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Greek Taxpayers Facing a Future of Debt Slavery

2 juli, 2015 - 06:00
Greece has defaulted on its debt to the International Monetary Fund, the first “developed” country to do so. But is Greece merely a casualty of a flawed eurozone or a canary in the coal mine?After hobbling along on “emergency” loans for five years, a $1.73 billion payment due Tuesday night went unpaid  —  the largest missed payment in the international finance organization’s seventy-one-year history. The IMF tellingly refused to call the missed payment what it was: a default, opting instead for “in arrears” (which, for the uninitiated, is a complex, highly-technical financial term that means default). Greece now shares company in this respect with the likes of Sudan, Zimbabwe, Afghanistan, Haiti, Yugoslavia, and Somalia.For Greece, the pain has been a long time coming, since it began relying on emergency loans five years ago. And now default  — while sending shocks of volatility through global financial markets  —  has been almost anticlimactic. But the jagged lines on a financial chart tell little of the carnage happening on the ground, or of what is to come.The problems Greece and the world face now are manifold. For Greeks, capital controls and bank closures have left people without access to the funds in their accounts. ATMs have lines stringing away from them at all hours, even though daily withdrawals are limited to €60. The next weapon in the financial warfare: deposit seizures. While it may be easy to dismiss these afflictions as the result of socialist policy, but that wouldn’t be an accurate characterization of what’s transpired.No, when Greece resorted to emergency funding, the Troika (the collective pejorative for the European Commission, European Central Bank, and IMF) authorized €110 billion in assistance, in exchange for vague, unquantified promises of “austerity.” The more recent loans were actually diversion of interest payments on Greek debt owed to other eurozone countries, lent back to Greece. Even now, after default, there is little doubt in the financial world what the “solution” to the debt crisis will be  —  more debt.Of course, it’s easy to dismiss these presumptions as the misguided naïveté of Keynesian central planners, but doing so ignores the more pervasive threat of sovereign debt. As Greeks are learning, the IMF (like many of the world’s central banks) will not accept default; it never has, and never will. Calling Greece “in arrears” didn’t do it any favors. The message is clear: you will pay. So although for a time Greece was comfortable, living beyond its means, it’s soon time to pay the piper.Government Debt Isn’t Like Private DebtSovereign debt isn’t like a credit card, family budget, or a mortgage, no matter how many folksy analogies politicians make. No, government debt is something altogether more sinister. When a state borrows money, repayment is on the heads of its citizenry, without expiration. At one point in the Hellenic drama Germany’s war reparations were at issue. An infinitesimally small minority of the population could recall the war, and an even smaller subset  —  if any  —  was even remotely accountable. But the point is illustrated clearly: public debt is interminable.This trait alone is toothless without its necessary complement: enforcement. Since government revenues are generated through taxes, and government debts are future revenues spent now, then debts are simply future taxes. While this is well-covered ground, most people seem to forget that taxes are one of the only debts for which nonpayment results in prison time.To make sovereign debt even worse, the citizenry doesn’t have the ordinary contractual protections of say, reviewing the terms, choosing how much to borrow, deciding on what to spend the money, or even agreeing to repayment schedules. Apparently, all of these choices are made at the “ballet-box.” But I’d wager that if you asked 100 people how to spend just $100, you’d get at least ninety-nine different answers. The problem gets worse, not better, when you have 300 million people and $1 trillion in debt on the table. In the end, there’s an incentive to pass the buck; the next generation can figure it out, we’re getting ours. But who will ultimately be forced to pay the bill? That demographic is unfortunate indeed, since they will be forced to pay exorbitant taxes without trappings of social welfare, just to make the interest payments on the largesse.For them, “figuring it out” means a life spent working to service another’s debts, backed by the callous indifference of law. There’s a word for that, isn’t there? Oh, yeah: slavery.

Five Laws to Repeal on Independence Day

2 juli, 2015 - 06:00
Unfortunately, Independence Day has become a day for many to celebrate the United States government. The actual historical event behind the day, however — the adoption of the Declaration of Independence — was an illegal act of political defiance that led to secession and the overthrow of an entire system of mercantilist government in North America.Moreover, it is quite anachronistic to connect the modern unified nation-state known as “the United States” to this event, nor does it make sense to invoke anything having to do with the Constitution of 1787.Indeed, as Jeffrey Rogers Hummel has pointed out, the Constitution we now labor under represents a counter-revolution against the Spirit of 1776. The Spirit of 1787, in contrast, was about taking what the Declaration of Independence repeatedly refers to in the plural as “free and independent states” and hammering them into one unified state.Fortunately, the Federalists — the now benighted and so-called “founding fathers” — partially failed and were beaten back by the anti-Federalists who demanded a Bill of Rights — the only laissez-faire portion of the Constitution — which temporarily crippled the centralizing efforts of the Federalists.But just as the Constitution itself is contrary to what is celebrated on Independence Day, we can also look to several Acts of Congress since 1787 that have perhaps done some of the most damage in undoing what the revolutionaries had intended.The Judiciary Act of 1789Unknown to many, the entire federal court system outside the Supreme Court stems from this one law adopted during the first session of Congress. At the time, there was fierce opposition from many in the United States who recognized that a federal system of courts would allow for the extension of federal law into the allegedly independent states themselves. The act created the office of the Attorney General and the appellate system of courts which today allows the Supreme Court to exercise appellate jurisdiction over pretty much every aspect of life inside the United States. Without these courts, the Supreme Court would be limited to its few areas of original jurisdiction. Thus, without the federal court system, there would be no courts through which to regulate things such as drug prohibition, marriage, abortion, wages, and the whole panoply of the modern federal regulatory state.The Louisiana Purchase TreatyThomas Jefferson announced the signing of the Louisiana Purchase Treaty on July 4, 1803. Jefferson considered the Purchase to be a great victory for his un-ironically named “Empire of Liberty” scheme in which the United States would spread “liberty” by force across North America.The Louisiana Purchase would have far reaching effects on the entire nature of the American confederation and on constitutional law. Direct Congressional control over lands in the west had always been a dream of nationalists and centralizers, and the Louisiana Purchase gave the US government access to vast new resources beyond the control of any state. Defense of these federal lands necessitated an expansion of a federal military force, and required a much larger apparatus of federal law to administer the lands.Moreover, these new federal lands created the impression for many that the states were created out of federal lands, instead of federal powers being granted to the central government by states. The later claim by anti-secessionists that the federal government created the states, and not vice versa, owes much to the Louisiana Purchase, and to this day, the federal government directly controls and owns over 50 percent of the land in most Western states.The Militia Act of 1903Prior to the adoption of the Militia Act, the law was ambiguous about how the federal government could seize control of state militias for use in the federal government’s wars. Some states resisted use of their troops in the invasion of Canada during the War of 1812, for example, and federal politicians faced the onerous task of convincing state governments to offer up state militias for national military service.Political realities meant that state governments were often more than happy to oblige of course, but there nevertheless remained the risk that the states could offer real and meaningful resistance to unpopular wars by withholding military support. Naturally, this was very inconvenient for the federal government, so in the name of repelling foreign bogeymen and enhancing “efficiency,” the armed forces of the United States were unified, allowing presidents to seize control of state militias whenever they liked. Today, the militias have been replaced by the adjuncts of the federal military known as the “National Guard.”The Revenue Act of 1913In 1913, the US Constitution was amended to allow Congress to levy personal income taxes. The amendment does not mandate an income tax, however, so later that year, Congress passed enabling legislation creating the income tax we know today. Since then, federal budgets have ballooned, tax burdens have swelled, and it is now simply accepted that the federal government should be able to examine every aspect of your financial life to make sure you’re paying “what you owe.” Financial privacy is now only a distant memory.The Federal Reserve Act of 1913While the United States had had central banks before, the Federal Reserve, created in 1913, is by far the most enduring and most powerful. Over the years, the Fed has become a behemoth that does everything from regulating the financial system to monetizing the debt to creating never-ending liquidity for its friends on Wall Street who — thanks to the Fed — never have to face the consequences of their bad investment decisions. In other words, the Fed is a mercantilist’s and crony capitalist’s dream institution, allowing the wealthy and powerful to constantly and silently extract wealth from the powerless many who hold US dollars and are subject to the whims of the too-big-to-fail financial system.What Are We Celebrating?In 1776, few imagined or looked to a future of central banks, massive national standing armies, or a federal legal system that regulated the daily lives of Americans down to the most minute details. In fact, had the typical Revolutionary War soldier been told that such a future awaited his country, he would have likely gone home immediately, as such a future would likely appear even worse to him than staying subject to the British Crown’s benign neglect.Yet, in spite of all of this, nothing can change the fact that America’s national holiday is founded on an act of treason and secession, and that the Declaration of Independence was born out of a generation of smugglers and “criminals” who refused to take orders from a far-more-powerful and well-armed government. It’s a reality that may yet prove inconvenient for our government and many others in the future.

Greece Illustrates 150 Years of Socialist Failure in Europe

2 juli, 2015 - 06:00
Greece cannot pay its debts ... ever. Nor can several other members of the European Union. That’s why Europe’s elite are loath to place Greece in default. If Greece is allowed to abrogate its debts, why should any of the other debtor members of the EU pay up? The financial consequences of massive default by most of the EU members is hard to predict, but it won't be pretty. Europe has built a financial house of cards, and the slightest loss of confidence will bring it crashing down.The tragedy of Europe has socialism at its core. Europe has flirted with socialism since the late nineteenth century. Nineteenth century Bismarckian socialism produced two world wars. Leninist socialism slaughtered and enslaved hundreds of millions until it collapsed, mercifully without a third world war. Yet, not to be deterred, in the ashes of World War II, Europe’s socialists embarked on a new socialist dream. If socialism fails in one country, perhaps it will succeed if all of Europe joined a supra-national socialist organization. Oh, they don't call what has evolved from this dream “socialism,” but it is socialism nonetheless.Socialism will not work, whether in one country, a multi-state region such as Europe, or the entire world. Ludwig von Mises explained that socialism is not an alternative economic system. It is a program for consumption. It tells us nothing about economic production. Since each man's production must be distributed to all of mankind, there is no economic incentive to produce anything, although there may be the incentive of coercion and threats of violence. Conversely, free market capitalism is an economic system of production, whereby each man owns the product of his own labors and, therefore, has great economic incentives to produce both for himself, his family, and has surplus goods to trade for the surplus product of others. Even under life and death threats neither the socialist worker nor his overseer would know what to produce, how to produce it, or in what quantities and qualities. These economic cues are the product of free market capitalism and money prices.Under capitalism, man specializes to produce trade goods for the product of others. This is just one way of stating Say’s Law; i.e., that production precedes consumption and that production itself creates demand. For example, a farmer may grow some corn for his family to consume or to feed to his own livestock, but he sells most of his corn on the market in exchange for money with which to buy all the many other necessities and luxuries of life. His corn crop is his demand and money is simply the indirect medium of exchange.Keynes attempted to deny Say’s Law, claiming that demand itself — created artificially by central bank money printing — would spur production. He attempted, illogically and unsuccessfully, to place consumption ahead of production. To this day Keynes is very popular with spendthrift politicians, to whom he bestowed a moral imperative to spend money that they did not have.We see the result of 150 years of European socialism playing out in grand style in Greece today. The producing countries are beginning to realize that they have been robbed by the EU’s socialist guarantee that no nation will be allowed to default on its bonds. Greece merely accepted this guarantee at face value and spent itself into national bankruptcy. Other EU nations are not far behind. It’s time to give free market capitalism and sound money a chance: it’s worked every time it’s been tried.

What’s Driving Bolivia’s Booming Economy

1 juli, 2015 - 06:00
To the surprise of many, Bolivia is now Latin America’s fastest growing economy. At a 5 percent growth rate it now outstrips once dominant but now stagnating regional competitors like Brazil and Peru. Furthermore Bolivia boasts some very impressive macrofundametals: its level of international reserves are the highest in all of Latin America, it has slashed its government debt, and its inflation rate stands at a respectable 5 percent. This accompanies a 307 percent increase in average income and a 25 percent reduction in the poverty rate since 2001.For those who have watched the demise of Venezuela and Argentina — the paragons of Latin American “21st century socialism” — Bolivia’s undeniable economic improvement appears to confound the expectation that socialism inevitably leads a country to ruin. Indeed the socialist policies of Evo Morales, Bolivia’s president since 2006, are based on exerting state control over natural resources and increased welfare spending. But, he’s credited with bringing about the turnaround.Has the “Third Way” Worked in Bolivia?Should the naysayers therefore reexamine their beliefs, and accede to the possibility of a “third way,” where a managed economy run by nice guys like Evo can bring about a positive outcome in people’s lives? Is Evo’s system superior to that which might prevail in an unregulated market?Well, there may not be any great mystery to Bolivia’s success, if we take into account the fact that it is actually riding high on the wave of a commodity boom, particularly in natural gas, which alone constitutes around 45 percent of Bolivia’s exports. Such is the reliance of Bolivia on this commodity that when the price falls, as has begun to happen this year, a rehash of the classic plot line of a Latin American government’s gravy train coming to a crunching stop would not be surprising.Government bureaucrats will be laid off, social programs will be shut down, and civil unrest will ensue. The only question is whether it will play out as a short drama or a long telenovela of the Venezuelan variety, with the government first running down its international reserves and then resorting to creating currency out of thin air ushering in the grand finale of hyperinflation.For some however, the very fact that Bolivia hasn’t played out like that in Venezuela and doesn’t seem likely to in the near future, would suggest that socialism is viable if it is well managed and trimmed of its more radical excesses.In fact, Evo’s tenure has undoubtedly been one of pragmatism. It is true that since 2005 he has expropriated just over twenty companies, but the level of expropriations in no way compares to that taking place in the culture of government impunity rife in Venezuela where 1,168 foreign and domestic companies were expropriated between 2002 and 2012. The infamous nationalization of foreign oil and gas fields is not one of complete state control, but is rather about gaining a controlling share of the profits made by foreign companies which can then be diverted into various social programs.All this would suggest, as the mainstream business press gleefully point out, that Evo is no old-style Latin American socialist. Instead, they claim, what he’s doing in Bolivia is really run-of-the-mill Nordic-style social democracy in a Latin American setting.The business press narrative however, ignores the genuinely significant and even transformative things that have occurred under Evo’s presidency, which despite the rhetoric they are couched in, have nothing to do with socialism and everything to do with advancing true freedom and enterprise.Rejecting US Control, the IMF, and the World BankFirst among these is Morales’s rejection of the international financial system and its pillars, the IMF and World Bank. In left-wing lore, this position is consistent with the continent-wide popular struggle against neoliberalism and “free-market fundamentalism” that brought Evo to power. But in reality, the IMF and World Bank interventions are about building an infrastructure of financial control and corporate patronage that is the complete antithesis of the free market.The modus operandi of these institutions is to go to a developing country already struggling under a mountain of debt and, colluding with its domestic elites, sign it up for a loan, usually to fund a transport or utilities development. This strategy is a win for the lenders, the western corporations given the development contracts, and anyone else who can benefit from this web of state-backed international corporatism. It is a loss for the recipient country (i.e., the taxpayers) who must service the crushing interest payments and make “structural adjustments” to their economy which are stated conditions for providing the loan.This is precisely what happened in Bolivia when by the early 80s its corrupt elites racked up around $3 billion in debt to foreign banks. The IMF stepped in offering a series of loans to cover the balance of payment crisis and “modernize” its infrastructure. Defenders of the free market might approve the fact that as a condition of the loans, over the next few decades, state enterprises were sold off to foreign corporations and government spending was restricted.Though we can always expect efficiency benefits from a state-run industry being run as a private concern, morally speaking, the state has no right to sell its stolen property to third parties, especially when they are corporations with state enforced privileges inaccessible to private citizens like limited liability and even guaranteed rates of profit. There is also nothing free market about the way taxes were increased on the poor to meet the demands for deficit reduction, or the way the whole emphasis of the IMF’s plan in Bolivia was to develop it as a commodity exporting country. This meant recommending measures like currency devaluation and creating an artificial export infrastructure dominated by western corporations.Morales’s Benign Neglect of the Informal EconomyWithout the IMF, Bolivia now has the chance to develop on its own terms instead of under the rule of technocrats. Of course, government control of the commanding heights of the economy is hardly conducive to organic growth. However, we should keep in perspective the fact that there is a division between this higher productivity part of the Bolivian economy and an informal and semi-informal sector that provides the vast majority of economic activity and employment. These latter sectors are also made up of mostly indigenous Indians, and it is in these areas where the true significance of Evo’s presidency can be felt.As Bolivia’s first indigenous leader, Evo Morales’s presidency has given the marginalized and poor a new found sense of pride. Refusal to cooperate in the US war on drugs and a decidedly laissez-faire attitude to informal and small-to-medium enterprise means that the state’s presence as an antagonistic force in the lives of ordinary people is at a historical low. This, in combination with a banking system flush with savings and low debt has been key to the bursting on to the scene of small enterprises run by indigenous entrepreneurs who have successfully leveraged their culture and trading channels to climb their way into the burgeoning middle class.In Bolivia, like neighboring Peru, even the poorest of the poor have the means to turn a stall into a small business and a small business into something larger. Where once his ancestors were turfed off their land and forced to work it for their colonial masters, an indigenous Indian can now open a textile factory and attain a level of wealth that surpasses that of the descendants of those who expropriated his forefathers.All over cities like La Paz, colorful mansions known as cholets (a term combining “cholo” the discriminatory term for someone of Indian descent, with the word chalet) are springing up, constructed in Andean style architecture, often five stories high, with the lower levels turned into businesses: living and breathing monuments to entrepreneurialism that have transformed the urban landscape.The reaction of the eurocentric elite is one of barely concealed horror: seeing their positions of managers and administrators of an economy based on resource extraction and patronage of western corporations become vulnerable, they instinctively oppose Evo, and collate around a conservative opposition that favors clamping down on the “informal” economy, resumption of the drug war, and alignment with US foreign policy objectives.Though it is right to oppose nationalization, it is hard to take seriously the argument that were Evo not in power, and Bolivia left in the hands of the “business friendly” opposition, the country would be necessarily better or conducive to genuine free enterprise. A great levelling of the playing field has occurred under Evo, not through forceful redistribution of wealth, but rather through standing back and letting freedom and entrepreneurialism of the people run unchecked. It is this that has made Bolivia a tangibly different country to what it was ten years ago, and it is the hope of all those who care about freedom, that this will be the enduring legacy of the Morales years, long after the commodity boom ends.

Economic Stagnation and the Global Bubble

29 juni, 2015 - 06:00
[From the May/June 2015 issue of The Austrian.]You’d think with all the “stimulus” from Washington over the fifteen years since the dotcom bust, American capitalism would be booming. It’s not. On the measures which count when it comes to sustainable growth and real wealth creation, the trends are slipping backwards — not leaping higher.After a look at new jobs data in April, we find the number of breadwinner jobs in the US economy is still two million below where it was when Bill Clinton still had his hands on matters in the Oval Office. Since then we have had two presidents boasting about how many millions of jobs they have created and three Fed chairmen taking bows for deftly guiding the US economy toward the nirvana of “full employment.”When you look under the hood, it’s actually worse. These “breadwinner jobs” are important because they’re the only sector of the payroll employment report where jobs generate enough annual wage income — about $50k — to actually support a family without public assistance.Moreover, within the 70 million breadwinner jobs category, the highest paying jobs which add the most to national productivity and growth — goods production — have slipped backward even more dramatically. There were actually 21 percent fewer payroll jobs in manufacturing, construction and mining/energy production reported in April than existed in early 2000.Now let’s look at productivity growth. If you don’t have it, incomes and living standard gains become a matter of brute labor hours thrown against the economy. In theory, of course, all the business cycle boosting and fine-tuning from fiscal and monetary policy, especially since the September 2008 crisis, should be lifting the actual GDP closer to its “potential” path, and thereby generating a robust rate of measured productivity growth.Not so. Despite massive policy stimulus since the late 2007 peak, nonfinancial business productivity has grown at just 1.1 percent per annum. That is just half the 2.2 percent annual gain from 1953 until 2000. So Washington-engineered demand stimulus is self-evidently not pulling up productivity by its bootstraps.Indeed, if you go back to the 1953–1973 peak-to peak period, which also encompassed several business cycles, the annual productivity growth rate averaged 2.7 percent, or two and one-half times the last fifteen year outcome.The same picture occurs on real median household income. During the same 1953–1973 interval, real median family income grew at 3.0 percent annually, rising from $26k to $46k during the period.By contrast, over the course of the next twenty-seven years, and after Washington ended both the Bretton Woods gold standard anchor on money and the practice of balanced budgets, real median incomes grew by only 0.8 percent annually, rising to $57k by the year 2000.Needless to say, it’s been all downhill since then. Real median income was $53k in 2014. That means median living standards of US households have been falling at a 0.5 percent annual rate since the turn of the century. There is no prior fifteen year period that bad, including the years after the 1929 crash.Labor Force Fundamentals DecliningThe argument of the Keynesians is that capitalism is a chronic underperformer. Left to its own devices it is always leaving idle labor and capital resources on the table, and is even prone to bouts of depressionary collapse absent the counter-cyclical ministrations of the state and its central banking branch.Well, then, given the monumental size and chronic intensity of policy stimulus during the last fifteen years, that particular disability should have been eliminated long ago. The US economy should be surfing near its full potential.In that regard, one measure of high resource utilization most surely would be the labor force participation rate. However, after the one-time boost of increased female participation after 1980, the trend has been in a nose-dive. And it’s not due to the baby-boomers getting old and repairing to the shuffleboard courts.Since the year 2000 — a time when the Fed’s balance sheet soared by nine-fold from $500 billion to $4.5 trillion — the prime age labor force participation rate has plummeted by 10 percentage points.A similar trend can be seen in the measures of aggregate labor hours. Even if productivity has turned punk, it might be thought that all this policy stimulus would flush labor hours into the economy. But despite an increase from 212 million to 250 million of the working age population since the year 2000, there has been virtually no gains in labor hours utilized by the private business economy, and this is all the more obvious when we remember that not all headline jobs are created equal — even though it is well known that the BLS counts a four hour window-washing gig and a 40-hour week in a steel mill the same.So the underlying truth is that actual apples-to-apples labor utilization has been going nowhere. In Q4 2014, the index of non-farm labor hours utilized by the business sector posted at 109.8 — virtually the identical level recorded in early 2000.That’s right. After growing at a 1.6 percent annual rate for a half-century running (1953 to 2000), labor resources deployed have flat-lined for the past 15 years. Rather than contributing to higher utilization of resources, the massive, chronic stimulus policies of recent years have been associated with just the opposite.So when it comes to the building blocks of prosperity, policy stimulus has not been stimulating much of anything — except a slide downhill.And while the American economy stagnates, serious global risks remain on the horizon.China at RiskIn China, the most fantastic credit bubble in recorded history is beginning to burst. That is, notwithstanding Wall Street’s sell-side propaganda, China’s vaunted $10 trillion GDP is not capitalist GDP in any familiar or meaningful sense; nor is it the product of organic market-based economic growth.Instead, it is “constructed GDP” which has been fabricated out of centrally issued and allocated fiat credit. Over the past two decades the People’s Printing Press of China issued virtually unlimited bank reserves in the process of buying up dollars to peg the RMB exchange rate in support of its national policy of export mercantilism. This, in turn, has enabled China’s total public and private credit outstanding to soar from $2 trillion at the turn of the century to $28 trillion today.In short, the overlords of red capitalism in Beijing caused the entire nation to borrow itself silly in order to fund a construction and investment mania that has no historical parallel. Indeed, the fourteen-fold explosion of debt in fourteen years has resulted in not only trillions of artificial “printing press GDP,” but, more importantly, in a stupendous accumulation of over-valued and uneconomic “assets” on both public and private accounts.There are currently an estimated seventy million empty high rise apartment units in China, for example, because under the baleful influence of unlimited credit these apartments were built for asset appreciation, not occupancy. In fact, most of China’s tens of million of punters who have invested in these units have taken pains to keep them empty and spanking new; like contemporary works of art, appreciation potential can be impaired by marks and scrapes.Needless to say, there is a huge problem when you turn rebar, concrete, and wallboard into tulip bulbs. Namely, when the price mania finally stops not only do the speculators who put their savings into empty apartment units get crushed, but, more importantly, demand for new units quickly evaporates, causing a devastating contraction up and down the building supply chain.The Eurozone’s Wishful ThinkingMeanwhile, in Europe, Greece and the EU are pinned between a rock and a hard place. There is not a chance that Greece can service its monumental debt, yet the eurozone politicians are now petrified by the fiscal trap they have concocted during their can-kicking rituals since 2010.So the baleful facts bear repeating. The eurozone governments have committed to $200 billion of direct fiscal guarantees to Greece, but in cobbling these expedients together during the 2010 and 2011 crises what the politicians of Brussels really did was to stick the ECB with the ultimate Old Maid’s card.Stated differently, in the process of bailing out their own banks, which were stuffed with Greek sovereign and private credits, Brussels did just enough to stabilize the private credit markets and ward off the vultures. This, in turn, allowed the ECB to pretend that Greek collateral was money and to pacify the German monetary sticklers about the sin of monetizing state debt. At length, the ECB became the money market for the entire Greek economy.Greece owes the ECB upward of $140 billion. That is, the Greek state and banking system owes the ECB more money than the entire deposits of the Greek banking system!Altogether then, Greece owes the politicians and apparatchiks who rule the continent from Brussels and Frankfurt the staggering sum of $340 billion. In fact, the sum is not staggering; it is lunacy itself. The cowardly, self-perpetuating rulers of the European superstate have managed to loan Greece what amounts to 3 percent of their own GDP when Greece itself only accounts for 2 percent of eurozone economic output.In the event of a blow-up and Grexit, exactly how would this mountain of Greek collateral be collected? Would it be done by the German army sent in to occupy the Greek ports and railway stations?The Serial Bubble MachineWith our own flat-lining economy at home and serious risks of implosions abroad, one would think that now is a good time to take an honest look at the state of the global economy and do some serious planning.But there’s no danger of that happening because the monetary politburo in the Eccles Building ignores all these fundamentals in order to focus on the short-run “incoming data.” It actually believes it can steer the business cycle as in times of yesteryear when the credit channel of monetary transmission still functioned effectively — even if destructively in the long-run.But that was a one-time parlor trick. Nowadays, American households are at “peak debt” and on a net basis can no longer raise their leverage ratios to supplement wage- and salary-based income with more borrowings. Likewise, business borrows hand-over-fist in response to the Fed’s dirt-cheap cost of debt, but the proceeds go into financial engineering, not productive investment.So the Fed blunders forward, oblivious to the fact that it is now 2015, not 1965, maintaining the lunacy of zero or soon near-zero interest rates. That maneuver creates floods of new credits, but in the form of gambling stakes which never leave the canyons of Wall Street. In so doing, they inflate financial assets values until they reach such absurd heights that they collapse of their own weight.The Fed has thus become little more than a serial bubble machine. Tracking the incoming data during the intervals between financial boom and bust, it mistakes unsustainable short-run gains for real economic growth. But overwhelmingly, the incoming data has been recording temporary GDP and born again jobs.For the second time this century we have had a boom in the part-time economy of jobs in bars, restaurants, retail, leisure and personal services. These jobs on average represent twenty-six hours of work per week and average wage rates of around $14/hour, thereby generating less than $20k on an annual basis.Since the top 10 percent of households account for upward of 40 percent of consumer spending it is not hard to see what will happen next. When this third and greatest financial bubble of this century finally collapses, the bread and circuses jobs will vanish in a heartbeat. 

No End in Sight For Higher-Education Malinvestment

29 juni, 2015 - 06:00
Those of us leaning in the Austrian direction see bubbles and malinvestments around every corner and assume, wrongly as it turns out, the market will right these wrongs lickety-split. But, for the moment a rational market is no match for cheap money. “Any college that is thinking about capital expansion, now is a very good time,” Robert Murray, an economist at Dodge Data told the Wall Street Journal. “Several years down the road, the climate might not be as good.”Now being a good time because stock market gains have pumped up endowments, “and low interest rates have created a favorable environment for colleges to build,” writes Constance Mitchell Ford. The campus building boom marches on.In 2014 colleges and universities commenced construction on $11.4 billion worth of projects, a 13 percent increase from the previous year. It’s the largest dollar value of construction starts since the heady days of 2008.Ms. Ford’s piece highlights a $2 billion project at Cornell and sixteen new buildings at Columbia worth $6 billion. But here in Auburn, Alabama the campus has been a construction zone since 2008 when I arrived. Multiple new dorms, a basketball arena, a fancy student center, and various new classroom buildings have been constructed at a time when funding from the state has been cut back. What’s now underway is the largest scoreboard in college football, with a plan to expand the stadium next.Back in the 1985–86 school year, full time tuition at Auburn for a non-resident was $2,585. Thirty years later it is now $28,040. That’s a compounded annual growth rate of 8.27 percent.According to Bloomberg, college tuition and fees have increased 1,120 percent since records began in 1978, and the rate of increase in college costs has been “four times faster than the increase in the consumer price index.”Tuiton at state schools is rising even faster says Peter Cappelli, professor of management at the Wharton School of the University of Pennsylvania. He told Becky Quick on CNBC’s “Squawk Box” the cost of an education has risen 50 percent faster at state schools versus private in roughly the last decade.Cappelli said a critical question is whether students will graduate in the first place, noting that only 40 percent of full-time students earn a degree within four years, and 30 million — and perhaps as many as 35 million — young adults do not finish their studies.Unfinished college is as useful as an unfinished building.College degrees are similar to what Austrians call higher-order goods. It’s believed a student will gain knowledge and seasoning in college, making him or her more productive and a candidate for a high-paying career. The investment of time and money in knowledge are undertaken for the payoff of higher productivity and a high future income. Higher education is the higher-order means to a successful career.The assumption is those high-pay jobs, (A) will require a college degree, and (B) they will be plentiful when the student graduates. Borrowing $100,000 to earn a law degree is a malinvestment if the student ends up writing briefs for $15 per hour. A recent graduate of the Charleston School of Law put fliers on cars announcing that he or she had borrowed $200,000 to attend school and is now working at Walmart for $35,000 a year.A post on the “Above The Law” blog revealed, “As of the 2013–2014 academic year, the total cost of a three-year J.D. degree from Charlotte Law was $123,792.00, while the median loan debt per graduate was $159,208.00. Just 34 percent of the class of 2014 was employed in full-time, long-term jobs where bar passage was required. ...”“More college graduates are working in second jobs that don’t require college degrees,” writes Hannah Seligson in the New York Times, “part of a phenomenon called ‘mal-employment.’ In short, many baby-sitters, sales clerks, telemarketers and bartenders are overqualified for their jobs.”Ludwig von Mises wrote in Human Action,The whole entrepreneurial class is, as it were, in the position of a master builder whose task it is to erect a building out of a limited supply of building materials. If this man overestimates the quantity of the available supply, he drafts a plan for the execution of which the means at his disposal are not sufficient. He oversizes the groundwork and the foundations and only discovers later in the progress of the construction that he lacks the material needed for the completion of the structure. It is obvious that our master builder’s fault was not overinvestment, but an inappropriate employment of the means at his disposal.As it is now, parents and students still have the belief that college is the way to, if not riches, at least a well-paying career. In a 2011 piece for with what turned out to be the hasty title of “The Higher-Education Bubble Has Popped” I quoted PayPal founder and early Facebook investor Peter Thiel, who questioned the value of higher education. He told TechCrunch,A true bubble is when something is overvalued and intensely believed. Education may be the only thing people still believe in in the United States. To question education is really dangerous. It is the absolute taboo. It’s like telling the world there’s no Santa Claus.Like most bubbles this one is being fueled by debt. USA Today reports, 40 million borrowers owe $29,000 each, totaling $1.2 trillion outstanding. Student loan debt is easy to get, but hard to get rid of. It’s hard to pay back without a high salary, nor can it be bankrupted away. “Government either guarantees or owns most of the student loans and has the power to sue and to garnish wages, tax refunds, and federal benefits like Social Security when borrowers default,” Kelley Holland writes.Defaults are plentiful. In the third quarter of last year, the three-year default rate was roughly 13.7 percent, with the average amount in default per borrower just over $14,000.These debtors “are postponing marriage, childbearing and home purchases, and ... pretty evidently limiting the percentage of young people who start a business or try to do something entrepreneurial,” says Mitch Daniels, president of Purdue UniversityI administer funds for a small scholarship for graduating high school seniors in my old home town. This year, for the first time, an applicant wrote that he needed financial help for college because his father, a veterinarian, can’t help his children because he’s struggling to make payments on his own student debt.The college boom is not just on campus. Student housing developers have been riding the college boom as well. Two years ago in a piece for The Freeman, I wrote about developers cashing in building dorms. These developers have even found Auburn, with its population of only 50,000. A project called 160 Ross has long-time residents in an uproar with its high density. But as much as locals don’t like it, students have snapped up units at $599 a bed.That rack rate has large student housing developers coming to town and CV Ventures is ready to break ground for a six-story mixed-used project on just one acre featuring 456 beds, stumbling distance from the college bars, with a Waffle House across the street.Meanwhile, everyday we hear about how online courses being the death knell for brick-and-mortar institutions. For the moment traditional colleges seem safe. “Because traditional campuses offer peer and teacher interaction,” writes Ron Kennedy, “as well as a plethora of other important benefits often sought by traditional, college-aged students, there will remain a need for traditional education.”More importantly, Kennedy continues, “Research has shown that students who interact face-to-face with their instructors and other students tend to be more academically balanced than their online counterparts. This is one reason why most employers still prefer students who have attended traditional campuses.”Trees don’t grow to the sky and neither will tuition. However, it’s doubtful young people will suddenly stay home with their parents and work toward degrees taking online classes. Parents who can afford it want to relive their college days vicariously through their kids.The higher education bubble continues to inflate.

Frédéric Bastiat’s

24 juni, 2015 - 06:00
The great economist Frédéric Bastiat would have turned 214 today. His contributions to liberty have been many, but while so many advocates of free markets focus on The Law, there is another book that represents his legacy even better: Economic Sophisms. This short work of essays epitomizes perhaps his most important contribution: using taut logic and compelling prose to bring the dry field of economics to hundreds of thousands of laymen.Bastiat did not, generally, clear new ground in the field of economics. He read Adam Smith and Jean-Baptiste Say and found little to add to these giants of economic thought. But Bastiat possessed a keen wit and a clear, pithy writing style. His writings have become immensely popular. One-hundred-and-fifty years after his death, essays like “A Petition” are still circulated as an effective counter to progressive economics.Bastiat makes three central contributions in Economic Sophisms. First, he reminds us that we should care about the consumer, not just the producer. Second, he dismantles the argument that there are no economic laws. Third, and more generally, he is one of the few politicians and writers who thought with his head, not with his heart. Bastiat used logic to clearly lay out the consequences of political actions instead of hiding behind good intentions.Surplus, Not ScarcityEconomic Sophisms expresses a common theme over and over again: we should craft policies that focus on consumers, not on producers.When Bastiat uses these phrases, it can be easy to misinterpret him. Keynes, writing 100 years after Bastiat, hijacked the terms. But Bastiat wasn’t a Keynesian. When he discusses how consumption is the end goal of the economy, what he means is: having goods (which benefits consumers) is more important than making goods (which benefits producers). Put another way, producers prefer scarcity, because it drives up prices. Consumers prefer surplus for the opposite reason.Producers advocate all sorts of methods for reducing the total quantity of goods (theirs excepted, of course). Producers seek to tax goods from other countries that compete with their own. They outlaw machines that would replace them. Producers even favor policies like burning food to drive up food prices, a policy that caused much starvation when it was enacted in the United States during the Great Depression. Consumers, by contrast, prefer abundance. They are happiest when they have a plethora of goods to choose from at a low price.Bastiat points out that we are all consumers, including the producers. The man who produces railroads also uses his wages to buy goods. One can imagine a world with no producers, a paradise in which man’s every need is fulfilled by nature or a benevolent God. But one cannot imagine a world with no consumption. In such a world, man would not eat or drink, have clothing or buy luxuries. Consumption, and quality of life, is the essential yardstick to measure a society’s economic prosperity.When we enact producer-backed measures like tariffs, Bastiat argues, we favor producers’ interests over consumers’. We show that we’d rather have scarcity than surplus. Taken to its logical extreme, such a policy is absurd. Would anyone truly argue that total scarcity is preferable to having plenty?The Principle of No PrinciplesIn Bastiat’s day, it was fashionable to claim that no real principles exist. X may cause Y, but a smaller X needn’t cause a smaller Y; it could cause Z instead, or A. Today, we see the same logic: people who claim, for instance, that a minimum wage hike to $100 would kill jobs but that a hike to $10.10 would somehow create them.In essay after essay, Bastiat destroys this myth. Economics is not a foggy morass where up is sometimes down, left can be right, and there are no absolute truths. Economics is not like nutrition, where a glass of wine can heal while two gallons can kill.In economics, a cause will produce a correlational effect, regardless of how large the cause is. If small X causes small Y, large X causes large Y. A minimum wage hike to $100 will kill many jobs; a minimum wage hike to $10.10 will still kill some. The effect does not vary, only the size of it.Indeed, one of Bastiat’s most common argumentative tools is reductio ad absurdum, or carrying a concept to its logical conclusion. Opponents of mechanization want to force railroads to stop at one city and unload goods, thereby generating work for the porters? Very well, says Bastiat. Why not have them stop at three cities instead? Surely that would generate even more work for the porters. Why not stop at twenty cities? Why not have a railroad composed of nothing but stops that will make work for the porters?By carrying concepts to their logical conclusion, Bastiat provides a firm antidote to the fuzzy thinking of protectionist advocates.Think with Your HeadIn Bastiat’s time, just as today, it was popular to think with one’s heart. “We must do something!” went the rallying cry; never mind the consequences. Good intentions were enough.Make-work, for instance, has always been a favorite policy of those who think with their hearts. They see men and women unemployed and demand government take action. Often, this action takes the form of impeding human progress: using porters instead of railroads, for instance. The initial consequence, for the porters, is positive: more end up employed. But Bastiat recognizes that such policies, while they may protect the porters, harm the economy as a whole. They raise prices and create scarcity.Bastiat looked at more than just the direct consequence of an action. He examined all the outcomes, using taut chains of logic to demonstrate how each policy would impact those whom he was most focused on — the consumer.Bastiat’s LegacyBastiat did not invent any new economic tools or schools of thought. But the clear logic with which he thought through economic ideas, and the clear and witty prose with which he lambasted those who did not do so, have made him one of the most popular economic figures of all time.Bastiat’s ideas in this text have been borrowed, rehashed, and republished for over 150 years. His insights have been appropriated by dozens of prominent thinkers. Most famously, Henry Hazlitt based Economics in One Lesson largely on the essays in Economic Sophisms. As we make note of his 214th birthday, perhaps we should raise a toast to the man whose ideas — in all their adopted formats — have done so much for the cause of liberty.

Self-Determination and Secession

24 juni, 2015 - 06:00
The secessionist impulse doesn’t seem to be going away in Europe. This month, the Wall Street Journal reported that the latest drive for secession comes from Sardinia. The leaders of the movement propose that the island, only part of Italy since the 1860s, be joined to Switzerland instead.The Sardinians have a tough row to hoe in convincing the Swiss to accept them as the newest Swiss canton (Sardinians do have a coastline to offer, however), but the whole episode illustrates yet again that the national borders drawn on the map over the past two centuries are beginning to outlive their usefulness.What Is Self-Determination?As with the Venetians, the Scots, and the Catalonians, the matter of Sardinian secession and/or annexation involves any number of referenda and discussions about “self-determination.” And in this case, as with most similar cases, one is left with the problem of determining how one can morally go about switching state affiliations without precipitating war or accusations of human rights abuses. The Europeans don’t phrase it this way, but when they discuss the need for plebiscites and “democracy,” this is what they mean.Certainly, this problem was not at all alien to the laissez-faire liberals of the nineteenth century, including Ludwig von Mises, who wrote: “No people and no part of a people shall be held against its will in a political association that it does not want.” Mises then went on to defend “the right of the inhabitants of every territory to decide on the state to which they wish to belong.”Murray Rothbard explained Mises’s position further:The right of self-determination in regard to the question of membership in a state thus means: whenever the inhabitants of a particular territory, whether it be a single village, a whole district, or a series of adjacent districts make it known, by a freely conducted plebiscite, that they no longer wish to remain united to the state to which they belong at the time, but wish either to form an independent state or to attach themselves to some other state, their wishes are to be respected and complied with. This is the only feasible and effective way of preventing revolutions and civil and international wars.On a purely technical level, it’s easy to imagine this sort of territorial plebiscitary process. The problem one is left with in these cases, however, is what to do with minorities that oppose the secession or annexation by other states. This is the claim made by nationalists who oppose secession by Catalonia, for example. The nationalists assert that even if a majority were to prefer independence, minorities within Catalonia itself would be disenfranchised by secession.The nationalists’ solution in this scenario, therefore, is to disenfranchise the majority. But this “solution” is nothing more than an appeal to the central government to unilaterally “settle” the problem with force. In contrast, the proper solution lies not in centralization but in further breaking down the size of each territory into smaller pieces to account for demographic realities and minority populations (which are rarely evenly dispersed) within the regions themselves.Doesn’t This Lead To Anarchism?But if any community, no matter how small, can simply break off and join another state or remain independent, what’s to stop single households from doing this?Rothbard asked this same question, and it brings us back to Mises’s comments on self-determination. Mises writes:If it were in any way possible to grant this right of self-determination to every individual person, it would have to be done. This is impracticable only because of compelling technical considerations which make it necessary that the right of self-determination be restricted to the will of the majority of the inhabitants of areas large enough to count as territorial units in the administration of the country.In other words, anarchism is theoretically justifiable, although technically problematic. Mises no doubt has a point here since there are economies of scale in both military and civil defense. It is debatable whether or not the technical consideration — from the state’s perspective — cannot be overcome with technological innovation, however. Bureaucratic administration (whether governmental or private) may have required a certain minimum size of departments and territorial units in Mises’s day, but it’s unclear that such problems are insurmountable today given the decentralization and networking capabilities of modern administrative and communications technology.Nevertheless, from a sociological and economic standpoint, Mises’s concern about there being a practical “floor” to the extent to which states can be broken up appears to be useful. After all, there is no denying that people like to join together in groups for a variety of purposes not limited to military and economic ends. The mega-states of the modern world are held together by coercion, but cities, towns, and communities are naturally occurring phenomena that pre-date states.Moreover, just as I give up the freedom to talk loudly or adjust the volume when I watch a movie at a theater instead of my home, virtually everyone — even in a system of theoretically limitless secession — would give up at least some of his own personal prerogatives in the name of joining a municipality, league, or association that could provide legal and defense services. At the same time, individuals would be careful to keep the majority of power at the local level, since individuals can still exercise influence over localized governments. (This is not the case in a huge state like the United States where an individual who is not a billionaire has nearly zero influence over anything the national government does.)But this raises a new question. If people “choose” to give up certain prerogatives to join with others in cities and towns, isn’t this true of all states? Haven’t people “voluntarily” chosen to be part of Russia, or part of the United States? The answer here is “no” because without a meaningful ability to make choices — or provide a new choice via secession — no truly voluntary choice has been made.A Sliding Scale From One-World Government To StatelessnessAs I’ve noted here, states erect legal and practical barriers to extend their monopoly powers over a large area, and over many facets of life in order to diminish choices and options. Likewise, states generally prohibit the creation of new states, so as to further strengthen their monopolies.So, the extent to which one is voluntarily subject to a civil government moves along a sliding scale. At one end of the scale is a one-world mega-state where no choice is possible at all. At the other end of the scale is a totally stateless society. Most — if not all — of human history has been characterized by civil governments that fall somewhere in between. Some civil governments are very large and very coercive. That is, they are quintessential states. Some governments are very small and very decentralized and are much less state-like. These later governments must compete with numerous nearby options for citizens and capital.Naturally, a world with fewer states and very centralized states offers few options, which in turn means fewer choices for persons, cities, towns, and communities.In spite of this, we still sometimes encounter the bizarre argument that secession is bad because secession “creates a new state.” But, just as consumers of pizza benefit when a new Pizza Hut opens down the street to compete with Domino’s Pizza, consumers of defense services and legal systems benefit when a new competitor becomes available in their neighborhood of states. If Domino’s Pizza managed to use force to prevent any other Pizza chain from opening up in town, that would clearly be a bad thing. Likewise, when a state uses force to prevent the creation of a new state, or prevent the movement of a region from one state to another, we can see this is undesirable because it limits choice, freedom, innovation, and all the good things we associate with a lack of monopoly power.So Can Sardinia Morally Secede?In the unlikely event that Switzerland declared it would love to welcome Sardinia into the confederation, Italian unionists would still oppose secession on legal and sentimental grounds. They would also claim that Sardinia cannot secede because some Sardinians wish to remain part of Italy. If a majority of Sardinians actually wished to secede, though, then Italian unionists are making the arbitrary claim that most Sardinians should be forced to remain in Italy because some Sardinians say so. And of course, the power of the Italian state would be hung as a constant threat over the heads of secessionists as well.The answer to this conundrum is not to simply accept the might-makes-right argument, of course. The answer is to therefore break Sardinia itself into smaller pieces. If the people of North Sardinia want to secede, and the people of South Sardinia, do not, then our problem has been solved. Even after this division is made, there are sure to still be disagreeable minorities, but with each reduction in the size of the territory in question, the amount of choice for those in the unfortunate minority increases. A move to South Sardinia from North Sardinia (to escape the secessionists) is far less disruptive to one’s life than a move from Sardinia to the Italian mainland for the same purposes.There is no perfect and clean method of breaking down nation-states, but as the Americans, the Irish, the Chechens, and many others could tell us, state intervention to prevent secession is often the bloodiest and messiest option of all.

Baltimore’s Unemployed and the True Cost of Minimum Wages

24 juni, 2015 - 06:00
Since President Johnson first declared war on poverty in his 1964 State of the Union address, this war has cost US taxpayers $22 trillion. The primary implement of this war has and continues to be public assistance programs. Prior to the war, the poverty rate had fallen steadily from just under 35 percent in 1949 to just over 15 percent in 1965. As expenditures on public assistance programs soared from roughly $50 billion per year in 1965 to just under $1 trillion in 2013, the poverty rate has been stuck between 10 percent and 15 percent. These trends suggest that public assistance programs trap people in poverty.The minimum wage is another major implement in the war on poverty. In 2009, it was raised to $7.25 per hour, its highest level (in real terms) since 1981. Thereafter, the poverty rate inched up to 15 percent in 2010, and remained near that rate through 2013. Despite this, President Obama, in his 2014 State of the Union address, called for the federal minimum wage to be raised to $10.10. Later that year, his sales pitch for this proposal included: “One of the simplest and fastest ways to start helping folks get ahead is by raising the minimum wage. Ask yourself: could you live on $14,500 a year? That’s what someone working full-time on the minimum wage makes. If they’re raising kids, that’s below the poverty line. And that’s not right. A hard day’s work deserves a fair day’s pay.”The president’s argument above, however, is based on a false narrative. The typical person earning the minimum wage is not raising a family on $7.25 an hour, and working forty hours a week. Only 2.6 percent of US workers earn the minimum wage, and most of them work part time, and are between the ages of sixteen and twenty-four.Problem “Solved”: Just Raise the Minimum Wage a Little at a TimeRecognizing the consequences of a sharp increase in the minimum wage, former President Clinton argued for a phased-in increase last fall on John Stewart’s The Daily Show. In Clinton’s segment, he told the show’s millions of viewers that “If you [raise it] in a phased way, it always creates jobs. Why? Because people who make the minimum wage or near it are struggling to get by, they spend every penny they make, they turn it over in the economy, they create jobs, they create opportunity, and they take better care of their children. It’s just the right thing to do, but it’s also very good economics.”Increasing the minimum wage, whether it is a sharp or modest change, is not the right thing to do, nor is it good economics. Those who disagree will point to the fact that modest phased-in increases to the minimum wage have not been associated with a sharp rise in unemployment. This argument, however, glosses over the fact that the minimum wage is generally raised during economic expansions, when low-skilled wages are higher than the legislated minimum. If true, the consequences of hiking the minimum wage are not felt until after the economy has entered a recession. Since we only observe the economy entering a recession at the new higher minimum wage, it is difficult to determine how much of a rise in unemployment is attributable to the higher rate.Has It Worked In Baltimore?Let us now turn to a case study that is particularly timely. The recent violence in Baltimore has led for calls that we “do something” about poverty in Baltimore. And yet, the city has been subject to wage legislation for years, with little result.Low-skilled wage intervention is substantial in Maryland where the state’s minimum wage is set to rise to $8.25 this July. Since 2007, the state has required certain employers to pay a “living wage,” which is $13.39 in Baltimore County and Baltimore City. In addition to the state minimum and living wage rates imposed on residents of Baltimore City, said city has legislated a minimum wage that applies to all businesses in the City with more than one employee, a living wage that applies to all service workers who are employed by city service contractors or their subcontractors, and over one hundred prevailing wage rates.If former President Clinton is correct in saying that legislating pay raises for low-skilled workers “always creates jobs,” then Baltimore’s economy should be a robust engine of job growth. The argument is correct — provided the marginal businesses that employ low-skilled labor remain in business, they do not lay off employees or cut their employees’ hours, and said employees spend every cent of the legislated pay raise. In such a world, a higher wage means more money, more money means more consumption, more consumption means more jobs, more jobs means more money, and so on in the infinite Keynesian spending cycle.Since 37 percent of young black male Baltimoreans (twenty to twenty-four) are unemployed, however, it’s fairly clear that things aren’t working out as the Keynesians have planned.Recognizing that it hasn’t worked, lawmakers have attempted to make workers more desirable by spending more on education. That has also failed.Despite Baltimore public schools’ per pupil expenditure being second only to that of New York City and low student-to-teacher ratio of 15.75, less than 15 percent of black Baltimore eighth graders are proficient in math and reading. Thus, it appears that these schools are graduating workers who have skills that are valued well below the legislated wage rates. Since these wage rates make it illegal to hire anyone whose job skills are valued below the legal wage, unemployment remains rampant.So what do poorly trained young Baltimoreans do if they want to work?The federal prohibition on narcotics drives the prices of illicit drugs up, and does little to tamp down consumption in Baltimore. Combined, these make the distribution and sale of narcotics very profitable. This allows the producers to pay their sales forces a wage that is not subject to federal, state, and local minimum wage rates. Hence, low-skilled, unemployed high school graduates and dropouts seek and find sales jobs in an illegal industry, which helps explain why a majority of the Maryland prison population is from Baltimore.

Dumping the Euro Isn’t a Cure-All: Easy Money Lets Governments Avoid Free-Market Reforms

24 juni, 2015 - 06:00
The Greek drama continues to unfold with the risk of “grexit” becoming increasingly likely. Yet, a large majority of the Greek people want to keep the euro. This, however, would require the Greek government to live within its means — something it has not been able to do for decades. With anti-austerity parties gaining strength continent wide, Greece may be the first, but not the last, to leave.For many years, it has been fashionable among some economists to blame the euro for all of Europe’s problems. Yet, the problem in Europe is not that it has a common currency, but that it has excessive government regulations, spending, and taxation. Economists who suggest that breaking up the euro will solve the region’s economic problems are like people selling gimmicks promising massive weight loss without either exercise or dieting. They want the gains without the pain.What they really want is just more flexibility to inflate fiat monies. For them, it’s much better to reduce government debt by simply inflating it away — thus sticking it to creditors — than having to take on the painful adjustment of limiting government size to what can be justified only with direct taxation.Money Manipulation Allows for More Government InterventionSuppose you have two regions under a single monetary system — Los Angeles and Las Vegas — with an inflationary economic boom in Las Vegas and increasing unemployment in Los Angeles. Salaries would slump in Los Angeles and surge in Las Vegas. Under such conditions, labor would normally move from Los Angeles to Las Vegas to find jobs, and capital would move from Las Vegas to Los Angeles to find cheaper labor.If capital will not or cannot move from Las Vegas to Los Angeles, and if labor cannot or will not move from Los Angeles to Las Vegas, then Los Angeles will just be stuck with falling wages, while Las Vegas capitalists will be stuck with expensive labor.A free market solution to this problem is to allow free movement of labor and capital to where labor and capital are demanded, and to allow for greater freedom in the use of labor and capital.However, governments can avoid having to allow such freedom in markets if they each have a central bank. If Los Angeles and Las Vegas are under two different monetary systems, monetary policy could be tailored to deal with each region’s economic problems. Los Angeles could turn to its own inflationary policy to match Las Vegas’s existing inflationary boom. This would improve Los Angeles’s export situation — by depreciating the currency — and prop up employment in the short term. Thus we find that governments will tend to turn to easy money instead of deregulation.On the other hand, if Los Angeles and Las Vegas are under a single monetary policy (and L.A. can’t simply inflate its currency at will), then Los Angeles can only address the ills in its economy by making its economy more attractive through tax cuts and deregulation.We find this sort of thinking prevalent in Europe today. The Europeans know that control over monetary policy can be used to cover up the shortcomings of irresponsible fiscal and regulatory policy. So, it’s no surprise that many of the most fiscally disastrous governments in Europe are now talking about getting rid of the euro. Each government wants its own money supply so it can kick the austerity can down the road, and inflate instead.In our example, we find that the governments of L.A. and Las Vegas are actually restricted in what they can do by a common currency, and naturally, Austrian economists would view such constraints as a very good thing — under a regime of sound money.A Sound Common Currency Is a Good ThingThe benefits of a common currency can be massive. Transparency is improved and uncertainty and risks are reduced.Anyone who has traveled to a foreign country knows the hassles of dealing with a foreign currency. You first have to pay a fee to convert your cash, and then you have to make sure you spend it all before you leave the country, otherwise you will be left with useless coins and bills at the bottom of your sock drawer.But not all currencies are equal, of course. The problem with the euro is not that it is a common currency but that it is a fiat currency which ultimately returns to its intrinsic value of zero.Indeed, the European Central Bank is now purchasing sixty billion euros per month of government bonds inducing governments to borrow even more.Why the Southern Block of Europe Wants Out of the EUAdvocates of breaking up the euro never talk about the southern bloc’s labor costs relative to those in China or India. They focus instead on German labor, which is more cost-effective. The Italians don’t like that they have to compete with Germany — in the making of automobiles, for example — under a single monetary system. If the Italians had their own monetary system, they could manipulate the money supply to favor their own automobile industry.With their own central bank, the Italians can put off having to ask themselves why their auto industry is so uncompetitive in the first place (hint: it has to do with Italian regulations and subsidies). Advocates of a breakup expect to gain competitiveness through devaluation, but a devaluation will only create a temporary gain, if at all, by benefiting exporters at the expense of the rest of society.A Solution for GermanyA stable unit of account and exchange is a great idea, but it needs governments willing to accept the discipline it imposes (or a population that demands it).Indeed, if anyone should dump the euro it should be Germany. Its current strategy to protect the euro is to use debt to solve a debt problem: to send good money chasing after bad. Germany would be wise to join like-minded countries on monetary policy and create a northern euro backed by gold. Meanwhile, southern eurozone countries are looking increasingly like a lost cause. People are not in the streets rioting for less government, but for more government. Let them have what they want: a worthless currency!

The Pope Should Listen to Tom Woods

23 juni, 2015 - 06:00
The release of the encyclical Laudato Si by Pope Francis last week had the predictable result of winning the Pontiff plaudits and huzzahs in the world’s press, and another round of bewildered head-shaking among observant Catholics. Whether in his formal remarks or his off-the-cuff observations, Pope Francis repeats many of the common objections to (and caricatures of) the market economy, objections we might encounter in the writings of any of the leftist thinkers who dominate the Pope’s Jesuit order.Meanwhile, so-called progressives in the Church, not normally so deferential to authority, triumphantly proclaim that matters of economics have been definitively settled and that the faithful ought to shut up and obey.The antidote to all this, released just this year, is the tenth anniversary edition of Tom Woods’s book The Church and the Market: A Catholic Defense of the Free Economy, which won first prize in the books division of the Templeton Enterprise Awards shortly after its release a decade ago.Tom’s thesis and its rapid spread have put Church liberals almost hysterically on the defensive — be sure to read Tom’s entertaining and relentless takedown of a left-wing Catholic conference warning the faithful of the terrible dangers of libertarianism — and has blasted open a discussion that progressives have been so eager to insist is closed. Before I explain what makes this book especially original, unique, and valuable, let me note that what it contains is of the greatest interest and importance no matter what, if any, religious convictions the reader may hold. It is the perfect book to read between Henry Hazlitt’s Economics in One Lesson on the one hand and advanced Austrian treatises like Mises’s Human Action and Rothbard’s Man, Economy and State, on the other.Tom begins by explaining praxeology, the Austrian method of economics, and shows how Austrians derive the concept of costs, value scales, supply and demand schedules, and the law of diminishing marginal utility, all from the simple proposition that human beings act, and that they use scarce means to substitute a more preferable for a less preferable state of affairs. If you’ve ever wondered exactly how Austrians employ the “action axiom” to arrive at robust economic conclusions, you’ll understand after reading this chapter.The rest of the book covers a vast array of topics, the misunderstanding of which has led to gross moral confusion: labor unions, wage rates, the “just price,” banking, money, inflation, business cycles, interest, monopoly, foreign aid, the welfare state, distributism, and a great deal more. The tenth anniversary edition contains a new introduction and an extra chapter. That extra chapter amounts to an overall defense of the book’s thesis, and takes the form of a systematic reply to a critic you almost feel sorry for.In other words, the book makes an extremely vigorous and persuasive case for Austrian economics as a science and the market economy as an economic system. I guarantee you will be better able to defend both after reading it, and that you’ll enjoy every page of Tom’s unrelenting presentation.When the book came out, it caused instant controversy. Catholic leftists and even some traditionalists denounced it. But Tom had plenty of supporters, among them Fr. Martin Rhonheimer of the Pontifical University of the Holy Cross in Rome; Crisis magazine; Fordham University’s James Lothian (writing in Homiletic and Pastoral Review); Bill Luckey, chairman of the department of economics at Christendom College; Sam Bostaph, chairman of the department of economics at the (conservative Catholic) University of Dallas; and even a scholar who had a hand in drafting a previous papal encyclical.The key thesis of the book that caused controversy among Catholics, the majority of whom never read the book and caricatured its argument, was as follows. A Catholic looks to the Church on matters of faith and morals. The technical details of particular academic disciplines, on the other hand, lie beyond the Church’s competence.For example, whether a particular medicine works or has side effects of varying degrees of intensity is a matter for physicians and medical researchers to say. If this medicine can be produced only by tearing the hearts out of living human beings, the Church may of course say that the use of the medicine is morally unacceptable.The Church may say that church architecture ought to draw the mind toward the contemplation of God, and be built in such a way as to stand the test of time. But churchmen would be going beyond their competence to describe the technical methods that are most suitable for this purpose.Likewise, it is all well and good to say that the welfare of the family, the building block of society, is of great importance. It is quite another to take sides regarding the precise, technical means of securing that welfare, as if the edifice of economic reasoning of the past 200 years did not exist. Demands for a “living wage” would of course be destructive to the family.Tom’s uncomprehending critics pounced. How dare Woods insist that the Church may not speak on economic matters! But Tom was not saying that at all, as we’ve already seen. There’s no reason Church authorities cannot make general statements about moral issues that happen to intersect with economics. What Tom did say — quite correctly, of course — was that the qualitative propositions of economic science, being facts of reality, lie conceptually beyond moral critique.In other words, if wage rates rise in a particular way, no amount of moral exhortation can make them rise another way. If the constraints of a finite world mean we can enjoy A only at the expense of B, no amount of pious mockery of the market system can eliminate this brute fact. We don’t condemn Avogadro’s number, or set down moral exhortations to change it.Some of the traditional Catholics who now object to Pope Francis’s encyclical Laudato Si were first in line to condemn The Church and the Market for its alleged dissent from other papal encyclicals. But the grounds on which these Catholics object to Laudato Si are in good measure the ones on which Tom pointed out difficulties with earlier documents. If we begin with faulty presuppositions drawn from misunderstandings of secular disciplines, any subsequent moral reasoning based on them is sure to be equally distorted. Quadragesimo Anno (1931) of Pius XI could look at the Great Depression and blame it on greed, and even the otherwise conservative Benedict XVI responded to more recent economic problems with what Tom has called “platitudinous warnings about materialism and greed.” As Tom wonders in the book, why is there no room in all this moral reckoning for even one mention of the moral problems of central banking?Developed thoroughly in The Church and the Market, Tom applied this analysis to Pope Paul VI’s Populorum Progressio (1967), which highlighted poor living conditions in the developing world. He jumped from a perfectly natural desire to improve those conditions to the wild non sequitur that state-led development aid programs, funded by the West, were the solution. He further expressed his belief in the Singer-Prebisch thesis, that a secular decline in the terms of trade — e.g., that the prices of commodities, which Third World countries tended to produce, were moving downward, while manufactured goods, produced by more advanced countries, saw their prices on the rise — meant that a liberalization of international trade couldn’t solve the developing world’s problems.At the time, economist Peter Bauer was warning in vain against development-aid programs. First, he said, they are unnecessary: if poverty were really a vicious circle, every country would still be in the Stone Age. When the right cultural attitudes and political and economic conditions are in place, funding for domestic projects will freely flow from abroad. Second, these programs would lead to bloodshed, as antagonistic groups clawed at each other for a share of the grant money. Such violence did indeed occur in about a dozen countries. Third, these programs subsidize evil, by allowing vicious government thugs to continue their destructive predations without having to face their full economic consequences.All of these predictions by Bauer came true as spectacularly as one could ask for. Even the New York Times, international agencies, and the Clinton administration were at last forced, albeit reluctantly, to admit that the programs had been a grotesque failure. But who, they pleaded — as if Peter Bauer had never existed — could have known?Even the empirical grounding of Paul VI’s case crumbled in the face of closer examination. Subsequent research found that there had been no secular decline in the terms of trade after all, so the major basis on which Paul VI proceeded to base his moral judgments was simply incorrect — a perfect illustration of Tom’s warning about the fate of moral judgments with which potentially faulty empirical claims or scientific understanding are intertwined.Tom notes that this embarrassment could have been avoided easily enough, had Paul VI enunciated general principles, as opposed to trying to pinpoint precise technical solutions on a matter on which he personally possessed no expertise, and to which the authority Catholics ascribe to the pope did not extend.Tom first explored this topic all the way back in 2002, in a paper for the Mises Institute. When the feedback was enthusiastic, he decided to write a whole book on the subject. We invited him to deliver our Lou Church Lecture in Religion and Economics in 2004, and his book was published the following year.Now Tom has written a dozen books, to be sure, ranging from The Politically Incorrect Guide to American History, which spent a dozen weeks on the New York Times bestseller list and sent both the neocons and the establishment into a frenzy — Tom’s book was the subject of a signed editorial on the New York Times editorial page — and Meltdown, Tom’s 2009 bestseller, featuring a foreword by Ron Paul, that diagnosed the financial crisis from an Austrian, free-market perspective.But in terms of his most lasting contributions to Austrian or libertarian thought, The Church and the Market is Tom’s masterpiece. It has forever changed the nature of the discussion of Catholic social teaching, and it ranks among the most compelling and effective short presentations of the ideas of Austrian economics I have encountered. Treat yourself to a copy of this vigorous polemic.

Soft Tyranny in Albuquerque: The Politics of

22 juni, 2015 - 06:00
In Breaking Bad, Vince Gilligan created one of the best shows in television history. He has followed it with a prequel, Better Call Saul!, which traces how the ethically-challenged lawyer featured in the earlier show — Saul Goodman — developed out of a perennial loser named Jimmy McGill. Breaking Bad fans are overjoyed that Gilligan has struck gold twice, and Better Call Saul! looks to become another television classic. And, although the show is not overtly libertarian, libertarians can learn from it.With only its first season completed, I’m sure the show has many surprises in store. But one thing is already clear: Gilligan continues to be the champion of the little guy against the establishment, and the poet of the shabbiness of ordinary existence in twenty-first-century America. He captures all the frustration, humiliation, and despair of living in the administered world of the modern state.Jimmy McGill is a bottom feeder in the swamp of government regulation that now covers the American landscape. As a rookie lawyer, Jimmy becomes a creature of the court system, trying to exploit it even as it exploits him. As the series opens, Jimmy is working as a public defender. In a heavily credentialed society, he is at a huge disadvantage — his law degree is from the University of American Samoa.Forced to beg for cases from an officious clerk, Jimmy is a parasite on society. If it weren’t for a myriad of government rules and regulations and a multitude of misfits who violate them, Jimmy would be out of work. Scratch beneath the surface of his world, and it’s government regulation all the way down.In only ten episodes, Jimmy has already run the whole gamut of modern bureaucracy. While struggling with the court system, he is also constantly interacting — and fighting — with a large, high-powered law firm that epitomizes the impersonality and coldness of modern office life. Jimmy has also run up against an uncaring hospital bureaucracy, which tries to commit his brother against his will to psychiatric treatment.As a named partner in the big law firm, Jimmy’s older brother Chuck might seem to represent the establishment himself. But he has developed a psychosomatic ailment, and thus joins the ranks of all the loners in Better Call Saul! who do not fit into society’s categories and thus incur its bureaucratic wrath.Another loner who runs afoul of the law in Better Call Saul! is Mike Ehrmantraut, Saul Goodman’s fixer and cleaner in Breaking Bad. When we learn his backstory in episode 6, we discover that he is a basically good man, who has turned to crime only because of his involvement with a corrupt police precinct in Philadelphia.In the final plot arc of the season, Jimmy develops a specialty in elder law, which takes him into the figurative bowels (and the literal dumpster) of an assisted living facility. In his efforts to help the old folks, Jimmy runs up against a new pack of lawyers, who swamp him with demands for paper work. The mounting cartons of case files Jimmy is continually dragging around symbolize the insane demands for documentation that bureaucracy imposes.Jimmy is fighting back against these bureaucratic forces, but only by turning his class action lawsuit into a RICO case, which will triple the damage award. Legal eagle Jimmy would have no talons without a federal statute originally intended to combat organized crime, but now routinely applied to white collar crime. In the end, the paperwork demands of the case force Jimmy to turn it over to the large law firm he despises. With all its complex rules, the state makes it impossible for a little guy like Jimmy to do business on his own.Libertarians tend to concentrate on the classic forms of government intervention: taxation, the monetary system, economic regulations. Better Call Saul! reminds us that government tyranny is actually more insidious and pervasive than might at first appear. When he was working on The X-Files, Gilligan had already explored the modern state’s panoptical regime, as analyzed by French philosopher Michel Foucault — a world rife with institutions, like schools, clinics, and prisons, that are not, strictly speaking, part of the government but nevertheless keep tabs on us and monitor our lives for the government’s purposes.A theme that unites Breaking Bad and Better Call Saul! (inherited from The X- Files) is that we live in a surveillance state and our government records can mark us for life. Jimmy is haunted by a single trumped-up sex crime charge.In order to regulate every aspect of our lives, the government cannot go it alone — it works through a web of intermediaries. Many of these institutions purport to take care of us, but in the process they chip away at our freedom. Better Call Saul! brilliantly portrays the interlocking directorate of modern government, quasi-governmental institutions, and all their satellites. The courts, the law firms, the police, the corporations, the hospitals, the assisted living facilities — they all work together to constrain our freedom — and they all operate within the state’s regulatory apparatus.Jimmy McGill is a contemporary Everyman, crushed by the soft tyranny Alexis de Tocqueville predicted for the United States in his Democracy in America. No wonder Jimmy is already embracing his dark, con-man side, and we can see him morphing into Saul Goodman.

Why Shareholders Are Better Than Corporate "Stakeholders"

19 juni, 2015 - 06:00
In a world of private property rights, where the contracts that derive from those rights must be honored, there would be no controversy about the rights of corporate “stakeholders.” Owners of capital resources pool them and delegate day-to-day control to corporate management as their agents. The only stakeholders those delegated agents agree to represent are the owners of those resources (i.e., the shareholders).However, stakeholder theory has made major inroads into firms’ fiduciary obligations to owners in recent decades. In consequence, shareholders have been increasingly demoted from owners with decision rights over their own assets to just one of many groups, all of whose desires must be incorporated into management decisions. That makes it worth revisiting the stakeholder approach to corporate management, as its growing influence increasingly insulates it from serious consideration.Transaction Costs and Social CooperationOne of the great benefits of clearly defined property rights is that they specify who parties must reach agreement with — everyone whose legitimate property rights would otherwise be violated. The consent of other parties, who have no authority to say “no” to others’ arrangements, because that extends beyond the reach of their property rights, need not be acquired. The result is far lower transactions costs. That enables far more mutually beneficial specialization and exchange, and the massive increases in production and wealth that results.One consequence of the clear definition of corporations as acting in the interests of those whose resources formed them — stockholders — is that it vastly increases their ability to raise large sums to benefit from economies of scale and scope. It also increases the liquidity of investments, decreasing the risks to owners involved, by making exchanging ownership claims far less costly. In contrast, if stakeholder theory was generally applied to corporations, it is hard to imagine efficiently conducting almost any large-scale or complex production process, involving vast numbers of contractual arrangements, as massive transactions costs would overwhelm the potential gains.Shareholders’ Interests Take Other Legitimate Stakeholders into AccountFormer GE head Jack Welch once criticized the shareholder interest model of the firm as “the dumbest idea in the world.” He asserted that employees, customers, and product quality deserved priority over shareholders. But it is not a choice between employees, customers, and product quality versus advancing shareholders’ interests.But attention to employees, customers, and quality in an unhampered market (as opposed to crony capitalism, from which GE benefited immensely), is the means to advancing shareholder interests. Share prices reflect gains from better utilizing and motivating employees’ skills and abilities, from better developing and serving customers, and from product improvements that users value more than they cost. All those stakeholders’ interests, derived from their property rights and the requirement of voluntary, mutually beneficial cooperation, are aligned with those of profit-seeking shareholders.In other words, other valid stakeholders’ interests are reflected by shareholders’ interests, not trampled by them. Workers have to voluntarily agree to their terms of employment. So firms will consider everything that workers or potential workers care enough about to offer the potential for a beneficial alteration in the terms of employment. But no party is ever allowed to escape the constraint of the need for others’ voluntary cooperation.Suppliers and venders are considered in a similar way. Any alteration that costs a firm less than it saves suppliers could receive mutual agreement. Consumer interests are also clearly taken into account, as they are the ultimate “enablers” of what is profitable and survivable, versus what is unprofitable and unsurvivable. Explicit, enforceable contracts spell out the terms some agree to. Powerful reputation and reliability mechanisms also put up what amounts to a bond to ensure reliability — the present values of future profits from ongoing “good” behavior, put at risk by poor present performance.As a further example, consider how professional sports teams consider fans. Those teams are certainly interested in making higher profits. So they care about those who go or might go to games, and all the things that might swing their decisions. They care about those who buy or might buy team hats, jerseys, etc., in a similar way, as well as those who might or might not listen on radio or watch on television (through ad revenues, subscription services, or broadcast right sales, etc.). They even care about those who do none of those things, but talk about the team around their water coolers at work, which can influence others’ revenue-generating behavior. Such fans need no direct power over team decisions in order to have their desires reflected in those decisions.Divergences Between Stakeholders’ Interests and Shareholder InterestsAs we have seen, many stakeholders’ interests are consistent with advancing shareholders’ interests, including workers, suppliers, customers, and even fans, are all incorporated in shareholders’ interests because they must be induced to cooperate on mutually agreed terms. If this was all stakeholder claims represented, stockholders would not object to stakeholder claims. But they often object strongly. What does that tell us? Those claims require imposing someone else’s decisions in place of owners’ decisions in an involuntary manner, which requires coercion against them. The coercion involved is also revealed by falling market capitalizations when campaigns for new “social responsibility” requirements target them. Further, even though “benefit corporations” can now be formed to advance specified stakeholder interests as well as stockholder interests, they have remained relatively uncommon, due to the difficulty of finding investors who agree both on their desires to advance the same stakeholder interests and the trade-offs they are willing to make between those ends and profits. That would not be the case if the stakeholder approach was generally superior in the eyes of those whose rights are involved.The coercion necessary to impose stakeholder obligations in violation of stockholders’ property rights, in turn, explains why stakeholders turn to government actions or threats to advance their claims. It is also why stakeholder claims play greater roles in more heavily regulated industries. Stakeholders’ ability to exercise political clout over government decisions can then more effectively be used to extort firms (e.g., banking, where permission to open new branches or make other transactions can be subject to “community” support or opposition).Ex Ante versus Ex PostStakeholder claims beyond those enabled by pre-existing property rights can often be best understood as ex post (after the fact) theft or piracy. They wait until something valuable has been created by others’ voluntary relationships, then try to deal themselves into leverage or power over subsequent choices, even when they had no appreciable role in causing its creation or growth. That makes their role as “benefactors,” because it is funded with other people’s resources, all benefit and no cost for them — self-defined social nobility for free. It is reminiscent of where people live in neighborhoods that “grew” in place of earlier citrus groves, but who then blockade others’ rights to do exactly the same thing with their land, in the name of protecting the community.Stakeholder Claims Are AsymmetricalIt is important to note that stakeholder attempts to leverage new power are also asymmetrical. Those non-shareholders who claim they should be given a say in firm decisions do not propose granting outside stakeholders rights to similar influence over their actions.If “community groups” are to be enabled to dictate firms’ choices because they are stakeholders, shouldn’t firms have similar powers over community decisions, because they are substantial stakeholders in the community? If a firm’s current workers should have decision-making power over it because of their stake in its policies, shouldn’t a firm have similar decision making power over those workers? After all, just as workers have a stake in not having their pay cut, the firm that employs them (and its customers) has a stake in workers’ pay not being jacked up.The history of political power also shows that it is most commonly utilized to support the already politically powerful. A good illustration is plant-closing legislation, which represented the politically powerful interests of local workers who are outcompeted by others who are not politically influential, but would offer consumers better terms. Similarly, anti-takeover laws were widely enacted to protect rather than prevent inefficient management teams, by insulating them from the threat of losing their jobs due to takeovers whose profitability lay in increasing efficiency and benefits to customers.The Stakeholder Approach Reduces the Accountability of ManagementAnother important problem of stakeholder theory is that it wipes out clear criteria — profitability — to evaluate managers, instead substituting ambiguous and often mutually inconsistent criteria, with no way of determining agreed-upon trade-offs. While this will serve stockholders poorly, it will often serve the interests of managers who would thereby see their constraints eased. That is a major reason why many managers support the stakeholder approach. It not only allows them to survive inefficiency and poor management, diametrically opposed to what stockholders hired them to do, but also gives them the ability to be seen as business statesmen and philanthropists in the process.ConclusionShareholder control of corporations follows from private property rights and the requirement that delegated agents perform their contractual commitments. In other words, it derives from self-ownership and liberty in economic arrangements. Firms, as agents for shareholders, have to live up to their voluntarily agreed contractual obligations to customers, suppliers, employees, and owners. As a result, they all benefit from those arrangements. Beyond that, a firm’s sole obligation to others is, in Walter Block’s words, “the one we all have to each other: to refrain from threatening or engaging in initiatory violence against them and their rightfully owned property.”That is why Block described stakeholder claims as “the entering wedge of yet another attack on private property rights.” Given the immense wealth enabled by that arrangement, the costs of undermining it on behalf of self-determined stakeholders are similarly immense. And the process of determining who will qualify as a stakeholder and how large each stake shall be will entail the arbitrary and coercive substitution of politics over voluntary exchange.

I Am the Very Model of a Modern US President

19 juni, 2015 - 06:00
As election season ramps up, many people are falling into political camps and assuming that their candidate will be wholly different from either the current administration or the contenders in the other camp. But for the past eighty years, United States presidents have been remarkably similar once in office. Most presidents, whatever their promises as candidates (usually to shrink parts of government) end up waging wars overseas and expanding government control here at home. The problem is not any one politician, be it Barack Obama, or George W. Bush, or Ronald Reagan. The problem is the institution as a whole.To commemorate the beginning of the 2016 election season, I’ve penned new lyrics to be sung to the tune of “I Am the Very Model of a Modern Major-General” from Gilbert and Sullivan’s The Pirates of Penzance:I am the very model of a modern US president:When you say that you want more freedom I say you can’t handle it.I oppose those greedy businessmen whose lives are decadentYou surely didn’t earn your wealth so now you will have less of it.If you start a company than I say you did not build itIt’s government that made this country wonderful do not forgetWe all chipped in to build those roads and educate your workforce too,So pay up and obey our rules and please believe we work for you.To fix a non-existent problem I passed Net Neutrality,‘Cause ISPs are evil and that is just reality.When you want commercial freedom I say you can’t handle it;I am the very model of a modern US president.I like to stand and rail against income inequality,For I believe that concentrated riches means more poverty.More government’s required to create a meritocracyAnd let’s please turn a blind eye to DC’s own aristocracy.I’ve rarely ever voted “no” on a new entitlementAnd my feds-run education can help teach the perks of government.I’m confident more government can make health care robust againThe system that gave us the VA is the one to trust again.For all my good old corporate friends, I promise them all subsidies,Taxpayers can foot the bill to help their noble companies.If you want some laissez-faire then I say we can’t handle that,Without those crony contributions I wouldn’t be president.And if I ever stopped launching new invasions overseas,If I ever stopped spying on those who didn’t vote for me,If I didn’t consider the 4th Amendment trivial,And if under me jailing whistleblowers wasn’t typical,If my AG nominee didn’t believe in asset forfeitureAnd if my logic for killing my people weren’t so circular,If I didn’t say fears of government are juvenile,You’d say a president had never been so Constitutional.I ran for office on a promise to shrink down our governmentBut we both know that when it comes to lying I’m not reticent.When you say you want more freedom I say you can’t handle it;I am the very model of a modern US president. 

Pope Francis’s Relentless Pessimism Fuels His Faith in Politics

18 juni, 2015 - 06:00
Pope Francis’s new encyclical “On Care for Our Common Home” has been released to much acclaim from the mainstream media. One German news source declares “Papal encyclical could break climate change deadlock.” “Pope Francis' views on climate change present a moral challenge to many 2016 GOP contenders,” declares US News and World Report. Not in many decades has a papal document been so easily used as a tool for political and electoral ax-grinding. Indeed, we would not normally cover a papal document at at all. Benedict’s “Caritas in Veritate,” for example, was published without any mention in free-market circles.On the other hand, this pope is far more political than most modern popes. This new encyclical, combined with his first one, “Evangelii Gaudium,” contains numerous assertions about public policy that stem from a particular historical and political worldview.And what is the worldview of this pope? Well, it is a vision that is relentlessly pessimistic. According to Francis, the world is very nearly falling down around us. The poor are getting poorer, he claims. The inequalities between rich and poor are worse than ever, he says. Pollution is making us sicker than ever, he implies. And the basic requirements for sustaining human life are becoming more inaccessible than ever. These claims serve a purpose: to illustrate that the rise of industrialization and market economies (a modern phenomenon) are the cause of these social and environmental ills. Francis’s Worldview Does Not Fit the FactsIn painting a picture of a world that Francis says resembles "an immense pile of filth," Francis is ignoring a wealth of empirical data through which his assertions can be shown to be simply and factually wrong.For example, when Francis released “Evangelii Gaudium,” many discovered that the document relied on a view of the world in which the standard of living worldwide was relentlessly declining, when the empirical data, in fact, suggests the opposite. Marian Tupy at The Atlantic wrote at the time:But here’s the problem: The dystopian world that Francis describes, without citing a single statistic, is at odds with reality. In appealing to our fears and pessimism, the pope fails to acknowledge the scope and rapidity of human accomplishment — whether measured through declining global inequality and violence, or growing prosperity and life expectancy.Tupy then quotes this line from Francis:We have to remember ... that the majority of our contemporaries are barely living from day to day, with dire consequences. A number of diseases are spreading. The hearts of many people are gripped by fear and desperation, even in the so-called rich countries. The joy of living frequently fades, lack of respect for others and violence are on the rise, and inequality is increasingly evident. It is a struggle to live and, often, to live with precious little dignity.Unfortunately, this paragraph — a rather maudlin one, to be sure — could be true for any time in human history, and yet it is less true now than it was in the past. Francis appears to not understand this. It's one thing to note — as any Christian clergyman should — that the plight of the poor requires our attention and charitable action. It's something else entirely to make unsupportable claims that the situation is getting worse. Similarly, with his new encyclical, Francis turns to environmental problems, and proceeds through a long laundry list of risks to human life and welfare — many of which he implies are modern and something new —and that things are also accelerating in a negative direction. This view especially comes through when he says:It is possible that we do not grasp the gravity of the challenges now before us. “The risk is growing day by day that man will not use his power as he should” ... we stand naked and exposed in the face of our ever-increasing power, lacking the wherewithal to control it.Human health is more and more ravaged by pollution every day, Francis suggests. And yet, one familiar with the real state of worldwide economic development doubts these assertions.In an editorial at the Catholic Herald, Philip Booth writes:Firstly, as is often the case with Pope Francis, his analysis of the economic state of the world is unduly pessimistic. It is correct to say that pollution leads to premature deaths. Indeed, many would argue that climate change will do so and some that it already does so. But, there are trade-offs. And the underlying picture is one of huge increases in life expectation and health because of the economic development that is taking place. Indeed, in many parts of the world, the environment is improving dramatically.Let’s review the actual facts:As Booth notes, air pollution leads to real health problems. But to find this at work, one should not look to wealthy countries, but to countries that have long shunned the market economy. China, for instance — which is on nobody’s list of most-free countries — is a pioneer in dumping pollutants into the water and air. Similarly, during most of the twentieth century, one found the most unfortunate pollution in the communist world which continued with its belching smoke stacks long after the capitalist world had cleaned up its own air. In other words, there is a solution to these problems, and it is the more market-oriented parts of the world that have found it.Meanwhile, the World Bank reports “remarkable declines in world poverty,” and the UN reports “world poverty is shrinking rapidly.” The American Association for the Advancement of Science reports that life expectancy around the world has increased steadily for nearly 200 years. The Institute for Health Metrics and Evaluation reports that life expectancy has been increasing while the death toll from diseases continues to fall. That population bomb we were warned about never went off.Moreover, if we use the economic data to make real comparisons between those countries that are more market-oriented versus those that are less so, we find that it is the market economies that provide better and cleaner conditions for the poor. To illustrate this, we need only ask the question: “would you rather be a poor person in the United States or in India? Would you rather be poor in Sweden or in Bolivia?” In spite of its reputation as a socialist paradise, the fact is that Sweden is far more capitalist and market-oriented than the less-capitalist countries that Francis seems to think are closer to the ideal. And the US, for all its faults, is a country where the poor have televisions and air conditioning.Unfortunately, it is necessary for Francis to stick to his pessimism in order to forward his main and central thesis: the advancement of the market economy worldwide has made the world a worse place.Industrialization and Market Economies Have Brought Wealth and Longer LivesBut, just as life expectancy for humans worldwide has been climbing for the past 200 years, so has industrialization, free trade, and a turn to markets instead of command economies, and autarky.This is an inconvenient truth for Francis and the Left, but one doesn’t need to split hairs in the data to see that more people live longer lives with more access to food and health care than ever before. The “green revolution” exported by rich countries has fed the world, and health care provided by the rich countries has cured the world of many diseases.Meanwhile, the world is in the midst of enormous migration from rural areas to cities, not because cities are so awful and dirty, but because industrialization (contrasted with crippling and laborious work on a rice paddy) offers a chance for more pay, more reliable income, and the chance to enjoy a surplus for the first time in their lives.Francis looks around the world and still sees many people in grinding poverty and subject to the tenuousness of life that has marked life for all of humanity for most of its existence. No serious person denies these things exist. What Francis proposes now, however, is a plan to hobble the institutions that provide the remedy.And, ultimately, Francis’s pessimism leads him to his turn toward politics and government. If you believe we are in the midst of an unprecedented crisis, then it makes more sense to hit the panic button and turn the world over to “experts” who will turn things around. Thus, we find in Francis’s work a call for governments, through coercion, to rid the world of pollution, to make the poor rich, and the weak strong.Religion vs. PoliticsBut what a contrast this presents to Francis’s predecessor John Paul II (who was known for his optimism). Francis turns to human institutions, and new human programs, new human experts, and new human initiatives to solve the world’s problems. John Paul II, however, took a much different position, writing in a 2000 document:"What must we do?"We put the question with trusting optimism, but without underestimating the problems we face. We are certainly not seduced by the naïve expectation that, faced with the great challenges of our time, we shall find some magic formula. No, we shall not be saved by a formula but by a Person ... [i.e., Jesus].It is not therefore a matter of inventing a "new programme." The programme already exists: it is the plan found in the Gospel and in the living Tradition, it is the same as ever.Note the prevalence of religious language; one need not be a Christian to see the contrast here. John Paul II, as a religious leader, encourages his audience (in a recurring theme in his writings) to turn to personal virtue as the solution to the ills of the world. Francis, on the other hand, looks to political institutions in both of his major writings.Francis is following a specific secular narrative in which so-called “neoliberalism” has robbed the world of its supposed natural abundance and mildness. In his misguided pessimistic nostalgia, he then turns to undoing the material gains of recent centuries through government action. It’s an unfortunate position, and one that does not suit a religious leader well.

Wealth Must Be Created Before We Can Give It To the Poor

17 juni, 2015 - 06:00
Business is often portrayed as being crude and cruel. According to the popular narrative — the Charles Dickens view of the world — businesses are filled with cold-hearted scrooges who value profits more than people. This is then contrasted with the kindness and altruism of charities, non-profits, and governments, which are all supposedly created to help people. Charity, in particular, is seen as ethically superior to business. After all, what could make a greater impact on the world than giving to the needy?This view of the world is shortsighted. While it’s true that charity helps people, business makes a far greater contribution to humanity. Virtually all of the increases in society’s standard of living are because of simple commerce, and it’s the poor, in particular, who benefit the most. To understand why, we need to examine the different formulas that charities and businesses operate under.Charities deal with distributing wealth — coordinating the transfer of some people’s “surplus” to other people’s “shortage.” Businesses, on the other hand, deal with creating wealth by selling goods and services people value.Wealth Creation Comes FirstWithout this initial creation of wealth, charities would have nothing to distribute. In the developed world, it’s easy to forget that poverty is the default state of human existence. Wealth is not found in nature; it must be created, and this is precisely the role of businesses and entrepreneurs. They are the force which takes us out of the state of nature. All cases of poverty have the same solution — not wealth distribution, but wealth creation. This is not merely a theoretical argument. It’s witnessed everywhere around the globe.The deeper we examine, the clearer it becomes. Consider the humble washing machine. We take it for granted in the developed world, but the washing machine has changed the lives of hundreds of millions of people. It’s no exaggeration to say its inventor has changed the course of history. How so? By dramatically reducing the amount of manual labor required to do laundry. Millions of people around the globe — women, in particular — are freed from spending countless hours washing clothing every week; their time can be spent elsewhere.Let’s take a conservative estimate and say the washing machine saves five hours of labor per week. If a hundred million people own a machine, that’s five hundred million hours of work saved per week — a number so large it’s hard to wrap your mind around. That’s five hundred million hours which can be spent doing other things — getting educated, spending more time with family, earning larger incomes, volunteering at the local food bank, etc.The impact of wealth creation and entrepreneurship is enormous, even though the engineer who designed the washing machine might have been selfish. His only motivation might have been to make money. Or, perhaps he kindly thought to himself, “I wish women didn’t have to spend so much time laboring over laundry.” Either way, the result was the same. The world has changed because of his invention. The businesses which sell washing machines, the engineers who design better ones, the steel workers who find cheaper ways to create the necessary raw materials — they all contribute to an exponential rise in people’s standard of living.The Ripple Effects of EntrepreneurshipThe benefits of entrepreneurship are not only immediate; they create a butterfly effect. Consider the plight of children who are born into families with washing machines. They, too, benefit from their mother’s free time. They might now be able to get an education and become engineers and producers themselves. Who knows? Perhaps the invention of the washing machine was an essential step to curing cancer. After all, the children who will grow up to become doctors must have a high enough standard of living in order to attend school.But the ripple effects don’t stop there. Consider the individuals who are saved by the doctor who cures cancer! They, and their families, will also benefit from the washing machine’s existence, and will be able to produce even more for the rest of society. In other words, wealth creation is exponential, and it literally changes the course of history. A greedy businessman might only care about himself, but his inventions and efficiencies end up benefitting society in an extraordinary way.Contrast this with charity. Giving a washing machine to somebody will change his or her life, there’s no question. And it certainly creates a ripple effect of its own. But creating a washing machine — or selling, designing, or improving one — changes the world. Even supplying the raw materials to the factory changes the world. The workers in the ore mill, or the waitress supplying their afternoon lunches, are directly involved in the process which brings people out of poverty.This does not diminish the role of charities; they serve a valuable function too. If you are like me — if you aren’t an entrepreneur or engineer — then charity is an essential way to help your fellow man. Not everybody has the skills necessary to create a new invention or become a successful businessman. But that doesn’t preclude them from making a positive difference in the world. However, we should be realistic: a donation of furniture to Goodwill does not create the same ripple effect as selling affordable food or power tools to everyone.Many economic truths work this way. We’re quick to praise what’s easily seen — giving a hamburger to someone truly in need — but we overlook or even condemn what happens behind the scenes and all of the labor and cooperation necessary to make and distribute cheap hamburgers. The farmer, the butcher, the truck driver, the cook, the engineer, and the businessman should also be praised for their work. Without them, there would be no surplus food for the charity worker to give away.

The Washington Intellectual Gravy Train

15 juni, 2015 - 06:00
[This article is an excerpt from the May/June 2015 issue of The Austrian.]Intellectuals have long been glorified as champions of truth and defenders of society’s highest values. But in Washington, they serve as Leviathan‘s Praetorian Guard. Intellectuals are thriving in DC thanks in large part to the ruinous policy advice they proffer.The District of Columbia has 120 times more political scientists per capita than the rest of the nation. But rather than producing “good governance,” the 3,200 political scientists and legions of other would-be Brain Trusters provide endless excuses to further extend the federal sway. Intellectuals usually come to Washington to help politicians leash other Americans, not to leash the government. And since they presume their preferred policies are better than freedom, intellectuals propel government programs to force their inferiors to “take their medicine.”Washington think tanks have proliferated at the same time federal policies have become far more intrusive and harebrained. There are now roughly 400 think tanks in the Washington area, some of which are little more than “cash machines for power” for politicians. Clifford May, the president of the Foundation for Defense of Democracies, commented in 2005: “It is the job of think tanks to create political capital. It is the job of politicians to spend it.” May’s think tank extols politicians who advocate bombing Muslim nations. Journalist Ken Silverstein, in an excellent report last year on think tank corruption, noted, “The Lexington Institute, a Virginia-based think tank, has never met a weapons program it didn’t like. That is not surprising since a good chunk of its funding — about $2.5 million in 2010 — comes from defense giants like Boeing, Lockheed and Northrop Grumman.”Some think tanks are fronts for political operatives. Jack Abramoff, the most powerful lobbyist in Washington, placed an aging beach lifeguard at the head of American International Center, a think tank he created to funnel money to himself and his favorite causes. The scam was fruitful until Abramoff’s other machinations won him admission to federal prison. Newt Gingrich’s boutique think tank, the Center for Health Transformation, pocketed $37 million from health care corporations and industry groups before going bankrupt in 2012 after Gingrich’s presidential campaign floundered. Gingrich used his op-eds and speeches to tout positions favored by his think tank donors and omitted mentioning who was bankrolling his operation.Think tanks are increasingly lackeys for foreign governments. The New York Times last June exposed how the government of Norway paid the Center for Global Development $5 million to hustle Washington officials to boost foreign aid spending. The Brookings Institution received a windfall from the government of Qatar to set up a research institute that, according to the Qatar government, would devote itself to “reflecting the bright image of Qatar in the international media, especially the American ones.” After an especially tawdry fixed election in 2011, the Kazakhstan government image was burnished by two think tanks on its payroll — the Center for Security and International Studies and the Institute for New Democracies. The Atlantic Council, another prominent DC think tank, pockets cash from Saudi Arabia, Bahrain, the United Arab Emirates, and NATO.Some think tanks offer little more than an intellectual version of “rent-a-mobs” of political protestors. In the same way that medieval kings grabbed any shabby pretext to invade neighboring countries, today’s politicians perennially seek pretexts to further invade citizens’ lives. And there is never a shortage of intellectuals who, like the courtiers of medieval courts, assure their masters that God — or at least social science — blesses their aggression.Washington think tanks provide a sheen of intellectual legitimacy to Leviathan. The profusion of think tanks and policy wonks also spawn the illusion that ideas drive policy in Washington. But in most cases, the ideas are simply pretenses to sanctify the pursuit of power.The role of intellectual grafters in contemporary Washington is epitomized by Jonathan Gruber, an MIT economist who received a $297,000 federal contract for aiding the push for the Affordable Care Act and earned the nickname, “the Oracle of ObamaCare.” He boasted in 2009 of his “black box” software program he used to gin up the numbers to promote the Obama legislative agenda. Invoking a secret computer model is the contemporary version of the tricks Merlin the magician practiced in King Arthur’s court. Gruber told a conference of economists in 2013 that the administration had to bamboozle the public about ObamaCare due to “the stupidity of the American voter.” His comments sparked a conservative firestorm but the liberal New Republic exonerated him as an “independent-minded professor” devoted to the public good.The more power politicians capture, the more profitable lying about government becomes. Nobel Laureate Friedrich Hayek, in his famous 1944 essay in The Road to Serfdom, “Why the Worst Get on Top,” showed why, once government acquires vast power, “the readiness to do bad things becomes a path to promotion.” In the same way, Washington is biased in favor of intellectuals who defend torture, total government surveillance, and the president’s assassination prerogative. The advocates and apologists for George W. Bush’s invasion of Iraq continue to be esteemed inside the Beltway as foreign policy visionaries.The bigger government becomes, the more the “intellectual playing field” is tilted in favor of servility. Kowtowing is also spurred by Medals of Freedom, National Humanities Awards, and other honorifics bestowed by the White House and federal agencies. Regardless of how badly previous government policies failed, the expert consensus is almost always in favor of new programs and new interventions. Washington intellectuals fret far more about public distrust of government than about federal oppression of American citizens.The closer that intellectuals get to politicians, the more weaselly they usually become.The Washington definition of “independent thinker” is merely someone without a visible receipt for his opinions. Americans should be as wary of “gravy train intellectuals” as they are of congressmen and other serial perjurers.

Gold and Economic Inequality

15 juni, 2015 - 06:00
Inequality is a top news items for 2015 driven largely by the Baltimore riots, the minimum wage debate, Thomas Piketty’s book Capital in the Twenty-First Century, and now the entry of socialist Bernie Sanders into the race for US president.The Left wants more welfare, better schools, free college, enhanced job training, and more. The Right, in contrast, wants welfare reform, charter schools, tax reform — not to be confused with tax cuts — and use of the negative income tax.Both sides get it wrong. Neither side understands economic inequality, nor what causes it to change. Recently I argued that the problem of urban blight is caused by too much government and the solution is to radically reduce government in key areas in order to create jobs and entrepreneurial opportunities. The same thing applies to economic inequality: tinkering with government policies in one direction or the other does not solve the problem.Some Inequalities Are To Be ExpectedThe first thing to note is that inequality is a natural feature of all societies, whether it is libertarian, socialist, or primitive. A well developed libertarian society tends to have a large middle class, a small lower class, and a revolving upper class. The low-income class is small because there are no legal barriers to opening new businesses, there are incentives to earn and save and be entrepreneurial. The upper class is “revolving” because there are no monopoly privileges or bailouts to maintain wealth.The second thing to note is that public policy impacts or alters the natural inequality of society. Say, for example, that a government requires all doctors and lawyers to have a license to practice and then limits the number of licenses. Bingo! Doctors and lawyers are now almost immediately richer because they have used the law to limit their competition which means higher fees and salaries for those protected professions.The Seen and Unseen: Government-Caused InequalityNaturally, the size and shape of government policies have an impact on economic inequality. The job of the economist is to make sure everyone understands that government policies have obvious effects that can be seen, but also have effects that are not seen. In most cases, the effects that are seen are some direct immediate benefit to a particular group of people. Likewise, the unseen effects have circuitous, indirect negative consequences on a large group of people that grow larger over time. Frédéric Bastiat said that “the ultimate consequences are fatal.”If the state provides generous welfare payments to poor people, this becomes an obvious direct benefit to the poor people who receive the money. However, in order to make those payments it is necessary to tax productive citizens, thus reducing their incentive to be productive. If being poor is the stipulation for receiving welfare payments, then people will have less incentive to be productive and escape from poverty. In the long run you end up with more poor people, a permanent poverty class, and a smaller economic pie to support the population.The impact of taxes and welfare on income distribution are fairly well known. However, these well-known effects are generally disregarded or dismissed by those who want to “do something about economic inequality.”The Monetary System MattersMoney is one important factor that is also ignored by both those on the political left and the political right. However, the monetary system and monetary policy have obvious and historically validated effects on economic inequality.A monetary system dominated by a central bank, such as the Federal Reserve, that uses fiat money can expect to benefit certain people, such as bankers and people with debt. Likewise, because such a system is inflationary, it tends to hurt workers and savers. Such a system can be expected to hurt the lower and middle classes and enrich those in the financial industry and the upper class.Hard Money and the Benefits of DeflationA gold standard has historically had a tendency to be slightly deflationary. This means that wage rates, cash balances, savings, and bonds tend to gain purchasing power over time. So this type of monetary system rewards the hard working and frugal classes which leads to an expansion of the middle class.This graph from the Pew Research Center provides enticing evidence of the differential impact of gold versus fiat paper money:The graph shows that economic inequality declined in the US from 1917 to the early 1970s when Nixon took America off of the gold standard. The shaded areas of the graph represent the 99 percent, while the lightest colored area at the top represent the upper 1 percent. Economic inequality increased during the inflationary 1920s, but the lower income classes rapidly improved versus the 1 percent when the gold standard was restored after WWII. The graph shows both marginal improvement and stability in economic inequality from the late 1940s to the early 1970s. The trend has been for greater economic inequality ever since.Austrian economists do not advocate any particular income distribution except the one determined by the market economy. Part of the answer to the problem of economic inequality is to return to an honest and sound monetary system including — but not limited to — the gold standard.