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The Political and Economic Mystiques of State Power

Mon, 25/09/2017 - 20:15
By: Richard M. Ebeling
Plunder

One of the great political mysteries has been the success of governments in ruling over societies with little opposition and resistance from the vast majority of the population, even when those governments have been brutal tyrannies and openly dictatorial in their control.

This has been true, no less, under democratic regimes, as well, under which levels of taxation have been far higher and the degrees of regulation over personal, social and economic activities often much more intrusive than under tyrants of bygone ages. This has been in spite of the fact that those governments are formally “answerable to the people” through regular elections determining who holds high political office with legitimized power over the electorate’s lives.

Conquest and Plunder as the Origin of the State

It has long been understood by historians that most modern States, such as in Europe, have their origins in conquest and plunder. Invading tribes and bands would vanquish existing rulers and their peoples, and settle down to permanently live off those whom they had not killed during the conquest.

The German sociologist, Franz Oppenheimer (1864–1943), especially emphasized this in his classic work on the origin of political power and authority, The State (1914). He argued that there are fundamentally two ways by which individuals may obtain the material means that they wish to have to maintain and improve their lives: the economic means and the political means: Said Oppenheimer:

There are two fundamentally opposed means whereby man, requiring sustenance, is impelled to obtain the necessary means for satisfying his desires. There are work or robbery, one’s own labor and the forcible appropriation of the labor of others.

I propose in the following discussion to call one’s own labor and the equivalent exchange of one’s own labor for the labor of others, the “economic means’ for the satisfaction of needs, while the unrequited appropriation of the labor of others will be called the ‘political means” ...

Oppenheimer warned that when individuals have the choice between these two methods for acquiring what they desire, people were too often tempted to use coercion rather than avenues of peaceful production and trade. He said: “Wherever opportunity offers, and man possesses the power, he prefers political to economic means for the preservation of his life.”

Oppenheimer then asked:

What, then, is the State as a sociological concept? The State ... is a social institution, forced by a victorious group of men on a defeated group, with the sole purpose of regulating the dominion of the victorious group over the vanquished, and securing itself against revolt from within and attacks from aboard. ... This dominion had no other purpose than the economic exploitation of the vanquished by the victors. No primitive state known in history originated in any other way.

From Roving Bandits to Permanent Power

Oppenheimer’s view was restated in more recent times by the Public Choice theorist, Mancur Olson (1932–1998), in his posthumous work, Power and Prosperity (2000), in terms of the economic motives and actions of the conqueror.  Olson argued that the origin of the state could be seen in the replacement of roving bands of plundering thieves by stationary bandits who settle down to rule over a territory over a prolonged period.

The roving band cares nothing for what happens in the area it has looted and then leaves behind. But the stationary bandit who wants to permanently live off the conquered area has to take into consideration the conditions and the incentives of his subjects if they are to keep producing and therefore creating something for him to plunder through taxation year-after-year.

Thus, out of the taxes he imposes, the stationary bandit must also, in his own self-interest, to some extent secure his subject’s property rights, enforce contracts, establish a judicial system to adjudicate their disputes, and even supply some “public goods,” such as roads and harbors to facilitate commerce.

But the resident conqueror’s motive in providing any such protections and enforcements for those over whom he rules is to extract the greatest amount of tax revenue for himself at the least cost of respecting and enforcing the property rights of his subjects, but to whom he must offer some minimal degree of such security. Otherwise, their incentive to produce the wealth out of which his tax revenues come might be far less. Said Mancur Olson:

The bandit leader, if he is strong enough to hold a territory securely and monopolize theft there, has an encompassing interest in his domain. This encompassing interest leads him to limit and regularize the rate of theft and to spend some of the resources he controls on public goods that benefit his victims no less than himself.

Since the settled bandit’s victims are for him a source of tax payments, he prohibits the murder and maiming of his subjects. Because stealing by his subjects, and the theft-averting behavior that it generates, reduces total income, the bandit does not allow theft by anyone but himself.

He serves his interests by spending some of the resources he controls to deter crime among his subjects and to provide other public goods. A bandit leader with sufficient strength to control and hold a territory has an incentive to settle down, to wear a crown, and to become a public goods-providing autocrat.

But brute force and fear is, in the long run, not a sustainable basis for permanent plunder and privilege by a conquering few over the conquered many. It is far better if those over whom the ruler rules not only acquiesce in his control and commands out of fear, but also do so willingly through belief in the rightness and justness of his political authority over them.

How, then, do political rulers inculcate this belief in their right to rule and with it an obedient allegiance and loyalty by the subjects and citizens to the governments they command?

Louis Rougier and Political and Economic Mystiques

This was a theme taken up by the French philosopher and classical liberal economist, Louis Rougier (1889–1982). Especially in the two decades of the 1920s and 1930s, between the two World Wars, Rougier was one of the leading European defenders of limited government and free market, competitive capitalism, and a critic of the totalitarian collectivisms of that time that seemed to be threatening to dominate much of the world.

He discussed this question in two works, Modern Political Mystiques and Their International Impact (1935) and Modern Economic Mystiques and Their International Impact (1938), both originally delivered as series of lectures at the Graduate Institute of International Studies in Geneva, Switzerland. The Graduate Institute was a classical liberal-oriented seat of higher learning that with the rise of Italian fascism and German Nazism served as a refuge for a number of prominent scholars searching for an intellectual home away from their, now, totalitarian homelands (including the Austrian economist, Ludwig von Mises, German economist, Wilhelm Röpke, and Italian historian, Guglielmo Ferrero, among others).

Governments and ideological movements, Rougier explained, wrap themselves in “mystiques” that serve as the rationales for claims to an ethical and legal right to rule. What is a “mystique”? Said Rougier:

The term refers then to a combination of beliefs which could not be demonstrated by reason or based on experience but which are accepted blindly for irrational reasons: by the effect of custom of which Pascal speaks, of education, of authority, of example, of preconceptions alleged to be inevitable, in short by the effect of all the pressures of social conformism.

These beliefs may be moral, esthetic, scientific, social, or political. Every doctrine that one no longer feels the curiosity or the need to call into question, whether it is because one accepts it as a dogma so evident that any inquiry about its solidity is superfluous, or because one adheres to it by an act of faith considered so necessary as a consequence of its sacrosanct beneficence that to abandon it would be outrageous, is a mystique and is accepted as such.

The Economic Mystique versus Laws of the Marketplace

An “economic mystique,” Rougier said, is one that allows a person to believe in the power of government to do anything it wants, say, in the form of various types of government intervention affecting wages, prices or production with the unquestioning presumption that what the government declares as the intervention’s purpose will fully materialize with no negative or unintended consequences.

The notion that there are economic “laws” of supply and demand, or cost and price relationships effecting profitability or employability, are either unknown or ignored or rejected by a seemingly unreasoned belief that because the stated goal of the intervention is “good,” then it is only necessary for government to implement the interventionist policy to make it so. The same applies, Rougier, said, in the case of the proponents of socialist central planning.

If something hinders or prevents the achievement of the intervention’s goal, then it must be due to either not enough “force” being applied or not enough money spent to make it so; or some nefarious, socially evil individuals or groups acting to thwart it. The same applies, Rougier argued, in the case of the proponents of socialist central planning. The failure to successfully meet the government’s planning targets can only be due to intriguing “enemies of the people,” or traitorous “wreckers” in the service of foreign powers trying undermine the triumph of the collectivist utopia, or a negligent lack of sufficient enthusiasm and disciplined dedication among some of the workers and managers.

The classical liberal-oriented economist has reason on his side relative to the believer in such economic mystiques because, Rougier insisted, not every value-judgment is merely a matter of “subjective” or personal, desire or belief, not open to objective investigation or evaluation. If a person says that he prefers wearing red ties to blue ones, or enjoys driving one type of car versus another, there may be little to dispute or challenge by someone else about that stated preference.

But if someone says, for instance, that they support a government imposed minimum wage or a trade barrier because he believes that such a policies will, respectively, improve the living condition of the unskilled with no affect on the amount of employment for such workers, or will increase the overall level of production and employment in the economy with no adverse effects, the economist has a logical and experiential benchmark on the basis of which to evaluate them. That benchmark is: will the interventionist means chosen, in fact, achieve the goals, purposes and ends in mind? Or as Rougier expressed it:

If afflicted with an inferiority complex, you prefer authoritarian regimes [because it “subjectively” enhances your sense of self-esteem], nobody will deny that your choice answers a real need in your character, and there is nothing to argue about. But if you state, ‘I prefer authoritarian and totalitarian governments to liberal government because they are better suited to assure the well-being of individuals and the peace of nations,’ you offer a judgment that one can submit to the verification of experience, to the facts and of history.

And the lessons of economic history and economic theory show beyond much of a reasonable doubt, said Rougier, that the means chosen in these cases — minimum wage laws, protectionist trade barriers, authoritarian regimes — will not bring about the desired ends of higher incomes, improved living standards, and international peace and harmony.

Attempts to reason with the holders of such economic mystiques are often brushed aside by their believers. The reasoned argumentation, presentation and discussion of historical or contemporary facts and evidence or logical argument are often emotionally rejected as a proof that the critic of the economic mystique has no compassion or a sense of caring for those to be helped by the intervention or the government planning.

Political Mystiques as Rationalizations of Power and Plunder

Part of the reason for this, Rougier suggests, is the wider and deeper problem of “political mystiques” that serve as the bases to justify and legitimize the right of some to rule over others, and the accompanying belief in their power to do “good” if only given enough power.

From the time of antiquity, Rougier explains, the conquerors and rulers have searched for that legitimizing justification for their control and command over others in society. The “monarchical mystique” did so, and for thousands of years, by successfully rationalizing political power through the claim and the indoctrination of a divine right to rule. The king held his absolute and unquestionable authority because he was a “god” himself, or had had this status bestowed on him by “the gods” or God.

From the time of the ancient Hebrews the anointing of the ruler by a high priest by poring “holy oil” upon his head, or being handed the sacred sceptered, or by having placing a crown upon the royal head, all symbolized that a “higher power” than any mortal man had selected this person and his heirs to command all others in his domains with loyalty and obedience by all those below him.

In Europe a long train of events over several hundreds of years challenged and weakened the absolutist claims of the king or emperor; this was partly done by the Catholic Church attempting to maintain or extend its own autonomy and authority, and partly by noblemen and then commoners who chafed under and resented and resisted the arbitrary decisions and demands of the monarchs under which they lived. By the time of the Enlightenment in the 1700s, secular skepticism and political dissent weakened and finally undermined the “superstition” of the “divine” authority and legitimacy of kings. While it linger on into the 1800s, the right of kings to rule over and command others was symbolically beheaded along with the actual decapitation of the king of France, Louis XVI, in Paris in 1793.

The Democratic Mystique of “the People’s” Self-Rule

But a new mystique arose rapidly in its place in the late eighteenth and early nineteenth centuries, the “democratic mystique.” From the rule of “the one” there emerged the idea and ideal of the “rule of the many.” Rougier explained:

By a daring transposition sovereignty was transferred from the monarch to the people themselves. It appeared that as soon as power was exercised by those who bore its burden, it would be exercised with the minimum of despotism ...

Since all the citizens are considered by their representatives to participate in the establishment of the law, the law seems to be the expression of the general will. Everyone submits to it willingly because everyone has the illusion that he has participated in its formation and that, obeying everybody, he obeys himself. The fundamental political problem, that of freely granted obedience, is, in a way, solved by definition.  This is where the great strength of democracies comes from. Never has any form of government exercised such extensive discretionary power over the governed without the apparatus of coercion.

Let us compare the ease with which the democracies have established general [military] conscription or have taken away up to 80 percent of the wealth of their citizens without provoking a revolt with the difficulty the monarchies under the old regime had in raising soldiers and taxes. By making the sovereign and the subject one, the democratic mystique has brought about the maximum of authority with the minimum of constraint.

But democracy “works,” argued Rougier, only for as long as the reach and responsibility of a government extends, in general, no further than primarily securing, protecting and respecting the rights of the individual members of society to their lives, liberty and property. The freedom of the individual is only assured for as long as the government does not intrude into the marketplace with interventions, regulations, controls and central planning.

That is, democracy served as a peaceful way of appointing those holding political office and securing people’s liberty rather than violating it only for as long as it functioned in a cultural and social setting based on the ideas and ideals of political and economic classical liberalism. In Rougier’s words:

As soon as the state adds economic power to its political power, whether it holds all the means of production or simply claims to regulate production according to a preconceived plan, it turns out to have all powers and to grant some of them only arbitrarily to individuals.

In reality, for an individual to be free vis-à-vis the state he must be able to do without the state’s services, he must be able, if need be, to resign from a public function, if he is forced to act against his conscience, without running the risk of not finding other employment. Now this in inconceivable in a statist or collectivist regime, where the individual has no other alternative than to be a functionary, a client of the state, or die of hunger.

Buried in the democratic mystique, Rougier explains, in the fallacy of “the people” ruling themselves. Once delegation of authority is transferred from the citizens themselves to representatives in the government who pass, administer, and enforce legislation and the law, two things have historically come into play. First, the elected representatives are discovered to have their own purposes and interests that may have little or nothing to do with that of the constituents as a whole who have put them in political office.

And, second, election and reelection may be more easily assured and maintained by serving coalitions of special interest groups who see ways of using the State for their own ends outside of the free and voluntary competition of market exchange. The political system of politicians and special interests “buries economic liberalism by using state intervention for its own benefit to maintain the positions it has acquired,” lamented Rougier.

Writing in the 1930s, Louis Rougier’s concern and fear was that the corrupted and corrupting “democratic mystique” was being superseded by the “totalitarian mystiques” of communism, fascism and Nazism – mystiques surrounding alternative collectivisms in the forms of Marxian class conflict, fascist aggressive nationalism, and Nazi “race warfare.” Here were other conceptions of the collective mystique of “the will of the people” far more brutal and tyrannical than anything seen in modern history.

The Tyranny of Modern Tribal Identity Mystiques

Today, there are other “political mystiques” that are advancing over the landscape of society. These are the “gender mystique,” the new multicultural “race mystique,” and the new anti-income inequality “social class conflict mystique.” They are all versions and forms of cultural and economic collectivism joined with demagogic intolerance of speech, thought and peaceful action, based on new tribal mystiques of group identity within which the individual is confined and from which there is no escape as an thinking and choosing individual.

And here, once again, what makes them “mystiques” as Rougier defined them, are unreflective and unchallengeable beliefs not open to reasoned discourse and debate. Any questioning and criticism of them is met with hysteria, emotional condemnation, and insistence that the opponent of the new tribal-group identity mystique be forcibly silenced and banished. Even, as some dare to say, to be put to death as an enemy of the gender, racial or ethnic collectives declared to be the irreducible social entities within which the individual is to be culturally and politically imprisoned.

In the 1930s, Louis Rougier insisted that if both the democratic mystique and the totalitarian mystiques were to be stopped and reversed, there was only one lasting avenue: “to return to the practices of political, economic, and cultural [classical] liberalism.” That message is no less true and relevant today in the face of the emerging totalitarianism of the new gender, racial and ethnic “identity politics” mystiques.



Categories: Current Affairs

Doesn't Mexico Have Building Codes?

Mon, 25/09/2017 - 04:00
By: Ryan McMaken
MexCity85quake.jpg

During the 1987 Whittier Narrows earthquake in Los Angeles, my mother was working in downtown Los Angeles in one of the buildings then known as the Arco Towers

The building was of early 1970s vintage, but thanks to expensive technology introduced to help high-rises withstand earthquakes, the Arco Towers merely swayed from side to side, rather than collapse in response to the quake. That earthquake was a medium-sized earthquake (to use casual terminology), but the building is designed to withstand far larger tremors. Eight people died in the wake of the quake. 

Two years earlier, the 1985 Mexico City earthquake struck with devastating results. While the earthquake was considerably stronger, the casualty totals were far beyond what we would expect were a similar quake to hit Los Angeles. While the number is still in dispute today, more than 30,000 people may have died in the quake, thanks largely to collapsed buildings. 

Fortunately, the death toll in Tuesday's Mexico-City quake looks to be much, much smaller than was the case in 1985. So far, casualty counts number in the low hundreds. 

The Wall Street Journal today attributes this to improvements in building codes: 

Mexico City’s building codes improved dramatically in the years following the city’s 1985 earthquake, a magnitude 8.1 temblor that killed more than 6,000 and toppled nearly 2,300 buildings, including hospitals, schools, hotels and entire high-rise apartment blocks.

After 1985, “the building codes changed a lot,” said Ricardo Warman, an architect who both builds and renovates houses in the Condesa and Roma neighborhoods of central Mexico City, among the hardest hit on Tuesday. “That is why most of the buildings that fell are from the 1950s, ’60s and ’70s.”

But why was Mexico still building earthquake-prone construction in the 1970s? By the mid-80s, California had already been at work addressing the earthquake issue for years. 

Why didn't Mexican cities pass better building code laws before then? 

RELATED: "Why Natural Disasters Are Worse For Poor Countries" by Ryan McMaken

Well, it turns out that they did have building codes before then, but merely passing laws doesn't actually solve problems. Prior to this week's quake — while commenting on Hurricane Harvey — Bret Stephens at the New York Times recalled: 

Why do richer countries fare so much better than poorer ones when it comes to natural disasters? It isn’t just better regulation. I grew up in Mexico City, which adopted stringent building codes following a devastating earthquake in 1957. That didn’t save the city in the 1985 earthquake, when we learned that those codes had been flouted for years by lax or corrupt building inspectors, and thousands of people were buried under the rubble of shoddy construction. Regulation is only as good, or bad, as its enforcement. 

So, for nearly 30 years leading up to the 1985 quake, new, improved building codes had been in place. but it seems that — as one Mexico City engineer described it — enforcement was "very lax."

But why did they ignore them? Was it part of just an amorphous tolerance for doing a lousy job? As Walter Block recently noted, we can't just blame corruption: 

They can have all the regulations and “safety standards” they want in poverty-stricken nations such as [Bangladesh]. Either these bureaucratic rules will be ignored, or, if they are rigidly upheld and enforced, then virtually no new houses will be built, and almost all extant houses will have to be torn down. Why? Since this country is so poor, it cannot possibly live “up” to these modern, western, regulations and “safety standards.”

In most cases, people don't ignore building codes because they're sociopaths who don't care about the safety of their customers.

Thanks to the existence of greed, of course, there's always the temptation to skimp on safety in order to pad profits, and just hope things work out. But in wealthy nations, there are numerous incentives beyond government regulation to not do this: (1) insurance companies may refuse to insure structures that are of questionable safety, and (2) there are well-developed legal systems that facilitate lawsuits against negligent builders. 

But perhaps most importantly: consumers of housing and office space in wealth countries can more often afford to pay for units in buildings where expensive retrofits and safety features have been added. In poor countries, by contrast, consumers are far less likely to be able to afford buildings constructed to specifications that would be considered run-of-the-mill in wealthier areas. Given that producers can only set prices at levels their customers can afford to pay, builders will build accordingly. 

The end result is that in wealthy areas, paying close attention to code regulations may shave some profitability off a building project. But in a poor country — as Block correctly suggests — rigid enforcement is more likely to totally erase profitability, and prevent new construction from being built at all. On other words, the opportunity cost of building a modern, earthquake-proof building in a poor country is much higher. 

So what's the solution? 

As Stephens points out: "Every child knows that houses of brick are safer than houses of wood or straw — and therefore cost more to build." Mexicans — of course — are already well aware that the ideal solution is to produce high quality housing for everyone. The problem is that sort of thing is expensive. 

Unfortunately, the answer to this conundrum is the same as with building to withstand hurricanes and other natural disasters:  bulding wealth is the only true long term solution. 

City councils can pass building code laws all day long, but as long as residents lacks the incomes necessary to afford housing, offices, and factory space that's built to withstand earthquakes, there will always be an especially large incentive to cut corners on construction. Innocent people will suffer as a result. 



Categories: Current Affairs

There's Nothing Moral about Opposing "Price-Gouging"

Mon, 25/09/2017 - 04:00
By: Christopher Westley
cuffs.PNG

Let’s face it. The economic case for “price gouging” is one for which economists have both a strong argument and minority view, relative to more popular narratives drilled onto the three-by-five card of acceptable opinion. In that sense, we are in familiar territory, going back at least to Thomas Carlyle’s attack on economics as “the dismal science” when he realized economic arguments, when accepted by the broader population, would hasten the demise of slavery. 

So I was not surprised when a good friend sent me a Dallas News op-ed by University of Texas sociologist Daniel Fridman raising moral objections to the economic case defending rising prices for necessities following natural disasters. I had an idea about the depth of Mr. Fridman’s argument when he began acknowledging the economic case thusly:

[Some economists] claim that we should not mess with prices, whose job is to get goods to those who want them the most. If prices go up, buyers will think twice before purchasing something they may not need, while suppliers will be incentivized to go the extra mile and provide needed goods in order to make more money. If you take that extra gain away, you will have fewer goods and in the wrong hands.

There is some truth to this.

It’s very broad-minded for Mr. Fridman to acknowledge some truth to the Laws of Supply and Demand. Coming from someone in the People’s Republic of Austin, this must be something of a milestone. (One wonders what other natural laws in which he recognizes some truth.) But it’s not the truth of these laws that concern him. Rather, it’s how they ignore the moral case against “gouging,” which Mr. Fridman believes is understood “almost universally.” He writes:

The moral condemnation of price gouging is a recognition that in certain social situations, raising prices is kicking vulnerable people when they are down. Our reaction to price gouging is not some silly knee-jerk rejection from people who don't know enough about economics, as it is sometimes portrayed. It is, rather, deeply reflective of the societal need for mechanisms other than markets.

I am not here to criticize the moral case against price “gouging” except to note that a thinker on the level of Thomas Aquinas considered its shortcomings. Rather, I would suggest that morality is hardly divorced from the case made by economics and that recognizing this relationship is key to returning economics to its roots. Between the time of Adam Smith and the Progressive Era, one studied economics as a branch of the Moral Sciences. Even today, a common thread between a Thomas Sowell and a Paul Krugman, or a Jeffrey Sachs and a Bill Easterly, would be moral indignation about something, and the desire to apply economic theory to correct it.

So what are the moral cases for “gouging”? Let’s consider three.

First, one wonders about the morality of those who would urge acts of violence — fines or imprisonment — against individuals for selling their own property at whatever price they want. This is essentially what Mr. Fridman argues for when supporting anti-“gouging” rules. But would he be willing to impose it himself by, say, personally raiding the perpetrator’s savings or locking her up in his garage for charging prices he dislikes? If he would have moral qualms about executing such acts himself, then why wouldn’t he have qualms about leaving them up to individual functionaries of the state? By arguing for such state power, Mr. Fridman simply trades small, disparate moral harms (subjectively determined) for actual large, institutionalized ones.

This point gets to the nature of the state, which is an entity in society that performs actions legally that would be considered profoundly immoral when performed on an individual basis. Those who support anti-“gouging” legislation effectively support putting a boot on the neck of many producers crucial to surviving a natural disaster.

Second, there’s the morality of allowing prices to reflect market conditions before and after a natural disaster. Given the certainty of shortages, waste, and needlessly prolonged recoveries when anti-“gouging” laws are enforced (through threats of violence!), then why can’t opposing such ordinances be based on morality as well? While Mr. Fridman argues pro-“gouging” economists such as Mark Perry and Michael Salinger ignore morality, they might be motivated by it.

One is reminded of the role of market prices in causing self-interested individuals to act in ways that are socially beneficial. One woman from the Florida Keys told USA Today about the sense of foreboding she felt driving back to her house and witnessing the damage wrought by Hurricane Irma, and the profound relief she felt upon finding her own home relatively unscathed. “Thank God our insurance company threatened to cancel us if we didn’t put on a metal roof,” she said. 

The threat of lost or higher priced insurance motivated many property owners to upgrade their houses to hurricane strength. Hundreds of thousands of Floridians, for instance, received discounted insurance for buying and then using hurricane shutters. According to the Associated Press, “Citigroup estimated that damages were just $50 billion — well below initial figures — in part because some homes were better equipped to weather the wind and rain than during [Hurricane] Andrew.”

Finally and most importantly, the debate over “gouging” illustrates a dominant utilitarianism in which the majority should be allowed to force its will on the minority, as long as the end is valued highly enough. For Mr. Fridman, the near universal acceptability of anti-gouging laws are enough for him to determine their morality. Mises addresses this point in Human Action (Scholars Edition, p. 153):

The liberals do not maintain that majorities are godlike and infallible; they do not contend that the mere fact that a policy is advocated by the many is a proof of its merits for the common weal. They do not recommend the dictatorship of the majority and the violent oppression of dissenting minorities. Liberalism aims at a political constitution which safeguards the smooth working of social cooperation and the progressive intensification of mutual social relations. Its main objective is the avoidance of violent conflicts, of wars and revolutions that must disintegrate the social collaboration of men and throw people back into the primitive conditions of barbarism where all tribes and political bodies endlessly fought one another.

It follows that permitting “gouging” is congruent with a political economy of peace, whereas intervening in the price system invites violence. Forcing markets below those that would clear the market always and everywhere, in normal times and during natural disasters, pits buyers against sellers and consumers against producers, when they otherwise would have strong incentives to cooperate.

I fear I may not have been fair to Mr. Fridman. After all, he wrote an op-ed with strict word count restrictions. He may well be familiar with the moral case on the other side of the “gouging” debate and yet be unable to address them. Still, I’d hope he’d concede that while natural disasters are by nature disruptive, the anti-“gougers” have no unique claim on the moral high ground. Economists who advocate against policies that prolong suffering and hinder recovery have morality on their side too.



Categories: Current Affairs

Elvis's Own Personal Drug War

Sat, 23/09/2017 - 04:30
By: Chris Calton
Nixon-Elvis-ap.jpg

When Elvis Presley died in 1977 from drug abuse, he was an official, badge-carrying federal agent for the Bureau of Narcotics and Dangerous Drugs, an honorary appointment granted by President Richard Nixon.

To say that Elvis Presley had a respect for law enforcement is to drastically understate his enthusiasm. In another life, he would have liked to have been a police officer, and he was obsessed with collecting police badges and uniforms. When he would perform shows around the country, he always made an effort to obtain a badge from the local police force, sometimes by using his celebrity status and other times by donating money to police functions. In some cases, he would offer a $5,000 donation to a police ball in order to procure a badge. He was also known to give expensive cars to local sheriffs, including Sherriff Bill Morris of Memphis who gratefully deputized Presley after receiving a gift of a Mercedes-Benz.

Elvis's Memphis police badge and ID

His generosity was so lavishly offered to members of the Denver police that it actually brought about suspicions of graft and corruption after the King’s death. Along with Cadillacs and Lincoln luxury cars, he paid for officers to take high-class vacations and gifted them with pricey jewelry. He purchased his own Denver police uniform and was made an honorary captain of the Denver Police Force. He would have been a police officer, Elvis once confided, but “God blessed him with a voice.”

Elvis posing in his Denver police uniform

Elvis Becomes a Drug Warrior

In 1970, California senator George Murphy promised to get Elvis a meeting with FBI director J. Edgar Hoover and Bureau of Narcotics and Dangerous Drugs (BNDD) director John Ingersoll. In both cases, Elvis was hoping that a generous private donation would be enough to buy him a federal badge from each of these departments.

Elvis never did get to meet Hoover, and when called the BNDD, Ingersoll was out of the office. He spoke, instead, to the number-two man of the Bureau, Deputy Director John Finlator. The deputy director was not swayed by Elvis’s fame or money and informed him that his department could neither accept donations nor issue honorary badges. Elvis’s offer was spurned.

Undeterred, Elvis penned a hand-written letter to President Nixon. In the letter, Elvis expressed his concerns for the “drug culture, the hippie elements, the SDS [Students for a Democratic Society], Black Panthers, etc.” Offering his services as a celebrity communicator to the president, Elvis went on to say, “I can and will do more good if I were made a Federal Agent at Large.”

To help the president wage his war against the drug users, the hippies, and the communists, Elvis said, “all I need is the Federal credentials.”

On December 21, 1970, President Nixon agreed to meet the King. In full form, according to an interview given by Egil Krogh, Nixon’s aide who received Elvis, he arrived “in a purple jumpsuit and a white shirt open to the navel with a big gold chain and thick-rimmed sunglasses.” The meeting with the president got off to an awkward start, with Elvis complaining to Nixon about the difficulties of performing in Las Vegas and expressing his anger for The Beatles.

Finally, Elvis revealed his agenda. “Mr. President,” he said, “can you get me a badge from the Bureau of Narcotics and Dangerous Drugs?”

This is what Egil Krogh was worried about. He knew that Elvis had already been turned away by the BNDD on this exact matter. Nixon turned to Krogh, calling him by his nickname: “Bud, can we get him a badge?”

“Well, Mr. President,” Krogh answered, “if you want to get him a badge, we can do that.”

Nixon gave the order to get the King a badge, which elated Elvis so much that he crossed to the other side of the desk and gave the president a bear hug. Elvis then had his body guards bring in the gifts he had brought with him, which he lavished on the president and his aides, including jewelry for their wives. Before leaving, Nixon and Elvis posed for one of the most famous photographs ever taken in the Oval Office.

Elvis was now a badge-carrying drug warrior, and he carried his badge with him for the rest of his life, until he died seven years later from a drug overdose.



Categories: Current Affairs

The Supreme Court Failed Us On Vietnam

Sat, 23/09/2017 - 04:00
By: Jacob G. Hornberger
vietnam.PNG

With last weeks’s beginning of Ken Burns’ new documentary about the Vietnam War, the war will be brought back to the front burner for national discussion and debate.

There is one thing that is crystal clear and indisputable about the U.S. intervention into Vietnam’s civil war: The intervention was illegal under our form of government. That’s because it was waged in violation of the U.S. Constitution, the document that sets forth the powers of U.S. officials, including those in the military and the CIA.

When the federal government was called into existence by the Constitution, its powers were limited to those set forth in the document itself. If a power isn’t enumerated, then it cannot lawfully be exercised.

The Constitution does not give the power to initiate war to the president. The Framers and the American people who ratified the Constitution did not want the president or the military making that decision. That’s why the Constitution delegates the power to declare war to Congress, the elected representatives of the American people.

Thus, if the president initiates war against another nation without a congressional declaration of war, he is acting unlawfully under our form of government.

The interesting question is: Why didn’t the U.S. Supreme Court and the federal judiciary declare the U.S. war on North Vietnam to be unconstitutional?

Ever since the Supreme Court’s decision in Marbury vs. Madison in 1803, the Court has assumed the authority and responsibility to declare acts of the president or laws enacted by Congress to be unconstitutional. And ever since Marbury, there have been many cases in which the federal courts have declared presidential actions or congressional laws unconstitutional.

Yet, when it came to U.S intervention into the Vietnam War, the federal judiciary declined to act. Why?

The issue was certainly clear-cut. The Constitution required a congressional declaration of war against North Vietnam. There was no congressional declaration of war against North Vietnam. Therefore, by initiating a war against North Vietnam, the president, the Pentagon, and the CIA were acting illegally under our form of constitutional government.

The federal judiciary has long rationalized its deference to the Pentagon and the CIA in terms of rhetoric like respect for “the coordinate branches of the government” or by suggesting that federal judges lack foreign-policy expertise or by simply asserting that a petitioners lacks “standing” to bring a legal action to declare a war to be unconstitutional.

In actuality, there is a more fundamental reason for judicial deference to the president and the U.S. national-security establishment.

The federal judges and the Supreme Court justices knew that, as a practical matter, there was no way that the president, backed by the military and the CIA, would comply with a judicial decision declaring the U.S. war in Vietnam to be unconstitutional. They also knew that, as a practical matter, there was no way for the federal courts to enforce their ruling against the president, the Pentagon, and the CIA.

Therefore, rather than expose the impotence on the part of the federal judiciary with respect to that particular part of the Constitution, the federal judiciary decided that it would be more prudent to create an appearance of lacking the authority or jurisdiction to declare the U.S. war in Vietnam unconstitutional. In that way, they could create the façade that the federal judiciary was still the ultimate arbiter of the constitutionality of an action while, in reality, deferring to the overwhelming power of the president, the Pentagon, and the CIA to wage what was clearly an unconstitutional war.

Everyone would have been better off if the Supreme Court and the lower federal courts had not shirked their responsibility under the Constitution and had instead done their duty by declaring the U.S. intervention into the Vietnam War to be unlawful and unconstitutional, even if the president, the Pentagon, and the CIA had ignored the court’s judgment. At least the American people would be able to easily see why President Eisenhower warned the American people of the grave threat that the military-intelligence establishment poses to the liberties and democratic processes of the American people.

Reprinted with permission. 



Categories: Current Affairs

Week in Review: September 23, 2017

Sat, 23/09/2017 - 04:00
By: Mises Institute
Week in Review image

Almost a decade later, the Federal Reserve this week announced it will begin reversing quantitative easing. Slowly. Very slowly. The balance sheet currently stands at $4.5 trillion and they will begin allowing $10 billion in assets to roll off their sheets next month. Given the unprecedented nature of QE, even this modest reduction has many market observers on edge. Of course, the fallout from the Fed's actions are still being felt, while the Trump Treasury is making threats that it would have disastrous consequences if acted on.

On Mises Weekends, Jeff is joined by Dr. Mark Thornton to get his take on the Fed's actions and what it all means for stock markets, investors, and the US economy. Can quantitative easing, a roundabout form of monetizing debt, actually work? Can monetary policy make us rich? Or are Fed officials just groping in the dark, putting off a day of reckoning?

And in case you missed them, here are this weeks Mises Wire and FedWatch articles, covering a wide array of topics:

 

 

 

 

 



Categories: Current Affairs

Elivs's Own Personal Drug War

Sat, 23/09/2017 - 04:00
By: Chris Calton
Nixon-Elvis-ap.jpg

When Elvis Presley died in 1977 from drug abuse, he was an official, badge-carrying federal agent for the Bureau of Narcotics and Dangerous Drugs, an honorary appointment granted by President Richard Nixon.

To say that Elvis Presley had a respect for law enforcement is to drastically understate his enthusiasm. In another life, he would have liked to have been a police officer, and he was obsessed with collecting police badges and uniforms. When he would perform shows around the country, he always made an effort to obtain a badge from the local police force, sometimes by using his celebrity status and other times by donating money to police functions. In some cases, he would offer a $5,000 donation to a police ball in order to procure a badge. He was also known to give expensive cars to local sheriffs, including Sherriff Bill Morris of Memphis who gratefully deputized Presley after receiving a gift of a Mercedes-Benz.

Elvis's Memphis police badge and ID

His generosity was so lavishly offered to members of the Denver police that it actually brought about suspicions of graft and corruption after the King’s death. Along with Cadillacs and Lincoln luxury cars, he paid for officers to take high-class vacations and gifted them with pricey jewelry. He purchased his own Denver police uniform and was made an honorary captain of the Denver Police Force. He would have been a police officer, Elvis once confided, but “God blessed him with a voice.”

Elvis posing in his Denver police uniform

Elvis Becomes a Drug Warrior

In 1970, California senator George Murphy promised to get Elvis a meeting with FBI director J. Edgar Hoover and Bureau of Narcotics and Dangerous Drugs (BNDD) director John Ingersoll. In both cases, Elvis was hoping that a generous private donation would be enough to buy him a federal badge from each of these departments.

Elvis never did get to meet Hoover, and when called the BNDD, Ingersoll was out of the office. He spoke, instead, to the number-two man of the Bureau, Deputy Director John Finlator. The deputy director was not swayed by Elvis’s fame or money and informed him that his department could neither accept donations nor issue honorary badges. Elvis’s offer was spurned.

Undeterred, Elvis penned a hand-written letter to President Nixon. In the letter, Elvis expressed his concerns for the “drug culture, the hippie elements, the SDS [Students for a Democratic Society], Black Panthers, etc.” Offering his services as a celebrity communicator to the president, Elvis went on to say, “I can and will do more good if I were made a Federal Agent at Large.”

To help the president wage his war against the drug users, the hippies, and the communists, Elvis said, “all I need is the Federal credentials.”

On December 21, 1970, President Nixon agreed to meet the King. In full form, according to an interview given by Egil Krogh, Nixon’s aide who received Elvis, he arrived “in a purple jumpsuit and a white shirt open to the navel with a big gold chain and thick-rimmed sunglasses.” The meeting with the president got off to an awkward start, with Elvis complaining to Nixon about the difficulties of performing in Las Vegas and expressing his anger for The Beatles.

Finally, Elvis revealed his agenda. “Mr. President,” he said, “can you get me a badge from the Bureau of Narcotics and Dangerous Drugs?”

This is what Egil Krogh was worried about. He knew that Elvis had already been turned away by the BNDD on this exact matter. Nixon turned to Krogh, calling him by his nickname: “Bud, can we get him a badge?”

“Well, Mr. President,” Krogh answered, “if you want to get him a badge, we can do that.”

Nixon gave the order to get the King a badge, which elated Elvis so much that he crossed to the other side of the desk and gave the president a bear hug. Elvis then had his body guards bring in the gifts he had brought with him, which he lavished on the president and his aides, including jewelry for their wives. Before leaving, Nixon and Elvis posed for one of the most famous photographs ever taken in the Oval Office.

Elvis was now a badge-carrying drug warrior, and he carried his badge with him for the rest of his life, until he died seven years later from a drug overdose.



Categories: Current Affairs

Mark Thornton: Can the Fed Unwind?

Fri, 22/09/2017 - 23:00
By: Mark Thornton, Jeff Deist
Mark Thornton on Mises Weekends

Federal Reserve Chair Janet Yellen announced the bank would begin selling assets it has relentlessly bought since the Crash of '08. The financial press, including the Wall Street Journal, dutifully praised Yellen for her steady hand. But our guest Dr. Mark Thornton has a different take on what it all means for stock markets, investors, and the US economy. Can quantitative easing—a roundabout form of monetizing debt—actually work? Can monetary policy make us rich? Or, are Fed officials just groping in the dark, putting off a day of reckoning? Jeff Deist and Mark Thornton unwind the narrative.



Categories: Current Affairs

There's a Bubble in New York City Taxi Medallions

Fri, 22/09/2017 - 16:30
By: Doug French
istock.PNG

It’s as old as time: taking on debt to fund a sure thing. Be it houses, stocks, cryptocurrencies, tulip bulbs or taxi medallions. Winnie Hu tells the current tale of woe brilliantly for The New York Times. Big city taxi medallions were once considered to be good as gold. Ms. Hu writes,

Sohan Gill once saw his medallion as such a good investment — ”better than a house” — that his wife bought two more in 2001. Now they cannot find enough drivers for the cabs because business is so bad. And Mr. Gill, 63, who had retired from driving, had to go back on the road. “How many more years am I going to drive to take care of these medallions?” he asked.

That sounds so much like Las Vegas 2005. Why own one house? Buy two more. Now retirement is put on hold.

A full blown medallion crash is unraveling in New York City as Ms. Hu explains.

Since 2015, a total of 85 medallions have been sold as part of foreclosure proceedings, according to city records. In August alone, 12 of the 21 medallion sales were part of foreclosures; the prices of all the sales ranged from $150,000 to $450,000 per medallion.

A medallion being essentially a license to drive a cab, $150,000 to $450,000 doesn’t seem like the bottom, however at the peak. 2014, a medallion went for $1.3 million. By the way, Uber was founded in 2009, but New York cab owners either didn’t get the memo, or didn't understand the implications.

In 2014, those crafty devils at New York City Hall sold 350 new medallions at the height of the market, generating $359 million in revenue.

The city has capped the number of medallions at 13,587, but, “There are more than 63,000 black cars providing rides in the city through five major app services: Uber, Lyft, Via, Gett and Juno,” writes Hu.

Cabbies are fighting back the way they always have, in court. But so far, to no avail. “We are not against competition, we are not against technology, but we want to compete fair and square,” said Nino Hervias, 58, a taxi owner and spokesman for the Taxi Medallion Owner Driver Association.

A couple drivers have taken legal action, known as an Article 78 proceeding, to compel the city and its regulators to establish and enforce standards that will make sure that all licensed cars — including yellow cabs — “are and remain financially stable.” It sounds like subsidies are being sought. The State Supreme Court will hear the case in October.

Meanwhile, a guy like Uppkar Thind, 46, an immigrant from India, is driving 11 to 13 hours a day trying to pay off a medallion he bought for $357,000 in 2006 with money borrowed from his relatives and a credit union. “I worked hard,’’ he told the Times. “I achieved my American dream and it turned into a nightmare.”

The nightmare sounds like it will continue. Ms. Hu writes,

In an unprecedented fire sale of medallions, up to 46 of them are expected to go on the auction block later this month as part of bankruptcy proceedings against taxi companies affiliated with an embattled taxi mogul. While the city has previously held auctions to sell a limited number of new medallions — about 1,800 since 1996 — this is believed to be the first auction to dispose of foreclosed medallions, according to city officials.

“I see my future crashing down,” says Issa Isac, 46, an immigrant from Burkina Faso who borrowed $335,000 to buy a medallion but couldn’t keep up with the payments. “I worry every day. Sometimes, I can’t sleep thinking about it. Everything changed overnight.”

As you would expect, some financial institutions have been sucked into this vortex. Forbes reports, 

Three New York-based credit unions that specialized in loaning money against taxi cab medallions, the hard-to-get licenses that allow the city's traditional cab fleet to operate, have been placed into conservatorship as the value of those medallions has plummeted.

However, while the over leveraged are hurting, big money is circling. Crain's New York Business reports, that private equity firms are kicking the tires. "A lot of very smart people who run very successful firms feel the market may have bottomed out," says Andrew Murstein, president of Medallion Financial. 

Gary Sernovitz writes for The New Yorker, "if you can buy medallions for ninety per cent less to operate in a business that’s down twenty per cent, the conditions may be ripe for a value investment—like buying real estate in 2009. Some institutional investors are tantalized."

New Yorkers may be getting a ride from Blackstone in the near future. 



Categories: Current Affairs

The Agony of the Welfare State, Finnish Style

Fri, 22/09/2017 - 14:30
By: Joseph T. Salerno
childrens-eyes-1914519_960_720.jpg

The title of this post—minus the reference to Finland—is shamelessly copped from a prescient essay that Ludwig von Mises wrote in 1953.  In his article Mises pointed out that in Great Britain and Europe, the system of progressive taxation was already confiscating nearly the entire  “surplus” incomes of the successful capitalists and entrepreneurs, meaning that higher tax rates would no longer produce additional funds to finance these countries’ ever-expanding welfare states.  “Henceforth,” Mises foretold, “the funds of the beneficiaries themselves have to be tapped if more handouts are to be made to them.”

Today things have gotten far worse than even Mises foresaw.  For now it is becoming evident that the “beneficiaries” of the most advanced welfare states are not reproducing rapidly enough to pay for the benefits that they are receiving and are therefore “endangering” the “long-term survival” of the “more generous” welfare states. A notable example is Finland, which faces a “massive baby problem.”  Thus, in 2016, Finland recorded the lowest number of newborn babies in 148 years, or since the great famine of 1868.  The Finnish fertility rate has fallen to 1.57 per woman and the number of people under 20 years of age as a percentage of the working age population is the lowest among Nordic countries at less than 40%, down from 60% in 1970. 

The situation has left mainstream economists devoid of solutions and wringing their hands in despair.  For Heidi Schauman, the Aktia Bank chief economist, the statistics are "frightening.”  As Ms. Schauman explains:

They show how fast our society is changing, and we don't have solutions ready to stop the development.  We have a large public sector and the system needs taxpayers in the future.

Schauman clearly does not appreciate the delicious irony of the modern welfare state revealed in the emphasized part of her statement.  Without ability to further expropriate wealthy capitalists and entrepreneurs, the welfare state has become a crazy machine with no purpose but to perpetuate its own existence by devouring massive quantities of taxes extracted from the people it ostensibly serves.  If demographic trends threaten the existence of the machine, well then, more people must be produced to feed it. It reminds me of the wonderful Twilight Zone episode, “To Serve Man.”



Categories: Current Affairs

Why is NASA Covering Up Elon Musk’s Mistakes?

Fri, 22/09/2017 - 04:00
By: Drew Armstrong
Elon_Musk_in_Mission_Control_at_SpaceX.jpg

On June 28th, 2015, Elon Musk’s SpaceX Falcon 9 rocket launched a Dragon resupply ship not into space, but rather into the Atlantic Ocean. It was a catastrophic failure that cost taxpayers $112 million. The payload that was meant to resupply the International Space Station (ISS) went up in a huge plume of smoke and flames. However, even though SpaceX did not complete their mission, they still received all but twenty percent of the full payment. Standard NASA protocol is to release a report on every launch accident, but to this day — two years later — there is still no formal statement as to what went wrong on the SpaceX accident.

Per NASA, there won’t be one released anytime soon. The Agency recently announced that it will in fact not publicly release a report on their investigation into the disastrous explosion of the SpaceX Falcon 9 rocket. They had originally committed to reporting their results by the summer of 2017, but have instead passed the buck to the FAA.

“Since it was an FAA licensed flight, NASA is not required to complete a formal final report or public summary, and has deferred any additional products related to the matter at this time,” the agency’s Public Affairs Office (PAO) stated. “The data is important for historical purposes, but the mishap involved a version of the Falcon 9 rocket, the version 1.1, that is now no longer in use.” Apparently, the fact that SpaceX is no longer using that version of the Falcon 9 after this $112 million “mishap” of taxpayer funds means the American taxpayers have no right to know what happened. Strangely, that storyline did not work for a competing firm’s similar failure that occurred eight months prior.

On Oct. 28th, 2014, an Orbital Sciences Antares rocket was loaded with NASA Supplies aboard a Cygnus cargo ship worth $51 million bound for the ISS. Upon lift-off, the booster exploded, and the payload was lost, severely damaging the launch pad. Just like the SpaceX flight, the Orbital rocket was an official FAA-Licensed commercial launch. Both the Antares and the Falcon 9 launches were conducted under the same NASA Commercial Resupply Services (CRS) program. And just like the Falcon 9, the Antares was part of an expiring line of rockets. Yet, NASA completed and published an executive summary within one year of the Antares incident.

The smell of hypocrisy has never been so potent.

After the report on the Antares accident was released, the explosion was traced to a failure of a turbo pump on an aging AJ26 first stage engine that was originally built for the Soviet Union’s lunar program more than 40 years earlier. Two months after the accident, Orbital announced it would replace the AJ26 engines with newly manufactured RD-181 engines which would require substantial modifications to Antares. The company learned from its mistake, as it should have been expected to do.

The same cannot be said for SpaceX. The only report NASA has made public regarding the Falcon 9 accident was an audit conducted by the agency’s Office of Inspector General. This report focused only on the loss of Dragon on NASA’s resupply program. The audit spent less than one page discussing the cause of the accident without presenting any conclusions.

This glaring hypocrisy between the handling of the Orbital and the SpaceX cases has not gone unnoticed. Rep. Lamar Smith (R-Texas), chairman of the House Committee on Science, Space and Technology wrote a letter just after the SpaceX accident to NASA Administrator, Charles Bolden, expressing his belief that this “discrepancy … raises questions about not only the equity and fairness of NASA’s process for initiating independent accident investigations, but also the fidelity of the investigations themselves.”

The lack of a full investigation into the SpaceX Falcon 9 accident begs the question: Why is SpaceX given such preferential treatment? It appears that NASA is playing favorites with SpaceX. Considering the high risk and astronomical cost of the space program, shouldn’t all those involved be held to the highest standards?

Instead of getting to the bottom of the problems leading up to the SpaceX explosion, NASA responded by giving SpaceX a new long-term contract. The contract included discounted prices for future cargo missions and other “significant considerations,” but it still gives the impression that NASA has chosen to reward failure. The whole process raises questions about how NASA handles launch failure investigations, manages risk for cargo flights, and assigns cargo for those missions — not to mention their standards of accountability to the taxpayers that are funding the space program.

While there is no doubt that SpaceX has implemented some innovative, cost-cutting solutions for NASA, it should not be held to a different set of standards. Over the years, there have been various amendments proposed to completely ban the use of the company’s competition. For instance, in the FY 2018 NDAA, the House Armed Service Committee has proposed limiting funding for Russian rocket engines, as well as funding for new launch vehicles and launch vehicle systems. Competitors like the United Launch Alliance (ULA) are working on new, competitive evolved expendable launch vehicles (EELVs) that use American-made rockets, but the NDAA in its current form would kill their progress and give SpaceX a monopoly.



Categories: Current Affairs

Mises and Cosmopolitanism

Thu, 21/09/2017 - 04:15
By: David Gordon
mises_1.PNG

Organizations named for someone often are accused of deviating from that person’s ideas, and the Mises Institute unfortunately is no exception. Recently, we have come under attack along the following lines: Ludwig von Mises was a cosmopolitan, opposed to nationalism and racism. Critics claim But the Mises institute, though named after him, has betrayed him. Guided by Murray Rothbard and Lew Rockwell, the Institute has opposed liberal humanist values. Mises would never have done this.

To assess this accusation, we must first ask, what is meant by “cosmopolitan”? The word is a translation from a Greek term introduced by Diogenes the Cynic in the 4th century B.C., who said, “I am a citizen of the world [kosmopolitês]” This notion became important in Stoic thought, and readers interested in the Greek idea of the “cosmic city” will find in Malcolm Schofield’s The Stoic Idea of the City a valuable guide.

The term often means something else today. Cosmopolitans, in this sense, oppose traditional values. They propose to liberate people from “old-fashioned” morality and wish to promote the interests of feminists, homosexuals, and the transgendered, as well as ethnic groups they regard as oppressed. They are “multicultural” and deplore undue stress on the West, as against other cultures. All peoples and cultures are equal, except of course for the oppressive West. They wish to spread what they call “tolerance” all over the world, and view customs they oppose as obstacles to be eradicated.

It is clear that Mises was not a “cosmopolitan” in this new and extended sense. When Mises in Liberalism talks about cosmopolitanism, he has in mind a fundamental point in his social theory. Everyone benefits through peaceful and cooperative exchange on the free market. With social cooperation through the market, human beings are no longer locked in a struggle in which the gain of some comes at the expense of others. Interference with the free market impedes peaceful cooperation and should be opposed by those who want peace and prosperity.

Mises’s remarks about nationalism depend on this basic insight. He opposed trade restrictions and other policies like currency devaluation by which one nation tried to gain at the expense of others. As always for Mises, social cooperation through the free market was of primary importance.

Mises did not oppose the self-determination of peoples. To the contrary, he favored it. He cited with approval Ernest Renan’s famous definition of a nation as a “daily plebiscite”: people in a national group have the right to form an independent state. Incidentally, Mises used Renan’s phrase in his account of consumer sovereignty. No one who reads Mises’s Notes and Recollections can be in any doubt that he cared very deeply for the survival of an independent Austria.

Though people had the right to form a state, they did not have the right to prevent groups within their borders from seceding and forming their own state. Mises is scathing in his criticism of the Spanish liberal Salvador de Madariaga for his opposition to autonomy for Catalonia. Ideally, the right of secession should extend to individuals. As always, Mises’s attention centers on the social cooperation of free individuals. Those in search of greater detail on Mises’s view of nationalism should consult the brilliant and comprehensive essay by Joseph Salerno, “Mises on Nationalism, the Right of Self-Determination, and the Problem of Immigration.” 

Exactly the same principle lies at the heart of Mises’s discussion of race. For Mises, the Darwinian struggle among animals does not apply to human beings, who can cooperate productively regardless of race. Mises strongly opposes eugenics, another ill-thought-out measure of interference in the market. However, he also rejects accounts of history based on racial struggle.

Mises was not a supporter of radical feminism. In Socialism, he says; "So far as feminism seeks to adjust the legal position of woman to that of man, so far as it seeks to offer her legal and economic freedom to develop and act in accordance with her inclinations, desires, and economic circumstances — so far it is nothing more than a branch of the great liberal movement, which advocates peaceful and free evolution. When, going beyond this, it attacks the institutions of social life under the impression that it will thus be able to remove the natural barriers, it is a spiritual child of socialism. For it is a characteristic of socialism to discover in social institutions the origin of unalterable facts of nature, and to endeavor, by reforming these institutions, to reform nature"

In sum, Mises’s cosmopolitanism is just the free market, no more and no less.

Thus, it would be silly to think that anyone at the Mises Institute opposes the free market. If, though, we at the Mises Institute count as cosmopolitans in Mises’s sense, have we acted against what he taught by alliances with illiberal persons and groups?

Precisely the opposite is the case. Mises was on friendly terms with Monsignor Seipel, the Christian Social Party Chancellor of Austria, supported the authoritarian government of Engelbert Dollfuss, and joined the Patriotic Front, an organization that Dollfuss founded.

After he moved to the United States, Mises became a member of the Editorial Advisory Board of American Opinion, published by Robert Welch of the John Birch Society, and wrote an article for it, “On the International Monetary Problem” (March 1967).

In Liberalism, Mises says, “The ultimate ideal envisioned by liberalism is the perfect cooperation of all mankind, taking place peacefully and without friction.” This is exactly what we favor at the Mises Institute. 



Categories: Current Affairs

Mises, Cosmopolitanism, and the Mises Institute

Thu, 21/09/2017 - 04:15
By: David Gordon
mises_1.PNG

Organizations named for someone often are accused of deviating from that person’s ideas, and the Mises Institute unfortunately is no exception. Recently, we have come under attack along the following lines: Ludwig von Mises was a cosmopolitan, opposed to nationalism and racism. Critics claim But the Mises institute, though named after him, has betrayed him. Guided by Murray Rothbard and Lew Rockwell, the Institute has allied with rightwing groups that oppose liberal humanist values. Mises would never have done this.

To assess this accusation, we must first ask, what is meant by “cosmopolitan”? The word is a translation from a Greek term introduced by Diogenes the Cynic in the 4th century B.C., who said, “I am a citizen of the world [kosmopolitês]” This notion became important in Stoic thought, and readers interested in the Greek idea of the “cosmic city” will find in Malcolm Schofield’s The Stoic Idea of the City a valuable guide.

The term often means something else today. Cosmopolitans, in this sense, oppose traditional values. They propose to liberate people from “old-fashioned” morality .and wish to promote the interests of feminists, homosexuals, and the transgendered, as well as ethnic groups they regard as oppressed. They are “multicultural” and deplore undue stress on the West, as against other cultures. All peoples and cultures are equal, except of course for the oppressive West. They wish to spread what they call “tolerance” all over the world, and view customs they oppose as obstacles to be eradicated.

It is clear that Mises was not a “cosmopolitan” in this new and extended sense. When Mises in Liberalism talks about cosmopolitanism, he has in mind a fundamental point in his social theory. Everyone benefits through peaceful and cooperative exchange on the free market. With social cooperation through the market, human beings are no longer locked in a struggle in which the gain of some comes at the expense of others. Interference with the free market impedes peaceful cooperation and should be opposed by those who want peace and prosperity.

Mises’s remarks about nationalism depend on this basic insight. He opposed trade restrictions and other policies like currency devaluation by which one nation tried to gain at the expense of others. As always for Mises, social cooperation through the free market was of primary importance.

Mises did not oppose the self-determination of peoples. To the contrary, he favored it. He cited with approval Ernest Renan’s famous definition of a nation as a “daily plebiscite”: people in a national group have the right to form an independent state. Incidentally, Mises used Renan’s phrase in his account of consumer sovereignty. No one who reads Mises’s Notes and Recollections can be in any doubt that he cared very deeply for the survival of an independent Austria.

Though people had the right to form a state, they did not have the right to prevent groups within their borders from seceding and forming their own state. Mises is scathing in his criticism of the Spanish liberal Salvador de Madariaga for his opposition to autonomy for Catalonia. Ideally, the right of secession should extend to individuals. As always, Mises’s attention centers on the social cooperation of free individuals. Those in search of greater detail on Mises’s view of nationalism should consult the brilliant and comprehensive essay by Joseph Salerno, “Mises on Nationalism, the Right of Self-Determination, and the Problem of Immigration.” 

Exactly the same principle lies at the heart of Mises’s discussion of race. For Mises, the Darwinian struggle among animals does not apply to human beings, who can cooperate productively regardless of race. Mises strongly opposes eugenics, another ill-thought-out measure of interference in the market. However, he also rejects accounts of history based on racial struggle.

Mises was not a supporter of radical feminism. In Socialism, he says; "So far as feminism seeks to adjust the legal position of woman to that of man, so far as it seeks to offer her legal and economic freedom to develop and act in accordance with her inclinations, desires, and economic circumstances — so far it is nothing more than a branch of the great liberal movement, which advocates peaceful and free evolution. When, going beyond this, it attacks the institutions of social life under the impression that it will thus be able to remove the natural barriers, it is a spiritual child of socialism. For it is a characteristic of socialism to discover in social institutions the origin of unalterable facts of nature, and to endeavor, by reforming these institutions, to reform nature"

In sum, Mises’s cosmopolitanism is just the free market, no more and no less.

Thus, it would be silly to think that anyone at the Mises Institute opposes the free market. If, though, we at the Mises Institute count as cosmopolitans in Mises’s sense, have we acted against what he taught by alliances with illiberal persons and groups?

Precisely the opposite is the case. Mises was on friendly terms with Monsignor Seipel, the Christian Social Party Chancellor of Austria, supported the authoritarian government of Engelbert Dollfuss, and joined the Patriotic Front, an organization that Dollfuss founded.

After he moved to the United States, Mises became a member of the Editorial Advisory Board of American Opinion, published by Robert Welch of the John Birch Society, and wrote an article for it, “On the International Monetary Problem” (March 1967).

In Liberalism, Mises says, “The ultimate ideal envisioned by liberalism is the perfect cooperation of all mankind, taking place peacefully and without friction.” This is exactly what we favor at the Mises Institute. 



Categories: Current Affairs

Questions Remain as the Fed Finally Begins to Reverse QE

Wed, 20/09/2017 - 20:45
By: Tho Bishop
yellen

Today the Federal Reserve announced that it will finally begin the process of reversing quantitative easing. Following the process it outlined earlier this year, the Fed will start allowing assets (Treasurys and mortgage-backed securities) to mature off its balance sheet, rather than re-investing them as had been its prior policy. The current plan is to start with a $10 billion roll off in October, and increasing quarterly until it reaches $50 billion by October of next year. Considering the Fed’s balance sheet currently stands $4.5 trillion, the Fed is envisioning a slow, multi-year process. As Philadelphia Fed president Patrick Harker described it earlier this year, the goal is for it to be “the policy equivalent of watching paint dry.”

Of course the old saying about the “best laid plans of mice and men” also applies to central planners, and as Janet Yellen once again noted today, “policy is not on a pre-set course.” Should markets react negatively, as they did when Bernanke hinted at reducing their purchases in 2013, the markets have reason to expect the Fed to act. In fact, when asked, Yellen kept the door open to both lowering interest rates and stalling its roll off should market conditions worsen. In fact, it appears that markets are already betting on the Fed to not follow through on its projected December rate hike.

As the Fed has been signaling for months now that a taper was in the works, the mainstream narrative suggests that tapering has been priced in (though stocks dropped on the news.) There are still major questions left unanswered.

One of the biggest questions going forward is who will step up to replace the Fed’s purchasing power in the US Securities market? In the past, the US has been able to count on China to purchase US debt. Even before the Trump administration threatened the country with sanctions, China was selling off Treasurys in order to help prop up its struggling economy. With other nations also backing off from US debt, the hope is that investors will fill the gap. While the continued actions of the ECB, BOJ, and other central banks may make US debt more attractive in comparison, increased investments in bonds is likely to come at the expense of other assets.

Of course the noise of the Fed’s actions only serves to distract from the real issue, which is the continuing economic stagnation of the US economy. While Yellen continues to boast about modest employment gains, full-time employment remains lower than it was prior to the recession.  Meanwhile, American’s personal debt has reached record highs — following the example of their government. How much of these gains are being fueled by credit and the false prosperity of inflated stocks and other assets? We’ll see.

For what it’s worth, the Fed itself — which is regularly overly-optimistic — doesn’t seem to have much faith in the future. It is now projecting long-term below 2%.



Categories: Current Affairs

Then Came Nixon

Wed, 20/09/2017 - 19:15
By: Chris Calton
Historical Controversies Podcast

In this episode, Chris Calton explains how the Nixon Administration kicked off the modern War on Drugs, featuring no knock raids, fictional crime stats, and the expansion of the American police state.



Categories: Current Affairs

Then Came Nixon

Wed, 20/09/2017 - 19:15
By: Chris Calton
Historical Controversies Podcast

In this episode, Chris Calton explains how the Nixon Administration kicked off the modern War on Drugs, featuring no knock raids, fictional crime stats, and the expansion of the American police state.



Categories: Current Affairs

Government Regulation and Crony Capitalism is Keeping Thousands in Florida without Power

Wed, 20/09/2017 - 18:45
By: Tho Bishop
Yellow_Tape_by_Downed_Power_Lines_(7536146736).jpg

Almost two weeks have passed since Hurricane Irma made landfall in South Florida, yet tens of thousands remain without power. With temperatures regularly eclipsing over 90 degrees, these outages are not only a grave inconvenience for Floridians cleaning up after the storm, but have proved to be deadly. Given the power of Irma, it is not surprising that it has left behind incredible devastation. Unfortunately it is also not surprising that it is a government-protected utility that has done the most to impede recovery. The pain and suffering currently being felt is the direct result of government policy and the perverse incentives of crony capitalism.

One of the talked about examples of how bad policy is making things worse for Florida families are a variety of government policies that discourages the use of solar power in the Sunshine State. Government policy dictates that Floridians are required to be connected to the central power grid, even if they have enough solar panels installed to power their entire house. Because of this requirement, a family stuck in areas without power with solar panels installed cannot use them now because doing so could endanger workers trying to restore power for their neighbors. Once again government’s desire for centralized control has unintended consequences.

Of course, even without such rules, it’s unlikely that all of Florida would decide to go off the grid. Given that, it’s important to understand how the legal monopoly granted to electric companies not only traps customers into being entirely reliant upon a single company, but actively incentivizes those companies to be reactive – rather than proactive – when it comes to natural disasters and other events that threaten service.

After all, companies like Florida Power & Light will respond to Irma as they have done to hurricanes past, by increasing prices on their customers.  Unfortunately, the revenue reaped seems to have made little impact in FPL’s preparedness for future storms. While the company has reported that its recovery efforts have moved faster this year than when Hurricane Wilma hit South Florida in 2005, more residents suffered outrages due to Irma – in spite of the fact that Wilma actually had higher sustained winds when it made landfall.  

Along with the temporary wage hikes following storms, the company also charges annual “storm fees” meant to pay for tree maintenance around power lines. FPL is now facing a class-action lawsuit in the aftermath of Irma over their apparent failure to do so.  Legal cases are certainly nothing new to FPL, as they have often legally fought measures requiring more of their powerlines to be buried underground, rather than be subjected to tropical storm winds above.

While FPL may be skimping on storm preparedness, they do make significant investments in the one resource that is truly vital to their business model: government.

FPL and other power companies are regularly among the largest political contributors in the state of Florida. In return, their lobbyists have been able to earn significant influence in writing energy legislation in the state of Florida. Of course this is the inevitable result of government granting monopolies to private companies. Isolated from the competition of the market, a business has no need to satisfy the needs of the customer, they only need to protect the relationship they have with government. Mises summed it up well in Human Action when he wrote, “Corruption is a regular effect of interventionism.”

Now given the amount of heat companies like FPL are facing following Irma, it’s possible the companies may finally have the political incentive to make some changes in the way they conduct business. Legislators may even be shamed into removing some of the restrictions on solar panels.

What Florida really needs, however, is to do away with the entire concept of natural monopolies for public utilities. There should be no legislation arbitrarily awarding either private or public companies a commercial fiefdom by legally protecting them from competition. Doing so ensures that desires of customers will always take a back seat to the good will of politicians, and will stifle the ability of the market to innovate superior methods of delivering such important services.

As Murray Rothbard wrote in Man, Economy, and State:

Regulation of public utilities or of any other industry discourages investment in these industries, thereby depriving consumers of the best satisfaction of their wants. For it distorts the resource allocations of the free market. Prices set below the free market create an artificial shortage of the utility service; prices set above those determined by the free market impose restrictions and a monopoly price on the consumers. Guaranteed rates of return exempt the utility from the free play of market forces and impose burdens on the consumers by distorting market allocations.

Hurricanes in Florida are as inevitable as Florida Man headlines. It is not a matter of if Florida will be hit with another powerful storm, but when will it happen next. If its state government wants to truly do everything it can to protect its citizens from the damage Mother Nature can wrought, it should free them from the devastation they face at the hands of government monopolies and crony capitalism. 



Categories: Current Affairs

The Washington Post's Latest (and Lamest) Attack on the Mises Institute

Wed, 20/09/2017 - 17:30
By: Ryan McMaken
institute2.PNG

Earlier this year, when Nancy MacLean released her book on economist James Buchanan, Democracy in Chains, many of Buchanan's supporters were shocked that someone would manufacture such an intricate and strained conspiracy theory to attack Buchanan. 

MacLean employed all the usual tricks of innuendo and hearsay to arrive at her conclusions: Buchanan was a racist. Buchanan supported dictators. Buchanan pushed a dark agenda of undermining America's most cherished institutions. All accusations relied on guilt-by-association tactics and assigning motivations to Buchanan that MacLean could not possibly have known. 

"But Buchanan was such a harmless guy!" went up the chorus from Buchanan's supporters, who were surprised by the personal nature of many of the attacks. 

What Buchanan's people did not understand was that no matter how much one tries to play "nice" with the mainstream media and mainstream academia, they'll never get beyond their hatred of anyone who favors lower taxes, decentralization, or even the most general libertarian positions. 

In the minds of the typical academic or journalist, the central crime of the libertarians is that they want to leave people alone, and reduce government power. This fact alone makes libertarians despicable. Thus, there's no real harm in trying to pin on them additional charges related to racism or loving dictators. After all, anyone who's awful enough to want to abolish the minimum wage is also likely to be fine with slavery and Pinochet-style car bombings. 

It's facile logic, of course, but this is the natural result of what we might call "libertarian derangement syndrome" — in which no accusation is too over-the-top when it comes to attacking libertarians. 

Thus, imagine my lack of surprise when The Washington Post this week published its latest screed against libertarians in general and the Mises Institute in particular. 

The Post publishes a new one of these every year or so, trotting out the same examples over and over to illustrate how libertarians — who might seem to be harmless to the untrained eye — are really part of a dark underbelly of white-supremacist militarism.

The article is all retreads, including the insinuation that Murray Rothbard was a racist because he saw no problem with right-wing anti-tax positions. Even worse in the minds of WaPo editors is the fact that Rothbard concludes that government regulations "trample on the property rights of every American" and are a bad thing. 

It is here where libertarian derangement syndrome most rears its head. Rothbard was against using government coercion to boss around private citizens and business owners, telling them whom to hire and what to pay employees. Therefore, he must be targeted for destruction by the official outlets of respectable opinion. Since Rothbard can't be quoted actually advocating for any act of aggression or oppression against anyone, we must therefore draw the conclusion that he was secretly a white-supremacist militant because he held certain anti-tax, anti-regulation opinions in common with some racists. This is a bit like condemning vegetarianism because Hitler was a vegetarian. 

By the end of the article, however, the author tips his hand and admits that the real problem is libertarianism in general, not with any particular alleged sin of Murray Rothbard or his associates at the Mises Institute. The evils of libertarianism, we are told, revolve around its "abstract notion of self-interest" which lends itself to all sorts of violence and sinister leanings.

Unfortunately, WaPo can't even get this right since libertarianism is not based on "self-interest" at all. The author may be confusing libertarianism with the philosophy of Ayn Rand — who specifically hated libertarians and condemned them. Libertarianism, rather, is based on the idea that it's wrong to initiate violence against other people. The end. 

Obviously, an ideology such as this is directly at odds with white supremacists or anyone else who walks around threatening others or committing acts of violence. 

What really galls WaPo though, is that this libertarian foundation of non-violence also means opposition to state-sponsored violence, including the regulatory state, the welfare state, and the endless wars of modern "humanitarian" America. 

It's because of these positions that libertarians will earn the ire of mainline academics and journalists forevermore. 



Categories: Current Affairs

If the Majority Votes to Secede — What About the Minority?

Wed, 20/09/2017 - 04:00
By: Ryan McMaken
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In recent years, left-wing groups have often been the driving force behind secession movements. This has been the case in Scotland, in Catalonia, and in California. 

In each case, the secession movements have been initiated in part to forward left-wing goals, such as the creation of a larger welfare state or to escape limitations imposed by political interest groups and institutions deemed to be too right-wing. 

Within the American context, the loudest calls for secession right now are coming from California where leftists are eager to assert their independence from the Trump administration in Washington.

Generally speaking, these California secessionists want single-payer health care, an even larger welfare state, confiscation of private firearms, and an ever larger environmental "protection" bureaucracy. That is, they want a European-style welfare state. 

California as Case Study 

This case presents Americans — and especially libertarian-minded Americans — with a question that continues to come up in recent years on secession matters: should they support a left-wing secession movement? 

Is it right or moral to support a secession movement that, in the short- and medium- terms is almost guaranteed to adopt policies that are counter to the cause of freedom and free markets? 

The answer must first and foremost be compared against the reality of forcing political union on a separatist region. That is, the cost of allowing a region to separate must be compared to the cost of keeping it in — i.e., military invasion, occupation, mass arrests, government surveillance, martial law, and worse.

Not surprisingly, we're forced to conclude the answer is the same whether we're talking about secession in Scotland, in California, or in Catalonia: the answer is yes.

What About the Minority Interests? 

Often, the immediate retort to this position is to point to those groups in the minority who are left stuck in the seceding territories. 

The argument goes something like this: "Now that you've cut California loose, what about those poor conservatives, gun owners, and business owners who will now be negatively impacted by a newly empowered California government? Before, California was at least somewhat restrained by its membership in the United States. Now the California government is even more free to inflict misery on the hapless taxpayers and productive people who are stuck there." 

To this criticism, there are at least two responses.

One: California Independence Means More Freedom for the Rest of the Country 

Those who wish to focus on merely what happens to those who are in California take a parochial and far-too-limited view. Yes, it's true that business owners, religious Christians, and gun owners in California (to name just three groups) would likely be negatively impacted by California independence. The California government has long illustrated an open hostility to these minority groups. 

The other side of the coin, however, is that California secession would lead to a significant expansion of freedom for the "rump" United States left behind. Freed of the influence of California on American politics, the remainder of the United States would likely move significantly in the direction of more freedom in markets. Federal regulations would likely be scaled back, and presidential candidates would no longer need to cater to interest groups with sizable memberships in California. 

California's 53-member delegation in Congress (39 of them Democrats) would be gone, and voting patterns in Congress would likely shift in a direction more hospitable to freedom and free markets. 

In other words, the nation would be freed from a great weight tied around its neck. One might even say the situation is analagous to the removal of an infected appendage. It wouldn't be the first time such a thing had happened. In 1861, when Southern States began seceding from the Union, New Yorker George Templeton Strong welcomed the prospect of being freed from the political influence of the slave drivers down south. He concluded "the self-amputated members were diseased beyond immediate cure, and their virus will infect our system no longer."

But, unlike Strong who might have been induced by conscience to think of the slaves left behind in the seceding territories, we face no similar scruples. Obviously, comparing modern California to a slave state of old is laughably inappropriate, and unlike the slaves, Californians are free to move away. Nor is it the moral obligation of Texans, or Floridians, or Coloradans to protect the Californians from the excesses of their own government.

Thus, when we think of post-secession California subject to the whims of a hard-left government there, we must also think of the 285 million remaining Americans who would benefit from the separation. 

Note also that this situation even has advantages for the taxpayers and business owners in California who wish to escape the California regime. 

Now that the rump United States has been improved by California's absence, those in California who seek a more business-friendly legal environment can dramatically change their fortunes for the better by moving across the new national boundary to Arizona or Nevada. For these migrants, the net gain achieved by leaving California has grown larger thanks to California's departure. 

Two: More States are Preferable to Fewer States 

The second response to the objection lies in the fact that secession already brings with it a solution to the problem. That is, the problems caused by one secession are solved by more secession. 

As I've explained here, here, and here, a larger number of states is preferable to a smaller number. A larger number of small states provides more practical choices to taxpayers and citizens in choosing a place to live under a governments that more closely match their personal values. 

Thus, in considering the problems of an independent California, we find that the primary problem faced by taxpayers and productive residents in California is that the state is simply too large and contains too diverse a population within its boundaries. 

As noted by numerous commentators over the years — including supporters of the Six Californias initiative — California's population is quite politically and culturally diverse, although it has been dominated for decades by a hard-left coalition of voters based around the Bay Area. Compared to these voters, Southern California residents appear downright centrist, but one would not know this by looking at statewide politics because Northern California is so adept at throwing its weight around. 

The solution to this, problem lies in breaking up California into still smaller pieces. We can see many of these political lines ripe for decentralization in the voting patterns revealed by statewide votes such as those for Propsition 187 and Proposition 8. We can see it in the map of legislative districts. Nor is this just a matter of metropolitan areas versus rural areas. Many suburban areas within the metroplexes of California are quite right-of-center in their own rights, and would surely benefit from further political decentralization. 

Urban core cities ought to be their own self-governing territories, with suburan and rural areas kept separate and self-governing in their own ways. 

The net result of all of this would be to offer a multitude of choices among taxpayers, entrepreneurs, gun owners, and moral traditionalists as to where they might live and enjoy the benefits of self-determination within their own communities. 

But before any of this can happen, we must first establish and extend the moral and legal legitimacy of self-determination through secession and decentralization. Clinging to the status quo of existing regional and national boundaries is reactionary in the extreme. Insisting that no community ought to be allowed self government unless its leaders are hard-core libertarians is impractical, irresponsible, and doomed to failure. 

Nevertheless, when confronted with new attempts at decentralization and secession, even some of those who claim to be for freedom and self-determination cling to ideas of imposing nationalistic control over others. They invent emotion-laden fictional slogans claiming "we are one nation" or "secession is treason" or other sayings designed to justify using the power of the state to impose political unity.  Ultimately, this is an ideology of monopoly and coercion, and tramples the very ideals of freedom that the nationalists claim they hold dear. 



Categories: Current Affairs

Trump's China-Sanctions Madness Imperils the Dollar

Wed, 20/09/2017 - 04:00
By: Ryan McMaken
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Last week US Treasury Secretary Steve Mnuchin warned the US will impose new sanctions on China if it doesn't conform to UN sanctions on North Korea:

"If China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the U.S. and international dollar system, and that’s quite meaningful."

In other words, the administration wants to sanction one of the US's biggest trading partners, and the world's second-largest economy.

China is the world's third-largest recipient of Americans exports, behind only Canada and Mexico. China is the world's largest source of imports for Americans, slightly ahead of both Mexico and Canada.

In 2016, Americans exported $169 billion in goods and services to China while importing $478 billion of goods and services. Every year, both consumers and producers benefit from the importation of Chinese electronics, machinery, food, footwear, and more.

Ratcheting up economic warfare with China could serve to cut off these avenues of trade and thus will only cost consumers and small business owners who currently benefit from lower-cost machinery, clothing, and more.

For the mercantilists in the Trump administration, of course, American consumers import "too much" from China anyway, and Americans and ought to be prohibited by the US government from purchasing what they want. The North Korea situation could serve as a convenient excuse for slapping prohibitions on American consumers in the name of "fair trade" while also serving as a foreign policy tool.

The last thing the US consumer needs is a trade war with China.

At this point, however, the US isn't talking about cutting off trade in such a blunt manner.

As Mnuchin notes, the strategy here is to "prevent [the Chinese] from accessing the U.S. and international dollar system." In practice, this would likely mean restricting access to the so-called SWIFT system which facilitates international transactions in dollars.

This idea is highly problematic in its own way. Were the Chinese to be cut off from the dollar, this would only create an enormous incentive for the Chinese to move away from the dollar into other currencies — including its own. China's largest trading partners would likely follow China in this exodus. Moreover, China and Russia have already foreseen the possibility of SWIFT being "weaponized."

As Jeff Thomas notes:

China, Russia and others have seen this day coming and have created their own SWIFT system, world cable network and world banking system. All that’s needed to kick it all into gear is a major international need to bypass SWIFT. The US government has just provided that need with this threat. There would certainly be teething pains in getting the new system running on a massive scale, but the sudden worldwide need would drive the implementation.

Moreover, China is a key trading partner for Germany, Russia, Australia, Japan. Brazil, and South Korea. Will these countries simply write off China as a trading partner because thy can't settle accounts in dollars?  It's unlikely. 

While this would not necessarily destroy the dollar, a movement away from the US dollar would greatly diminish the dollar's standing as the world's reserve currency. It would diminish the dollar's role as the go-to currency, and this would, in turn, drive up borrowing costs — i.e. interest rates — for the US government. This would turn the US's currently sustainable debt problem into an unsustainable one. Massive domestic budget cuts in the US would follow. 

The fact is, as Foreign Policy noted last year, China is becoming "too big to sanction." Todd Williamson writes on how the IMF has now added China’s currency, the renminbi (RMB), to its basket of four reserve currencies known as Special Drawing Rights. In doing so, Williamson notes, the IMF "may have delivered a severe blow to the strength of a key tool in the West’s geopolitical arsenal: financial sanctions."

He continues: 

The RMB is currently the fourth-most traded currency on the global market (behind the dollar, euro, and pound). It now holds the third highest percentage in the basket, at just under 11 percent, placing it ahead of the pound’s 8 percent (though far below the dollar, which holds more than 40 percent). The IMF’s decision to include the RMB is more than a symbolic sign of the currency’s liberalization: It’s also a big step toward the RMB’s regular usage outside of China. The SDR determines the mix of currencies in which the IMF lends out — a total of $112 billion in 2015 — and the RMB’s inclusion in this distribution mechanism will likely drive up the currency’s demand. The comfort level of the RMB’s usage in global transactions among central banks, sovereign wealth funds, and other massive financial institutions will rise with the currency’s greater accessibility.

In other words, slapping financial sanctions on the Chinese is nothing at all like doing the same to the Iranians or the Venezuelans. The Chinese economy and the Chinese currency are already huge global players which huge trading partners. 

Now, as Thomas notes, if the US forces China away from the dollar will not be without pain. If it were painless, the Chinese state would have abandoned the dollar already. 

China Is Highly Motivated to Go Its Own Way on North Korea

Should the US force the Chinese regime's hand, the regime will be highly motivated to stay the course on North Korea, in spite of the potential for economic disarray. 

China already feels itself surrounded by Western client states, including Japan, South Korea, Taiwan, and the Philippines. The Chinese state is not going to abandon its buffer state in North Korea. Were North Korea to be absorbed into a Greater Korea on American terms, this would be seen as a disaster by the Chinese, since it would place US forces right on a Chinese land border, just across the Yalu River. 

To get a sense of why the Chinese will not cave to US attempts at regime change in North Korea, imagine how the US would behave if China threatened the US with sanctions — unless the US permitted Chinese troops on the south bank of the Rio Grande. 

Add in the fact that the Chinese state is not subject to elections, and we can see the political will to carry on with de-dollarization in the face of US sanctions would be significant indeed. 

Another likely outcome of financial sanctions would be to encourage the Chinese to dump their holdings of US debt. China currently holds seven percent of all US bonds. Were the Chinese to dump these holdings, it will become far more difficult for the US and its central bank to continue paying rock-bottom interest rates on its 20-trillion-dollar debt. 

If the US wants to really continue with this sanctions game, it need also be prepared to face the reality that its not 1989, and that the world may not be willing to treat dollars and US sanctions in the way the US expects it to. The likely response will only be the latest evidence that the US "unipolar moment" is over. 



Categories: Current Affairs

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