Ludwig von Mises Institute
Earlier this year, Lithuania reinstituted the military draft, which the Lithuanian state claimed was in response to threats from Russia. Ukraine has also recently reinstituted the draft, with mixed political results, and for similarly stated reasons.Regardless of how one gauges the magnitude of Russian aggression, the problem faced by small states like Lithuania is an important one.How can a small state with a small population — and thus a small military — ever hope to defend itself against a much larger state?This is an important question for libertarians especially, since, as Hans-Hermann Hoppe has noted, if we must have states, a system of small, independent states (i.e., Monaco, Lichtenstein, Luxembourg, and arguably Switzerland) is much more ideal than a system of medium-sized or large states.As illustrated here and here, we find that small states are less able to impose strong coercive state monopolies since small states face greater competition from surrounding states, and the more abusive states (if small) are at greater risk of losing their most productive citizens to emigration. Thus, small states have an incentive to pursue more laissez-faire policies.The natural implication of this is that libertarians and other proponents of laissez-faire should seek a world of small states through secession, or through radical decentralization which leads to de facto local autonomy.In response to this, opponents of secession and decentralization claim that only large and strong states can provide adequate military defense in the face of illiberal and large foreign regimes. “We can reduce the Americas and Europe to regions of small, weak states,” they may say, “but that would leave them defenseless against domination by some future equivalent of China, or Russia, or the United States.”But are small states really defenseless?Wealth — Not Size — Buys DefenseWar-making is an expensive and capital-intensive endeavor. Ironically, some of the most warlike states often have their genesis in relatively laissez-faire economies (e.g., those of the American and Imperial British economies) because those economies are able to provide more tax revenue.The other side of coin, however, is the fact that wealthier societies have a greater ability to defend themselves from aggressors. Wealthier societies can afford important and expensive armaments such as anti-aircraft defenses and related defensive technologies. They can afford to pay for specialized highly-trained troops instead of resorting to a 100-percent conscription tax on people with no particular skill for soldiering. Wealthier societies can also more easily obtain nuclear weapons technology which has clearly been shown to deter war-making by large aggressive states.Also, wealthier societies can buy defense from neighbors in a variety of other ways. They can employ foreign mercenaries, and they can simply bribe unfriendly foreign regimes. Potential foreign aggressors will also be reluctant to bomb wealthy foreign cities that are sources of lucrative trade and investment.And finally, in a wealthier society, residents at an individual and small organizational level, are more capable — if the state permits it — of arming themselves, which has the effect of adding another layer of resistance to foreign aggression.The Advantages of DecentralizationThis latter advantage of economic wealth brings us to the tactical advantages of political and military decentralization. Hoppe writes:As a monopolist of ultimate decision-making, the state decides for everyone bindingly whether to resist or not; if to resist, whether in the form of civil disobedience, armed resistance or some combination thereof; and if armed resistance, of what form. If it decides to put up no resistance, this may be a well-meaning decision or it may be the result of bribes or personal threats by the invading state — but in any case, it will certainly be contrary to the preferences of many people who would have liked to put up some resistance and who are thus put in double jeopardy because as resisters they disobey now their own state as well as the invader.On the other hand, if the state decides to resist, this again may be a well-meaning decision or it may be the result of pride or fear — but in any case, it too will be contrary to the preferences of many citizens who would have liked to put up no resistance or to resist by different means and who are entangled now as accomplices in the state’s schemes and subjected to the same collateral fallout and victor’s-justice as everyone else.The reaction of a free territory is distinctly different. There is no government which makes one decision. Instead, there are numerous institutions and individuals who choose their own defense strategy, either independent of or in cooperation with others, each in accordance with one’s own risk assessment. Consequently, the aggressor has far more difficulties gathering information and conquering the territory. It is no longer sufficient to “know” the government, to win one decisive battle or to gain control of government headquarters from where to transmit orders to the native population. Even if one opponent is “known,” one battle is won or one defense agency defeated, this has no bearing on others.Moreover, the multitude of command structures and strategies as well as the contractual character of a free society affect the conduct of both armed and unarmed resistance. As for the former, in state-territories the civilian population is typically unarmed and heavy reliance exists on regular, tax-and-draft-funded armies and conventional warfare. Hence, the defense forces create enemies even among its own citizenry, which the aggressor state can use to its own advantage, and in any case there is little to fear for the aggressor once the regular army is defeated. In contrast, the population of free territories is likely heavily armed and the fighting done by irregular militias led by defense professionals and in the form of guerilla or partisan warfare. All fighters are volunteers and all of their support: food, shelter, logistical help, etc. is voluntary. Hence, guerrillas must be extremely friendly to their own population. But precisely this: their entirely defensive character and near-unanimous support in public opinion can render them nearly invincible, even by numerically far superior invading armies. History provides numerous examples: Napoleon’s defeat in Spain, France’s defeat in Algeria, the U.S. defeat in Vietnam, Israel’s defeat in South Lebanon.Collective Defense, Guerilla Warfare, and Private ArmsRothbard explored these same themes in his work on the American Revolution, in which he noted the essential role of guerilla warfare in that conflict. Simultaneously during the war, the “United States” functioned as a group of independent states that had come together for the purposes of collective defense. The coalition was successful against the most powerful state of the era, and the Americans states remained de facto independent small entities, even if they functioned internationally under a single diplomatic banner.Consequently, we find that effective military defense does not necessitate a centralized state or political unity. There is no compelling reason to believe that had there been twenty or thirty colonies instead of thirteen, that the outcome or conduct of the war on the side of the Americans would have been any different.These facts remain relevant even today since other regions of the world could take advantage of the same dynamics, were they able to overcome their commitments to nationalism and authoritarianism. For example, if Lithuania were serious about military defense, it might look to the fact that the former states of the Soviet Bloc, from Estonia to Bulgaria (not including the former SSRs, such as Ukraine), have a combined population of over 100 million people and populations spread out over a large area. In other words, the region has the potential to mount a credible and effective military defense to foreign invaders through decentralized, collective defense.Defensive military capability would also be greatly enhanced by a commitment to economic growth through deregulation and laissez-faire. Not surprisingly, though, most of the states of the region are unwilling to free their economies from government intervention. At the same time, those same states are committed to disarming the local populations and centralizing military capability while palming off their defense costs on the American taxpayer via NATO. That is, they remain committed to old models of state defense that have failed them spectacularly in the past.The region (like most of the world) remains mired in the idea that a centralized state and a defenseless private sector are the best option for defense. The number of privately owned-firearms in Bulgaria, for example, is six guns per 100 people. In Poland, the number is 1.3 private guns per 100 people. There are even fewer private guns in Lithuania (0.7 per 100), which has decided that enslaving young men via conscription is better than letting citizens have guns. When we compare these numbers to gun ownership in Switzerland, which has a rate of forty-five guns per 100 people (the rate is eighty-eight per 100 in the United States), it becomes abundantly clear that the regimes of eastern Europe are not serious about any type of military defense that does not prioritize protecting the state’s monopoly of coercion over its own citizens.Ideology MattersEconomics, size, and the quality of war materiel all matter, but none of these factors can overcome the power of ideology. Hoppe writes:[H]ow is one to explain, for instance, that France has not long ago conquered Monaco, or Germany Luxemburg, or Switzerland Liechtenstein, or Italy Vatican City, or the U.S. Costa Rica? Or how is one to explain that the U.S. does not “finish the job” in Iraq by simply killing all Iraqis. Surely, in terms of population, technology and geography such are manageable tasks.The reason for these omissions is not that French, German, Swiss, Italian or U.S. state rulers have principled moral scruples against conquest, occupation, expropriation, confiscation, enslavement and the imprisonment or killing of innocents — they do these things on a daily basis to their “own” population. ... [W]hat constrains the conduct of state rulers and explains their reluctance to do things that appear feasible from a “technical” point of view is public opinion, domestically, but also abroad.As La Boétie, Hume, Mises, Rothbard have explained, government power ultimately rests on opinion, not brute force. Bush does not himself kill or put a gun to the head of those he orders to kill. Generals and soldiers follow his orders on their own. Nor can Bush “force” anyone to continue providing him with the funds needed for his aggression. The citizenry must do so on its own, because it believes that, by and large, it is the right thing to do. On the other hand, if the majority of generals, soldiers and citizens stop believing in the legitimacy of Bush’s commands, his commands turn into nothing more than hot air.Ultimately, no governmental structure can prevent war if the prevailing ideology is one that prefers violence to peace and nationalism to international laissez-faire. Likewise, Sweden and Norway (for example) no longer come to blows, not because peace is imposed on them by NATO or the US, but because the people of the region view war as an untenable option. There is peace (for now) throughout most of the West because few of the productive taxpaying citizens of the West are inclined to make war on other citizens of the West. This is an ideological triumph, not a military one.
The job-threatening rise of the machines is an economically illiterate meme that refuses to die. We’re actually probably in the early stages of it, a bull-market in neo-luddism, if you will. Bastiat’s “Candlemakers Petititon” answered this one long ago, but today I’ll run a little thought experiment that owes it all to good old Bastiat.Let’s say Weird Al Yankovic invents a machine capable of making everything with a single push of a button. The first thing he does is print up a bunch of machines and sell them for a ton. Weird Al is now a billionaire, and there are thousands of make-everything machines.This diffusion of Weird Al’s new technology replicates the market process, where new tech spreads in proportion to its usefulness. If you doubt this, because of patents, for example, check out Brazil’s experience with AIDS drugs, where they tore up the patents on humanitarian grounds.Weird Al’s machines will, at a minimum, be mass produced in Brazil. Or China. Or Mozambique.So, one way or another, we get a bunch of make-everything machines.What happens to the jobs? We’re getting everything for near-free now. So all the production jobs disappear. There are still lots of jobs, of course — child-care, gardeners, musicians. But all the production jobs have vanished — something like 20 percent of jobs, maybe up to 50 percent when you include knock-on replacement of people by capital (truck drivers, robot bartenders). Heck, let’s go crazy and say 90 percent of the jobs vanished. Nobody’s got a job outside of preschool or performing on a stage. It’s the end of the world, right?Well, the key here is that, now that everything is made with the push of a button, everything’s extremely cheap. For example, a sixteen-bedroom house or a Lamborghini costs almost nothing. Let’s say they now cost ten cents.The main expense in such a world is probably surface space. To park all those dime-a-dozen cars. It’d take a while to “run out” of space, though — divide the world by the people and you get about twenty acres (eight hectares) for a family of four — about 100 large surburban yards. Add in the oceans — floating islands cost nothing, remember — and triple that. We end up with about 300 homes-worth of space per family.What about those unemployed people? Well, when a house or a year’s food costs a dime, they’ll be willing to work really cheap. We’ll work for a penny a day. After all, that’s a new house or a years’ food every two weeks.Who would hire these workers for a penny? Plenty of people. Heck, if workers cost a penny a day I’d hire several for each of my children. Just to keep the kids from getting bored. I’d hire another to cook, one to clean, one to run errands. One to keep track of my mail. One to check Facebook for me. At a penny a day I’d personally hire 100 people, easy. You would too — a buck a day’s nothing.So the remaining 10 percent of workers who didn’t lose their jobs — babysitters, baristas, musicians — would want 100 workers each. Even at a penny, they’d take them all, and they’d be paying an outrageous rate — a tenth-house per day! That’s a daily rate of $15,000 in today’s terms.Now, those who kept their jobs would, of course, see dropping wages. A barista who made $12 an hour in the old days would have to compete with the hordes of unemployed workers. Maybe her wage would drop to a penny, too. But, remember, a penny now buys $15,000 worth of stuff.When the smoke clears, most people would make some extremely low wages — a penny a day. And that extremely low wage would be worth an awful lot — $15,000 a day. Implying an annual income north of several million dollars in today’s values. Some lucky few would make a dollar a day — probably the people who are good at things machines cannot do: entertainment, child-care, being a good listener, strumming the guitar at the old-folks’ home, and laughing at jokes. At a dollar a day, this super-rich elite that excels at human skills — such as making us laugh — would be billionaires in today’s values.Either way, there would be nothing we think of even remotely as “poverty.” Sure, there’ll be inequality, but it’ll be of the sort “Sarah’s got 200 Lamborghinis and I’ve only got 40.”The upshot is that wages plunge, but production costs plunge even more. Of course, this is based on the ridiculous Weird Al machine. Why do this? To illustrate the absolute worst-case scenario, when machines make everything for near-nothing.What about going one step further, that the machine destroys all jobs in the whole world — it makes every single thing for us free, and it even keeps the folks entertained and the warm fuzzies flowing at the old folks’ home.Well, we’ve already got a case study there — the sun. It gives us warmth and mangos for free. And how do we respond? We sit around and lazily enjoy it. So a machine that truly replaced all jobs would simply mean nobody works anymore — life’s somewhere between a non-stop party and a non-stop pleasant walk in the woods followed by a nice bonfire with friends and chardonnay.We should all be so lucky that the machines do actually take every last job there is.
For a few years now, a modern form of Luddite-ism has decried a seemingly ramped-up use of technology that is expected to upend labor markets in the near future to degrees heretofore unseen. In this world, what we know as fast food restaurants will become completely self-serve, with iPad-ish screens used to order French fries and machines in the kitchen to prepare them. All those workers in that industry, well, they’re out of luck and will just have to acquaint themselves with their next-best work option, which probably involves a government dole and a parent’s spare bed.But it’s not just fast food. Think self-driving semi-trucks. Google cars. Virtual classrooms replacing traditional ones. Robots replacing factory workers. Vertically-oriented business models with roots in post-war America are giving way to horizontal-oriented ones that produce more with less. Stereotypical Exhibit A: In 1988, Kodak employed 144,000 people in its film business. In 2012, it filed for bankruptcy, a year that witnessed the emergence of Instagram, a photo company that, at the time, served over thirty million customers with its thirteen employees.Without delving into the economics of these trends, which I consider to be positive in the long-run — albeit exacerbated by labor cost-increasing government policies — let me offer a confession. I always thought economists were going to avoid these trends. Yes, our interactions with students might change, and robots might even replace us in the classroom, but these developments seemed a long way off. Regardless, the everyday work of writing an academic paper or book review would never be taken on by technology.The Inconvenient Depression of 1920–21But reading James Pethokoukis’s snippy review of James Grant’s The Forgotten Depression in the New York Times makes me wonder if I’m right. Unfortunately, it’s easy to conceive of a computer algorithm producing output quite similar to Pethokoukis’s take on Grant’s thesis.The book’s thesis is well-known to Austrians, at least since Tom Woods’s 2009 Intercollegiate Review article. In a nutshell, it states that the economic downturn the US experienced in the beginning of the 1920s was quite similar to the one witnessed at the end of that decade. The key difference between the two downturns was the policy response. In the early 1920s, the explicit policy was to avoid intervention in market forces so that they could correct as quickly as possible, differing from what took place following Black Thursday in 1929, when the interventionists were large and in charge. Whereas much of the 1920s recovery was based on real factors resulting from real adjustments made during the correction, recovery in the 1930s was thwarted and delayed for the entire decade, as interventions hindered markets’ normal correcting processes, causing unintended secondary problems that served to justify further interventions.Today, mainstream economists (and journalists like Pethokoukis) ignore the short depression and correction that occurred in the early 1920s. It doesn’t fit into the Keynesian justification for activist government, hyper-bureaucracies, and statist “think tanks” of the left and right. (Pethokoukis himself is a fellow at the American Enterprise Institute.) The only depression that matters is the Great One because without it, Washington, DC might still be the boring small swamp town envisioned by the writers of the Constitution, from which explicit powers might be executed, and little else. Before the Great One, the United States was (arguably) a decentralized confederation, but afterward it was a centralized nation-state, the growth of which has been inversely related to the free society ever since.But if you happen to reside in the Capitol, what’s not to like about it?Economics on Auto-PilotSo in criticizing Grant’s thesis, Pethokoukis raises old canards that are easily disproven, but are made in a rote manner, as if by a machine! Here’s how it works. In terms of the classic input-output model associated with economist Wassily Leontief, you input terms like “liquidationist,” “austerian,” “do-nothing,” and “Harding,” and the output emerges in the form of the review employing terms like “economic nostalgia,” “pre-New Deal,” “poor argument,” and “critical role of government.”And the argument, well, you’ve heard it all before. Austerity that worked in the early 1920s no longer worked in the late 1920s because the economy had changed during the interim, which is why economically activist policy responses emerged then and are required today “for 21st-century policy makers in a crisis,” to use Pethokoukis’ words. Lost in this argument is the one reason why the 1921 Depression is largely forgotten: Market forces ended that Depression before it would do lasting damage, so that electrification, telephony, the mass production of automobiles, radios, and motion pictures defined the 1920s instead of soup lines, record unemployment, bank holidays, and Brain Trusts. We remember the Depression of 1929 because it defined the dreary decade that followed (and never really ended until discredited New Dealers were pushed out of Washington following FDR’s death in April 1945).I am not saying Pethokoukis didn’t skim The Forgotten Depression before critiquing it, but his review reads like he did little else than fall back to the approved public school civics course explanation for the Great Depression in formulating his objections. One assumes that if he did read it, he would have been less dismissive of Grant’s arguments, rich data, and anecdotes.But these are the terms of the argument as preferred by the New York Times and the beltway establishment, and they’re so commonplace that perhaps I can be forgiven for assuming they result from labor-reducing mass production technology. If Pethokoukis did utilize an input-output program, his output included what Pethokoukis intended as a coup de grâce near the end:A better natural experiment for Grant’s depression-fighting formula is what’s happening in the eurozone right now. With a jobless rate over 11 percent, a combination of fiscal austerity and tight money is on the verge of sending the region into its third recession since 2007. But who knows, maybe it will generate a catchy tune or two.Is Pethokoukis really arguing that the ghost of Warren G. Harding, and not that of John M. Keynes, has even remotely influenced post-2008 EU and ECB policies? Does he not know that the budget-balancing and trade surplus-ing German economy has been among the strongest in the EU, something of an anti-Greece? Or has AEI secretly employed Paul Krugman as a ghostwriter?My explanation is simpler: There is a machine that produces these pieces and, sometimes, they require a software update.
But can the debate really be as one-sided as I portray it? Well, look at the results: again and again, people on the opposite side prove to have used bad logic, bad data, the wrong historical analogies, or all of the above. I’m Krugtron the Invincible!Thus wrote the great Paul Krugman. A man so modest as to proclaim that “I think I can say without false modesty, a huge win; I (and those of like mind) have been right about everything.”Quite a claim. Indeed, predictions are extraordinarily difficult. Even to an expert in a subject who has dedicated his life to a field of study, predicting the future proves elusive. Daniel Kahneman referenced a study of 284 political and economic “experts” and their predictions and found that “The results were devastating. The experts performed worse than they would have if they had simply assigned equal probabilities to each of three potential outcomes.”A whole book of such wildly inaccurate predictions by experts was compiled into the very humorous The Experts Speak with such prescient predictions as Dr. Alfred Velpeau’s “The abolishment of pain in surgery is a chimera. It is absurd to go on seeking it” and Arthur Reynolds belief that “This crash [of 1929] is not going to have much effect on business.” Indeed, a foundational block of Austrian economics (that some Austrians unfortunately forgot regarding premature predictions of hyperinflation) is that the sheer number of variables in the world at large makes accurate forecasting extraordinarily difficult.So it must be a rare man indeed that can be right about everything. And this man, Paul Krugman is not.Predicting a Bubble He RecommendedPaul Krugman likes to reference the fact that he predicted the housing bubble. Of course, he also sort of recommended it. From a 2002 column of his,To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.In 2009, when this came out, he denied its obvious implication and wrote, “It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.” So that doesn’t count as a recommendation? It certainly sounded like he was agreeing with Paul McCulley on inflating a housing bubble. And he verified that that’s exactly what he meant in a 2006 interview where he said,As Paul McCulley of PIMCO remarked when the tech boom crashed, Greenspan needed to create a housing bubble to replace the technology bubble. So within limits he may have done the right thing. But by late 2004 he should have seen the danger signs and warned against what was happening; such a warning could have taken the place of rising interest rates. He didn’t, and he left a terrible mess for Ben Bernanke.The best Krugman can possibly say is that he thought Greenspan went too far with the housing bubble he recommended.Deflation is Around the CornerWhile running victory laps because the United States hasn’t seen massive price inflation, Krugman seems to have forgotten what his prediction actually was. In 2010 he wrote, “And what these measures show is an ongoing process of disinflation that could, in not too long, turn into outright deflation ... Japan, here we come.”Robert Murphy called him on this and noted Krugman’s response,... Krugman himself ... said of his 2010 analysis: “(In that post, I worried about deflation, which hasn’t happened; I’ve written a lot since about why).”Note the parenthetical aside, and the timing: Krugman in April 2013 is mentioning in parentheses to his reader that oh yes, as of February 2010 he was “worried about deflation, which hasn’t happened.” In other words, Krugman entered this crisis with a model that predicted how prices would move in response to the economic situation, and chose his policies of government stimulus accordingly. He was wrong, and yet maintains the same policy recommendations.But of course to Krugman, anyone who predicted price inflation can’t explain why that hasn’t happened. Such people are just those “... who take a position and refuse to alter that position no matter how strongly the evidence refutes it.” Krugman is different.Europe Will Do Better Than the United StatesIn 2008, Krugman wrote:... tales of a moribund Europe are greatly exaggerated. ... The fact is that Europe’s economy looks a lot better now — both in absolute terms and compared with our economy.”Later he noted that “Americans will face increasingly strong incentives to start living like Europeans” and that “he has seen the future and it works.” (I should probably note that that is a quote he borrowed from Lincoln Steffens about the Soviet Union.)Then Greece went bankrupt and the international consensus is unquestionably that the crisis hit Europe harder.The Euro Will CollapseNiall Ferguson counted eleven different times between April of 2010 and July 2012 that Krugman wrote about the imminent breakup of the euro. For example, on May 17th, 2012, Krugman wrote,Apocalypse Fairly Soon. ... Suddenly, it has become easy to see how the euro — that grand, flawed experiment in monetary union without political union — could come apart at the seams. We’re not talking about a distant prospect, either. Things could fall apart with stunning speed, in a matter of months, not years. And the costs — both economic and, arguably even more important, political — could be huge.Most of these predictions are laced with weasel words such as “might,” “probably,” and “could” (more on that shortly). Still, while I’m no fan of the euro, and it might still collapse, as of today, three years later, it has not. If the word “imminent” means anything at all, Krugman was wrong.The Sequester Will Doom Us AllPaul Krugman at least admitted the sequester was “relatively small potatoes.” But for “relatively small potatoes” he makes a big deal about it, referring to it as “one of the worst policy ideas in our nation’s history.” And it “will probably cost ‘only’ around 700,000 jobs.” (Note the word “probably” again.)Then later, he decided that these were actually quite large potatoes, stating,And, somehow, both sides decided that the way to buy time was to create a fiscal doomsday machine that would inflict gratuitous damage on the nation through spending cuts unless a grand bargain was reached. Sure enough, there is no bargain, and the doomsday machine will go off at the end of next week.The economy has done quite well since then actually. Indeed, how $85.4 billion dollars in “cuts” (from the next year’s budget not the previous year’s spending) could affect anything in a $17 trillion dollar economy is simply beyond me. And of course, it didn’t.Interest Rates Can’t Go Below ZeroIn March of this year, Krugman wrote in regard to some European bonds with negative nominal yields,We now know that interest rates can, in fact, go negative; those of us who dismissed the possibility by saying that people could simply hold currency were clearly too casual about it.”But as Robert Murphy points out, “The foundation for the Keynesian case for fiscal stimulus rests on an assumption that interest rates can’t go negative.” Murphy also points out that Krugman should admit he was wrong again because back in 2009, Krugman wrote,And the reason we’re all turning to fiscal policy is that the standard rule, which is that monetary policy plus automatic stabilizers should do the work of smoothing the business cycle, can’t be applied when we’re hard up against the zero lower bound. [i.e. zero percent interest]“Inflation Will be Back”In 1998, Paul Krugman predicted “Inflation will be back.”Nope.“The Rate of Technological Change in Computing Slows”Same article as the last one, “... the number of jobs for IT specialists will decelerate, then actually turn down.”Aside from a short dip after the 2001 recession, the answer would be nope again.Weasel Words and “Accurate Predictions”Let’s take a look at Paul Krugman’s “accurate prediction” of the financial crisis. On March 2nd, 2007, he predicted the following explanation would be given a year from then for the financial crisis he was sort of predicting,The great market meltdown of 2007 began exactly a year ago, with a 9 percent fall in the Shanghai market, followed by a 416-point slide in the Dow. But as in the previous global financial crisis, which began with the devaluation of Thailand’s currency in the summer of 1997, it took many months before people realized how far the damage would spread.So the crisis would begin in China? Almost.He concluded that column by saying, “I’m not saying that things will actually play out this way. But if we’re going to have a crisis, here’s how.”That’s a good hedge, just like with the euro. He can say he got the financial crisis right (albeit happening in a different way than he expected), but then say he didn’t get the euro wrong because he added “probably” before any prediction about it.Normally, there would be nothing wrong with these weasel words. Given the nature of predictions, any prediction that is made should have a qualifier in front of it. It’s simply an admission that you aren’t omniscient. But you can’t eat your cake and have it too. Either Krugman was right about the crisis (sort of) and wrong about the euro (and many other things) or neither should count at all.Or course, this doesn’t refute Krugman’s theories. But then again, Krugman may want to slow down on his victory laps.
In his article “The Big Meh” Paul Krugman complains that despite all the information technology advances the effect so far has been negligible as far as economic growth is concerned.Krugman writes “That the whole digital era, spanning more than four decades, is looking like a disappointment. New technologies have yielded great headlines but modest economic results. Why? ... The answer is that I don’t know — but neither does anyone else.”Indeed if one looks at the real gross domestic product to the potential real gross domestic product ratio the economy does appear to be hovering below potential with the ratio of 0.977 registered in Q1 this year.Contrary to Krugman, we suggest that economists such as Ludwig von Mises and Murray Rothbard have provided a clear answer to the issue of technology and economic growth.In Man, Economy, and State, Rothbard says that technology, while important, must always work through the investment of capital in order to generate economic growth.On this issue, Rothbard recalls Mises and writes,What is lacking in (underdeveloped counties) is not knowledge of Western technological methods (“know how”); that is learned easily enough. The service of imparting knowledge, in person or in book form, can be paid for readily. What is lacking is the supply of saved capital needed to put the advanced methods into effect.Most modern theories that emphasize the importance of new ideas and new technologies give the impression that these ideas and technologies have a “life of their own.” Many experts hold that because of the limited amounts of capital and labor, without technological progress, the opportunities for growth will eventually run out.We Need Funding To Implement New IdeasIdeas, unlike material inputs, are not themselves scarce. Consequently, it is argued, new ideas for more efficient processes and new products can make continuous growth possible.We suggest that regardless of how many ideas people have, what matters is whether these ideas can be implemented. What always limits the implementation of various new techniques is the availability of funding. While ideas and new techniques can result in a better use of scarce resources, they can however, do very little without the pool of real savings.So regardless of how clever we are and regardless of various technological ideas, without an adequate pool of funding nothing will emerge. It is through the expansion in the pool of real savings that an increase in the stock of capital goods is possible. And it is the increase in the capital goods per worker that permits economic growth to emerge.To Get More Funding, We Need SavingsObviously, new ideas and new technology can be introduced during the production of new capital goods (i.e., new technology) and will be imbedded in the capital goods stock. The crux of the matter however, is that capital goods cannot emerge without a prior increase in the pool of funding or pool of real savings.Take, for instance, a baker John who produced ten loaves of bread. He consumes two loaves of bread whilst the other two loaves — his real savings — he employs to purchase a new part to improve his oven. With a better oven he can now raise the output of bread to twenty loaves. If he still consumes only two loaves, then with a larger savings (now stands at eighteen loaves) he can enhance further his oven by introducing new parts, which will enable the introduction of new technology. Note that all this is made possible on account of real savings.We suggest that despite new technologies, a major impediment to economic growth has been the relentless central bank tampering with financial markets.Since 2008 this tampering was made manifest in the extremely loose monetary policy of the Fed that resulted in the massive monetary expansion of the Fed’s balance sheet and the lowering of interest rates to almost nil.These policies have been responsible for a severe erosion of the pool of real savings and thus a weakening of the process of capital formation. This in turn has undermined real economic growth notwithstanding new information technology.For Krugman and his followers savings is bad news — it is seen as less demand — hence one shouldn’t be surprised that Krugman is puzzled as to why new ideas haven’t manifested in a more robust economic growth. Contrary to Krugman, boosting so-called aggregate demand whilst undermining the capital formation process, and hence the ability to produce goods and services, cannot strengthen economic growth over time. In fact this way of thinking results in the notion that something can be generated out of nothing.
A comparison between CEOs and the average worker seems like a perfect manifestation of the old cliché, “the rich get richer and the poor get poorer.” During the recent financial crisis, stories were commonplace of CEOs paying themselves millions as they drove their firms into the ground. Not only that, we constantly read that CEOs are out-earning the average worker by a sickening amount — and that this gap is on the rise. And of course those reporting on these alleged trends do so to further a specific agenda: shameless greed and salary disparity.One of the most common charges leveled against CEOs is that they out-earn the average worker 300:1. I’ve even seen a variation of this claiming a ratio of 500:1, but the more common figure cited is from the AFL-CIO, which claims a ratio of 331:1. Nowhere in the AFL-CIOs report is the disclosure that the CEOs in question are CEOs “of an S&P 500 Index company.” So, in fact, the sample is only of 500 CEOs, and those at some of the nation’s largest companies, while there are nearly 250,000 CEOs in the United States representing firms of varying size.But read any news outlet and you get the same story. Look at Al Jazeera’s reporting, “In 2013 the average American CEO was paid 331 times what the average worker in the United States earned and 774 times what full-time minimum wage workers made, according to a new analysis released Tuesday by the AFL-CIO, the nation’s largest labor union.” The fact that this only reflects the pay of 500 CEOs not millions of Americans is clearly glossed over, as they even claim that this is representative of the “average CEO.”Even the “experts” aren’t much better. Paul Krugman cites the same misleading statistic in his book The Conscience of a Liberal without clarification. Robert Reich, being at least half honest, uses the same stat for potentially millions to see in his documentary Inequality for All, but only clarifying who the stat represents — “big companies” — in his blog at UC Berkeley.So we now know the greatest problem with the AFL-CIO statistic is that it is not representative of all CEOs, just those at the nation’s largest companies. The report does reveal an actual fact: there is a CEO to worker pay gap. The average CEO in the United States earned a salary of $178,400 in 2013, compared to $46,440 for the average worker (both figures exclude benefits). This is a radically different picture from the misrepresentation of the AFL-CIOs data report, which enthusiastically takes a group of outliers to draw conclusions from. The pay gap between the CEOs the AFL-CIO sampled and the average worker is a multiple of the gap between the actual average CEO and average worker.In addition to pointing out the outrageous CEO salaries, many claim that CEO pay is on the rise. This maybe characterized as a “half-truth,” depending on how the claim is spun. When looking at CEO salaries at the nation’s largest companies, the gap in pay between CEOs and workers has increased. In the early 1980s, a gap of only 42:1 existed, compared to the gap of 300+:1 we see today.For many, the rise in CEO pay relative to the average worker’s pay is a perfect illustration of the rise in inequality that Occupy brought to the nation’s conscience. And, we are told it should worry us if this disparity comes at the expense of the worker, as the CEO takes more and more for himself, leaving scraps for everyone else.Luckily, this is not what happened. Something changed: the average size of a company on the S&P500. The companies comprising the S&P are ever changing, with larger companies replacing smaller ones. It would thus make sense that as the average market capitalization of companies comprising the S&P increases, the average CEO pay of those firms will increase. According to economists Xavier Gabaix and Augustin Landier in a study published by the National Bureau of Economic Research, “the six-fold increase in CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large U.S. companies during that period.”There are obvious exceptions to the rule, such as bailed-out firms paying their CEOs exorbitant salaries, or the seemingly oft-reported media stories on CEOs paying themselves handsomely as they run their firms into the ground, but they’re just that: exceptions.Contrary to whatever narrative is implied by the “CEO pay is out of control” charge, this increase in pay has not been at the expense of the typical worker. Worker compensation (salary + benefits) as a percent of corporate income has been relatively stable since the 1940s.
The positivist ideas dominant among economists led them to agree that, as stated by the motto of the Econometrics Society, “Science is prediction.” We are surrounded by forecasts about numerous economic indicators. “Experts” reveal the rate of growth with .1 percent precision as if they were reading the oracle or seeing the future in chicken entrails.In the nineteenth century, people used to believe everything which was written in the newspapers. With time, they became more skeptical and began to question what has been considered as a reliable source of information. After that came television. Images have real power over the minds, but after a while, people began to mistrust the news and exercise their critical judgment. Oddly however, government statistics and economic predictions are held as truths since they exist and people only too rarely question the figures.But if we can’t trust the government to produce safer rail travel or more affordable health care, why should we trust it to produce better economic predictions? Why would things be different for statistics and predictions?Let’s Be Optimistic!The case of France is instructive on these matters. Indeed, the French Ministry of Finance‘s growth rate predictions, published each year, have a very poor record. These predictions are important since they are used to estimate government revenue for the following year. If the numbers are made up, then how can the parliament vote on the budget wisely? The government has steadfastly predicted the French GDP every year since 1999 and has recorded an average error of 1.03 percentage points — a meaningful gap when dealing with GDP.In the last fifteen years, the French government has been overly optimistic thirteen times. This is not surprising when the predictions are subject to constant manipulation by politicians. Some highly ranked officials in the Ministry of Finance still remember the tragicomic episode when, during the summer or 2010, the then Minister of Finance Francois Baroin, had to meet with President Nicolas Sarkozy at Fort Brégançon, the French Camp David. Baroin submitted the 2011 growth rate forecast which was 1.2 percent. “We cannot announce 1.2%, it’s too low, let's say 1.5%” declared the minister to his team just before meeting with Sarkozy. President Sarkozy unsatisfied with the numbers as well, and with the stroke of a pen said: “we will do 2%!” Lucky for them, the growth rate that year was 1.7 percent. But even when it significantly misses the mark, the government always wins by manipulating the numbers. Who will remember the fake predictions in six months?Private organizations and the European Commission, which are less susceptible to direct political pressure, perform only slightly better in predicting the French GDP figures. For example, the “Centre de Prévision de l’Expansion” has committed an average error of 0.75 percentage points for the 1999-2014 period.The Problem with Mathematical ModelsAlthough some private sector forecasters have more of a talent for guesswork than their public sector counterparts, the very assumption that we can compute predictions through “complex mathematical models” is flawed. Why, first of all, is the margin of error never published? Indeed, rather than giving a point estimate, would it not be more coherent to use a range? Second, to make forecasts, you need to make assumptions about how the economy works. If your assumptions are wrong, “sophisticated mathematical models” won’t fix that.As Mark Thornton put it, “The dominance of positivism in economic methodology encourages economists to worry less about the logical consistency of their models and to concentrate more on the development of models that exploit historical data in making predictions.” Moreover, Austrian economists remind us that the future is always uncertain. If we could know the future with certainty, there would be no place for human action. Austrians are therefore skeptical about predictions. Ludwig von Mises claimed that economic theory can help us to make only qualitative predictions but cannot be used to produce quantitative predictions:Economics can predict the effects to be expected from resorting to definite measures of economic policies. It can answer the question whether a definite policy is able to attain the ends aimed at and, if the answer is in the negative, what its real effects will be. But, of course, this prediction can be only “qualitative.” It cannot be “quantitative” as there are no constant relations between the factors and effects concerned. The practical value of economics is to be seen in this neatly circumscribed power of predicting the outcome of definite measures.And Hazlitt wrote in his November 22, 1948, column in Newsweek:The economic future, like the political future, will be determined by future human behavior and decisions. That is why it is uncertain. And in spite of the enormous and constantly growing literature on business cycles, business forecasting will never, any more than opinion polls, become an exact science.There’s Nothing Wrong with Predictions, ThoughOnly good economic theory can enable us to analyze the facts and help us make valid predictions. Richard Cantillon made correct predictions about John Law’s Mississippi Bubble system based on sound economic theory, and he made a fortune as a result. But good economics does not need complex mathematical models. Often, economists who were critical about the use of math in economic science were nonetheless excellent forecasters. For example, Yves Guyot, the great classical French economist was strongly opposed to the mathematization of economic science and criticized Léon Walras on this ground. However, he was the best in making economic predictions. Even Schumpeter, in History of Economic Analysis, was forced to admit that:as businessman or politician, I should have consulted Guyot — who was a wizard at practical diagnosis — rather than Pareto in order to be enlightened on, say, the prospects of employment or of metal prices in the next six months.Of course, Schumpeter denigrated the so-called “lack of scientific inspiration” of the French Classical school of economics — the close relative of the Austrian school of economics. It is however ironic that the “good economists” Schumpeter is speaking about — i.e., Pareto and Léon Walras — are those economists who developed very elegant mathematical models which are completely unable to give us any practical knowledge about what happens in the real world. Equations won’t tell us anything about how individuals act and therefore about how the economy works. If one wants to make good predictions, one has to master the basic laws of human action. Only then does it become possible to interpret correctly numbers and empirical facts.
The IRS reports that more people renounced their US citizenship during the first quarter of 2015 than during any other quarter in history. Notably, a sizable portion of those renouncing their citizenship are doing so to escape heavy taxation. The United States one of only a handful of OECD nations that imposes a "worldwide" tax on its citizens and residents-- and is the only country other than the military dictatorship of Eritrea that taxes its citizens living abroad on literally all forms of income.Interestingly, it is the wealthy (i.e., generally the most economically productive members of society) who are leaving permanently, and the fact that the US is driving out its wealthiest members is not a good sign for the long-term prospects for the country. It is also the opposite of what happens in a country with a healthy respect for private property and basic human freedoms.Overcoming Barriers to ExitSpecifically, the IRS reports that 1,335 American citizens gave up their citizenship forever during the first quarter. During 2014, more than 3,400 did the same. This is only a tiny portion of the total population of American citizens, although this does not count the much larger group of expatriates who remain citizens. Three million of them leave the country per year. Nor do the numbers include long-term residents who give up residency.The overall numbers giving up citizenship, remain small, but it’s actually startling that the number is as large as it is. Giving up citizenship costs more now than ever before. CNN reports that “the government increased the renunciation fee to $2,350, more than four times what it used to cost. ... On top of that, some U.S. citizens are slapped with a giant ‘exit tax’ bill — sometimes millions of dollars — when they renounce. ... The tax pain can last for years, with some former Americans on the hook for additional payments decades after they renounce.”And, once renunciation is complete, US law enables the US Attorney General to bar former citizens from ever re-entering the country again if the government decides that the former citizen left to avoid paying taxes. The experience of Eduardo Saverin illustrates the many barriers and pitfalls related to renouncing citizenship.So, renouncing citizenship may not only bring large monetary expenses, but may mean one can no longer visit friends and family in the United States ever again.Clearly, the US government isn’t exactly trying to cut the cost for emigrants. And why would any state ever want to ease the process of emigrating for those with money and valuable skills? It is to the state’s advantage to capture as much as it can in terms of capital and human resources as possible.The Option of EscapeIn fact, it has been the relative ease-of-exit that has served as a check on government power throughout much of history, and the relative ease with which the most productive members of society could escape more oppressive regimes was an important factor in the economic and political development of Europe.Ralph Raico, in his essay “The Theory of Economic Development and the European Miracle,” examined how the small size of states, and the lack of significant barriers to relocation for merchants and other taxpayers, was central to the rise of economic prosperity and ideologies of liberty and private property. When a prince proposed to raise taxes, Raico observed, the most productive members of society would move their wealth and themselves to neighboring jurisdictions where princely expropriation was lighter. Raico writes:Although geographical factors played a role, the key to western development is to be found in the fact that, while Europe constituted a single civilization — Latin Christendom — it was at the same time radically decentralized. In contrast to other cultures — especially China, India, and the Islamic world — Europe comprised a system of divided and, hence, competing powers and jurisdictions.Within this system, it was highly imprudent for any prince to attempt to infringe property rights in the manner customary elsewhere in the world. In constant rivalry with one another, princes found that outright expropriations, confiscatory taxation, and the blocking of trade did not go unpunished. The punishment was to be compelled to witness the relative economic progress of one’s rivals, often through the movement of capital, and capitalists, to neighboring realms. The possibility of “exit,” facilitated by geographical compactness and, especially, by cultural affinity, acted to transform the state into a “constrained predator.”Decentralization of power also came to mark the domestic arrangements of the various European polities. Here feudalism — which produced a nobility rooted in feudal right rather than in state-service — is thought by a number of scholars to have played an essential role. ... Through the struggle for power within the realms, representative bodies came into being, and princes often found their hands tied by the charters of rights (Magna Carta, for instance) which they were forced to grant their subjects. In the end, even within the relatively small states of Europe, power was dispersed among estates, orders, chartered towns, religious communities, corps, universities, etc. ...In other words, a system of a large number of small jurisdictions — compounded by decentralization within the jurisdictions themselves — led to an inability on the parts of rulers to easily control the movement of persons and capital.Unfortunately, however, we see little in common between the modern United States and the Europe described by Raico.In addition to direct legal costs imposed by the US government itself, the American state also benefits from informal barriers imposed by demographics and geography. For example, nearly 80 percent of native English speakers live within the United States, and this imposes a practical barrier to exit since exit is likely to require that the emigrant learn a new language. Furthermore, the sheer size of the United States ensures that emigration requires that the emigrant move hundreds, if not thousands, of miles away from friends and family. The fact that the US borders only two countries further ensures a lack of choice when seeking “nearby” regimes that may be more favorable to the emigrant's likes. Differences in climate (Canada is cold and very dark in winter) and the fact that one may not be welcomed by foreigners add further to the incentives against relocation.For the potential emigrant, then, the repercussions of relocation are enormous and daunting, and quite unlike the European merchant of the middle ages, described by Raico, who can escape the edicts of one prince by taking up residence among others — who speak the same language and practice the same religion — fifty miles down the river.Love it or Leave It?During the Vietnam War, supporters of the war invented the slogan “Love It or Leave It” as an epithet against those who opposed the war or other perceived injustices perpetrated by the American state. The assumption is that if one doesn’t like the US government, one should just go to some other country. A similar slogan (in Portuguese) was also employed by the military dictatorship in Brazil.Undoubtedly, many who do not “love it” would “leave it” if leaving did not involve such an enormous life change.To illustrate this, let’s indulge in a thought experiment in which a secession movement splits the United States into two independent pieces, with the boundary at the Mississippi River. In such a scenario, citizens of the two countries would suddenly find themselves with two countries from which to choose, with both choices offering similar climates, cultural amenities, and languages. Relocation from one to the other would also place emigrants no further away than a short plane ride or automobile trip. The populations of cities along the border, such as St. Louis and Minneapolis would boom as residents attempted to pick and choose among opportunities offered on both sides of the border.Obviously, if secession then continued to other jurisdictions, and the old US is broken up into several or even dozens of new jurisdictions, the choices among regimes available to residents would multiply. Emigration would become a much less daunting affair (especially for those with money and assets who would be welcomed by other jurisdictions) and one would be far more likely to make the plunge based on economic considerations.Naturally, states are well aware of these realities too, which is why the federal government works tirelessly to supersede the variety offered by state laws with uniform federal law on everything from banking to gay marriage. In spite of all of this, people still “vote with their feet” by moving from high tax states, cities, and counties to low-tax states, cities, and counties. The feds tolerate this because they have the all-important income tax, capital gains taxes, and more. Try to escape those taxes, and you’ll find you won’t “love it.”
The International Monetary Fund (IMF), once the conductor of a global dollar exchange standard based partially on gold convertibility, has mutated into the official platform for the 2 percent inflation standard launched surreptitiously by the Greenspan Fed in July 1996. The Federal Open Market Committee (FOMC) then approved a position paper by Professor Yellen that price stability should mean 2 percent inflation forever. Europe joined the standard in 1998, and Japan became the newest member in January 2013.Earthquakes and Economic StagnationThe IMF warns in its just published “Article IV Assessment,” that the Bank of Japan must stand ready to implement even more radical monetary steps including enhanced Quantitative Easing and cutting short-term rates below 0.1 percent (IMF-speak for negative rates) as it is likely to “take longer than envisaged” to reach its 2 percent inflation target. Will Tokyo repudiate such advice and instead decide that the last-in member of the 2 percent inflation standard should also be the first out? For Japan’s sake, one would hope that this would occur before a financial earthquake occurs in the late dangerous phase of global asset price inflation originating in the present Federal Reserve’s Great Monetary Experiment.This decision would require Japanese Prime Minister Shinzo Abe to retreat from a position key to his political victory in December 2012 and which has been central to his government’s economic policy ever since. While still the opposition leader with the Liberal Democratic Party (LDP), Abe had galvanized popular support in the context of a widely perceived incompetence and bungling by the Democratic Party of Japan (DPJ) government to the national emergencies related to the Fukushima nuclear disaster.Abe declared war on deflation and the “deflation mind set” even though Japan was not in deflation according to any reputable monetary concept. In fact, changes in economic performance were more likely due to Japan’s shrinking number of working-age persons which had seriously outpaced the US during the previous decade (a point underscored in the latest quarterly report from the Bank for International Settlements).Nevertheless, Abe’s anti-deflation campaign played directly into the widespread economic fears rampant amidst the dislocation of a financial quake and the concurrent currency war offensive by the Obama-Bernanke Fed.The DPJ had been the fulcrum of hard money principle in Japan, with advisers such as Eisuke Sakakibara who rejected “inflationism and devaluation,” but by 2012 the party was in no position to launch an effective defense of a hard yen policy. The then professorial head of the Bank of Japan Masaaki Shirakawa, who had largely (not totally) resisted the tide of modern monetary populism, became an easy target of ridicule.Will Japan Quit the 2 Percent Experiment?If Japan is to change its monetary path it would have to be due to Prime Minister Abe demonstrating great statesmanship. He would need to speak to his fellow citizens about the looming danger of the financial quake as the global asset price inflation created by the Federal Reserve approaches its impossible-to-time end phase. He would need to persuade them that Japan should restore a hard currency as the accompaniment of profound economic liberalization. The post-financial earthquake emergency and US currency offensive which had once justified his unorthodox monetary policy would now be over. He would appoint a new central bank chief consummate at communicating these ideas as well as being rock solid on principle.By all accounts, though, PM Abe takes pride in the booming stock market. The loyal members of Bank of Japan chief Haruhiko Kuroda’s team stress how attacking deflation psychology has buoyed the appetite for risk assets, fundamental to Japan’s promised renaissance. They point in addition to the government’s direct measures to stimulate risk-bearing, for example, getting the public sector pension funds to add to their holdings of domestic and foreign equities.How Hard(er) Money Would Have Helped the JapaneseThe problem here is that these policies are stimulating Japanese capital to flow into high-risk assets globally just at a time when these are already seriously inflated by Federal Reserve policy and when the yen is historically cheap in real terms. Japanese investors may yet rue the day PM Abe drove them into such irrational behavior. Surely they would have done better if Japan had stuck to monetary orthodoxy, long-term interest rates had been free of manipulation, and the yen had gained great international custom as the hard currency of the global system, parallel to the hard Deutschemark of the 1970s.Yes investors would have made some foreign asset acquisitions — but at 80–90 to the dollar these would have had been better value than at 120–130. Japanese investors would not have been incentivized to pursue fleeting and hard-to-catch profit in the carry trade (risky arbitrage into high-yield credits, high-interest rate currencies, and long-maturity government bonds). And the yen would not become subject to whiplash in the form of sudden appreciation from the collapse of that trade as the quake spread terror.In a long-run scenario with harder money, Japanese investors would have amassed gradually over the long-run foreign assets which in aggregate were financed by inflows into the yen prized for its hard money characteristics. They would have bought, though, a much bigger amount after the asset price inflation disease had finished rather than in its present phase of high speculative temperature. And meanwhile, substantially positive interest rates in Japan would have acted as a discipline on the Japanese government which is now totally lacking.Many suspect that the ultimate objective of the “political establishment,” however, is to cure the public finances via a huge dose of inflation. Once most of the government debt has been converted into bonds at puny long-term rates or into floating rate bills, then monetary depreciation can do its job of confiscatory taxation. The timing of that break-out into high inflation is inherently uncertain — it depends on the neutral rate rising well above market rates driven there by a range of possible circumstances (e.g., wider budget deficits, increased investment opportunity, and fears of accelerated depreciation). It could far postdate the next global financial quake.Naturally, Japan could not have avoided all danger of economic disaster even if it had been pursuing a hard money path in defiance of the IMF and global central bankers club. But vigorous progress on liberalizing Japan’s financial system, internationalizing a hard yen, and effecting big reductions in government spending would have put Japan in better stead. And it is even plausible that by this stage the Japanese economy would have been more dynamic as individual decision makers, whether business or household, benefited from less exposure to asset price deflation shock and subsequent monetary chaos. Business spending and entrepreneurship could have been in full bloom. Instead, the Abe-Kuroda monetary experiment has taken the Japanese economy into an Indian summer from the viewpoint of investors in Tokyo stocks. Many business decision makers though have no illusion about the likely winter ahead. The failure of the Obama-Bernanke-Yellen Great Monetary Experiment culminating in a global financial earthquake would necessarily mean the failure of the Abe-Kuroda monetary experiment. This makes them understandably cautious. What comes next though may be very different in Japan than in the US.It is a mainstream scenario that the political pendulum in the US could swing against future experimentation and toward monetary orthodoxy. In Japan, by contrast, the pendulum under presently visible political circumstances would more likely swing toward intensified monetary experimentation.
Last Friday came the unpleasant news that Ross Ulbricht, the 31-year-old former operator of the Silk Road site, has been sentenced by a federal court to life in prison without parole. This follows his conviction in February for typically dubious (nowhere in the Constitution) federal crimes including conspiracy, money laundering, and the circular “engaging in a continuing criminal enterprise.”His sentence, which appears unduly sadistic even by today’s standards, was handed down with a lecture from Judge Katherine B. Forrest:“[What] is clear is that you were captain of the ship as Dread Pirate Roberts and you made your own law. It was your opus, and you wanted it to be your legacy.” “What you did was unprecedented,” she told Ulbricht, “and in breaking that ground as the first person he had to be punished accordingly.”"You are no better a person than any other drug dealer."Too bad he wasn’t sentenced like any other drug dealer.The central issue in the Ulbricht case, as always, is an evil and unbridled federal government. No human being should be locked away for engaging in (or facilitating) peaceful, voluntary commerce among willing participants. Dark sites like Silk Road, and the cyber payment systems they employ, exist because of state prohibitions on voluntary human conduct. They are natural market reactions to government interference. This cannot be overstated.But is Ulbricht a commendable libertarian martyr by definition, simply by virtue of falling into the crosshairs of an immoral federal government waging an unjust drug war? Does lamenting his indefensible sentence mean celebrating him and his actions?The libertarian blogosphere certainly seems to think so. Social media buzzed all weekend with praise for Ulbricht as a brave soul who created a safer alternative to buying drugs off the street. For many libertarians, he is worthy of praise for taking agorism to the next level via technology — for challenging the state head on, and paying the price.Ulbricht himself is no longer so sure. He exhibits deep regret not only for throwing his young life away, but also for dragging his family through hell. And he apparently no longer shares the same view of maximum freedom that his libertarian champions hold:“Silk Road was supposed to be about giving people the freedom to make their own choices, to pursue their own happiness,” he said. “I learned from Silk Road that when you give people freedom, you don’t know what they’ll do with it.”Who can blame him for changing his tune in the end, whether to curry favor with the judge or not? After all, it won’t be his Facebook fans spending the next five or six decades in a supermax federal cell.Furthermore, there are allegations by federal prosecutors that Ulbricht sought to have several people killed for threatening to disrupt the operation of Silk Road. Now of course we must rush to Ulbricht’s defense here: prosecutors are notorious liars, and undoubtedly they floated the solicitation of murder charge both to discredit him publicly and to deny him bail pending trial. Furthermore, even the most specious allegations often scare the daylights out of suspects and thus help secure plea agreements. So we shouldn’t put much faith into this, especially since the solicitation charges were not merely dropped by prosecutors — they were never brought at all (despite the sentencing judge’s contention that Ulbricht’s unambiguous journal entries prove he paid hit men — his mother thinks the entries are bogus).It’s tempting to dismiss the simplistic power of the state’s narrative about Ulbricht. But hit men aside, do libertarians really want to create a cause célèbre out of a young man who used his intelligence and talents to sell drugs online? Even without thoroughly understanding his background and personality?Agorism and its implications, however much they resonate with libertarians, have always been a losing proposition with the general public. The public might rally behind a medical doctor who supplies marijuana illegally to help a sick cancer patient, or an individual suffering with MS who uses a foreign online pharmacy to obtain prescription drugs not approved by the FDA.But trafficking in “illicit” drugs — drugs used recreationally or by addicts rather than medical patients — is something different altogether. And while attitudes toward marijuana have changed considerably, organs like the DEA remain effective at portraying traffickers as ruthless and sinister criminals.Unfortunately the Silk Road prosecution will only strengthen dark connections in the public hive mind between internet markets, privacy, cryptocurrencies, and real (i.e. not victimless) criminality. That these connections are mostly unfounded misses the point: the conflation of voluntaryist agorism with libertarianism is not likely to push the public in our direction.Ulbricht is reputed to have read Rothbard. But Rothbard wrote the definitive contra agorism article way back in 1980, when online markets existed only in sci-fi novels. Engaging in a friendly joust with agorist figurehead Samuel Konkin, Rothbard demonstrated a decidedly negative view of agorism’s value to the libertarian movement:It is no accident ... that the entire spectrum of the black market movement, from tax rebels to agoric theoreticians, are almost exclusively self-employed. ... Black marketeers might well benefit themselves in the micro sense, but they have no relevance to the “macro” struggle for liberty and against the State. Indeed, in a kind of reverse invisible hand, they might even be counterproductive. It is possible that the Soviet black market, for example, is so productive that it keeps the entire monstrous Soviet regime afloat, and that without it the Soviet system would collapse. This does not mean, of course, that I scorn or oppose black market activities in Russia; it is just to reveal some of the unpleasant features of the real world.Much as I love the market, I refuse to believe that when I engage in a regular market transaction (e.g., buying a sandwich) or a black-market activity (e.g., driving at 60 miles per hour) I advance one iota nearer the libertarian revolution. The black market is not going to be the path to liberty, and libertarian theoreticians and activists have no function in that market.In other words, black market entrepreneurs (like all entrepreneurs) will sink or swim without the assistance of libertarian theorists.Clearly Mr. Ulbricht is the victim of shocking injustice. But his story serves as a cautionary tale about the priorities of those who seek a freer society. We should celebrate men and women of good character who wake up every day and provide us with value — whether economic, familial, social, civil, or religious. These are true libertarian heroes, individuals who go around, under, over, or through the state and its clutches in their everyday lives. It is not always the swashbuckling anti-hero, but often the quiet, sober, staid, bourgeois businessman who deserves praise for sustaining us.
Brendan Nyhan at The New York Times seems to be under the impression that the Trans Pacific Partnership (TPP) has something to do with free trade. Nyhan writes that the TPPis the latest step in a decades-long trend toward liberalizing trade — a somewhat mysterious development given that many Americans are skeptical of freer trade.But Americans with higher incomes are not so skeptical. They — along with businesses and interest groups that tend to be affiliated with them — are much more likely to support trade liberalization.Nyhan is probably correct that much of the population — especially the part that’s never studied economics — is against the lowering of trade barriers. After all, much of the population is wed to ancient ideas of mercantilism which views trade with foreign countries as a zero-sum game in which anything that benefits foreigners must be harmful to “us.” As Henry Hazlitt wrote with exasperation in Economics in One Lesson, “popular thought ... in everything connected to international relations, [has] not yet caught up with Adam Smith ...”Nyhan is apparently deeply confused, however, since he equates the Trans Pacific Partnership with “trade liberalization.” In fact, the TPP is not about any type of liberalization, but is about centralizing political power. The TPP will further transfer the negotiation and implementation of trade policy into the hands of a small number of global regulators and bureaucrats, while further reducing the prerogatives of Congress and state legislators in the US. Indeed, citizens of all twelve member nations of the TPP will see trade policy become more remote and unknowable thanks to the TPP. And, since trade is but one small part of the agreement, we can expect a further shift toward opaque and authoritarian global decision making on everything from environmental policy to the internet to immigration.There is no denying that the secret negotiations among unelected elites appointed by TPP members may result in the lowering of trade barriers for selected friends of the global regulators. This cronyist system of rewards and punishments for global favorites, however, should most certainly not be confused with free trade.Real Free Trade is About Decentralization of PowerFull-blown free trade is about total decentralization in trade policy. In a country that enjoys free trade — that is, a country that has implemented unilateral free trade — it is fully up to the individual consumer and entrepreneur as to whether or not he wishes to do business with foreign suppliers. Under such a system, a baker who must buy delivery trucks and flour for his business can choose whether or not he will obtain his supplies from foreign or domestic suppliers. In most cases, he will choose the most economical option, and the marketplace will reflect this reality.Trade agreements like the TPP and NAFTA, on the other hand, leave these decisions not up to individual citizens, but to government regulators and negotiators who make decisions in the interest of the state and its favored special interests.Because of this, any agreement that threatened to implement true free trade would pose a significant threat to the status quo which greatly favors powerful special interests over the interests of small business owners and ordinary consumers. As Murray Rothbard pointed out:If authentic free trade ever looms on the policy horizon, there’ll be one sure way to tell. The government/media/big-business complex will oppose it tooth and nail. We’ll see a string of op-eds “warning" about the imminent return of the nineteenth century. Media pundits and academics will raise all the old canards against the free market, that it’s exploitative and anarchic without government “coordination.” The establishment would react to instituting true free trade about as enthusiastically as it would to repealing the income tax.In truth, the bipartisan establishment’s trumpeting of “free trade” since World War II fosters the opposite of genuine freedom of exchange. The establishment’s goals and tactics have been consistently those of free trade’s traditional enemy, “mercantilism” — the system imposed by the nation-states of sixteenth to eighteenth century Europe.Capitalizing on Fear of Freedom in TradeUnfortunately, it would likely be very easy for the media and business and political elites to turn the population against any move toward genuine free trade.Concerned only with what they see in their own industries and not with the unseen benefits to others, special interest groups such as workers and owners in domestic industries will seek to use the coercive power of government to their own benefit.By resorting to the violence of the state to control trade and crush the competition, what these groups are saying is people should not be able to freely choose what products and services they want. “We reserve the right to dictate to others what their choices should be,” is the position of the protectionist.They are no different from taxi drivers who seek to crush Uber or native workers who seek to increase their own wages by legally sanctioning employers who hire immigrant labor.For an illustration of the real effects of protectionist trade policy, we could look to the plight of any small business person who seeks to lesson his costs in the pursuit of making a living. Take an entrepreneur, for example, who finds there is a need in his city for more lawn and garden maintenance services. He or she then seeks to find the lowest-priced and most-reliable lawn mowing machines he can. He knows that the lower he can keep his costs, the lower his own prices will be. Or, if competition is light, he will be able to make more profit and hire more employees.Ready to stand in the way of all of this are the workers at a domestic lawn mower factory who are quite happy producing lawn mowers that are both more expensive and less reliable than the mowers produced in a neighboring country.The workers succeed in pressuring the government to slap a tariff on foreign lawn mowing machines which raises costs for the entrepreneur. The entrepreneur then sees his own profits drop which leads to layoffs and even to unemployment to the small business owner himself.Protecting One Domestic Industry at the Expense of AnotherNow, supporters of protectionism would no doubt come back with their own tale of woe about how, if the lawn business has been able to buy cheap mowers, the workers at the domestic lawn mowing factory would be laid off and destitute.But, implied in the protectionist position is that it is good for the government to make a purely arbitrary decision to support one industry over another. For the protectionist, the freely-made decision of homeowners and gardeners is not to be tolerated and must be quashed by government. Moreover, to make sure that none of those sneaky gardeners gains access to any of these “cheap” foreign-made machines, a small army of customs workers must be hired to ensure compliance and that anyone who dares furnish any business owner with the “wrong” kind of machine will be punished, fined, and possibly imprisoned under federal law.For the protectionist, this is all a perfectly good and legitimate function of government. The act of buying an economical machine becomes a crime, and the workers at the factory are able to go on producing their second-rate product.Truly Free Markets Don’t Need a TPPObviously, to simply let Americans be free to buy what they want, we don’t need a NAFTA, or TPP, or global junkets of trade bureaucrats to decide what will or will not be allowed to cross over international borders. Certainly, the growth of the TPP moves member states further from the possibility of true free trade since trade policy will become increasingly enmeshed within a multilayered international bureaucracy that only inhibits a nation-state’s ability to unilaterally reduce trade barriers.When not prevented by international treaties, however, all that need happen for freedom in trade to appear is for the government to refrain from punishing private citizens who seek to do business with foreign suppliers of desirable goods. That would be real “trade liberalization.”
We live in a world of massive monetary inflation and extremely low interest rates. Mortgage rates are near historic lows and yet it seems that people cannot get loans. Home sales are up, but with a near record percentage of sales made with cash, rather than a mortgage. The unemployment rate is nearing “full employment” and yet a record number of people do not have jobs.We are repeatedly told that the unprecedented monetary stimulus by the Federal Reserve and other central banks is necessary to stimulate the economy, create jobs, and generate economic growth. The truth is that this scheme is designed to stealthily steal from the productive classes in order to enrich the unproductive financial class and the counterproductive political classes. It is a con game.Financial RepressionWith politicians and central bankers seemingly gone mad with their obsession for money printing and ultra low interest rates, it is nice to know that academic economists have a term (i.e., financial repression) for the policies that have created our current economic conditions.However, it is not a new term. Its use dates back to at least 1973 when two Stanford University economists, Edward Shaw and Ronald McKinnon, used the term in separate publications. The phrase was initially meant to criticize various policies that reduced economic growth in undeveloped countries, rather than as an indictment of the world’s leading modern economies.Financial repression is a revolving set of policies where the government insidiously takes wealth from the private sector, and more specifically makes it easier for government to finance its debt. In today’s environment this includes:ZIRP or “zero interest rate policy” where many of the world’s central banks keep their lending rates to banks at or near zero. Naturally, this makes the interest rate on government debt lower than it otherwise would be.QE or “quantitative easing” is the central bank policy of buying up government debt from banks. This increased demand increases the price of government bonds and reduces the interest rates on those bonds.These are the two major policies of financial repression currently in use. The combination of the two policies has allowed governments to borrow money, both short- and long-term bonds, at extremely low interest rates. This, in turn, has kept the government’s interest payments on the national debt relatively low.Other signs of financial repression in the United States include requiring banks to hold government bonds for their capital requirements, which the Basil III accords increased; high reserve requirements, which paying interest on excess reserves effectively accomplishes; and capital controls that restrict or tax the exportation of wealth. And then there is the “War on Cash.”All these policies also come under the rubric of “macroprudential policy” under which government bureaucrats hyper-regulate and oversee the entire financial industry. Macroprudential policy provides another aspect of financial repression: government control or outright ownership of banks and financial institutions while simultaneously providing banks with barriers to competition. It is difficult to precisely define macroprudential policy, but it would seem to mean a group of imprudent policies that only make sense if you are trying to maintain the macro mess we find ourselves in.Negative Interest Rates?When you combine financial repression with bail-in provisions for banks and unstable currencies you end up with the nearly unfathomable phenomenon of negative nominal interest rates on government bonds. Several European countries have already sold two-year bonds for more than their face value, so that bond buyers are paying more than 1,000 euros for which they will only receive 1,000 euros in two years time.Why would anyone accept that deal if you could just hold the 1,000 euros in cash? Well, there is the natural inclination to keep your money safe in a bank. So people with vast sums of money do not want to keep several million euros in cash. They would rather keep it in a bank and earn interest.The problem with that approach is that banks are not paying interest and, more importantly, some governments have established bail-in provisions for systemically important big banks, similar to what happened during the financial crisis in Cyprus. These provisions mean that depositors in failed banks will receive “haircuts” for any uninsured deposits. A “haircut” means depositors would lose some percentage of their uninsured deposits. Alternatively, uninsured bank deposits and bonds could be exchanged for equity shares in the bank.So, for wealthy depositors it might make sense to pay more than the face value for a government bond if they think that the governments are more trustworthy and more likely to redeem the bond compared to their bank redeeming their deposits.An alternative reason for bondholders’ willingness to pay more than the face value of a bond is unstable currencies and exchange rates. If I live in the eurozone and expect the euro to depreciate against the Swiss franc or the Norwegian kroner, then you might consider buying Swiss and Norwegian government bonds with negative nominal returns based on the expectation that you will still be better off than if you bought bonds denominated in euros.The Effects of Bad GovernmentFinancial repression is an outgrowth of bloated government budgets and enormous government debts. It is the worst way of dealing with government debt and actually works against the proper ways of addressing fiscal problems which include: eliminating government programs, eliminating military bases, austerity based on cutting politicians and government employees’ salaries and benefits, and deregulation and privatization to increase economic growth.The effects of financial repression cause economic harm throughout the productive sectors of the economy including workers, savers, entrepreneurs, retirees, and pensions. It hurts the insurance industry that protects our lives, homes, health, and property. The economic beneficiaries include the big banks and Wall Street, the national government itself, and certain large corporations.Carrying on the Traditions of Bad GovernmentIn Siena, Italy, the fourteenth-century frescoes called The Allegory of Good and Bad Government are housed in the old city hall on the Piazza del Campo. Good government is based on peace, resilience, prudence, fairness, and self-control with a special emphasis on justice. Good government is depicted on the right side of the hall as thriving commerce, productive labor, and good economic conditions.Across the room is the mirror image of bad government. It is based on cruelty, deceit, fraud, rage, division, war, greed, arrogance, and excessive pride. The effects of bad government are depicted with the city in ruins, demolished houses, and no commerce except for the making of amour and weapons. The city streets are deserted and out in the country two armies are poised for war.On the side of good government sits an image of justice on a throne. Across the room, an image of tyranny sits on the throne. The panorama of the frescos is breathtaking and all too accurate, and financial repression is merely the latest contribution of the modern state to the concept of bad government.
The standard narrative floating about the mainstream press is that the developing world is held back by a quagmire of free market fundamentalism. Sure, there are a few exceptions to this narrative, such as Peter Bauer and William Easterly. But pretty much all we hear is a chorus from the likes of Jeffrey Sachs; that in order for these poor countries to become wealthy, they must receive aid from wealthy countries and rein in the free market.Salon even had the audacity to refer to Honduras as a “modern day libertarian dystopia.” As the author states, “Eliminate all taxes, privatize everything, load a country up with guns and oppose all public expenditures, you end up with Honduras.” A country where “the police ride around in pickup trucks with machine guns, but they aren’t there to protect most people. ... For individual protection there’s an army of private, armed security guards.”And then there’s Naomi Klein, whose popular book The Shock Doctrine claimed those who support free markets actually use crises to enact their free-market reforms on poor countries and ensure such poverty continues.There is so much wrong with all of this that it’s hard to know where to start. First of all, Klein gets things backward. While corporations have certainly done their share of wrong (usually with the help of the government), Robert Higgs showed quite clearly in Crisis and Leviathan that it is the state that uses crises to grow. In the United States, the government grew vastly during World War I, the Great Depression, World War II, and even the Cold War. It is now using the War on Terror to grow once again.Economic Freedom Is Still Too Rare In the Developing WorldAs Johan Norberg noted in his critique of Klein’s book,If we look at the Fraser Institute’s Economic Freedom of the World statistics (EFW), we find only four economies about which we have data that haven’t liberalized at all since 1980. All the others have. Obviously this also means that we will see economic liberalization even in brutal dictatorships, just as in peaceful democracies. ... Klein relies on her personal interpretation of anecdotes and examples and never tries to supply broad, statistical evidence for her case. It’s an understandable omission, because the data don’t support her argument. There is a very strong correlation between economic freedom on the one hand and political rights and civil liberties on the other.Indeed, while these reforms leave much to be desired and the world has taken a massive step backward since the financial crisis, there has still been a decent amount of liberalization. And the world’s economic progress, while again leaving much to be desired, has been undeniable.One must merely glance over the Economic Freedom of the World rankings to see that the developing world ranks by far the lowest. The index takes into account the following,Size of Government: Expenditures, Taxes, and Enterprises;Legal Structure and Security of Property Rights;Access to Sound Money;Freedom to Trade Internationally;Regulation of Credit, Labor, and Business.Western countries in North America and Europe rank the most free followed by countries in Eastern Europe and Asia, then comes the Middle East and Latin American with Africa at the bottom. Hong Kong ranks first with an 8.98 rating, the United States comes in 12th at 7.81 (behind Canada at 7th). Even “socialist” countries such as Norway and Sweden come in high at 30th and 32nd respectively. Yes, they may have a large government welfare system, but they also have (relatively speaking) sound property rights and free trade.On the other hand, El Salvador comes in 60th, Brazil 103rd, Mali 133rd, and Chad at 146th. Venezuela — which just happens to be going through a major economic crisis — comes in dead last. (There is no data on North Korea.)Remember the “free market dystopia” of Honduras that “eliminated taxes” and “privatized everything”? Well, it ranks 116th on the 2015 Index of Economic Freedom and 104th by the World Bank Group on the ease of doing business. The same group ranked Honduras 153rd on how cumbersome the tax burden is. Apparently, eliminating taxes actually means having a 25 percent top personal tax rate, 30 percent corporate tax, and a brutal 15 percent national sales tax. It’s almost as if Ludwig von Mises himself had come up with Honduras’s economic policies.On the contrary, the developing world is thoroughly interventionist. Property rights are scarce so raising capital is extremely difficult. Local police can and do harass business owners into bribes and without strong property rights and fair courts to settle disputes, much of these economies are little more than a black market. It’s like the illicit drug market in the United States writ large. The government’s themselves, far from laissez-faire, could often best be described as kleptocracies. Indeed, the reason Honduras needs “private security guards” is because the state police do little more than harass their own citizenry.Another example of Latin American interventionism is Peru. While researching his book The Mystery of Capital, Hernando de Soto decided to try and start a small clothing factory in Peru. He hired a lawyer and a few students and set them on their way. The result?They had to do a lot. They had to get 11 different permits from seven different ministries. They were asked for bribes 10 times, had to actually pay bribes twice, there were lots of delays. ... In total, it would take you at least 278 days working eight hours a day to do business with a small, little factory.A friend of mine who had a business in Ecuador, told me of similar experiences to that of Hernando de Soto. And it’s certainly not just Latin America either. The documentary Commanding Heights describes “the Permit Raj” in India that came to being after the British Raj was removed in 1947. As Narayana Murthy, the chairman of Infosys Technologies put it, “It used to take us about 12 to 24 months and about 50 visits to Delhi to get a license to import a computer worth $1500 dollar.”Because of this, “Businessmen found it almost impossible to get things done.” India’s Finance Minister P. Chidambaram noted that “Every permit was procured by corrupt means.” In other words, a bribe. This giant, corrupt bureaucracy is the primary factor in keeping the underdeveloped world underdeveloped. Fortunately, in India’s case, it has liberalized somewhat and seen robust economic growth.How Rich Countries Get RichOverall, the wealthiest countries generally have freer markets. As noted above, Hong Kong is ranked as the world’s freest economy and has had some of the most remarkable growth in world history. In fact, John Stossel tried the same experiment as Hernando de Soto in Hong Kong. He filled out a one page form and opened his business the following day.As a paper from the National Center for Policy Analysis noted, “Per capita income is seven times higher in the economically freest economies compared with the least free countries.” In the top quintile in 2002, the per capita income was $26,106 per year. In the bottom quintile, it was a mere $2,828.These countries are also freer. Freedom House releases a report ranking countries by political rights and civil liberties. The colored map they provide looks almost identical to the one released by the Fraser Institute. And the same National Center for Policy Analysis report found an almost perfect correlation between economic freedom and political freedom.How Foreign Aid Perpetuates Corruption and Human Rights AbusesMany might concede this point, but argue that foreign aid is still needed as a stop gap measure. But foreign aid just locks in corrupt leaders and their bad economic systems by allowing the corrupt elites in those countries to linger on with their failed policies. A report from The Center for Strategic and International Studies observed that “The history of U.S. assistance is littered with tales of corrupt foreign officials using aid to line their own pockets, support military buildups, and pursue vanity projects.” Or as one snarky pundit put it, “foreign aid is taking money from poor people in rich countries to give to rich people in poor countries.” Tom Woods puts this all in perspective,Not long ago Parade magazine published a ranking of the twenty worst dictators currently in power. The U.S. government had contributed aid to all but one of them.How exactly is this supposed to break the cycle of poverty?Not surprisingly, it doesn’t. A study by Raghuram G. Rajan and Arvind Subramanian for the World Bank noted,we find little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth. We also find no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others.Instead of foreign aid, what these countries need is freedom; economically and politically. And unfortunately, the developing world is sorely lacking in both.
The ECB is now two months into its bond buying binge but the European Central Bank (ECB) never clearly explained the goal and purpose of its own version of quantitative easing. The deflation bogeyman was never a serious threat, nor was it based on any solid theoretical foundation.A possible justification may have been to make the 1 percent much wealthier so that their extravagant lifestyles trickled benefits down to the average working stiff. Another possible reason may have been to lower the value of the euro to benefit exporters at the expense of the rest of European consumers, the middle class, and the poor. This would be a violation of the unwritten rule that monetary policy should not be targeting the value of the currency directly.Of course, when the rule maker breaks his own rules, it reduces the importance of all rules. The commitment not to print to finance government spending has gone to the same graveyard as the 60 percent debt-to-GDP rule or the under-3 percent budget deficit rule. Meanwhile, the ECB’s current actions are making a mockery of the alleged independence of central banking.Central Banks Are Buying Up Government DebtUnder normal conditions, economists take it for granted that interest rates cannot drop below zero. Instead of paying someone to borrow your money, you could just as easily stuff the money in your mattress. So why is so much of European government debt actively trading at negative rates? Why would you take money out of your mattress and pay 1,060 euros for something that will only get 1,000 euros in a year?The answer is simple: buying government debt can make sense if you have no intention of holding the debt to maturity and think you can find a “greater fool” who will buy the debt from you. That greater fool is often the European Central Bank which, like many other central banks around the globe, is buying up government debt to keep debt-financed programs alive for another day.And now, faced with very low or even negative interest rates on government debt, governments have been rushing to issue even more debt before announcing, in all likelihood, more vote-getting government expenditures. So, let’s not be fooled by the ECB’s charade that its actions are not indirectly financing new government expenditures.Why Aren’t Banks Lending More?What about bank lending? Isn’t the ECB’s quantitative easing and negative-interest-rate policy spurring a Europe wide surge in borrowing? After all, negative interest rates are supposed to have the effect of discouraging saving and encouraging movement away from presumably safe government debt into other types of borrowing.You can lead a horse to water, but you cannot make him drink, so the fact that interest rates are at rock bottom levels is not necessarily enough to spur a frenzy of borrowing by businesses in the face of an uncertain economic future.Banks also face new hurdles. Not surprisingly, the ECB’s current actions are, in reality, being somewhat defeated by its previous monetary policy. Banks, as financial intermediaries, make money between deposit rates and lending rates. They borrow short term and lend long term.By setting negative rates on reserves, however, and by inducing negative interest rates on government bonds, the ECB has created a significant compression in yields. This has reduced bank profits. Banks must now charge customers for deposits. Large customers such as hedge funds and mutual funds have been withdrawing funds, further drawing down bank profits.For example, several large pension funds in Switzerland have recently rediscovered the advantages of the mattress. As Pater Tenebrarum noted,One fund manager showed that for every CHF 10 million in pension money, his fund would save CHF 25,000 — in spite of the costs involved in vault rent, cash transportation and other expenses.Furthermore, Basel III forces banks to hold more risk-free assets. Banks have been forced to load up on government debt at negative rates. This also has been squeezing profits. Does anyone really expect European banks to lend more in such an economic environment?What’s the Endgame?The real objective of the ECB’s current money printing is essentially to kick the can down the road. It won’t solve Europe’s deep-seated structural problems. It will only postpone the inevitable and will also make the final reckoning much, much worse. Printing intrinsically worthless paper will not solve Europe’s fundamental problem of supply being misaligned with demand — a misalignment created by government’s incessant interference with the workings of the price system.With this new phase of monetary expansion, Europe is slowly walking down the same slippery slope toward hyperinflation that is the inevitable endgame of all fiat currency systems.In this, Germany missed an opportunity to set the ship straight. It should have made it crystal clear that any purchase of government bonds by the ECB (which violates European law) would have meant Germany’s leaving the currency union and reestablishing the deutschmark under German control. But then again, the German government is not the German people. Such quantitative easing makes it much easier to finance government spending, and the resulting inflation will lower the real value of the government’s existing debt. Of course, this is all for short-term benefits to the government, with long-term costs to everyone else.
Argentina will hold elections this year, and a number of provinces will be electing governors. Buenos Aires, the capital city, is holding elections for mayor, and Mauricio Macri, who is stepping down as mayor, is a favorite to become the next president. Toward the end of the year, a presidential election will be held and Cristina Kirchner, after two consecutive mandates, will have to step down because she cannot be re-elected.Like Chávez and Maduro in Venezuela, Argentina can be described as a country that fell victim to extreme populism during the Nestor and Cristina Kirchner administrations, which began in 2003. Twelve years later, this populist political project is about to end.The economic policy of populism is characterized by massive intervention, high consumption (and low investment), and government deficits. This is unsustainable and we can identify several stages as it moves toward its inevitable economic failure. The last decade of extreme populism in Argentina can be described as following just such a pattern.After observing the populist experience in several Latin American countries, Rudiger Dornbusch and Sebastián Edwards identified four universal stages inherent in populism in their article “Macroeconomic Populism” (1990). Even though populism can present a wide array of policies, certain characteristics seem to be present in most of the cases.Populism usually fosters social mobilization, political propaganda, and the use of symbols and marketing practices designed to appeal to voter’s sentiments. Populism is especially aimed at those with low income, even if the ruling party cannot explain the source of its leaders’ high income. Populist rulers find it easy to use scapegoats and conspiracy theories to explain why the country is going through a hard time, while at the same time present themselves as the saviors of the nation. It is not surprising that for some, populism is associated with the left and socialist movements, and by others with the right and fascist policies.The four stages of populism identified by Dornbusch and Edwards are:Stage IThe populist diagnosis of what is wrong with an economy is confirmed during the first years of the new government. Macroeconomic policy shows good results like growing GDP, a reduction in unemployment, increase in real wages, etc. Because of output gaps, imports paid with central bank reserves, and regulations (maximum prices coupled with subsidies to the firms), inflation is mostly under control.Stage IIBottleneck effects start to appear because the populist policies have emphasized consumption over investment, the use of reserves to pay for imports, and the consumption of capital stock. Changes in sensitive relative prices start to become necessary, and this often leads to a devaluation of the exchange rate, price changes in utilities (usually through regulation), and the imposition of capital controls. Government tries, but fails, to control government spending and budget deficits.The underground economy starts to increase as the fiscal deficit worsens because the cost of the promised subsidies need to keep up with a now-rising inflation. Fiscal reforms are necessary, but avoided by the populist government because they go against the government’s own rhetoric and core base of support.Stage IIIShortage problems become significant, inflation accelerates, and because the nominal exchange rate did not keep pace with inflation, there is an outflow of capital (reserves). High inflation pushes the economy to a de-monetization. The local currency is used only for domestic transactions, but people save in US dollars.The fall in economic activity negatively affects tax receipts increasing the deficit even more. The government needs to cut subsidies and increases the rate of the exchange rate, depreciation. Real income starts to fall and signs of political and social instability start to appear. At this point the failure of the populist project becomes apparent.Stage IVA new government is swept into office and is forced to engage in “orthodox” adjustments, possibly under the supervision of the IMF or an international organization that provides the funds required to go through policy reforms. Because capital has been consumed and destroyed, real wages fall to levels even lower than those that existed at the beginning of the populist government’s election. The “orthodox” government is then responsible for picking up the pieces and covering the costs of failed policies left from the previous populist regime. The populists are gone, but the ravages of their policies continue to manifest themselves. In Argentina the expression “economic bomb” is used to describe the economic imbalances that government leaves for the next one.Economic Populism is Alive and WellEven though Dornbusch and Edwards wrote their article in 1990, the similarities to the situation in countries like Venezuela, Bolivia, and Argentina is notable. In recent years, to keep populist ideas going in the minds of voters, Venezuela created the Ministry of Happiness, and Argentina created a new Secretary of National Thought.These four stages are actually cyclical. The populist movement uses the fourth stage to criticize the orthodox party, and argues that during the populists’ tenure, things were better. The public opinion discontent with stage IV allows the populist movement to win new elections, receive an economy in a crisis or recession and the cycle starts over again from stage I. It is not surprising that populist governments usually appear following the hard times caused by economic crisis. A more bold populist government could avoid stage IV by finding a way to remain in office, calling off elections, or creating fake election results (as was the case in Venezuela). At such a point, the populist government succeeds in turning the country into a fully authoritarian nation.
In recent years, home price indices have seemed to proliferate. Case-Shiller, of course, has been around for a long time, but over the past decade, additional measures have been marketed aggressively by Trulia, CoreLogic, and Zillow, just to name a few.Measuring home prices has taken on an urgency beyond the real estate industry because for many, home price growth has become something of an indicator of the economy as a whole. If home prices are going up, it is assumed, “the economy” must be doing well. Indeed, we are encouraged to relax when home prices are increasing or holding steady, and we’re supposed to become concerned if home prices are going down.This is a rather odd way of looking at the price of a basic necessity. If the price of food were going upward at the rate of 7 or 8 percent each year (as has been the case with houses in many markets in recent years) would we all be patting ourselves on the back and telling ourselves how wonderful economic conditions are? Or would we be rightly concerned if incomes were not also going up at a similar rate? Would we do the same with shoes and clothing? How about with education?With housing, though, increases in prices are to be lauded, we are told, even if they outpace wage growth.We’re Told to Want High Home PricesBut in today’s economy, if home prices are outpacing wage growth, then housing is becoming less affordable. This is grudgingly admitted even by the supporters of ginning up home prices, but the affordability of housing takes a back seat to the insistence that home prices be preserved at all costs.Behind all of this is the philosophy that even if the home-price/household-income relationship gets out of whack, most problems will nevertheless be solved if we can just get people into a house. Once someone becomes a homeowner, the theory goes, he’ll be sitting on a huge asset that (almost) always goes up in price, meaning that any homeowner will increase in net worth as the equity in his home increases.Then, the homeowner can use that equity to buy furniture, appliances, and a host of other consumer goods. With all that consumer spending, the economy takes off and we all win. Rising home prices are just a bump in the road, we are told, because if we can just get everyone into a home, the overall benefit to the economy will be immense.Making Homes Affordable with More Cheap DebtNot surprisingly, we find a sort of crude Keynesianism behind this philosophy. In this way of thinking, the point of homeownership is not to have shelter, but to acquire something that will encourage more consumer spending. In other words, the purpose of homeownership is to increase aggregate demand. The fact that you can live in the house is just a fringe benefit. This macro-obsession is part of the reason why the government has pushed homeownership so aggressively in recent decades.The fly in the ointment, of course, is if home prices keep going up faster than wages — ceteris paribus — fewer people will be able to save enough money to come up with either the full amount or even a sizable down payment on a loan.Not to worry, the experts tell us. We’ll just make it easier, with the help of inflationary fiat money, to get an enormous loan that will allow you to buy a house. Thus, rock-bottom interest rates and low down payments have been the name of the game since the late 1980s.We started to see the end game at work during the last housing bubble when Fannie Mae introduced the 40-year mortgage in 2005, which just emphasized that when it comes to being a homeowner, the idea is not to pay off the mortgage, but to “buy” a house and just pay the monthly payment until one moves to another house and gets a new thirty- or forty-year loan.It Pays To Be in DebtOn the surface of it, it’s hard to see how this scenario is fundamentally different from just paying rent every month. If the homeowner stops paying the monthly payment, he’s out on the street, and the bank keeps the house, which is very similar to the scenario in which a renter stops paying a landlord. There’s (at least) one big difference here, however. It makes sense for the homeowner to get a home loan rather than rent an apartment because — if it’s a fixed-rate loan — price inflation ensures the real monthly payment will go down every month. Residential rents, on the other hand, tend to keep up with inflation.But why would any lending institution make these sorts of long-term loans if the payment in real terms keeps getting smaller? After all, thirty years is a long time for something to go wrong.Lenders are willing and able to do this because the loans are subsidized and underwritten through government creations like Fannie Mae (which buys up these loans on the secondary market), through bailouts, and through a myriad of other federal programs such as FHA. Naturally, in an unhampered market, a loan of such a long term would require high interest rates to cover the risk. But, Congress and the Fed have come to the rescue with promises of bailouts and easy money, meaning cheap thirty-year loans continue to live on.So, what we end up with is a complex system of subsidies and favoritism on the part of lenders, homeowners, government agencies, and the Fed. The price of homes keeps going up, increasing the net worth of homeowners, and banks can make long-term loans on fairly risky terms because they know bailouts of various sorts will come if things go wrong.But problems begin to arise when increases in home prices begin to outpace access to easy money and cheap loans. Indeed, we’re now seeing that homeownership rates are going down in spite of low interest rates, and vacancy rates in rental housing are at a twenty-year low. Meanwhile, new production in housing units is at 1992 levels, offering little relief from rising prices and rents. Obviously, something isn’t going according to plan.Who Loses?The old debt-based tricks that once kept homeownership climbing and accessible in the face of rising home prices are no longer working.From a free market’s perspective, renting a home is neither good nor bad, but American policymakers long ago decided to favor homeowners over renters. Consequently, we’re faced with an economic system that pushes renters toward homeownership — price inflation and the tax code punishes renters more than owners — while simultaneously pushing home prices higher and higher.During the last housing bubble, however, as homeownership levels climbed, few noticed or cared about this. So many renters became homeowners that rental vacancies climbed to record highs from 2004 to 2009. But in our current economy, one cannot avoid rising rents or hedge against inflation by easily leaving rental housing behind.This time around, the cost of purchasing housing is going up by 6 to 10 percent per year, but few renters can join the ranks of the homeowners to enjoy the windfall. Instead, they just face record-high rent increases and a record-low inventory in for-sale houses.There once was a time when rising home prices and rising homeownership rates could happen at the same time; it was possible for the government to stick to its unofficial policy of propping up home prices while also claiming to be pushing homeownership. We no longer live in such a time.
[Excerpted from March/April 2015 issue of The Austrian.]THE AUSTRIAN: How did you first become familiar with the Mises Institute?Jingjing Wang: I do not remember the exact time when I first got to know the Mises Institute, but I heard Hayek’s name around 2007 when I was a junior student in business administration in China. It was 2010, when I took a course in Beijing on “Classical Readings in Institutional Economics” for my master’s degree. Ludwig von Mises’s book Liberalism was on the reading list. I did web searches on Mises, and found there was an institute named after him. I became more and more familiar with the Mises Institute after 2011 when I came to the US for Ph.D. study.TA: In recent years, we’ve seen more and more activity from Austrian scholars and translators in China. What’s your assessment of the state of Austrian economics and free-market economics in general in China?JW: It is very inspiring that there are more and more academic activities by Austrian scholars and similarly minded people. These activities include translating classical books, organizing seminars and reading groups, and even publishing original works related to Austrian economics. But research by Chinese scholars on Austrian economics is not a totally new phenomenon.For instance, Böhm-Bawerk’s works were translated into Chinese as early as the 1930s. Hayek also had a few Chinese students when he taught at the London School of Economics, and his disciples brought Austrian economics back to mainland China through Taiwan or Hong Kong. In recent years, due to the influence of the internet and the enthusiasm of young students, translations are not limited to classical books. More and more, recent Mises University videos, Mises Daily articles, and interesting topics from other sources have also been translated, and these can reach a much broader audience than traditional channels. So, I am very positive about this movement. In the future, I hope all these works can lay a very solid foundation for other scholars to conduct original studies, and for applied Austrian economics to analyze what has happened in China.TA: Why did you decide to pursue an academic career?JW: That is a hard question to answer. Actually, I never thought to pursue an academic career initially since I did not know what it meant before I went to the university. Also, I did not expect I could get a chance to go to study in the university, although I had a dream to be an elementary or middle school teacher when I was young. Later, after I chose business administration as my major by accident, I thought that being a white collar worker and earning decent money is also a good choice. But, I felt lost after years of being a star student and learning things which I was not very interested in. In my senior year, following my advisor Xiaoyun Yang’s advice, I wandered around neighboring universities, auditing courses randomly, and searched topics which I have passion for. She was my first mentor who led me to doing serious research. Then, I followed my heart and ended up pursuing an academic career. I think it is the place where I can find a peaceful mind, a happy and meaningful life.TA: What convinced you to apply to become a Mises Institute Fellow?JW: The real question is about what motivated me to do what it took to become a Mises Fellow. It is a privilege for an Austrian scholar to be a Mises Fellow and conduct research at the Mises Institute, and I looked forward to being a Fellow for a long time. So, I really worked hard to be eligible to apply for a fellowship. I attended Austrian reading groups organized by Peter Klein, and I attended Mises University and the Rothbard Graduate Seminar. Also, during that time I heard good things about being a Mises Fellow from my advisor, and my colleagues Per Bylund and Jim Chappelow, who helped me make good preparations.TA: What was the nature of your academic work while at the Mises Institute?JW: Herbert J. Davenport was a main interest, especially the link between him and Frank Knight in entrepreneurship studies. I have had a strong passion for studying the history of economic thought for quite a long time, and I was very excited to work on this during the whole summer as a Mises Fellow. Davenport was a very prominent American economist of the Austrian school during the early twentieth century. Unfortunately, he is nearly forgotten by the mainstream economists, and even most Austrians. My work tries to highlight his contributions to entrepreneurship studies, and to unravel the mystery of Frank Knight’s idiosyncratic way of illustrating the nature of uncertainty and profit. Meanwhile, I also attempt to understand Davenport’s loan-fund doctrine of capital, and how this impacts Knight’s view of capital and the debate between Knight and Hayek on capital theory.TA: What was your favorite part of being a Fellow?JW: It is very difficult to pick my favorite part since there are so many aspects of the experience that I enjoyed a lot. First, it is very convenient to have access to professors’ help and advising every day. Most of the time, I could just knock on their door, and ask questions. Second, I was very fortunate to work in the research wing at the Mises Institute with many brilliant Fellows. Their passions and commitments to Austrian economics encourage me. Third, the Mises Institute is a great place to conduct research, and was an enjoyable and beautiful place to stay. Last but not least, both the professors and staff are very supportive, and they really care about Fellows.TA: How have your experiences with the Mises Institute affected your plans for the future and future academic work?JW: As I have said, I have long had a strong passion for conducting research in the history of economic thought, but early on, I did not have enough courage to do it because it is difficult work, especially for young scholars. I really appreciated the support I received from the Mises Institute that enabled me to learn how to do this type of research, and how to reach out to professors for help. Of course, it is hard to summarize and express the influence of the Mises Summer Fellowship on me, and I may still not know the full impact of it on my career.