Mises Wire

E-Verify Threatens Us All

Ron Paul — Tue, 13 Feb 2018 09:45 -0600

By: Ron Paul

In addition to funding for a border wall and other border security measures, immigration hardliners are sure to push to include mandatory E-Verify in any immigration legislation considered by Congress. E-Verify is a (currently) voluntary program where businesses check job applicants’ Social Security numbers and other Information — potentially including “biometric” identifiers like fingerprints — against information stored in a federal database to determine if the job applicants are legally in the United States.

Imagine how much time would be diverted from serving consumers and growing the economy if every US business had to comply with E-Verify. Also, collecting the relevant information and operating the mandatory E-Verify system will prove costly to taxpayers.

Millions of Americans could be denied jobs because E-Verify mistakenly identifies them as illegal immigrants. These Americans would be forced to go through a costly and time-consuming process to force the government to correct its mistake. It is doubtful employers could afford to keep jobs open while potential hires went through this process.

A federal database with Social Security numbers and other identifying information is an identify thief’s dream. Given the federal government’s poor track record for protecting personal information, is there any doubt mandatory E-Verify would put millions of Americans at risk for identity theft?

Some supporters of E-Verify deny the program poses any threat to civil liberties, as it will only be used to verify citizenship or legal residency. They even claim a system forcing individuals to have their identities certified by the government is not a national ID system. These individuals are ignoring the history of government programs sold as only affecting a particular group or being used for a limited purpose being expanded beyond initial targets. For example, Americans were promised that only the wealthiest Americans would ever pay income taxes. And some of the PATRIOT Act’s worst provisions that we were told would only be used against terrorists are routinely used to investigate drug crimes.

E-Verify almost certainly will be used for purposes unrelated to immigration. One potential use of E-Verify is to limit the job prospects of anyone whose lifestyle displeases the government. This could include those accused of failing to pay their fair share in taxes, those who homeschool or do not vaccinate their children, or those who own firearms.

Unscrupulous government officials could use E-Verify against those who practice antiwar, anti-tax, anti-surveillance, and anti-Federal Reserve activism. Those who consider this unlikely should remember the long history of the IRS targeting the political enemies of those in power and the use of anti-terrorism laws to harass antiwar activists. They should also consider the current moves to outlaw certain types of “politically incorrect” speech, such as disputing the alleged “consensus” regarding climate change.

Claiming that mandatory E-Verify is necessary to stop illegal immigration does not make it constitutional. Furthermore, having to ask the federal government for permission before obtaining a job is a characteristic of authoritarian societies, not free ones. History shows that mandatory E-Verify’s use will expand beyond immigration enforcement and could be used as a tool of political repression. All those who value liberty should oppose mandatory E-Verify.

Reprinted with permission.

Remembering Burt Blumert

David Gordon — Sun, 11 Feb 2018 09:30 -0600

By: David Gordon

Today would have been the 89th birthday of Burt Blumert, one of the greatest personalities of the modern libertarian movement. Burt was the indispensable man behind the scenes and was a key figure in the Mises Institute, the Center for Libertarian Studies, and LewRockwell.com. He was one of Murray Rothbard’s closest friends; and when you met him, it was easy to see why Murray liked him. He was a genial and kind person and a source of wise counsel to all those fortunate to know him. Burt was the founder of Camino Coins and a principal figure in the hard money community. If you want to get a sense of what Burt was like, you have only to read his collection of humorous essays, Bagels, Barry Bonds, and Rotten Politicians (2008). It was a source of great pride and comfort to Burt in his final illness that he was able to see this book in print. Burt helped me with good advice when I most needed it, and I will always be grateful to him for his counsel and friendship

Mark Thornton: Is the Bust Here?

Mark Thornton, Jeff Deist — Fri, 09 Feb 2018 15:00 -0600

By: Mark Thornton, Jeff Deist

With stock markets in turmoil earlier this week, the Mises Institute's resident expert on booms and busts joins Jeff Deist to make sense of it. Will new Fed Chair Jerome Powell do everything possible to prop up markets, or will he be more hawkish than Janet Yellen? What kinds of indicators does Mark look for to predict trouble (hint: it's not the VIX). Why does the volume of margin loans matter, and why is the Russell 2000 Index a better predictor than the Dow or Nasdaq? Are cryptocurrencies now bound up with macro trends? And is Austrian business cycle theory necessarily incomplete as a tool to help investors?

See Mark Thornton's 2004 article "Housing: Too Good to be True".

From Abortion to Circumcision, Democracy Won't Save Minorities from the Majority

Ryan McMaken — Fri, 09 Feb 2018 12:30 -0600

By: Ryan McMaken

The UK Independent reported last week that legislators in Iceland have proposed a ban on circumcision of boys. In practice of course, a ban on male circumcisions essentially outlaws Judaism. Anticipating opposition from advocates for religious freedom, the legislation "insists the 'rights of the child' always exceed the 'right of the parents to give their children guidance when it comes to religion'."1

Iceland is not alone in considering laws that pit the majority against the allegedly barbaric practices of a minority group.

In the Netherlands, for example, animal rights activists are hard at work trying to outlaw kosher and halal meats.

Meanwhile, in Quebec, lawmakers have recently prohibited the use of head coverings by — presumably Muslim — women in certain public places.

Nor is the circumcision debate limited to Iceland. Male circumcision has been on shaky legal ground in Germany in recent years where a court banned the practice in 2012. Perhaps recognizing that banning Judaism could look bad for German "tolerance," lawmakers intervened to allow the practice again.

For the subjects of this regulation, the activities being targeted are no mere preferences. They touch on fundamental values, and they present a clear conflict with other value systems. In cases such as these, where there is no apparent room for compromise, whose values ought to prevail?

Democracy Doesn't Always Work

Throughout most of the West, of course, we're all taught from an early age that "democracy" will allow everything to work itself out. The parties in conflict will enter into "dialogue," will arrive at a "compromise" and then everyone will be happy and at peace in the end.

But, that's not how it works in real life. While there some areas for compromise that can be found around the edges of issues such as moral values and ethnic identity, the fact is that in the end, kosher meats are either legal or they're not. Circumcision is either legal or it's not. Abortion is either legal or it's not. Muslim head coverings are either legal or they're not.

After all, if one group of people believe that a 3-month-old fetus is a parasite that has trespassed against the mother, those people are going to find little room for compromise with a group of people who think the same fetus is a person deserving legal protection.

Indeed, we see the shortcomings of democracy at work every time this latter issue comes up. One side calls the other killers who are complicit in the killing of babies. The other side calls their opponents rubes and barbarians, probably motivated by little more than crazed misogyny. Similar dynamics, of course, are present in cases involving animal rights, circumcision, and headscarves. One side thinks that their side is the only acceptable option for virtuous people. "Virtue," of course, can be defined any number of ways. Some are so blinded by their cultural biases, in fact, that they even conclude that no "civilized" person could possibly believe that, say, circumcision is anything other than a barbaric practice.Those who continue to believe in such things must therefore be forced "into the 21st century" by the coercive power of the state. Their religious beliefs, as Hillary Clinton demanded in 2015, "have to be changed."

These problems also exist under authoritarian, non-democratic regimes. But anti-democrats usually admit that the state is using force to support one side over the other. Democrats, on the other hand, often prefer to indulge in comforting fictions. What many supporters of democracy refuse to admit is that there is no peaceful debate that will solve this conflict. The conflict is philosophical and moral in nature. And, so long as both sides are forced to live under a single legal system, any "compromise" will take the shape of one side imposing its position on the other by force. In the end, the losing side will be taxed to support the regime that disregards its views and forces compliance with laws made by the winning side.

Majority Rule: Conquest and Colonialism by Other Means

In his work on nationalism, Ludwig on Mises examined the fundamental problem that comes from various groups with different value systems living under a single unitary state. Even when there are certain theoretical guarantees for minority groups, the political reality is that groups with minority beliefs are at the mercy of the majority. This is true in matters of conflicting ethnic groups and religions, but is also applicable to any number of groups with conflicting values.

Joseph Salerno ably sums up Mises's thought:

Mises maintains that two or more “nations” cannot peacefully coexist under a unitary democratic government. National minorities in a democracy are “completely politically powerless” because they have no chance of peacefully influencing the majority linguistic group. The latter represents “a cultural circle that is closed” to minority nationalities and whose political ideas are “thought, spoken, and written in a language that they do not understand.” Even where proportional representation prevails, the national minority “still remains excluded from collaboration in political life.” According to Mises, because the minority has no prospect of one day attaining power, the activity of its representatives “remains limited from the beginning to fruitless criticism . . . that . . . can lead to no political goal.” Thus, concludes Mises, even if the member of the minority nation, “according to the letter of the law, be a citizen with full rights . . . in truth he is politically without rights, a second class citizen, a pariah.”
Mises characterizes majority rule as a form of colonialism from the point of view of the minority nation in a polyglot territory: “[It] signifies something quite different here than in nationally uniform territories; here, for a part of the people, it is not popular rule but foreign rule.” Peaceful liberal nationalism therefore is inevitably stifled in polyglot territories governed by a unitary state, because, Mises argues, “democracy seems like oppression to the minority. Where only the choice is open oneself to suppress or be suppressed, one easily decides for the former.” Thus, for Mises, democracy means the same thing for the minority as “subjugation under the rule of others,” and this “holds true everywhere and, so far, for all times.” Mises dismisses “the often cited” counter-example of Switzerland as irrelevant because local self-rule was not disturbed by “internal migrations” between the different nationalities. Had significant migration established the presence of substantial national minorities in some of the cantons, “the national peace of Switzerland would already have vanished long ago.”

Those on the winning side, of course, don't see any problem here. What the minority thinks of as "oppression" is really — according to the winners — just "modernization," "progress," "decency," "common sense," or simply "the will of the majoirity." The fact that the enforcement of that will of the majority is founded on state violence is of little concern.

The Solution: Secession and Decentralization

Mises, who was himself a democrat, offered a solution to the problem of democratic majorities: self-determination through secession and decentralization.

For Mises, populations must not be forced perpetually into states where they will never be able to exercise self-determination due to the presence of a more powerful majority. On a practical level then, populations in regions, cities, and villages within existing states must be free to form their own states, join other states with friendlier majorities, or at least exercise greater self-government via decentralization.

Moreover, in order to accommodate the realities of constantly-changing populations, demographics, and cultures, borders and boundaries must change over time in order to minimize the number of people as members of minority populations with little to no say in national governments controlled by hostile majorities.

In Mises vision, there is no perfect solution. There will always be some minority groups that at odds with the ruling majority. But, by making states smaller, more numerous, and more diverse, communities and individuals stand a better change of finding a state in which their values match up with the majority. Large unitary states, however, offer exactly the oppose: less choice, less diversity, and fewer changes to exercise self-determination.

The Option of Decentralized Confederations

Nor do all political jurisdictions need to be totally independent states. Mises himself advocated for the use of confederation as a solution to problems of cultural and linguistic minorities.2 Confederations might be formed for purposes of national defense and diplomacy, Mises noted. But in any country with a diverse population, in order to maintain internal peace, self-government of domestic affairs must be kept localized and so as to minimize the ability of a majority group to dominate a minority group.

Mises didn't invent this idea, of course. This sort of confederation was justified on similar grounds by the founders of the Swiss Confederation and the United States. Moreover, while not planned out ahead of time, the government of Austria-Hungary was by necessity decentralized to minimize internal conflict. In cases such as these, matters of language, religion, education, and even economic policy must be handled by the local majority, independent of any nationwide majorities. Or else democracy becomes little more than a tool for the winning coalition to bludgeon the losing coalition.

For decades, this worked at various times in the United States. On the matter of abortion, for instance, Americans agreed prior to Roe v Wade to allow abortion laws to be determined at a local level and be kept out of the hands of the national government. Public schools — and what was taught in them — were governed almost exclusively by local school boards and state governments. Even immigration policies and linguistic issues were decided by local majorities, and not by national ones. So long as these matter remained local matters they were irrelevant to national politics. Under these conditions, a victory for one party or another at the national level has little impact on the daily practice of one's religion, moral values, or schooling.

As localized democracy turns into mass democracy, however, majorities exercise increasing power over minority groups. Each election becomes a nationwide referendum on how the majority shall use its power to crush those who pose a threat to the prevailing value system. Even worse, when there is one nationwide "law of the land" there is no escape from its effects, save to relocate hundreds of miles away to a foreign land where the emigrant must learn a new language and a new way of life far from friends and family.

Needless to say, as this sort of democratic centralization increases, the stakes become higher and higher. The potential for violence becomes greater, and the disenfranchisement of minority groups becomes ever more palpable.

Mises understood well what the end game to this process is. It's political and social unrest — followed by political repression to "restore" order. War may even follow. For Mises, the need to guarantee localized self-determination was no mere intellectual exercise for political scientists. It was a matter essential to the preservation of peace and freedom. We would do well to take the matter as seriously as he did.

1. Chinese communist officials have taken this a step further by banning children from churches and taking other measures to "restric[t] children from joining Christian groups and attending religious activities." (http://www.catholicherald.co.uk/news/2018/02/09/chinese-priests-ordered-to-put-up-signs-banning-children-from-churches/)

2. For more on this, see Mises's 1941 essay "An Eastern Democratic Union: A Proposal for the Establishment of Durable Peace in Eastern Europe." Mises discusses the issue of handling linguistic and ethnic conflicts within a larger confederation. Found in Selected Writings of Ludwig von Mises, Volume 3, edited by Richard Ebeling.

Central Banks Holding Steady, But Promise More Rate Hikes

Ryan McMaken — Thu, 08 Feb 2018 16:15 -0600

By: Ryan McMaken

On February 5, the Reserve Bank of Australia held its key rate steady at 1.5 percent.
The Bank of Canada raised its benchmark interest rate to 1.25 percent in January.
At its February Meeting, the Federal Reserve announced it would hold the Federal Funds Rate steady at 1.5 percent.
The Bank of England in January warned that it plans to hike rates this year, possibly as early as May. But its policy committee unanimously voted to keep the key rate at 0.5 percent earlier this month.
The Bank of Japan announced it is keeping its key rate steady at -0.1 percent.

In all cases — The Fed, the Bank of Canada, the BofE, the BOJ, and the Bank of Australia — central bankers said they expected to raise rates more in the near future. Even at the Bank of Japan, which has been especially dovish and pro-QE in recent years, the bank scaled back QE a tiny bit:

After years of blistering asset purchases, the Bank of Japan disclosed today that total assets on its balance sheet actually inched down by ¥444 billion ($3.9 billion) from the end of November to ¥521.416 trillion on December 31. While small, it was the first month-end to month-end decline since the Abenomics-designed “QQE” kicked off in late 2012.

The Bank of Canada has perhaps been the most aggressive at raising rates, with three rate hikes since July.

But, in all cases, rates remain well below where they were in 2008 before the financial crisis. We're now entering the tenth year of low-low interest-rate policy and Quantitative Easing. And even though we're hearing constantly about how the global economy is red hot, it appears the most central banks are still reluctant to get anywhere near what might be properly called "normalization."

One big exception to the claims of more rate hikes is the European Central Bank which isn't even talking about optimism at this point. Unlike other central banks, the ECB is already saying it might have to miss its self-imposed deadlines for unwinding QE:

The European Central Bank's top economist has warned that its bond-buying efforts will have to continue beyond the planned deadline of September, if inflation does not pick up.
Inflation has remained well short of the central bank's target of close to, but below, 2pc in recent years. Monthly data released at the end of January revealed that prices had risen by 1.3pc, the lowest reading since July 2017. The ECB has also warned that it expects inflation to slow in the next few months.

The European economy continues to be nothing to write home about, but even if things were better, it's hard to see how the ECB, faced with so many debt heavy regimes in Europe, would be willing to raise interest rates and put European governments on the hook for higher payments on their debts.

Using their conventional measures of inflation, central banks continue to see muted growth, which is partly why they refuse to budge much on their QE and key rates. Asset prices, however, continue to rise, with home prices reaching new highs in the US and — until this week, at least — stock prices were moving up rapidly.

Meanwhile, the New York Fed's broader measure of price inflation shows inflation at an 11-year high.

With interest rates so far below where they were at the beginning of the last financial crisis, it's hard to see where central banks will go the next time a recession hits. The likely outcome is only small movement in interest rates, with more reliance on central-banks buying assets.

The Fed's Bill Dudley, however, maintains that the economy is still strong, and there's plenty of time and room to bring rates up. This week's mini-crash was only "small potatoes" according to Dudley.

Here are the specific key rates discussed here, with links:

Fed. Reserve: Federal Funds Rate
Bank of England: Official Bank Rate
Reserve Bank of Australia: Cash Rate
Bank of Japan: Overnight Call Rate (Observed); (Target Rate)
Bank of Canada: Overnight Target Rate
ECB: Deposit Facility Rate
People's Bank of China: Overnight Rate

Is This Week's Mini-Crash Just the Beginning?

Brendan Brown — Fri, 09 Feb 2018 06:00 -0600

By: Brendan Brown

According to the mainstream narratives, a state of inflation alert was the catalyst to the US stock market mini-crash of February 2 and February 5, 2018. This explanation echoes the run-up to the October 1987 stock market crash. On other occasions in history, inflation alerts have not had such an immediate effect, with the pull-back of asset price inflation (which typically leads reported goods and services inflation) waiting for a substantial tightening of monetary policy.

Now everyone and his dog realizes that an inflation “break-out” (from inertia under the 2 per cent standard) would mean a bigger take for Uncle Sam and an eventual crash and recession. Some investors who have been riding the “hunt for yield” train decide it is time to get off, but on approaching the exit they encounter a stampede of like-minded people. Asset prices have gapped down or, worse, the market has seized up. Aggravating the stampede is the arrival of fellow-investors who have suddenly discovered the state-of-the-art products and services they — during the hunt for yield — have blown up.

Many decide to postpone their exit hoping for a quieter time in the future. The history of the stampede and the realization that many of its one-time participants still “want out” weigh on markets and the economy going forward.

In autumn 1987, the trigger to the inflation alert had been the new Fed Chief (Alan Greenspan) hinting that he would no longer steer monetary policy towards bolstering the dollar in line with the Louvre Accord of early that year. Paul Volcker (the previous Fed Chief) had had late remorse for having pursued a policy of monetary inflation since the Plaza Accord of summer 1985 (where he had signed up for Treasury Secretary Baker’s dollar devaluation policy). In the first half of 1987, Volcker had been tightening policy, annoying the Treasury Secretary and thereby failing to gain a nomination for a further term. The Bundesbank quickly indicated that Germany (unlike Japan at the time) would not follow the US on this further journey into monetary inflation. The US-German policy divergence (underlined by Secretary Baker criticizing a Bundesbank rate hike) and the related dollar setback, triggered a US inflation alarm in the stock markets.

The late Jude Wanniski, a well-known contemporary economist close to anti-Baker conservatives, saw this alarm as the crucial catalyst to Black Monday (October 19). Adding to the drama of the market quake was the failure of a newly popular strategy of portfolio insurance during the post-Plaza asset price inflation; many investors had become convinced that they could carry larger equity risk positions than in the past due to the hedging potential of the new equity future markets; but when prices suddenly gapped down they found this tool of “hedging on demand” froze.

Today Germany is out of the picture in terms of sounding an inflation alert. The new “grand” coalition deal concluded this week in Berlin seals German abdication as hard money sovereign in Europe, a role in practice abandoned in stages since the launch of European Monetary Union. At every point where Germany could have called a halt to the softening of the European monetary regime Chancellor Merkel has fallen back on the default position “there is no way back.”

Pundits suggest the Merkel coalition deal will culminate in an electoral disaster for her CDU/CSU alliance and its SPD partner, meaning an overall majority next time for the anti-euro and euro-sceptic parties (AfD, FDP, and Left). Perhaps that would make possible a German hard money restoration, especially if in a post-Merkel era the CDU/CSU move to the right, but that is too uncertain and too far ahead to become a matter of present market speculation.

Despite German abdication, the inflation alert this time did nonetheless come in part from a weakening of the dollar, which responded to the Davos chatter of Treasury Secretary Mnuchin (expressing fondness for a cheap greenback). But it was due more fundamentally to a US federal budget deficit in a late boom phase of the cycle projected now at as much as 6% of GDP next year. Another factor is the appointment of a Yellen loyalist who gets on well with the Treasury Secretary (and presumably President Trump) as Fed Chief, with only four Republican senators voting against. Actual wage and price data was a factor as well. The approach of 10-year Treasury bond yields to 3% helped to precipitate the alert.

Asset managers following the popular risk parity portfolio strategies using innovatory financial products based on trading so-called “market volatility” (the VIX) found themselves blindsided when the alert caused equity prices to gap down. Underlying the strategies had been the notion that asset managers could combine high leverage with assets of perceived low volatility to manufacture synthetic portfolios of a stipulated overall higher volatility and returns to match; they could also take advantage of an alleged overpricing of volatility in the markets to create arbitrage profit (taking short positions in volatility against long positions in risk). As the price for volatility and actual volatility gapped up at the start of this month, these strategies blew up.

Central bank officials, whether from the Fed, ECB, or Bundesbank have been quick to say that there is no macro-economic significance or even serious financial consequence from the blow up and the related mini-crash. But how could it be that a jump in perceived asset risks (volatility) across the board and related jump in the price of put and call options can be so inconsequential?

In Finance 101 we learn that the price of credit, especially high-risk credit, is tied by formula to the price of options on the underlying equity, and volatility is a key input to pricing (according to Black-Scholes). The spread on corporate bond yields (above Treasuries), for example, should now rise meaningfully, especially for high-risk categories. That is a potential big drag on overall risk markets and economic activity. Alongside we may well find a greater reticence of many households and businesses to spend now that the recent market tremor has heightened anxiety about the end game all know is coming for the monetary inflation created by our central bankers.

No doubt the Fed, ECB and BoJ would exercise their “Greenspan puts” in response to an economic slowdown and continued market pullback this year by delaying still further policy normalization. That put was successful in 1987/8 in producing an eighteen-month respite before the final stage of asset price inflation set in (featuring then global real estate market downturn and eventually recession) while goods-inflation meanwhile did indeed spike upwards. This time a hypothetical Powell put may not even have that success given that so much of the speculative narrative that has accompanied asset market temperature rises to the sky in this cycle is already so aged and problematic sustained by market momentum which has faded away and even gone into reverse.

Our Interests and Their Interests

Murray N. Rothbard — Mon, 12 Feb 2018 14:00 -0600

By: Murray N. Rothbard

In the 20th century, the advocates of free-market economics almost invariably pin the blame for government intervention solely on erroneous ideas — that is, on incorrect ideas about which policies will advance the public weal. To most of these writers, any such concept as "ruling class" sounds impossibly Marxist. In short, what they are really saying is that there are no irreconcilable conflicts of class or group interest in human history, that everyone's interests are always compatible, and that therefore any political clashes can only stem from misapprehensions of this common interest.

In "The Clash of Group Interests," Ludwig von Mises, the outstanding champion of the free market in this century, avoids the naïve trap embraced by so many of his colleagues. Instead, Mises sets forth a highly sophisticated and libertarian theory of classes and of class conflict by distinguishing sharply between the free market and government intervention.

It is true that on the free market there are no clashes of class or group interest; all participants benefit from the market and therefore all their interests are in harmony.

But the matter changes drastically, Mises points out, when we move to the intervention of government. For that very intervention necessarily creates conflict between those classes of people who are benefited or privileged by the State and those who are burdened by it. These conflicting classes created by State intervention Mises calls castes. As Mises states,

Thus there prevails a solidarity of interests among all caste members and a conflict of interests among the various castes. Each privileged caste aims at the attainment of new privileges and at the preservation of old ones. Each underprivileged caste aims at the abolition of its disqualifications. Within a caste society there is an irreconcilable antagonism between the interests of the various castes.

In this profound analysis Mises harkens back to the original libertarian theory of class analysis, originated by Charles Comte and Charles Dunoyer, leaders of French laissez-faire liberalism in the early 19th century.

"We have to abandon the cozy view that all of us, we and our privileged rulers alike, are in a continuing harmony of interest."
But Mises has a grave problem; as a utilitarian, indeed as someone who equates utilitarianism with economics and with the free market, he has to be able to convince everyone, even those whom he concedes are the ruling castes, that they would be better off in a free market and a free society, and that they too should agitate for this end. He attempts to do this by setting up a dichotomy between "short-run" and "long-run" interests, the latter being termed "the rightly understood" interests. Even the short-run beneficiaries of statism, Mises asserts, will lose in the long run. As Mises puts it,

In the short run an individual or a group may profit from violating the interests of other groups or individuals. But in the long run, in indulging in such actions, they damage their own selfish interests no less than those of the people they have injured. The sacrifice that a man or a group makes in renouncing some short-run gains, lest they endanger the peaceful operation of the apparatus of social cooperation, is merely temporary. It amounts to an abandonment of a small immediate profit for the sake of incomparably greater advantages in the long run.

The great problem here is: why should people always consult their long-run, as contrasted to their short-run, interests? Why is the long run the "right understanding"? Ludwig von Mises, more than any economist of his day, has brought to the discipline the realization of the great and abiding importance of time preference in human action: the preference of achieving a given satisfaction now rather than later. In short, everyone prefers the shorter to the longer run, some to different degrees than others.

How can Mises, as a utilitarian, say that a lower time preference for the present is "better" than a higher? In brief, some moral doctrine beyond utilitarianism is necessary to assert that people should consult their long-run over their short-run interests. This consideration becomes even more important when we consider those cases where government intervention confers great, not "small," gains on the privileged, and where retribution does not arrive for a very long time, so that the "temporary" in the above quote is a long time indeed.

Mises, in "The Clash of Group Interests," tries to dismiss war between nations and nationalisms as senseless, at least in the long run. But he does not come to grips with the problem of national boundaries; since the essence of the nation-State is that it has a monopoly of force over a given territorial area, there is ineluctably a conflict of interest between States and their rulers over the size of their territories, the size of the areas over which their dominion is exercised.

While in the free market, each man's gain is another man's gain, one State's gain in territory is necessarily another State's loss, and so the conflicts of interest over boundaries are irreconcilable — even though they are less important the fewer the government interventions in society.

Mises's notable theory of classes has been curiously neglected by most of his followers. By bringing it back into prominence, we have to abandon the cozy view that all of us, we and our privileged rulers alike, are in a continuing harmony of interest. By amending Mises's theory to account for time preference and other problems in his "rightly understood" analysis, we conclude with the still less cozy view that the interests of the State-privileged and of the rest of society are at loggerheads — and further, that only moral principles beyond utilitarianism can ultimately settle the dispute between them.

This article is excerpted from Murray Rothbard's 1978 preface to Ludwig von Mises's The Clash of Group Interests and Other Essays.

End Space-Station Funding Right Now

Laurence M. Vance — Mon, 12 Feb 2018 11:00 -0600

By: Laurence M. Vance

Donald Trump’s possible decision to end NASA’s funding of the International Space Station by 2025 brings up that age-old question of the proper role of government, although it is certainly not he who is bringing it up.

The International Space Station (ISS) program is a joint operation between NASA and the space agencies of Russia, Japan, Canada, and eleven countries of Europe. According to NASA’s “Reference Guide to the International Space Station.”

NASA and the space agencies of Russia, Japan, Europe and Canada have hosted investigators from 83 nations to conduct over 1700 investigations in the long-term micro-gravity environment on-board the ISS. Many investigators have published their findings and others are incorporating findings into follow-on investigations on the ground and onboard. Their research in the areas of earth and space science, biology, human physiology, physical sciences, and technology demonstration will bring yet to be discovered benefits to humankind and prepare us for our journey beyond low Earth orbit.

The first of many components of the ISS was launched into orbit in November 1998. Assembly was completed in July 2011. The station has been continuously occupied by a maximum of six astronauts from various countries since November 2000.

The ISS is the largest man-made object to ever orbit the Earth. In NASA’s reference guide, it is described thus:

The ISS has a mass of 410,501 kg (905,000 lbs) and a pressurized volume of approximately 916 m3 (32,333 ft3). The ISS can generate up to 80 kilowatts of electrical power per orbit from solar arrays which cover an approximate area of 2,997 m2 (32,264 ft2). The ISS structure measures 95 m (311 ft) from the P6 to S6 trusses and 59 m (193 ft) from PMA2 to the Progress docked on the aft of the Russian Service Module. The ISS orbital altitude can range from 278-460 km (150-248 nautical miles) and is in an orbital inclination of 51.6 degrees. The ISS currently houses 6 crew members.

The ISS is so large it can be seen from Earth with the naked eye. It maintains an orbit between 205 and 270 miles above the Earth, and completes 15.5 orbits per day.

Of course, all of this comes at a price — an enormous price to U.S. taxpayers.

The ISS is the most expensive object ever built. According to a recent audit by NASA’s Office of Inspector General, “Through fiscal year (FY) 2017, NASA has spent approximately $87 billion for ISS development, operations, research, and associated Space Shuttle flights. For FY 2018, NASA’s total projected ISS budget is $3.4 billion, including roughly $318 million for research efforts.” The program’s total cost is estimated to be about $150 billion, with each day spent on-board by an ISS crewmember costing about $7.5 million.

Although Donald Trump’s fiscal year 2018 budget request is not due to be released until February 12, according to a draft budget proposal leaked by the White House Office of Management and Budget (OMB) and reviewed by The Verge, “The Trump administration is preparing to end support for the International Space Station program by 2025.” A NASA spokesman would say only that “NASA and the International Space Station partnership is committed to full scientific and technical research on the orbiting laboratory, as it is the foundation on which we will extend human presence deeper into space,” and would not comment “on any leaked or pre-decisional documents prior to the release of the President’s FY19 budget.” Back in 2014, the Obama administration extended funding of the ISS “until at least 2024.” Many players in the commercial space industry want NASA to extend funding through 2028, the year that many consider to be the end of the ISS’s operational lifetime.

If Donald Trump decides that he wants to end NASA’s funding of the ISS, it won’t be because he opposes government space exploration or government funding of scientific research in space. He simply has other ambitions, such as wanting NASA “to send astronauts back to the Moon, as a pit stop to eventually send people to Mars.”

But why wait until 2025 to end funding of the ISS? Why not end funding now?

That a government space program has or has not resulted in valuable discoveries and inventions; created jobs; or benefited science, medicine, and engineering is not the issue. And besides, there is no real way to measure or quantify what the space program has done for society. There is a big difference between government jobs and private-sector jobs. Government funding of space exploration, research, and experiments crowds out private efforts. And the actual costs of a space program may exceed its supposed benefits.

Although a government space program may be popular with the majority of Americans and have wide bipartisan support in Congress, it is still neither authorized by the Constitution nor a proper function of government.

In an ideal society in which the federal government is strictly limited by the Constitution, the only possible legitimate functions of government are defense, judicial, and policing activities: keeping the peace; prosecuting, punishing, and exacting restitution from those who initiate violence against, commit fraud against, or otherwise violate the personal or property rights of others; providing a forum for dispute resolution; and constraining those who would attempt to interfere with people’s peaceful actions.

If an exception can be made for government funding of a space program because it has “benefits,” then no reasonable, logical, or rational argument can be made against government funding of anything.

Not only should government funding of the ISS be ended now, government funding and operating of the space program should also be ended now.

All space stations, bases on the Moon, missions to Mars, space exploration, space tourism, space experiments, space research, rocket launches, and space colonization should be carried out and funded by private organizations and institutions without government management, cooperation, partnerships, or funding of any kind. Americans who want astronauts to explore strange new worlds, seek out new life and new civilizations, and boldly go where no man has gone before should be the ones paying for it.

Originally published by the Future of Freedom Foundation.

Get Ready for the War on Meat

José Niño — Tue, 13 Feb 2018 11:00 -0600

By: José Niño

Plant-based diets, especially vegan diets, seem to be all the rage these days.

Based on the practice of eschewing animal products, veganism has attracted a broad coalition of interest groups — ranging from animal rights to environmental activists — who believe that veganism is the most ethical and sustainable way of promoting human health and animal welfare.

At first, these appear to be reasonable premises for an alternative lifestyle that challenges the dietary status quo.

But when placed under the microscope, the modern vegan movement has shown signs of increased politicization and a tendency to mesh with socialist causes.

Veganism as a Vessel for Interventionism

Recent developments have demonstrated that veganism is making headway not only in the cultural realm, but also in the political sphere.

It is no secret that many elites at international organizations have an aversion toward meat. In fact, institutions like the United Nations have called for the reduction of meat consumption on the grounds of environmental sustainability and health concerns.

And like any good globalist institution, they believe in using government force, in this case, taxation, to curb meat consumption.

But bureaucrats and their vegan foot soldiers are not alone. Groups like the Farm Animal Investment Risk and Return (FAIRR), an investment initiative network that monitors factory farms, has thrown its hat into the ring by pushing for meat taxation. This group is no roughshod, grassroots operation; it’s backed by investors that preside over roughly $4 trillion in assets.

The recent meat tax discussions show a paradigm shift in the issue where politicians, bureaucrats, nutritionists, and even powerful financial interests are actively flirting with the idea of using state power to discourage meat consumption.

It’s only a matter of time before governments around the world start implementing meat taxes, adding to the ever-growing list of taxes that citizens must endure.

But is meat taxation a viable way to reduce consumption?

The Problems with Sin Taxes

Sin taxes are nothing new in US history. Busybody politicians have targeted all sorts of activities — alcohol consumption and smoking — that they deem to be destructive and try to use the heavy-hand of the state to curtail these so-called vices.

In the majority of the aforementioned cases, sin taxes failed to reduce consumption of said activities. And in the few instances that sin taxes did succeed in curbing consumption, the problems of prohibition and black markets would come into the equation.

Mark Thornton accurately depicts the results of prohibitive taxation or outright bans of certain goods or substances:

The scourge of crystal meth is another example of the "potency effect" or what has been called the "iron law of prohibition." When government enacts a prohibition, increases enforcement, or increases penalties on a good such as alcohol or drugs, it inevitably results in substitution to more adulterated, more potent, and more dangerous drugs.

The major takeaway from Thornton’s analysis is that when the government puts the clamps on goods and services, it creates incentives for black market actors to offer more dangerous, lower quality alternatives.

If the anti-meat crowd had their way, proposed meat taxes would have a similar effect, as shady suppliers will look to profit off lower-quality meat products that turn out to be harmful for consumers.

As these alternatives start to bring about negative effects, politicians will naturally respond with even more intervention. Unless cooler heads prevail, more destructive interventions and unintended consequences will follow.

Moreover, just as meat providers are being driven by consumer demand toward more organic, cage-free and "certified humane" meats, additional government interventions will only work in the opposite direction, placing these products out of reach of more consumers.

It's about Control

Health arguments aside, the real issue at hand in these discussions is control. Taking a page from their environmentalist ilk, vegans constantly rely on alarmist tactics to advance their cause. And this agenda consists of more than just educational campaigns — it involves using a strong centralized state to carry out their dietary vision.

To achieve this zealous plant-based vision, these actors will ultimately have to control and regulate the means of production of meat. The US government already wields tremendous power over food through the Food and Drug Administration (FDA) and the Department of Agriculture (USDA). These agencies, with pressure from anti-meat activists, can be used as vehicles to implement one-size-fits-all policies.

Central planning of this sort forms the bedrock of socialism and the latest anti-meat crusades represent another ambit that socialists will exploit in order to gain more traction. At its core, political veganism is the same fundamental philosophy but with different cosmetic features.

It Boils down to Freedom

Individuals should be free to choose whatever diet they desire. The best diet is the one an individual can consistently stick to long enough to achieve their body composition and health goals.

Unfortunately, veganism has taken a page out of the global warming playbook by lending itself as a vehicle for increased state centralization and control over the private affairs of peaceful citizens. The recent meat tax propositions serve as a firm reminder of why there must be a complete separation of Food and State.

Just like the state should stay out of our wallets, the state should stay out of our grocery stores and kitchens.

The New German Government Is Bad News

Kai Weiss — Thu, 08 Feb 2018 06:30 -0600

By: Kai Weiss

Germany finally has a new government. After months of negotiating, a breakdown of talks between the Conservatives, Greens, and Liberals, and constant fighting between the Conservatives (CDU/CSU) and Social Democrats (SPD), the two major parties reached an agreement yesterday.

Members of the SPD still have to vote on the coalition agreement, which is “only” 177 pages long, but this should just be a matter of time – that is, no later than early March. For all Germans however, this spells trouble – well, at least for everyone except the Social Democrats. The SPD, despite being the biggest losers in the federal election, are the triumphant winners of the coalition talks.

Martin Schulz, their leading candidate in the elections, will become Minister of Foreign Affairs, something unimaginable just a few weeks back, when his political career seemed closer to coming to an abrupt end after the miserable job he was doing, rather than getting one of the most prestigious jobs in the country. Under the leadership of the former President of the European Parliament, the SPD had the worst result in party history – in current polling, they now even have to fight for second place with the right-wing Alternative for Germany (AfD). Funnily enough, right after the election Schulz proclaimed loudly that he would never be a minister in a Merkel-led government. So much for that.

But Schulz is not the only SPD loser who suddenly comes out as a (temporary) winner. Olaf Scholz (yes, the same name just with an “o”), the mayor of Hamburg, was close to having to step away from his position last July, when his city got demolished by left-extremist groups during the G8 meeting, Hamburg became a war zone between the “antifascists,” and the police. Now he is Minister of Finance. Whatever one might think of his predecessor Wolfgang Schäuble, in comparison to Scholz, Schäuble will surely seem as a fiscal hawk – he did balance the budget after all, and was the loudest proponent of the EU’s austerity policy, which was so heavily attacked by the SPD.

Even worse, Heiko Maas will probably return to the Justice Department. Thanks to him, hate speech and fake news are now monitored in Germany, which for many has made the normal usage of Facebook an impossibility.

Long term, however, the appointment of Andrea Nahles as the new leader of the SPD could be worst. All of the SPD politicians mentioned so far do have high positions for now, but in reality are merely “dead men walking” (as George Osborne would say).

Nahles, though, has finally arisen from the far-left wing of the SPD, after being Minister of Labor in the last four years. Her goal is that the “new” SPD will from now on focus more on “social justice,” and should get closer to the Left Party, potentially even for a future coalition government. “We have failed to address the negative sides of globalization,” she said in September. “The SPD once again has to learn how capitalism works, and, if necessary, criticize it viciously.” Obviously, the SPD could learn how capitalism works – but under Nahles, it’s likelier that only the fallacious critique remains, and in a worst-case scenario, that the SPD turns into a Jeremy-Corbyn-style Labour party.

This government, however, doesn’t just spell trouble for Germany, but perhaps even more so for Europe. The EU is already missing the sound voice from across the pond – no, not the US, but the common-sense Brits – but the skeptical, lukewarm voice from Germany could be history now as well. Angela Merkel, who suddenly looks like the right-wing part of the government (which should make it clear how dire the situation is), is probably in the final years of her tenure as Chancellor. She will intend to make a statement – and nowhere is this better possible than concerning the EU.

This is why she will be much friendlier to the idea of a “United States of Europe,” already endorsed by Martin Schulz on Twitter a few weeks back, who demanded it to be implemented by 2025 (just like that). Reform plans put forward by Macron, Juncker, Verhofstadt, and other EU federalists should find much more support from Germany – these include for example a European Monetary Fund, a more intense cohesion policy (i.e. more direct redistribution from rich to poor member states), more cooperation on defense, regulatory and tax harmonization, maybe even a European-wide social safety net, and just overall – how could it be any other way – more power to Brussels (also by possibly easing majority voting in the Council to mum the “dissidents” from Poland, Hungary, the Netherlands, or Denmark for instance). The coalition agreement is extremely vague on which EU the German government actually wants to see – but be assured, if anything it is starkly pro-EU, and will favor more integration.

Thus, the question remains if there are any good news at all – and thankfully there are, though they will be hard to notice at first. In parliament, now with another Grand Coalition, but two new parties, the opposition will be much stronger. With the liberal FDP, and the right-wing AfD – which both have their own problems, but do bring a breath of fresh air in favor of slightly more liberty-oriented policies, there will be loud opponents to the status quo.

More importantly, though, the two ruling parties have just shifted their problems forward another four years. Judgement day will come nonetheless, and will just be worse. Germans are fed up by the CDU and SPD, which is why the two parties were the biggest losers in the last election. Germans are fed up by the Merkel’s and Schulz’. Let’s hope – and it admittedly may be naïve – this translates to a major political turnaround in the near future, regardless of inside the ruling CDU, where a conservative rebellion against the left-wing Merkel wing is ongoing, or outside, with new faces coming in. Today’s news will not change anything on that. It can only postpone it.

UPDATE, February 9: The German political scene was thrown into chaos once again today, when Martin Schulz announced that he actually doesn't want to be Minister of Foreign Affairs after all. Tension inside the SPD has been growing since the announcement two days ago that he would break his promise to never enter a Merkel-led government, which culminated yesterday in heavy attacks by Sigmar Gabriel, the Minister of Foreign Affairs up to now, who surprisingly was completely excluded from the SPD gift giving of ministries, calling Schulz at one point the "man with the hair on his face." Who will replace Schulz remains to be seen, but if Gabriel pulls it off to return to his position the improvement over Schulz would be minute. For instance, at a conference on the EU budget at the Commission a month ago, Gabriel said that actually, Germany is not a net payer to the EU, since "we are all winners as regards European integration!" If Gabriel is just unable to do math, or caught himself in some EU fanaticism was not evident.

Paul Krugman Should Love President Trump’s Infrastructure Plan

Robert P. Murphy — Fri, 09 Feb 2018 06:00 -0600

By: Robert P. Murphy

America’s most famous Keynesian, economist Paul Krugman, predictably used his New York Times column to excoriate President Trump’s State of the Union infrastructure proposal. Yet ironically, Krugman’s own positions on the economy and climate change should lead him to applaud Trump’s ideas. This is just another episode where Krugman displays his partisanship, rather than fidelity to his ostensible goals for the public.

Right off the bat, Krugman is in an awkward position, because back when he thought Hillary Clinton was going to be the next president, Krugman stressed the need for more infrastructure spending. For example, in a column from August 2016 titled, “Time to Borrow” (!), Krugman wrote:

The campaign still has three ugly months to go, but the odds — 83 percent odds, according to the New York Times’s model — are that it will end with the election of a sane, sensible president. So what should she do to boost America’s economy, which is doing better than most of the world but is still falling far short of where it should be?
There are, of course, many ways our economic policy could be improved. But the most important thing we need is sharply increased public investment in everything from energy to transportation to wastewater treatment.
How should we pay for this investment? We shouldn’t — not now, or any time soon. Right now there is an overwhelming case for more government borrowing. [Bold added.]

Well, it turns out that the NYT’s model gave Krugman a false sense of security, since his “sane, sensible” choice didn’t end up winning. After Trump’s surprise election, Krugman—being Krugman—suddenly flipped in his economic analysis. After the August 2016 column we just cited—titled “Time to Borrow,” remember—Krugman then wrote a column in early January 2017 titled, “Deficits Matter Again.” (Of course they do—a Republican is in the White House again!) And, if Krugman flipped on the wisdom of government deficits, he also now must be a massive opponent of Trump’s proposed infrastructure plan.

How Can Krugman Oppose a Giant Infrastructure Plan?

So how does the Nobel laureate pull this particular rabbit out of the hat? Here’s Krugman’s case, from the recent column following Trump’s State of the Union address:

[W]hile we desperately need new investment in public capital, Trump’s proposal – Trumpfrastructure? – isn’t remotely serious. At best, it would be a trivial sum of money pretending to be something big. At worst, it would amount to an orgy of crony capitalism, privatizing public assets while generating little new investment.
So, what’s being sold here? Trump gave a big number, $1.5 trillion. But a leaked draft of the plan says that it will involve only $200 billion of federal money. The rest is supposed to be induced spending from private investors. That’s quite a trick. How does it work?
The answer is, basically, that it doesn’t. Private investors won’t spend on public infrastructure unless guaranteed a return. This only works if they’re given ownership, and the ability to collect future revenue from the public.
…[E]ven where it does work — say, on toll roads and bridges — that private investment doesn’t come free; it’s in return for the ability to collect fees from the public, which is just taxation in another form. And there’s no evidence that doing public investment this way saves any money. On the contrary, it usually ends up costing taxpayers more than just having the government build the thing.

So there you have it: Krugman thinks he’s reconciled his earlier calls for massive infrastructure spending, with his current opposition to Trump’s call for massive infrastructure spending. But even on his own terms, and in light of his other writings, Krugman’s case doesn’t hold up.

Why Krugman Ought to Applaud Trump’s Plan

On Krugman’s own description of it, Trump’s plan has private investors put up a bunch of their own money to do the lion’s share of infrastructure spending, in exchange for the revenues that flow to the projects over time from fees levied on the citizens who use the items (bridges, roads, etc.). In other words, the plan is economically equivalent to financing public works projects through privately financed deficits, except it cuts out the IRS middleman.

Krugman should be a huge fan of this approach. After all, Krugman tells us that sure, the economy seems to be doing OK in the first year under Trump, but that “when the next big shock comes…we’ll need an effective, coherent response from officials beyond the world of central banking.” This is because—Krugman claims—we are dangerously close to the “zero lower bound” world of the liquidity trap, so that the Fed can’t just cut interest rates when the next shock hits us.

In that context, then, Krugman should be ecstatic to learn that the Trump Administration has already gotten the wheels in motion for private investors to put up $1.3 trillion on the front end to build infrastructure, in exchange for revenues to be collected over the following decades. That is exactly the kind of plan to promote investment spending via deficit finance that Krugman thinks is necessary when the Fed is rendered impotent because interest rates hit 0%.

Better for the Environment, Too

I am not being facetious; my analysis above flows directly from Krugman’s writings in the years following the financial crisis. Back then—when it was Barack Obama rather than Donald Trump in the White House—Krugman even stressed the fact that it was foolish to worry about costs. Indeed, it was a virtue for the government to spend more money than “necessary” on things; worrying about cost-effectiveness was the last thing to do in the midst of a depression. So again, in that spirit, Krugman should be happy for Trump’s plan to go through, even if it works exactly as Krugman has described it in his latest column.

Finally, if we’re talking about roads and bridges, then even “price gouging” is great, from Krugman’s perspective. If a private owner sets tolls to maximize profit, then this will ensure a smooth flow of traffic. As economists have been arguing for decades, the familiar and agonizing traffic jams plaguing our major cities are not a force of nature—they are instead the predictable consequence of government setting prices below their market-clearing levels.

And so, even in the “worst case” scenario where private owners charge higher tolls than would occur on government-owned roads, this will reduce traffic congestion and cut back on vehicle emissions. Not only will it enhance economic efficiency (which is why free-market economists welcome it), but it will reduce the threat of catastrophic climate change, which Krugman claims to be very worried about.

In short, even if President Trump’s infrastructure proposal works out exactly as Paul Krugman has described it, Krugman should be applauding it. According to Krugman’s own stated views, Trump’s plan will be an insurance policy to maintain aggregate demand in the event of another shock to the economy. Furthermore, the more bridges and roads that are transferred into private hands, the less traffic congestion and carbon dioxide emissions.

Originally published by the Institute for Energy Research

James Buchanan on Methodological Individualism and the Market Process

Thomas J. DiLorenzo — Thu, 08 Feb 2018 14:00 -0600

By: Thomas J. DiLorenzo

A rigorous application of methodological individualism is perhaps what most separates the Austrian and Public Choice schools from most others. The idea that the individual should be the unit of analysis has spared public choice and Austrian economists from many of the mistakes of what might be called collectivist economics. The Austrians, for example, have exposed a great deal of macroeconomic nonsense due to the fact that Keynesian theory largely ignored aggregation problems. The Austrian conception of markets, based on the interaction among individuals and on man's inherent "propensity to truck, barter and exchange," is also more useful and informative, in my view, than the perfect competition model.

Buchanan and other public choice theorists have greatly improved our understanding of the political process by scrapping the "organic" view of collective action, which describes government, more or less, is a benevolent despot, making decisions that are assumed to be in the public interest."

Not so long ago, in 1968, Buchanan remarked:

Most ... economists take an approach different from my own, and one that I regard as both confused and wrong. In my vision of social order, individual persons are the basic component units, and "government" is simply that complex of institutions through which individuals make collective decisions, and through which they carry out collective as opposed to private activities. Politics is the activity of persons in the context of such institution.1

Of course, the economics profession has changed significantly since then, particularly in light of the public choice revolution. Methodological individualism has replaced more collectivist views in academic circles.

Nevertheless, it is far from clear that there has been a decisive "victory." Social welfare functions still clutter the economics journals. Moreover, there is no shortage of recommendations for government intervention in the name of the mythical "public interest." Proponents of methodological individualism have made great strides, but the collectivist mind set dies a slow death.

Buchanan has also long been considered a proponent of the Austrian view of the 'market process. In this regard he is more than jus a "fellow traveler"; his work has played an important role in helping to distinguish between the theory of the market as a process and the alternative, neoclassical theory of competitive equilibrium. Thus, in addition to his seminal work on subjective cost theory, Buchanan has helped clarify the Austrian view of the market as a process.

In his 1963 presidential address to the Southern Economic Association, Buchanan explained how the economics profession was apparently being led astray by its focus on the "theory of resource allocation." He forcefully argued that the standard neoclassical definition of economics as the study of the allocation of scarce mean among competing ends "has served to retard, rather than advance scientific progress.2" The reason for this, according to Buchanan, is that there is very little economic content in much of modern economics. What neoclassical economics, all too often involves is a computation problem, the computation of equilibrium prices, for example which "to the subjectivist, [seems] an absurd exercise.'"'3

A good example is the work of Nobel Laureate Tjalling Koopmans who began his career by working out the optimal allocation of a set of tankers carrying oil across the Atlantic during World War II. Buchanan properly labels such work as engineering, not economics and claims that he must have been "a confirmed subjectivist long before I realized what I was because I recall thinking in 1946, when Koopmans was lecturing...at the University of Chicago, that there seemed to be absolutely no economic content in what he was doing."4

Buchanan has attempted to persuade the economics profession to abandon its fixation on allocation problems per se, for "if there is really nothing more to economics than this, we had as well turn it all over to the applied mathematician.5" This does appear to be the direction the profession has been heading; for "developments of note ...during the past two decades consist largely of improvements in...computing techniques, in the mathematics of social engineering."6

Instead of becoming weakly-trained mathematicians (at least by the standards of professional mathematicians), Buchanan suggested replacing the theory of resource allocation with the theory of markets.

This would require paying more attention to

a particular form of human activity, and upon the various institutional arrangements that arise as a result of this form of activity. [Namely,] man's behavior in the market relationship, reflecting the propensity to truck and to barter, and the manifold variations in structure that this relationship can take.7

These, Buchanan has written, are the proper subjects of economics.

This approach helps us understand why, in perfect competition, there is no competition (or any trade, for that matter). It also reveals how a market is not competitive by definition, as in the neoclassical model, but that a market becomes competitive. "It is this becoming process, brought about by the continuous pressure of human behavior in exchange, that is the central part of our discipline...not the dry rot of postulated perfection."8

Thus, Buchanan's view of the market system may properly be labeled Austrian. Furthermore, he has urged us to apply this same notion of the economic process to the study of political institutions. This is why public choice theory is largely a study of political processes, with policy recommendations usually focusing on altering institutional processes, rather than political outcomes or end states.

Excerpted from The Subjectivist Roots of James Buchanan's Economics

1. JamesBuchanan, "An Economists's Approach to Scientific Politics," in M. Parons, ed., Perspectives in the Study of Politics (Chicago: Rand McNally, 1968),p. 78.

2. JamesBuchanan, "What Should Economists Do?" Southern Economic Journo (January 1964): 213-22.

3. JamesBuchanan, "General Implications of Subjectivism In Economics," In Geo frey Brennan and Robert D. Tollison, eds., What Should Economrsts Do? (Indianapoh Ind.: Liberty Press, 19791, p. 85.

4. Ibid.

5. JamesBuchanan, "What Should Economists Do?"p. 217.

6. Ibid.

7. Ibid.

8. Buchanan,Cost and Choice, p. 83.

The United States Is a Tax Haven for Global Investors…and that’s Good for America

Daniel J. Mitchell — Thu, 08 Feb 2018 06:00 -0600

By: Daniel J. Mitchell

According to bureaucrats at the Paris-based Organization for Economic Cooperation and Development, so-called tax havens are terrible and should be shut down. Their position is grossly hypocritical since they get tax-free salaries while pushing for higher taxes on everyone else, but not very surprising since the OECD’s membership is dominated by increasingly uncompetitive European welfare states.

Many economists, by contrast, view tax havens favorably since they discourage politicians from over-taxing and over-spending (thus protecting nations from “goldfish government“).

I agree with this economic argument for tax havens, but I also think there’s a very strong moral argument for these jurisdictions since there are so many evil and incompetent governments in the world.

But I don’t want to rehash the argument about the desirability of tax havens in this column. Instead, we’re going to focus on a nation that is becoming the world’s premier “offshore” center.

But it’s not a Caribbean island or a micro-state in Europe.

Instead, as noted in a recent Bloomberg editorial, the United States is now the magnet for global investment.

…the U.S. is becoming one of the world’s best places to hide money from the tax collector. …Congress rejected the Obama administration’s repeated requests to make the necessary changes to the tax code. As a result, the Treasury cannot compel U.S. banks to reveal information such as account balances and names of beneficial owners. The U.S. has also failed to adopt the so-called Common Reporting Standard, a global agreement under which more than 100 countries will automatically provide each other with even more data than FATCA requires. …the U.S. is rapidly becoming the new Switzerland. Financial institutions catering to the global elite, such as Rothschild & Co. and Trident Trust Co., have moved accounts from offshore havens to Nevada, Wyoming and South Dakota. New York lawyers are actively marketing the country as a place to park assets. …From a certain perspective, all this might look pretty smart: Shut down foreign tax havens and then steal their business.

The Economist also identified the U.S. as a haven.

America seems not to feel bound by the global rules being crafted as a result of its own war on tax-dodging. It is also failing to tackle the anonymous shell companies often used to hide money. …All this adds up to “another example of how the US has elevated exceptionalism to a constitutional principle,” says Richard Hay of Stikeman Elliott, a law firm. …America sees no need to join the CRS. …reciprocation is patchy. It passes on names and interest earned, but not account balances; it does not look through the corporate structures that own many bank accounts to reveal the true “beneficial” owner; and data are only shared with countries that meet a host of privacy and technical standards. That excludes many non-European countries. …The Treasury wants more data-swapping and corporate transparency, and has made several proposals to bring America up to the level of the CRS. But most need congressional approval, and politicians are in no rush to enact them. …Meanwhile business lobbyists and states with lots of registered firms, led by Delaware, have long stymied proposed federal legislation that would require more openness in corporate ownership. (Incorporation is a state matter, not a federal one.) …America is much safer for legally earned wealth that is evading taxes… It has shown little appetite for helping enforce foreign tax laws.

And here are some passages from a recent column in Forbes.

…foreign financial institutions are required to report the identities and assets of United States taxpayers to the IRS. Meanwhile, U.S. financial institutions cannot be compelled to reveal the same information to foreign countries. Additionally, the United States has not adopted the Common Reporting Standard. …So, the United States government obtains tax and wealth information from other countries, but fails to share information about what occurs in the U.S. with those other counties. …the U.S. is among the top five best countries for setting up anonymous shell companies. Tax havens deliver a set of benefits including secrecy, potential tax minimization, and the ability of the wealthy to access their monies from anywhere in the world. For a substantial percentage of the global super-rich, the United States is regularly unmatched.

Here’s some of what was reported by the U.K.-based Financial Times.

South Dakota is best known for its vast stretches of flat land and the Mount Rushmore monument… Yet despite its small town feel, Sioux Falls has become a magnet for the ultra-wealthy who set up trusts to protect their fortunes from taxes… Assets held in South Dakotan trusts have grown from $32.8bn in 2006 to more than $226bn in 2014, according to the state’s division of banking. The number of trust companies has jumped from 20 in 2006 to 86 this year. The state’s role as a prairie tax haven has gained unwanted attention… The Boston Consulting Group estimates that there is $800bn of offshore wealth in the US, nearly half of which comes from Latin America. …Bruce Zagaris, a Washington-based lawyer at Berliner, Corcoran & Rowe, says the US offshore industry is even bigger than people realise. “I think the US is already the world’s largest offshore centre. It has done a real good job disabling competition from Swiss banks.”

If this sounds like the United States is hypocritical, that’s a very fair accusation.

Indeed, it was the topic of an entire panel at an Offshore Alert conference. If you have a lot of interest in this topic, here’s the video.

This is an odd issue where I agree with statists (though only with regard to which jurisdictions are “havens”). For instance, the hard-left Tax Justice Network has calculated that the United States is not the biggest offshore jurisdiction. But America is close to the top.

In the TJN’s most-recent Financial Secrecy Index, the United States ranks #2. They think that’s a bad thing (indeed, one of their top people actually asserted that all income belongs to the government), but I’m happy we’ve risen in the rankings.

TJN also has specific details about U.S. law and I think they’ve put together a reasonably accurate summary.

The bottom line is that America is a haven, though it’s probably worth noting that we’ve risen in the rankings mostly because other nations have been coerced into weakening their human rights laws on financial privacy, not because the United States has improved.

At the risk of pointing out the obvious, TJN and I part ways on whether it’s good for the United States to be a tax haven.

I already explained at the start of this column why I like tax havens and tax competition. Simply stated, it’s good for taxpayers and the global economy when governments are forced to compete.

But there’s also a good-for-America argument. Here’s the data from the Commerce Department’s Bureau of Economic Analysis on indirect investment in the U.S. economy. As you can see, cross-border flows of passive investment have skyrocketed. It’s unknown how much of this increase is due to overall globalization and how much is the result of America’s favorable tax and privacy rules for foreigners.

But there’s no question the U.S. economy benefits enormously from foreigners choosing to invest in America.

All of which helps to explain why it would be a big mistake for the United States to ratify the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

Unless, of course, one thinks it would be good to undermine American competitiveness by creating a global tax cartel to enable bigger government.

P.S. The OECD doesn’t like me, but I don’t like them either.

P.P.S. The TJN folks and OECD bureaucrats claim that their goal is to reduce tax evasion. My response is that a global tax cartel is a destructive way of achieving that goal. There’s a much better option available.

P.P.P.S. Rand Paul is one of the few heroes on this issue.

Originally published on International Liberty

Filibuster in Nicaragua, Part 2: Nicaragua Conquered

Chris Calton — Wed, 07 Feb 2018 09:45 -0600

By: Chris Calton

Despite the bitter defeat in the First Battle of Rivas, William Walker and his small army of American filibusters successfully take control of the Democratico capital of Nicaragua, ending the Nicaraguan civil war. This episode is Part 2 of 6 of the story of William Walker’s attempt to establish his own Republic of Nicaragua.

How Entrepreneurs Wouldn't Let a Beloved Car Brand Die

Marcia Christoff-Kurapovna — Sat, 10 Feb 2018 06:00 -0600

By: Marcia Christoff-Kurapovna

Aston Martin, “the noble company that’s been at death’s door more times in its long history than most”, in the words of one elegant British sporting journal, is going through one of the very best periods of its storied 105-year history, with a public offering being organized to crown a profitable run that has saved the day—yet again. In 2016, the carmaker, now based at sleek new Warwickshire digs a far cry from the leaky-roof “cottage” where it was camped out most of its life, hit record profits when just a year prior the company had reported close to $100 million in losses. Following an astute game plan to launch a new car every nine months for the next five years, the strategy led to the creation of DB11, its first all-new model for a decade and called the most powerful production car the company has ever built. It won the Car Design Award for 2016 and helped double revenues in the first quarter of 2017. Enigmatic Aston Martin, it appears, is finally back on track.

The turnaround is the latest episode in the Great Entrepreneurial Saga that is the course of Aston Martin’s wild ride through seven bankruptcies between 1924 and 2017. More entertainingly, it is the story of the derring-do businessmen-adventure hunters who swooped in with deus ex machina timing to save the sexy company at each crisis milestone armed with more panache than the dapper spy associated with the car’s alluring mystique. “Maybe we should wait for more data points”, opined the New York Bureau Chief of The Automobile, one the UK’s best written reading pleasures. “But as far as I’m concerned, the car is the most important data point. This one makes me think it is saved.”

Those beautiful cars: once upon a time hand-made (requiring 1200 hours of labor each); the seven coats of paint (requiring 40 hours each), the long wheelbases, the fine Italian bone structure…It’s been a costly venture and the company’s victory lap is deserved. Yet none of it would have happened had a handful of risk-taking romantics decided to abandon or debase what to them was the gold standard of engineering.

Born in 1913 by Mssrs. Bamford and Martin on a borrowed English engine (Coventry-Simplex) and a borrowed Italian chassis (Isotta Franschini), Aston (the name of a racing hill) Martin was steered over the course of its luxuriously bumpy ride by three principal visionaries. Sir David Brown, who led the company during its magic era of the 60s (hence the “DB” model initials); Victor Gauntlett, the pinstriped patriot who saw saving the company as a matter of British honor, and Ulrich Bez, the BMW and Porsche engineering icon--each man as distinctly maverick as the troubled cars that held them in awe.

In the case of Brown, born into a successful tractor manufacturing family, it was merely a matter of answering a classified ad in The Times of London one day in 1947 that offered for sale a “High Class Motor Business”. The “business”, largely supported by a Polish count, had gone bankrupt already three times in 1924, 1925 and 1932. Going into the 1940s, the company only produced parts for the war effort.

Brown acquired Aston Martin and, a year later, Lagonda (a well-regarded British car marque founded in 1906 by an American former opera singer) for a total of less than £75,000. This was followed by his acquisition of coachbuilder Tickford in 1955. Sir David concentrated these all under the Aston Martin umbrella and spearheaded the gran tourismo style of design that would come to define the car’s image. The iconic DB series of Aston Martins soon came to grace the planet-—in particular, the whip-smart DB2 (1950-1953) favored by this author; the DB4 (1958-1963), considered the “quintessential” Aston Martin, and the DB5 (1963), the “James Bond” (Goldfinger) car;

Amateur racing driver and motorcyclist, Joint Master of the South Oxfordshire Hunt, a keen sailor, shooting aficionado, qualified pilot, polo and tennis player, racehorse owner, it was the handsome Sir David who gave birth to the British rival of Ferrari and the Aston Martin brand its “eternal” cachet. During the quarter century of his stewardship, with the win at Le Mans in 1959 and one “bloody marvelous” road car after another, DB’s influence on the company was immense.

However, in the early seventies the company was in trouble again—one factor being California emission standards requirements, which entirely halted all U.S. sales. Brown paid off all the company’s debts and sold it for £101 to an investment bank. The company went into receivership in 1974 and then was sold for around £1 million to an American semi-conductor magnate. New models, beautiful as they were, could not resuscitate the company. Then in stepped petroleum magnate Victor Gauntlett, who in April 1980, Gauntlett put £500,000 into Aston Martin Lagonda (representing a 10 percent stake). “Aston Martin's reputation seemed to exceed its capacity for making profits”, as one publication noted. The company was cash-starved with a luxury product, and faced an uncertain future but none of this deterred Gauntlett who, in 1981, became executive chairman.

Wry and romantic—in reply to a journalist’s inquiry into how he would make a small fortune of the car company he stated: “start with a big one”—the heritage-obsessed Gauntlett saved the company twice in the 1980s, something he deemed a personal crusade. He bought a stake in Italian auto design house of Andrea Zagato, resurrecting a prior collaboration with that company from the 1950s, and instituted new high-ticket limited edition models. Bolstered by a reviving economy, sales began to climb. A limited-edition Vantage (dubbed “Britain’s first supercar”), and Volante Zagato (1989) coupes at £86,000 each brought in enough funds to complete the Aston Martin Virage, the first new Aston launched in 20 years, in 1988.

He promoted the brand tirelessly. He marketed the Lagonda as the fastest four-seater in the world, achieving impressive sales in countries like Oman, Kuwait and Qatar. In 1986, Gauntlett negotiated the return of fictional British secret agent James Bond to Aston Martin, with Gauntlett supplying his personal pre-production Vantage for use in the filming of The Living Daylights and selling a Volante to Bond producer for use at his home in America. (Sadly, Gauntlett turned down the role of a KGB colonel in the movie). Through Gauntlett’s stewardship, the car become a Royal Appointment to the Prince of Wales for the first time and production at Newport Pagnell, the famous “cottage” that housed the company, continued to improve, with the factory managing to build about four and a half luxury sports cars a week

The company was doing well, but Gauntlett knew it needed extra funds to survive long term. In May 1987, he met Walter Hayes, then vice-president of Ford Europe, who saw the potential of the brand and the meeting resulted in Ford taking a share holding in September 1987. Gauntlett stayed on until 1991.

Soon to follow was the Ulrich Bez era. Throughout the 1990s, Aston was launching cars though as models refitted from unused Jaguar prototypes, another Ford property. It was in 2000 at the age of fifty-seven, that the racing enthusiast, aeronautics PhD protégé of Ferdinand “Ferry” Porsche came on the scene to become of the company’s most colorful names in the company’s recent history.

“Ulrich Bez is a carmaker, and the last of a dying breed”, states Paolo Tumminelli, a noted automobile historian, forward to the book Making Aston Martin. For Bez, “the Professor” in his life was Ferdinand Porsche—the father of the 911, uncompromising, resourceful and idealistic—who was the mentor of Bez’s ten year apprentice-to-designer (the Porsche 993, 986, 928 GTS) career. When Bez was recruited by Ford to take over, he bluntly told the company to pull the plug on everything because “everything” was being done wrong. Disgusted by the cheapening of luxury sports cars for the mass market (with harsh words to say about Porsche), Bez explained to Ford that his aim was to “retain Aston Martin’s exclusivity while wanting its popularity and market share to grow exponentially”. Ford gave him the green light. “Bez understood that something as special as Aston Martin could not be successful—or profitable—if it was treated as just another cog in the machine of a large motor corporation”, writes Tumminelli.

And so began an era of a new production plant, new vehicle architecture, Italian chassis designers Andrea Zagaro and Girogetto Giugiaro, the latter called the “designer of the century”, were brought back to the company. The DB9, with its striking architecture, was introduced, as was the V12 Vanquish. The company started to make a profit for the first time since its founding in 1913. However, in 2006 Ford sold off its premium unit, including Aston Martin, to a consortium of investors led by David Richards, a Formula One name. Bez’s proudest accomplishment, he has said, was for Aston to be voted “coolest brand” in 2011, beating out Apple.

But they weren’t out of the woods just yet. Though the beautiful DB9 was a purely Aston product, unlike what had come before it that had been contracted out to Jaguar, critics were tough. “[It was] not without rough edges…more than seemed appropriate for the leather-lined cabin of a gentleman’s express”, sniffed a reviewer from Automobile, the UK publication. “It lacked the surprise and delight you’d want in something meant to be more special than mere Porsches and VW-era Bentleys.”

Still, under Bez’s leadership Aston Martin took on a new life, selling more than 50 000 cars in 13 years, more than three times the number sold from 1913 to 2000. Then, problems began to loom once more. Shiny, carbon fiber hyper-cars such as the hybrid electric Valkyrie and the Vulcan came out in 2015, yet these multimillion dollar wonders could not stave off an encroaching financial slump. Already in 2013, Dr. Bez stepped down as CEO staying on as executive chairman and Andy Palmer, formerly the American CEO of Nissan, took his place.

The company went back to the drawing board and soon followed the now famous DB11 of 2016, the first model Aston Martin has launched under a technology partnership with Daimler, its popularity sent sales soaring by 75%. Die-hard fans and would-be worshippers want this to be the last of the legendary car maker’s troubles. In the words of Andrew Palmer: “In the first century we went bankrupt seven times. The second century is all about making sure that is not the case”.

Brexit Has Reached the Point of No Return

Alasdair Macleod — Sat, 10 Feb 2018 11:00 -0600

By: Alasdair Macleod

The actual negotiations could easily run right up to the deadline in March 2019, when Britain is due to leave. If no agreement is forthcoming by that date, both sides might agree to extend negotiations, but that only seems likely if there is a good prospect of an agreement. Otherwise, Britain leaves and falls back on WTO trading rules, or does away with tariffs altogether. This is seen by the EU negotiators as a threat to Britain, believing it is Britain which is running out of time. Therefore, if Britain wants a trade deal, she must make it clear that a no-deal option is attractive to her. And, be it clearly understood, the negotiations only cover a minor part of the UK’s overall economy.

It’s Much Ado About Not Much Trade

WTO tariffs apply to physical goods, involving only £143bn exported from the UK’s £2,000 billion economy to the EU, and imports from the EU of a larger £235.5bn. Excluding agricultural products of some £5bn (net of spirits), average trade-weighted tariffs on goods imported into the EU from non-member states without a trade agreement is only 2.3%.[i] Therefore, the EU’s external tariffs which will be applied to UK non-agricultural goods exports to the EU involves only 7.5% of the UK’s GDP, and is a tax on EU citizens amounting to roughly £2bn. Is this really worth arguing over, and paying massive divorce fees?

The larger issue is services, and here we must differentiate between services sold to consumers, such as retail investments, and wholesale services, such as capital market operations, commercial lending, legal services, architectural services, etc. The retail services involved are not material, and in any event are easily distributed through locally-incorporated subsidiaries in Dublin and Luxembourg. Wholesale services are generally excluded from trade agreements for practical reasons.

Therefore, if a trade agreement is not forthcoming, the cost to British business as a whole is not as material as the Remainers and lobbying businesses have it, and certainly less than the implied cost of normal currency volatility on cross-border settlements. One should conclude that the absence of a trade agreement costs considerably less than the UK Government paying money to the EU for an implementation period.

The Current State of the Brexit Debate

It is becoming clear that the Remainers are driven by little more than a desire to prevent change while distrusting free markets. Nick Clegg, who was Deputy Prime Minister in the Conservative/Liberal-Democrats coalition, has recently published a book entitled How to stop Brexit (And make Britain great again)[ii]. There are no substantive arguments in favour of Remain, not even a neo-Keynesian discourse. Make Britain great again? The book is miss-sold. There is nothing on the subject of the book’s subtitle at all.

Mr Clegg’s unquestioning assumption, which he appears to share with other leading Remainers, is Brexit is just plain wrong. He makes much of the Brexit campaign’s supposed lies about the extent of the rebate when Britain leaves the EU. There was no lie: it merely failed to differentiate between the funds Britain would save, and the money that is spent by the EU in the UK funded by the UK taxpayer. The latter amount is decided by the EU, not the UK, so all the Brexiteers were quoting was a gross figure sent to Brussels, which on Brexit would become available to the Government to save or spend as it sees fit.

Furthermore, there was no mention of “project fear”, the Remain campaign’s concerted effort to frighten voters into voting Remain. But, as we saw only this week, the pro-Remainers in the establishment are at it again. They prepared and leaked another negative report based on the same economic modelling. A reasonable person would have been so embarrassed by the failure of the first attempt at economic propaganda, as to not repeat it. But we are dealing with ingrained beliefs, not reason.

On the evidence, Remainers cannot argue their case effectively. Furthermore, the cost of backtracking on Brexit, which receives too little attention, is now considerable, and almost certainly unpalatable to the electorate. Unless Britain does achieve a proper Brexit, she becomes, taking the words of Jacob Rees-Mogg,[iii] a vassal state, having lost considerable political credibility and the ability to influence EU policy as she has done before.

Realistically, bridges have been burnt, even though the panjandrums in Brussels want Britain to change her mind. The Thatcher rebate would certainly be lost, and Brussels is preparing more onerous regulations in the knowledge Britain can no longer obstruct the EU executive’s plans. The Tobin tax on financial transactions can now be introduced, which would kill the City, if Britain remained, more certainly than any threat from Paris and Frankfurt as rival financial centres. A Tobin tax introduced in Euroland after Britain leaves would see Eurozone wholesale financial business migrate to London.

If Britain backtracks or compromises on sovereignty, it will be disastrous for her, and little account has been taken of the new opportunities for the City, operating from outside the EU.

Enter the European Research Group

The ERG, unlike its name might suggest, is the grouping of pro-Brexit backbench Conservative MPs determined to ensure Britain truly leaves the EU. The recent appointment of Jacob Rees-Mogg, as its new high-profile chairman, promises a new dynamism in the battle between the Brexiteers and the Remainers. The ERG has considerable power, being comprised of sixty MPs while Mrs May commands no overall majority.

Further pressure is being applied through the 1922 Committee, which officially represents all backbench Conservative MPs. Amongst them are Remainers and those without well-defined opinions, the latter becoming increasingly alarmed at the lack of a clear government policy. If forty-eight of them formally write to the 1922 Committee expressing no confidence in Mrs May, an election for a new leader (and therefore prime minister) is automatically triggered. It is rumoured that forty such letters have already been received. Between the ERG and the 1922 Committee, the Brexiteers’ ability to pressure the Government into sticking with a firm Brexit policy is increasing.

All this lends support to Mrs May’s original Lancaster House declaration, which is what the ERG is seeking to achieve. In the Commons, opposition to Brexit has been subdued enough to get the required legislation through the House, without major concessions. This is not the case, however, in the Lords, which by sending legislation back to the Commons for reconsideration threatens to delay the whole process at a time of tightening deadlines.

Mrs May’s greatest problems are likely to be in dealing with her own advisors, senior civil servants whose only world is one of bureaucracy, and the Treasury, populated with staunch neo-Keynesians. Bureaucrats resist change, particularly when it involves a whole new paradigm, which is always seen as risky. And the Treasury believes in manipulating the economy to enhance tax income, the antithesis of any free market proposition, with which it has little empathy.

These operators are unhappy at the prospect of past agreements being torn up to be replaced by, in their view, uncertainty. Thus, Oliver Robbins, whose job is to coordinate negotiations with the EU from Downing Street, and Sir Jeremy Heywood, the Cabinet Secretary, are seen by the ERG to be pursuing a policy of fudging the changes required for a true Brexit. And Philip Hammond, the Chancellor, is now being downright obstructive.

However, governments have a duty to represent the electorate, not the permanent establishment, which is there to serve ministers in pursuing government policy. Individual ministers are meant to toe the agreed policy line. Mrs May, in trying to accommodate the Remainers, appears to be in danger of siding with the permanent establishment and the Treasury, against her own stated policy, instead of firmly instructing it to do the Cabinet’s bidding. Doubtless, the ERG will ram this point home.

Keeping the Broader Picture in Sight

It is always difficult for a prime minister at the coal-face of day-to-day problems to retain a broader vision. The ultimate prize for Mrs May would be to go down in history as having laid the foundations for a prosperous Britain. To achieve this, she must have a proper understanding of free trade, as Robert Peel acquired when he sided with Richard Cobden and abolished the Corn Laws in the 1840s. Unfortunately, Mrs May has little option but to listen to risk-averse advisors and central planners who deny the primacy of free markets, not just for handling day-to-day issues, but also, it appears, to guide her for the broader picture. In short, she has to have an independence and resolve to act despite her advisors’ advice.

Some members of Mrs May’s Cabinet do understand free trade. They include heavyweights such as Boris Johnson, Michael Gove, David Davis and Liam Fox. Even though Philip Hammond, the Chancellor, has been persuaded against it by his permanent staff, the ERG does have powerful allies in the Cabinet.[iv]

The European Research Group understands, to a reasonable degree at least, the fallacies of central planning and the faults of the socialism of the European project, while understanding the benefits of free trade. Its leadership should be well placed for the task. This is where the position of Mr Rees-Mogg is important. He personally appears to understand the benefits of free markets, has a good grasp of the individual Brexit issues, and argues his case well. This is in sharp contrast with the Remain camp, and the middle ground of lobby-fodder on both sides of the House.

That middle ground is his to win, but time is severely limited. To do so he must not only argue his case well, but also get the following points across, loud and clear:

The best outcome for the British consumer is no tariffs, and their removal is the responsibility of the UK Government. The best outcome for the economy is not found in protecting business through trade tariffs, because that is to the detriment of the consumer.
Current EU trade tariffs disadvantage the poor most. This point will become increasingly relevant when price inflation gathers pace ahead of the final Brexit date (March 2019), as the global credit cycle progresses. An appreciation of this simple fact makes tariffs indefensible, and a clean break Brexit becomes more obviously the best solution.
No separation payments should be made to the EU, unless they are specifically itemised and contractually justified. The capital payments demanded by the EU in any political compromise are not only a needless expense, but an imposition on the Treasury’s finances which are already in deficit. Furthermore, the loss of revenue from the removal of all tariffs is a considerably smaller sum than the amounts demanded by the EU negotiators.
The Treasury must be persuaded that free trade leads to a stronger economy, which will be reflected in higher tax revenues. Moreover, a botched compromise, effectively being advocated by the Treasury, is a significant threat to the government’s finances.
There is no need for an implementation or transition period. These extensions do not encourage businesses to adapt to Brexit so much as they delay the necessary changes. Any such period should be firmly restricted to be as short as possible and involve no payment.

In any event, time is short, not only given the Brexit timetable, but ideally it must be concluded, or at least set in stone, before the disruption of the next crisis of the global credit cycle.

Yes, Tax Cuts Really Are The Reason for Your Raise

Nathan Keeble — Mon, 12 Feb 2018 06:00 -0600

By: Nathan Keeble

Since Trump’s reduction of the corporate tax to 21%, workers across the country have been rejoicing. Companies like Wal-Mart, Apple, Bank of America, and many more have announced firm wide bonuses and minimum wage raises. To most, the tax cuts appear to be a clear success. However, some commentators, such as Dr. Veronique de Rugy at Reason, are saying not so fast.

Dr. de Rugy claims that these announcements are not in line with economic theory. For wages to be affected by tax cuts takes an extended period of time. The newly freed revenue must be accumulated and invested into new capital equipment which boosts worker productivity and, consequently, their wages. Quite simply, Dr. de Rugy suggests that the tax cuts simply have not been in place long enough to be held directly responsible for these announcements, and she even ponders if they are nothing more than PR moves.

In truth, these bonuses and raises are perfectly in line with what economic theory predicts.

How Wages Are Determined

Wages are equivalent to the expected increase in revenue an individual’s labor generates for the business, or, equivalently, the amount which is expected to be lost if his or her labor went unemployed.

For example, imagine a restaurant employs 5 cooks who are capable of serving C number of customers per hour, earning E dollars in revenue. One cook wins the lottery and retires to the Bahamas, and now the restaurant is only capable of serving C-L customers, and consequently only earns X in revenue. Clearly, entrepreneurs will only be willing to pay the difference between E and X, a number which will be called W, to employ a fifth cook. W is what economists refer to as the marginal revenue product, and, thanks to competition in the labor market, wages tend towards this number in a free market, less a discount for time preference.

To see how taxation effects wages, imagine if every time the restaurant owner goes to deposit his firm’s earnings an armed robber stole 35% of the firm’s net income. Disregarding momentarily what that thief does with his loot, whether he builds roads or funds a study of cocaine’s effects on the promiscuity of Japanese quail, the moment the robbery occurs, the restaurant is making less money than before. It immediately renders the firm less efficient, and the money to be imputed back to the factors of production, including workers, is immediately smaller.1 Put another way: the revenue the firm can keep has now gone down, meaning revenue per employee goes down. This pushes wages down, even though, in a free market, the firm would have been willing to pay employees more.

After some time, a new, more “charitable” thief replaces the former and decides to only steal 21% of the restaurant’s net income. Part of the cost of the crime has been reduced, and this will have the same effect as a reduction in any other cost. While wages won’t return to their levels before the robberies began, they will rise, because the worker’s labor has become more productive the moment the reduction in theft occurs. Moreover, the firms expectations of revenue will rise, potentially leading to higher wages.

If one replaces the word theft with tax, and the restaurant with corporate America, one can see clearly that the rise in wages is clearly in line with standard economic analysis. While it is true that a reduction in corporate taxes will enable greater investment in capital goods, this phenomena is separate from the one that is primarily at work presently. Reducing the burden of government on the private sector has both immediate and long run benefits for workers and capitalists alike, and Trump’s tax reform is evidence of this.

Tax Cuts are Good, But We Need Spending Cuts Too

More action is needed for the benefits of this reform to stick. So long as there is deficit spending enabled by money printing at a central bank, government spending must also be reduced to lessen the effects of the inflation tax.

Returning to our example, imagine the thief does not desire to reduce his expenditures below his current levels despite stealing less. Indeed, our thief has developed the ability to perfectly counterfeit his local economy’s currency, deceiving everyone who receives it. The tangible effects will be similar to his blatant theft. The price of goods will rise in such away as to nullify nominal increases in wages, but not before real tangible wealth has been transferred to the thief and the first receivers of the new money respectively.

Alternatively, perhaps if the thief fears the community catching on to his counterfeiting scheme, he could seek to borrow the money from the community’s financiers. The financiers would be happy to oblige, because he can clearly demonstrate that he has a large and incomparably reliable source of income. In this case, the thief would be able to maintain his current expenditure levels, but at the expense of growth within the economy. Sooner or later, the thief’s debt must come due, and to meet it without a drop in his expenditures, his only recourse will be to either steal a greater amount of money from the restaurant or turn on his printing press.

The lesson is clear. If Congress and the Trump administration wish to see the welfare of the American people rise in a permanent fashion, they should follow their tax cuts with cuts in spending.

1. A situation is conceivable in which the demand for the restaurant’s food is such that it’s customers are willing to pay enough to cover the costs of the robbery, but this scenario would only mean that demand for other goods must fall accordingly, with the corresponding fall in factor values.

Don't Tax Spanish Olives — And Don't Subsidize them Either

Ángel Manuel García Carmona — Fri, 09 Feb 2018 11:15 -0600

By: Ángel Manuel García Carmona

In November 2017, Spaniards learned that the US Secretary of Commerce had decided to tax the import of black olives — between 2.31 and 7.25 percent — because these were being sold below market price. That is, the Trump administration decided the Spaniards were guilty of "dumping" olives.

As usual, the dumping was made possible by domestic subsidies. These came from the funds (nearly 40 percent of total budget) that the European Union (EU) dedicates to its Common Agrarian Policy (CAP). Spain receives more than €5 billion.

According to the EU, the CAP exists to boost agrarian production, thus guaranteeing a certain level of income to the agrarian population, “stabilizing markets,” guaranteeing the security of supplies, and ensuring “reasonable prices.” This interventionist strategy, however, exists to shield a sector that produces less than 2 percent of EU GDP.

The Costs of Tariffs and Subsidies

CAP policy has been problematic. One the one hand, the subsidies have caused a foreign backlash, leading to Trump’s tariff which harms Spanish producers — Spanish companies have lost many contracts with American buyers who have turned to olives from Egypt, Morocco, and Turkey instead). But another side effect of CAP has been harm inflicted on low-income countries that now cannot export their products into Europe.

Thus, thanks to CAP, Spanish industries are on both ends of this anti-trade equation.

The US, however, is hardly a paragon of free trade.

After all, the US Department of Agriculture spends $25 million every year on subsidies for farm businesses, since the approval of 1862 Morrill Act. Some of those subsidies are for insurance, export promotion, and price-loss coverage.

A better approach would be to move more toward a system of virtually no agricultural subsidies at all, as is the case in New Zealand. In 1984, the New Zealand government passed a reform to eliminate farm subsidies. At the beginning, this was a cause for alarm among farmers.

However, the New Zealand agriculture sector has not suffered, and the number of farms has remained constant since the reform. More than 10 percent of the working population is linked to agriculture and around 90 percent of total farm output is exported. Contrary to the EU situation, agriculture represents almost a 7 percent of New Zealand GDP.

We Need Unilateral Free Trade

Bilateral trade agreements mustn’t be reviewed, but repealed

Bilateral trade agreements like CETA and NAFTA are not a real case of free trade, and apart from being just commercial ties among a series of countries or continental blocks, they tend to promote harmonization of rules and crony capitalism.

RELATED: "The Case for Unilateral Free Trade" by Louis Rouanet

Engaging a “trade war” in the name of free trade as Trump is doing against China — regarding solar panels and European Union agriculture — is not a good solution neither moral nor economically. Americans will suffer.

Instead of slapping new tariffs on olives from Spain, both sides of the Atlantic ought to think about real, unilateral, free trade.

While it is true the US president is wrong to impose new tariffs, the EU establishment is also hypocritical in denouncing “Trump’s protectionism” because the EU maintains its own protectionist policies that are especially damaging to developing economies.

Venezuela Needs Monetary Freedom, and Soon

Luis B. Cirocco — Thu, 08 Feb 2018 11:00 -0600

By: Luis B. Cirocco

We've heard many excuses from the Venezuelan state: "private property can't not be protected under such a system," and "schools of economics will close because we won't need economists to control monetary policy," and "we tried that in the past," and "our currency is a national symbol," and "it destroys jobs!" Many have been the sophisms spread by Venezuelan "intellectuals" and politicians over decades to demonize what should be one of the most natural market processes of a society: monetary freedom, otherwise known as "currency competition."

The selection of one particular medium of exchange (money) or various media of exchange as a market process, and not as a governmental imposition, is explained in a masterful way by Murray Rothbard in his essay What Has Government Done to Our Money? and by Friedrich von Hayek in his essay Denationalisation of Money, just to mention two outstanding examples. Detractors and criticisms based upon the most ridiculous and selfish fallacies are particularly abundant in Venezuela to justify the intervention of the state through “legal tender” laws and other laws designed to force citizens to use only the money approved by the Venezuelan state.

Why It's Important

In my personal case, I first heard the concept of monetary freedom while I was studying in a master's course in 2011. It was the first time I heard names such as Mises, Friedman, Hayek, and Rothbard, and then I became aware of the essence of their work in defense of liberty. It was in that class where Dr. Hugo J. Faría showed us that there is an efficient way to protect the fruit of people’s work that has been overlooked — on purpose — by our intellectuals and "leaders" for decades. The benefits of currency competition are ignored because it would empower individuals while curtailing the power of the state and other state-favored elites.

Of course, in Venezuela at this point in history, denationalizing the money should also be accompanied by an effective and profound institutional reform focused on the protection of natural rights, the empowerment of citizens — and not of government, and the establishment of a free market economy.

How It Works

In the simplest form of the system, the US dollar, the euro, and the Venezuelan bolivar — for example — could coexist within the country, allowing people to have options to better protect their savings and negotiate with their employers the currency in which they would like to receive their salaries. The scheme can even embrace currencies issued by private organizations as well. In other words, the local bolivar would have to compete against other counterparts for the preference of all Venezuelans. It would eventually become clear that just the most useful money would be accepted and exchanged while the others would be displaced.

Although I do not believe in central banks — because they represent a terrible source of moral hazard for the economies — in a scenario of free monetary competition the political cost of eliminating the central bank at once or by decree could be avoided because currency competition would induce the central bank to behave in a more ethical way. If it indiscriminately increased the money supply — for example — the local bolivar would lose its purchasing power and people would easily migrate to other currencies.

The implementation of its simplest form necessarily goes through the elimination of the legal tender in our constitution. Panama is a clear example of a nation which, from its constitution on, does not force people to use a specific currency. There, just for practical and historical reasons, the US dollar is used as a primary medium of exchange but not because it is legally mandated. Not having a central bank and legal tender has resulted in an average annual inflation rate of around 3% in Panama over the last century.

It is not necessary to be an expert in economics to understand the evil results caused by the fractional reserve scheme, eneabled by governments and central banks. But, providing citizens with options to better protect the fruit of their work is one of the most important policies that should be carried out nowadays in Venezuela, a country with the highest annual inflation rate on the planet, according to The Troubled Currencies Project led by professor Steve Hanke. Venezuela also now has the lowest level of economic freedom in the world, according to the Economic Freedom of the World report of the Fraser Institute, and where 82% of the population is in poverty, of which 50% is in critical poverty, according to a recent survey conducted by three renowned Venezuelan universities (Universidad Central de Venezuela, Universidad Simón Bolívar, and Universidad Católica Andrés Bello).

"People will not understand the model" is another typical excuse political "leaders" use to push the idea that monetary freedom’s implementation is not possible. Our experience at Econintech conferences, however, is that people do understand it and, moreover, would be willing to accept it.

Venezuela is Desperate for Reform

In July 2017, Dr. Rafael Acevedo and I were truly honored by the Mises Institute when we were allowed to present the reality of the Venezuelan crisis and its historical causes at the 2017 Mises University. To us, it was a very rewarding experience for which we will always be thankful, but we could not imagine how the crisis would be explained now: just some months later, the inflation, scarcity, insecurity, and corruption levels are even higher than those we showed last July. The cause, as imagined, is always the same: there is no political willingness to change, from its roots, the central planning and mercantilist model imposed since 1959 and exacerbated since 1998, just — perhaps — to relax it.

I always tell my students to think about the following fundamental questions: Why is a monetary system with so evident benefits for the citizens of our country always demonized by intellectuals and politicians? Why is it surrounded by ridiculous technical jargon to make it look complicated, when barely mentioned? Why is monetary freedom purposely confused with not having monetary exchange controls? Could it be possible that some elites are profiting from preventing common people from enjoying the benefits of monetary freedom?

For answers to these questions, I direct the students to Dr. Faría’s papers:

The Scam That Is Urban "Land Use" Planning

Lee Friday — Wed, 07 Feb 2018 11:00 -0600

By: Lee Friday

For many years, property owners with vacant buildings in London, Ontario have applied for a 30 percent rebate on their property taxes. However, City Council decided to cut the rebate in half for 2018, then eliminate it entirely at year’s end. Additionally, despite insufficient parking in downtown London, Council is seriously considering a reduction in the number of parking lot permits.

Ending the rebate and reducing the number of parking lots will stimulate development, according to the politicians. Unfortunately, these actions may produce the opposite result.

Regarding the tax rebate, the London Free Press (LFP) quotes Councillor Stephen Turner:

The policy benefits land speculators, those who buy land to sit on it, and hurts development . . . We want to offer incentives to develop, not disincentives . . . If someone has been holding on to a vacant building since 1998, they are clearly speculators. That decreases development potential . . .

Similarly, Councillor Tanya Park was quoted by the LFP:

Any owner with vacant lots downtown are not doing themselves or the city any service. The earning potential is huge . . . It behooves one to get them (developed). . .

The Scourge of Speculators?

Politicians constantly vilify “speculators.” We are all speculators! Each of us makes decisions on a regular basis, the outcomes of which are often unknown to us until some future time. This means we are speculating. My wife and I decide to dine at a restaurant that is new to us. We may love it. We may be disappointed. We are speculating.

When entrepreneurs initiate new projects, they do not know if they will be successful. There are many unknown factors awaiting them, not the least of which is the fickle, discriminating consumer. Entrepreneurs are speculating, and most new businesses fail within five years.

Our standard of living i.e. the goods and services we enjoy in modern society, are an outcome of successful entrepreneurial efforts. Thus, speculators should be praised, not condemned. As Ludwig von Mises wrote in Human Action:

. . . dealing with the uncertain conditions of the unknown future – that is, speculation – is inherent in every action, and . . . profit and loss are necessary features of acting which cannot be conjured away by any wishful thinking.

Developers Want Profits — But Also Must Avoid Losses

Councillor Turner says long-term owners of vacant land and buildings are “decreasing development potential”, and to address this supposed deficiency he wants to increase taxes. First, increasing taxes is not an incentive to development, but a disincentive.

Second, owners are not keeping properties idle because of tax rebates. They have simply not yet identified a development project which they believe will be sufficiently profitable to justify the cost – including taxes – of development which they must obviously absorb. The risk of loss is always present. Profits, or losses, determine the success, or failure, of any business. As Mises said, this reality “cannot be conjured away by any wishful thinking.”

Owners hold idle property because (a) they believe a profitable opportunity will materialize in the future, and/or (b) they have not received an offer for the property which is sufficiently attractive for them to forego the opportunity for future development themselves. The fact that they have not received such an offer indicates that other entrepreneurs do not have any better ideas. As Murray Rothbard wrote in Man, Economy, and State:

In many cases . . . a land site, once committed to a certain line of production, could not easily or without substantial cost be shifted to another line. Where the landowner anticipates that a better line of use will soon become available or is in doubt on the best commitment for the land, he will withhold the land site from use if his saving in “change-over cost” will be greater than his opportunity cost of waiting and of forgoing presently obtainable rents. The speculative site-owner is, then, performing a great service to consumers and to the market in not committing the land to a poorer productive use. By waiting to place the land in a superior productive use, he is allocating the land to the uses most desired by the consumers.

The Function of For-Profit Parking Lots

The LFP quoted a major developer:

The most important reason London has 700,000 sq. ft. of vacant office space in the downtown is because we do not have enough convenient parking,” said Shmuel Farhi, a top core property owner. “Every spot lost means one less potential new downtown worker."

This simple economic fact seems lost on Councillor Jesse Helmer, who said (emphasis added):

I understand why people want parking downtown . . . I have been consistent with not voting for temporary parking . . .

So, Helmer is saying he does not want to allow entrepreneurs to provide the parking which he knows people want. And Helmer is supposedly a representative of the people!

Do not concern yourself with Helmer’s choice of words, “temporary parking” versus permanent parking, because some councillors seem opposed to either form of parking. The LFP reported that in 2014, Sifton Properties applied for a rezoning to establish a parking lot for permanent use and council refused, instead approving a new temporary use for three years.

Government Ignorance about Land-use Planning

City Council says vacant space and parking lots are preventing more economically productive development. However, business expansion requires parking expansion. As Farhi pointed out, there is a lot of vacant office space because there is insufficient parking.

John Fleming, the bureaucrat in charge of planning, said:

It would be a lot easier if we knew that once parking lot permission is withdrawn, somebody would by default develop the land. We know that that’s going to take some time, and in that time, we’re going to potentially have a vacant piece of land that’s not being used.

Exactly. Fleming is confessing his ignorance about whether the City’s policy will actually achieve its goal. It is entirely possible that a former downtown parking lot will remain vacant for many years, when it could have served a useful economic purpose as a parking lot. And as parking facilities become more scarce and expensive, businesses and workers may flee to the suburbs. Thus, downtown London would experience economic contraction, which is the opposite of Council’s professed goal.

Politicians and bureaucrats are ignorant about land-use planning. The same goes for numerous entrepreneurs, as many of their ventures fail. The difference is that entrepreneurs (and their investors) are investing their own money. Thus, they are highly incentivized to plan well because they personally bear the burden of their own mistakes.

In contrast, the government has little incentive to plan well because taxpayers, consumers, and businesses are forced to bear the burden of the government’s mistakes. But why do politicians and bureaucrats continue to force their planning decisions on the rest of us when they readily admit to their own ignorance?

The simple answer is because they can. They are power hungry, and like to portray themselves as indispensable masterminds to the voters. And it matters not a whit to them when their grandiose schemes fail, as they invariably do. After all, they have no skin in the game, and they always blame someone else, e.g., those evil speculators. As Shmuel Farhi said:

The market drives development, not hopes and wishes . . . all mayors want to see development. The problem is, if the development is unsuccessful they can just walk away, but the bankers and lenders will not.

Entrepreneurs should not have to apply for parking lot permits from the government. They should be free to seek permission directly from consumers. If the government stops interfering in the marketplace, more parking lots will be provided, and parking fees will decline. If too many lots are built, owners of empty lots will face losses.

Losses are the method by which consumers deny permission to parking lot owners to continue their business. Thus, the land remains available for a future development which an entrepreneur believes will more effectively satisfy the preferences of consumers.

Consumer Sovereignty Is a Problem For Government "Stimulus" Plans

Justin Murray — Tue, 13 Feb 2018 06:00 -0600

By: Justin Murray

It’s a new year and that means we are in for another year of the same rehashed political partisanship disguised as sound economic analysis. The latest rehash is that the US economy is still experiencing the worst post-recession recovery in the nation’s history (a story that’s rehashed year after year) and, as usual, the old saws are dusted off and trucked out as explanations. The usual explanations come in the form of the “savings glut” and the “demand deficit” and the answer is usually increasing spending somewhere and that somewhere is entirely dependent on the policy pronouncement’s partisan leanings. In other words, it’s the job of the government to rush to the rescue, stimulate the economy and make up for the lack of aggregate demand, or the Keynesian policy pronouncement that government should go into debt to make up for the lack of consumption by the consumers on the market.

Of course, if any of this actually worked, the US would be on a rather stable path already since, despite the arguments, government spending and debt has soared significantly in the wake of the 2007 financial crash. To put it into context, the increase in annual US Federal (not to mention State level) government spending since the end of the recession is roughly equal to the entire annual output of Canada and is greater than the economic output of all but nine nations. And that’s just the spending increase. The total spending puts US government entities, if calculated as its own country, #4 on the GDP list, a DoD budget increase away from surpassing Japan.

Given this immense level of spending, how come the recovery is still considered to be relatively poor? The problem is that the entire philosophy of government stimulus; be it interest rate manipulations or direct subsidy and spending, runs into a harsh truth. And that harsh truth is what Mises referred to as consumer sovereignty.

As Mises noted:

The real bosses [under capitalism] are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser. They make poor men rich and rich men poor. They are no easy bosses. They are full of whims and fancies, changeable and unpredictable. They do not care a whit for past merit. As soon as something is offered to them that they like better or is cheaper, they desert their old purveyors.

In other words, the notions of demand deficit or savings glut are entirely fictitious and it is not the government’s job to try and fix this.

What does this mean? For a demand deficit to be a real issue, it would imply that the consumer, or the demand end of the supply-demand mechanic, is obligated to purchase what is supplied. This is exactly the opposite of what the relationship is. While it is true that, per the common misinterpretation of Say’s Law, it is difficult for demand to manifest without the supply first being brought to market, this by no means implies that the demand is now under any obligation to purchase that supply. If this were true, the road to riches is as simple as hanging up a sign in a store front and presenting whatever junk you find lying around in the window.

What is seen as a savings glut or demand deficit is no more than the sovereign consumer saying, “I have no interest in what is available on the marketplace right now.” That disinterest can either be in what is being offered or at the price which it is offered.

The onus, then, is on the producer, or the supply, to alter or adjust to meet the demand. This is where the entrepreneurial process is so important as the demand frequently does not know what it wants until someone takes a risk and offers up a product or service to the marketplace. It’s not the fault of the buyer that the corner store went out of business but the fault of the operator of that corner store for not offering what the consumer wanted or not organizing his capital in a way that allowed him to deliver that offering to the consumer at a reasonable price. It is up to him to reorganize, either the offering or how it is offered, or go out of business and liquidate that capital to someone else who may have a better insight on the desires of the market.

Where the prolonged recession recovery comes is not because of this mythical insufficient demand but by the very policies the government is engaging in to fight this mythical problem. By boiling down economic activity from innumerable granular transactions between a near infinitely varied mixes of interests into simple aggregates, the government creates the misconception that it can fix things by boosting the “gross” in “gross domestic product.” The only way it can do so is by boosting the consumption of pre-existing goods and services. The very same goods and services the sovereign consumer has rejected.

Doing this overrides the desire of the consumer and forcibly directs their resources to purchase those very same goods and services they previously did not want and, by the basis of the taxation system, don’t even receive even the modicum of benefit they may otherwise have obtained if they were forcibly marched into the store to buy a product. Since the government can’t tell the difference between a pet rock and an iPhone, it will just assume the product or services it purchases or subsidizes are part of this demand deficit and not the market losing interest in what is being offered with attempts to bail out failing entities leading to future supply gluts, is again manifesting in automobiles when the market was not permitted to liquidate to match the new demand requirements.

Government then expects the market to just magically start working again and the demand just start buying again without ever concerning itself about the what and for how much and uses the reinvigoration of old marketplace product sales as a benchmark to cease intervention; which is a situation that will never manifest. Even fully subsidized to the point of “free” won’t necessarily manifest demand, as the Soviets have long proven with multiple supply gluts under their planned economy.

By trying to fight this illusionary problem, government has essentially ensured that the problem will persist near indefinitely and require even greater luck and chance to find those products and services the market desires. Those taxes, subsidies, and competition for debt in the credit markets does little more than ensure the entrepreneurs who have the ideas are now cut off from the necessary capital and labor required since it is tied up in subsidized and artificially supported entities. Even if an entrepreneur can find a way to obtain the capital and personnel required to start-up his new business, those sovereign consumers are being taxed to support industries they no longer desire and lack the resources necessary to complete the transaction.

If government was really concerned with a sustained, strong, economic recovery, it would first begin by ceasing support of non-performing entities. While it would be painful, given the length of time non-valuable companies have been allowed to persist or even propagate, those lost jobs and closed businesses will now have a clear path to be reallocated to more valuable uses. The government can do this by cutting spending and eliminating the immense regulatory burden placed on the economy as a whole.

The economy can’t recover when the government is interfering with the ability of suppliers to reorganize, reallocate, and reinvest. Because the demand side of the equation will not suddenly decide it will start buying the products and services it has already rejected. If a brutal totalitarian society like the former Soviet Union couldn’t force people to consume products in the exact quantities and mix it dictated, the United States can’t, either and won’t see any serious economic recovery or sustained growth until it ceases with the expectation that consumers will fall in line with expectations. You can lead consumers to the store, but you can’t make them buy.

Infrastructure Spending Won't Make America Great Again

Christopher Westley — Tue, 06 Feb 2018 11:00 -0600

By: Christopher Westley

This past Tuesday afternoon, I was speaking with a reporter who was interested in the positive effects of infrastructure spending that occurred in the form of fiscal “stimulus” in my part of the country, back during the dark days of the Great Recession, around 2009 and 2010. How did this help our region, he wanted to know?

My answer: It didn’t help very much, and that if it did, then (a) it didn’t matter because the growth was not sustainable — it would have stopped when infrastructure spending stopped; (b) you would have to balance any seen positive economic activity with unseen, decreased economic activity on the part real people coerced to finance the stimulus; (c) it may have delayed the correction to the extent that it allowed business owners and workers to put off making tough choices based on market signals: and (d) you would have to believe economic growth is something that occurs due to infrastructure spending as opposed to the development of property rights institutions, saving, time preference, the specialization and division of labor, and so on.

Still, I wondered: Why the concern about infrastructure spending? Then I went about my day, ignoring Trump’s State of the Union, like a normal person. It was only this morning that I read about his infrastructure spending proposal:

Tonight I’m calling on Congress to produce a bill that generates at least $1.5 trillion for the new infrastructure investment that our country so desperately needs. Every federal dollar should be leveraged by partnering with state and local governments, and where appropriate, tapping into private sector investment, to permanently fix the infrastructure deficit. And we can do it.

Then it made sense. Infrastructure spending and its effects on the economy were pre-speech talking points, as were the Keynesian biases that this spending tempered the severity of the Great Recession, and would likely provide an economic boost in the future.

The assumption is current levels of public infrastructure spending are deficient, and that as a result, highways, bridges, airports, trains, and waterways are today dilapidated, dirty, and dangerous. But if this were true, the more accurate conclusion would be that public infrastructure spending is among the biggest scams of the century.

Rest assured, it’s not true. The fact is that federal, state, and local spending on transportation infrastructure is well into the tens of billions each month. As the chart below shows, this spending increased to over $25 billion a month in 2011, during the heyday of QE2. This number has only increased over time, as the average spending over the last two years has been just under $30 billion a month.

Monthly public spending on infrastructure in the US exceeds the annual GDP of Paraguay. Annually, we spend more on infrastructure than the GDP of Hong Kong.

Let’s admit it: If infrastructure spending promoted economic growth, the US economy would resemble a modern day Incan Empire. But to argue as much would be to claim that industrial revolutions occurred in the past mostly because the mass of workers were relieved, by force, of a portion of their wealth to finance new turnpikes, canals, and railroads.

This isn’t the case. The Industrial Revolution moved from England to the United States because capital became more secure in the latter relative to the former. Tom DiLorenzo points out in his book How Capitalism Saved America that most roads in the 19th century — when the Industrial Revolution moved from England to North America — were privately financed.

It would take the advent of the 20th century Progressivism and the overweening nation-state that transportation functions became the domain of public-sector cartels. We should view this development as the exception, not the rule. As Walter Block wrote in The Privatization of Roads and Highways, "we must realize that just because the government has always built and managed the roadway network, this is not necessarily inevitable, the most efficient procedure, nor even justifiable."

To be fair to Trump, he is at least promoting an issue that was a common talking point as a presidential candidate. At the time, my reaction was twofold. On the one hand, if the Feds must waste billions of dollars, better it be within our shores than overseas.1 (Why should the military-industrial complex always get the loot?) On the other hand, Candidate Trump’s focus on infrastructure expansion contradicted his criticisms of the ruling class, which he considered subservient to special interests. To assume that special interests don’t similarly influence infrastructure spending is naïve, in the least.

People who are “like, really smart,” like Trump, get this better than anybody. But why the regime focus on infrastructure? A couple of possibilities come to mind.

First, wasteful infrastructure spending is at least visible. When taxpayers read about billions of dollars being misplaced in Afghanistan, for instance, it is seen as a zero-sum game. With the exception of “bridges to nowhere,” many people believe domestic infrastructure spending provides at least some net benefit — even when they acknowledge its unseen costs. The federal government has long had a difficult time justifying its very existence in the post-Cold War world. Infrastructure might then serve the propaganda purpose today that the Space Race served in the 1960s.

Second, the political class loves infrastructure spending because it can be so easily targeted, even down to the level of zip code. The ability to direct tens of millions of dollars in conscripted capital to politically important regions of the country is a godsend to a ruling class that depends on the support of key constituencies. While politicized spending dates back to the Washington administration, I have always admired the late Jim Couch’s important research on its effects in centralizing power during the New Deal.

Given that infrastructure projects most always employ large numbers of local workers, this spending serves as a way for the State to maintain popular support by a large class of workers whose livelihoods now depend on federal spending. If a government that robs Peter to pay Paul can always depend on the support of Paul, then Trump’s proposal guarantees a good number of Pauls — a bought-and-paid-for voting bloc.

While the Pauls can be identified, they should nonetheless be ignored. As Rothbard wrote in For a New Liberty (p. 387), “the chances of converting those who are waxing fat by means of State exploitation are negligible, to say the least. Our hope is to convert the mass of the people who are being victimized by State power, not those who are gaining by it.” Trump is at his populist best when he appeals to the victims. Unfortunately, he is at his populist worst when he adds to infrastructure spending already out-of-control by creating new divisions in society between the productive and parasitical classes.

Why is this? Because in this new political era, a divided, unproductive government is one of the few things that most unites us, while a government united behind welfare or warfare boondoggles — including infrastructure spending — sow division. It’s no mistake that these divisions have increased as the institutional constraints on the redistributive state have been removed.

Infrastructure is an effect of wealth creation, not its cause. Confusing this point is the road to hell, not prosperity, which is, as The Donald might say, “Sad!”

1. This is a very weak justification for such spending to the extent that it still justifies many billions of dollars’ worth of coercive wealth redistribution. Furthermore, as Rothbard often argued, such spending on welfare always seems to result in increased spending on warfare, given the symbiotic relationship between the two types of government expansion.

Dehomogenizing Austrian Economics: The Revival of Wieser

Joseph T. Salerno — Mon, 05 Feb 2018 15:00 -0600

By: Joseph T. Salerno

To follow up on Peter Klein's post today, the dehomogenization debate of the last few decades was actually initiated by a radical reinterpretation of the socialist calculation debate of the 1930s published by Israel Kirzner in 1988. Prior to Professor Kirzner’s seminal article, “The Economic Calculation Debate: Lessons for Austrians,” it was widely accepted by both neoclassical and Austrian economists that Hayek (and Lionel Robbins) had diverged from and softened Mises’s position that economic calculation was “impossible” under socialism. My initial articles, cited in Klein’s post, responding to Kirzner’s claims were an attempt to deepen the understanding of the differences in the arguments made by Mises and Hayek by tracing them back to their contrasting approaches to general economic theory.

As the debate evolved, it by no means “sidelined” Wieser, as Stefan Kolev recently lamented, but rather brought to the fore the unique character of Wieser’s thought and his substantial influence on later Austrian economists. In my article “The Place of Human Action in the Development of Modern Economic Thought,” published in 1999, I argued that Wieser had an enormous influence not only on Joseph Schumpeter, but both directly and through Schumpeter on the most prominent members of the fourth generation of the Austrian school, including Hayek, Gottfried Haberler, Fritz Machlup, and Oskar Morgenstern. My article elicited a response from Bruce Caldwell, an eminent Hayek scholar, in which he denied that Hayek’s ideas on general equilibrium theory were formulated under the influence of Wieser or Schumpeter. In my reply to Caldwell, I analyzed the general equilibrium framework of Wieser’s magnum opus, Social Economics, and documented its major influence on Hayek’s economic theory. A little later, Sam Bostaph published a long and penetrating study of Wieser’s views on economic calculation and how they conflicted with some of Menger’s fundamental ideas and shaped Hayek’s views. If anything, the debate revived serious scholarly research into Wieser’s work, to which Kolev himself has contributed (see here and here).

Whatever side one takes on the dehomogenization debate, it cannot be denied that the controversy served to highlight the diversity of views that Austrian economists, old and new, have entertained on issues that lay at the heart of economic theory. For this reason, there will be a session marking the 30th anniversary of the initiation of the debate at the 2018 Austrian Economics Research Conference. Several participants in the early stages of the debate will present their views on what impact it had on their own and their students’ research and how it has transformed Austrian economics in its theoretical and doctrinal aspects.

Why Good Economics Requires Good Theory

Frank Shostak — Tue, 06 Feb 2018 06:00 -0600

By: Frank Shostak

It is generally held that by means of statistical and mathematical methods one can organize historical data into a useful body of information, which in turn can serve as the basis for the assessments of the state of the economy. It is also held that the knowledge secured from the assessment of the data is likely to be of a tentative nature since it is not possible to know the true nature of the facts of reality.

Some economists such as Milton Friedman held that since it is not possible to establish “how things really work,” then it does not really matter what the underlying assumptions of a theory are. On this way of thinking, what matters is that the theory can yield good predictions.

According to Friedman,

The ultimate goal of a positive science is the development of a theory or hypothesis that yields valid and meaningful (i.e., not truistic) predictions about phenomena not yet observed…. The relevant question to ask about the assumptions of a theory is not whether they are descriptively realistic, for they never are, but whether they are sufficiently good approximation for the purpose in hand. And this question can be answered only by seeing whether the theory works, which means whether it yields sufficiently accurate predictions.1

For instance, an economist forms a view that consumer outlays on goods and services are determined by disposable income. Based on this view he forms a model, which is then validated by means of statistical methods. The model is then employed in the assessments of the future direction of consumer spending.

If the model fails to produce accurate forecasts, it is either replaced, or modified by adding some other explanatory variables. What matters here is how well consumer outlays are correlated with various variables in order to secure a good predictive model. In this sense, all that an economist requires is to establish a good fit between dependent variable and various other variables.

On this way of thinking, we form our view regarding the real world based on how well the various pieces of information are correlated with each other.

Observe however, that by establishing a good fit between personal consumer outlays and the various other pieces of information, one does not really explain the nature of consumer outlays, one just describes things.

By establishing that changes in consumer outlays are well correlated with the changes of various pieces of statistical data, one says nothing about the nature of things. This type of information does not tell us much regarding the underlying cause and effect. The fact that a good correlation was established between consumer outlays and disposable income does not imply that outlays are caused by disposable income. It is quite possible that one could also find very good correlation with some other variable. Does this then imply that the other variable is the cause of consumer outlays?

To make sense of the data we must have a theory, which stands on its own feet, and did not originate from the data.

The heart of such a theory is that it must originate from something real that cannot be refuted. For instance, a theory that rests on the foundation that human beings are acting consciously and purposefully complies with this requirement.

The statement that human beings are acting consciously and purposefully cannot be refuted, for anyone that tries to do this, does it consciously and purposefully i.e. he contradicts himself. (He consciously sets a goal to refute that human beings act consciously and purposefully).

Ludwig von Mises, the founder of this approach labeled it praxeology. Using the knowledge that human beings are acting consciously and purposefully, Mises was able to derive the entire body of economics.

Consequently, Mises has concluded that contrary to the natural sciences where the true causes are not known to us in economics the knowledge that human beings are acting consciously and purposely permits us to ascertain what the underlying true causes are. On this way of thinking the causes emanate from human beings themselves.

According to Murray Rothbard,

One example that Mises liked to use in his class to demonstrate the difference between two fundamental ways of approaching human behavior was in looking at Grand Central Station behavior during rush hour. The “objective” or “truly scientific” behaviorist, he pointed out, would observe the empirical events: e.g., people rushing back and forth, aimlessly at certain predictable times of day. And that is all he would know. But the true student of human action would start from the fact that all human behavior is purposive, and he would see the purpose is to get from home to the train to work in the morning, the opposite at night, etc. It is obvious which one would discover and know more about human behavior, and therefore which one would be the genuine “scientist”.2

Why Natural Science Methods Are not Applicable in Economics

Economists have always been envious of the practitioners of the natural sciences because of the statistical and mathematical methods employed in the natural sciences. They have thought that introducing the methods of natural sciences in economics could lead to a major break-through in our understanding of the world of economics.

Now, while the natural scientist can isolate various factors he does not, however, know the laws that govern these factors.

All that he can do is hypothesize regarding the “true law” that governs the behavior of the various particles identified.

He can never be certain regarding the “true” laws of nature. On this Murray Rothbard wrote,

The laws may only be hypothecated. Their validity can only be determined by logically deducing consequents from them, which can be verified by appeal to the laboratory facts. Even if the laws explain the facts, however, and their inferences are consistent with them, the laws of physics can never be absolutely established. For some other law may prove more elegant or capable of explaining a wider range of facts. In physics, therefore, postulated explanations have to be hypothecated in such a way that they or their consequents can be empirically tested. Even then, the laws are only tentatively rather than absolutely valid.3

While in the natural sciences we cannot know the true causes, we have seen that this is not the case with respect to economics.

The fact that man pursues purposeful actions implies that causes in the world of economics are known to us- they emanate from human beings themselves and not from outside factors.

In economics we do not have to hypothesize regarding the true causes – we know them. Hence, we do not require any empirical testing by means of statistical and mathematical methods to verify something, which is already known to us.

For instance, contrary to popular thinking, individual outlays on goods are not caused by real income as such.

In his own unique context, every individual decides how much of a given income will be used for consumption and how much for investments. While it is true that people will respond to changes in their incomes, the response is not automatic.

Every individual assesses the change in his income against the particular set of goals he wants to achieve. He might decide that because of an increase in his income it is more beneficial for him to increase his investment rather than to increase his consumption.

Also, a logically derived theory permits us to ascertain the reasons for the possible discrepancy between the data and the theory. For instance, according to economic theory, individuals assign a greater importance of having goods at present rather than in the future. This emanates from the fact that in order to maintain their lives and wellbeing people have to consume at present rather than in the future. On this way of thinking interest rates cannot be negative. If however, we do observe negative interest rates this does not contradict the theory but rather forces the analyst to find out how this could have happened. Most likely, he will discover that the main reason for the discrepancy between the observed data and the theory is due to central bank monetary policies.

Conclusion

Reliance on statistical data as a foundation for the formation of a view about the state of the economy could generate suspect outcomes. For statistical data cannot produce much information about the underlying causes behind the facts of reality. What is required to ascertain the underlying causes is a logically worked out theory that “stands on its own feet” i.e. a theory that is not derived from the data. A theory introduced by Ludwig von Mises complies with this requirement. The Mises’s theory, which rests on the foundation that human beings act consciously and purposefully, enables to uncover the true causes in the world of economics. Ludwig von Mises held that since causality emanates from human beings and not outside factors no quantitative modelling is possible. The analysis should be qualitative.

According to Mises,

The mathematical method must be rejected not only on account of its barrenness. It is an entirely vicious method, starting from false assumptions and leading to fallacious inferences. Its syllogism are not only sterile; they divert the mind from the study of the real problems and distort the relations between the various phenomena.4

1. Milton Friedman, Essays in Positive Economics, Chicago: University of Chicago Press, 1953.

2. Murray N. Rothbard preface in Theory and History by Ludwig von Mises.

3. Murray N. Rothbard, “Towards a Reconstruction of Utility and Welfare Economics”, On Freedom and Free Enterprise: The Economics of Free Enterprise, May Sennholz, ed. (Princeton, N.J.: D.Van Nostrand, 1956), p3.

4. Ludwig von Mises, Human Action third revised edition Contemporary Books Inc, Chicago, p 350.

The Debt Ceiling Hysteria and Profligate Government

Richard M. Ebeling — Tue, 06 Feb 2018 14:00 -0600

By: Richard M. Ebeling

Once again, the financial fears have been ratcheted up due to recent announcements by the U.S. Treasury Secretary, Steven Mnuchin, and the Congressional Budget Office (CBO) that by the middle of March 2018 the Federal government will have run out of room to continue borrowing due to the official debt ceiling. Some are now calling for scrapping a legal debt ceiling altogether, and allow Uncle Sam to have an unlimited line of credit. This is a bad idea.

Back in September 2017, Congress and the President agreed to temporarily suspend the Federal debt ceiling until December 8, 2017. Whatever might be the cumulative outstanding debt at that time would become the new legal ceiling, unless Congress voted to raise it, which did not happen. So when December 8 rolled around, the total Federal debt, due to continuing government borrowing in the last months of 2017, came to around $20.5 trillion.

The Debt Default Drama and Ending the Debt Ceiling

Since then the Treasury Department has been applying a variety of previously used devices out of its grab bag of tricks to shift funds around and delay paying into a number of Federal accounts to keep spending more money than it has been taking in, in taxes. As a result, de facto outstanding Federal debt now stands at over $20.63 trillion, and rising.

Once more the bugaboo of “default” has been heard in various quarters unless the debt limit is increased by mid-March, when the Treasury’s accounting manipulations will have reached their end; unless, of course, the Congress and the President agree to raise the debt limit or to simply jettison the existing legislative rule of a Federal debt ceiling altogether.

James Capretta, a senior research fellow at the American Enterprise Institute, recently proposed repealing the debt ceiling legislation in an opinion piece that appeared on the website of Real Clear Policy on February 2, 2018. Mr. Capretta argued that having the debt ceiling fosters concern about a default on interest payments coming due on past debt that could seriously and dangerously shake the credit-worthiness of the U.S. government in financial markets around the world. Concerns about Uncle Sam’s willingness and ability to pay its global creditors in a timely fashion, due to the debt limit, also weakens the U.S. as an attractive destination for foreign investors to put their money, Mr. Capretta reasoned.

Since the Federal government has not been operating within a Congressionally passed budget for the current 2018 fiscal year that began on October 1, 2017 and which runs to September 30, 2018, it is only possible to estimate government expenditures, tax revenues and the likely deficit for Uncle Sam’s budgetary twelve months. But as a basis for analysis, in 2017, the Congressional Budget Office projected total government spending in FY 2018 likely to be almost $4.1 trillion, tax revenues from all sources of about $3.5 trillion, with a resulting budget deficit of around $600 billion.

Debt Interest Coming Due, Just Cut Spending by 8 Percent

The CBO also estimated that net interest payments for the current fiscal year would be about $307 billion, or about 7.5 percent of all government spending. This means that if the debt ceiling were not to be raised, it would require the Federal government to reduce spending by less than 8 percent in all other activities to meet his interest obligations to both domestic and foreign holders of U.S. Federal debt.

Even if “mandatory entitlement” spending – Social Security and Medicare – that takes up about 50 percent of all Federal spending were considered to be “off the table” for any cut, then that requires just a 15 percent reduction in that other 43 percent of the non-net interest part of the budget. It seems hard to believe ways could not be found to cut merely 15 cents out of each of those non-“entitlement” dollars spent by Uncle Sam. Even if defense spending were to be considered “untouchable” due to Republican insistence on maintaining at least the current level of such expenditures, it is still hard to believe that $307 billion out of spending on non-defense “discretionary” outlays could not be reduced in some way, shape or fashion.

The fact is, therefore, there is no threat to the U.S. government defaulting on interest payments on outstanding debt. As for principle payments on any of the debt that may come due, the current debt limit does not preclude the Treasury Department from simply rolling over maturing debt, while keeping the total under the legal debt ceiling.

Debt Crisis Hides Real Problem – Government Spending

Once again, this is all smoke and mirrors to avoid dealing with the fundamental and underlying problem: the continuance of and increases in the American interventionist-welfare state. This is the crux of it all. Neither Democrats nor Republicans want to have to “face the music” and tell their respective voter constituents that given current levels of Federal taxation (including under the new tax law passed in December 2017), the U.S. government does not take in enough in taxes to meet all the existing programs and desired legislative promises that have put all of them into high political office.

Deficit spending and the inescapable rising national debt that accompanies it enables politicians to tell the coalitions of special interest groups that vote on election day that Uncle Sam can give them something for nothing, or if not for nothing, then for less that what all of those government giveaway programs really cost.

If we use the Congressional Budget Office’s projection for fiscal year 2018 as a benchmark of government of likely spending and taxing, the Federal government will spend about 15 percent more than it takes in, in taxes, thus generating that possible $600 billion deficit. This means that voters are being told that for every $100 of government spending they, the taxpayers, will only have to cough up $85 dollars in taxes. What a bargain; the politicians are offering a “15 percent off sale” to attract voter-customers who want something from the political trough in Washington, D.C.

Now, of course, that seeming “discount” on government transfers and redistributive funding – for everything from National Public Radio to farm subsidies, from military hardware contracts to Social Security payments, from regulatory agencies micro-managing how private enterprises do business to national security surveillance of everything we electronically say and write, and from billion dollar cash handouts to foreign governments to fighting wars in far-off lands – all do have to be paid for.

Budget Deficits are Paid for Now and in the Future

They are paid for both right in the here and now, as well as in the future. Those who have benefited over the years and the decades from the annual deficit spending that has resulted in that $20.6 trillion debt have left a loan payback burden on their children and grandchildren who, in principle, will be taxed to pay in the years and decades-to-come at least the growing net interest payments on that growing debt.

This is equivalent to a mom and a dad who go on a spending binge, max out their credit cards, and then leave it in their wills that all the debt they have accumulated just having fun “now” while they have been alive, is to be considered a legal obligation for their sons and daughters to pay off along after they have gone. “Oh, and ‘P.S.’, we loved you so much that we wanted to leave you something that you’d remember us for every day of your own lives.”

But the national debt is not simply an intergenerational transfer for others to have to be taxed to pay off in the future, given what has been borrowed in the past or in the present to benefit those living in an earlier time. It is also a real transfer from one portion of the current generation to another. The fact is what is borrowed today represents a shifting of the use of real resources to the government for the benefit of those upon whom the goods and services are spent that is made possible by those government borrowed real resources; that is the portion of the society’s savings that is taken out of the hands of those in the private sector who otherwise could have borrowed those real resources and devoted their use to market-based investment and production.

Even if a part of those privately borrowed resources had been used to finance the purchase of a car or to cover the mortgage on a home, or even to just go on a “dream” vacation, it would have been a private individual making his own time valuational choice and decision to be willing to trade away a portion of his own future productively earned income as repayment of the principle and interest so as to have had the benefit and use of a desired consumer item closer to the present.

But with government borrowing, it is politicians spending other people’s money and resources on those who have put them in office at the current expense of private persons would have been able to borrow that money and those resources for various consumer and investment purposes of their own voluntary choice. And it is those same politicians who place a debt obligation on some as yet undesignated future taxpayers to pay back what they have syphoned off through borrowing to serve their own current political ends and those of the special interest groups to whose demands they pander.

Debt Ceilings Meant to Limit Government

The fact is, if there is a legal Federal government debt ceiling and if that ceiling is reached, it then requires those in Congress to either go through the process of rationalizing or justifying why its legislatively imposed line of credit on the global financial markets should be raised, or for the government to now operate on the basis of a balanced budget. If the debt ceiling is not increased, then the Federal government lawfully can only spend what it takes in, in taxes. That is, expenditures on all items may not exceed revenues collected from all tax sources. In other words, the government functions in the confines of an annual balanced budget. (See my article, “The National Debt Limit Equals a Balanced Budget”.)

Any dollar the government spends must be matched by a clear and designated tax dollar collected from someone. The cost of anything and everything the government does is now far more transparent to taxpayers and voters. There are no (or at least far fewer) “free lunches” under the illusion that government can give that something for nothing; or at a discounted tax price of what it really costs in terms of scarce resources in society transferred from the private sector to government through borrowing.

This is why Mr. Capretta’s policy proposal to abolish the Federal government’s debt ceiling legislation is so importantly undesirable. Congress could then pass and every president could then just sign off on any future Federal government budget they want that serves their agreed-upon political interests with far less concern or second thought about how much the inevitable annual budget deficits are adding to the national debt.

The debt ceiling makes those in political office and the voter-taxpayers more aware of how much has been accumulated due to those budget deficits in terms of total outstanding government debt. And makes it is a more conscious decision whether or not to allow Uncle Sam to keep eating up more and more of the society’s productive resources and wealth through borrowing, and the greater tax burden being placed upon the citizens of the future, including our children and grandchildren.

The Crisis is Not Debt Default, But Too Much Government Spending

But what about Mr. Capretta’s concern and fear that the periodic political battle in Washington, D.C. about raising the debt ceiling threatens to rattle global financial markets and undermine America’s credit worthiness status? I would suggest that it is better to risk this than to brush the debt problem under the political rug and make it less publicly out of sight of the American citizenry through abolishing a debt ceiling rule.

The end of the road of not facing where America’s continuing and rising national debt is leading us is what we witnessed over the last several years in the national debt crisis in Greece. It might be said that we are not Greece; we are a bigger and financially and productively far more robust and successful economy, out of which the debt burden can be carried.

No doubt the politicians of every country that eventually faced a national debt crisis and potential or real default said the same about their own country’s ability to keep borrowing year-after-year. Greece has been able to get other members of the European Union and global organizations like the International Monetary Fund to finance the government’s “embarrassment” of not being able to fund all that was coming due out of what they owed.

Who would “bail out” America if such a dangerous day of reckoning was to arrive or appear much closer on the horizon? Mars, Jupiter, Saturn, Venus? It certainly will not be China, the Arab oil countries, Japan, or even sovereign wealth funds such as those held by the governments of Norway or Holland.

The fundamental budgetary problem faced by the United States government is the total amount of what it spends from taxing and borrowing combined. That is the measure of how much of what people honestly produce in society is actually taken away from their hands and coercively shifted into the decision-making grasp of political plunderers. It arises from a political and ideological environment in which government, over decades, has come to be viewed as a vehicle through which some in society can get what they want from others through the use of political means rather than peaceful, market-based productive means.

Big Government is the True Source of the Debt Problem

The financial crisis in America is not that government cannot borrow more due to a legal debt ceiling. It is due to a government that already taxes, spends and regulates far beyond anything imaged by or consisted with the Founding Father’s conception of a constitutionally limited government meant to only secure the life, liberty and honestly acquired property of all who live and work within its jurisdictional confines.

The debt limit rule imposes on the country an awareness of exactly how much out of control government has become, especially, though not only, in its fiscal extravagance. It forces people to think or rethink what is it that government is doing that should cost so much, and particularly in the form of a borrowing that facilitates those running for political office and holding such power to avoid speaking the truth to the citizens of the country about what it costs in lost personal and financial freedom from every dollar the government borrows and then commits the existing and future generations to have to pay for.

Rules serve to do two things: They direct people’s conduct within the confines of certain corridors of behavior and action, and they remind people why certain forms and types of conduct are to be considered good, better or right compared to others. Budgetary rules, including debt ceilings, are meant to limit how profligate governments can be with other people’s money, both in the present and across generations.

We need some “teach-ins” during such moments of budgetary crises to get people to rethink what it is that government is for and what it should not be for; and to challenge deficit spending that is a form of fiscal governing that enables those in government to hide the truth about what everything they are doing really costs in lost liberty and financial servitude to the State.

What the FBI/FISA Memo Really Tells Us About Our Government

Ron Paul — Mon, 05 Feb 2018 12:15 -0600

By: Ron Paul

The release of the House Intelligence Committee’s memo on the FBI’s abuse of the FISA process set off a partisan firestorm. The Democrats warned us beforehand that declassifying the memo would be the end the world as we know it. It was reckless to allow Americans to see this classified material, they said. Agents in the field could be harmed, sources and methods would be compromised, they claimed.

Republicans who had seen the memo claimed that it was far worse than Watergate. They said that mass firings would begin immediately after it became public. They said that the criminality of US government agencies exposed by the memo would shock Americans.

Then it was released and the world did not end. FBI agents have thus far not been fired. Seeing “classified” material did not terrify us, but rather it demonstrated clearly that information is kept from us by claiming it is “classified.”

In the end, both sides got it wrong. Here’s what the memo really shows us:

First, the memo demonstrates that there is a “deep state” that does not want things like elections to threaten its existence. Candidate Trump’s repeated promises to get along with Russia and to re-assess NATO so many years after the end of the Cold War were threatening to a Washington that depends on creating enemies to sustain the fear needed to justify a trillion dollar yearly military budget.

Imagine if candidate Trump had kept his campaign promises when he became President. Without the “Russia threat” and without the “China threat” and without the need to dump billions into NATO, we might actually have reaped a “peace dividend” more than a quarter century after the end of the Cold War. That would have starved the war-promoting military-industrial complex and its network of pro-war “think tanks” that populate the Washington Beltway area.

Second, the memo shows us that neither Republicans nor Democrats really care that much about surveillance abuse when average Americans are the victims. It is clear that the FISA abuse detailed in the memo was well known to Republicans like House Intelligence Committee Chairman Devin Nunes before the memo was actually released. It was likely also well known by Democrats in the House. But both parties suppressed this evidence of FBI abuse of the FISA process until after the FISA Amendments Act could be re-authorized. They didn’t want Americans to know how corrupt the surveillance system really is and how the US has become far too much like East Germany. That might cause more Americans to call up their Representatives and demand that the FISA mass surveillance amendment be allowed to sunset.

Ironically, Chairman Nunes was the biggest cheerleader for the extension of the FISA Amendments even as he knew how terribly the FISA process had been abused!

Finally, hawks on both sides of the aisle in Congress used “Russia-gate” as an excuse to build animosity toward Russia among average Americans. They knew from the classified information that there was no basis for their claims that the Trump Administration was put into office with Moscow’s assistance, but they played along because it served their real goal of keeping the US on war footing and keeping the gravy train rolling.

But don’t worry: the neocons in both parties will soon find another excuse to keep us terrified and ready to flush away a trillion dollars a year on military spending and continue our arguments and new “Cold War” with Russia.

In the meantime, be skeptical of both parties. With few exceptions they are not protecting liberty but promoting its opposite.

Reprinted with permission.

How the Patent-Troll Wright Brothers Fought to Stifle Innovation

Chris Calton — Mon, 05 Feb 2018 11:15 -0600

By: Chris Calton

The standard justification for patent protection is that without this government-granted monopoly, innovations will come to an abrupt halt. People only innovate with the expectation that they will make money, and this form of economic protectionism is therefore necessary in a capitalist economy.

So say the great expositors of crony capitalism, anyway.

But when one begins to study the history of technology, the patent demonstrates quite clearly that such protection is a roadblock to innovation, rather than the driver of it. I can cite numerous examples of this (firearms, television, etc.), but I believe the most telling history is that of the airplane.

According to our textbook histories, the Wright brothers are hailed as the inventors of the airplane. To say that this is an exaggeration is generous. Orville and Wilbur Wright offered an important innovation that served as a step toward sustained flight – namely, they developed a system for controlling the airplane by twisting the wings of a plane – but after taking aircrafts a step forward, the brothers spent most of their career making sure that no other innovations could follow. This is because what standard histories call “the invention of the airplane” is really just the government grant of a patent.

The patented technology was important, but it still required serious improvement before the airplane could become a viable means of transportation. But with their patent in hand, the inventive brilliance of these two men transferred from designing new machines to developing legal strategies to prevent anybody else from improving on their innovations. Time magazine refers to the Wright brothers as “patent trolls.”

Most of the great innovations in flight did not come from the Wright brothers but, instead, came from their greatest competitor, Glenn Curtiss. Although the Wright brothers were the first to make a successful controlled flight, they refused to demonstrate this ability to the public. Instead, they patented their technology and guarded their innovation jealously, all while Glenn Curtis was busy innovating publicly and with no great fear of people “stealing” his ideas.

In the first two decades of the twentieth century, Curtiss developed several innovations in flight – far surpassing the Wright brothers’ wing-warping novelty. In fact, to circumvent their patent, he developed his own system of controlling flight that is the predecessor to the modern technology: the aileron.

The Wright brothers claimed that the aileron – what was then referred to as a “horizontal rudder” attached to the wingtip – infringed on their 1906 wing-warping patent. Instead of continuing to improve on their own invention, the Wrights spent their energy in the courtroom by filing lawsuits against every design Curtiss made.

Glenn Curtiss, meanwhile, was less concerned with patents and more concerned with innovation. He responded to the Wrights by constantly redesigning and improving his airplanes – including coming up with more innovations, such as lightweight engines and planes that could land and takeoff from the water. He spent a fortune deflecting all of Orville and Wilbur’s legal challenges, all while continuing to advance the technology of flight.

But if Curtiss was winning the contest of innovation, the Wright’s would win the legal competition. Eventually, the courts ruled that any of Curtiss’s designs could not legally be sold unless he obtained a license from the Wright brothers and paid them a twenty-percent royalty on every plane he manufactured. By this time, he had a slew of airplane designs – each one better than anything the Wright’s could produce – but he was not legally allowed to take them to market without a license the Wright brothers were unwilling to sell him.

With their government-granted monopoly secure, the Wright brothers became the sole manufacturer of airplanes in the United States. And like many such industrialists – with a market artificially protected from competition – they lacked any incentive to improve their product. This, of course, is the exact opposite effect that patent-apologists claim to be the purpose of patent protections.

The status of the airplane industry in the United States continued to be stagnant until the United States government finally decided to take action to incentivize further improvements. With the onset of World War I, the outdated Wright planes were being rapidly eclipsed by German engineers who were not subject to the Wright monopoly protections. When the U.S. entered the war in 1917, it had a vested interest in the improvement of the airplane, so it all but repealed the Wright patent. The government reduced the Wright royalties from twenty percent to only one percent, and more importantly, it removed Orville’s power to sell or withhold licenses to his competitors (Wilbur Wright died in 1912, leaving the patent solely in the hands of his brother).

With the patent protection held by Orville Wright effectively done away with, the United States finally saw an explosion of innovation in the airplane industry – many of which were innovations that already existed but were artificially prevented from being brought to market. Contrary to standard patent theory, the Wright brothers were not incentivized to innovate because of the prospect of patent protection, but they did use their patent rights to stifle innovation both within their own company and the innovations of any potential competitors who dared to improve on their design.

Wieser and the Austrians

Peter G. Klein — Mon, 05 Feb 2018 08:30 -0600

By: Peter G. Klein

Over at ThinkMarkets, Stefan Kolev provides an excellent summary of Friedrich von Wieser's career and contributions to Austrian economics. Wieser and his brother-in-law Eugen von Böhm-Bawerk formed the second generation of the Austrian school, helping develop Carl Menger's ideas into the rich, varied, and flourishing tradition we know today. As Kolev points out, Wieser was not only an important (if idiosyncratic) theorist but also an effective organizer and champion for the Austrian school in Vienna and in the larger profession.

Unfortunately, Kolev grossly misinterprets the "dehomogenization" debate of the last twenty years as an attack on Wieser or an attempt to marginalize Wieser's contributions. On the contrary, the dehomogenization literature — launched by Joe Salerno's reevaluation of Mises's and Hayek's contributions to the socialist calculation debate (here and here) and featuring contributions from Rothbard, Kirzner, Yeager, and many others, including myself — is an exercise in exactly what Kolev endorses, the careful analysis of the history of economic thought.

Following the Austrian revival of the 1960s and 1970s it became common, both inside and outside the Austrian school, to refer casually to "the Austrian view" on X, Y, or Z. But, it is obvious from reading the Austrian literature from Menger onwards that the Austrian school, while shared commitments to methodological individualism and subjectivism, is remarkably diverse. The second, third, and fourth generations in particular developed their ideas in different directions and there is no unique "Austrian" view on core issues or valuation, production, and exchange.

Indeed, Salerno's papers on economic calculation were a specific response to the notion of a "Mises-Hayek argument" against socialism. Salerno showed, thorough careful exegesis and interpretation, that Mises and Hayek offered distinct, yet complementary, critiques of socialist economic planning and organization. It does both Mises and Hayek a disservice to lump their contributions together and, even worse, to imply that by tracing out their similarities and differences one is, in Kolev's words, building "models of intellectual dynasties or of litmus-test purity checks as to 'who is an Austrian.'" Of course, Wieser is an Austrian — I have never heard anyone claim otherwise! — but his version of Austrian economics is unique. Indeed, no two "Austrians" have identical views on any fundamental issues of theory, method, or application. Three cheers for that, the hallmark of a flourishing intellectual tradition!

In my own work on entrepreneurship I have developed what I take to be a thoroughly "Austrian" understanding of the entrepreneurial function, one that is distinct from Israel Kirzner's well-known writings on the entrepreneur. I critique Kirzner's interpretation of entrepreneurship as alertness or discovery (a view I trace to Wieser, by the way). Along with Nicolai Foss I have built upon Mises, Frank Knight, and other thinkers to elaborate an alternative view of entrepreneurship as judgment about the use of heterogeneous resources under uncertainty. (For an introduction to some of the different interpretations of Kirzner, see this dialogue between Boettke, Rizzo, Sautet, and myself.)

I often hear Kirzner's ideas on discovery and alertness described as "the" Austrian approach to entrepreneurship. On the contrary, as I discuss in my own work, there is no single Austrian take on the entrepreneur. Indeed, I see Kirzner's view as very different from the view held by most of his Austrian predecessors. For this, I have been accused of "Kirzner bashing!"

On the whole, there is great value in tracing out not only the similarities but also the differences among thinkers and ideas, especially within a broad tradition. Of course, the interpreter is likely to prefer some thinkers and ideas more than others. But recognizing, discussing, and evaluating these differences is an essential task in the development of ideas and should be embraced, not shunned.

Is the Marketplace What's Really Killing Coal?

Andrew Moran — Sat, 03 Feb 2018 12:45 -0600

By: Andrew Moran

In 2016, Coal Country propelled Donald Trump to the White House. On the campaign trail, Trump repeatedly slammed the Obama administration for its environmental policies targeting the coal industry, while regularly promising to bring back jobs to the sector. This was something West Virginia and Wyoming coal miners wanted to hear, not Hillary Clinton pledging “to put a lot of coal miners and coal companies out of business.”

So, with Trump’s first year in the Oval Office in the history books, has the coal industry been saved?

Last year, output was up, and exports increased. However, coal-fired power plants are still shutting down, employment remains low, and the president’s proposal to subsidize coal plants was rejected by federal regulators.

Trump’s critics will inevitably pounce on the White House’s inability to rescue the industry, which will indeed be a talking point for Democrats seeking to regain the support of middle America. But the industry’s decline, particularly when it comes to jobs, has been in the making for many years.

Coal Country usually blames the Obama-era Clean Power Plan and the Stream Protection Rule. But the future has been bleak for a long time, and there’s a myriad of reasons why coal is dead and never coming back. Free market, government policy, machinery, green energy. Take your pick.

Coal Employment Peaked in 1923

In 1890, there were 300,000 coal workers. For three decades, coal employment kept going up, eventually employing nearly one million workers. But that trend ended abruptly in the 1920s.

With the prevalence of machinery and businesses replacing most manual workers in the sector, coal employment peaked in 1923 with about 900,000 miners.

Yes, even with the creation of the Environmental Protection Agency (EPA), thanks to President Richard Nixon, there was an uptick in the 1970s. But it wasn’t because of sound economic policies. In 1973, the Department of Labor proceeded to count white-collar staffers as coal workers.

Once again, there was a steady decline in employment figures beginning in the 1980s.

Today, there are roughly 50,000 American coal workers. Who knows where these statistics will be 10 or 20 years from now?

The Rise of Natural Gas

A decade ago, coal accounted for about half of the fuel used to generate U.S. electric power, but it tumbled to 30% in 2016. What contributed to the steep drop? Natural gas.

In 2007, natural gas provided just 20% of the nation’s electricity needs. Today, that number has spiked to 34%, surpassing coal’s share for the first time in history.

Thanks to the shale revolution, the country’s natural gas production has spiked over the last decade, helping the U.S. become the world’s biggest producer. With enormous supplies of cheap natural gas and a resource that is slashing the nation’s emissions, utilities are witnessing two significant opportunities: reduce electricity rates and accomplish their clean energy objective.

According to the Energy Information Administration (EIA), it is projected that more than 36 gigawatts of new natural gas capacity will come online this year, the largest increase in more than a decade.

And this is only the beginning for natural gas’s meteoric surge.

Since natural gas prices have crashed to around $3 per million British thermal units (Btu), analysts expect greater demand from manufacturers, exporters, and the energy industry in the coming years.

In the end, it will primarily be natural gas that accelerates coal’s destruction.

Washington Still Complicit

For the most part, the free market killed coal, but Washington also had a hand in its death. The instruments of regulations and bureaucratic red tape were used to bring the former energy giant to its knees.

Here are just some of the regulations coal firms contend with: Cooling Water Intake Structures, Stream Buffer Zone Rule, Examinations of Work Areas in Underground Coal Mines for Violations of Mandatory Health or Safety Standards, Greenhouse Gas New Source Performance Standard, and the list goes on.

Coal-fired power facilities were developed at a time when there was very little bureaucracy. They burned coal; they were not designed to cater to bureaucrats from federal environmental agencies. When companies sought to modernize their plants, the regulators made it way too expensive, producing a generation of so-called zombie power plants.

Want to create a new plant? The standard permitting process is just too long. From the time the providers of capital agree to finance the project to seeing the blueprints come to fruition typically takes several years due to the various required permits, regulators needing to determine if their requirements are met, and many other factors.

Very few wealthy investors would want to park their money in such a high-risk endeavor.

Coal technology has evolved in recent years. In October 2015, a Saskatchewan-based power plant launched, promising to generate electricity for 100,000 homes, while also being eco-friendly. Will it work? Others are following suit in the U.S., and some are even posting a profit in a natural gas world.

President Trump has scaled back some of the Obama-era regulations, attempting to offer the battered industry some reprieve. Though coal leaders are grateful for the deregulation, they understand the economics of the situation.

Matt Preston, research director for North American coal markets at Wood Mackenzie, told CNBC:

“All of those hurdles would have been overcome if natural gas was really expensive … but with gas cheap, you just don’t go over those hurdles. It’s a help, there’s no doubt about it. But they’re not going to improve the economics of today.”

No business or sector should ever receive government subsidies. But perhaps coal’s lifespan would expand if it were given preferential treatment in terms of taxpayer dollars like green energy has for years.

A Long-Term Trend Reversing?

Despite the slight upticks in coal mining employment over the years, there is no reason to suggest that the long-term trend is on the cusp of reversing. But these are just the market forces at play. Right now, natural gas dominates the energy sector amid the fracking boom, and it is playing an impressive role in the geopolitical world.

The U.S. is an energy behemoth, Organization of the Petroleum Exporting Countries (OPEC) is irrelevant, and the nation’s CO2 emissions are plummeting. All of this can be attributed to the natural gas boom.

Unfortunately, the natural gas boom is also the culprit for coal’s annihilation.

Originally Published by Liberty Nation.

Daniel McAdams on the Real Cost of "Defense"

Daniel McAdams, Jeff Deist — Fri, 02 Feb 2018 14:00 -0600

By: Daniel McAdams, Jeff Deist

Daniel McAdams from the Ron Paul Institute joins Jeff Deist for an unbridled discussion of the true costs of war. We know the US spends more on "defense" than many big countries combined, but what are the actual numbers? How long can the federal budget sustain empire and entitlements? Will rising interest rates finally force Congress to stop expanding wars, building bases, buying useless weapons systems, and meddling around the world? And is Trump the president far more hawkish than Trump the candidate? This is a great conversation with one of the leading libertarian foreign policy voices.