Mises: More politics means more conflict


This essay, written by Mises Daily editor Ryan W. McMaken, was originally published on the Ludwig von Mises Institute’s website.

NPR recently reported on a June 2014 journal article in which political scientists Shanto Iyengar and Sean Westwood conclude that one’s political affiliation is now the primary source of group polarization in America, outpacing even race as a major source of conflict.

The Report Findings

Iyengar and Westwood write, according to NPR:

Research shows: More and more residential neighborhoods are politically homogenous. Partisan politics has become a key indicator in interpersonal relations. There is a greater tendency by parents these days to raise objections to a son or daughter marrying someone who supports the opposing political party. “Actual marriage across party lines is rare,” the report points out. “In a 2009 survey of married couples, only nine percent consisted of Democrat-Republican pairs.”

In the report itself, we also find that the reasons for such strong segregation between the two groups is not based on “favoritism” of one’s own group, but on “animus” toward the other group. In other words, while ethnic favoritism can often be explained by familiarity with the culture of one’s own co-ethnics, the political division is driven primarily by outward-looking hostility. One could reasonably conclude then, that in such cases, fear is a major consideration in regarding the members of the “other” political group.

Past Ideological Divides

While partisan divides have always been non-trivial in American society, fifty years ago, they were regarded as generally weak. In addition, during the nineteenth century, partisan divides were important, but were less important than other issues such as the North-South or urban-rural divide, ethnic origin, and religion.

Such non-political variables have long been recognized as a determinant of one’s political affiliation, and rightly so. But now one’s political affiliation may be working in reverse, determining what states people live in, what neighborhoods they choose, and with whom they associate in general. In other words, one’s politics was once determined by non-political realities, but politics now determine one’s non-political life too, determining potential spouses, friends, neighbors, and even business associates.

Politics now rivals, or has even replaced, family group, ethnicity, or community of origin as a determinant of one’s behavior and everyday preferences.

The More Powerful the State, The Higher the Stakes

Iyengar and Westwood attribute this growth in partisan animosity to the rise of negative campaigning and “news sources with a clear partisan preference.” The rise of overtly partisan major news channels may be relatively novel, although anyone familiar with Nixon’s 1950 campaign against Helen Gahagan Douglas might be skeptical of the proposition that negative campaigning is something new.

It appears more likely that the rise of politics to a position of prominence in the daily lives of an ever-greater number of people is the fact that the political stakes are, in fact, very high.

In a society where a government is weak, decentralized, and unable to enact the more radical wishes of any majority group, a losing side is less likely to regard the winning side as a genuine threat to one’s daily life. Winning or losing elections remains important, but is not considered to be determinant of the losing side’s ability to keep one’s property, livelihood, and way of life relatively safe from the winners. On the other hand, if a state is very powerful, and the winning side is able to regulate, tax, and coerce in an ever more heavy-handed fashion, the stakes of each election are very high indeed.

In Democracy in America, Alexis de Tocqueville noted that while Americans vigorously debated proposed laws and new candidates, the losing side invariably and immediately accepted the outcome of the election. This is often interpreted as some kind of devotion to the wonderfulness of democracy, but it more likely reflects the fact that the losers (assuming they’re whites who enjoyed full citizenship) knew that it was unlikely that they would face any real reprisals from the winning side. Unlike many regimes at the time in Europe and Latin America (such as Revolutionary France), losing a political contest in America did not entail exile, executions, or separation from one’s property. The American state (at that time and place) was simply too weak to do such things.

Consequently, one could ignore politics (for the most part), and daily life was governed more by economic, religious, and familial interests.

In modern America, however, this is not the case at all. With pervasive government spying, police statism, a bureaucracy that can shut down your business at any time it likes, and a health care system that forces one group of people to pay for the sexual activities of another group, the political stakes are very high indeed.

It is no wonder that partisan group now regard the other side with fear and loathing. Who can say what misfortunes await us in case the other side wins?

Now, many keen observers of politics will note that there’s indeed precious little difference, in the big scheme of things, between the political parties. Anyone who’s paying attention can see that party elites get along fine while most of the rancor can be found among the naive rank and file. There’s a reason for this. Regardless of who wins, virtually nothing will be contemplated that might lead to meaningful reductions in regulation, taxation, or the punitive excesses of the criminal justice system. The larger trend in the growth of the state overwhelms any tiny adjustments that DC is willing to make in the present political climate.

Nevertheless, the enormous size, power, and scope of the modern American state, and the knowledge that it extends to every aspect of life, has made it plausible to even the most ignorant partisan that the next lost election may bring with it enormously high costs and even destruction to one’s way of life.

Diminish Conflict by Weakening the State

Iyengar and Westwood assume that the partisan divide is problematic, as does most of the mainstream-media commentary. Yet the proffered solutions only range from tame to pointless, usually involving education or “greater personal contact” between groups, as if the problem of state coercion is nothing at all but something in our imaginations. The real solution lies in greatly weakening, dismembering, and decentralizing the state (through secession, nullification, and the end of majority rule) to the point where the political winners cannot wield immense power over the losers.

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How the NFL tackles American taxpayers

This essay, written by Salmaan A. Khan, was originally published at Mises.org.

The NFL is running one of its own games on the public; and as one of the most subsidized nonprofit organizations in American history, the NFL excels at tackling the American taxpayer. It should be of no surprise that with its religious-like following, the NFL receives the same tax-exempt status as a church, exempted under the IRS 501(c)6 code from paying federal taxes. The legislation puts the NFL as a nonprofit trade association, which it has been under since 1942.

But over the past 20 years, 101 new sports facilities have opened in the United States — a 90-percent replacement rate; and lately there has been a rising tendency for renovation costs to skyrocket into the hundreds of millions of dollars. According to Harvard University urban planning professor Judith Grant Long, the taxpayer foots on average 70 percent of the bill, with often not a penny coming out of the pockets of the team or its owners. The rest of the funding comes from tax-exempt municipal bonds supported under the G4 stadium loan program, which provides loans in return for revenue generated from ticket sales and premium seating.

As is the case with “too big to fail” financial institutions, the NFL is given politically favored status and protected by a trench of antitrust exemptions. But unlike the overpaid (read: taxpayer-subsidized) CEOs of Goldman Sachs and Chase Bank, NFL commissioner Roger Goodell earns twice as much as they, thanks to an NFL flush with taxpayer cash. Goodell earned more than $44 million in 2013, and in the past five years he has made over $105 million.

But the league’s most precious gift from the state is perhaps Public Law 89-800, which grants the NFL a legal monopoly over broadcasting rights. Walmart and BP can only dream of such a gift. According to Gregg Easterbrook, the 1966 law was “effectively a license for NFL owners to print money.” The deal was offered to the NFL in exchange for one promise: not to schedule games on Friday or Saturday nights during the fall, the time when most high schools and colleges play their games.

There are many unintended consequences at work, according to Bloomberg. Many cities, counties and states also pay the stadiums’ ongoing costs, by providing sewer services, electricity, stadium improvements and other infrastructure. All this is happening while the NFL shrouds its rhetoric with free-market jargon like “job creation” and “revenue generation,” which economists are now seeing the real cost of.

According to Long, when ongoing costs are added, her research finds that 13 teams have made a handsome profit on stadium subsidies, thus receiving more money from the public than they needed to build their facilities. An examples of the NFL profligacy can be seen in Chicago, where the Soldier Field renovation costs have already surpassed $650 million. This outdid the makeover cost of the Jacksonville Jaguars, Miami Dolphins, Denver Broncos, Washington Redskins and Buffalo Bills stadiums combined. Ironically, this is happening in one of the most fiscally damaged states in the country; Illinois is 42nd in job creation and on its way to matching the default risk-rating of war-torn Iraq. And in spite of its enormous cost, Soldier Field has actually lost 5,000 seats in the renovation.

In Chester, Pennsylvania, close to 45 percent of its residents live below the poverty line. The city has been on the list of one of America’s most distressed communities since 1995. According to the Pacific Standard, Chester’s per capita income would rank between Turkey and Dominica. On average, its residents are poorer than those of Uruguay, Lebanon, and Antigua and Barbuda.

In spite of this, Chester spent $117 million on a soccer stadium. With 97 percent of funding coming from the public, that’s $3,334.90 for every man, woman and child in Chester. Take a look at Forest City near Cleveland, Ohio, where 1 out of every 3 people live in poverty — making it second on the list of the poorest big cities. It is home to three major sports facilities, including the Cleveland Browns; and total expenditures of the stadiums were $1.1 billion, with taxpayers subsidizing 75 percent of the cost, roughly $825 million.

But as far as politicians are concerned, the economic “contributions” of football teams are far more important than those of mere ordinary taxpayers. People whose jobs do not involve televised athletics must simply pay taxes without complaint to line the pockets of those with friends at city hall.

Khan is a graduate of Benedictine University with a B.A. in economics. He currently works for a telecom company and is pursuing a graduate degree in supply chain management.

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The U.S. government is the world’s largest subprime debtor

This article by David Howden was originally published on Mises.org

Lehman Brothers filed for Chapter 11 bankruptcy protection six years ago this month. The event has become famous as the spark that ignited the global financial crisis. Since that date, millions of people have lost their jobs and livelihoods, and countless others have seen their futures evaporate before their eyes, sometimes permanently.

At the heart of the crisis of 2008 was a common cause acknowledged by almost all commentators. Borrowers now infamously known as “subprime” (or more politely, “non-prime”) were the main reason behind the meltdown. As financial institutions extended loans to those with less than stable means to repay their debts, the foundation of the financial world was destabilized.

Six years on and these subprime debtors are largely a relic of the past. That fact notwithstanding, there is a new threat lurking in the global financial arena. This one borrower is far larger than all the previous subprime characters combined, and poses a far more dangerous hazard to the financial stability of nearly all (if not all) of the world’s citizens. I am speaking, of course, of the U.S. government.

Subprime borrowers are defined by FICO scores, which are largely inapplicable to sovereign nations. We can instead look at the type of loans these borrowers took on to understand how precarious the U.S. federal government’s finances are.

To simplify matters greatly, consider three types of loans that made debt attractive to subprime borrowers. The first was the adjustable rate mortgage. After a short period at a low introductory teaser rate, the interest rate would reset higher. Second was the interest-only loan. Borrowers could take out a sum of money and, for a period, not worry about paying down the principal. An extreme form of the interest-only loan is the final type: the negative-amortization loan. In this case, not only does the payment not reduce the principal of the loan, it doesn’t even cover all the accrued interest! The effect is that each month that goes by, the borrower slips further in debt as interest deferral is added to the principal to be repaid.

In the wake of the crisis, a lot of commentators focused on two measures of the government’s financial stability. The first was its debt-to-GDP level, which was added to on a yearly basis by its deficit (also expressed as a percentage of GDP). At its nadir in 2010, the federal government ran a budget deficit of nearly 10 percent of GDP (the highest since World War II). As of today, the federal debt level (ignoring unfunded liabilities such as Social Security or Medicare) amounts to 102 percent of GDP.

While these numbers are indeed high, they really understate the problem. After all, the denominator in both cases is the total income of the whole United States, not just that of the government.

To get a better feel for these figures, consider how much the federal government borrows as a percentage of its income (the sum of its tax receipts).


Figure 1: Net federal government borrowing as a percentage of federal tax revenue (percent). Source: St. Louis Federal Reserve Economic Data

In Figure 1 we can see that not only does the federal government often finance itself with debt, but it does so by borrowing a lot relative to its income. In 2009, it borrowed 85 percent as much as it was able to raise through taxes! While commentators praise the government for getting its budget deficits under control and down to a more “reasonable” level of 4 percent of GDP, we can see that it still needs to borrow more than 20 percent of its income to keep its operations afloat.

Of course, this is just the yearly deficit. Turning our attention to the cumulative effects of this in terms of the gross federal debt outstanding we can see that the situation is even more precarious.


Figure 2: Gross federal debt as a percentage of federal tax revenue (percent). Source: St. Louis Federal Reserve Economic Data

As of last year, the gross amount of debt owed by the federal government was about 5.5 times its tax receipts. That would be equivalent to someone earning $30,000 a year owing $165,000. Somehow, people are up in arms about students graduating with an average of $30,000 in debt and landing a measly $30,000-a-year job; but few people want to face the realization that the federal government is in five times worse shape.

The federal government is in worse financial state than is commonly recognized, but few people would call it a subprime debtor, right? Let’s look at the type of borrowing the government does, and you can make up your own mind.

Many subprime borrowers were caught when they borrowed for short periods only to see their interest charges increase when their adjustable rate mortgages reset higher.


Figure 3: Weighted average maturity of federal debt outstanding (months). Source: United States Treasury Department

In Figure 3 we can see that the average maturity of debt was about 5.5 years as of last year. Nearly half of its outstanding debt is due within three years, and a full two-thirds need to be repaid within five. This may not be as short-term as some other debtors, but it’s not exactly a fixed-rate mortgage either. On the other hand, it is troubling because the Federal Reserve has dedicated itself explicitly to a policy of fostering higher inflation. Accompanying this higher inflation will be increased interest rates and a new problem for the government to “solve” as it is forced to borrow at higher interest rates.

What about interest-only, or negative-amortization loans? As we can see in Figure 4, for the past decade (at least) the Treasury has underpaid its annual interest expense by about $200 billion per year. Last year, that amounted to about 5 percent of its total tax receipts. This amount is added to the principal outstanding each year to increase the gross level of indebtedness of the federal government.


Figure 4: Federal Interest Expense and Payments ($bn.) Source: St. Louis Federal Reserve Economic Data and United States Department of the Treasury

Of course, this is not a strict example of a negative-amortization loan. However, it has the same effect in the end, with the only difference being that the Treasury borrows money each year and incurs more interest in order to pay off the interest on its existing debt.

The U.S. government not only borrows in the same way that those destabilizing subprime lenders did six years ago, it does so on a much larger scale. Back in 2008, there were almost $15 trillion of mortgages outstanding (around 100 percent of 2008 U.S. GDP). Many, if not most, of these were not subprime. By comparison, there is about $2 trillion more than this amount in federal debt today, the majority of which is repaid under conditions similar to those troublesome subprime borrowers. To make matters worse, since not all the nation’s income is the government’s, this amounts to more than 5.5 times the relevant tax base that it can repay it with. (Of course, unlike subprime borrowers who lost their jobs and income during the recession, the federal government can unilaterally increase its income by raising or introducing new taxes. I don’t think many want to see this option pursued.)

I will end by answering a troubling question: Who lends this money to the federal government? After all, if the federal government’s “subprime” borrowing debacle goes down like the private one did six short years ago, it would be nice to know at whom to point the finger. Banks and other financial institutions received the lion’s share of the blame for their part in so-called predatory lending of money to those who couldn’t repay, but who is lending to the government?

Lots of “little people” own a few T-bills, but they pale in comparison to the Federal Reserve.

Before the crisis, the Fed kept its Treasury purchases fairly steady and low relative to the total issuance (about 6 percent to 7 percent until 2007). Despite some early shedding of Treasuries early in the crisis in lieu of lower quality mortgage-backed securities and federal agency debt (something Philipp Bagus and I called “qualitative easing” at the time, see here (pdf) and here (pdf) and here), by 2010 more than half of all Treasury debt was bought by the Fed. Even today, while talk of tapering QE abounds, the Fed is still responsible for more than 40 percent of the federal government debt.

The federal government’s finances were not always so shoddy. While it is convenient to blame Congress for the present situation, it takes two to tango. The will to spend was apparent in the government, but the Fed provided the means.

Six years ago, financial institutions were demonized as subprime borrowers who could not repay their loans. If the federal government turns out to be just another subprime debtor, we should expect the blame to be placed on the Federal Reserve for fostering such a situation and allowing it to persist for so long.

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When Government Targets Truckers, Everything Becomes More Expensive

Enduring the bureaucratic and regulation-ridden work environment, U.S. truckers work tooth and nail to keep supply chains moving and on schedule. Because of regulatory interference, U.S. trucking outfits are among the few remaining industries that are still largely run and/or owned by mom-and-pop operations. According to the American Trucking Association, nearly 70 percent of all goods moved in the U.S. are transported on trucks. That comes to almost $670 billion in real, physical goods, from durable and manufactured goods, to finished parts for assembly, to consumer goods.

There are about 3.5 million truck drivers in the U.S., and of those, 1 in 9 are owner-operators. Trucking represents 84 percent of all commercial transport revenue, and 68 percent of all freight tonnage in America. Rail, on the other hand, makes up less than 6 percent of freight tonnage transport.

In 2009, $33.1 billion was paid by commercial trucks for federal and state highway taxes. It makes up roughly 5 percent of GDP, and 1 out of 13 private sector employees are involved in the trucking industry, not just drivers but office staff, warehouse, and engine and truck manufacturers. Go one step more and include accountants, attorneys, insurance companies and other related services.

In spite of trucking’s importance to both consumers and producers, however, the state has been preying on trucking companies and seeking to squeeze truckers of their productivity. One recent example of this is the Hours of Service Rule. Introduced into the Federal Register in December 2011, some additional provisions were passed in July 2013 and trucking companies are now starting to feel the pinch. Some of the new updates include: limiting the maximum average work week for drivers to 70 hours, a decrease from the previous maximum of 82 hours. Also included are restrictions on night driving, a mandatory 34-consecutive-hour break after completing their 70 hours; and it requires truck drivers to take a 30-minute break during the first eight hours of a shift.

In 2011, prior to the installment of the HOS rule, Schneider National predicted a productivity drop of between 3 percent and 4 percent. Four months after its implementation, Schneider reported declines of 3.1 percent on solo shipments and 4.3 percent on team shipments. These examples illustrate the common government error of looking at truckers in the aggregate. The problem is that government regulations ignore the fact that truckers are all different in terms of experience and productivity. And since the average age of a trucker is 50 years old, most have experience in knowing when they need to stop and rest. Moreover, any experienced driver will tell you that trucking is not your ordinary 9-to-5 job, and to increase productivity (and thus lower prices for consumers), many truckers like to drive at night to avoid traffic congestion on the highways.

The American Transportation Research Institute conducted a study in December 2013 on the HOS rule; they concluded that it is hurting both drivers and companies together. In its survey, it uncovered that almost 80 percent of motor carriers say they have had productivity losses since the rules went into effect as of July 2013. And things have gotten especially more difficult for commercial drivers, for whom an overwhelming majority (4 out of 5) claim that the new HOS rules have negatively impacted their quality of life, while 2 out of 3 say they are experiencing more fatigue. The same ratio (2 out of 3) says they have experienced a decrease in pay. One of the more interesting findings is that drivers state they are now forced to drive during peak driving hours and that the new rules did not account for safety risks caused by increased traffic. ATRI concludes that annualized cost at a minimum is $1.6 billion and could go as high as $3.9 billion.

Syed Armutcuoglu, managing director of investment bank Loeb Partners, believes the new HOS rules coupled with the chronic driver shortage and a still-weak economy will drive many smaller carriers out of business. “The majority of trucking companies own fewer than five vehicles” he said, “and cannot survive a 3 percent to 5 percent drop in utilization.” The HOS rule was pushed even more aggressively after the accident that involved a freight truck killing the driver of actor Tracy Morgan. But lo and behold, the driver of that truck was found to not have slept for 24 hours. In other words, new regulations did nothing to stop the accident. And, ironically, of the 40,000 to 45,000 traffic deaths that occur each year, fewer than 9 percent of those deaths involve commercial vehicles. More than 80 percent of those accidents are the fault of the noncommercial drivers. Of those death-related accidents, only 4 percent are fatigue-related. Drinking-related issues accounted for .06 percent of those accidents.

The second damaging set of regulations are Compliance, Safety and Accountability program rules (CSA rules), an unscientific, point-based use of metrics that is supposed to reflect a company’s safety record. The lower the number, the safer you seem to carriers. Unfortunately, even if you are a safe driver, such a minor thing as a small light outage on the side of the hauler could count as a reason for state troopers (many of whom are dedicated to harassing and citing truckers), to hurt your CSA score, therefore making you look like a perilous road villain in the eyes of carriers. Recent criticism by trucking experts states that CSA rules do not take into account who is at fault in an accident; instead, it has a strong tendency to look at only the number of crashes a particular company has experienced. One example given during Congressional testimony was that rear-end collisions, wherein a trucker is hit in his semi while sitting still, was counted by the Federal Motor Carrier Safety Administration (FMCSA) exactly the same as if the truck were involved in a highway crash going at high speed. There are no empirical studies that show CSA scores improve safety.

Last, in February, the Obama administration announced a rigorous set of new fuel requirements for big-rigs and tractor-trailers that is putting small companies in a financial bind. According to the Washington Examiner, the EPA is ordering large trucks and buses to reduce greenhouse gas emissions by up to 20 percent and overhaul engine design starting with models built in 2014. Most operators will need to spend thousands of dollars upgrading their rigs or buying new vehicles, with prices starting at $50,000 on average. John Salez, owner of B&H Trucking in Elk Grove Village, Illinois, claims the new rules have prevented him from investing nearly $2 million in buying new trucks.

Altogether, with the mandatory requirements of expensive exhaust systems, regulating hours and an absurd point system that is falsely believed to reflect accurate safety records, it all spells lower productivity and higher prices. What once took 10 trucks now takes 12, thus leading to an increase of the cost of goods, which, of course, is passed on in part on to the consumer. Meanwhile, the resulting increases in the price of entry into the trucking industry squeezes small trucking businesses, leading to labor shortages that could have been prevented had the industry been left to the owner-operators.

Is This The Libertarian Moment?

This article by originally appeared on Mises.org.

Earlier this month, The New York Times wondered aloud if the “libertarian moment” had arrived. A good question, to be sure.

To answer it, though, Times reporter Robert Draper sought out not quite the top libertarian thinkers in the world, but instead those people most easily reached within a 10-minute walk from the Capitol or the Empire State Building.

Draper begins with an ex-MTV personality and proceeds from there. None of the people whose work and writing have shaped the libertarian movement, and who have converted so many people to our point of view, make an appearance. Ask the hordes of young kids who are devouring libertarian classics how many of them were introduced to libertarianism, or even slightly influenced, by the figures on whom The Times chooses to rely. You already know the answer.

The movement’s major thinkers have rather more intellectual heft behind them, which I suspect is why The Times would prefer to keep them from you. Far better for libertarianism to seem like an ill-focused, adolescent rebellion against authority per se, instead of a serious, intellectually exciting school of thought that challenges every last platitude about the state we were taught in its ubiquitous schools.

Economist and historian Bob Higgs shared my impression of the Times article:

Of course, it’s easy to ridicule libertarians if you focus exclusively on the lifestyle camp. Easy, too, to accuse them of inconsistency, because in truth these particular libertarians are inconsistent. Easy, too, to minimize their impact by concentrating heavily on conventional electoral politics, as if no other form of societal change were conceivable. Easy, too, to ignore completely the only ones — the anarchists — who cannot be accused of inconsistency or ridiculed for their impotence as players in the conventional political game, a game for which they have only contempt. Finally, it’s easy, too — and a great deal more interesting for general, clueless readers — to focus on the hip libertarians.

As Bob points out, the Times reporter says he finds inconsistency among libertarians, because some want to cut only this much, or abolish only those things. But this is what he gets for focusing on the political class and the Beltway brand of libertarianism. Libertarianism is about as consistent a philosophy as a Times reader is likely to encounter. We oppose aggression, period. That means we oppose the state, which amounts to institutionalized aggression.

We have zero interest in “public policy,” a term that begs every important moral question. To ask what kind of “public policy” ought to exist in such-and-such area implicitly assumes (1) that private property is subject to majority vote; (2) that people can be expropriated by the state to whatever degree the state considers necessary in order to carry out the “public policy” in question; (3) that there exists an institution with moral legitimacy that may direct our physical resources and even our lives in particular ways against our wills, even when we are causing no particular harm to anyone.

Still, I note in passing, political consultants are doing their best to make a quick buck on the rising tide of libertarianism. A fundraising email I receive from time to time urges people to get involved in the political process, since simply “educating people” (contemptuous, condescending quotation marks in original) isn’t enough. Instead, they’re told, it’s more important to spend their time supporting political candidates who occasionally give a decent speech but who otherwise deny libertarian principles on a routine basis, in the spurious hope that once in office, these candidates will throw off their conventional exteriors and announce themselves as libertarians.

The Times, too, thinks primarily about politics, of all things, when assessing whether the libertarian moment has arrived. The article is fixated on the political class. But why conceive of the question so narrowly? Why should we assess the growth and significance of libertarianism on the basis of political metrics alone?

The left understands this point. Recall Antonio Gramsci’s strategy for bringing about lasting leftist victory. He did not advocate immediate and exclusive emphasis on political activity. If the people’s minds had not been changed in the direction that a leftist government would want to take them, all their political conniving would be in vain anyway.

Vastly more important, Gramsci taught, was for their ideas to work their way through the universities, the arts and all the other institutions of civil society. At that point, it wouldn’t matter who won the elections. The people would already be in their hands — and in all likelihood, the two competing candidates would themselves have adopted leftist language and ideas, whether they realized it or not, to boot.

Now judged by Gramsci’s standard, the libertarian moment has not arrived any more than it has in politics. These institutions are firmly in the hands of those who hold libertarian ideas in contempt, even if an exception might be found here and there.

But if we define the term “libertarian moment” more modestly, a different conclusion emerges. No, we have not reached a point at which anything like a majority of Americans have embraced our ideas. But we have reached a point at which even mainstream sources, which in the pre-Internet age could get away with ignoring us altogether, are forced to acknowledge us, if only for purposes of dismissal and ridicule.

Economic commentary can no longer pretend that our choices are either fiscal expansion or monetary expansion. A new school of thought has spoiled the party, letting Americans know that these phony choices by no means exhaust the real alternatives.

Thanks to Ron Paul, a new generation understands it’s all right to favor the free market and to oppose war. Libertarians have done more than anyone else to expose the Democrats as just another wing of the war party, and to show there’s no real debate in America over foreign policy. This is considered extremely uncouth by those who wish to maintain the pretense that open discussion of important issues takes place in the land of the free.

After decades of virtually no progress at all against the war on drugs, the prohibitionist regime is beginning to crack all around us. The standard bromides in its favor elicit only cynical chuckles from a rising generation that knows better.

Ordinarily, federal bailouts would be bipartisan and all but unanimous, with self-described supporters of the market economy solemnly informing us that just this once, it had to be done. Progressives have not distinguished themselves here as they might have; Rachel Maddow once said we wouldn’t have had an economy without the bailouts. It’s the libertarians who have stood against the establishment tide, as usual.

In other words, we are having discussions that we did not have in the past. Libertarians have staked out positions that a lot of ordinary people share, but which they never saw articulated in public, thereby giving people the confidence and courage to express dissent. Ten years ago, these dissident views would have been drowned out by the establishment consensus, which closes ranks whenever an issue of real importance arises.

Is it too much to call this the libertarian moment? Whatever we want to call it, it’s the beginning of something never seen before in American history, and that alone is reason to celebrate.

–Llewellyn H. Rockwell Jr. is chairman and CEO of the Ludwig von Mises Institute in Auburn, Alabama, editor of LewRockwell.com, and author of “Fascism versus Capitalism.” Send him mail. See Llewellyn H. Rockwell Jr.’s article archives.

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The Myth Of The Unchanging Value Of Gold

This article by Joseph T. Salerno was published on Mises.org on Aug. 29.

According to mainstream economics textbooks, one of the primary functions of money is to measure the value of goods and services exchanged on the market. A typical statement of this view is given by Frederic Mishkin in his textbook on money and banking. “[M]oney … is used to measure value in the economy,” he claims. “We measure the value of goods and services in terms of money, just as we measure weight in terms of pounds and distance in terms of miles.”

When money is conceived as a measure of value, the policy implication is that one of the primary objectives of the central bank should be to maintain a stable price level. This supposedly will remove inflationary noise from the economy and ensure that any changes in money prices that do occur tend to reflect a change in the relative values of goods and services to consumers. Thus, for mainstream economists, stabilizing a price index based on a basket of arbitrarily selected and weighted consumer goods, e.g., the CPI, the core CPI, the Personal Consumption Expenditure (CPE), etc., is a prerequisite for rendering money a more or less fixed yardstick for measuring value.

This idea — that a series of acts involving interpersonal exchange of certain sums of money for quantities of various goods by diverse agents over a given period of time somehow yields a measure of value — is another ancient fallacy that can be traced back to John Law. Law repeatedly referred to money as “the measure by which goods are valued.” This fallacy has been refuted elsewhere and rests on the assumption that the act of measurement involves the comparison of one thing to another thing that has an objective existence, and whose relevant physical dimensions and causal relationships with other physical phenomena are absolutely fixed and invariant to the passage of time, like a yardstick or a column of mercury.

In fact, the value an individual attaches to a given sum of money or to any kind of good is based on a subjective judgment and is without physical dimensions. As such, the value of money varies from moment to moment and between different individuals. The price paid for a good in a concrete act of exchange does not measure the good’s value; rather, it expresses the fact that the buyer and the seller value the money and the price paid in inverse order. For this reason neither money nor any other good can ever serve as a measure of value.

Unfortunately, advocates of a gold-price target wholeheartedly embrace this mainstream doctrine while giving it an odd twist. They begin with the wholly unsupported assumption that one commodity, gold, is stable in value and that, therefore, it can serve as the lone guiding star — or “The Monetary Polaris” as Nathan Lewis terms it — for Fed monetary policy. According to Steve Forbes, writing in the introduction to Lewis’s “Gold: The Monetary Polaris,” real gold standards have one thing in common: “They use gold as a measuring rod to keep the value of money stable. Why? Because the yellow metal keeps its intrinsic value better than anything on the planet.”

Louis Woodhill, in a Forbes column, writes in a similar vein, explaining that “[t]he fundamental validity of the gold standard rests upon the premise that the real value of gold remains constant over time. … The most fundamental thing about a unit of measure is that it be constant. … Gold is not money, and it should not be money. However we can and should use gold to define the value of the dollar.” These passages reflect an almost mystical belief that the “intrinsic” or “real” value of gold is, for all practical purposes, eternally unchanging, unaffected by the continual flux of human valuations, stocks of resources (including gold itself ), technology and entrepreneurial judgments that define the essence of the dynamic market economy. Furthermore, no definition is ever given of what exactly the concept of “intrinsic value” means or in what units it is expressed.

Historical experience clearly shows that the value of gold visàvis other commodities has fluctuated over the centuries, even when gold has served as the monetary standard. This was certainly the case, for example, when the U.S. returned to the gold standard after the Civil War. From 1880 to 1896, U.S. wholesale prices fell by about 30 percent. From 1897 to 1914, wholesale prices rose by about 2.5 percent per year or by nearly 50 percent. This rise came about mainly as the result of a nearly doubling of the global stock of gold between 1890 and 1914 due to discoveries of new gold deposits in Alaska, Colorado, and South Africa and due to improvements in the technology of mining and refining gold.

Proponents of gold-price targeting thus seem to ignore both theory and history in assuming that once the dollar price of gold has been fixed, the value of money itself becomes forever stable and immune to the influence of market forces of supply and demand. Inflation and deflation are, therefore, ipso facto banished from the economy. This implies that any changes occurring in the quantity of money under a fixed-gold price regime are to be construed as benign and stabilizing adjustments of the supply of money to changes in the demand for money. Steve Forbes writes: “The fact that a foot has 12 inches doesn’t restrict the number of square feet you have in a house. The fact that a pound has 16 ounces doesn’t restrict your weight, alas — it’s a simple measurement. … The virtue of a properly constructed gold standard is that it’s both stable and flexible — stable in value and flexible in meeting the marketplace’s natural need for money. If an economy is growing rapidly such a gold-based system would allow for rapid expansion of the money supply.”

In other words, Forbes’ “stable and flexible” gold standard would facilitate and camouflage an inflationary expansion of the money supply that would, according to Austrians, distort capital markets and lead to asset bubbles. The motto of our current gold-price fixers seems to be: “We want sound money — and plenty of it.”

Joseph Salerno is academic vice president of the Mises Institute, professor of economics at Pace University, and editor of the Quarterly Journal of Austrian Economics. He has been interviewed in the Austrian Economics Newsletter and on Mises.org. Send him mail. See Joseph T. Salerno’s article archives.

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Police States And Inner-City Economics

This article by Ryan McMaken originally appeared at Mises.org.

The recent civil disobedience, rioting and police brutality in Ferguson, Missouri, reminds us of what happens when police states and bad economics are mixed together.

Devastated by decades of ruinous economic policies, the economies of many inner cities continue to languish as the self-ownership of local residents is treated with contempt by the police and any attempt at building a small-business-based or wage-based economy is hobbled by government regulation.

The result is a local economy with chronically unemployed wage earners coupled with entrepreneurs who lack the capital necessary to deal with government regulations. The social consequences of such a situation are dire and lead to a population that lives in the area, but is not invested in it.

Some conservatives have taken to asking why some of the residents are destroying their own neighborhoods through looting and other forms of violence. But of course, even if we make the obvious distinction between looters (a minority of the population) and the nonviolent population, these are not “their” neighborhoods in any meaningful sense: The residents have not been allowed to attempt to build local capital or even have control over their own bodies.

Policing And Self-Ownership

The killing of Michael Brown, an unarmed teenager, by Ferguson police is just one of countless stories we see daily in which police use overwhelming force against unarmed citizens. The police, in the aftermath, receive only raises and huge pensions. Indeed, year after year, the cost and scope of police forces grow higher and higher while the quality of service (the percentage of murders solved has dropped from 91 percent to 61 percent since 1963) continues to go down.

This is exactly what we should expect from an organization that enjoys a total monopoly within its jurisdiction and simultaneously is the last word in whether or not it will be held accountable for the cost or quality of its work. The same organization that controls the police controls the courts, and also has the power to tax. Consequently, as Hans-Hermann Hoppe has noted, the state at all levels is an “agency that unilaterally fixes the price that private citizens must pay for the state’s service as ultimate judge and enforcer of law and order.”

Murray Rothbard has explored the nature of non-monopolist policing, and how it would much more effectively protect private property. But in today’s world, the average citizen, and especially the low-income average citizen, has virtually no influence over policing decisions; and, in cases of abuse, he has little hope of assistance from those who control the police.

All citizens of modern nation-states are subject to police forces of this sort, but the aggressiveness of police in American inner cities has been shown to be far greater and with much higher likelihood of arrest of citizens for minor nonviolent offenses ranging from smoking a joint to jaywalking.

The expansion of police prerorgatives has accelerated in recent decades, first with the “War on Drugs” and then with the “War on Terrorism,” both of which have resulted in what we see today in the form of heavily militarized police forces, asset forfeiture and an endless list of federal laws that bring long jail sentences, even when no criminal intent is proven.

As the prerogatives and wealth of the police expand, the personal freedoms and self-ownership of citizens continues to shrink, but nowhere is this felt more keenly than in low-income areas.

The War on Drugs has likely been the greatest catalyst for this, since as Ludwig von Mises explained, once it is established that the state can regulate what one puts into one’s body, there are no grounds left on which to oppose other intrusions of the state.

Thanks largely to the War on Drugs, the police, in addition to enjoying a total legal monopoly on force, have become essentially unrestrained in questioning and detaining citizens. Once upon a time, the idea of it being a crime to merely possess a non-weapon like marijuana or cocaine would have been considered ludicrous. But today, any citizen at any time can be suspected of carrying an illegal substance, and subject to being questioned and detained.

This ever-present justification for disrupting the daily lives of peaceful private citizens perhaps does more to foster an environment of violence and suspicion than anything else. Not surprisingly, no-knock raids, aggressive questioning, frisking and pointless arrests provide ample (and totally unnecessary) opportunities for interactions between police and citizens to turn violent.

The Destruction Of Inner-City Economies

Naturally, the effects of such a state of affairs on the local economy are not good. Citizens who are constantly in danger of losing wages due to arrest or fines, or who may have their assets seized (without any due process), can hardly be expected to acquire much capital or develop a low-crime preference in the same way as people who are relatively free of repeated police harassment. Certainly, citizens who develop a criminal record for petty non-violent offenses will see economic opportunities severely limited, and act accordingly.

But even if one manages to escape the frequent harassment of street police, the constraints placed on average citizens by an ever-expanding regime of economic regulations hobble economies everywhere, and are especially damaging in places that already lack capital such as Ferguson.

The narrative among conservatives is that welfare, by distorting the incentive structure, has ruined the economies of the inner cities. This is true to an extent, but the problem is far more fundamental than this. This is not simply a matter of people choosing not to work (although that is often the case); this is a matter of people being excluded — by law — from participation in the economic system.

The most notable aspects of this are the minimum wage and the high cost of entry for small business into the economy.

For many residents of inner cities, entering the economy as an entrepreneur or wage earner is out-and-out illegal. In a place like Ferguson, a young person is prevented from working full time during much of his youth thanks to mandatory school attendance laws. If he misses school, he and his parents are harassed by police, and possibly arrested and left to face economic ruin. Upon graduating, the young person, thanks to the public schools, then faces the world with few marketable skills.

He is employable at some level; but as a low-productivity worker, the only entry-level wage he can command is at a level below the minimum wage. In this situation, federal law dictates that he shall remain unemployed indefinitely. Consequently, unemployment among black teenagers is more than 20 percent. Common sense tells us that the best way a new public-school grad can attain any marketable skills is by working at a job. And yet, these jobs are all closed to him by law.

If our public-school grad then attempts to turn to legal self-employment, he will find himself similarly out of luck because the cost of entry into the economy as a small business owner has been raised to a largely unattainable level by government regulation. Licensing, and compliance with OSHA, EEOC, forced “tolerance” and a bevy of other regulations render the small-business avenue closed for someone in such a community. Even if such a person manages to somehow acquire an automobile in spite of all the licenses, taxes and certifications required, he can’t even rent out the car or drive customers for money without special permission from the government. Certainly, some people are able to come from within the community and succeed under these conditions. But if your economy requires near-heroic levels of perseverance and luck just to open a burger stand, there is something deeply wrong with your economy.

How can we be the least surprised, then, when people in these communities simply give up or turn to black markets (i.e., illegal entrepreneurship such as drug dealing) to make a living?

Further complicating the situation is the fact that wage earners and entrepreneurs face a community stripped of capital in recent decades by damaging federal laws. During the 1970s and 1980s, federal “anti-segregation” mandates such as forced busing meant that the middle classes fled the cities, and took their capital with them, leaving workers behind, but not capital. Both racial and economic segregation became worse, and worker productivity plummeted. The government’s solution, of course, was not to deregulate, but to distribute welfare funds in amounts too low to provide a decent standard of living, but just high enough to prevent widespread revolt against the political system.


Naturally, this economic gutting of the inner cities, fostered by federal, state and local laws, led to crime. But what has the response of both national policymakers and local “leaders” been? It most certainly has not been to call for the legalization of low-skill labor (lowering the minimum wage) or the empowerment of local entrepreneurs (by lowering taxes and eliminating regulations). No, the answer is always more police, more government, more regulation and more welfare. Michael Brown and many like him have paid the price for this dead-end strategy. Freeing inner cities from militarized police forces is a good start, but government is destroying these communities in many ways, and police brutality is just one of them.

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Ryan W. McMaken is the editor of Mises Daily and The Free Market Send him mail. See Ryan McMaken’s article archives.

Tax Cuts Are Only For The Powerful

The article, written by Crosby Kemper III and Rex Sinquefield, was originally published at Mises.org

Ninety-seven years ago, a small but ruthlessly determined band of revolutionaries set out to prove that it would be possible to achieve material happiness — and social justice — by replacing free markets with economic planning.

In his classic work Socialism, produced in 1922, just five years after the Bolshevik revolution of 1917, Ludwig von Mises predicted the failure of Soviet communism. He pointed out that the planners would be flying blind — lacking the vital information that comes from free-market pricing. In his words, the marketplace acts as “a daily referendum of what is to be produced and who is to produce it.”

“The problem of economic calculation is the fundamental problem of Socialism,” Mises wrote.

Socialist writers may continue to publish books about the decay of Capitalism and the coming of the socialist millennium; they may paint the evils of Capitalism in lurid colors and contrast them with an enticing picture of the blessing of a socialist society; their writings may continue to impress the thoughtless — but this cannot alter the fate of the Socialist idea. … [They] cannot make Socialism workable.

Of course, Mises was right. The Soviet experiment produced human misery on a prodigious scale — resulting in the starvation and murder of tens of millions of people.

And he was no less right in his other prediction: saying that socialist writers would “continue to impress the thoughtless” with their belief in exalted government — despite all of the horrors and failures.

The whole debate about job creation in the state of Missouri over the course of 2013 illustrates our continued susceptibility to what Mises called “the fundamental problem of Socialism” — the false idea that politicians and planners can pick economic winners and losers.

Trolling For Jobs (With Taxpayer Money)

In the continuing evolution of this “unworkable” idea, we have passed from one form of statism to another: from communism to Third World economics (featuring mammoth projects such as Egypt’s Aswan Dam), and from Third World economics to what we will call third-grade economics — where everyone wants a shiny new object, at taxpayer expense.

Three years ago, the shiny new object of our lawmakers’ affection in Jefferson City was the proposed creation of an “Aerotropolis,” or “China Hub,” at Lambert-St. Louis International Airport, backed by hundreds of millions of dollars of state tax credits.

In 2013, the shiny object that Missouri Gov. Jay Nixon and political leaders of both parties sought was a brand-new plant for building large commercial airplanes.

In September, Nixon vetoed a bill that would have given some tax relief to all Missourians — both individuals and businesses. He said that tax relief was not needed because Missouri already is “a low-tax state.” Then in December, the governor turned around and urged Missouri legislators to approve a massive tax cut — an even bigger tax cut than the one he vetoed — for the exclusive use of one company.

How strange — and yet how typical!

The proponents of big government like to pooh-pooh the importance of taxes (thinking you can never tax and spend enough) … until there is something they want — like a new plant. Then suddenly taxes matter; they matter a whole lot.

What happened between September and December was the Great Boeing Job Auction. When the 31,000-member International Association of Machinists (IAM) in the state of Washington voted two-to-one to reject Boeing’s offer of an eight-year contract, the company decided to put production of a new airliner, the 777X, in play — inviting proposals from other states.

Boeing initiated a bidding war that attracted governors of 22 states and about twice that number of local jurisdictions. It was nothing if not shamelessly frank in describing everything it wanted in the way of financial incentives and freebies. It wanted:

  • Site at no cost, or very low cost.
  • Facilities at no cost, or significantly reduced cost.
  • Infrastructure improvements provided on location.
  • Full support in worker training.
  • Entire applicable tax structure including corporate income tax, franchise tax, sales/use tax, business license/gross receipts tax and excise taxes to be significantly reduced.

It is hard to think of a better wish list for corporate welfare, or crony capitalism.

At Nixon’s urging, the Missouri Legislature and the Saint Louis County Council quickly put together a joint package that offered Boeing $3.5 billion in tax cuts and tax credits, mostly over a 10-year period. That comes to almost $600 for every man, woman and child in Missouri. A substantial portion of the state tax credits on offer were transferrable — meaning that Boeing could sell them for cash to other companies wanting to shelter income in Missouri.

But it was not enough.

The Washington legislature upped the ante — approving tax breaks and other benefits valued at close to $9 billion over 16 years. In a second vote in early January of 2014, the Seattle chapter of the IAM approved Boeing’s offer of a long-term contract. With that, Boeing announced it would keep 777X production at its massive plant in Everett, Wash.

Taxes Matter — For Everyone

At the end of this saga, Nixon and other enthusiastic advocates of the Boeing aid package (including the Saint Louis Regional Chamber) did not complain that they had been used as a stalking horse in an elaborate game of rent-seeking and corporate politics. Instead, they heaped praise upon themselves. It was, they said, a worthy effort proving that our state can play in the big leagues of economic development — winning the attention and respect of one of America’s biggest and most respected corporations.

To which we ask — what about every other employer in the state of Missouri? Do they not enter into your thinking? Does it not occur to you that the great engine of job creation in this country over the past several decades has been small business, not big business?

Show-Me Institute Policy Analyst Patrick Ishmael zeroed in on this point in an op-ed in the St. Louis Business Journal on Jan. ­­24, 2014. He wrote:

If, as we often are told, Missouri is a “low-tax state,” why was it necessary to make Boeing’s taxes even lower? And why should the state support corporate handouts to one company, but actively deny them to family businesses in our community?

Channeled in a different direction, the incentives that the state of Missouri offered to Boeing would make it possible to cut Missouri’s 6.25 percent tax on business income in half.

Think of what that would mean to thousands of Missouri businesses.

Who is to say that substantial tax relief for all businesses would not create many more jobs than the addition of a single Boeing plant?

Missouri has been among the most generous of states (or, to be more accurate, among the most wasteful of states) in doling out commercial tax credits to politically favored businesses. It has also trailed all but a handful of other states in economic growth and job creation.

Every year, the state of Missouri hands out about $400 million in targeted tax credits earmarked for economic development. That is money that supposedly goes to promising business ventures and commercial developments. But the return on this investment of taxpayer money is not just bad, it is appalling. Again and again, the would-be great success stories have turned into disappointments.

Crosby Kemper III is executive director of the Kansas City Public Library and former CEO of UMB Financial Corporation. He co-founded and is chairman of the Show-Me Institute. See Crosby Kemper III’s article archives.

Rex Sinquefield is co-founder and former co-chairman of Dimensional Fund Advisors, Inc. He also is co-founder of the Show-Me Institute. See Rex Sinquefield’s article archives.

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When State-Subsidized Industries Attack

This piece, written by Dave Albin, was originally published on the Mises website. 

Recently, a corn ethanol plant in Nebraska that switched to using cheaper sugar to produce biofuel was sued by local corn farmers. The dispute allows a glimpse into the clashing worlds of subsidized agriculture, and highlights what happens when people make market-oriented decisions within the tangled framework of the state-directed economy.

Corn and sugar are two of the most important agricultural commodities in the world, and have been produced by humans for thousands of years. The U.S. corn belt is where approximately 40 percent of the world’s corn crop is grown, while sugar is produced in other countries (the U.S. is a sugar importer). Global corn ending stocks, which are the amount of supply on hand to meet demand, fluctuate over time. As a result, this and other factors cause the price of corn to rise and fall to reflect these market conditions.

When corn is plentiful, and prices are low, it makes economic sense to use it for other products, such as producing the sweetener high fructose corn syrup, and the biofuel ethanol. When corn prices increase, from expanded global demand as a food product, or as livestock feed in response to high demand for meat, or from one of the periods of low ending stocks, the production of ethanol or corn syrup cannot be justified economically.

Enter the government. As has been described here before, this relationship between corn and sugar has been exploited by the U.S. government for some time. In order to artificially elevate the price of sugar in the U.S., a tariff on cheap foreign sugar has been imposed since the 1980s. This makes using corn-based sweetener more attractive. In addition, the USDA protects domestic sugar producers by guaranteeing minimum prices for sugar loans, and by buying sugar for auction, to be used for non-food purposes, when the sugar price falls below these minimums.

Having not forgotten about the ethanol producers, the U.S. has slapped an import tariff on foreign (sugar-based) fuel ethanol, while at the same time, providing a subsidy for U.S. (corn-based) fuel ethanol.

Setting the stage for the current battle, recently the U.S. government, through the Feedstock Flexibility Program , has been allowing ethanol plants (including the one in Nebraska in question here) to purchase cheap sugar from government auctions (remember the protections given to domestic sugar producers) to make ethanol from sugar (because the price of corn was relatively high). Thus, a lawsuit filed by the Nebraska farmer’s co-op that had been supplying the corn States that the ethanol plant violated its obligations by using the rail line (owned by the co-op) to haul sugar, and by not buying corn to make the ethanol.

The truly strange part in this emerging battle is that, while the current claims made by the corn farmer’s co-op against the ethanol plant may indeed demonstrate breach of contract, the entire underlying framework that established everything here is only possible due to the state-supported nature of the marketplace. This dispute would not have happened in a free market.

And the key here is that state-intervention caused a dispute. If the government had not bought up cheap U.S. sugar, propped up the U.S. corn ethanol industry, and then allowed ethanol plants to purchase that artificially cheap sugar from the government to restart idled processing lines, this lawsuit on behalf of the “damaged” corn producers would have never happened.

In a free-market setting, inexpensive sugar from countries outside the U.S. would flood the market for use in food products, and some of it would likely be used to produce fuel ethanol. More of the plants might be located near ports (not Nebraska) to minimize transporting sugar around the country. More corn may have then been available for traditional food (not high fructose corn syrup) and livestock feed uses which have been the primary uses for thousands of years. Currently about 30 percent of corn produced in the U.S. is converted into ethanol.

Perhaps the worst part about all of this is that the ethanol plant was simply trying to purchase a cheaper, alternative feedstock to restart the plant. In 2012, the ethanol company did not purchase corn as its price rose, and only operated the plant for two weeks that year. Both of these were logical, market-driven decisions, and they have resulted in legal action against the ethanol company.

While the state supports of industry may have seemed like gifts at the beginning, the distorted framework of the government-directed economy makes everyone worse off. Rather than focusing on producing commodities based on actual market conditions, which come from consumers, companies now are forced to use gimmicks and beg for favors from the government. Consumers are the ultimate losers when this happens.

*Albin conducts process development research and provides technical support for a food equipment manufacturer in Iowa.
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The Relationship Between High Taxes And Revolutions

This essay, written by Peter St. Onge, was featured on the Mises Institute website on July 31.

History is full of tax revolts. It’s a fairly popular pastime, if historians are to be believed. But when do they come? What’s the spark and what’s the gasoline?

In Sun-Tzu’s Art of War, he argues that long military campaigns are unwise because they exhaust the people, and he says that long campaigns exhaust “seven tenths” of the wealth of the elites.

This is one of those oddly-specific claims that sometimes strike westerners as hilarious. But Sun-Tzu was a historian, and lived in an era with plenty of case studies of war’s destruction. So it’s worth exploring his rule of thumb here.

One of the problems we immediately face is a lack of good statistics for most historical periods. Even in the twentieth century, statistics can be incomplete, biased, or poorly collected. Before then, all bets are off — the statistics stink in history.

So we have two choices: either we completely ignore the past, and reinvent every wheel. Or else we estimate the past using these kinds of subjective commentaries like Sun-Tzu’s. The model is a radar, used not to “see” something but to estimate its location with fragments of data.

So let’s use this “radar” method on Sun-Tzu’s “seven-tenths.” One interpretation is that he thinks there’s an upper limit to the devastation that can be imposed on your own citizens. This would be consistent with modern economic “marginal analysis,” where people value a loss more as it grows bigger. For example, if you take $10 from a billionaire, it’s not a big deal, but if you take his last $10 in the world he’ll fight you to avoid going hungry.

In this light, Sun-Tzu is saying that once you pass the 70 percent threshold, people become desperate enough to shift from sheep to wolf.

We can translate this into a modern hypothesis, that the people will accept up to a 70 percent tax rate with manageable protest, but go much beyond that and you’re likely to have problems. Now, we’re still a way off this mark in the U.S.: spending at all levels of government in 2014 was about 42 percent. The highest spenders in the world, according to the OECD, are the Scandinavians at about 50 percent.

While these are high numbers, they’re still well below Sun-Tzu’s 70 percent. And the trends are not as bad as they might seem. While the trend is worsening, we’ve still got a ways to go: OECD average tax take grew about 4 percent between 1975 and 2010. At that rate the U.S. wouldn’t get to 70 percent for another 250 years. Fortunately we’d have a “canary in the coalmine” as the Scandinavians would hit this threshold about 100 years earlier.

One caveat for Sun-Tzu’s scenario is that regulation was pretty primitive in his day. By one estimate these regulations add another 11 percent to government’s “take,” bringing the number up to 53 percent, but still below 70 percent.

A second big caveat is that this is all assuming past trends continue. History doesn’t have perfect case studies, so we don’t know what happens when an internet-and-computer wielding state gets the upper hand. So we could get to 70 percent much faster.

On the other hand, the State has become much more clever at hiding its taxes. Payroll withholding and hidden regulatory costs might not stir the people the way that a direct requisition might. And then, of course, there is the hidden tax in a central banks’ inflation of the money supply.

Taking it all in, my guess is that this back-of-the-envelope “radar” tally suggests that current tax trends are plenty sustainable, for better or worse. Unless the trend changes significantly, taxes will likely continue rising slowly and, like the frog in boiling water, people will grumble and that’s that.

There may be other catalysts, of course — the “culture wars” or incessant stoking of ethnic and racial animosity could come to a head. But on current trends taxes won’t be the spark.

*Peter St. Onge is a Summer Fellow at the Mises Institute and an Assistant Professor at Taiwan’s Fengjia University College of Business. He blogs at Profits of Chaos.
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First A Portrait, Now A Book: George W. Bush Takes 41 As His Subject

It turns out that George W. Bush hasn’t been spending all of his post-White House time at his easel, painting portraits of foreign leaders and former pets.

The 43rd president has written a biography of his father, the 41st president, George H.W. Bush, that will be released Nov. 11 by Crown Publishers, with an initial printing of 1 million copies.

The book, which has not yet been titled, will focus on the elder Bush’s service as a bomber pilot in the Pacific during World War II, his years in the Texas oil business and his career in Washington, where he served as a congressman, U.S. representative to China, CIA director and vice president before ascending to the White House.

Crown’s publisher, Maya Mavjee, said the book would bring to life the elder Bush’s personal qualities and principles through the unique perspective of his son. In a short statement, George W. Bush described the 41st president as a “great servant, statesman and father” and said he loved writing the story of his life.

The younger Bush published his own memoir, “Decision Points,” about his eight years in the White House, in November 2010. The book has sold 3 million copies in all formats, which, according to Crown, makes it the bestselling presidential memoir of all time.

George H.W. Bush recently celebrated his 90th birthday by skydiving, as he had on his 85th and 80th birthdays. Much of his family — including son Jeb, the former Florida governor who is considering a run for president — gathered to celebrate the occasion at the family’s compound in Maine.

George W. Bush, who along with his wife is now a frequent Instagrammer, posted a picture of his father after the jump. “Thank God for this man and thanks to the All Veteran Parachute Team for a Safe Landing.”

The 43rd president, who lives in Dallas and spends weekends at his retreat outside Crawford, Texas, also reflected on the experience of painting his father during a recent interview with his daughter, NBC correspondent Jenna Bush Hager, on the “Today” show. His portraits of world leaders, including that of his father, were recently exhibited at the George W. Bush Presidential Center at Southern Methodist University in Dallas.

“It was a joyful experience to paint him. I painted a gentle soul,” Bush said, noting that his father is a “great listener” who was a “master at befriending people to find common ground” in foreign diplomacy.

As usual, his mother, Barbara Bush, was among her son’s toughest critics. “That’s my husband?” she asked when she saw the portrait during a live satellite appearance on the “Today” show segment. Apparently she was not interested in a portrait of her own.

“Absolutely not,” she said crisply when asked whether she would pose for her son.

– Maeve Reston


©2014 Los Angeles Times

Visit the Los Angeles Times at www.latimes.com

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Mises Scholar Explains How To Start Reforming The Federal Reserve

This essay, written by Brendan Brown, was originally published on the Mises website.

First the good news. The House Financial Services Committee has held a hearing on “Legislation to Reform the Federal Reserve on its 100-year Anniversary.” The hearing focused on a bill introduced by Scott Garrett and Bill Huizenga which would require the Fed to provide Congress with a clear rule to describe the course of monetary policy. Now for the bad news. The rule is to be an equation showing how the Fed would adjust interest rates in response to changes in certain economic variables. And the star witness before the committee proposing his own version of such a rule is renowned neo-Keynesian economist, ex-Bush official Professor John B. Taylor.

Inputs into the so-called “Taylor Rule” involve key magnitudes such as “the neutral rate of interest” and “the natural rate of unemployment” as well as the “targeted rate of inflation.” One might have hoped that the Republicans by now would have realized that monetary reform should involve first and foremost jettisoning neo-Keynesian economics. Even the most talented Fed official cannot know the neutral level of interest rates (whether for short, medium, or long maturities) or the natural level of unemployment. And as to inflation targets, these should be scrapped in any monetary reform and replaced by the aim of monetary stability broadly defined to include absence of asset price inflation and a very long-run stable anchor to goods and services prices.

First, Set Interest Rates Free

An essential component of monetary reform should be setting interest rates free. This means no more official pegging or guidance of short-term interest rates and no attempt to manipulate in various ways long-term interest rates. Markets can do a better job of discovering the neutral rates of interest (across different maturities) and positioning market rates at any time relative to these so as to guide the economy along an equilibrium path than any set of well-informed and even well-meaning Fed officials. This is all on the big assumption that the reformers can design a monetary system around a suitable firmly placed pivot.

Under the gold standard the pivot was a fixed price for gold alongside the widespread use of gold coins. And so the amount of high-powered money in the world grew in line with the above ground stock of yellow metal, which occurred at a glacial, but flexible pace. The demand for high-powered money was itself a fairly stable function of income and wealth. And so the system was well-anchored. Yes, there were imperfections, including the advent of fractional-reserve banking which meant that the demand for high-powered money became less stable. Yet given the absence of deposit insurance and too-big-to-fail and only limited lender of last resort roles banks could be counted upon to have a strong demand for reserves (mainly in the form of gold) to back their deposits. Moreover the obligation to convert customers’ deposits into gold coin on request buttressed this demand for high powered money from the banks.

More Steps Toward Proper Reform

As a matter of practical politics the Republican Congressmen may well conclude that an imminent return to gold is unfeasible. But they could consider in the light of these considerations how best to re-secure the pivot to the US monetary system by creating high-powered money for which demand would be stable and the rate of increase in supply flexibly very low. The steps toward this end would include:

· Abolishing the payment of interest on bank reserves.

· Strict curtailment of lender of last resort function.

· Long-term abolition of deposit insurance.

· Fed withdrawal from creating liquidity in debt markets (no more eligible bills, repo-transactions, etc.).

· Issuance of large-denomination notes (adding to the demand for currency, a key component of high-powered money).

· A legal attack on monopoly power in the credit card business which results often in payers of cash not enjoying a discount.

In this suitably reformed system there would be a huge demand for high-powered money (whether in the form of currency or reserves held by the banks) highly distinct in function from any alternative assets. This demand would not depend on legislating artificially high reserve requirements which bank lobbyists would surely whittle down over time. That was the Achilles heel of the briefly successful monetarist experiment in Germany during the 1970s and early 1980s, as the bankers were finally able to bring political pressure toward lowering reserve requirements such that monetary base no longer was a secure pivot to the monetary system. Accordingly, the Bundesbank gradually shifted to explicit pegging of short-term interest rates albeit subject to a medium-term target for wider money supply growth.

Turning back to the US, even with the reforms suggested, there would still be the difficult question of how to determine the growth in supply of high-powered money. Without a gold connection there has to be some degree of discretionary control in this process, albeit constrained by a quantitative guide (such as an average 1 to 1.5-percent rate of expansion per annum, similar to the expansion rate of above ground gold over the past century) and ultimately constitutionally-embedded legal restrictions.

High-powered money as defined by such a monetary reform would be a far cry from the present situation where the size of the Federal Reserve balance sheet has been recording explosive growth for many years and where the main form of high-powered money, excess reserves, pays interest at above the market rate to the banks. The Republicans in their pursuance of monetary reform would do well to propose some initial steps which would prepare the way for bolder change at a later date with the aim of creating a stable supply and demand for high-powered money.

A key step would be the immediate suspension of interest payments on reserves (which only started in 2008) coupled with a rapid timetable for disposing of the Fed’s massive portfolio of long-term fixed-rate bonds. The Bernanke Fed, and now the Yellen Fed, has used this portfolio as a means of manipulating long-term interest rates (with this depending on an emperor’s new clothes effect whereby markets attach unquestioning importance to the Fed’s massive holdings in forming their expectations of bond prices) and of scaring investors into real assets so adding to the strength of their asset price inflation virus injections.

One suggestion for a rapid timetable would be the Treasury and Fed entering into a deal in which the long-term fixed-rate T-bonds held by the Fed would be converted into long-term floating rate debt and into short- or medium-term T-bills. This would mean less accounting profit under the present structure of yields for the Fed and a lower cost of borrowing for the Treasury. But who really cares about such bookkeeping between the federal government and its monetary agency? In turn the Treasury would announce a long-term timetable for raising the ratio of long-maturity fixed to floating rate debt in the overall total outstanding.

Rome was not made in a day. And the Republicans are certainly not in a position to legislate radical monetary reform. But that is no excuse for a careless decision by the would-be reformers to veer into a cul-de-sac under the misleading directions of Professor Taylor.

Brendan Brown is an associated scholar of the Mises Institute and is author of Euro Crash: How Asset Price Inflation Destroys the Wealth of Nations and The Global Curse of the Federal Reserve: Manifesto for a Second Monetarist Revolution. See Brendan Brown’s Mises article archives.
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Even The Feds Admit Minimum Wages Cause Unemployment

This article, written by Nicholas Freiling, was originally published by Mises on June 17.

Minimum wage doesn’t apply to everyone.

When Congress first established minimum wage in the Fair Labor Standards Act of 1938, it left a loophole for businesses that employ people with disabilities.

The Secretary, to the extent necessary to prevent curtailment of opportunities for employment, shall by regulation or order provide for the employment, under special certificates, of individuals … whose earning or productive capacity is impaired by age, physical or mental deficiency, or injury, at wages which are lower than the minimum wage.

These special certificates are known today as 14(c) permits, and thousands of employers have one. Some studies claim that more than 300,000 Americans work for subminimum wage under the auspices of such permits.

This isn’t well known. Advocates of minimum wage often base their support for the measure on ethical grounds, claiming that all workers deserve a degree of compensation regardless of their productivity. Such was the reasoning of Seattle Mayor Ed Murray, who raised his city’s minimum wage last week to the unprecedented level of $15 per hour under the guise of “equal access and opportunity for all.”

Yet minimum wage advocates rarely address the issue of minimum wage exemptions. If minimum wage is supposed to help those who otherwise would not earn a “living wage,” why exempt people with disabilities — often the least productive of us all?

Ironically, Congress presumes the answer to this question is in the minimum wage legislation itself, undermining its logic in the process.

When Congress passed the 14(c) exemption along with minimum wage in 1938, they did so, as quoted above, “to prevent curtailment of opportunities for employment” of people with disabilities. The authors of the bill understood that minimum wage leads to unemployment for those “whose earning or productive capacity is impaired.” So in order to avoid the negative publicity associated with putting people with disabilities out of work, they exempted such people from minimum wage.

But this begs a question. If people with disabilities are exempt from minimum wage because their earning capacity is impaired and finding employment might otherwise be impossible, why don’t people without disabilities whose earning capacity is equally low also qualify for an exemption?

Admittedly, this question is opposite of that asked by most people who are aware of the 14(c) exemption. Where the exemption is known, it’s often derided as an act of discrimination against people with disabilities — not everyone else.

But as economists have shown, minimum wage doesn’t help the lower class. It prohibits employers from hiring anyone whose earning or productive capacity is below the enforced minimum hourly wage, creating permanent unemployment among the least productive people. As economist Murray Rothbard noted, “laws that prohibit employment at any wage that is relevant to the market must result in outlawing employment and hence causing unemployment.”

So by exempting people with disabilities from minimum wage, Congress actually discriminates against the non-disabled — those who cannot work under the auspices of a 14(c) permit — and favors people with disabilities.

But of course, if Congress intends minimum wage law to be effective toward its end of ensuring no one works for less than the specified hourly wage, this couldn’t be otherwise. If everyone were exempted who could not find work at the going minimum wage, minimum wage would be pointless and ineffective. On the other hand, if no one were exempted and everyone subject to the same minimum wage law regardless of physical condition, people with disabilities would be hard pressed to find work and many of them would sadly become unemployable.

It’s a sticky situation. By continuing to exempt people with disabilities from minimum wage, Congress reveals its implicit awareness of minimum wage’s negative effects on the least productive people. Yet to end all exemptions means to disadvantage people with disabilities in the workplace who already have a hard enough time finding work. Finally, to repeal minimum wage altogether and allow everyone to negotiate wages freely would mean to admit a seventy-five-year long mistake that harmed thousands, if not millions, of unskilled laborers over the past half-century who found themselves unemployed at some time or another.

The 14(c) exemption for people with disabilities reveals the brokenness of minimum wage law. It makes the policy all the more heinous, as lawmakers insist on enforcing, and even strengthening, such laws while exhibiting their full awareness of how it harms the least productive people. Nevertheless, ending the 14(c) exemption will do more harm than good. Instead, the exemption should apply to everyone — with or without a disability — who cannot find work in the current minimum wage environment. Only then will Congress, to use its own words, “prevent the curtailment of opportunities for employment” for everyone who wants to work.

Freiling is a freelance writer. He studied economics at Grove City College and is currently pursuing an MA in Economics at George Mason University. His work has been published by the American Enterprise Institute, the Ludwig von Mises Institute, Relevant Magazine, Townhall.com and The Collegian at Grove City College.

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Economic Scholar: The Fed Won’t Let The Economy Heal

This essay, written by Frank Shostak, was originally published at Mises.org.

Most commentators are of the view that the massive monetary pumping of the Fed during 2008 prevented a major economic disaster. The yearly rate of growth of the Fed’s balance sheet jumped from 3.9 percent in January 2008 to 150.9 percent by December of that year. The Federal funds rate target was lowered from 3 percent in January 2008 to 0.25 percent by December of that year.



According to popular thinking, the Fed’s actions have bought time to allow the U.S. economy to heal — much like keeping a coma patient on life support. Consequently, popular thinkers are harshly criticizing commentators that advocate allowing economic recession to take its course.

Contrary to popular thinking, economic recessions or economic busts are not about the end of the world but about the removal of various non-productive activities, also labeled as bubble activities brought about by previous loose monetary policies of the central bank.

Observe that by means of loose monetary policy wealth is diverted from wealth generators to non-wealth generating activities. The stronger the pace of monetary pumping the stronger is the divergence of wealth. (Bubble activities, which don’t generate wealth, cannot exist without this divergence.)

Obviously then the longer the divergence of wealth takes place the weaker wealth generators become. Note that once the ability of wealth generators to generate wealth comes under pressure the so-called economy follows suit. After all it is the increase in wealth that supports overall economic activity.

It is increases in wealth that fund increases in productive and non-productive activities. So how then can aggressive monetary pumping by the Fed during 2008 have allowed the economy to buy time and to heal?

We suggest that the massive monetary pumping of 2008 has bought time for non-productive bubble activities. However, as we have seen, such activities undermine wealth generators thereby weakening the economy as a whole.

If loose monetary policy is enforced over a prolonged period of time it runs the risk of severely weakening the process of wealth generation. A situation can then emerge where the pool of wealth becomes stagnant or starts to decline.

Once this happens the economy plunges into a severe slump since there is now less funding available to support both productive and non-productive activities. In such a case, what is required to heal the economy is the fast removal of bubble activities.

This will leave a larger amount of necessary funding in the hands of wealth generators thereby strengthening the process of wealth generation — the key for economic recovery.

Again, we suggest that rather than healing the economy massive monetary pumping by the Fed during 2008 has strengthened bubble activities thereby weakening the economy.

To clarify our points further, consider a company that is comprised of ten divisions, of which six are making profits and four divisions are suffering losses. A responsible CEO would be expected to either restructure the four losing divisions or to shut them down. If he/she were to keep them going then this is going to weaken the company.

The profits from the six profitable divisions, instead of being used to strengthen the company’s ability to generate profits, will be employed to support the four losing divisions.

The longer this lasts the worse the fundamentals of the company become. At some stage, once the company’s ability to generate profits diminishes, it runs the risk of going “belly up.”

Would it be valid to say that by allowing the non-profitable divisions to stay longer the company buys the time in order to heal itself?

As we have seen, the longer the CEO keeps the losers the worse the company’s “bottom line” is likely to become. Contrary to popular thinking then, the sooner the cleansing takes place the stronger the company is likely to become and the better the shareholders’ interest is going to be served.

Obviously, the restructuring or the elimination of losing divisions is going to be painful for some of the individuals that are employed in these divisions. However, a strengthening in the company’s fundamentals is likely to increase their chances of being re-employed in other divisions. Likewise, with the elimination of bubbles in the economy individuals that were made redundant are likely to be re-employed in newly expanding wealth generating activities.

Summary and Conclusions

Most commentators are of the view that the Fed’s massive monetary pumping of 2008 has prevented a major economic disaster. We suggest that the massive pumping has bought time for non-productive bubble activities, thereby weakening the economy as a whole. Contrary to popular thinking, an economic cleansing is a must to “fix” the mess caused by the Fed’s loose policies. To prevent future economic pain, what is required is the closure of all the loopholes for the creation of money out of “thin air.”

-Frank Shostak is an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org. His consulting firm, Applied Austrian School Economics, provides in-depth assessments and reports of financial markets and global economies.

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The Mythology Of The Supreme Court

This column by Ryan W. McMaken originally appeared on the Ludwig von Mises Institute website on May 13.

The Supreme Court’s recent decision on prayer at government meetings reminds me that Supreme Court “season” is upon us. And for the next two months or so, we can expect to see the court decide on a variety of cases that can have profound impacts on the lives of citizens and non-citizens alike. The court’s decision in Town of Greece vs. Galloway has produced a lot of commentary on both sides, with much discussion about the dynamics between justices, and how Justice Anthony Kennedy must have been in a pro-prayer mood that day, since his decisions appear to be made on a variety of unknowable whims.

Nearly all of this commentary contains the assumption that it is perfectly normal, and probably laudable, that the Supreme Court has the power to decide the legality of virtually everything under the sun, from the death penalty to where local governments can build strip malls.

If there was ever any doubt that public schooling has been an immense success when it comes to conditioning children to blindly accept even the most implausible myths of governance, we only need look to the high regard in which most Americans hold the Supreme Court. The fact that nine modern philosopher kings are empowered to sit in judgment of every American law and custom, right down to whether or not a city council meeting, in a town virtually no American could find on a map, can include some bland prayer time. It troubles no schoolchild that he is taught that democracy is the source of legitimacy for all governments one minute, and then the next minute is told he should fully trust nine lawyers in robes in Washington, D.C., to have the final word on law for 300 million Americans.

The proposition that nine people should tell 300 million people what sorts of laws they should make is rather ludicrous on its surface, but the justification largely rests on the assertion that the judges are somehow above politics and make decisions based on nearly pure reason. Political scientists and most people with experience in the legal profession no doubt know this is nonsense, but the average American is far more likely to be accepting of the long-standing myth that the court is a sort of backstop that prevents “bad” American laws from being allowed to stand. “Sure,” they might say, “Congress and the President, which are infected by vulgar politics, can do many horrible things; but the Supreme Court will dispassionately evaluate them and decide laws strictly on their legal merits.”

This view of the court is of course hopelessly fanciful, and the truly political nature of the court is well documented. Its politics can take many forms. For an example of its role in political patronage, we need look no further than Earl Warren, a onetime candidate for President and a former Governor of California, who was appointed to the court by Dwight Eisenhower. It is widely accepted that Warren’s appointment was payback for Warren’s non-opposition to Eisenhower’s nomination at the 1952 Republican convention. The proposition that Warren somehow transformed from politician to deep thinker after his appointment is unconvincing at best. Or we might point to the famous “switch in time that saved nine” in which Justice Owen Roberts completely reversed his legal position on the New Deal in response to political threats from the Franklin Roosevelt Administration. Indeed, Supreme Court justices are politicians, who behave in the manner public choice theory tells us they should. They seek to preserve and expand their own power.

The court, jealous of its power and reluctant to hand down decisions that might actually cause the court to lose prestige, is at times careful to reflect the majority opinion regardless of how atrocious it might be. To see this, we need look no further than Korematsu vs. The United States, in which the court declared it perfectly legal to round up American citizens and throw them into concentration camps.

The court forever plays a careful balancing act with both the public and with other branches of the Federal government in which if continually pushes the bounds of Federal power without rocking the boat to the point of calling its legitimacy into question among the majority of the population. Naturally, Congress and the Presidency, themselves committed to untrammeled Federal power, have no problem with most of this on most occasions, except perhaps in the details.

Bizarrely, however, the court has even managed to cultivate a reputation as a limit on the power of government, as well as a reputation that justices will rein in the state because it is committed, however imperfectly, to the Constitution of the United States. This is wishful thinking in the extreme, however, since the Constitution is nothing more than what the Supreme Court says it is; and this has been well established since Chief Justice John Marshall first introduced judicial review into the court’s decisions. If the Constitution was designed to prevent rule by judges (which may or may not be the case), it has clearly failed in its mission. Moreover, the court acts to insert intellectual legitimacy into laws and policies that formed out of nothing more that interest group lobbying, political payoffs and even outright corruption. Once these laws receive the imprimatur of the Supreme Court, they cease to be political acts, questionable in origin, and take on the life of perpetually established law and precedent.

The public’s deference to the court and its decisions is the key factor in the court’s immense power, and the myth of the court as the protector of what’s left of the Constitution is especially powerful. But as Ludwig von Mises noted in Liberalism, as an agent of the Federal government, the idea of the court as a friend to limited government is an absurdity:

The tendency to impose oppressive restraints on private property, to abuse political power, and to refuse to respect or recognize any free sphere outside or beyond the dominion of the state is too deeply ingrained in the mentality of those who control the governmental apparatus of compulsion and coercion for them ever to be able to resist it voluntarily. A liberal government is a contradictio in adjecto. Governments must be forced into adopting liberalism by the power of the unanimous opinion of the people; that they could voluntarily become liberal is not to be expected.

Naturally, the court does not limit itself at all, but it knows it is nonetheless limited by public opinion at least as well as anyone else. The court’s strenuous efforts to maintain an aura of majesty and intellectual loftiness can be seen in its refusal to allow television cameras in its hallowed halls or any sort of direct observation by the public at large. The judges wear academic robes and sit on their high bench. They could just as easily do their jobs in business suits while sitting at the same height as everyone else. Of course, if that were the case, the justices would just look like the glorified county commissioners they are; and the court’s propaganda war against the public is essential in maintaining its near total immunity from any meaningful oversight from anyone at all.

Mises: With Government Roads, The Customer Is Always Wrong

This essay, written by anarcho-capitalist Ben Wiegold, was originally published on the Mises Institute’s website.

From the moment automobiles became commonplace in society, people have been dying in them at astonishing rates. Tragically, over the last century almost 4 million people (around 35,000 per year) lost their lives on U.S. roadways alone, with India, China, and Russia averaging almost 300,000 per year combined.

But early figures indicate that 2013 saw the lowest number of traffic fatalities in the U.S. since 1936. Jenny Robinson of AAA Mid-Atlantic commented that this is “good news” and that it appears “tougher laws … have been effective.”

Certainly this begs the question: if tougher laws are such an easy solution, why do so many people still lose their lives? Whenever the National Highway Traffic Safety Administration (NHTSA) or Mothers Against Drunk Driving (MADD) attempts to answer this question, they typically point to such well-known culprits as texting, car safety, drunk driving, weather, or inexperienced drivers. In its sum, the total list of causes is limited only to the number of factors that one can think of.

Interestingly, of all these variables, the only one that is common to all of them is the only one that is never mentioned, let alone considered: all of these deaths occurred on state-controlled roads. Thus isn’t there any extent to which federal, state, and local governments are to be held responsible?

If deaths occurred to this degree, relatively speaking, on private roads in gated communities or in shopping mall parking lots, criminal lawsuits and bankruptcy filings would be rampant. At a minimum, insofar as blame is placed on individual drivers, it must be remembered from where they received their licenses to drive. Furthermore, by looking for new traffic laws as a preventative measure, there is at least implicit blame placed on state institutions because in that case they should have passed these laws decades ago (and more laws next year too).

The reality is that new traffic laws are enacted every single year, yet the tragedies continue, and the most obvious change such legislation has actually managed to effect is increased revenues for governments through increased fines and citations. For every ticket that is written, for every accident that occurs, and for every person who is injured or killed on the nation’s roadways, witness the failure of state bureaucrats to meet the consumption demands of the driving public.

To be more specific, people want to be allowed to drive faster; to not spend hours per day sitting in traffic; to make U-turns when necessary; to blow red lights and stop signs when safe; to drive on roads without gigantic pot holes; to be able to read street signs; to text or talk on the phone while driving; to be notified of road closures; to have construction projects on their preferred roads be completed as quickly as possible at times that are convenient; to be surrounded by competent motorists; to drive in cars that will not malfunction; to drive where extreme weather conditions are minimized as much as technologically possible; to assume the potential risks of driving after consuming alcohol; and perhaps most importantly, to not lose their lives in the process of moving from place A to place B.

For those accustomed to living with a real lack of alternatives, it’s difficult to envision how such seemingly contradictory demands are to be satisfied — but that’s the point entirely: a uniform approach by definition only serves one set of interests, typically those of the people administering and enforcing it. Nevertheless, society is full of all different kinds of interests. There is no reason why some roads can’t have lower speed limits for bad and inexperienced drivers, while others have no limits at all for people who desire such services. Likewise, some roads could advertise warnings saying they allow intoxicated drivers at minimal speeds, while others boast a zero tolerance policy. The possibilities are numerous and diverse.

By allowing for more than one provider, not only will each develop their own areas of specialization, but competition will help all providers figure out what works and what doesn’t in terms of the bottom line: maintaining happy customers.

The popular phrase “the customer is always right” applies quite well to the business world, but when it comes to the roadways, the customer, i.e., the average citizen, is typically wrong in the eyes of law enforcement and legislators. Whereas entrepreneurs in a market setting try to anticipate changes in consumer demand in advance and to solve potential problems before they become problems, bureaucrats simply resort to blaming those they are supposed to be helping, while they allow unsolved problems to compound upon one another.

Some may object that governments have limited resources too and that it’s not their fault they’re limited by current technological capabilities. These individuals must be reminded, however, that these are the same people running NASA, which sent human beings to the moon over five decades ago. Besides, the American Society of Civil Engineers said last year that the nation needs to spend $3.6 trillion on infrastructure by 2020. Although this includes many other things besides roads, it’s necessary to remember just how much money $1 trillion is: with it you could buy 40 million new-model cars, replace the annual incomes of 19 million American families, or pay the annual salaries of all 535 members of congress for 10,000 years.

So in all likelihood, the NHTSA and other related agencies are irresponsible and inefficient with their too-big-to-be-cut budgets. Meanwhile, in the real world, to be able to take home a pay check, owners, managers, and workers in private firms must prove themselves and serve their customers day and night, or risk losing their jobs and livelihoods when disgruntled consumers switch to a competitor.

Where there is a monopolistic provider, as is the case regarding roads, bureaucrats are relatively comfortable in their privileged positions. Even when public protest reaches such levels that someone must take the fall and either resign or be let go, the institution itself faces no sizeable danger whatsoever. While private companies depend on the voluntary support of their patrons, the state extracts its continual revenue supply (taxes) and denies its victims alternatives (monopoly), both at the barrel of a gun.

Fear-mongers will claim that without such practices, the roads and thus society itself would fall into chaos and disarray. To such objectors, reference may be made to anything from hectic city and rush hour driving, delayed accident clean up and endless highway construction, to the common practice of cops blatantly disobeying their own traffic laws. Needless to say, such disorder is everywhere already.

Ben Wiegold is a staunch anarcho-capitalist and has been educating himself through the Mises Institute since 2011. He is also a self-taught musician who has played with a number of small bands in the Chicagoland area.

Ranchers And Empire In The American West

This column by Ryan W. McMaken originally appeared on the Ludwig von Mises Institute website on April 14, 2014.

The militarized siege of a cattle ranch near Bunkerville, Nev., drew national attention as dozens of federal agents, armed with machine guns, sniper rifles, helicopters and more descended on the ranch to seize cattle and people and generally to show everyone who’s boss.

The conservative press has framed the story in a variety of ways, casting the story both as matter of outright federal seizure of private land and as an absurd environmental crusade to save a tortoise from extinction.

The reality looks to be a little murkier, however, as is often the case when dealing with land ownership in the American West. Back in September, the Las Vegas Sun reported on the Bundy family and noted that troubles began 20 years ago when the family’s patriarch unilaterally determined that he would no longer pay the Bureau of Land Management use fees that have long been required to graze on federal lands. The exact legal and historical details of the Bundy family’s case will emerge slowly over time, but even if the family is completely in the wrong legally (which it probably is), it’s safe to say that taxpayer dollars might be better spent on things other than a shock and awe campaign waged against a tiny ranch in the middle of a Nevada desert. Nonetheless, this is just the latest dispute in a long history of ranchers jockeying with the Federal government over land use permits and land use regulations.

While those who are unfamiliar with land use in the West may see this as some sort of new dastardly deed on the part of the federal government, it is in fact the case that leasing federal land for grazing (among many other things) has been the status quo in the West for more than a century, and the federal government has owned at least 40 percent or more of the land in many Western states ever since it was annexed to the United States in the 19th century. In fact, the nation’s 13 Western states are home to 93 percent of federal land, with two-thirds of all land in Utah and 81 percent of all land in Nevada owned by the feds.

The image of the American West as a place of private property and blissful independence from government control has long been a myth, and the fact is that life in the West has involved the federal government much more so than life in the East much of the time. This is because the land and other natural resources in the West are controlled by a vast socialist bureaucracy governing water, land and minerals going back to the late 19th century. Certainly, within the larger framework of federal control, heavily asserted by a central government bloated by the Civil War, there were many communities that did live extremely independently and in ways that might be considered anarchistic. However, since the 1890s, the overall economy of the American West is best viewed as one that has been dominated by federal land ownership, regulation, subsidies and bureaucracy.

The Rise Of The Federal Bureaucracy In The West

In his history of the American West, Richard White writes:

Beginning in the 1890s, the central government ceased to be a nursemaid to the future states and a prodigal distributor of resources to the country’s citizens and corporations. Washington instead became a manager of Western land, resources, and, inevitably, people.

Behind this was the philosophy that the central government could best ensure that the resources of the Western U.S. were distributed and managed “efficiently.” This belief was the natural outcome of the stilted and error-laden classical economics of the time whose models depended on assumptions about idealized markets and competition that did not exist in the unindustrialized West. In other words, in the minds of 19th-century intellectuals, government intervention would be necessary to create the conditions necessary for the existence of efficient capitalism. As it had done with the railroads, the federal government would step in to ensure competition and efficiency in the new marketplaces of the frontier.

By 1903, Theodore Roosevelt’s Public Land Commission solidified the concept of public ownership throughout the West, thus ending the idea that all lands in the West should be distributed via the homestead acts, which were themselves artifacts of federal government programs.

The rise of the Bureau of Reclamation (which managed water) and the Bureau of Land Management ensured that both water and land would be controlled either directly or indirectly by federal government agencies indefinitely. Whatever the philosophical origins, the situation quickly degenerated into the all-too-familiar situation seen anywhere that the state dominates and controls the distribution of resources. Federal agencies became the target of lobbying efforts by interest groups large and small, with regulatory capture resulting. Leases for land for oil drilling, mining and grazing quickly became important for doing business in the region; and, naturally, maintaining influence within federal agencies under such conditions was a key to success.


Support for federal control in the region remained widespread among Westerners themselves. As a region that was poorer and less able to attract capital than the East, many Westerners quickly made peace with this system of federal ownership — not least of all because the Federal government, through subsidies, public works programs and military spending, had become an economic driver in the West.

But competition for control of federal lands among various segments of the population continued all the same. Writes White:

Corporations tended to be more fickle allies of the federal bureaucracies, but on the whole, they, too, proved sympathetic to federal management; certainly they were more sympathetic than small businessmen. Large and small resource users in the West, all pursuing their own calculus of self-interest, split over particular proposals. … Small stock grazers and small lumbermen tended to oppose the new federal presence which tended to thwart their ambition for expansion. Larger stock raisers and big timber companies, however, realized that federal supervision could serve their interests by helping restrain the overproduction that plagued their industries, by restricting the expansion of potential competitors, and by allowing them to turn their greater financial resources into privileged access to the federal domain.

In other words, private firms that dominated the Western economies liked the federal bureaucracy because it helped powerful firms keep prices high and bar entry for competitors.

In later decades, the federal agencies would also be influenced by new environmental and conservationist groups, but for all the talk of preserving the desert tortoise in the Bundy ranch case, it should not surprise anyone if we find later that major oil and gas firms are actually behind the drive to finally end desert access for small ranchers.

The Legacy Of Empire In The West

When we see federal agents harassing ranchers, we should be reminded that the conquest of the American West was really an early exercise in empire that would set the stage for the enormous government that Americans now face today. While we now view the West as just another part of the United States today, it was once a colonial empire seized militarily from Indians and Mexicans, and then — through federal programs such as the homestead acts, land grants and major infrastructure projects like railroads — turned into an enormous source of subsidies for American settlers and corporations. Those who inhabited the lands prior to annexation, such as the Indian tribes and the Hispanos of old New Spain, were rounded up and put in reservations or forced to abandon old economic and social systems.

Like most jurisdictions within colonial empires, the American West was administered not locally, but directly from the capital of the conquering state. It was in D.C. where the borders of new states where drawn, where officials were appointed and where orders were given to federal troops who policed the region. Even after statehood was granted (by the central government, of course), the region remained dominated by the federal government. The overseas empire that began with the Spanish-American War was simply the natural outgrowth of the conquests in western North America during the nineteenth century. It was in the West that the United States government learned how to be an empire, to directly control enormous swaths of land, and to dominate and control local economies.

This legacy continues today. As we viewed the standoff in Nevada, we saw the echoes of a previous conquest of those same lands decades earlier. Many in the West today now find themselves victims of the same federal government that their ancestors once cheered as it drove out the original inhabitants, laid down roads and built dams. The federal government is a fickle master, however; and the fact that it never relinquished control of so many lands that it had seized makes it an undeniable force for all who wish to do business here.

Note: The views expressed in Daily Articles on Mises.org are not necessarily those of the Mises Institute.

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Economics Professor Explains Why Keynesian Economists Don’t Understand Inflation

This essay, written by economist Frank Hollenbeck, was originally published on April 7 on Mises.org.

The “monetary cranks” and “ignorant zealots” of old are back preaching salvation if only we had more inflation. Keneth Roggoff and Fed President Charles Evans did not mince words, while others have been more circumspect. Christine Lagarde warns us of the “ogre of deflation” and the “risks” of low inflation, while others have been urging easier monetary policy to reduce the value of the yen or the euro. Of course, it’s much easier to let this inflation tiger out of its cage than to get it back in. We have ample evidence that once inflation picks up, it’s extremely difficult to control. Inflation in the US was 1 percent in 1915, almost 8 percent in 1916, and over 17 percent in 1917. It was about 2 percent in 1945 and jumped to over 14 percent by 1947. During the 1970s, inflation was mild in 1972, and climbed to 11 percent by 1974 and stayed at very high rates until Volker raised interest rates to 19 percent to tame the beast.

Even if you agree a 2 percent inflation target is an appropriate policy, inflation should, at least, be measured correctly. Proper measurements are unlikely since mainstream economists today, unfortunately, use a simplified version of the original quantity theory of money. In this version, money is linked exclusively to nominal income, and the CPI or GDP deflator are used as a proxy for prices of the goods and services in nominal income. This version is obtained from Keynes’s theory of liquidity preferences.

Yet, the original, non-Keynesian quantity theory of money clearly shows that the demand for money is to conduct all possible transactions, and not just those that make up nominal income. Money is linked to prices of anything that money can buy, consumer goods, stocks, bonds, stamps, land, etc. From this, an average price cannot be measured since appropriate weights are not obtainable. The use of the simplified, Keynesian version in economic textbooks and by the professional economist has caused immense damage. When your theory is wrong, your policy prescriptions will likely also be wrong.

Unnoticed by many mainstream economists is the fact that we are actually having the inflation everyone was so worried about back in 2009. It is simply showing up in asset prices instead of consumer prices. For some reason we consider higher food prices as bad and something to be avoided, while higher home prices are viewed as a good thing and something to be cheered. But they are both a reduction of your purchasing power. Today, home prices outpace wage growth significantly in many markets, and remain at high bubble-like levels, pricing homes out of reach of many young couples. Their incomes have less purchasing power: the money can buy less of a house, just like it can buy less of a hamburger.

By setting an inflation target, the FED did not let deflation run its course after the crash of 2008, and that was a big mistake. During the 2001-2007 boom years, housing prices shot up. This speculative bubble led to massive overbuilding of both private homes and commercial properties.

Deflation would have allowed a realignment of relative prices closer to what society really wants to be produced, but by inflating the money supply, the FED interfered with this essential clearing process. Housing prices should have dropped, much, much more than they did relative to other prices. Housing should then have remained in a slump possibly for a decade or more, until this overhang of construction had been cleared off. The new ratio of relative prices would have allowed resources to move into the production of goods and services more in line with what society would demand in a functioning market. The carpenter might have moved on and worked on an oil rig, possibly at an even higher salary. But that did not happen.

Today, housing is back, with price increases at bubble-era levels and construction activity picking up. Yet, the overhang has not disappeared. It has just been left in limbo, because of the “extend and pretend” strategy of banks made possible by the central bank’s massive printing over the last five years. Of course, when the music, or money printing, stops, the adjustment in housing will be even more disastrous.

The Fed should draw several lessons from history about inflation. The first is that an ounce of prevention is worth a pound of cure. You treat inflation like sunburn, by protecting yourself before your skin turns red. Second, the FED should not be concerned with consumer price inflation, but the increase in all prices which we are incapable of measuring (the weights being impossible to calculate). The recent increase in asset prices, such as stocks or agricultural land prices should be a strong warning signal.

The real solution is to end fractional reserve banking. The central bank would then be superfluous. It would not be missed. Its record at counterbalancing the negative effects of fractional reserve banking has been disastrous, and if anything, it has made things much worse.

If banks were forced to hold 100 percent reserve, neither the banks nor the public could have a significant influence on the money supply. Banks would then be forced to extend credit at the same pace as slow moving savings. Credit would finally reflect the real resources freed up to produce capital goods. The money supply could then be what it should always have been, a means of measuring exchange value, like a ruler measuring length, and as a store of value.

Hollenbeck teaches finance and economics at the International University of Geneva. He has previously held positions as a Senior Economist at the State Department, Chief Economist at Caterpillar Overseas, and as an Associate Director of a Swiss private bank. See his Mises article archives.

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Mises Institute: A Closer Look At Income Inequality

This article by Andrew Syrios originally appeared on the Ludwig von Mises Institute website on March 31.

Economic inequality is the big thing these days. Barack Obama has called it the “defining challenge of our time,” and the number of books being published on the subject could fill a small library. Of particular note is a survey by Michael Norton and Dan Ariely of 5,000 Americans asking what they thought wealth inequality should be compared to what it actually is. Norton and Ariely asked which of two distributions the survey participants preferred, either that of the United States or Sweden (without knowing what those distributions represented). Here’s what they were given:


Needless to say, 92 percent chose Sweden. This survey has become all the buzz on the progressive left, and a YouTube video about the study has gone viral with more than 14 million views. Not surprisingly, however, there are enormous problems with this analysis. First and foremost, Norton and Ariely used Sweden’s income distribution instead of wealth because “… it provided a clearer contrast.” I’m sure the left’s love affair with Sweden and an attempt to stack the deck had nothing to do with it. The top 20 percent in Sweden actually own 73 percent of the wealth. (In the United States it’s 85 percent.)

More importantly, though, like just about every other discussion on inequality, they neglect to control for age. Age is by far the most important and most ignored variable in both income and wealth inequality. The word “age” doesn’t appear once in Norton and Ariely’s paper, nor does it in the Wikipedia page on the subject; and it is not controlled for in Edward N. Wolff’s influential paper on wealth inequality, on which this survey appears to be based.

This feeds the illusion that the top 1 percent, or 10 percent, or whatever is a static group. But as the OECD noted, in 2008 there was an annual 27.2 percent turnover figure in who was in the top 1 percent of income earners. Further, a University of Michigan study showed that only 5 percent of the people in the bottom income quintile in 1975 were still there in 1991, and 29 percent had moved to the top.

Wealth is a bit more stable than income, but it grows with time just the same. According to a Pew study, the net wealth of those over 65 between 1989 and 2009 went from $120,000 to $170,000. For those younger than 35, their wealth actually decreased from $11,500 to $3,500. Indeed, people under the age of 44 possess only 11 percent of the wealth in the United States.

To further illustrate this point, try this thought experiment. Say everyone in the country made the same income, but got a promotion each decade. They start at $20,000 per year in their 20s, then they go to $30,000 per year in their 30s, etc. In addition, they save 5 percent of their income each year and make no return on their savings. To make things simpler, we’ll assume there is the same number of people in each age bracket. Income and wealth inequality would look like the following with the wealth figure representing what they would have at the end of that decade of life:



This is about the same as the distribution the survey participants desired, which should make it clear that they didn’t take age into account either. And this thought experiment assumes that everyone is equally talented, that every industry is equally profitable, and that everyone has just as good saving and investment habits. In addition, if we add just a small return on their savings, that chart would be skewed even more.

There are many other factors that need to be considered when discussing wealth inequality as well. For example, while the entitlement systems in the United States are embarrassingly underwater, they should be considered. According to Bankrate.com, “A male average earner who retired at age 65 in 2010 paid out $345,000 in total Social Security and Medicare taxes, but will receive $417,000 in total lifetime benefits ($464,000 for a woman).” If the government simply mandated people to have a health savings or retirement account (or better yet, let people keep their own money), that would smooth out the curve. Since payroll taxes are capped at $113,000, most of the increase would go to the lower and middle classes.

Furthermore, Norton and Ariely’s study compares households instead of individuals — a tried and true way of distorting income and wealth data. Households vary in shape and size and cannot be directly compared. As Thomas Sowell has said, “… there are 39 million people in the bottom 20 percent of households, and 64 million in the top 20 percent. So you’re saying, yes, 24 million additional people do tend to have more money.” When we further take into account that many in the bottom 20 percent are recent immigrants from poor countries, in prison, single parents, on welfare, disabled, drug addicts, etc., it becomes clear that dividing the country into such groups is simplistic at best.

Underlying all of this discussion is the belief that wealth inequality is out of control. While it has increased in recent years (primarily due to the loss of home equity for the middle class), according to Wolff, “… [wealth inequality] remained virtually unchanged from 1989 to 2007.” The liberal Economic Policy Institute released a study showing how much the top 1 percent owned at various times over the past 50 years and found the following:


Other studies have detected a similar “trend.” In fact, a recent study found that economic mobility in the United States has “remained extremely stable,” just the “rungs of the ladder have grown further apart.”

So wealth inequality is not nearly as out of control as many liberal pundits say. This, of course, does not mean everything is fine and dandy. Cronyism and government largesse have caused serious problems throughout the economy and should be done away with, not compounded with more redistribution and government control.

Andrew Syrios is a Kansas City-based real estate investor and partner with Stewardship Properties. He also blogs at Swifteconomics.com. See Andrew Syrios’s article archives.

The Fed’s Hands Are Tied

This article, written by banking consultant Patrick Barron, originally appeared on the Mises Institute’s website on April 1.

No change.

Oh, you want more? Groucho Marx used to tell a joke on himself that “I wouldn’t want to belong to any club that would admit me as a member.” That pretty much sums up why we shouldn’t expect much from the new chairman of the Federal Reserve System. This Administration and this Congress will never admit anyone that is not of the Keynesian-School-of-economics persuasion. As long as this mentality resides in the political halls of power, our Nation will not get another Paul Volcker.

That means that we should anticipate a continuation of policies that assume that monetary expansion can spur economic growth. It cannot. Monetary expansion can spur phony economic growth; i.e., fooling entrepreneurs to invest capital in projects that will not return a profit. GDP may go up — temporarily. Employment may go up — temporarily. Janet Yellen and her fellow Keynesians believe that the Fed, through money creation, can create software engineers, doctors, nurses, and steel mills. In other words, they think they’re creating real resources. It’s nonsense, yet they seem to be true believers. They may couch this error in highfalutin terms, but that is what they mean on a fundamental level. In the end capital will be destroyed, resulting in an economic bust, and the nation will have wasted years and resources that it can never recover.


Now, Yellen may preside over a gradual “tapering” of the unprecedented “quantitative easing” program begun under Bernanke. But this does not mean that she is different. Remember, that program was unprecedented; everyone knew at its beginning that it could not continue forever. Whoever occupies the Fed chairmanship would have to end that program at some point — we hope. There is no guarantee, however. If rates start to rise, unemployment rises, and businesses start to go bust, the Fed could jump right back into the program, because that is all it knows how to do — print money. The real question is whether Yellen and her fellow travelers will accept a recession that most likely will occur as QE ends. The Fed likes to think of QE as a jump start, a one-time boost, a helping hand, etc. But these are false analogies. QE funds projects that cannot exist in its absence; therefore, when QE ends or even slows down, these projects will be revealed to be unprofitable. No amount of cost cutting will make them profitable. They were born of QE and they will die when QE ends. The only question is whether the Fed will accept the necessary recession or will jump right back into money printing. If it does the latter, we can expect an even greater bust in the future.

The Fed has painted itself into a corner. There is no way that the Nation can avoid either a recession or the collapse of the value of the dollar. We should prefer the recession, then insist on an end to monetary expansion, regardless of the howls from the politicians that the government cannot continue its many programs otherwise. At the core this is a political problem. Only a radical change in the mindset of government can end the monetary madness.
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If I Must Sell, You Must Buy

This column by Jim Fedako originally appeared on the Ludwig von Mises Institute website on March 15, 2014.

If I were a business owner, must I sell to you? If you answer yes, you must balance that requirement with your obligation to buy from me.

All trade is bilateral. Well, to be more exact, and since we live in a country where a nebby uncle named Sam interferes in many trades, it is better to state that all free trade is bilateral.

In a modern economy, money facilitates exchange. So, typically, a good or service is exchanged for money, with both sides of the trade benefiting a priori. Of course, one side could end up regretting the trade, but such is life when passions are fleeting.

To better understand the ethics involved in trade, and to address the proposition that opened this article, let’s consider an actual market — a local farmers market — to represent the mental construct termed the free market.

On the sidewalk surrounding a small town square, various farmers set up inward-facing stalls to sell that which they reap. In some cases, stalls offer unique goods. But, for the most part, each stall has the same fresh fruits and vegetables, along with similarly sweet smelling baked goods. Milling about in the center of the square are customers, moving from stall to stall, looking for that which will satisfy their wants and desires.

Farmers size up customers and customers size up farmers. And they all size up each other, with farmers sizing up farmers and customers sizing up customers. Ears strain to hear the deals being done. And any bargain offered to one will likely be requested by those next in line or in the vicinity.

Behaviors, appearances, tones, etc., are assessed by everyone on both sides of the stalls. The farmer who is too gruff with a low bidder will likely find the line in front of his stall become shorter. And the disheveled farmer whose stall is disorganized and dirty will likely see few customers willing to pay a market price.

In addition, customers who come across as savvy and smart will likely realize a better bargain than those appearing new and naïve.

According to the current view, once the farmer opens his stall, he is required to sell to whoever approaches and offers the market price. To even suggest this may be wrong is to invite the wrath and invectives from feigned intellectuals and their sycophants.

Regardless, let’s take a look.

Suppose a farmer from Pittsburgh despises folks from Cleveland — he is, in the vernacular of the day, a Cleveland hater. Yet, he must serve folks seemingly resplendent in their Browns attire, no exceptions. However, should the farmer billboard the Steelers logo on his chest, any Browns fan spiteful of his team’s losing record could opt for the next stall — he is not forced to buy from him who is forced to sell.

Seeing a little imbalance here?

In a bilateral exchange, even those where money sits on one side of the deal, there is no ethical difference between the two participants. To make a claim that the farmer must sell since, if he does not sell, the customer goes wanting for goods is no different from making the opposite claim: the customer must buy since, if he does not buy, the farmer goes wanting for cash, as well as all that cash provides (the ability to pay utility bills, the doctor, the dentist, etc.).

Since farmers at the market are few relative to customers, the envy of the majority holds sway. The man with the harvest, no matter how hard he hoed and hauled, is deemed a public good and subject to the vagaries of society. This is enforced by Uncle Sam, whose insistence in intervening collapses the construct of a free market into coerced trilateral exchanges, with coercion in one direction only.

To support coercion with respect to the seller without demanding the same from the buyer is to advocate for a system that thieves the property and labor of one to benefit another. However, to support completely coerced exchanges is to advocate for total state slavery.

Since the balancing of coercion violates the ethics of self and property, as does coercion in one direction, the only valid solution is for the nebby uncle to mind its own business and allow Steelers fans and Browns fans to associate and trade, or not associate and not trade, as desired.

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Crony Capitalism And The Transcontinental Railroads

This article, written by Mises Daily editor Ryan W. McMaken, was originally published by Mises on March 10.

When Barack Obama used the transcontinental railroads as an example of the wonderful things that can be accomplished with grandiose government programs, he was attacked for mistakenly referring to the railroads as “inter continental.” Notably, he was attacked by approximately no one for talking up a government program that in reality should be best remembered as a pioneering feat in government corruption, corporate welfare, and immense waste.

Although not related in quite the heroic terms it once was, the trans­continental railroads retain their place as one of the great alleged suc­cess stories of nineteenth-century America. According to the popular myths, the same myths now exploited by the president, and challenged by no one, the railroads, these supposedly great monuments to the ingenuity of American industrialists, united East and West by bringing together the economies of the West coast and the East coast. This government program then set the stage for the massive economic growth and national greatness that would occur in the United States during the early twentieth century.

And yet, few claims about the necessity or success of the transcontinental railroads are true. While none would argue that transcontinentals would not become economically feasible in the private market at some point, during the 1860s, as the first transcontinentals took shape, there was no economic justification. This is why the first transcontinentals were all creatures, not of capitalism or the private markets, but of government. There simply were not enough people, capital, manufactured goods, or crops between Missouri and the West coast to support a private-sector railroad.

As creatures of government and of taxpayer-funded schemes to subsidize the railroads and their wealthy owners through cheap loans and outright subsidies, the railroads quickly became scandal-ridden, wasteful, and contemptuous of the public they were supposed to serve.

This tale is told in grim detail in historian Richard White’s 2011 tome on the transcontinental railroads, Railroaded: The Transcontinentals and the Making of Modern America, which exposes the near-utter disconnect between the railroads and the true geography of the markets in the mid-nineteenth century.

While it has been long-assumed that the West coast benefited immensely from the transcontinentals that connected the West coast to eastern markets, in fact the overland railroads made little difference. The West coast already had its own economy founded on exports to Europe and Asia, and Californians and Oregonians obtained all the goods they needed by sea. Indeed, for years after their completion, the railroads of the West coast were unable to effectively compete with the steamship operators (many of them also subsidized by Congress) that provided cheaper transportation of goods. Naturally then, this situation degenerated into a political competition between railroads and steamship companies seeking more favorable treatment from the federal government.

In general, however, the economy of the West coast turned to the more efficient and more competitive sea carriers. By the 1860s, the sea carriers were already taking advantage of well-developed trade with the Panama Railroad across Central America, completed in 1855, that was providing true transcontinental shipping at a much lower price over a much shorter overland route.

In spite of massive subsidies and free lands equal in size to New England, the lack of overland trade made it difficult for the railroads to turn a profit, and after a series of bankruptcies, bailouts, and other schemes, railroad owners like Leland Stanford, Thomas Durant, and Jay Gould managed to make a lot of money manipulating federal largesse, but many others, including families and ranchers who followed the flood of money and capital west during the boom, but who found themselves as paupers on the western plains after the bust, were ruined by the railroad’s bubble economy.

With the signing of the first bill to create the transcontinentals in 1862, it was already known that there was no economic justification for the railroads, which is why they were, according to White, “justified on the grounds of military necessity.” Lacking any privately funded-entrepreneurs willing to build a road through more than a thousand miles of territory uninhabited by whites, the 1862 Railroad Act created the Union Pacific, making it the first federally-created corporation since the Bank of the United States. Legal and economic shenanigans ensued, and it would not be until the 1890s that anyone built a privately-funded railroad, the Great Northern Railway.

Indeed, by the 1890s, global progress in technology and technique had greatly reduced the cost of constructing railroads. The benefits of waiting for the private sector to construct railroads when costs and consumer demand made them feasible could have been enormous. The costs of not waiting were indeed huge. The transcontinentals set the stage for the corruption and corporate capitalism that now defines the Gilded Age in the minds of many. While much of the American economy of that era was characterized by very free markets, the railroad markets west of Missouri were anything but. In the end, the railroads constituted a huge transfer of wealth from taxpayers, Indians, Mexicans, and more efficient enterprises who found themselves competing with these subsidized behemoths.

It was the same old story of using the state to socialize costs while privatizing profits. As one opposition Congressman declared in response to the Railroad Bill, the enterprise was “substantially a proposition to build this road … on Government credit without making [the railroads] the property of the Government when built. If there be profit, the corporations may take it; if there be loss, the Government must bear it.”

Even if presented with this information today, many Americans, both left and right, are likely to just shrug and make the consequentialist argument that the railroads were “worth it” because without them, “America” (whatever that means to the one making the argument) wouldn’t be as “great” (another perfectly malleable term) without the transcontinentals being built by the U.S. government. This enormously presumptuous statement, however, completely ignores the opportunity cost of constructing and financing the railroads in that fashion. What else could have been funded with the resources that went to the railroads during the decades following the American Civil War? We’ll never know.

Yet even during the 1870s and 80s, when it became apparent to many that the railroads were a gargantuan waste of money, and most of the railroad companies were in bankruptcy, the railroad’s supporters claimed that it had all been a great idea because, although the railroads were bankrupt, the railroads themselves were still there, and were now presumed to be an immutable part of the landscape forever available for future Americans. Even that argument held no water, of course, because it turns out that railroads require an enormous amount of upkeep and maintenance. This was especially true of the first transcontinentals which were poorly and cheaply constructed, and which required rebuilding in many places. The railroads were in fact huge white elephants that in many cases could only be maintained with cheap government financing and other forms of corporate welfare.

Interestingly, White, in his conclusions in Railroaded, appears somewhat dismayed at the chaos that reigned among the railroad companies and within the so-called markets that connected the railroads to the farmers, ranchers, and miners who used the railroads for shipping. Lacking the insights of the Austrian School, White fails to see the booms, busts, and waste of the transcontinentals as the natural outcome of a government-dominated market divorced from a functioning consumer market or price system. White’s understanding of economics remains mired in neo-classical assumptions using buzzwords like “competition” and “efficiency” as the most important aspects of markets. In this, White is very much like his nineteenth-century subjects who, we learn from White, were themselves stuck in non-Austrian economic thinking that so often concludes that when markets appear to be broken, they can be fixed by government-mandated competition and government-determined prices that are said to be more “efficient.” The central role of the consumer, so well understood by Austrians, was often ignored by even the most consistent free-marketeer of that time and place.

I’m forced to forgive White for his ignorance of economics, however, for he has done a great service in providing us with such detailed and unvarnished documentation of the crony capitalist world of the transcontinental railroads. Although he’s likely a complete stranger to the works of Bastiat, White concludes that the unseen cost of the transcontinentals is one of the great ignored realities of the railroads. Those who dogmatically defend the government’s transcontinentals, White asserts, need to “escape” thinking that assumes the “inevitability of the present.” Yes, it’s a fact that the government-financed railroads were built, and yes, it’s a fact that American standards of living increased greatly in the decades that followed. The assumed connection between those two events, however, is on far shakier ground, and the assumption that it was right to tax and defraud millions of American taxpayers to make the enormous boondoggle a reality, is on the shakiest ground of all.

Mises Institute: Labor Unions And Freedom Of Association

This article by Gary M. Galles originally appeared on the Ludwig von Mises Institute website on Tuesday, March 4. 

Mandatory union membership and mandatory dues imposed on those who do not want to join are again at issue. On the heels of contentious “right to work” disputes in several states, the Supreme Court has recently heard arguments challenging an Illinois mandate requiring home health care workers to pay representation fees to a union they did not want. That case, Harris v. Quinn, has the potential to even challenge the Court’s 1977 Aboud precedent upholding mandatory union dues for public sector workers. Such a result would be a victory for liberty.

Unions and their allies in Harris v. Quinn reiterate the claim, accepted in Aboud, that “union security” rules are needed to prevent workers from unfairly opting out of paying for union services. But that claim, which portrays the issue as defending the property, contract, and freedom of association rights of unions (to be paid for services rendered to workers they represent), intentionally misrepresents the core issue, which is the liberty of workers and employers.

“Union security” rules are clear violations of the liberty of workers’ and employers’ freedom to not be forced to associate with certain groups against their will, a freedom unions ironically steamroll in the name of freedom of association, asserted only for themselves, despite its inconsistency with freedom of association for all. Consequently, unions must find a legitimate sounding way of defending the coercion involved. That is where the free-rider argument comes in, which frames the issue as protecting legitimate rights, rather than the illegitimate use of government-granted coercive powers to impose employment terms violating government’s primary role: protecting individual rights.

Labor laws have made unions exclusive representatives for groups of workers. Therefore, unions assert that every worker must be forced to pay for his or her representation, or he or she will be able to “free ride” on those services. That is, workers’ rights must be abrogated to prevent non-members’ unethical behavior.

But free-riding on unions is not the fundamental problem. Mandatory exclusive representation in the form of monopoly unions imposed to the detriment of those who disagree (pro-union legislation exempted unions from antitrust laws) is the fundamental problem.

Given majority approval in a union certification election, current labor law interpretation requires all affected workers to submit to union representation and pay the union’s price for it. Those terms are imposed not only on workers who voted for the union, but for those who supported another union, those who preferred remaining union-free, and those who did not vote (including those hired after the union is certified, who never get an effective chance to vote). Workers (or the agents they select voluntarily) and employers are prohibited from negotiating their own arrangements, including labor-management cooperation not controlled by the union and “yellow-dog” agreements requiring abstention from union involvement (which, before labor laws eliminated such rights, the Supreme Court called “part of the constitutional rights of personal liberty and private property”).

The supposed “free-riding” workers are those who would refuse union representation, but are not allowed to. They are harmed by the imposition, revealed by their unwillingness to pay the “price” for those services. They are not free-riding on the union. They are “forced riders,” required to abide by, and pay for, violations of their rights and interests, to benefit unions. That violation of workers’ (and employers’) rights, not their attempts to escape the harm unwanted representation imposes on them, is the central issue.

Despite union rhetoric, they don’t really want to solve the “free rider” problem they hang their argument on, because it is easily fixable. But unions stop at nothing to prevent the solution. All a fix would require is ending mandatory exclusive union representation. If workers were allowed to choose representation by different unions or other agents or to negotiate for themselves, the problem would disappear. Each union would only negotiate for its voluntary members, eliminating so-called free riders. But unions have fought with tooth, nail, and their members’ wallets to impose and maintain exclusive representation, knowingly harming all dissenters and thereby creating the “free rider” problem. And their recent behavior, as in Michigan, reveals how far they will go to maintain that power to circumvent competition in the labor markets they control, now largely in the public sector.

Despite unions’ deceptive arguments for their government-granted exclusive, abusive powers in terms of freedom of association, real, general freedom of association does not invalidate the potential of workers forming unions. Scholars who are part of the Austrian School have been at the forefront of making that clear.

As Walter Block put it in “Labor Relations, Unions, and Collective Bargaining: A Political Economic Analysis,” “unionism … admits of a voluntary and a coercive aspect. The philosophy of free enterprise is fully consistent with voluntary unionism, but is diametrically opposed to coercive unionism.” Voluntary unions are consistent with liberty because “if it is proper for one worker to quit his job, then all workers, together, have every right to do so, en masse.” And in his “The Yellow Dog Contract: Bring It Back!” he addressed this issue directly:

Are unions per se illegitimate? No. If all they do is threaten mass quits unless their demands are met, they should not be banned by law. But as a matter of fact, not a one of them limits itself in this manner. Instead, in addition, they threaten the person and property not only of the owner, but also of any workers who attempt to take up the wages and working conditions spurned by the union. They also favor labor legislation that compels the owner to deal with the union, when he wishes to ignore these workers and hire the “scabs” instead.

Ludwig von Mises, in his 1966 magnum opus, Human Action, also made the distinction between voluntary and coercive unions clear:

The issue is not the right to form associations. It is whether or not any association of private citizens should be granted the privilege of resorting with impunity to violent action. … The problem is not the right to strike, but the right — by intimidation or violence — to force other people to strike, and the further right to prevent anybody from working in a shop in which a union has called a strike.

Requiring union representation and endowing those unions with monopoly powers violates the liberty and freedom of association of dissenting workers, employers, non-union workers, and consumers. Undoing that abuse would fix every union free-riding and forced-riding problem. And it would be easy to do. As Murray Rothbard put it, in his 1973 For a New Liberty, “All that is needed, both for libertarian principle and for a healthy economy, is to remove and abolish these special privileges.” That is why Harris v. Quinn, which offers the Court another chance to see through the “free-rider” smokescreen to the central issue, presents an opportunity for a reform that would benefit the vast majority of Americans.

Gary M. Galles is a professor of economics at Pepperdine University. He is the author of The Apostle of Peace: The Radical Mind of Leonard Read. Send him mail. See Gary Galles’s article archives.

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