovereignty over our lives.Again quoting Mises:If it were in any way possible to grant this right of self-determination to every individual person, it would have to be done. (italics added)Furthermore, some conservatives argue that we should not support secession movements where the breakaway movement is likely to create a government that is more “liberal” than the one it replaces. This was the case in Scotland, where younger Scots who supported the independence referendum in greater numbers hoped to create strong ties with the EU parliament in Brussels and build a Scandinavian-style welfare state run from Holyrood (never mind that Tories in London were overjoyed at the prospect of jettisoning a huge number of Labour supporters!).But if support for the principle of self-determination is to have any meaning whatsoever, it must allow for others to make decisions with which we disagree. Political competition can only benefit all of us. What neither progressives nor conservatives understand — or worse, maybe they do understand — is that secession provides a mechanism for real diversity, a world where we are not all yoked together. It provides a way for people with widely divergent views and interests to live peaceably as neighbors instead of suffering under one commanding central government that pits them against each other.Secession Begins With YouUltimately, the wisdom of secession starts and ends with the individual. Bad ideas run the world, but must they run your world?The question we all have to ask ourselves is this: how seriously do we take the right of self-determination, and what are we willing to do in our personal lives to assert it?Secession really begins at home, with the actions we all take in our everyday lives to distance and remove ourselves from state authority — quietly, nonviolently, inexorably.The state is crumbling all around us, under the weight of its own contradictions, its own fiscal mess, and its own monetary system. We don’t need to win control of DC.What we need to do, as people seeking more freedom and a better life for future generations, is to walk away from DC, and make sure we don’t go down with it.How To Secede Right NowSo in closing, let me make a few humble suggestions for beginning a journey of personal secession. Not all of these may apply to your personal circumstances; no one but you can decide what’s best for you and your family. But all of us can play a role in a bottom-up revolution by doing everything in our power to withdraw our consent from the state:Secede from intellectual isolation. Talk to like-minded friends, family, and neighbors — whether physically or virtually — to spread liberty and cultivate relationships and alliances. The state prefers to have us atomized, without a strong family structure or social network;secede from dependency. Become as self-sufficient as possible with regard to food, water, fuel, cash, firearms, and physical security at home. Resist being reliant on government in the event of a natural disaster, bank crisis, or the like;secede from mainstream media, which promotes the state in a million different ways. Ditch cable, ditch CNN, ditch the major newspapers, and find your own sources of information in this internet age. Take advantage of a luxury previous generations did not enjoy;secede from state control of your children by homeschooling or unschooling them;secede from college by rejecting mainstream academia and its student loan trap. Educate yourself using online learning platforms, obtaining technical credentials, or simply by reading as much as you can;secede from the US dollar by owning physical precious metals, by owning assets denominated in foreign currencies, and by owning assets abroad;secede from the federal tax and regulatory regimes by organizing your business and personal affairs to be as tax efficient and unobtrusive as possible;secede from the legal system, by legally protecting your assets from rapacious lawsuits and probate courts as much as possible;secede from the state healthcare racket by taking control of your health, and questioning medical orthodoxy;secede from your state by moving to another with a better tax and regulatory environment, better homeschooling laws, better gun laws, or just one with more liberty-minded people;secede from political uncertainly in the US by obtaining a second passport; orsecede from the US altogether by expatriating.Most of all, secede from the mindset that government is all-powerful or too formidable an opponent to be overcome. The state is nothing more than Bastiat’s great fiction, or Murray’s gang of thieves writ large. Let’s not give it the power to make us unhappy or pessimistic.All of us, regardless of ideological bent and regardless of whether we know it or not, are married to a very violent, abusive spendthrift. It’s time, ladies and gentlemen, to get a divorce from DC.Image source: iStockphoto.

Secession Begins at Home

29 January, 2015 - 07:00
[This article is adapted from a talk presented at the Houston Mises Circle, January 24, 2015.]Presumably everyone in this room, or virtually everyone, is here today because you have some interest in the topic of secession. You may be interested in it as an abstract concept or as a viable possibility for escaping a federal government that Americans now fear and distrust in unprecedented numbers.As Mises wrote in 1927:The situation of having to belong to a state to which one does not wish to belong is no less onerous if it is the result of an election than if one must endure it as the consequence of a military conquest.I’m sure this sentiment is shared by many of you. Mises understood that mass democracy was no substitute for liberal society, but rather the enemy of it. Of course he was right: nearly 100 years later, we have been conquered and occupied by the state and its phony veneer of democratic elections. The federal government is now the putative ruler of nearly every aspect of life in America.That’s why we’re here today entertaining the audacious idea of secession — an idea Mises elevated to a defining principle of classical liberalism.It’s tempting, and entirely human, to close our eyes tight and resist radical change — to live in America’s past.But to borrow a line from the novelist L.P. Hartley, “The past is a foreign country, they do things differently there.” The America we thought we knew is a mirage; a memory, a foreign country.And that, ladies and gentlemen, is precisely why we should take secession seriously, both conceptually — as consistent with libertarianism — and as a real alternative for the future.Does anyone really believe that a physically vast, multicultural, social democratic welfare state of 330 million people, with hugely diverse economic, social, and cultural interests, can be commanded from DC indefinitely without intense conflict and economic strife?Does anyone really believe that we can unite under a state that endlessly divides us? Rich vs. poor, black vs. white, Hispanic vs. Anglo, men vs. women, old vs. young, secularists vs. Christians, gays vs. traditionalists, taxpayers vs. entitlement recipients, urban vs. rural, red state vs. blue state, and the political class vs. everybody?Frankly it seems clear the federal government is hell-bent on Balkanizing America anyway. So why not seek out ways to split apart rationally and nonviolently? Why dismiss secession, the pragmatic alternative that’s staring us in the face?Since most of us in the room are Americans, my focus today is on the political and cultural situation here at home. But the same principles of self-ownership, self-determination, and decentralization apply universally — whether we’re considering Texas independence or dozens of active breakaway movements in places like Venice, Catalonia, Scotland, and Belgium.I truly believe secession movements represent the last best hope for reclaiming our birthright: the great classical liberal tradition and the civilization it made possible. In a world gone mad with state power, secession offers hope that truly liberal societies, organized around civil society and markets rather than central governments, can still exist.Secession as a “Bottom-Up” Revolution“But how could this ever really happen?” you’re probably thinking.Wouldn’t creating a viable secession movement in the US necessarily mean convincing a majority of Americans, or at least a majority of the electorate, to join a mass political campaign much like a presidential election?I say no. Building a libertarian secession movement need not involve mass political organizing: in fact, national political movements that pander to the Left and Right may well be hopelessly naïve and wasteful of time and resources.Instead, our focus should be on hyper-localized resistance to the federal government in the form of a “bottom-up” revolution, as Hans-Hermann Hoppe terms it.Hoppe counsels us to use what little daylight the state affords us defensively: just as force is justified only in self-defense, the use of democratic means is justified only when used to achieve nondemocratic, libertarian, pro-private property ends.In other words, a bottom-up revolution employs both persuasion and democratic mechanisms to secede at the individual, family, community, and local level — in a million ways that involve turning our backs on the central government rather than attempting to bend its will.Secession, properly understood, means withdrawing consent and walking away from DC — not trying to capture it politically and “converting the King.”Secession is Not a Political MovementWhy is the road to secession not political, at least not at the national level? Frankly, any notion of a libertarian takeover of the political apparatus in DC is fantasy, and even if a political sea change did occur the army of 4.3 million federal employees is not simply going to disappear.Convincing Americans to adopt a libertarian political system — even if such an oxymoron were possible — is a hopeless endeavor in our current culture.Politics is a trailing indicator. Culture leads, politics follows. There cannot be a political sea change in America unless and until there is a philosophical, educational, and cultural sea change. Over the last 100 years progressives have overtaken education, media, fine arts, literature, and pop culture — and thus as a result they have overtaken politics. Not the other way around.This is why our movement, the libertarian movement, must be a battle for hearts and minds. It must be an intellectual revolution of ideas, because right now bad ideas run the world. We can’t expect a libertarian political miracle to occur in an illibertarian society.Now please don’t get me wrong. The philosophy of liberty is growing around the world, and I believe we are winning hearts and minds. This is a time for boldness, not pessimism.Yet libertarianism will never be a mass —which is to say majority — political movement.Some people will always support the state, and we shouldn’t kid ourselves about this. It may be due to genetic traits, environmental factors, family influences, bad schools, media influences, or simply an innate human desire to seek the illusion of security.But we make a fatal mistake when we dilute our message to seek approval from people who seemingly are hardwired to oppose us. And we waste precious time and energy.What’s important is not convincing those who fundamentally disagree with us, but the degree to which we can extract ourselves from their political control.This is why secession is a tactically superior approach in my view: it is far less daunting to convince liberty-minded people to walk away from the state than to convince those with a statist mindset to change.What About the Federales?Now I know what you’re thinking, and so does the aforementioned Dr. Hoppe:Wouldn’t the federales simply crush any such attempt (at localized secession)?They surely would like to, but whether or not they can actually do so is an entirely different question … it is only necessary to recognize that the members of the governmental apparatus always represent, even under conditions of democracy, a (very small) proportion of the total population.Hoppe envisions a growing number of “implicitly seceded territories” engaging in noncompliance with federal authority:Without local enforcement, by compliant local authorities, the will of the central government is not much more than hot air.It would be prudent … to avoid a direct confrontation with the central government and not openly denounce its authority …Rather, it seems advisable to engage in a policy of passive resistance and noncooperation. One simply stops to help in the enforcement in each and every federal law …Finally, he concludes as only Hoppe could (remember this is the 1990s):Waco, a teeny group of freaks, is one thing. But to occupy, or to wipe out a significantly large group of normal, accomplished, upstanding citizens is quite another, and quite a more difficult thing.Now you may disagree with Dr. Hoppe as to the degree to which the federal government would actively order military violence to tamp down any secessionist hotspots, but his larger point is unassailable: the regime is largely an illusion, and consent to its authority is almost completely due to fear, not respect. Eliminate the illusion of benevolence and omnipotence and consent quickly crumbles.Imagine what a committed, coordinated libertarian base could achieve in America! 10 percent of the US population, or roughly thirty-two million people, would be an unstoppable force of nonviolent withdrawal from the federal leviathan.As Hoppe posits, it is no easy matter for the state to arrest or attack large local groups of citizens. And as American history teaches, the majority of people in any conflict are likely to be “fence sitters” rather than antagonists.Left and Right are Hypocrites Regarding SecessionOne of the great ironies of our time is that both the political Left and Right complain bitterly about the other, but steadfastly refuse to consider, once again, the obvious solution staring us in the face.Now one might think progressives would champion the Tenth Amendment and states’ rights, because it would liberate them from the Neanderthal right wingers who stand in the way of their progressive utopia. Imagine California or Massachusetts having every progressive policy firmly in place, without any preemptive federal legislation or federal courts to get in their way, and without having to share federal tax revenues with the hated red states.Imagine an experiment where residents of the San Francisco bay area were free to live under a political and social regime of their liking, while residents of Salt Lake City were free to do the same.Surely both communities would be much happier with this commonsense arrangement than the current one, whereby both have to defer to Washington!But in fact progressives strongly oppose federalism and states’ rights, much less secession! The reason, of course, is that progressives believe they’re winning and they don’t intend for a minute to let anyone walk away from what they have planned for us.Democracy is the great political orthodoxy of our times, but its supposed champions on the Left can’t abide true localized democracy — which is in fact the stated aim of secession movements.They’re interested in democracy only when the vote actually goes their way, and then only at the most attenuated federal level, or preferably for progressives, the international level. The last thing they want is local control over anything! They are the great centralizers and consolidators of state authority.“Live and let live” is simply not in their DNA.Our friends on the Right are scarcely better on this issue.Many conservatives are hopelessly wedded to the Lincoln myth and remain in thrall to the central warfare state, no matter the cost.As an example, consider the Scottish independence referendum that took place in September of 2014.Some conservatives, and even a few libertarians claimed that we should oppose the referendum on the grounds that it would create a new government, and thus two states would exist in the place of one. But reducing the size and scope of any single state’s dominion is healthy for liberty, because it leads us closer to the ultimate goal of self-determination at the individual level, to granting each of us sovereignty over our lives.Again quoting Mises:If it were in any way possible to grant this right of self-determination to every individual person, it would have to be done. (italics added)Furthermore, some conservatives argue that we should not support secession movements where the breakaway movement is likely to create a government that is more “liberal” than the one it replaces. This was the case in Scotland, where younger Scots who supported the independence referendum in greater numbers hoped to create strong ties with the EU parliament in Brussels and build a Scandinavian-style welfare state run from Holyrood (never mind that Tories in London were overjoyed at the prospect of jettisoning a huge number of Labour supporters!).But if support for the principle of self-determination is to have any meaning whatsoever, it must allow for others to make decisions with which we disagree. Political competition can only benefit all of us. What neither progressives nor conservatives understand — or worse, maybe they do understand — is that secession provides a mechanism for real diversity, a world where we are not all yoked together. It provides a way for people with widely divergent views and interests to live peaceably as neighbors instead of suffering under one commanding central government that pits them against each other.Secession Begins With YouUltimately, the wisdom of secession starts and ends with the individual. Bad ideas run the world, but must they run your world?The question we all have to ask ourselves is this: how seriously do we take the right of self-determination, and what are we willing to do in our personal lives to assert it?Secession really begins at home, with the actions we all take in our everyday lives to distance and remove ourselves from state authority — quietly, nonviolently, inexorably.The state is crumbling all around us, under the weight of its own contradictions, its own fiscal mess, and its own monetary system. We don’t need to win control of DC.What we need to do, as people seeking more freedom and a better life for future generations, is to walk away from DC, and make sure we don’t go down with it.How To Secede Right NowSo in closing, let me make a few humble suggestions for beginning a journey of personal secession. Not all of these may apply to your personal circumstances; no one but you can decide what’s best for you and your family. But all of us can play a role in a bottom-up revolution by doing everything in our power to withdraw our consent from the state:Secede from intellectual isolation. Talk to like-minded friends, family, and neighbors — whether physically or virtually — to spread liberty and cultivate relationships and alliances. The state prefers to have us atomized, without a strong family structure or social network;secede from dependency. Become as self-sufficient as possible with regard to food, water, fuel, cash, firearms, and physical security at home. Resist being reliant on government in the event of a natural disaster, bank crisis, or the like;secede from mainstream media, which promotes the state in a million different ways. Ditch cable, ditch CNN, ditch the major newspapers, and find your own sources of information in this internet age. Take advantage of a luxury previous generations did not enjoy;secede from state control of your children by homeschooling or unschooling them;secede from college by rejecting mainstream academia and its student loan trap. Educate yourself using online learning platforms, obtaining technical credentials, or simply by reading as much as you can;secede from the US dollar by owning physical precious metals, by owning assets denominated in foreign currencies, and by owning assets abroad;secede from the federal tax and regulatory regimes by organizing your business and personal affairs to be as tax efficient and unobtrusive as possible;secede from the legal system, by legally protecting your assets from rapacious lawsuits and probate courts as much as possible;secede from the state healthcare racket by taking control of your health, and questioning medical orthodoxy;secede from your state by moving to another with a better tax and regulatory environment, better homeschooling laws, better gun laws, or just one with more liberty-minded people;secede from political uncertainly in the US by obtaining a second passport; orsecede from the US altogether by expatriating.Most of all, secede from the mindset that government is all-powerful or too formidable an opponent to be overcome. The state is nothing more than Bastiat’s great fiction, or Murray’s gang of thieves writ large. Let’s not give it the power to make us unhappy or pessimistic.All of us, regardless of ideological bent and regardless of whether we know it or not, are married to a very violent, abusive spendthrift. It’s time, ladies and gentlemen, to get a divorce from DC.Image source: iStockphoto.

Secession Begins at Home

29 January, 2015 - 07:00
[This article is adapted from a talk presented at the Houston Mises Circle, January 24, 2015.]Presumably everyone in this room, or virtually everyone, is here today because you have some interest in the topic of secession. You may be interested in it as an abstract concept or as a viable possibility for escaping a federal government that Americans now fear and distrust in unprecedented numbers.As Mises wrote in 1927:The situation of having to belong to a state to which one does not wish to belong is no less onerous if it is the result of an election than if one must endure it as the consequence of a military conquest.I’m sure this sentiment is shared by many of you. Mises understood that mass democracy was no substitute for liberal society, but rather the enemy of it. Of course he was right: nearly 100 years later, we have been conquered and occupied by the state and its phony veneer of democratic elections. The federal government is now the putative ruler of nearly every aspect of life in America.That’s why we’re here today entertaining the audacious idea of secession — an idea Mises elevated to a defining principle of classical liberalism.It’s tempting, and entirely human, to close our eyes tight and resist radical change — to live in America’s past.But to borrow a line from the novelist L.P. Hartley, “The past is a foreign country, they do things differently there.” The America we thought we knew is a mirage; a memory, a foreign country.And that, ladies and gentlemen, is precisely why we should take secession seriously, both conceptually — as consistent with libertarianism — and as a real alternative for the future.Does anyone really believe that a physically vast, multicultural, social democratic welfare state of 330 million people, with hugely diverse economic, social, and cultural interests, can be commanded from DC indefinitely without intense conflict and economic strife?Does anyone really believe that we can unite under a state that endlessly divides us? Rich vs. poor, black vs. white, Hispanic vs. Anglo, men vs. women, old vs. young, secularists vs. Christians, gays vs. traditionalists, taxpayers vs. entitlement recipients, urban vs. rural, red state vs. blue state, and the political class vs. everybody?Frankly it seems clear the federal government is hell-bent on Balkanizing America anyway. So why not seek out ways to split apart rationally and nonviolently? Why dismiss secession, the pragmatic alternative that’s staring us in the face?Since most of us in the room are Americans, my focus today is on the political and cultural situation here at home. But the same principles of self-ownership, self-determination, and decentralization apply universally — whether we’re considering Texas independence or dozens of active breakaway movements in places like Venice, Catalonia, Scotland, and Belgium.I truly believe secession movements represent the last best hope for reclaiming our birthright: the great classical liberal tradition and the civilization it made possible. In a world gone mad with state power, secession offers hope that truly liberal societies, organized around civil society and markets rather than central governments, can still exist.Secession as a “Bottom-Up” Revolution“But how could this ever really happen?” you’re probably thinking.Wouldn’t creating a viable secession movement in the US necessarily mean convincing a majority of Americans, or at least a majority of the electorate, to join a mass political campaign much like a presidential election?I say no. Building a libertarian secession movement need not involve mass political organizing: in fact, national political movements that pander to the Left and Right may well be hopelessly naïve and wasteful of time and resources.Instead, our focus should be on hyper-localized resistance to the federal government in the form of a “bottom-up” revolution, as Hans-Hermann Hoppe terms it.Hoppe counsels us to use what little daylight the state affords us defensively: just as force is justified only in self-defense, the use of democratic means is justified only when used to achieve nondemocratic, libertarian, pro-private property ends.In other words, a bottom-up revolution employs both persuasion and democratic mechanisms to secede at the individual, family, community, and local level — in a million ways that involve turning our backs on the central government rather than attempting to bend its will.Secession, properly understood, means withdrawing consent and walking away from DC — not trying to capture it politically and “converting the King.”Secession is Not a Political MovementWhy is the road to secession not political, at least not at the national level? Frankly, any notion of a libertarian takeover of the political apparatus in DC is fantasy, and even if a political sea change did occur the army of 4.3 million federal employees is not simply going to disappear.Convincing Americans to adopt a libertarian political system — even if such an oxymoron were possible — is a hopeless endeavor in our current culture.Politics is a trailing indicator. Culture leads, politics follows. There cannot be a political sea change in America unless and until there is a philosophical, educational, and cultural sea change. Over the last 100 years progressives have overtaken education, media, fine arts, literature, and pop culture — and thus as a result they have overtaken politics. Not the other way around.This is why our movement, the libertarian movement, must be a battle for hearts and minds. It must be an intellectual revolution of ideas, because right now bad ideas run the world. We can’t expect a libertarian political miracle to occur in an illibertarian society.Now please don’t get me wrong. The philosophy of liberty is growing around the world, and I believe we are winning hearts and minds. This is a time for boldness, not pessimism.Yet libertarianism will never be a mass —which is to say majority — political movement.Some people will always support the state, and we shouldn’t kid ourselves about this. It may be due to genetic traits, environmental factors, family influences, bad schools, media influences, or simply an innate human desire to seek the illusion of security.But we make a fatal mistake when we dilute our message to seek approval from people who seemingly are hardwired to oppose us. And we waste precious time and energy.What’s important is not convincing those who fundamentally disagree with us, but the degree to which we can extract ourselves from their political control.This is why secession is a tactically superior approach in my view: it is far less daunting to convince liberty-minded people to walk away from the state than to convince those with a statist mindset to change.What About the Federales?Now I know what you’re thinking, and so does the aforementioned Dr. Hoppe:Wouldn’t the federales simply crush any such attempt (at localized secession)?They surely would like to, but whether or not they can actually do so is an entirely different question … it is only necessary to recognize that the members of the governmental apparatus always represent, even under conditions of democracy, a (very small) proportion of the total population.Hoppe envisions a growing number of “implicitly seceded territories” engaging in noncompliance with federal authority:Without local enforcement, by compliant local authorities, the will of the central government is not much more than hot air.It would be prudent … to avoid a direct confrontation with the central government and not openly denounce its authority …Rather, it seems advisable to engage in a policy of passive resistance and noncooperation. One simply stops to help in the enforcement in each and every federal law …Finally, he concludes as only Hoppe could (remember this is the 1990s):Waco, a teeny group of freaks, is one thing. But to occupy, or to wipe out a significantly large group of normal, accomplished, upstanding citizens is quite another, and quite a more difficult thing.Now you may disagree with Dr. Hoppe as to the degree to which the federal government would actively order military violence to tamp down any secessionist hotspots, but his larger point is unassailable: the regime is largely an illusion, and consent to its authority is almost completely due to fear, not respect. Eliminate the illusion of benevolence and omnipotence and consent quickly crumbles.Imagine what a committed, coordinated libertarian base could achieve in America! 10 percent of the US population, or roughly thirty-two million people, would be an unstoppable force of nonviolent withdrawal from the federal leviathan.As Hoppe posits, it is no easy matter for the state to arrest or attack large local groups of citizens. And as American history teaches, the majority of people in any conflict are likely to be “fence sitters” rather than antagonists.Left and Right are Hypocrites Regarding SecessionOne of the great ironies of our time is that both the political Left and Right complain bitterly about the other, but steadfastly refuse to consider, once again, the obvious solution staring us in the face.Now one might think progressives would champion the Tenth Amendment and states’ rights, because it would liberate them from the Neanderthal right wingers who stand in the way of their progressive utopia. Imagine California or Massachusetts having every progressive policy firmly in place, without any preemptive federal legislation or federal courts to get in their way, and without having to share federal tax revenues with the hated red states.Imagine an experiment where residents of the San Francisco bay area were free to live under a political and social regime of their liking, while residents of Salt Lake City were free to do the same.Surely both communities would be much happier with this commonsense arrangement than the current one, whereby both have to defer to Washington!But in fact progressives strongly oppose federalism and states’ rights, much less secession! The reason, of course, is that progressives believe they’re winning and they don’t intend for a minute to let anyone walk away from what they have planned for us.Democracy is the great political orthodoxy of our times, but its supposed champions on the Left can’t abide true localized democracy — which is in fact the stated aim of secession movements.They’re interested in democracy only when the vote actually goes their way, and then only at the most attenuated federal level, or preferably for progressives, the international level. The last thing they want is local control over anything! They are the great centralizers and consolidators of state authority.“Live and let live” is simply not in their DNA.Our friends on the Right are scarcely better on this issue.Many conservatives are hopelessly wedded to the Lincoln myth and remain in thrall to the central warfare state, no matter the cost.As an example, consider the Scottish independence referendum that took place in September of 2014.Some conservatives, and even a few libertarians claimed that we should oppose the referendum on the grounds that it would create a new government, and thus two states would exist in the place of one. But reducing the size and scope of any single state’s dominion is healthy for liberty, because it leads us closer to the ultimate goal of self-determination at the individual level, to granting each of us sovereignty over our lives.Again quoting Mises:If it were in any way possible to grant this right of self-determination to every individual person, it would have to be done. (italics added)Furthermore, some conservatives argue that we should not support secession movements where the breakaway movement is likely to create a government that is more “liberal” than the one it replaces. This was the case in Scotland, where younger Scots who supported the independence referendum in greater numbers hoped to create strong ties with the EU parliament in Brussels and build a Scandinavian-style welfare state run from Holyrood (never mind that Tories in London were overjoyed at the prospect of jettisoning a huge number of Labour supporters!).But if support for the principle of self-determination is to have any meaning whatsoever, it must allow for others to make decisions with which we disagree. Political competition can only benefit all of us. What neither progressives nor conservatives understand — or worse, maybe they do understand — is that secession provides a mechanism for real diversity, a world where we are not all yoked together. It provides a way for people with widely divergent views and interests to live peaceably as neighbors instead of suffering under one commanding central government that pits them against each other.Secession Begins With YouUltimately, the wisdom of secession starts and ends with the individual. Bad ideas run the world, but must they run your world?The question we all have to ask ourselves is this: how seriously do we take the right of self-determination, and what are we willing to do in our personal lives to assert it?Secession really begins at home, with the actions we all take in our everyday lives to distance and remove ourselves from state authority — quietly, nonviolently, inexorably.The state is crumbling all around us, under the weight of its own contradictions, its own fiscal mess, and its own monetary system. We don’t need to win control of DC.What we need to do, as people seeking more freedom and a better life for future generations, is to walk away from DC, and make sure we don’t go down with it.How To Secede Right NowSo in closing, let me make a few humble suggestions for beginning a journey of personal secession. Not all of these may apply to your personal circumstances; no one but you can decide what’s best for you and your family. But all of us can play a role in a bottom-up revolution by doing everything in our power to withdraw our consent from the state:Secede from intellectual isolation. Talk to like-minded friends, family, and neighbors — whether physically or virtually — to spread liberty and cultivate relationships and alliances. The state prefers to have us atomized, without a strong family structure or social network;secede from dependency. Become as self-sufficient as possible with regard to food, water, fuel, cash, firearms, and physical security at home. Resist being reliant on government in the event of a natural disaster, bank crisis, or the like;secede from mainstream media, which promotes the state in a million different ways. Ditch cable, ditch CNN, ditch the major newspapers, and find your own sources of information in this internet age. Take advantage of a luxury previous generations did not enjoy;secede from state control of your children by homeschooling or unschooling them;secede from college by rejecting mainstream academia and its student loan trap. Educate yourself using online learning platforms, obtaining technical credentials, or simply by reading as much as you can;secede from the US dollar by owning physical precious metals, by owning assets denominated in foreign currencies, and by owning assets abroad;secede from the federal tax and regulatory regimes by organizing your business and personal affairs to be as tax efficient and unobtrusive as possible;secede from the legal system, by legally protecting your assets from rapacious lawsuits and probate courts as much as possible;secede from the state healthcare racket by taking control of your health, and questioning medical orthodoxy;secede from your state by moving to another with a better tax and regulatory environment, better homeschooling laws, better gun laws, or just one with more liberty-minded people;secede from political uncertainly in the US by obtaining a second passport; orsecede from the US altogether by expatriating.Most of all, secede from the mindset that government is all-powerful or too formidable an opponent to be overcome. The state is nothing more than Bastiat’s great fiction, or Murray’s gang of thieves writ large. Let’s not give it the power to make us unhappy or pessimistic.All of us, regardless of ideological bent and regardless of whether we know it or not, are married to a very violent, abusive spendthrift. It’s time, ladies and gentlemen, to get a divorce from DC.Image source: iStockphoto.

Secession Begins at Home

29 January, 2015 - 07:00
[This article is adapted from a talk presented at the Houston Mises Circle, January 24, 2015.]Presumably everyone in this room, or virtually everyone, is here today because you have some interest in the topic of secession. You may be interested in it as an abstract concept or as a viable possibility for escaping a federal government that Americans now fear and distrust in unprecedented numbers.As Mises wrote in 1927:The situation of having to belong to a state to which one does not wish to belong is no less onerous if it is the result of an election than if one must endure it as the consequence of a military conquest.I’m sure this sentiment is shared by many of you. Mises understood that mass democracy was no substitute for liberal society, but rather the enemy of it. Of course he was right: nearly 100 years later, we have been conquered and occupied by the state and its phony veneer of democratic elections. The federal government is now the putative ruler of nearly every aspect of life in America.That’s why we’re here today entertaining the audacious idea of secession — an idea Mises elevated to a defining principle of classical liberalism.It’s tempting, and entirely human, to close our eyes tight and resist radical change — to live in America’s past.But to borrow a line from the novelist L.P. Hartley, “The past is a foreign country, they do things differently there.” The America we thought we knew is a mirage; a memory, a foreign country.And that, ladies and gentlemen, is precisely why we should take secession seriously, both conceptually — as consistent with libertarianism — and as a real alternative for the future.Does anyone really believe that a physically vast, multicultural, social democratic welfare state of 330 million people, with hugely diverse economic, social, and cultural interests, can be commanded from DC indefinitely without intense conflict and economic strife?Does anyone really believe that we can unite under a state that endlessly divides us? Rich vs. poor, black vs. white, Hispanic vs. Anglo, men vs. women, old vs. young, secularists vs. Christians, gays vs. traditionalists, taxpayers vs. entitlement recipients, urban vs. rural, red state vs. blue state, and the political class vs. everybody?Frankly it seems clear the federal government is hell-bent on Balkanizing America anyway. So why not seek out ways to split apart rationally and nonviolently? Why dismiss secession, the pragmatic alternative that’s staring us in the face?Since most of us in the room are Americans, my focus today is on the political and cultural situation here at home. But the same principles of self-ownership, self-determination, and decentralization apply universally — whether we’re considering Texas independence or dozens of active breakaway movements in places like Venice, Catalonia, Scotland, and Belgium.I truly believe secession movements represent the last best hope for reclaiming our birthright: the great classical liberal tradition and the civilization it made possible. In a world gone mad with state power, secession offers hope that truly liberal societies, organized around civil society and markets rather than central governments, can still exist.Secession as a “Bottom-Up” Revolution“But how could this ever really happen?” you’re probably thinking.Wouldn’t creating a viable secession movement in the US necessarily mean convincing a majority of Americans, or at least a majority of the electorate, to join a mass political campaign much like a presidential election?I say no. Building a libertarian secession movement need not involve mass political organizing: in fact, national political movements that pander to the Left and Right may well be hopelessly naïve and wasteful of time and resources.Instead, our focus should be on hyper-localized resistance to the federal government in the form of a “bottom-up” revolution, as Hans-Hermann Hoppe terms it.Hoppe counsels us to use what little daylight the state affords us defensively: just as force is justified only in self-defense, the use of democratic means is justified only when used to achieve nondemocratic, libertarian, pro-private property ends.In other words, a bottom-up revolution employs both persuasion and democratic mechanisms to secede at the individual, family, community, and local level — in a million ways that involve turning our backs on the central government rather than attempting to bend its will.Secession, properly understood, means withdrawing consent and walking away from DC — not trying to capture it politically and “converting the King.”Secession is Not a Political MovementWhy is the road to secession not political, at least not at the national level? Frankly, any notion of a libertarian takeover of the political apparatus in DC is fantasy, and even if a political sea change did occur the army of 4.3 million federal employees is not simply going to disappear.Convincing Americans to adopt a libertarian political system — even if such an oxymoron were possible — is a hopeless endeavor in our current culture.Politics is a trailing indicator. Culture leads, politics follows. There cannot be a political sea change in America unless and until there is a philosophical, educational, and cultural sea change. Over the last 100 years progressives have overtaken education, media, fine arts, literature, and pop culture — and thus as a result they have overtaken politics. Not the other way around.This is why our movement, the libertarian movement, must be a battle for hearts and minds. It must be an intellectual revolution of ideas, because right now bad ideas run the world. We can’t expect a libertarian political miracle to occur in an illibertarian society.Now please don’t get me wrong. The philosophy of liberty is growing around the world, and I believe we are winning hearts and minds. This is a time for boldness, not pessimism.Yet libertarianism will never be a mass —which is to say majority — political movement.Some people will always support the state, and we shouldn’t kid ourselves about this. It may be due to genetic traits, environmental factors, family influences, bad schools, media influences, or simply an innate human desire to seek the illusion of security.But we make a fatal mistake when we dilute our message to seek approval from people who seemingly are hardwired to oppose us. And we waste precious time and energy.What’s important is not convincing those who fundamentally disagree with us, but the degree to which we can extract ourselves from their political control.This is why secession is a tactically superior approach in my view: it is far less daunting to convince liberty-minded people to walk away from the state than to convince those with a statist mindset to change.What About the Federales?Now I know what you’re thinking, and so does the aforementioned Dr. Hoppe:Wouldn’t the federales simply crush any such attempt (at localized secession)?They surely would like to, but whether or not they can actually do so is an entirely different question … it is only necessary to recognize that the members of the governmental apparatus always represent, even under conditions of democracy, a (very small) proportion of the total population.Hoppe envisions a growing number of “implicitly seceded territories” engaging in noncompliance with federal authority:Without local enforcement, by compliant local authorities, the will of the central government is not much more than hot air.It would be prudent … to avoid a direct confrontation with the central government and not openly denounce its authority …Rather, it seems advisable to engage in a policy of passive resistance and noncooperation. One simply stops to help in the enforcement in each and every federal law …Finally, he concludes as only Hoppe could (remember this is the 1990s):Waco, a teeny group of freaks, is one thing. But to occupy, or to wipe out a significantly large group of normal, accomplished, upstanding citizens is quite another, and quite a more difficult thing.Now you may disagree with Dr. Hoppe as to the degree to which the federal government would actively order military violence to tamp down any secessionist hotspots, but his larger point is unassailable: the regime is largely an illusion, and consent to its authority is almost completely due to fear, not respect. Eliminate the illusion of benevolence and omnipotence and consent quickly crumbles.Imagine what a committed, coordinated libertarian base could achieve in America! 10 percent of the US population, or roughly thirty-two million people, would be an unstoppable force of nonviolent withdrawal from the federal leviathan.As Hoppe posits, it is no easy matter for the state to arrest or attack large local groups of citizens. And as American history teaches, the majority of people in any conflict are likely to be “fence sitters” rather than antagonists.Left and Right are Hypocrites Regarding SecessionOne of the great ironies of our time is that both the political Left and Right complain bitterly about the other, but steadfastly refuse to consider, once again, the obvious solution staring us in the face.Now one might think progressives would champion the Tenth Amendment and states’ rights, because it would liberate them from the Neanderthal right wingers who stand in the way of their progressive utopia. Imagine California or Massachusetts having every progressive policy firmly in place, without any preemptive federal legislation or federal courts to get in their way, and without having to share federal tax revenues with the hated red states.Imagine an experiment where residents of the San Francisco bay area were free to live under a political and social regime of their liking, while residents of Salt Lake City were free to do the same.Surely both communities would be much happier with this commonsense arrangement than the current one, whereby both have to defer to Washington!But in fact progressives strongly oppose federalism and states’ rights, much less secession! The reason, of course, is that progressives believe they’re winning and they don’t intend for a minute to let anyone walk away from what they have planned for us.Democracy is the great political orthodoxy of our times, but its supposed champions on the Left can’t abide true localized democracy — which is in fact the stated aim of secession movements.They’re interested in democracy only when the vote actually goes their way, and then only at the most attenuated federal level, or preferably for progressives, the international level. The last thing they want is local control over anything! They are the great centralizers and consolidators of state authority.“Live and let live” is simply not in their DNA.Our friends on the Right are scarcely better on this issue.Many conservatives are hopelessly wedded to the Lincoln myth and remain in thrall to the central warfare state, no matter the cost.As an example, consider the Scottish independence referendum that took place in September of 2014.Some conservatives, and even a few libertarians claimed that we should oppose the referendum on the grounds that it would create a new government, and thus two states would exist in the place of one. But reducing the size and scope of any single state’s dominion is healthy for liberty, because it leads us closer to the ultimate goal of self-determination at the individual level, to granting each of us sovereignty over our lives.Again quoting Mises:If it were in any way possible to grant this right of self-determination to every individual person, it would have to be done. (italics added)Furthermore, some conservatives argue that we should not support secession movements where the breakaway movement is likely to create a government that is more “liberal” than the one it replaces. This was the case in Scotland, where younger Scots who supported the independence referendum in greater numbers hoped to create strong ties with the EU parliament in Brussels and build a Scandinavian-style welfare state run from Holyrood (never mind that Tories in London were overjoyed at the prospect of jettisoning a huge number of Labour supporters!).But if support for the principle of self-determination is to have any meaning whatsoever, it must allow for others to make decisions with which we disagree. Political competition can only benefit all of us. What neither progressives nor conservatives understand — or worse, maybe they do understand — is that secession provides a mechanism for real diversity, a world where we are not all yoked together. It provides a way for people with widely divergent views and interests to live peaceably as neighbors instead of suffering under one commanding central government that pits them against each other.Secession Begins With YouUltimately, the wisdom of secession starts and ends with the individual. Bad ideas run the world, but must they run your world?The question we all have to ask ourselves is this: how seriously do we take the right of self-determination, and what are we willing to do in our personal lives to assert it?Secession really begins at home, with the actions we all take in our everyday lives to distance and remove ourselves from state authority — quietly, nonviolently, inexorably.The state is crumbling all around us, under the weight of its own contradictions, its own fiscal mess, and its own monetary system. We don’t need to win control of DC.What we need to do, as people seeking more freedom and a better life for future generations, is to walk away from DC, and make sure we don’t go down with it.How To Secede Right NowSo in closing, let me make a few humble suggestions for beginning a journey of personal secession. Not all of these may apply to your personal circumstances; no one but you can decide what’s best for you and your family. But all of us can play a role in a bottom-up revolution by doing everything in our power to withdraw our consent from the state:Secede from intellectual isolation. Talk to like-minded friends, family, and neighbors — whether physically or virtually — to spread liberty and cultivate relationships and alliances. The state prefers to have us atomized, without a strong family structure or social network;secede from dependency. Become as self-sufficient as possible with regard to food, water, fuel, cash, firearms, and physical security at home. Resist being reliant on government in the event of a natural disaster, bank crisis, or the like;secede from mainstream media, which promotes the state in a million different ways. Ditch cable, ditch CNN, ditch the major newspapers, and find your own sources of information in this internet age. Take advantage of a luxury previous generations did not enjoy;secede from state control of your children by homeschooling or unschooling them;secede from college by rejecting mainstream academia and its student loan trap. Educate yourself using online learning platforms, obtaining technical credentials, or simply by reading as much as you can;secede from the US dollar by owning physical precious metals, by owning assets denominated in foreign currencies, and by owning assets abroad;secede from the federal tax and regulatory regimes by organizing your business and personal affairs to be as tax efficient and unobtrusive as possible;secede from the legal system, by legally protecting your assets from rapacious lawsuits and probate courts as much as possible;secede from the state healthcare racket by taking control of your health, and questioning medical orthodoxy;secede from your state by moving to another with a better tax and regulatory environment, better homeschooling laws, better gun laws, or just one with more liberty-minded people;secede from political uncertainly in the US by obtaining a second passport; orsecede from the US altogether by expatriating.Most of all, secede from the mindset that government is all-powerful or too formidable an opponent to be overcome. The state is nothing more than Bastiat’s great fiction, or Murray’s gang of thieves writ large. Let’s not give it the power to make us unhappy or pessimistic.All of us, regardless of ideological bent and regardless of whether we know it or not, are married to a very violent, abusive spendthrift. It’s time, ladies and gentlemen, to get a divorce from DC.Image source: iStockphoto.

Secession Begins at Home

29 January, 2015 - 07:00
[This article is adapted from a talk presented at the Houston Mises Circle, January 24, 2015.]Presumably everyone in this room, or virtually everyone, is here today because you have some interest in the topic of secession. You may be interested in it as an abstract concept or as a viable possibility for escaping a federal government that Americans now fear and distrust in unprecedented numbers.As Mises wrote in 1927:The situation of having to belong to a state to which one does not wish to belong is no less onerous if it is the result of an election than if one must endure it as the consequence of a military conquest.I’m sure this sentiment is shared by many of you. Mises understood that mass democracy was no substitute for liberal society, but rather the enemy of it. Of course he was right: nearly 100 years later, we have been conquered and occupied by the state and its phony veneer of democratic elections. The federal government is now the putative ruler of nearly every aspect of life in America.That’s why we’re here today entertaining the audacious idea of secession — an idea Mises elevated to a defining principle of classical liberalism.It’s tempting, and entirely human, to close our eyes tight and resist radical change — to live in America’s past.But to borrow a line from the novelist L.P. Hartley, “The past is a foreign country, they do things differently there.” The America we thought we knew is a mirage; a memory, a foreign country.And that, ladies and gentlemen, is precisely why we should take secession seriously, both conceptually — as consistent with libertarianism — and as a real alternative for the future.Does anyone really believe that a physically vast, multicultural, social democratic welfare state of 330 million people, with hugely diverse economic, social, and cultural interests, can be commanded from DC indefinitely without intense conflict and economic strife?Does anyone really believe that we can unite under a state that endlessly divides us? Rich vs. poor, black vs. white, Hispanic vs. Anglo, men vs. women, old vs. young, secularists vs. Christians, gays vs. traditionalists, taxpayers vs. entitlement recipients, urban vs. rural, red state vs. blue state, and the political class vs. everybody?Frankly it seems clear the federal government is hell-bent on Balkanizing America anyway. So why not seek out ways to split apart rationally and nonviolently? Why dismiss secession, the pragmatic alternative that’s staring us in the face?Since most of us in the room are Americans, my focus today is on the political and cultural situation here at home. But the same principles of self-ownership, self-determination, and decentralization apply universally — whether we’re considering Texas independence or dozens of active breakaway movements in places like Venice, Catalonia, Scotland, and Belgium.I truly believe secession movements represent the last best hope for reclaiming our birthright: the great classical liberal tradition and the civilization it made possible. In a world gone mad with state power, secession offers hope that truly liberal societies, organized around civil society and markets rather than central governments, can still exist.Secession as a “Bottom-Up” Revolution“But how could this ever really happen?” you’re probably thinking.Wouldn’t creating a viable secession movement in the US necessarily mean convincing a majority of Americans, or at least a majority of the electorate, to join a mass political campaign much like a presidential election?I say no. Building a libertarian secession movement need not involve mass political organizing: in fact, national political movements that pander to the Left and Right may well be hopelessly naïve and wasteful of time and resources.Instead, our focus should be on hyper-localized resistance to the federal government in the form of a “bottom-up” revolution, as Hans-Hermann Hoppe terms it.Hoppe counsels us to use what little daylight the state affords us defensively: just as force is justified only in self-defense, the use of democratic means is justified only when used to achieve nondemocratic, libertarian, pro-private property ends.In other words, a bottom-up revolution employs both persuasion and democratic mechanisms to secede at the individual, family, community, and local level — in a million ways that involve turning our backs on the central government rather than attempting to bend its will.Secession, properly understood, means withdrawing consent and walking away from DC — not trying to capture it politically and “converting the King.”Secession is Not a Political MovementWhy is the road to secession not political, at least not at the national level? Frankly, any notion of a libertarian takeover of the political apparatus in DC is fantasy, and even if a political sea change did occur the army of 4.3 million federal employees is not simply going to disappear.Convincing Americans to adopt a libertarian political system — even if such an oxymoron were possible — is a hopeless endeavor in our current culture.Politics is a trailing indicator. Culture leads, politics follows. There cannot be a political sea change in America unless and until there is a philosophical, educational, and cultural sea change. Over the last 100 years progressives have overtaken education, media, fine arts, literature, and pop culture — and thus as a result they have overtaken politics. Not the other way around.This is why our movement, the libertarian movement, must be a battle for hearts and minds. It must be an intellectual revolution of ideas, because right now bad ideas run the world. We can’t expect a libertarian political miracle to occur in an illibertarian society.Now please don’t get me wrong. The philosophy of liberty is growing around the world, and I believe we are winning hearts and minds. This is a time for boldness, not pessimism.Yet libertarianism will never be a mass —which is to say majority — political movement.Some people will always support the state, and we shouldn’t kid ourselves about this. It may be due to genetic traits, environmental factors, family influences, bad schools, media influences, or simply an innate human desire to seek the illusion of security.But we make a fatal mistake when we dilute our message to seek approval from people who seemingly are hardwired to oppose us. And we waste precious time and energy.What’s important is not convincing those who fundamentally disagree with us, but the degree to which we can extract ourselves from their political control.This is why secession is a tactically superior approach in my view: it is far less daunting to convince liberty-minded people to walk away from the state than to convince those with a statist mindset to change.What About the Federales?Now I know what you’re thinking, and so does the aforementioned Dr. Hoppe:Wouldn’t the federales simply crush any such attempt (at localized secession)?They surely would like to, but whether or not they can actually do so is an entirely different question … it is only necessary to recognize that the members of the governmental apparatus always represent, even under conditions of democracy, a (very small) proportion of the total population.Hoppe envisions a growing number of “implicitly seceded territories” engaging in noncompliance with federal authority:Without local enforcement, by compliant local authorities, the will of the central government is not much more than hot air.It would be prudent … to avoid a direct confrontation with the central government and not openly denounce its authority …Rather, it seems advisable to engage in a policy of passive resistance and noncooperation. One simply stops to help in the enforcement in each and every federal law …Finally, he concludes as only Hoppe could (remember this is the 1990s):Waco, a teeny group of freaks, is one thing. But to occupy, or to wipe out a significantly large group of normal, accomplished, upstanding citizens is quite another, and quite a more difficult thing.Now you may disagree with Dr. Hoppe as to the degree to which the federal government would actively order military violence to tamp down any secessionist hotspots, but his larger point is unassailable: the regime is largely an illusion, and consent to its authority is almost completely due to fear, not respect. Eliminate the illusion of benevolence and omnipotence and consent quickly crumbles.Imagine what a committed, coordinated libertarian base could achieve in America! 10 percent of the US population, or roughly thirty-two million people, would be an unstoppable force of nonviolent withdrawal from the federal leviathan.As Hoppe posits, it is no easy matter for the state to arrest or attack large local groups of citizens. And as American history teaches, the majority of people in any conflict are likely to be “fence sitters” rather than antagonists.Left and Right are Hypocrites Regarding SecessionOne of the great ironies of our time is that both the political Left and Right complain bitterly about the other, but steadfastly refuse to consider, once again, the obvious solution staring us in the face.Now one might think progressives would champion the Tenth Amendment and states’ rights, because it would liberate them from the Neanderthal right wingers who stand in the way of their progressive utopia. Imagine California or Massachusetts having every progressive policy firmly in place, without any preemptive federal legislation or federal courts to get in their way, and without having to share federal tax revenues with the hated red states.Imagine an experiment where residents of the San Francisco bay area were free to live under a political and social regime of their liking, while residents of Salt Lake City were free to do the same.Surely both communities would be much happier with this commonsense arrangement than the current one, whereby both have to defer to Washington!But in fact progressives strongly oppose federalism and states’ rights, much less secession! The reason, of course, is that progressives believe they’re winning and they don’t intend for a minute to let anyone walk away from what they have planned for us.Democracy is the great political orthodoxy of our times, but its supposed champions on the Left can’t abide true localized democracy — which is in fact the stated aim of secession movements.They’re interested in democracy only when the vote actually goes their way, and then only at the most attenuated federal level, or preferably for progressives, the international level. The last thing they want is local control over anything! They are the great centralizers and consolidators of state authority.“Live and let live” is simply not in their DNA.Our friends on the Right are scarcely better on this issue.Many conservatives are hopelessly wedded to the Lincoln myth and remain in thrall to the central warfare state, no matter the cost.As an example, consider the Scottish independence referendum that took place in September of 2014.Some conservatives, and even a few libertarians claimed that we should oppose the referendum on the grounds that it would create a new government, and thus two states would exist in the place of one. But reducing the size and scope of any single state’s dominion is healthy for liberty, because it leads us closer to the ultimate goal of self-determination at the individual level, to granting each of us sovereignty over our lives.Again quoting Mises:If it were in any way possible to grant this right of self-determination to every individual person, it would have to be done. (italics added)Furthermore, some conservatives argue that we should not support secession movements where the breakaway movement is likely to create a government that is more “liberal” than the one it replaces. This was the case in Scotland, where younger Scots who supported the independence referendum in greater numbers hoped to create strong ties with the EU parliament in Brussels and build a Scandinavian-style welfare state run from Holyrood (never mind that Tories in London were overjoyed at the prospect of jettisoning a huge number of Labour supporters!).But if support for the principle of self-determination is to have any meaning whatsoever, it must allow for others to make decisions with which we disagree. Political competition can only benefit all of us. What neither progressives nor conservatives understand — or worse, maybe they do understand — is that secession provides a mechanism for real diversity, a world where we are not all yoked together. It provides a way for people with widely divergent views and interests to live peaceably as neighbors instead of suffering under one commanding central government that pits them against each other.Secession Begins With YouUltimately, the wisdom of secession starts and ends with the individual. Bad ideas run the world, but must they run your world?The question we all have to ask ourselves is this: how seriously do we take the right of self-determination, and what are we willing to do in our personal lives to assert it?Secession really begins at home, with the actions we all take in our everyday lives to distance and remove ourselves from state authority — quietly, nonviolently, inexorably.The state is crumbling all around us, under the weight of its own contradictions, its own fiscal mess, and its own monetary system. We don’t need to win control of DC.What we need to do, as people seeking more freedom and a better life for future generations, is to walk away from DC, and make sure we don’t go down with it.How To Secede Right NowSo in closing, let me make a few humble suggestions for beginning a journey of personal secession. Not all of these may apply to your personal circumstances; no one but you can decide what’s best for you and your family. But all of us can play a role in a bottom-up revolution by doing everything in our power to withdraw our consent from the state:Secede from intellectual isolation. Talk to like-minded friends, family, and neighbors — whether physically or virtually — to spread liberty and cultivate relationships and alliances. The state prefers to have us atomized, without a strong family structure or social network;secede from dependency. Become as self-sufficient as possible with regard to food, water, fuel, cash, firearms, and physical security at home. Resist being reliant on government in the event of a natural disaster, bank crisis, or the like;secede from mainstream media, which promotes the state in a million different ways. Ditch cable, ditch CNN, ditch the major newspapers, and find your own sources of information in this internet age. Take advantage of a luxury previous generations did not enjoy;secede from state control of your children by homeschooling or unschooling them;secede from college by rejecting mainstream academia and its student loan trap. Educate yourself using online learning platforms, obtaining technical credentials, or simply by reading as much as you can;secede from the US dollar by owning physical precious metals, by owning assets denominated in foreign currencies, and by owning assets abroad;secede from the federal tax and regulatory regimes by organizing your business and personal affairs to be as tax efficient and unobtrusive as possible;secede from the legal system, by legally protecting your assets from rapacious lawsuits and probate courts as much as possible;secede from the state healthcare racket by taking control of your health, and questioning medical orthodoxy;secede from your state by moving to another with a better tax and regulatory environment, better homeschooling laws, better gun laws, or just one with more liberty-minded people;secede from political uncertainly in the US by obtaining a second passport; orsecede from the US altogether by expatriating.Most of all, secede from the mindset that government is all-powerful or too formidable an opponent to be overcome. The state is nothing more than Bastiat’s great fiction, or Murray’s gang of thieves writ large. Let’s not give it the power to make us unhappy or pessimistic.All of us, regardless of ideological bent and regardless of whether we know it or not, are married to a very violent, abusive spendthrift. It’s time, ladies and gentlemen, to get a divorce from DC.Image source: iStockphoto.