Monday, June 24, 2013

Why we Don’t Need Trade Wars

In the movie ‘L'Auberge Espagnole’ (‘The Spanish Apartment’) a French college student goes abroad to Barcelona, Spain, to learn Castillian Spanish and complete his studies of economics, with the promise of an attractive job offer from his sponsor upon his return to France. In one scene, one of the economics professors insists upon teaching the course – to his students who come from all over the world – in Catalán, the historical language of Catalonia, the region of Spain of which Barcelona is the capital. “If you want Castellano” – (the language of Castille that came to dominate Spain as a whole and South America besides – what we call ‘Spanish’) – “then go to Madrid!” he booms.
No doubt Catalán is a beautiful language with a rich literary and cultural heritage. But it is worth noting that while this business prof is training his charges in Catalán, the Chinese are teaching their business students (and 300 million of their closest friends, more than the population of the United States) … in English! Pop quiz: Who’s going to dominate the global economy in the 21st century?
This Catalonian professor was practicing what could be called cultural protectionism; insisting upon doing things his way, insulated from external realities. But his students will pay a price in diminished opportunity, for preferring the provincial to the global, blinders to eyes wide open.
And so it is with the more overt forms of economic protectionism and isolationism: tariffs, quotas, regulation that discriminates against imports, supposedly in favor of exports, etc. Most of these measures help only a few privileged or politically connected groups of people, and only for a short period of time, while injuring the welfare of the society at large, especially over the long term.

Trade Facts and Stats
Here are some facts and stats which paint a picture of the globally interconnected economic world in which we live today :
• International trade has tripled to quadrupled in the last 50 years.
• During the same two generations of expanding globalization, the US workforce and total employment have doubled. Prior to 2008, the unemployment rate averaged 5 to 6 percent. Trade is not causing loss of the number of jobs (the employment crisis of 2009 – 2011 was not caused by trade, free or otherwise).
• Trade does not cause declining wages. Real hourly compensation in America, including non-wage benefits, increased 41% on average from 1973 to 2007, and 23% from 1991 to 2007.
• Over the past 40 years or so, median US household income has increased 20%, from about $40,000 per year to about $50,000. The average size of a household was 3.2 people in 1967; 2.6 people today . Therefore those household income figures translate into more dough per individual today.
• 20% of humanity lives in China, and trade with China constitutes 15% of all US foreign trade.
• The USA spends about 2% of its GDP on goods imported from China; $260 billion in consumer goods and $60 billion in industrial goods. Two-thirds of that are products designed in the US, manufactured in Japan, Gernany, South Korea, Taiwan, Singapore, Malaysia and/or the US, and finally assembled, at the end of the chain, in China. Think Apple iPad.
• The percentage of the world’s population living in ‘absolute’ poverty ($1.25/day or less) has decreased from over 50% in 1981 to 25% in 2005. In China, 600 million people have climbed out of absolute poverty in the last 30 years.
• Quality of life has improved across the board in the developing world in this era of globalization. For example, since 1960:
- Life Expectancy: from 45 years to 65 years
- Infant Mortality: down 60 percent
- Food: from less than 2,000 to more than 2,600 calories/day
- Literacy: from less than half to over two-thirds
-- Child Labor: down from 25% to 10%.
• American companies employ 10 million workers outside of the United States. Fewer than 5% are in China; an equal number are in Germany, a country with 1/17th the population of China.
• More than two thirds of American foreign investment flows to other wealthy peer countries, not Third World ‘sweatshops’.
• Wage rates and labor costs are not the same thing. If Fatcatistan’s workers get paid twice the ducats per hour of workers in Pauperia but produce three times the value output, then Fatcatistan has the lower labor costs.
• In 1776, 97% of Americans were farmers. Now only 3% of the population works in agriculture, yet we are the best-fed (overfed? most obese?) nation on earth and the world’s leading exporter of food.
• Employment in the American Manufacturing sector declined 20% in 17 years, from 17.1 million jobs in 1991 to 13.5 million in 2008. On the other hand, employment in the Service sector during the same period increased 51% from 37 million to 56 million. Thus a decline of 3.6 million jobs in manufacturing has been offset by a 19 million-job increase in construction, professional, business, financial, education, health and other services.
• American consumers spend 60% of their discretionary income on services today, whereas two generations ago, they spent more than that proportion on manufactured goods.
• Meanwhile, manufacturing output – productivity – increased by about 60%. We’re making more stuff, producing more value, with fewer people, just as we did in agriculture in past generations.
• America (a.k.a. 250,000 companies) is the world’s #1 exporter. We make $380 billion worth of semiconductors, civilian aircraft, vehicle parts and accessories, passenger cars, industrial machines, pharmaceutical preparations, telecommunications equipment, organic chemicals, electric apparatus and computer accessories …and twice again as much more stuff. Not too shabby for a country that ‘doesn’t make anything anymore’.
• When imports go up, so do exports. When imports go down, so do exports. Anti-trade / pro-protective tariff theory predicts the opposite, and fails.
• The Trade deficit is negatively correlated with unemployment. That is, when the deficit goes up, unemployment falls / employment increases. If you are pining for the good old days, those few individual years when we got the trade deficit ‘under control’, you are a cheerleader for recessions: 1961, 1975, 1982, 1991, 2001.
• More than half of imports into the US are raw materials or intermediate products that American manufacturers use as inputs to their final product. Domestic American companies need imports.
• 97% of job displacement in the US is due to technological change, not trade. Every year, 15 million jobs disappear and another 15+ million are created. Trade-related job churn accounts for up to 500,000 of that, which is to say 3%.
• Stuff that is traded in international markets gets less expensive all the time, whereas products and services protected or insulated from competition get more expensive. Think computers on the one hand vs. college tuition on the other; TVs vs. medical services; cellphones vs Super Bowl tickets; clothing vs. car repair. Trade makes stuff cheaper for you and me.
• Two thirds of GM and Ford’s business is outside the US.
• With your outsourcing hysteria, get some IN-sourcing tranquilizer: For example, Japanese manufacturers employ about a third of all Americans who work in the automotive industry, in factories in 11 US states. The 5+ million American employees of foreign-owned affiliates here earn on average 30% more than employees of domestic companies. Ask them if they think that’s a bad thing.
• Americans own over $100 trillion worth of assets. Our negative Net International Investment Position (the difference between foreign assets that we own and American assets owned by foreigners) is less than 2 percent of that. 40% of that less-than 2% are equity positions – stocks, real estate, direct investment – that is not a debt burden; it does not need to be ‘paid back’.
• Price discrimination, like charging different prices for tickets to occupy the same movie theatre seats to adults, seniors, children and students, is a perfectly economically rational and legal practice. Yet when a foreign company sells in the US market below average cost, we call it ‘dumping’, call the international police and slap fines on the ‘criminals’. Someone please tell BMW that I would like a 2014 740iL ‘dumped’ in front of my garage with the key in the ignition and a blue bow on top. In return I promise: 1) I’ll send a check for $100 to satisfy the ‘below average cost’ requirement (including shipping, handling and gift-wrapping), and 2) I won’t sue or lobby my congressman for a redress of grievance.
• About 100,000 Americans are employed in the steel industry; about 4 million (that’s 40 times as many more) work in industries that use steel to make products. The steel tariff of 2002 may have helped the few steel workers temporarily, but it screwed everyone else, like the steel-consuming industries and you and me who buy or rent cars, machine tools, industrial equipment and office space. Thankfully the tariff was repealed in 2004 under persuasion from that evil foreign menace to our sovereignty, the World Trade Organization (WTO).

Sunday, June 23, 2013

Inflation and Monetary Crises Part 2: Just What the Heck IS Money, Anyway?

(Read Part 1 HERE.)
In order to understand how to avoid the consequences of large-scale monetary disasters, of which hyperinflation is one and depression is another, we have to understand in the first place exactly what money is, how it came about, what it means, how it gets corrupted, and therefore how to manage it correctly.
In order to understand money, we first need to remove it from the scene; imagine what life was like before and without money. Without money, we have a barter economy. If you want to obtain eggs, cloth, cereal and milk for your family, you have to offer a sheep, a goat and/or several pounds of carrots in exchange.
Let us ignore the obvious disadvantages of such a system for the moment. One thing we can note right away is with no money, there is no possibility of monetary fraud and the concept of counterfeiting is meaningless; assuming that all parties to the transaction are satisfied with the quality and quantity of the goats, eggs, carrots etc. involved in the exchange, there can be no such thing as inflation or monetary crisis.
So that’s it! We go back to a barter economy and live happily ever after! The End!

OK, I’m kidding. We’re just getting started here. There are distinct disadvantages to the barter economy that make an alternative highly desirable (just, without the crises). These disadvantages include:
• Granularity: If all you possess to exchange is one 3000-pound ox, whereas all you need right now is a day’s supply of various foodstuffs and clothing, then even if you could find a trading partner who had just the exact mix of items you needed (unlikely), the quantity mismatch works against the trade taking place.
• Transportability: If you live on a small farm near a bucolic village, then walking your ox to the market, permitting it to graze on grasses and contribute productive fertilizer by the side of the road, may not be too much of a problem. But if you want to exchange for some grain, silk or molasses produced hundreds or even thousands of miles away, or if you live in an apartment in a city, keeping and transporting your ox is a major inconvenience.
• Security: An ox is perishable; it can easily get sick and die. It’s too big and temperamental to keep in a cash drawer.

OK, what’s with the obsession on oxen? Well, first, Adam Smith used an ox in his example illustrating the same point about the difficulty of barter. But also, Carl Menger, the founder of the ‘Austrian’ school of economics, pointed out that cattle in the form of smaller specimens such as goats and sheep were among the earliest forms of money in agrarian and nomadic societies . That is, a man’s wealth was largely measured by how many heads of sheep, goats, cows etc. that he owned, and perhaps more importantly, people would willingly accept such cattle as payment for other goods in the market, even if they had no immediate use for them themselves, because they knew that they could easily exchange them for the other items that they did need. While retaining all of its value in use, cattle took on additional special value as the most marketable commodity in the economy and therefore highly useful in indirect exchange. Money, in the true and original sense of the word, was born.
• Fundamental definition of money (in case you missed the point): Any commodity generally accepted in a particular market in exchange for other goods, which the receiver intends not to use him/herself but to exchange for yet other goods and/or services.

Or, condensed:
• Money is the common commodity used as a medium of indirect exchange in a given market.

Note again that there is no possibility of inflation or purely monetary crisis under a commodity-money economy. It’s very difficult to ‘counterfeit’ a goat, or to ‘print’ too many of them; if you could reproduce a large number of goats, the fact that they are real, useful and valuable goods rather than pieces of paper means that their increase cannot defraud a market, even if the relative scarcity of other goods changes the exchange rate. Any banker-shepherd who issued more than one claim ticket for the same goat would soon be bankrupt and possibly lynched.
Over the generations and across cultures, hundreds of commodities having intrinsic use value have been used as the common medium of exchange in particular markets: furs (in Canada), tobacco (in Maryland and Virginia), cakes of wax (on the upper Amazon), cod (in Iceland), bolts of silk, slaves, salt, seashells, nails, dates, tea-bricks, glass beads, grains --- in short, anything which was in common or abundant supply in a given market, which people knew they could easily trade for something else if they didn’t need the particular thing themselves.

An important aspect of the emergence of money in civilization is that it occurred originally without coercion or government intervention of any kind. It was a spontaneous creation of the individuals acting in their own best interest in voluntary exchanges of the marketplace. No decrees or authorization of ‘legal tender’ was required for the origin of money.
As trading and industry evolved to become more sophisticated, highly developed, and extended over greater distances, there emerged independently in many cultures at different times in history a tendency to prefer above all other money-commodities, the precious metals: copper, tin, nickel, silver, and the king of them all, gold.
Gold is the most advantageous of all the money-commodities in the overwhelming majority of markets. Its beauty gives it aesthetic value. It has real value in use, for ornamentation, fashion accessories, art, statuary, and in an advanced civilization, electronic components. Its physical characteristics, weight and relative scarcity give it a high value relative to its bulk. As metals go, it is soft and malleable, easily minted into coins or sub-divided into small units. It isn’t perishable like livestock or foodstuffs. It is easier to carry, store and guard, especially in a city or on a long journey, as compared to a comparably valuable quantity of cattle or molasses. For these reasons gold has emerged as the closest thing to a universal standard across history and cultures for monetary currency.

So, just what are paper money and electronic bank credits? Do these represent a higher level of monetary evolution?
Paper money originated as claim receipts for a certain quantity of real commodities on deposit with another party, such as a granary or bank. Paper and electronic bank credits are entirely consistent with the principle of sound money as long as they are not counterfeit, that is, they represent real promises to redeem claims for the commodities they represent. A treasury note, such as a dollar, originally acted like a warehouse receipt, giving the owner a claim, if not to a specific identified unit, then at least to a certain specific quantity of gold (1/20 ounce) that the treasury had in it warehouse (bank vault). As long as paper money (and its modern, high-tech counterpart) retained this anchor to real goods, and the issuing agency made good on its promise to redeem the notes on demand for the promised quantity of gold, then there was no fraud and no possibility of a monetary crisis. It was when the banks succumbed to the temptation to issue more notes than it had gold to back them, in effect issuing multiple claims to the same units of real goods in the warehouse, that the trouble started. Jesus Huerta de Soto has documented the phenomenon of fractional reserve banking from the time of the ancient Greeks and Romans, though the middle ages and Renaissance up to the present day. Significantly, the Bank of Amsterdam (Holland) of the 17th and 18th centuries was the longest enduring financial establishment for as long as it maintained a strict policy of 100% gold reserves. This institution endured in spite of wars, pestilence, political upheaval and other crises that make our own modern problems seem trivial.

A private or independent bank could not and cannot long issue more claims than it has gold to back them, because sooner or later, depositors are going to attempt to redeem their claims. It doesn’t take much to trigger a panic run when customers suspect that the bank won’t be able to make good on all its promises. For this reason, the free-market failure feedback mechanism functions perfectly to correct errors and fraud in private banking. Note that by private banking, I mean banking exercised neither with interference nor (extremeley important point) with any privilege from government, such as the right not to fulfill its contracts.
Under central banking however, where the government grants a charter to one institution, giving it the exclusive privilege to originate money and/or set fractional reserve policies, requires all other banks to keep their reserves on deposit with the central bank and doesn’t redeem its notes in real commodities, then at the very least, a bias for inflation is built in to the foundation of the financial system. With virtually complete control of the total money supply of a nation, the government has an unmatched ability to conjure monetary units out of nothing.
This essentially fraudulent act is the origin of the debauchery of paper currency, the root, indeed the very definition of inflation.
• The general rising prices of commodities in the market are the symptom and end result of inflation, not inflation itself.

Inflation comes about for reasons of political corruption. It is easier for governments to inflate on the sly than to openly raise taxes. In desperate times such as wars and revolutions, kings and presidents have financed armies with counterfeit money, with disastrous consequences . Even in less-than desperate times, politician love to print money and spend it on themselves, their friends, and the constituents most likely to vote for them. The perpetual motion machine of politics works for a few cycles, until the crisis erupts.

Inflation and Monetary Crises - Part 1: A Crisis of Counterfeiting

In 1924, the German government printed and circulated a 100 trillion-mark note . Billions to tens of billions of marks were required to exchange for one dollar. This was the culmination of a period of catastrophic hyperinflation in which the value of the mark dropped, not by a few percentage points per year or even per month, but on an hourly basis. Prices rose from a few marks for common items first to hundreds, then to thousands, then millions and finally to billions of marks. A single egg was priced at 150 billion marks at one point. Workers demanded to be paid twice a day so that they could get rid of the money and exchange it for something --- anything tangible and physical --- before the money lost more of its value. An anecdote which may or may not be true in fact but which illustrates the nature of the crisis tells of a wheelbarrow full of cash found in the street that was dumped out so that the thief could make off with the wheelbarrow, never mind the cash. Money was so worthless that bills were burned in fireplaces to conserve firewood fuel. Life savings were wiped out. Economic and social chaos ensued. The crisis contributed to the rise of Hitler.

The story of Germany in the 1920’s is only one of the more dramatic historical examples of hyperinflation and its power to destroy civilization. Argentina in the 1980’s is another well-known example, described succinctly by Tom Chao:
“Argentina went through steady inflation from 1979 to 1991. Before 1979, the highest denomination was 10,000 Pesos. By 1981, the highest denomination was 1,000,000 Pesos. In the 1983 currency reform, 1 Peso Argentino was exchanged for 10,000 Pesos. In the 1985 currency reform, 1 Austral was exchanged for 1,000 Pesos Argentino. In the 1992 currency reform, 1 new Peso was exchanged for 10,000 Australes. The overall impact of hyperinflation: 1 new Peso = 100,000,000,000 pre 1983 Pesos.”

The fact is, just about any country in the world has experienced periods of high inflation at some time in its history and to the present day. A representative sampling of 55 national currencies in February 2007 revealed 21 which traded at more than 10 to the U.S. Dollar, of which 5 trade between 100 and 1000 to the Dollar and 7 which trade between 1000 and 25,000 to the Dollar . It is doubtful that any of these currencies were originally established at such valuations; it is also likely that many of the more ‘normal’ currencies are only trading within a reasonable range following one or more orders-of-magnitude re- (or de-) valuations.
It doesn’t take a hyperinflation on the order of tens of percentage points per month in order to destroy wealth and leave a lasting impression. People who have sacrificed, scrimped and set aside pennies, earning a few percent on their savings each year, can have decades’ worth of saving wiped out by ‘mere’ double-digit annual inflation. The decline and fall of the Roman Empire has been blamed by some on erosion of the currency’s value. The 1970s is remembered by the baby-boom generation of America very negatively as the decade of ‘malaise’, never to be repeated, even though inflation was ‘only’ between 10 and 20 percent per year.
Inflation leaves deep mental impressions upon those who live through it.
The currency crisis in France following World War II was mild compared to the one in Germany in the 20’s. Yet 25 years after President de Gaulle created the ‘new Franc’ which was reset at 100 times the old depreciated one in order to normalize its value (to something on the order of an American quarter dollar), I personally met many older-generation people in France on different occasions who would go through a moment of mental hesitation when computing or contemplating complex or large monetary amounts, calculating and re-calculating the value in terms of ‘ancien’ and ‘nouveau’ (‘old’ and ‘new’).

We see that inflation is a significantly evil, destructive force in the economy, to be contained, preferably extinguished completely. But not only do people disagree on the cause (greedy businessmen, greedy unions, greedy consumers, greedy speculators, greedy foreigners or greedy politicians), they frequently can’t agree even on exactly what inflation is. So, permit me to assert the following definition, which the next section will be required to explain in detail:
• Inflation is: Government-initiated counterfeiting on a massive scale.

Inflation is the introduction of an excess of paper money or (electronic) credits into an economy over the real assets of the economy. It is caused essentially by the government creating, out of thin air, what is essentially counterfeit money.

See Part 2 HERE.

Saturday, June 22, 2013

Why we don't need a new New NEW Deal - Part 2

(Click here for Part 1.)
Franklin Delano Roosevelt took office in March 1933. He would create hundreds of new interventionist agencies and embark on unprecedented projects, transforming American society on a massive scale. The following is only a representative sample of the alphabet soup of interventions, projects and agencies initiated by the Roosevelt Administration known in the aggregate as the New Deal:
• United States Bank Holiday / Emergency Banking Act: FDR ordered every bank in the country closed on the first week of his term. No one could make deposits or withdrawals, that is, have access to their own property.
• “Relief, Recovery and Reform”: slogan of the early FDR administration
• Tennessee Valley Authority (TVA)
• Works Progress Administration (WPA)
• Wagner Act: Boosted privileges of unions and approved collective bargaining rights.
• Federal Deposit Insurance Corporation (FDIC)
• Federal Housing Administration (FHA)
• Securities and Exchange Commission (SEC)
• Agricultural Adjustment Association (AAA)
• National Recovery Administration (NRA)
• Works Progress Administration (WPA)
• Executive Order 6102, a.k.a. gold confiscation
• Farm Credit Act
• National Industrial Recovery Act / National Recovery Administration
• Public Works Administration
• Civilian Conservation Corps
• Federal Emergency Relief Administration (FERA)
• Reconstruction Finance Corporation
• Civil Works Administration
• Emergency Relief Appropriation Act
• National Labor Relations Act / National Labor Relations Board (the people who tell Boeing they can’t open a new plant in a non-union state.)
• Fair Labor Standards Act
• Fair Employment Practices Commission
• Federal Project Number One (sponsoring artists, artistic works and productions)
• Committee on Economic Security
• Social Security Act

Finally, toward the end of his reign, FDR attempted to implement what he called the
• Second Bill of Rights

Many of these agencies and institutions are with us to this day and are likely to continue for generations. What these acts, agencies and institutions DIDN’T do is end the Depression.
The Depression lasted seven more years beyond Hoover, with a second, ‘double-dip’ recession in 1937-38. It didn’t end definitively, with the return of full employment, until World War II production and mobilizations were well under way. World War II’s destruction and death per se didn’t fix the Depression. It was the return of relatively free-market policies and the END of the most aggressive interventions and the demonization of businessmen which permitted the economy to return to a more rational basis for functioning.

So what would you have done, smarty-pants?
Crises always look a lot simpler from a distance in space and time. But the response of Hoover and Roosevelt to the Crash and Depression were not those of panicked, surprised men with no clue what to do. They were the premeditated strategies of calculating men, carried out in their moment of opportunity. Hoover and FDR were interventionists who didn’t believe in free-market, laissez-faire capitalism and exploited every crisis for the purposes of implementing their own vision of governance, fully formed years earlier.
It’s not that these were bad men; we can assume they sincerely believed, as many of our politicians to this day believe, that it is the appropriate role of the federal government, its hundreds of agencies and tens of thousands of bureaucrats, to micro-manage every aspect of our economic lives ‘for the greater good’. To a degree they can be forgiven for being, as all mortal men are, imperfect and in this case, mistaken.
The same is difficult to say for the politicians who, 80 years later, insist upon leading us down the same path to government expansion, micromanagement and high taxation above and beyond the New Deal (and later, Lyndon Baines Johnson’s Great Society) with the excuse that it’s necessary in order to resolve or prevent the crisis and bring prosperity, security and health care to all. The evidence is overwhelming that regardless of political party, such intervention only amplifies and prolongs the crisis. Politicians and government, even ‘good’ ones, do not create wealth, produce high wages and low prices for workers, high revenue and low costs for businesses, or innovative and environmentally friendly products and services. They can’t guarantee no one will fail and shouldn’t guarantee that anyone succeed at the expense of anyone else. Only the market – entrepreneurs, business people, private firms big and small, investors, speculators, insurers and individual consumers – cooperating voluntarily, acting in their own interest within the rule of law, can accomplish the best production and distribution of wealth possible in an imperfect, physical world (as opposed to celestial paradise).

As a matter of economic principle, it was futile for Hoover or FDR to:
• Attempt to prop up wages. If the total amount of wealth and activity in an economy has diminished for whatever reason (natural disaster, war, contraction of trade due to protectionism – Smoot Hawley – and retaliation by partners, or other destruction of wealth), then someone’s wages will have to fall in real terms. If one politically favored group’s wages are artificially maintained above what they would be under un-coerced voluntary cooperation, then someone else’s wages have to fall proportionately (and unjustly, including to zero – unemployment) to balance the aggregate accounts.
• Attempt to prop up commodity prices for farmers. If corn is too cheap, marginal corn farmers need to grow soybeans or take a higher-paying job in industry. This is how it has always been. When our nation was born, 97% of the population worked the land; now that proportion is reversed, with only 3% in agriculture feeding the entire US and much of the rest of the world. Low prices benefit the consumer and as such are not inherently bad.

The futility of the intervention was brought to light when the Federal Farm Board’s policy of price supports encouraged overproduction of wheat, cotton, wool and other products, resulting in even worse collapsing market prices and devastating losses. At that point Hoover intervened in another direction, to order acreage to be plowed under, taken out of production, and to destroy ‘excessive’ livestock.
• Attempt to prop up prices for the benefit of big industrial producers. If oil or lumber is too cheap, marginal oil/lumber companies have to get into a different business where they have a relative advantage and/or where the consumers are clamoring for the product. No subsidy or privilege is required, let alone justified, to bring the economy back into balance.
• Attempt to ‘protect’ domestic industries from foreign competition via protective tariffs such as the Smoot-Hawley bill. Such actions always hurt domestic consumers and invite retaliation from foreign governments and their favored industries. The Smoot-Hawley bill was arguably the single most important trigger of the October 1929 crash, as investors and economists correctly re-estimated the value of their investments under a reduced-trade market.
• Herd workers into unions that they would not join under conditions of voluntary cooperation. Favoring unions at the expense of free labor is a violation of liberty; it raises wages for some at the expense of others who receive less (or nothing) and undermines the ability of workers to develop as independent entrepreneurs. Independent-minded Americans have always resisted unionization compared to other western nations, for good reason.
• Manipulate money and credit prices / interest rates. Monetary manipulation by private individuals is prosecutable as counterfeiting and/or fraud, and is no less evil or destructive when practiced by government. Forcing interest rates too high chokes economic activity; forcing them too low makes longer production cycles – and with them higher investment returns – appear like mirages in the desert, deceiving investors to make bets that are destined to fail.
• Embark on public works projects for the purpose of ‘putting America back to work’. If a road or bridge needs to be built, let the agency most impacted by it (municipal, country or state government, or private firms) build it. If an electric company sees a business opportunity in building a dam, let them buy the property, indemnify 3rd parties and other stakeholders, carry plenty of insurance, clean up their messes, reimburse anyone they harm, and finance the project with their own investor’s resources (and reap whatever profits the market may bear without having it taxed away). But spending capital for the sake of busy activity does not increase wealth; it sucks wealth away from where it is more desperately needed. The 1930’s Autobahn in Germany was a glamorous showcase, but an economic and social disaster.
• Weaken protection for creditors in bankruptcy proceedings. This is a classic case of attempting to make a balloon smaller by squeezing it at one end; it always bulges out at the other. What person with money to lend wants to risk their capital in an environment in which the government has signaled its willingness to arbitrarily change the terms of any loan contract? Such uncertainty leads to a contraction of credit. How does that help future borrowers/debtors?
• Threaten and demonize innocent people. In different times and places, this has meant Christians, blacks, Jews, merchants, bankers, gypsies, homosexuals, whites, Hutus, the mentally deficient, the culturally undesirable, browns, union workers, strike breakers (‘scabs’), foreigners, rich people, poor people, good people, bad people and ugly people. Corrupt and despotic politicians have employed this base technique for millennia, but it is unworthy of an enlightened leader of a free people today to do so. The only justification for any accusation is specific allegations of criminal wrongdoing targeted at the specific individuals (not groups) who committed them. Investing and/or speculating against the market outcomes desired by a political party or government program does not qualify as justification for group persecution.
• Increase government spending in time of diminished tax revenue.
• Micromanage business.

As a solution to the economic crisis, Roosevelt’s interventions and the alphabet soup of angencies created to implement them were equally or more futile than those of Hoover. The Social Security Act and system will require its own in-depth discussion. But make no mistake, Bernie Madoff could not have done worse in the long term.

• The Great Depression was a crisis of government intervention, not one of free-market capitalism. Government intervention is the problem; free-market capitalism under the rule of law is the solution.
• The Hoover-Roosevelt administrations constituted a continuum, not a fundamental change of policy direction. Herbert Hoover was not a free-market, laissez-faire capitalist, limited-government president.
• As long as the interventionist philosophy prevails in our nation’s capital and in state capitals, we can expect more economic crises, as bad or worse. It doesn’t matter that the interventions are ‘for the greater good’ or that the people leading the intervention are good, well-intentioned, virtuous, upstanding citizens. An impossible task is still impossible when undertaken by a mortal saint.

It is remarkable that the myth of the ‘success’ of the New Deal lives on to this day. The Depression lasted seven more years beyond Hoover, with a second, deep recession in 1937-38. The depression didn’t end definitively, with the return of full employment, until World War II production and mobilizations were well under way. In other words, a calamitous event in which tens of millions of people worldwide were killed and hundreds of cities, with all of their wealth and assets, were completely destroyed, was by one measure less damaging to the economy – perhaps even beneficial – than the policies of Hoover, FDR and the New Deal.
It is dangerous to hold the thought that war is an antidote to economic depression, just as is it is to consider war and conquest a solution to economic challenges such as securing reliable supplies of materials that your country lacks (from Caesar’s conquests to Hitler’s ‘lebensraum’).

World War II’s destruction and death didn’t fix the Depression. What happened was that many government interventions of the New Deal, including the demonization of businessmen, were abandoned and not reinstated after the war was over. The end of the Hoover-FDR New Deal ended the Depression. It would have ended 10 years sooner if this tragic blunder had never been attempted. Moreover, some of the worst tragedies of the War might have been avoided if not for the worldwide ripple effects of the economic malaise. May we never again be tempted to repeat such a disaster.
That depends on YOU, citizen economist.

Why we don't need a new New NEW Deal - Part 1

The last time the American economy was in such dire straits was over 30 years ago; perhaps 70. Do the lessons of the Great Depression perhaps hold any explanations, let alone solutions? Let’s recall a bit what happened all those years ago (it might even feel familiar):
• From September 1929 to July 1932, the Dow Jones Industrial Average (DJIA) fell from a high of 381 to 43, an 88% decline. In our time, that would be like the Dow falling from 15,000 to 1,800.
• Some of the most dramatic moments occurred in late October 1929, on the 24th (‘Black Thursday’: almost 13 million shares, or approximately 3 times the daily average, traded for a 6-point drop in the DJIA) and the 29th (‘Black Tuesday’: 16+ million shares traded for a 30-point drop).
• The market didn’t recover its pre-crash level for 25 years.
• Chronic unemployment soared from a historical average of 5% to over 15% for almost a decade, peaking at 25% in 1933.
• Industrial production was cut in half.
• Business construction dropped 84%.
• Bank failures spiked from a historic average of 700 per year to 1,350 in 1930, 2,293 in 1931, 1,453 in 1932; 4000 commercial banks failed in 1933.
• The crisis rippled worldwide and contributed to the rise of Hitler and Mussolini in Europe.
• Four years into the Roosevelt presidency, in 1937-38, the economy sank into recession for a second dip.
• Only World War II in the 1940’s resulted in increased production and put an end to high unemployment, at a terrible price; millions of lives lost in the war, all production being channeled into armaments with little left over for consumer goods or comforts. True prosperity would not return until the late 1940’s or later.

The lessons to be learned from this calamity are indeed applicable to our present-day crisis. But the conventional wisdom about the Great Depression – that it was caused by the excesses of free markets that must necessarily lead to crisis by virtue of capitalism’s inherent contradictions, abetted by the laissez-faire policies of a Republican president Herbert Hoover, and that the government-expanding New Deal policies of Democratic president Franklin Delano Roosevelt were the necessary and proper remedy which saved us from a worse fate – is entirely wrong.
The stock market crash of October 1929 was the direct result, not of free-market capitalism, but precisely of government interference in the market, transmitted via the political signal that the Smoot-Hawley Tariff bill, a protectionist monstrosity, would be made law. The market correctly estimated that this bill would substantially constrain international commerce, reducing the current market value of financial and other assets. The search for the right revaluation was a panicked activity; but that panic was rationally justified.
The subsequent government responses to the initial crisis dug the country increasingly deeper into the hole.

A Crisis of Intervention
Remember the Great Depression of the 1920s? Of course you don’t, because it didn’t happen. It might be because President Warren Harding ignored his Secretary of Commerce Hebert Hoover’s advice to intervene in the recession of 1921, and that recession quickly recovered and was forgotten.
Herbert Hoover was no laissez-faire leader. In the early ‘20s, before either was president, Hoover collaborated with Franklin Delano Roosevelt in the American Construction Council, an attempt to turn the construction industry of the entire nation into one giant cartel. He participated in the drafting of the Railway Labor Act of 1926, a major step to collectivizing labor relations. He believed that high wages in an economy cause general prosperity, rather than – the other way around – that prosperity produces higher wages. From this premise much of Hoover’s efforts as president would be targeted at maintaining pre-crash wage rates for those workers who still had jobs. Economic theory states that artificially attractive prices cause shortages. In this case, it lead to a shortage of jobs: unemployment.

After the crash, President Hoover (1929-33) intervened aggressively in the economy. Hoover:
• Summoned the leaders of the largest corporations and business associations to a series of conferences for, in his own words, “the coordination of business and governmental agencies in concerted action.” They acted in large part to maintain existing wage rates and continue expansion. Real wages for employed workers increased for most of Hoover’s term, peaking at 11% above 1929 levels in 1931 and still a ‘healthy’ 8% in 1933 while unemployment simultaneously soared to 25% (in other words, nice work if you can get it; God help you if you can’t).
• Urged public works programs in response to the crisis. The Division of Public Construction of the Department of Commerce was created in December 1929. Hoover urged state governors to follow suit at their level.
• Intervened in different directions at different times in commodity markets. When the Federal Farm Board’s policy of price supports resulted in overproduction of wheat, cotton, wool and other products, thereby collapsing prices and bringing devastating losses, Hoover changed course to order acreage to be plowed under, taken out of production, and to destroy ‘excessive’ livestock.
• Authorized construction of Hoover Dam on the Colorado River, at a cost of $915 million (equivalent of roughly $45 billion of today’s dollars).
• Signed the Smoot-Hawley Tariff into law in 1930.
• Weakened bankruptcy laws in favor of debtors and eroding the property rights of creditors.
• Imposed an immigration ban which effectively reduced legal immigration from Europe by 90% overnight. He deported as many as 20,000 ‘undesirable’ aliens per year.
• Publicly assailed speculators and coerced the New York Stock Exchange to curtail short selling; campaigned against ‘unpatriotic’, ‘traitorous’ hoarders (or put another way, demonized frugal, risk-averse citizens who claimed the right to their property and thereby exposed unsound credit policies and institutions).
• In February 1931, signed the Employment Stabilization Act, creating the Employment Stabilization Board. Unemployment soared to 25% in 1933 and didn’t fall to pre-depression levels until 1940.
• Massively increased government expenditures at a time when revenue to the treasury was falling, resulting in the largest peacetime deficits to date in American history. Federal expenditures rose 30% in 1930 alone, from $4.2 billion to $5.5 billion.
• In 1931, created the President’s Organization on Unemployment Relief, effectively inserting the federal government for the first time into a sphere that had previously been considered the responsibility of private charities and religious organizations.
• In 1931-32, created the Reconstruction Finance Corporation, intended to centrally and comprehensively direct and manage the banking, lending, insurance and finance industries.
• Reduced the hours worked by government employees without reducing their salaries.
• Cancelled oil-drilling permits on publicly-owned land, in an effort to restrict supply and maintain a ‘minimum fair price’ for the petroleum industry.
• In May 1931, closed Federally-owned forest land to new logging, in order to defend timber prices.
• Urged the Federal Reserve to relax its lending and discount standards (in other words, engaged in artificial credit expansion). See: Glass-Steagall Act of 1932.
• Signed the Federal Home Loan Bank Act, creating the Federal Home Loan Bank Board, since 1989 the Office of Thrift Supervision, intended to promote home ownership.

One of the few of Hoover’s acts which could be qualified as pro-limited government and individual property rights was his income tax rate cut of 1930, from the stratospheric height of 5% to 4% (a cut of 20%) for individuals, and 12% to 11% for corporations. Prior to the 1930’s, the income tax had not taken anything like its modern bite in the daily lives and livelihoods of citizens.
However, in 1932 he reversed course and raised income taxes as well as prior wartime excise taxes and sales taxes on hundreds of consumer goods. The surtax on the highest incomes went from 25% to 63%. When businessmen suggested to Hoover that the tax regimen was detrimental to the general economic health and that the government would do better to cut expenditures by $2 billion, Hoover brushed them aside.

Read Part 2 of Why we don't need a new New NEW Deal HERE.

Friday, June 21, 2013

Understanding the Financial Crisis of 2008

The Housing market – prices and lending behavior – went irrational in the first half of the first decade of the 2000’s, then crashed in 2008, sending seismic financial shock waves around the world which are still reverberating late in 2013, with stubbornly high unemployment and massive increases in public spending and debt which haven’t improved the situation at all.
Since housing was the spark that set off the fire, let’s take a closer look at that.
Not all housing markets (by geography) experienced the same wild gyrations. As a national average, the rise in purchase prices paid was only 38% from 1999 to 2005, and the ‘collapse’ only 10 percent from 2006 through 2008 (in other words, home prices were still higher in 2008 than in 1999 by 28% – hardly a crisis). But in certain local markets in Nevada, Florida, Arizona and coastal California and a few others, the rise and fall was much more amplified, with prices more than doubling in some places during the boom and falling almost as far or farther in the crash. Most of the rest of the country was not going nuts. In places like Houston and Dallas Texas, for example, there was hardly any extraordinary rise in prices and therefore no traumatic bust. Moreover, housing in general has been more affordable in those markets, taking a substantially smaller share of an owner’s or renter’s income to maintain than in the ‘hot’ markets.
In other words, the housing market surge and collapse was at its root a localized phenomenon, not a general or national one.
So why did prices rise so dramatically in these particular markets? It’s a question of Supply and Demand: mainly for land on the one hand, and for mortgage loans on the other.

The supply of loans (price/interest rate and availability/approval) is principally governed by the lender’s perception of the risk of getting paid back (or not) for the cash advanced to the borrower. In a free market, banks that lend to deadbeats will soon be bank-rupt, unable to recoup the money they’ve advanced (bankers consider that a bad thing). So traditionally these have been very conservative and prudent, wearing their bow ties and green eyeshades, scrutinizing and documenting every potential borrower’s credit history, good character and sources and amounts of income, as well as general economic conditions that may affect the continuance of the same. The higher the perceived risk of lending, the more constrained the supply of lendable funds and the higher the interest rate (credit price) charged. The calculation of risk and supply are made on the basis of general market conditions, the amount of cash that each bank has available, and case-by-case particulars centered around the individual borrower or co-borrowers.
In the 1970’s, the price of housing in Nevada, Florida, Arizona and coastal California were not that much different from the rest of the country, neither in absolute terms nor as a percentage of the owner’s/renter’s income required to maintain a home (which is to say, affordability).
Two contradictory and not fully thought-through political goals kicked off the long march to disaster:
• Wilderness Preservation
• Affordable Housing

Wilderness Preservation
Beginning in the 1970’s, the environmental movement and its political allies promoted increasingly extensive and rigorous land-use restriction laws. These policies were always promoted under the slogans of preserving wilderness, saving farmland, creating open space, ‘smart growth’, rescuing endangered species and/or habitat and other happy, desirable outcomes.
News Flash! Reducing the supply of a good puts upward pressure on its market price! In the markets and geographical regions where such laws were passed, real estate prices began to climb out of previously ‘normal’ ranges. The cost of real estate, and with it, housing, skyrocketed in relation to other regions where the legal environment favored full unfettered private property rights. Housing became less affordable.

Affordable Housing
"Neither by comparison with the recent past nor by comparison with other countries today is most housing in the United States unaffordable. The median-priced home in the United States as a whole is 3.6 times the median income of Americans. For Great Britain, the median-priced home is 5.5 times the median income and in Australia and New Zealand, the ratio of home prices to income is 6.3."
-Thomas Sowell, The Housing Boom and Bust

Nevertheless, the federal government and its appendages have been on a decades-long crusade to make housing in America more ‘affordable’.
The Community Reinvestment Act of 1977 gave the federal government an unprecedented foothold in micromanaging the business practices of lenders, telling them to whom they should lend, how much and on what terms. In the 1990’s the power of this act were amplified, with banks having to establish racial and ethnic quotas, both in their lending and in their hiring practices, and ask permission before merging or opening new branches (permission which might be denied on the political grounds of not having done enough ‘socially responsible’ work or lending in their communities). In 1993 the Department of Housing and Urban Development , or HUD, began suing banks over race-based statistical disparities.
The implicit assumptions seem to have been that a) bureaucrats in Washington (and community activists at ACORN) know better than bankers in Peoria what are the ‘correct’ lending criteria and practices for their local markets, what is the best and soundest ‘socially responsible’ policy for what to do with their depositor’s money, b) that lending is somehow doing someone a favor as opposed to being a mutually beneficial exchange, and c) that unless Washington keeps a close vigil on greedy, racist bankers, they would discriminate unfairly against racial minorities, denying them loans more often than White/European majority applicants.
Point a) is laughable on its face, yet its premise underlies most government economic policy today. Point b) seems to ignore the fact that lenders are in the business of lending and benefit from it, WANT to lend.
Point c) is easily refuted:
• Banker’s favorite color is not white or black, but green. Any banker offended by receiving a monthly loan payment from a brown or yellow person will soon find himself in the red. The natural mechanism of the market is for gaps in supply to be eagerly filled by entrepreneurs, however greedy or racist they may be. Customers missed by one supplier will be eagerly served by another.
• Statistical differences between racial groups are not proof of unfair discrimination against individuals. When controlled for credit ratings, wealth, income, employment history and other factors, no material discrepancies remain.
• Black-owned banks have been shown to turn down black applicants for loans at a higher rate than White-owned banks .
• Chinese and Japanese Americans have suffered discrimination and even internment in the past. But today, Asian applicants in the aggregate are turned down for loans less often than White/European Americans. This fact does not support a theory of white racism among bankers.
So banks were under increasing pressure to make loans to satisfy politicians rather than depositors and borrowers; to loosen lending standards, to NOT scrutinize and document the individual applicant’s creditworthiness, good character and sources and amounts of income but to focus their attention on rectifying the supposed evils of ‘redlining’ and ‘disparate impact’. Thus the non-traditional or ‘subprime’ market grew from 7 percent of all loans in 2001 to 19 percent in 2006.
But how could the banks do this (neglect their lending standards) without cutting their own throats?
The politicians who did the banker no favors by bullying them into making millions of loans that they might not have made, gave them a way out: Flip the loans, and with them the default risk – good, bad or ugly – to someone else.
Over the past 40 years, the privileges and obligations of two government-sponsored companies, Fannie Mae and Freddie Mac , have been significantly beefed up, again for the purpose of promoting ‘Affordable Housing’. These companies have CEOs, stockholders and profit-and-loss statements like private banks and other publicly-traded companies, but they were chartered by the federal government for the purpose of doing ‘good’ in their markets (as opposed to merely raking in obscene profits for their greedy shareholders and CEO’s like Franklin Raines and his $90 million compensation package), in exchange for which they enjoy preferential tax treatment and the implicit guarantee that if anything goes wrong, Uncle Sam (that’s you and me the taxpayer) will pick up the tab.
Since at least 1992, Fan and Fred have been under orders to buy up more and more ‘affordable housing’ mortgages from the originating lender banks. By 2007, Fan and Fred had purchased 40 percent of the sub-prime and/or non-traditional mortgages (a.ka. ‘Liar Loans’, loans made with minimal or no documentation, due diligence, credit checks, character references etc.) originated in the United States, or about one million million dollars worth . The total value of their debt outstanding as of 2010 was over 8 million million dollars; that’s two-thirds the magnitude of the national debt of the United States.
Fannie Mae and Freddie Mac have long enjoyed unwavering support from cheerleaders in positions of significant power in the federal government, among them Barney Frank, Christopher Dodd, Maxine Waters, Joe Baca, Nancy Pelosi, Charles Rangel and Kit Bond, among others.
In any event, the inevitable happened. In 2006, loan default rates, especially in the sub-prime market, reached record levels. In 2007 Countrywide Home Loan’s share price collapsed and it was acquired by Bank of America. BofA itself was one of several targets of the Troubled Asset Relief Program (TARP) to the tune of $45 billion, along with several other financial dominoes that were deemed ‘too big to fail’: Citigroup, $50 billion; AIG, $40 billion; Wells Fargo, $25 billion; J.P. Morgan Chase, $25 billion.
In spite of TARP and multiple rounds of economic ‘stimulus’ spending plans by the Bush and Obama administration (or perhaps because of them), the employment rate and general economic health of the country has sunk to lows not seen in at least 30 years, with hardly an exit in sight.
The natural economic forces of Supply and Demand were derailed in housing markets in America in the early years of the 21st century, leading first to the craze and then inevitably to the crisis. Like all crises of this magnitude, this one was one of government interference in the natural, self-correcting mechanisms of the free market, building one intervention on top of another until it collapsed of its own dead weight.

Thursday, June 20, 2013

What Happened to the Party of JFK?

When President John F. Kennedy challenged Americans to “Ask not what your country can do for you; ask what you can do for your country,” it was call to take responsibility for ourselves and help our neighbors; it wasn’t an exhortation to pay more taxes to Washington DC. Kennedy CUT tax rates across the board, and promoted the cuts as energetically as Ronald Reagan would 20 years later, as the best way to increase the prosperity of the nation and the receipts to the treasury. History proved Kennedy right; the decade of the 1960’s was an era of robust economic growth in spite of an expensive and unpopular war (Vietnam) and the ambitious manned Apollo mission to the moon.
JFK is one of the great idols of liberals, but his actual fiscal policies are completely alien to the Democratic party of today, which has lurched toward hard-left socialism. Obama, Reid, Pelosi and their fellow travelers seem hell-bent to raise practically every existing tax as high as they can get away with and then pile new ones like the VAT on top. Nothing should move that they don’t command and control.
What are the results so far? Prolonged stagnation, unemployment sustained at record levels; the Great Recession.
This is America? Time to ask ourselves what we can do to take it back.

JFK State of the Union Address January 14 1963:
America has enjoyed 22 months of uninterrupted economic recovery. But recovery is not enough. If we are to prevail in the long run, we must expand the long-run strength of our economy. We must move along the path to a higher rate of growth and full employment.
For this would mean tens of billions of dollars more each year in production, profits, wages, and public revenues. It would mean an end to the persistent slack which has kept our unemployment at or above 5 percent for 61 out of the past 62 months--and an end to the growing pressures for such restrictive measures as the 35-hour week, which alone could increase hourly labor costs by as much as 14 percent, start a new wage-price spiral of inflation, and undercut our efforts to compete with other nations.
To achieve these greater gains, one step, above all, is essential--the enactment this year of a substantial reduction and revision in Federal income taxes.
For it is increasingly clear--to those in Government, business, and labor who are responsible for our economy's success--that our obsolete tax system exerts too heavy a drag on private purchasing power, profits, and employment. Designed to check inflation in earlier years, it now checks growth instead. It discourages extra effort and risk. It distorts the use of resources. It invites recurrent recessions, depresses our Federal revenues, and causes chronic budget deficits.
Now, when the inflationary pressures of the war and the post-war years no longer threaten, and the dollar commands new respect-now, when no military crisis strains our resources--now is the time to act. We cannot afford to be timid or slow. For this is the most urgent task confronting the Congress in 1963.
In an early message, I shall propose a permanent reduction in tax rates which will lower liabilities by $13.5 billion. Of this, $11 billion results from reducing individual tax rates, which now range between 20 and 91 percent, to a more sensible range of 14 to 65 percent, with a split in the present first bracket. Two and one-half billion dollars results from reducing corporate tax rates, from 52 percent--which gives the Government today a majority interest in profits-to the permanent pre-Korean level of 47 percent. This is in addition to the more than $2 billion cut in corporate tax liabilities resulting from last year's investment credit and depreciation reform.
To achieve this reduction within the limits of a manageable budgetary deficit, I urge: first, that these cuts be phased over 3 calendar years, beginning in 1963 with a cut of some $6 billion at annual rates; second, that these reductions be coupled with selected structural changes, beginning in 1964, which will broaden the tax base, end unfair or unnecessary preferences, remove or lighten certain hardships, and in the net offset some $3.5 billion of the revenue loss; and third, that budgetary receipts at the outset be increased by $1.5 billion a year, without any change in tax liabilities, by gradually shifting the tax payments of large corporations to a . more current time schedule. This combined program, by increasing the amount of our national income, will in time result in still higher Federal revenues. It is a fiscally responsible program--the surest and the soundest way of achieving in time a balanced budget in a balanced full employment economy.
This net reduction in tax liabilities of $10 billion will increase the purchasing power of American families and business enterprises in every tax bracket, with greatest increase going to our low-income consumers. It will, in addition, encourage the initiative and risk-taking on which our free system depends--induce more investment, production, and capacity use--help provide the 2 million new jobs we need every year--and reinforce the American principle of additional reward for additional effort.
I do not say that a measure for tax reduction and reform is the only way to achieve these goals.
--No doubt a massive increase in Federal spending could also create jobs and growth-but, in today's setting, private consumers, employers, and investors should be given a full opportunity first.
--No doubt a temporary tax cut could provide a spur to our economy--but a long run problem compels a long-run solution.
--No doubt a reduction in either individual or corporation taxes alone would be of great help--but corporations need customers and job seekers need jobs.
--No doubt tax reduction without reform would sound simpler and more attractive to many--but our growth is also hampered by a host of tax inequities and special preferences which have distorted the flow of investment.
--And, finally, there are no doubt some who would prefer to put off a tax cut in the hope that ultimately an end to the cold war would make possible an equivalent cut in expenditures-but that end is not in view and to wait for it would be costly and self-defeating.
In submitting a tax program which will, of course, temporarily increase the deficit but can ultimately end it--and in recognition of the need to control expenditures--I will shortly submit a fiscal 1964 administrative budget which, while allowing for needed rises in defense, space, and fixed interest charges, holds total expenditures for all other purposes below this year's level.
This requires the reduction or postponement of many desirable programs, the absorption of a large part of last year's Federal pay raise through personnel and other economies, the termination of certain installations and projects, and the substitution in several programs of private for public credit. But I am convinced that the enactment this year of tax reduction and tax reform overshadows all other domestic problems in this Congress. For we cannot for long lead the cause of peace and freedom, if we ever cease to set the pace here at home.

Tuesday, June 18, 2013

What – Me Worry about Taxes?

If you think income taxes don’t matter to you because you don’t pay any, think again.
If you are a working person with a modest income who pays little or no federal income tax, how the system is rigged still matters to you, for one simple reason: it hits your employer (or potential employers) directly; the more your ‘rich’ boss has to pay in taxes, the less likely it is (s)he can give you the raise, or even the job in the first place.
Profit, or surplus of revenue over expenses, is what makes investment in the next round possible. Capital investment and innovation is what makes wages, salaries and standards of living rise over time. It is because private property rights and economic freedom have been defended better in the West in general and the United States in particular than around the rest of the globe, that working people here have the highest standard of living that the world has ever seen.
But the more that profit or ‘surplus income’ is taxed away by the government, the less is available for capital investment, to bid up wages and salaries. Inefficiencies inherent to government (an agency that doesn’t register profit and loss based on providing the best product or service that the consumers demand, at the lowest cost) ensure that those dollars don’t go as far to increase wealth for the whole society.
Government and unions have a role to play, but it is a supporting role, not a primary one. Government’s proper role is to act as an impartial referee, to ensure everyone plays by the same rules and to punish and prevent wrongs, from civil fraud to violent crime; but not to pick winners and losers. Unions can be a positive force as the legitimate agency of workers who pool their resources voluntarily to coordinate their negotiations with employers.
But granting special legal privileges (including looking the other way at violence) to particular, politically-connected unions at the expense of taxpayers and other equally worthy workers lacking the same connections, is a violation of the principles of liberty and equality, and a recipe for economic crisis. Unions did not create the prosperity of the United States of America. The countries and industrial sectors that have the most powerful unions also have the most sickly economies. The once-proud and mighty General Motors is on government life support due in part to the abuses of the United Auto Workers. The entire nation of Greece is collapsing under the weight of its public-sector pensions. Europe has very powerful unions…and stagnant economies, with 10%+ unemployment ALL THE TIME, not just during recessions.
Depending on your own personal situation, you may see it as your goal to become a member of a powerful union, or to maintain and expand the privileges that you already have. But choking the host industry or country to death is not a sustainable model for a healthy society.
On the other hand, a low-tax, reasonable regulatory regime that permits people like yourself and the entrepreneurs who employ you to keep the fruits of their honest labor and decisions, and save and invest it in more productivity, leads to higher wages and better working conditions than any union or government program can offer, and is sustainable until the end of time.
Vote OUT the statists, and replace them with citizens who have created jobs with their own money.
Even though half of all Americans don’t pay any federal income taxes, yet 66% believe that the tax burden in America is too high. The consensus in America is that the government should not take more than 20% of anyone’s income, yet we’re way above that already and headed for … Europe. In the Old Continent, whose ways we once repudiated with the Declaration of Independence, they have individual income tax rates that are higher than ours and national sales taxes (value-added taxes, or VATs) on top that average 20%.
And what do our friends have to show for these economic policies? Before the recent downturn, the US created four times as many new jobs every year as the European Union. The average resident in our poorest states is wealthier than the average European. And the shocking double-digit unemployment we’re suffering is just business as usual over there.
Prosperity doesn’t come from taxation. It comes from entrepreneurial capitalism; liberty constrained only by the equal liberty of every other person to life, peace and (private) property.
Yet the Democrats still believe that we (if not all of us then certainly those with enough wealth or income to potentially employ the rest of us) are not taxed enough, and they want to add the glorious VAT to our portfolio of tribute. Where will it end?
In the early 1770’s we petitioned King George III of England for relief and it fell on deaf ears. Now we are getting European taxation with Democratic Party representation. It’s time to change both.

Monday, June 17, 2013

Who could possibly have known that Socialism would fail?

You may have thought that Socialism had been definitively discredited when the greatest experiment ever conducted, the Soviet Union, collapsed with the Berlin Wall in 1989; yet socialist ideas and parties, some of whom don’t dare call themselves by their true name, still live on. Socialism ought to have been discredited when the Berlin Wall went up in the first place in 1961, demonstrating to the world that Socialism is a giant maximum-security prison.
But Ludwig von Mises, the Austrian (later American) economist, demonstrated that Socialism could never fulfill its promise no matter what variation was attempted nor how wise and virtuous the men running it. He did this in 1922.
Think about that for a minute: 1922.  The smoke and mustard gas of WWI was barely clear. The Bolshevik ‘experiment’ in Russia was only 4 years old and Stalin the Butcher of the Soviet Union had not yet risen to power. Nobody had heard of Hitler or Mao or Castro or Kim Jong Il or Idi Amin or Pol Pot. At that time, the Socialist movement was ascendant all over the world, even in the United States; intelligent men and women of goodwill could reasonably believe it held out hope for a better, more prosperous and just world.
But Mises burst the bubble. He demonstrated logically that every wage and price control, every tariff, tax, privilege, prejudice, manipulation and regulation that does NOT derive from government’s legitimate need to prevent and punish murder, robbery, assault, fraud, theft, rape, persecution and conspiracy – every such interference distorts and destroys information necessary for rational economic planning and action. If some collective entity like the state owns or otherwise controls all capital goods, all land, natural resources, factories, machinery, health care services etc. then
·        there is no market for these goods
·        no buying and selling,
·        no bargaining and haggling,
·        no Supply and Demand.
·        If there is no market then there are no prices.  Prices constitute the indispensable information system for signaling the needs and scarcities in an economy, and the cost of available alternatives. There are a hundred different ways to build a building, and dozens of alternative materials and techniques for each component. Which combination is the most economical? Who knows? Without prices, there is no way of knowing. There is no other metric that can adequately substitute for market prices.
·        Economic planning cannot function without these numbers.

That is why Socialism fails every time it is tried: Economic calculation is impossible under Socialism.
And then there’s the bureaucracy. With no markets there is no competition, neither incentive nor reward for better customer service or to provide a higher quality product at a lower price. The entire economy becomes like a giant post office or Department of Motor Vehicles, with self-serving, inner-directed bureaucracies with languages and cultures of their own, foreign to the rest of us, with iron-clad privileges, job security and pensions that do not vary with how well or poorly they serve willing customers.

When you accuse liberals of leading us down the path to Socialism and state bureaucracy with their massive government programs, they scoff and wave you off like you’re some kind of nut case. “We’re not socialists, we’re progressives”, they say. “We only want the best of both systems, the Middle Way.”
But there is no ‘middle way’, in the sense of a happy medium, best of both worlds.  Every forcible intervention in the economy, every wage and price control, every tax and regulation that does NOT derive from government’s legitimate need to prevent and punish murder, robbery, assault, fraud, theft, rape, persecution and conspiracy, every such interference distorts and destroys information necessary for rational economic planning and action and is a step toward socialism and crisis.
Mises had been an Austrian artillery officer on the eastern front during the Great War (1914-19).  Where did he get the time and resources to sit down and carefully think through profound philosophical and theoretical issues?  There was no History Of The Gulags Of The Soviet Union or of the genocides of communist China and Cambodia. Yet Mises saw it all coming. To paraphrase Albert Einstein: ‘there is nothing quite so practical as a good and valid theory.’
So, how come you’ve never heard of Mises? The main answer is that he lost the popularity contest among politicians, even Republicans, to Keyenes. (Remember Richard Nixon?: “We’re all Keynesians now”.) Mises’ vision of limited government and individual liberty does not glorify politicians and their grand projects.
A second reason is that much of Mises’ writing, such as his 900-page magnum opus Human Action, is written in thick, academic prose that is inaccessible to most lay readers.  But there is one work of his that is short (100 pages), covers his complete philosophy, and is written in plain language: Economic Policy: Thoughts for Today and for Tomorrow. This was distilled from a series of lectures that he gave in Buenos Aires, Argentina, in 1959. Now there’s a country that could have profited from his advice, if only they had taken it. 

Sunday, June 16, 2013

Doctor expert on PPACA reviews 'Pull the Plug on Obamacare'

"I have read thousands of pages of commentary on ObamaCare and done dozens of public presentation on it , but this small booklet can be read in an hour or two and is the best, clearest, easiest reading, most accurate distillation of the law I have so far encountered. It should be read by every American who wants to prevent American health care from the drastic deterioration to which ObamaCare dooms us if not repealed."
Read the full review at

More Health care reform resources on the Obamacare page.

Socialism, its Variants and its Results

Socialism is the highest order of civilizational evolution; an economic and social system in which everyone gives according to his/her ability and receives according to his/her need; where fairness and justice reign and human needs are given their due priority over profits, and parasitic capitalist exploiters are stomped out along with racism, sexism, homophobia, distinctions of class and environmental destruction.
Astute readers many note a tone of sarcasm. But if that definition of socialism is obviously absurd, then aren’t we getting into a straw man argument? After all, no one in America believes that stuff anymore, right?
Few politicians in America call themselves socialists, but it’s hard to find a point of fundamental philosophical disagreement between the socialist parties of Europe (who at least aren’t squeemish about proclaiming their name) and the Democrat party of 2013. Moreover, the tactics and actions of the Democrat party in general and the Obama-Reid-Pelosi administration in particular can leave little doubt as to their philosphical foundations.
But why are they wrong? And why are we right-wing nut jobs so adamant about Capitalism, the scourge of the Earth?

The Flavors
There are, of course, other alternative social models to Capitalism, such as absolute monarchy, theocracy, anarchy, or feudalism, such as the landowner-serf/slave relationships practiced in the middle ages in Europe and through the 19th century in Russia and the southern United States. But none of those models pose a serious ideological challenge to Capitalism in our day.  The debate which remains is between Capitalism and one or another form of socialism.
Under the general umbrella, there have been many variations of socialism proposed and/or attempted.  Here are a just few terms which are commonly used as synonyms or which describe variants of socialism:
·        Collectivism: emphasizes the aggregate social group over the individual, the sharing of goods, the general rather than personal ownership of the means of production.
·        Statism: emphasizes the direction of human affairs by the state; typically the federal or national government.
·        Planned Economy: This is a term intended to promote socialism as a rational and therefore superior system in contrast to the unplanned ‘anarchy of capitalist production’.  An important question that arises is, whose plans?  Yours or the state’s?  Are individuals, families, churches and other voluntary associations to be permitted to make and carry out their own plans for their lives and activities, without coercion and in voluntary cooperation with their peers, or is it only the Master Plan of the nation, the central committee, the Federal Planning Administration or the Supreme Beloved All Wise Leader (may he reign for one thousand years!) that counts? Who plans and who obeys?  What is the penalty for disobedience?  Moreover, is this a superior social system? Can it actually work?
·        Interventionism: Indicates that Capitalism and liberty are permitted to a point, but the political party in power attempts, through taxes, regulations, privileges and prohibitions, to engineer the economy so as to achieve the outcomes it favors. Protective tariffs for favored domestic industries and currency and credit manipulation fall under this category. So do subsidies for ethanol, wind and solar power technologies combined with taxes on petroleum-based products.
·        Keynesianism: John Maynard Keynes is perhaps the most influential economist of the 20th (and now the 21st) century.  His General Theory of Employment, Interest and Money (1936) provided the academic endorsement for the New Deal policies of president Franklin Delano Roosevelt during the Great Depression. While not advocating socialism outright (he was no fan of Marx), his theory calls for an active management role for government in allocating resources and deficit spending, presumably to better cope with recessions and unemployment.
·        Mafiaism: A more vicious form of Interventionism, characterized by privileges, prejudices and swift, violent justice for those who get out of line. Very little pretense of virtue or appeal to transcendent principles are made. Markets and private property are tolerated as long as they don’t threaten the powerful and well-connected, but the threat of nationalization of the enterprise or imprisonment, enslavement or murder of private business owners is ever-present. This form of socialism describes Russia, China and Venezuela as it is practiced today, among others.
·        Fascism and/or National Socialism: A variation of dictatorial socialism in which business firms retain a façade of private ownership while taking all their orders and directives from the government, frequently the supreme leader.  The most notable examples of this form were the National Socialist Worker’s Party, or Nazis, in Germany under Hitler from 1933-1945, and Benito Mussolini’s Partito Nazionale Fascista in Italy of 1922-1943. The Nazi movement was characterized by expansionist aggression against neighboring countries, fueling World War II, and the mass genocide of Poles, gypsies, and Jews.
·        Theocratic Fascism: Think Iran under the mullahs since 1979. Economic activity is severely controlled by the state, which derives its legitimacy from religious doctrine.
·        Communism: a political movement or party that pursues its absolute socialist objectives ruthlessly and dictatorially, without regard to democratic principles, human rights or concepts of checks and balances of political power such as those embodied in the US Constitution. The Soviet Union of 1918 – 1989, The People’s Republic of China under Mao Zedong from 1949 to 1976, North Korea (the ‘Democratic People's Republic of Korea’) from 1948 to the present, Cambodia under Pol Pot and the Kmer Rouge (1975-79) and Cuba under Fidel Castro from 1959 to the present, are prominent examples of communist regimes. These regimes have been characterized by mass genocide against their own citizens; millions upon millions of people found to be enemies of the regime, ideologically not sufficiently committed, or simply inconveniently in the way of the regime’s objectives.
·        Democratic Socialism:  Modern-day Western Europe, characterized by parliamentary democratic institutions, powerful trade and public-sector unions and governments which directly command 50% or more of the national product. Double-digit unemployment rates and out-of-control public debt threaten the integrity of this society.
·        Progressivism: Most liberal socialists in the United States deny that they are socialists and prefer the term ‘Progressive’. After all, who could be against ‘progress’ and for stodgy, reactionary and/or racist conservatism?  But the political term ‘progressive’ has a specific, historical meaning which most people who call themselves by the term don’t understand, which they would be shocked to learn, which is completely at odds with American constitutional principles and traditions and destructive to capitalist economics. 

Karl Marx didn’t invent Socialism, but he was its most significant champion in the 19th century. He is credited with inventing the term ‘capitalism’, which he meant as an insult, but which is perfectly acceptable to those of us who defend it.
Marx believed that advanced capitalist societies like Great Britain and the United States suffered from fundamental contradictions that would result in them evolving naturally to their historical destiny of the socialist worker’s paradise. However, all of the countries that went hardcore communist in the 20th century were backward, feudal nations like Russia, China, North Korea, Cuba, Cambodia and Vietnam.  Not one of these nations had an advanced, capitalist industrial base before convulsing into communism. That’s just one way in which Marx was wrong.  But the worst error turns out to be his judgment of the nature of the communist society itself. Instead of being the worker’s paradise that he envisioned, all of these countries became hellholes of violence, mass murder/genocide, ideological oppression, physical deprivation and starvation. Hundreds of millions of people died in atrocious conditions in the purges, prison camps, firing squads and deteriorating housing, nutrition and medicine of the communist ‘paradise’.

In spite of all this, the appeal of the ‘fair and just’ society where the wise and benevolent government ensures that no one goes hungry or is without medicine, lives on. Socialists attempting to distance themselves from the genocides of the communist regimes may claim that those don’t represent true socialism; that true socialism is something else, democratic, compassionate, humanitarian. But the historical record is brutal and unforgiving: those nations that took socialism the farthest suffered the worst oppressions known in human history. No wonder so many present-day socialists prefer to call themselves ‘progressives’ while pursuing essentially the same goals by essentially the same methods.