Ludwig von Mises Institute
[This interview is from the December issue of The Free Market.]Mises Institute: You recently retired after a long time at Metropolitan State University of Denver, where you were both an economics professor and the dean of the Business School. How did you end up there, and end up as dean?John Cochran: I had a good guardian angel who helped me come to Metro State. I’m not sure about that on becoming dean, though. I received my undergraduate degree in economics from Metro State. Gerald Stone, then chair of the econ department, and Ralph Byrns were two of my professors there. As I worked on my graduate degrees at University of Colorado-Boulder, I would occasionally stop by Metro just to touch base. In spring 1981, I was just completing teaching my first principles course at UC-Boulder and had just completed the requirements for an MA in economics. The first edition of the Byrns and Stone principles book would be available for fall 2001. Metro had an open visiting position and had offered the job to a recent CU PhD. He had told them he would take their job, but wouldn’t use their book. Ralph and Jerry were talking it over and Ralph said to Jerry, “We can’t hire him.” Jerry said, “We can’t not hire him just because he said he won’t use our book.” Ralph replied, “But he is telling us he will be a ‘lunch tax’.” Jerry said, “Yes, but who else can we get?” [A “lunch tax” is a high-maintenance employee. — Ed.]About that time I walked into the office to say hello. Ralph asked me three questions. Do you have a masters? Have you any teaching experience? When I said yes to both, Ralph, then asked, “Would you like a full-time teaching position this fall?” I have been at Metro ever since.I taught from 1981 to 1986 in a visiting position as I completed my research on Hayek-Keynes and my dissertation which eventually developed into a book I co-authored with Fred Glahe, The Hayek-Keynes Debate: Lessons for Current Business Cycle Research (Edwin Mellen Press, 1999). From 1986 to 2004 I taught in the economics department. I was tenured and promoted to associate professor in 1990 and promoted to professor in 1996. I served as chair of the department from 1990–1994 and then again from 1996 to 2004. I might say I was an accidental dean. Late in the fall of 2003, during the aftermath of the first boom-bust of the Great Moderation, Metro fired the dean of business. I was encouraged by many faculty members and staff to apply for the interim position. I was hesitant, but then realized I (and many others I respected) really did not want to work for any of the folks who either wanted or were being considered for the position. I applied and was appointed to the position perhaps a week before the start of the spring 2004 semester. What I thought would be a 6 month-to-a-year position lasted two-and-a-half years. I was hired as permanent dean in July 2006.MI: There are now at least two Austrians at MSUD, Nicolás Cachanosky and Alexandre Padilla. Did you have a role in their coming to teach at MSUD?JC: I had a direct role in hiring Alex Padilla. Metro State had a visiting position open for fall 2002. Hoping to attract an Austrian, I posted the job announcement on the Mises Institute scholars email list. Alex, a former Mises Fellow who was just finishing a stint at George Mason and had just published “Can Agency Theory Justify the Regulation of Insider Trading?” in The Quarterly Journal of Austrian Economics, applied, interviewed well, and was hired. He thrived in the position and I was able a couple of years later to use a recruitment tool to convert him to tenure track which began spring 2006. Padilla had more to do with bringing in Nicolás Cachanosky, who actually was hired into the position I vacated when I completed my transitional retirement in 2012. Alex chaired the search committee. There was at least one member of the committee adamantly against an Austrian influenced economist, no matter how good his scholarship and teaching accomplishments. Although just completing his PhD at Suffolk University under Ben Powell, Cachanosky’s qualifications to date were clearly vastly superior to any others in the pool, which did include some George Mason graduates and ABDs. At Alex’s request and as an emeritus prof, I reviewed the files of the top ten or so candidates. I then lobbied longtime colleagues on the committee, the department chair, and wrote a strong letter of support to the current dean of business. I look forward to excellent contributions to MSUD and the Denver community from both for many years ahead.MI: Generally speaking, do other economists see a benefit from having a diversity of schools of thought within a department, or is there resistance to having Austrians on staff?JC: Many economists do see an advantage in diversity. One of my dissertation advisors, Tracy Mott, now at the University of Denver, was an excellent role model as a gentleman and scholar. While his work focused on extending the ideas of Michal Kalecki and John Maynard Keynes on the relation of financial considerations to economic activity, he was open to disagreement and instrumental in my early research. While at DU, if he had students interested in Austrian economics he would occasionally have me or Padilla in to make a presentation.In general, most good economists are looking for colleagues who are good scholars, good teachers, and not a lunch tax. Most of the Austrians I know and respect easily fit this bill. Obviously — from the comments above on the hiring of Professor Cachanosky — there can still be resistance. There can also be resistance from outside the economics department. I was denied promotion to professor the first time I applied when the college wide review committee did not like my two papers with Fred Glahe on separating school and state (“Praxeology and the Development of Human Capital: The Separation of School and State,” in Cultural Dynamics and “Privatization True and False: Private Enterprise and Education,” in the Journal of Private Enterprise). The next year I promoted the papers as anti-voucher instead and flew through with flying colors.MI: In a recent interview, Guido Hülsmann said that he’s seen great progress in the ability of Austrian economists to get faculty positions at good (if not highly-elite) institutions. What are your observations here?JC: Mine are more indirect, but I would tend to agree. Ben Powell has moved from San Jose State University, to Suffolk, and now to Texas Tech. More and more GMU grads are moving into positions with at least masters programs and some with respected PhD programs. During my term as dean at Metro State we had at least two (if not more) Austrian or fellow-traveler candidates whom we would have liked to hire, but we were not able to compete with other institutions with either salary, teaching load, or scholarly support. The Colorado mountains only buy so much.MI: In the past, the availability of materials by Austrian economists — such as Rothbard’s History of Economic Thought — was a real issue. What effect has the spread of affordable Austrian publications in the last twenty years had on the instructor’s ability to engage students?JC: I just received a short note from Lew Rockwell thanking me for being such a faithful donor since 1988. I became such a faithful donor because the great work the Institute was doing to make material available in print and online was benefiting me not only professionally in my scholarship, but was making it incredibly easier for me to engage students. Benefits for many extended beyond the classroom. Class handouts or a web link often stimulated curiosity and led at least some to become self-learners about Austrian economics and the philosophy of liberty.Walter Block once sent me an email asking if I was a classical liberal or an anarcho-capitalist. I replied that it depended on how long it had been since I had read or re-read Rothbard (I would now add Robert Higgs’s Delusions of Power). If recently, I was an anarcho-capitalist. But in my teaching, I was probably more of a classical liberal (although my intro lecture which highlighted the distinction between the political and economic means often would have at least one leftist/progressive in tears). I found it more effective with less tuning out. By using materials available at mises.org, students who were intrigued would, on their own, discover the anarcho-capitalist perspective. Image source: Mises Institute archives.
The Swiss central bank’s recent move to de-peg the Swiss franc from the euro reminds us of the importance of choice in currency. By pegging the Swiss franc to the euro, the Swiss central bank was in effect subsidizing the euro by refusing to compete with it. If carried into the long term, this would have meant a de facto monetary union between the euro and the franc. Fortunately for most people however, the Swiss central bank maintained its legal independence from the euro and the peg was eventually ended, thus freeing the holders of Swiss francs from the new round of money-supply inflation that is expected from the European Central Bank.Those who have their savings in euros are not so lucky. Those in the Eurozone who work hard to save and invest will have the value of their euros reduced to further subsidize and bail out politically-connected investors who have financed southern European governments. All the while, the government of the European Union will enrich itself and its friends through the money-creation mechanism. Such are the expected results of the expansion of government’s money monopoly in the Eurozone.The Government’s Money MonopolyThe European monetary experiment illustrates anew for us how a monetary monopoly is an indispensable component of an effort to achieve political unity and more powerful government. As Philipp Bagus has noted, the currency known as the euro is just as much a political instrument as it is an economic one. It greatly enhances the monopoly power enjoyed by the nascent state known as the European Union without having to first achieve true de jure political union. The central bankers of a unified Europe are far more powerful than the central bankers of any one European state could ever hope to be.Although much further down the road in this respect, the United States is subject to a monetary union similar in many ways to that of the European Union. In the eighteenth century, state currencies were abolished with the victory of the new American Constitution in 1788, and the First Bank of the United States was created shortly thereafter. At that point, the central government’s control of the money supply was far from complete, however. A true functioning monopoly over the money supply did not arrive until the twentieth century with the Federal Reserve System, which through its regulatory power was able to impose a de facto money monopoly on the United States.Today, it is nearly impossible to conduct business in the United States without using US dollars, and the federal government, which tightly regulates the financial system, greatly discourages to the point of utter impracticality the use of privately-produced or foreign currency for daily business in the US.Why Currency Competition Is ImportantFrom a central planner’s perspective, the ideal monetary situation is a single global currency controlled by a single central bank. With only one currency, a government could inflate at will without threat from any competing currency save a black market trade in commodity monies, which would of course be outlawed. In other words, the less competition a central bank has from other currencies, the better.Toward the other end of this spectrum is a global economy with at least dozens of competing currencies. Some currencies would be more stable and respectable than others, but all would be at least somewhat restrained by the knowledge that every currency, if devalued too much, will at some point be abandoned in favor of a more reliable and stable currency.Thus, if one wishes to restrict the power of states, and to enhance personal and economic freedom, one of the most meaningful first steps must be to oppose state control over the money supply, and failing that, to weaken the state’s monopoly through competition and secession.Baby Steps Toward Currency FreedomInterestingly, in spite of a century of a totally centralized money supply, and a constitutional prohibition on state-issued currency, some American states still imagine themselves as having a role in the monetary system. In the wake of the 2008 financial crisis, for example, lawmakers from thirteen states suggested their home states take advantage of a loophole in the Constitution (of sorts) and make gold and silver coins legal tender in their states as a hedge against economic disaster. Utah went slightly further:Utah became the first state to introduce its own alternative currency when Governor Gary Herbert signed a bill into law [in 2011] that recognized gold and silver coins issued by the U.S. Mint as an acceptable form of payment. Under the law, the coins — which include American Gold and Silver Eagles — are treated the same as U.S. dollars for tax purposes, eliminating capital gains taxes.Since the face value of some U.S.-minted gold and silver coins — like the one-ounce, $50 American Gold Eagle coin — is so much less than the metal value ... the new law allows the coins to be exchanged at their market value, based on weight and fineness.While a step in the right direction, this sort of thing is obviously a long way from offering anything actually resembling significant currency competition for the US dollar.Utah and “the Ute”Nevertheless, for the sake of argument, let’s say that Utah (which certainly has its own idiosyncratic secessionist history) were to go even farther than this and issue its own currency (called “the ute”) which it declared to be legal tender in Utah alongside the US dollar. Using the old Swiss franc as a model, in this scenario, the Utah Central Bank is also legally obligated by the Utah legislature to ensure that the ute enjoys 20 percent gold backing.Would everyone immediately flock to using the ute? Probably not. The US dollar would still have the advantage with huge network effects on its side. There’s no reason to believe people nationwide would start hoarding utes any more than Europeans today hoard Swiss francs. Nevertheless, the impact on monetary freedom for many Americans over time could be significant. Americans looking for a safe haven could buy utes, and traveling to Utah to set up accounts denominated in utes would not be practical for most people. Other states would be free to adopt utes also as legal tender or to simply allow people to conduct business in utes.Through all of this, everyone would still be free to use the US dollar. Those concerned about the ute being “sketchy” or at the mercy of sinister Utah inflationists could simply choose to not use utes.But even this little bit of competition for the dollar would diminish the monopoly power the Fed now enjoys. While a minor consideration in terms of the immense global economy, the existence of the ute would partially restrain those looking to inflate the dollar freely. Those who understood the impact of Fed’s easy money policies on their dollar holdings could abandon the dollar for the ute. Now regarded as “the Switzerland of North America” the ute becomes a model for some other states as well, and as they adopt their own currencies, or each other’s currencies, the Fed’s monetary monopoly would be impacted even more.An Extremely Modest ProposalEven a little bit of monetary choice is better than virtually no choice at all, but obviously, such a proposal is extremely moderate and hardly resembles what we’d call “free-market banking.” The “ute” scenario assumes the presence of central banks (albeit competing ones) and currencies that are at best partially backed by commodity money. On the other hand, the fact that this scenario will seem so radical and politically implausible to many illustrates just how far we’ve come from sound money and freedom in money. Image source: iStockphoto.
Originally, paper money was not regarded as money but merely as a representation of a commodity (namely, gold). Various paper certificates represented claims on gold stored with the banks. Holders of paper certificates could convert them into gold whenever they deemed necessary. Because people found it more convenient to use paper certificates to exchange for goods and services, these certificates came to be regarded as money.Paper certificates that are accepted as the medium of exchange open the scope for fraudulent practices. Banks could now be tempted to boost their profits by lending certificates that were not covered by gold. In a free-market economy, a bank that overissues paper certificates will quickly find out that the exchange value of its certificates in terms of goods and services will fall. To protect their purchasing power, holders of the overi-ssued certificates naturally attempt to convert them back to gold. If all of them were to demand gold back at the same time, this would bankrupt the bank. In a free market then, the threat of bankruptcy would restrain banks from issuing paper certificates unbacked by gold. Mises wrote on this in Human Action,People often refer to the dictum of an anonymous American quoted by Tooke: "Free trade in banking is free trade in swindling." However, freedom in the issuance of banknotes would have narrowed down the use of banknotes considerably if it had not entirely suppressed it. It was this idea which Cernuschi advanced in the hearings of the French Banking Inquiry on October 24, 1865: "I believe that what is called freedom of banking would result in a total suppression of banknotes in France. I want to give everybody the right to issue banknotes so that nobody should take any banknotes any longer."This means that in a free-market economy, paper money cannot assume a "life of its own" and become independent of commodity money.The government can, however, bypass the free-market discipline. It can issue a decree that makes it legal (or effectively legal) for the over-issued bank not to redeem paper certificates into gold. Once banks are not obliged to redeem paper certificates into gold, opportunities for large profits are created that set incentives to pursue an unrestrained expansion of the supply of paper certificates. The uncurbed expansion of paper certificates raises the likelihood of setting off a galloping rise in the prices of goods and services that can lead to the breakdown of the market economy.Central Banks Protect Private Banks from the MarketTo prevent such a breakdown, the supply of the paper money must be managed. The main purpose of managing the supply is to prevent various competing banks from overissuing paper certificates and from bankrupting each other. This can be achieved by establishing a monopoly bank, i.e., a central bank-that manages the expansion of paper money.To assert its authority, the central bank introduces its paper certificates, which replace the certificates of various banks. (The central bank's money purchasing power is established on account of the fact that various paper certificates, which carry purchasing power, are exchanged for the central bank money at a fixed rate. In short, the central bank paper certificates are fully backed by banks’ certificates, which have a historical link to gold.)The central bank paper money, which is declared as the legal tender, also serves as a reserve asset for banks. This enables the central bank to set a limit on the credit expansion by the banking system. Note that through ongoing monetary management, i.e., monetary pumping, the central bank makes sure that all the banks can engage jointly in the expansion of credit out of “thin air” via the practice of fractional reserve banking. The joint expansion in turn guarantees that checks presented for redemption by banks to each other are netted out, because the redemption of each will cancel the other redemption out. In short, by means of monetary injections, the central bank makes sure that the banking system is "liquid enough" so that banks will not bankrupt each other.Central Banks Take Over Where Inflationist Private Banks Left OffIt would appear that the central bank can manage and stabilize the monetary system. The truth, however, is the exact opposite. To manage the system, the central bank must constantly create money "out of thin air" to prevent banks from bankrupting each other. This leads to persistent declines in money's purchasing power, which destabilizes the entire monetary system.Observe that while, in the free market, people will not accept a commodity as money if its purchasing power is subject to a persistent decline. In the present environment, however, central authorities make it impractical to use any currency other than dollars even if suffering from a steady decline in its purchasing power.In this environment, the central bank can keep the present paper standard going as long as the pool of real wealth is still expanding. Once the pool begins to stagnate — or, worse, shrinks — then no monetary pumping will be able to prevent the plunge of the system. A better solution is of course to have a true free market and allow commodity money to assert its monetary role.The Boom-Bust ConnectionAs opposed to the present monetary system in the framework of a commodity-money standard, money cannot disappear and set in motion the menace of the boom-bust cycles. In fractional reserve banking, when money is repaid and the bank doesn’t renew the loan, money evaporates (leading to a bust). Because the loan has originated out of nothing, it obviously couldn’t have had an owner. In a free market, in contrast, when true commodity money is repaid, it is passed back to the original lender; the money stock stays intact. Image source: iStockphoto.
In 2014, the US homeownership rate fell below 65 percent, which means it’s back to where it was during the 1970s and much of the 1990s. Various federal agencies have long made homeownership a priority, and have introduced a bevy of government and quasi-government programs including the GSEs like Fannie Mae, FHA-insured loans, VA-insured loans, the Bush administration’s “American Dream Downpayment Initiative” and, of course central bank meddling to keep interest rates nice and low for the mortgage markets.And for all their efforts, all the inflation, and all the taxpayer-funded subsidies poured into bailouts, we have a homeownership rate at where it was forty years ago. During the housing boom, though, homeownership rates climbed to unprecedented levels, cracking 70 percent or more in many parts of the country. When the boom in homeownership came to an end, it was not a painless matter of people selling their homes. It was a very costly readjustment process, and it was something that would have been completely unnecessary and would never have happened to the degree it did without the interference of Congress, the central bank, and the easy-money induced boom they engineered.The American Dream = HomeownershipHomeownership rates have never been an indicator of economic prosperity. Switzerland, for example, has a homeownership rate half of the US rate. Nevertheless, raising the homeownership rate has long been a pet project of politicians in Washington.The political obsession with raising homeownership rates dates back to the New Deal when Roosevelt began introducing a variety of homeownership programs designed to drive down the percentage of households that were renting their homes. Based on romantic ideas of frontier homesteading, it was assumed that owning a house was the only truly American way of living. It was during this time that the thirty-year mortgage — an artifact of government intervention — became a fixture of the mortgage landscape. And homeownership rates did indeed increase. And with it, debt loads increased as well.By the 1990s, central-bank engineered low interest rates propelled mortgage debt loads to awe inspiring new levels, and houses kept getting bigger as families got smaller. Government-sponsored entities like Fannie Mae and Freddie Mac kept the liquidity flowing and home equity lines of credit turned houses into sources of income.From 2002 to 2007, those of us who worked in or around the mortgage industry were amazed at just how easy it was to get a loan even with a very sketchy credit history and unreliable income. Only token down payments were necessary. Many of these less-than-impressive borrowers bought multiple houses. Behind all of it was the Federal government and the Fed forever repeating the mantra of more homeownership, lower interest rates, more mortgages, and rising home prices. The rising homeownership levels were for the populists. The rising home prices were for the bankers and the existing homeowners.A Housing-Related Employment BubbleThe housing bubble became the gift that seemingly never stopped giving because with all this home buying came millions of new jobs in real estate, construction, and home mortgages. Seemingly everyone looked to real estate as a source of easy money. The bag boy at your local grocery store was selling condos on the side, and everyone seemed to be selling new home loans. Home builders couldn’t keep up with the orders and contractors had six-week waiting lists.We know how that all ended. The foreclosure rate doubled from 2002 to 2010. Implied government backing of Fannie Mae and Freddie Mac became explicit government backing, and numerous too-big-to-fail banks which had invested in home mortgages were bailed out to the tune of hundreds of billions of taxpayer dollars. Some lenders like Countrywide and Indymac essentially went out of business, and all lenders (including many who were not bailed out) faced costs ranging from 20,000 to 40,000 per foreclosure in lost revenue, legal fees, and other costs. Foreclosures begat foreclosures as foreclosure-dense neighborhoods were most prone to price drops, leading to negative equity, which in turn led to even more foreclosures. Ironically, the most responsible borrowers — the ones who made sizable down payments and reliably made payments, and thus had more skin in the game — were the ones who suffered the most and who had the most to lose by simply walking away from their homes.Real estate agents, loan industry professionals, construction workers, and others who relied on the home purchase industry lost their jobs and had to spend time and money on retraining in completely new industries. Or they were simply among the millions who collected unemployment checks and food stamps supplied by those who still had jobs.Was the Bubble Worth It?And for what? The opportunity cost of it all was immense and during the bubble years, total workers in housing-related employment ballooned to 7.4 million, many of whom were fooled by the bubble into thinking the home-sales industry was a good long-term career. To get these jobs they spent many hours and thousands of dollars on certification, training, and job experience. After the bubble popped, three million of those jobs disappeared. From 2001 to 2006, employment in the mortgage industry increased by 119 percent, only to have most of those jobs disappear from 2006 to 2009.Now, there will always be people who make bad career decisions, and there will always be frictional unemployment, but without the housing bubble and the myriad of federal programs and central bank pumping behind it, would millions of workers have flooded into these industries knowing that most of them would be unemployable in that same industry only a few years later? That seems unlikely.Moreover, might we be better off today if those same people, many of whom were very talented, had invested their time and money into other fields and other endeavors? What businesses were never opened and what products were never made because so many flocked to the housing sector? We’ll never know.Thanks to the government’s relentless drive for more homeownership and ever-increasing home prices, millions of workers concluded that real-estate jobs were the best bet in the modern economy. They thought this because investors chasing yield in a low-interest-rate environment were pouring their money into owner-occupant housing in response to government guarantees on single-family loans and easy money for mortgage lending.The people were promised more homeownership, but after just a few years, it has become clear they didn’t get it. At the same time, Wall Street was promised high home prices, and when the prices faltered, it was offered bailouts instead. Wall Street got its bailouts.The cost of the housing bubble is often calculated in dollar amounts that can easily be counted on Wall Street, but for those who aren’t politically well-connected — for ordinary workers, homeowners, construction firms, and many others — the cost in time and lost opportunities will forever remain among the many unseen costs of government intervention. Image source: iStockphoto.
As highlighted by David Henderson and Peter Boettke, markets and competition are like weeds, not delicate flowers. Economies recover even from severe boom-bust episodes and despite growth-retarding regime uncertainty. Even burdensome regulation, per Pierre Lemieux, causes a “slow-motion collapse” or stagnation, not a crash. But one thing can be counted on, as innovation or recovery begin to deliver additional spending power to the productive class of the economy, the “unmet needs” crowd will just as quickly be out clamoring for a heightened government share of the ‘bounty’ for some imagined greater public good.A recent example; an editorial, “Capitalize on low fuel prices by raising Colorado gas tax,” in the Denver Post emphasized that the currently low and expected-to-remain-low gasoline prices presents an excellent opportunity to painlessly raise the gasoline tax, if not at the Federal level — due to resistance of some to raise taxes — then at the state level. Like many who support big government, an extra dollar in a potential taxpayer’s pocket is much better spent by the enlightened elite.The Post’s argument, reminded me of my second favorite passage from classic libertarian literature, Lysander Spooner’s comparison of the taxman to the highwayman. I say second because if I said favorite someone would remind me of Franz Oppenheimer’s and Murray Rothbard’s distinction between the political means (plunder, predation) and the economic means (voluntary production and exchange), or Bastiat’s numerous contributions such as The Law, “The Candlemakers’ Petition,” or “What is seen and what is unseen.”The Post’s proposal would, as Spooner argues, have the government ride beside you as you drive while extolling how much you benefit from this ‘partnership’ all the while the government continues to pick your pocket. You will hardly notice, we’re told. It’s only pennies on the dollar! Who could possibly object besides Walter Block?Lysander Spooner! Spooner very effectively refuted the contention that government and its taxes are akin to voluntary club membership for mutually beneficial gains as he compares the government to a highwayman.The fact is that the government, like a highwayman, says to a man: Your money, or your life. And many, if not most, taxes are paid under the compulsion of that threat.The government does not, indeed, waylay a man in a lonely place, spring upon him from the road side, and, holding a pistol to his head, proceed to rifle his pockets. But the robbery is none the less a robbery on that account; and it is far more dastardly and shameful.The highwayman takes solely upon himself the responsibility, danger, and crime of his own act. He does not pretend that he has any rightful claim to your money, or that he intends to use it for your own benefit. He does not pretend to be anything but a robber. He has not acquired impudence enough to profess to be merely a “protector,” and that he takes men’s money against their will, merely to enable him to “protect” those infatuated travelers (sic), who feel perfectly able to protect themselves, or do not appreciate his peculiar system of protection. He is too sensible a man to make such professions as these.Furthermore, having taken your money, he leaves you, as you wish him to do. He does not persist in following you on the road, against your will; assuming to be your rightful “sovereign,” on account of the “protection” he affords you. He does not keep “protecting” you, by commanding you to bow down and serve him; by requiring you to do this, and forbidding you to do that; by robbing you of more money as often as he finds it for his interest or pleasure to do so; and by branding you as a rebel, a traitor, and an enemy to your country, and shooting you down without mercy, if you dispute his authority, or resist his demands. He is too much of a gentleman to be guilty of such impostures, and insults, and villanies [sic] as these. In short, he does not, in addition to robbing you, attempt to make you either his dupe or his slave.The proposal also illustrates the cost-benefit analysis of many proponents of government taxation and expenditure: any existing programs are more important than any new program. Never is there a need to re-prioritize. As new potential revenue sources become available or if the elite recognize unused tax potential, new government spending, always on an unmet need, is more beneficial than any spending by an actual earner on any private benefit.Economic ignorance abounds. Resources are scarce. There are always competing ends and unmet needs. But in an unhampered market, a free economy, an unmet need is an end sacrificed, temporally set aside, as resources were used for higher valued uses.Be on guard as these “impostures, and insults, and villanies” come to a country, state or local government near you. Image source: iStockphoto.
North Carolina recently offered Boeing $683 million in tax incentives to open a plant in North Carolina to build Boeing’s new 777X jetliner. The NC bid failed, as did those from some other states, when Boeing decided to build the 777X in its home state of Washington where there is no state, personal, or corporate income tax.More recently, North Carolina was prepared to offer Toyota up to $107 million worth of incentives to lure the automaker’s North American headquarters from Los Angeles to Charlotte, bringing 2,900 jobs with it. The Charlotte Observer reported that Charlotte lost out to Plano, Texas. The Texas offer was only $40 million but Texas has no corporate or personal income tax and has direct flights to Japan.Businesses do not locate in any one place solely because of the tax laws. However, as tax burdens climb, the tax treatment of the business itself, and of its higher-paid employees and executives, becomes a more important consideration. Thus the incentive packages, made up primarily of special tax abatements for a set period of time, are developed and used in recruiting new businesses.It is apparent that the politicians — politicians as diverse as Governor Pat McCrory of North Carolina and Governor Andrew Como of New York — who try to make use of these incentives, are totally missing the point they are illustrating. If you have to bribe a company to locate in your state or bribe one not to leave, your taxes and whatever else you are using to bribe them, are too high or otherwise onerous. If this were not so, companies and entrepreneurs would move to your state without being bribed and those already there would not be trying to leave. Low taxes and a favorable business climate, like that of Texas, bring in many companies from other places, like California, where the business climate and taxes are not favorable.Ally Bank ran a commercial several months ago illustrating this concept. The point of the commercial was that it is wrong to treat new customers better than old ones. More importantly, state “incentives” for new businesses, or those planning to leave, may amount to failure to provide equal protection under the (tax) law and may actually be bad for the state’s economy.In April, Governor McCrory proposed a public-private partnership that would take over the economic development functions of the North Carolina Commerce Department. It is not yet clear how the partnership’s marketing would work or whether it would still offer tax and other “incentives” to attract companies to relocate to North Carolina. The budget approved by the House and Senate has no credits, instead offering grants totaling $10 million. (The Department of Commerce is in the process of determining how the grants program will be structured.) As a point of comparison, under the current incentives program, the state gave out $61.2 million in credits in 2013.New York is mounting an effort to attract new businesses and entice entrepreneurs to start new businesses through its “Start Up New York” program. See their video ad here.The Upstate New York economy is not good. Many of the little manufacturing companies that lived along the old Erie Canal have gone and even some of the big ones, like Xerox, Kodak, IBM, Bausch & Lomb have left, are leaving, or are diversifying out of state. In his article “The Ghost of America Future” Bob Lonsberry points out that New York has the highest combined state and local taxes, property taxes, and gasoline taxes in the country. Upstate New York is also losing population and representation in Congress. Is this a place where you would move to or start your business? Even if you get a tax break now, what happens when the time is up? Worse yet, if other businesses and population are leaving, will there be any local market for you?North Carolina, on the other hand, has gained some of the people leaving New York. North Carolina’s traditional tobacco and furniture manufacturing businesses have shrunk. But North Carolina is home to Research Triangle Park (RTP) the biggest research park on the east coast and home to several information-technology, communications, and biotech companies. Moreover, the influx of people moving in from New York and other high-tax northern states has boosted the North Carolina service and real estate sectors. So North Carolina is a better place to move your business to or start up a new business. Then why does Governor McCrory have to offer incentives? Because, even though North Carolina is much better then New York, it is still too highly taxed and regulated when compared to many other states.In truth, the states should close their economic development offices, cut the size and expense of their governments, and reduce or eliminate the taxes levied on businesses. They should also cut the regulatory red tape required to start a business and then operate that business within their state. Personal income taxes should also be eliminated so that companies considering moving to take advantage of the good business climate will bring their headquarters and high earners along. If you really are a good place to do business and your current businesses are doing well, you will not have to bribe a company to move in. Just get out of the way. Look at Texas!If you are a small businessman or CEO of a big public company like Boeing, where do you want to move or expand? If a state that you are considering will offer you a “bribe” to move there, how will they treat you when you become one of the “old” companies there? If you are in the economic development office of a state, why do you think you should offer a new company something you would not offer to those already there? If you are a businessman in any state whose government will offer “incentives” to a new company, you should consider suing for equal protection under the law! Image source: iStockphoto.
[This article is excerpted from the December issue of The Free Market, and is adapted from the fifth chapter of 2014's The Fed at One Hundred, edited by David Howden and Joseph Salerno.]Throughout the existence of the Fed, its officers and intellectual supporters understandably asserted that the government’s movement toward central banking was a most beneficial evolution. In a 1948 issue of The Federal Reserve Bulletin, for example, Fed Chairman Thomas B. McCabe asserted that money production could not manage itself, so we need a central bank such as the Fed that acts for the public interest. Nearly three decades later, the venerable Arthur Burns claimed that the basic assets of the Fed are concern for the general welfare, moral integrity, respect for tested knowledge, and independence of thought.The alleged benefits from a Fed-managed elastic money stock became the standard justification for the Fed in later propaganda. Again in 1948, Fed Chairman McCabe asserted that a lack of a central bank caused a continual threat of financial panic, but the Fed put an end to this danger — a rather cheeky claim to make only a few years after the Great Depression. Subsequent Fed Chairman William McChesney Martin claimed that the Fed was designed to minimize panics and crises due to irregularities in flow of money supply and make the monetary system function more smoothly, but that a gold standard was too rigid.In 2013, Chairman Ben Bernanke likewise told college students that “financial stability concerns were a major reason why Congress decided to try to create a central bank in the beginning of the 20th century.”Alas, from the beginning, reality diverged from Fed rhetoric. What the Fed claimed it did and would do sharply differed from what it actually did and from the consequences of its actions. Instead of preventing and ameliorating crises, it caused and aggravated them. Instead of fighting inflation, it was inflation’s fountainhead. Instead of remaining politically independent, it served politicians.While it was originally claimed that the Fed would make financial and economic crises impossible by supplying an elastic money stock, in reality, from the beginning the Federal Reserve System was deliberately designed as an engine of inflation to be controlled and kept uniform by the central bank.Federal Reserve RealityU.S. economic history clearly refutes the notion that the Fed merely maintained an elastic currency to satisfy only the needs of commerce. If that were so, one would expect no necessary long-term trend toward increasing inflation, yet that is what we see. The rate of annual increase of the monetary base has increased with each inflation-enhancing institutional change in our monetary system. From 1918 through 1933, the year Roosevelt took us off the domestic gold standard, the monetary base increased at an average annual rate of approximately 2.2%. From 1933 to 1971, when Nixon took the dollar off the last vestiges of the international gold standard, the monetary base increased at an average annual rate of 6.4%. After we left gold for good, the Fed increased the monetary base at an average annual rate of 9.8%.The money stock followed suit. Since the advent of the Fed, M2 money stock increased by $10,006.4 billion in 2012. That is over a 452% increase during the life of the Fed.As one might expect as the money supply increased continually over the past century, the purchasing power of the dollar collapsed relative to what it was the century before the Fed. The consumer price index was 22.8 times higher in June 2013 than in January of 1913.From 1800 to about 1895, the purchasing power of the dollar roughly doubled. Then, as prices began their long march up after the advent of the Fed, the dollar’s purchasing power began its long slide downward, culminating in a PPM (purchasing power of the monetary unit) of approximately 8 cents in 2009 compared to the dollar of 1800. So much for maintaining the value of the dollar, stable price, and manipulating the money supply only for the needs of commerce.In light of the historical record, concerns about price deflation should be laughable. Noticeable price deflation has occurred only three times over the past one hundred years. The Fed allowed for price deflation in the wake of the 1920–21 recession, which is why it was over so quickly. It was ineffective in stopping monetary and price deflation in 1931–33 even though it was not for lack of trying.The Fed Fails to Prevent CrisesThe financial meltdown of 2008 is merely the most recent economic debacle fostered by the Fed. Less than eight years after its origin, a Fed induced inflationary boom set in motion the recession of 1920–22. Fed inflation in the mid-to-late 1920s ushered in the recession that turned into the Great Depression. After World War II the Fed oversaw inflation and recession during the 1950s. By 1963 Fed-backed inflation so far outstripped the U.S. stock of gold that it was nowhere near large enough to cover our obligations under the Bretton Woods system. The situation was so bad, in fact, that the U.S. Treasury was compelled to borrow abroad in money other than dollars because of foreign lack of confidence in U.S. currency. The Fed prevented neither the stock market crash of 1987 nor the collapse of the hedge fund Long Term Capital Management. Immediately after the great stock market crash of 1987, then new Federal Reserve Chairman Greenspan, assured investors that the Fed stood ready to provide whatever liquidity was necessary to keep the markets afloat. The Fed’s solution to the 1990s recession and Mexican Peso crisis was more of the same — monetary inflation via credit expansion.Investors flush with new cash were looking for opportunities and became hip to the next big thing: technology and the internet. Fed inflation in the 1990s led to the tech-stock bubble and subsequent recession of 2000. The Fed again responded by doing what it does best: assuring investors, expanding credit and increasing the money supply and repeated its “accommodation” after the 9/11 terrorist attacks. Many investors, bitten by the tech crash and induced by various lending regulations, directed their new money into real estate and then mortgage backed securities and financial derivatives based on these securities. Capital was malinvested again resulting in the Great Recession and the worst of crony capitalism.Economic history demonstrates that not only has the Fed not provided economic stability, again and again it has introduced instability and economic destruction through its inflationary credit expansion and interest rate manipulation.ConclusionFor 100 years the Fed has proclaimed its econonomic indispensibility. The picture it paints of a world without the Fed is a dystopian one in which society is left lurching from recession to recession, alternately experiencing runaway inflation and high unemployment. Thanks to the Fed, it is claimed, we instead enjoy sound money, fewer recessions, high employment, stable prices, and increased standards of living. In other words, the Fed is absolutely necessary for full-orbed macroeconomic stability.Economic reality teaches a vastly different lesson, however, because the laws of economics have a way of impinging on statist rhetoric. The history of the Fed has been one of monetary inflation, higher overall prices, diminished purchasing power, economic depressions, and lost decades. In 1913 the state sowed the inflationist wind and for a hundred years we have been reaping the economic whirlwind.
Legal recreational cannabis/marijuana/pot is almost one year old in Colorado. The Denver Business Journal recently published a retrospective containing several articles reviewing the experience. The general conclusion is that it has been a big success, not the tragedy some had predicted or claimed. The remarkable thing is that the report claims the biggest remaining problem for the industry is caused by the Federal Reserve!Some of the big concerns prior to legalization have turned out to be trivial or failed to materialize at all. Expectations of overdose deaths, delinquency, and crime did not materialize to the extent that the newspaper barely reported on those issues. Crime in Denver actually declined in early reports.Earlier this year, I examined the experience in Colorado and found that most reports were favorable to legalization. For example, the Business Insider reported that “Legalizing Weed in Colorado Is A Huge Success,” although they did report a “down side” as well. Jacob Sullum reported that such things as underage consumption and traffic fatalities declined, but not significantly within an already declining trend.There was one early report that strongly called into question the legalization of marijuana in Colorado. It was put out by an outfit called the “Rocky Mountain High Intensity Drug Trafficking Area” program. It turns out that the program is part of the White House Office on Drug Policy, but that fact is not advertised in the report. Their lengthy report, “The Legalization of Marijuana in Colorado: The Impact,” appears to be very scientific and evidence based. However, I found it has more logical holes than a wheel of Swiss cheese gone wrong.There certainly has been an increase in consumption and some diversion to minors. Colorado has historically been a high use and high abuse state, ranking above the national average in many categories. However, Colorado is close to the national average in the important category, the rate of drug overdose deaths, and the majority of deaths are the result of prescription painkillers, such as Vicodin and Oxycontin.It is also true that there is anecdotal evidence of problems with legal weed in Colorado. There was the young man who consumed several times the recommended number of marijuana-infused cookies and jumped from a hotel to his death. There was a story of a dog that died after eating cookies left on the kitchen table. And there were several stories of children stealing cookies from their homes or their grandmothers and sharing them with their friends at school.However, these events are still just newsworthy anecdotes, not trends or statewide calamities. They are also predictable. In transitioning from prohibition to legalization there are going to be such problems, but competition has its many ways of weeding out such problems over time. The marijuana dispensary industry has already been implementing new procedures and new ways of packaging edibles to improve their safe use.Federal Regulations Prevent Financial Freedom in the IndustryThe one remaining problem is that people in the growing and retail businesses have been denied access to the banking system. Without bank accounts, and being a largely cash business, the firms are more at risk of robbery. Without bank accounts it is more difficult to pay vendors and employees, and paying fees and taxes to local governments has created headaches for all. Everyone agrees that the simple solution would be to allow the use of credit cards and bank accounts.Local banking officials seem to be cooperating. The Colorado Division of Financial Services issued a charter for a credit union designed to serve the industry. However, efforts are being blocked by a holdup on obtaining deposit insurance and by none other than the Federal Reserve nixing efforts for the credit union to obtain a “master account” from the Federal Reserve.A master account provides banks and financial services companies with a primary nine-digit routing number, which is the nine digit number on the bottom left of your bank checks. Without the routing number a bank cannot participate in the Fed’s check clearing system and this would make the use of checking accounts prohibitively inconvenient.Trouble in the Federal Courts?An additional new hurdle for legal pot recently emerged when the states of Nebraska and Oklahoma sued Colorado over its legalization law in the US Supreme Court. Those states argued that Colorado's licensing of marijuana dispensary stores violates the US Constitution's Supremacy Clause. This clause says that when there is a conflict between federal and state law, the federal law trumps state law.I am not a legal scholar, but it seems to me that Nebraska and Oklahoma have little or no “standing” in bringing such a lawsuit. I also believe that this Supreme Court can see the “writing on the wall” when it comes to things like legalizing pot and gay marriage. The writing on the wall comes from the people, and a large and growing majority of the people support medical and recreational marijuana legalization. Demographically, these majorities can be expected to grow into supermajorities in a fairly short time frame.Colorado is only the cutting edge. Recreational marijuana has also passed in Washington, Alaska, Washington, DC, and in some local jurisdictions. More states are on their way to recreational marijuana and there are twenty states with legalized medical marijuana.Including states that have decriminalized marijuana, the majority of Americans now cannot be put in jail for consuming small amounts of marijuana. Government officials have attempted to portray legalization as reckless and chaotic, but those who favor the limits on government should not attempt to derail these legalization efforts. Such efforts will only serve to enhance the cause of human liberty at the expense of political power in the long run.
In the wake of the Obama administration’s partial normalization of relations with Cuba, proponents of the embargo condemned the move, with National Review publishing an unsigned editorial claiming that allowing Americans to trade freely with the island nation amounts to giving comfort to murderous dictators. NR’s editors concluded with:The Cuban government is not legitimate, and never has been. It is a one-party dictatorship with a gulag, an archipelago of prisons into which democrats and dissidents are thrown. We hope that the new American policy — Obama’s policy — does not benefit the Cuban dictatorship and harm Cuban democrats. We fear that yesterday was a good day for the Castros and a bad day for the Cuban people, and for American foreign policy.This is all very interesting from an international relations perspective, and there is no doubt that the Cuban regime is a brutal regime. On the other hand, why does the brutality of the Cuban regime make it alright for the US regime to jail and persecute private American citizens who attempt to trade with people in Cuba?That is, after all, the position of those who favor the embargo. Embargoes are not something where a magic fairy waves her wand and Cuba suddenly becomes invisible to Americans.No, supporting an embargo means supporting the government when it fines, prosecutes, and jails peaceful citizens who attempt to engage in truly free trade. Support for an embargo also requires support for a customs bureaucracy that spies on merchants and consumers, and the whole panoply of enforcement programs necessary to punish those who run afoul of the government’s arbitrary pronouncements on what kind of trade is acceptable, and what kind is verboten. Naturally, this is all paid for by the taxpayers.How the American State Punishes TradeTo get a taste of the reality of embargoes, one need only consult the Treasury Department’s summary of the Cuban embargo as administered by the “Office of Foreign Assets Control.”For those who think the embargo has something to do with freedom, they might wish to consult the section on punishments for trading with people in Cuba:Criminal penalties for violating the Regulations range up to 10 years in prison, $1,000,000 in corporate fines, and $250,000 in individual fines. Civil penalties up to $65,000 per violation may also be imposed. The Regulations require those dealing with Cuba (including traveling to Cuba) to maintain records for five years and, upon request from OFAC, to furnish information regarding such dealings.Nothing says “freedom” like $250,000 fines and mandatory presentation of five years of private records upon demand from the federal government.Private companies, of course, regard such potentially draconian sanctions as no joke, and companies must spend time and resources training employees and business associates to be sure that they do not find themselves in violation of federal law. This manual from Snap-on Tools is one example of how private companies must stay up to date on details such as this:The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) maintains strict embargoes banning, and lesser sanctions limiting U.S companies and their foreign subsidiaries from entering into commercial transactions with specified foreign countries, persons and business entities. Congress recently quintupled the maximum civil fines per violation of many of these sanctions from $11,000 to $50,000 (each unlawful shipment constitutes a violation), and doubled maximum potential criminal penalties assessed willful violations from 10 years to 20 years in prison. Moreover, enforcement is being given a much higher priority…It’s easy to see why those who favor greater government intervention in the economy would have no problem with such a program, but it’s alleged defenders of free markets like the editors at National Review who appear to be most insistent that the US government keep all its agents armed and ready, and a prison cell open for anyone who violates their federal programs of choice.Embargoes as Mercantilist ProhibitionAt their heart, embargoes are nothing but a specific type of prohibition. Sometimes, the government imposes prohibitions on transactions involving certain goods, such as cannabis. Other times, the prohibition extends to all transactions with people in a certain place. The fundamentals are the same, however, in that they prohibit peaceful exchange, with heavy penalties for violators.Moreover, embargoes are a throwback to the mercantilism of the days of yore when economic policy was viewed as a tool of international affairs, and should be designed, at least in part, to benefit the regime of the home country.Historically, the mercantilist regimes of old tightly controlled trade opportunities which were debated as part of armistice agreements, such as the Peace of Utrech (1713) when the British were able to force the Spanish to allow exactly one ship of merchandise annually into Spanish colonies. At home, during the same era, the British state forbade its own citizens with valuable engineering knowledge from leaving the country, lest they emigrate to a foreign land and share their knowledge with foreigners. The economic needs of the state superceded those of the individual.This is the type of economic policy that precipitated the American Revolution, when Americans in the colonies were allowed to trade with only specified nation-states and territories in such a way that was seen as advantageous to the British Crown. The freedom fighters in that conflict engaged in rampant smuggling throughout eastern North America to avoid taxes and to trade with the French and the Spanish who were hardly paragons of democratic liberalism.Unfortunately, the Americans did not learn their lesson in the revolution, and got to work erecting their own trade restrictions by the late eighteenth century. The greatest crime of the era, however, was Thomas Jefferson’s embargo against the British which crippled the shipping and shipbuilding industries in the United States. Naturally, it was pointed out at the time that the Constitution did not permit any such action on the part of the federal government. No such quaint considerations restrain the American state or its pro-embargo allies today.Cuba is not the only country subject to embargoes handed out by the American state, and North Korea, Iran, and Syria are in similar positions. The question is often asked as to whether or not these sanctions work. I would certainly claim that they do not work in accomplishing their stated purposes, but whether or not they work is really beside the point. Those who advocate for such embargoes need to back up a step and first prove that it is moral and legitimate for nation-states to dictate to the people who pay the bills (i.e., the taxpayers) with whom they are allowed to trade. A society that actually respects private property rights, of course, will accept no such proposition and will respect the right of private citizens to dispose of their property as they see fit. On the other hand, those who believe that it’s the prerogative of governments to micromanage private property and throw violators in prison are encouraged to move somewhere that the government can take a robust and active role in such things. Cuba, for instance. Image Source: iStockphoto.
The basic unit of all economic activity is the uncoerced, free exchange of one economic good for another. Moreover, the decision to engage in exchange is based upon the ordinally ranked subjective preferences of each party to the exchange. To achieve maximum satisfaction from the exchange, each party must have full ownership and control of the good that he wishes to exchange and may dispose of his property without interference from a third party, such as government.The exchange will take place when each party values the good to be received more than the good that he gives up. The expected — but by no means guaranteed — result is a total higher satisfaction for both parties. Any subsequent satisfaction or dissatisfaction with the exchange must accrue completely to the parties involved. The expected higher satisfaction that one or each expects may not be dependent upon harming a third party in the process.Third Parties Cannot Create Value by Forcing ExchangeSeveral observations can be deduced from the above explanation. It is not possible for a third party to direct this exchange in order to create a more satisfactory outcome. No third party has ownership of the goods to be exchanged; therefore, no third party can hold a legitimate subjective preference upon which to base an evaluation as to the higher satisfaction to be gained. Furthermore, the higher satisfaction of any exchange cannot be quantified in any cardinal way, for each party's subjective preference is ordinal only.This rules out all utilitarian measurements of satisfaction upon which interventions may be based. Each exchange is an economic world unto itself. Compiling statistics of the number and dollar amounts of many exchanges is meaningless for other than historical purposes, both because the dollars involved are not representative of the preferences and satisfactions of others not involved in the exchange, and because the volume and dollar amounts of future exchanges are independent of past exchanges.One Example: The Case of EthanolLet us examine a recent, typical exchange that violates our definition of a true exchange yet is justified by government interventionists today: subsidized, protected, and mandated use of ethanol.The use of ethanol is coerced; i.e., the government requires its mixture into gasoline. Government does not own the ethanol, so it cannot possibly hold a valid subjective preference. The parties forced to buy ethanol actually receive some dissatisfaction. Had they desired to purchase ethanol, no mandate would have been required.Because those engaging in the forced exchange did not desire the ethanol in the first place, including the dollar value of ethanol sales in statistics purporting to measure the societal value of goods exchanged in our economy is meaningless. Yet the government includes all mandated exchanges as a source of “value” in its own calculations.This is just one egregious example of many such measurements that are included in our GDP statistics purporting to convince us that we have "never had it so good."Another Example: The Soviet EconomyOur flawed view that governments can improve satisfaction caused us to misjudge the military threat of the Soviet Union for decades. Our CIA placed western dollar values on Soviet production data to arrive at the conclusion that its economy was growing faster than that of the US and would surpass US GDP at some point in the not too distant future. Except for very small exceptions, all economic production resources in the Soviet Union were owned by the state. This does not necessarily mean that it was possible for the state to hold valid subjective preferences, for those who occupied important offices in the state held them at the sufferance of what can only be described as gang lords, who themselves held office very tentatively.State ownership is not real ownership. Those in positions of power with responsibility over resources hold their offices for a given period of time and have little or no ability to pass their office on to their heirs. Thus, the resources eventually succumb to the law of the tragedy of the commons and are plundered to extinction. Nevertheless the squandering of the Soviet Union's commonly held resources was tallied by our CIA as meeting legitimate demand.Professor Yuri Maltsev saw first-hand the total destruction of the Soviet economy. In Requiem for Marx he gives a heartbreaking portrayal of the suffering of the Russian populace through state directed, irrational central planning that did not come close to meeting the people's legitimate needs, while our CIA continued to crank out bogus statistics of the supposed strength of the Soviet economy upon which the Reagan administration based its unprecedented peacetime military expansion.Peaceful Exchange Allowed, Violent Exchange RedressedWith the proviso that no exchange may harm another, as explained so well in Dr. Thomas Patrick Burke's book No Harm: Ethical Principles for a Free Market, we are led to the conclusion that no outside agency can create greater economic satisfaction than can a free and uncoerced exchange. The statistics that support such interventions are meaningless, because they cannot reflect the satisfaction obtained from true ordinally held subjective preferences. Once this understanding is acknowledged and embraced, the consequences for the improvement of our total satisfaction are tremendous. Our economy can be unshackled from government directed economic exchanges and regulations. Image Source: iStockphoto.
Few issues divide libertarians the way the Fourteenth Amendment to the United States Constitution does. Gene Healy has observed that "[c]lassical liberals of good faith have found themselves on either side of the issue."On the one side are those who praise the amendment for circumventing the power of the states to prejudice, police, regulate, or otherwise use force to impose discriminatory laws on their citizens. On the other side are those who, while acknowledging the problematic nature of state misconduct and wrongdoing, are not willing to condone the transfer of power from states to the federal government, and in particular to the federal judiciary.The divide comes down to one's views on federalism, i.e., on the balance or separation of the state and national governments.The first and fifth sections of the Fourteenth Amendment are the most controversial. Section One consists of the Citizenship Clause, the Privileges or Immunities Clause, the Due Process Clause, and the Equal Protection Clause, and Section Five bestows on the US Congress the authority to enforce the amendment legislatively. These provisions have vested increased powers in the national government, allowing federal courts to bring states into compliance with federal laws regarding certain individual rights — or alleged rights.The United States Supreme Court in Barron v. Baltimore (1833) held that the Bill of Rights — the first ten amendments to the US Constitution — bound only the federal government and not state governments. Through the Fourteenth Amendment, which was officially ratified in 1868, the United States Supreme Court and inferior federal courts have gradually "incorporated" most of the provisions of the Bill of Rights to apply against the states. The federal government has thereby empowered itself to bring state governments into compliance with provisions originally intended to restrain only federal abuses.If the federal government were the only or the best mechanism for reducing the type of discrimination and rights violations prohibited by the Fourteenth Amendment, the Fourteenth Amendment would be welcome and warranted. But it is not the only conceivable corrective, and besides, isn't it counterintuitive for libertarians to applaud and champion an increase in both the scope and degree of federal power, even if that power has, on some occasions, brought about admirable results?In contexts unrelated to the Fourteenth Amendment, it is almost never controversial for libertarians to promote nongovernmental, local, or decentralized cures for unfair, discriminatory laws and practices. It is often alleged that industry and trade and plain economics are better mechanisms for reducing discriminatory behavior, whether it is based on race, class, sex, gender, and so forth, than is government force. Yet frequently those libertarians who raise alarm about the Fourteenth Amendment's governmental, federal, and centralized approaches to discriminatory laws and practices are disingenuously treated, in the place of argument, as supporters of those laws and practices rather than as principled opponents of federal, centralized reparations for social harms.Any debate over the Fourteenth Amendment must address the validity of its enactment. During Reconstruction, ratification of the Fourteenth Amendment became a precondition for the readmittance of former Confederate states into the Union. Healy has called this "ratification at the point of the bayonet" because, he says, "[t]o end military rule, Southern states were required to ratify the Fourteenth Amendment." The conditional nature of this reunification belies the claim that the Fourteenth Amendment was ratified by any mutual compact of the states.Federal Judges Regard the Purpose of the Amendment as IrrelevantIn 1873, Justice Samuel F. Miller, joined by four other justices, held that the Fourteenth Amendment protected the privileges and immunities of national and not of state citizenship. The case involved state regulations of abbattoirs to address the health emergencies resulting from animal blood that was seeping into the water supply. Justice Miller opined that the Fourteenth Amendment was designed to address racial discrimination against former slaves rather than the regulation of butchers:[T]he war [i.e., the Civil War] being over, those who had succeeded in re-establishing the authority of the Federal government were not content to permit this great act of emancipation to rest on the actual results of the contest or the proclamation of the Executive [the Emancipation Proclamation], both of which might have been questioned in after times, and they determined to place this main and most valuable result in the Constitution of the restored union as one of its fundamental articles.Justice Miller's point is that the meaning and purpose of the Fourteenth Amendment — protecting and preserving the rights of freed slaves — are cheapened when they are taken to justify federal intervention into the everyday economic affairs of a particular state industry. State regulation of animal slaughtering is not the same type or degree of oppression as the enslavement of people based on their race. To argue otherwise is to minimize the gravity of racist ideology.Justice Miller acknowledged that the state regulation at issue was "denounced not only as creating a monopoly and conferring odious and exclusive privileges upon a small number of persons at the expense of the great body of the community of New Orleans," the city effected by the slaughterhouses in question, but also as a deprivation of butchers' right to exercise their trade. Nevertheless, Justice Miller did not believe the federal government was entitled under the Constitution to interfere with authority that had always been conceded to state and local governments.Having established the limited reach of the privileges or immunities clause in the Slaughterhouse Cases, the Supreme Court would later turn to the Equal Protection Clause and the Due Process Clause to strike down state laws under the Fourteenth Amendment. But the Supreme Court has not stopped at state laws: gradually it has used the Equal Protection Clause and the Due Process Clause as a pretext for regulating private citizens and businesses. The Fourteenth Amendment, which was intended to reduce discrimination, has even been used, ironically, to uphold affirmative-action programs that discriminate against certain classes of people.Ceding power to federal judges does not predispose them to liberty. Because Section Five of the Fourteenth Amendment permits Congress to pass amendments or enact laws dealing with state infringements on individual liberty, it isn't necessary or constitutionally sound for the federal judiciary to assume that role. Members of Congress, unlike federal judges who enjoy life tenure, are accountable to the voters in their states and are thus more likely to suffer from their infidelity to the Constitution.At a conceptual level, moreover, it seems odd for libertarians to champion domestically what they decry in foreign relations, namely, the paternalistic doctrine that a more powerful central government ought to use its muscle to force smaller political units into compliance.The Legacy of the AmendmentHas the Fourteenth Amendment generated constructive results? In many areas, yes. Are some of the ideologies it has targeted deplorable? In many cases, yes. Were anti-miscegenation statutes, school segregation statutes, and statutes barring African-Americans from sitting on juries bad? Yes, of course. It does not follow, however, that just because some cases under the Fourteenth Amendment have invalidated these bad laws, the Fourteenth Amendment is necessarily or unconditionally good, especially in light of the slippery slope of precedent that over time distances rules from their intended application. "If courts begin using the Fourteenth Amendment to enforce libertarian natural rights," cautions Jacob Huebert in Libertarianism Today, "it would be but a small step for them to start using it to enforce non-libertarian positive rights."Scholars on the left such as Erwin Chemerinsky, Charles Black, Peter Edelman, and Frank Michelman have advocated for the protection and enforcement of "rights to subsistence" under the Fourteenth Amendment. These would include rights to government supplied food, healthcare, and a minimum wage. State laws that abridged these rights — that failed to provide these welfare benefits — would be deemed unconstitutional; the federal executive would then ensure that every citizen within the transgressing states receives health insurance, food insurance, and a basic income, all subsidized by taxpayers.I'm willing to admit not only that as a practical matter I would litigate under provisions of the Fourteenth Amendment to competently and ethically represent my client (imagining a system in which federal power is not so entrenched is useless to litigators in a real system in which federal power is deeply ingrained) but also that, in a more ideal world, there might be other, less deleterious vehicles for fighting discrimination and rights violations than the Fourteenth Amendment. The workshop of everyday activity does not service hopeful abstraction. One cannot unmake a system overnight; lawyers must advocate with the laws available to them and cannot invent new ones for their cases or hang their hats on mere policy. Not if they want to succeed.Absent the Fourteenth Amendment, many individuals and businesses with valid complaints might be without constitutional remedies. That doesn't mean, however, that the terms and effects of the Fourteenth Amendment are unquestionably desirable or categorically good. One can celebrate the victories achieved through the Fourteenth Amendment while recognizing that there must be a better way.The Fourteenth Amendment is not itself a positive good but a dangerous animal to be handled with care. Libertarians as a class have manifest undue devotion to its operation. We need instead an open, honest, and collegial debate about the merits and function of this amendment, lest other creatures of its likeness rear their head in the future, and at the expense of our cherished liberties. Image source: iStockphoto.
Recently, the Financial Times published an article containing charts displaying the correlation between government spending and real GDP growth.A report on the article that includes some of the charts may also be found on an ungated website here. Based on these correlations, the author of the article, Matthew Klein, comments: “It’s no secret that spending cuts (and tax hikes) have retarded America’s growth for the past four years.” He goes on to argue that from mid-2010 to mid-2011, the reduction in government spending in the US shaved 0.76 percent off of the economic growth rate. Klein conjectures that this slowdown in the growth rate caused a level of real GDP today that is 1.2 percent less than it would have been in the absence of this exercise in “austerity.” He also points out that since 2012 almost all of the depressive effect on real GDP growth of government austerity was the result of the reduction in military spending. While some of the reduction was beneficial, Klein opines, “some of it represents a self-inflicted wound.” Indeed it may represent a self-inflicted wound on the Federal government, but in that case it benefits the private economy.Now it is certainly true that a reduction in real government spending causes a reduction in real GDP, as it is officially calculated. But contrary to Mr. Klein, the reduction in government spending does not retard the growth of production of goods that satisfy consumer demands and, in fact, most likely accelerates it. In addition, real incomes and living standards of producers/consumers in the private sector rise as a direct result of the decline in government spending. The reason for this seeming paradox lies in the conventional method used to calculate real output in the economy. Let me explain with a simple example.The Problem with Calculating GDPLet us suppose a simple island economy in which the private sector produces 1,000 apples per year. Suppose further that the government of the island taxes the private producers 200 apples per year to sustain its military as it invades a neighboring island in order to neutralize a “potential terrorist threat.” According to standard national income accounting, which is deeply rooted in Keynesian economics, real GDP is calculated as 1,200 apples: the 1,000 (pre-tax) apples either currently consumed by the producers, invested by them in planting new apple trees to provide for future consumption, or paid out in taxes plus the 200 apples expended on the island’s military which is busily producing the “public good” of national defense. In other words, the island’s real GDPFor simplicity, we ignore capital depreciation in this in this simple island economy, assuming that the apple trees once planted live forever never needing to be maintained or replaced. Thus GDP = NDP. includes the 1,000 apples voluntarily produced by the private sector plus the “apple value” of national defense which is valued at its cost of production, that is, the 200 apples of compulsory tax revenues spent on conquering the adjacent island.Now let us assume that by the next year the conquest has been completed and the island allegedly harboring the terrorists has been pacified. Our island’s government decides to cut its military and reduces taxes by 100 apples. All other things equal, real GDP falls from 1,200 to 1,100 apples, since national defense now contributes only 100 apples worth of government services to the 1,000 apples produced by the private sector. But there is the rub. The apples were voluntarily produced and therefore were demonstrably more highly valued than the resources (effort and time) used to produce them. In sharp contrast, there is no evidence whatever that the private producers/consumers valued the military services supplied by government more highly than the cost of producing them or even that they valued them at all. The reason is because government military spending was financed by the coercive extraction of resources from the private sector, whose members had no choice and therefore expressed no valuations in the matter.No Way to Calculate Real Value of Tax-Financed AmenitiesThe same conclusion holds for any coercively-financed venture, such as government construction of an island infirmary. In the absence of voluntary production and exchange, there is no meaningful way of ascertaining the value of goods and services. The government investments and services may have some value to private consumers, but there is no objective scientific method of gauging what that value is. Indeed, assuming government wastes at least 50 percent of the resources expended, the net benefit to consumers of government production would be zero.Using “Gross Private Product” InsteadSo for these and other reasons, national income accounting on Austrian principles would exclude government expenditures in calculating the total production of the economy. Thus in our island economy real output or what Austrians, following Murray Rothbard, call “Gross Private Product” or “GPP”Once again, absent depreciation, GPP = NPP. is equal to only the 1,000 apples produced by the private sector and excludes government expenditures of 200 apples on the provision of military services (or an infirmary).The Austrian approach to national income accounting was pioneered by Murray Rothbard, pp. 339–48 and Rothbard, pp. 1292–95. But the 1,000 apples of GPP actually overstates the resources left at the disposal of the private sector, because 200 apples were forcibly siphoned off from potentially valuable private consumption and investment activities to fund government activities that can only be judged as wasteful from the point of view of the original producers of those resources. In this sense the 200 apples paid in taxes can be seen as a “depredation” on the private economy as measured by GPP.I am using the term “depredation” to mean the forcible taking of the property of another, whether legal or not, and for whatever purpose. There is precedent for this usage in older law codes. In French law, “depredation” denoted “the pillage that is made of the goods of a decedent.” Old Scottish law defined “depredation” as “the (capital) offence of stealing cattle by armed force” (Lesley Brown, ed., The New Shorter Oxford English Dictionary on Historical Principles, 4th ed. [New York: Oxford University Press, 1993], p. 639). Netting out this depredation we then arrive at what Rothbard calls “private product remaining in private hands” or PPR. PPR equals GPP minus total depredation (i.e., government spending).Actually, depredation is calculated as government spending or tax revenues, whichever is greater (Rothbard, p. 340). But since the US government has rarely run a surplus since World War 2 we can ignore this complication. In our hypothetical island economy PPR is therefore 800 apples (= 1,000 apples – 200 apples). Thus government spending should not be added to private production but rather subtracted from it to get a sense of the living standards of private persons engaged in productive economic activity.Robert Batemarco uses Rothbard’s approach to calculate GPP, PPR and PPR/Employment (nongovernment) for the years 1947–83 to track the movement of private living standards during these years.Reducing Taxes and Spending Increases WelfareBased on the above analysis, when the island government cuts military spending by 100 apples, assuming no other changes, it does indeed reduce real GDP from 1,200 to 1,100 apples. However, from the Austrian perspective, real output of valuable goods remains constant at GPP = 1,000 apples, while the economic welfare of producers is significantly enhanced because depredation on their output falls by 100 apples causing PPR to rise from 800 to 900 apples! But this is not all. A portion of the tax cut of 100 apples will be devoted to investing in the seeding of new trees, thus increasing the capital sock and accelerating economic growth over time.Even in the short run, there is likely to be positive growth of GPP due to “supply-side effects.” For instance the cut in marginal tax rates increases the opportunity cost of leisure and spurs producers to work more hours. The private labor force further expands with the influx of former soldiers. Thus it may turn out that GPP increases from 1,000 to 1,075 apples (and, consequently, PPR from 800 to 975 apples). In this scenario the 100-apple cut in government expenditure would be partially offset by the 75-apple rise in private product so that the GDP statistic would register a smaller decline then previously calculated, from 1,200 to 1,175 apples. Despite the decline of the meaningless GDP statistic, however, the result would be a boon for the private economy, as apple production, the real incomes and living standards of apple producers, and the capacity to produce apples in the future all improve.From the Austrian standpoint, then, the path back to immediate economic health and sustainable long-term growth is massive tax and spending cuts anywhere and everywhere. Yes, this is austerity — but only for the government. Slashing political depredation on the private economy will release a cornucopia of current and future benefits on private consumers. And these benefits are virtually cost free because the resources consumed by the government budget are almost all a pure waste from the point of view of the private producers of those resources.Deeply slashing the bloated budget of the US government by, say, 25 percent would not only cure the sham deficit problem, but more importantly it would rapidly reverse the trend of the declining middle class and powerfully and permanently stimulate the anemic long-run US economic growth rate. For the real problem is not the size of the budget deficit per se, but rather the depredation on gross private production contributed by the overall federal budget.To calculate total depredation on the private economy, of course, state and municipal spending must be accounted for. Thus a US government budget of $4 trillion and a deficit of $500 billion represents far greater depredation on and is far more harmful to the private economy then a budget of $3 trillion partly financed by a deficit of $1 trillion. Image source: iStockphoto.